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Climate Change is Real and has Consequences

Trying to dodge fallout of climate change, firms reorganize supply-chain networks in Thailand and beyond

By Pavin Chachavalpongpun Created: April 8, 2012 Last Updated: April 10, 2012
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Flood damaged cars sit at the Honda factory in Ayutthaya Province on Dec. 27, 2011. Japanese car assembler Honda scrapped 1,055 cars, which were damaged by the floods in Thailand. (Pornchai Kittiwongsakul/AFP/Getty Images)

Flood damaged cars sit at the Honda factory in Ayutthaya Province on Dec. 27, 2011. Japanese car assembler Honda scrapped 1,055 cars, which were damaged by the floods in Thailand. (Pornchai Kittiwongsakul/AFP/Getty Images)

As the monsoon season approaches Thailand, farmers are not alone watching the rolling clouds, so are factory owners and workers. Unlike the farmers who hope for the rains to flood seedling plots, workers worry that devastating floods might follow and drown factories.

The floods of 2011 inundated 250 factories, putting 200,000 people out of work and disrupting global supply chains of electronics and auto parts. As the Thai government readies plans to fight floods, foreign manufacturers aren’t taking chances, reorganizing supply-chain networks and looking for alternative sites for production.

In retrospect, 26 of the 90 provinces in Thailand were seriously affected by the sheer volume of the floodwaters. Many automotive assembly plants and parts-maker factories for Honda, Toyota, Isuzu, Nissan and Ford, situated in and around Ayutthaya and Pathum Thani provinces, suffered greatly from the destructive floods, with severe effects on the world’s automotive markets.

A new production model could entail a multi-sourcing strategy and climatic de-risking of the supply chain.

Automotive production in Thailand has certainly been affected in the near term due to the shortage of auto parts as a result of the floods, with no apparent medium- or long-term effect on the country as an automotive production hub in the region.

Almost 10 percent of total auto parts for local production comes from the country’s flood-affected regions. Toyota, Auto Alliance Thailand, Mitsubishi Motors, Nissan all depends on auto-part makers in this particular region. Frost & Sullivan, ID, reports that some of the factors likely to be considered by original equipment manufacturers in the future include increasing the stockpile in terms of auto parts and revisiting the process of just-in-time production.

A new production model would entail exploring a multi-sourcing strategy that involves not only sourcing parts from different suppliers but from different regions as well—a climatic derisking of the supply chain with original equipment manufacturers investing in geographic locations least impacted due to natural disasters. For example, Toyota recently announced its plan to build its second production plant in Karawang, West Java, Indonesia, which has had a good record for being a climate-safe area.

Meanwhile, as part of diversifying its production bases by not relying on Southeast Asian plants alone, Toyota will also expand its North American production facilities to make the cars it needs for export.

Manufacturers could be losing confidence in Thailand or any other locale struggling to cope with the challenges of climate change.

Hard Drives

Flooding in Thailand also forced the increase of the cost of traditional computer hard drives, at least the in short term, because manufacturers struggled to work around shuttered plants and suppliers. Hard drives were in relatively short supply throughout the end of 2011 and into 2012. This has already impacted the availability and pricing of everything from notebook and desktop computers to media players, set-top units for cable television and stand-alone hard drives.

As analysts have anticipated, reduced supply coupled with high capital expenditures, as a result of the floods, has meant that hard-drive prices have gone up, already engendering ripple effects across the industry. Computer makers were supply-constrained and could not make as many systems as they thought they could sell.

Thus, they had no choice but to raise prices on the computers they could make to meet revenue goals. For example, if limits on hard-drive availability meant a computer maker could only make about 85 percent of the number of systems originally planned.

Prices for those systems would have to be 11 to 25 percent higher for the manufacturers to maintain the same level of revenue and keep their investors happy. But that was before factoring in increases in hard-drive prices. Already, hard-drive costs have increased 10 percent, driving up prices for low-margin products as much as 20 percent. While not immediately noticeable, the price range of a notebook computer has increased since last year, due to costs and revenue pressure from supply constraints.

Although the floodwaters have receded, it does not mean that hard-drive makers and component manufacturers could just walk back into their fabrication plants, flip a switch, and get back to work. Some facilities remained offline as companies repaired and replaced expensive manufacturing and process equipment. This meant that hard-drive shortages continued after the floodwaters receded, and manufacturers incurred significant costs to get back online.

As for the impact on foreign direct investment, according to the recent report of the World Bank, estimated damage to Thailand’s manufacturing base is about $13 billion in terms of assets destroyed and US$22.75 billion in production loss. While short-term FDI in Thailand may be aided by the rebuilding effort at damaged plants, investor confidence will probably suffer in the medium to long term.

Calculating Risks

Investors are likely to revisit their manufacturing footprint and take into account the risk of floods and other natural disasters in Thailand. As a result, existing operations in Thailand may be scaled back or eliminated altogether and new investments curtailed, especially if there are other attractive destinations in the region such as Malaysia and Vietnam. But this must not overlook the fact that Thailand was an attractive investment destination in the first place, with a well-developed infrastructure, a free-enterprise economy, generally pro-investment policies, and strong export industries.

To regain investor confidence, Thailand, under the leadership of Prime Minister Yingluck Shinawatra, has proposed spending $4.2 billion on reconstruction and steps to prevent future floods. She has sought to reassure investors that Thailand would remain a safe place for business, as leading Japanese companies including Honda Motor and Toyota Motor have scrapped profit forecasts after the floods and shut factories in Thailand.

In fact, Yingluck even paid a visit to Japan in early March with the key objective to boost investor confidence in Thailand and, in particular, show off concrete plans toward managing floodwaters should the problem reoccur.

It might be too little too late for the Yingluck government to control damages. Declaring her visit to Japan a success, Yingluck ignored reports that some big Japanese companies may want to spend more to build factories in Thailand’s neighbors, including Indonesia and Vietnam, after the Thai floods disrupted production.

Honda Chief Financial Officer Fumihiko Ike said that his companies hoped the Thai government would improve infrastructure, including water-drainage systems. However, the company is planning on flexibility in managing factories in neighboring nations. Honda has acknowledged the need to reconsider diversifying investment not only inside Thailand to avoid flood-prone areas, but other locations, too.

Meanwhile, Takahiro Sekido, chief Japan economist at Credit Agricole CIB in Tokyo, said: “Executives recognize the concentration risk after the floods. The recent trend of accelerating investment into Thailand will cool despite the fact that Thailand was such an ideal destination.”

After all, the concerns among foreign investors are not only on nature’s damaging floods, but also the “political floods,” with various actors in Thai politics exploiting the disaster to undermine opponents, thus delaying necessary cooperation and the speediest solution to the problem.

Pavin Chachavalpongpun is an associate professor at the Center for Southeast Asian Studies, Kyoto University. With permission from YaleGlobal Online. Copyright © 2012, Yale Center for the Study of Globalization, Yale University.



  • sandcanyongal

    The title is stupid because the fact that climate change is real is settled. Honda and the other companies aren’t going to dodge anything until vehicle fuel is developed that does not pollute. This is the bottom line. Putting up industrial wind mills, solar, drilling in the arctic will solve nothing, period.


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