Thai Flooding Hits Big Manufacturers

A Toshiba factory is partially-submerged at Bangkadi Industrial Park in Pathum Thani province. (Agence France-Presse/Getty Images)

An elderly woman was evacuated as floods advanced into Bangkok on Sunday. (Reuters)

Ford Suspends Vehicle Production as Local Component Suppliers Fall Victim to Flooding

OCTOBER 26, 2011

By JAMES HOOKWAY

The Wall Street Journal

BANGKOK—The damage from floods in Thailand is spreading to more of the world's biggest manufacturers as supply chains falter and break under the weight of the spreading disaster.

Ford Motor Co. and Michelin on Wednesday followed Toyota Motor Corp. by suspending some operations at their Thai plants. The U.S. auto maker said that so far it has produced 17,000 fewer vehicles than it had previously planned, and that total lost production could reach 30,000 vehicles.

Ford said it is "working closely with its affected suppliers to return to production as quickly as possible and to minimize any potential impact in other regions." A Michelin spokeswoman said it is shutting some operations in high-risk areas and expects sales to auto makers and output to be hurt.

The two companies are the latest to feel the pain of over-reliance on Thailand, a midsize country of 67 million people whose outsized importance in global supply chains is now becoming clear.

Chinese computer maker Lenovo Group Ltd. on Wednesday said it expects its supply of hard disk drives to tighten through the first quarter next year as a Connecticut-size mass of water swamps suppliers and begins flowing into the northern suburbs of Bangkok.

Technology consultancy IHS iSuppli has warned that the availability of hard disk data-storage devices could fall by as much as 30% in the last three months of the year as a result of the floods in Thailand, which supplies around 40% of the global output of the devices. Western Digital Corp.'s plants in Thailand are closed because of the floods, which have killed more than 360 people since late July, while Seagate Technology PLC has said it could soon face a shortage of parts.

Apple Inc.'s new chief executive, Tim Cook, recently told Wall Street analysts that he, too, expects a shortage of disk drives in the coming months. Taiwanese contract notebook computer maker Compal Electronics Inc. on Wednesday said it has enough components to last until November, but that the outlook beyond then is unclear.

The reliance on Thailand factories underscores a potential weak link in many companies' strategies to trim costs and shore up profitability: Their manufacturing supply chains sometimes are too narrow to withstand an unexpected disruption. Japan's massive earthquake and tsunami last March chipped away at second-quarter growth rates in countries around the world as manufacturing of key electronic components and specialized chemical compounds were stopped in their tracks. The year before, a volcanic eruption in Iceland disrupted air cargo and travel across the Atlantic Ocean.

Now, Thailand's worsening disaster is reviving a debate over whether some companies are pushing lean supply chains too far in a search for short-term efficiency at the cost of long-term security.

"As we have seen from both the Japan earthquake and now the Thailand floods, catastrophic disruptions and their far-reaching impacts are increasingly becoming the 'new norm' and not some improbable 'black swan' type event," said an Asia-based supply chain specialist who declined to be named.

Paul Martyn, vice president for supply chain strategy at Milan-based BravoSolution SpA, said companies have three factors to consider when organizing their supply chains—capacity, inventory on hand and time needed to adjust production in event of disruption.

"There is a lot of pressure on companies to perform and keep things lean," said Mr. Martyn. "But if they fast forward to disaster, they can pay a price," he said, adding that many chief executives are now becoming increasingly aware of the risks of such narrow supply chains.

Manufacturers from Japan, the U.S. and elsewhere often concentrate in building up a few key production hubs around the world. Thailand emerged as one of these growth hot-spots in the 1980s after moves to depreciate the U.S. dollar helped send Japan's yen soaring. Japanese manufacturers, especially its big auto makers, responded by seeking alternative production hubs overseas.

Many of them chose Thailand, lured in part by investment incentives that allowed foreign firms to own the land in which they built their factories, along with relatively good infrastructure for the region, some of it the result of heavy U.S. investment during the Vietnam War. As local support industries expanded, other manufacturers followed, creating a critical mass in the country of hard disk plants, semiconductor factories and food-processing operations that turned Thailand into a major production and export hub.

Some of the companies that had descended on Thailand during those years are already moving to rethink and diversify their supply chains, though.

Toshiba Corp. on Wednesday said it began producing hard disk drives in the Philippines Tuesday as an alternative to Thailand after it was forced to halt production at nine plants here. Mazda Motor Corp. said this week it will consider importing parts from its operations in China and Japan to help revive production at its Thai plants.

Japan's Nidec Corp., which makes motors for hard disk drives, said it would begin diversifying more of its output to plants in the Philippines and China. Its president, Shigenobu Nagamori, said Tuesday that "we actually had wanted to diversify a bit more," but said that until now key customers in Thailand had preferred the company to manufacture locally.

Still, the flood crisis won't necessarily lead to companies abandoning Thailand wholesale. David Peck, chief executive of Arrow Technologies Pte. Ltd. in Singapore, which supplies specialized manufacturing equipment to many Thailand-based plants, described the flood crisis as "an abnormal situation."

He estimated that it could take some manufacturers between six and eight weeks to get their plants ready to resume operations after the floodwaters recede. Many of them require pristine conditions to produce specialized components.

While many of them will broaden out their supply chains, Mr. Peck said Thailand-based manufacturers will likely stick with the country because that's where they are heavily invested.

"In the long term, nothing changes because they need the capacity" that Thailand provides, he said.