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Business English: Foreign groups push to get Thai business moving
Despite the disaster it is still a preferred location for global manufacturersThailand's worst floods in five decades have largely subsided, but the impact on the global supply chain remains difficult to quantify as foreign manufacturers offer contrasting accounts of the true extent of the damage.
About a quarter of the 1,000 large foreign manufacturers affected by the floods in the country, each of which plays an important role in the global supply chain for the consumer electronics and automotive industries, have resumed some operations, according to analysts.
However, estimates by manufacturers of hard disk drives - Thailand accounts for 45 per cent of global production - other technology groups and carmakers vary widely in terms of damage caused by the floods and the effect on future production in the country.
Thailand produced 1.8m vehicles in 2010, half of which were exported. However, flood damage hit component manufacturers and large carmakers such as Toyota, Honda and Nissan, causing a 36 per cent drop in exports for 2011, according to HSBC.
Toyota, one of Thailand's biggest foreign investors, recently said recovery had been quicker than expected at three of its plants but halved its annual profit forecast to USD2.6bn, blaming flood damage. Honda, meanwhile, said its Thai assembly plant would not reopen until April, resulting in more than 100,000 units of lost production, but plans to move some motorcycle production to the country from Japan.
Intel, the world's biggest chip supplier, lowered fourth-quarter revenue guidance by about USD1bn in early December, anticipating shortfalls in computer production due to flood damage, but Intel's rival Advanced Micro Devices played down the impact of HDD shortages on the personal computer market.
These diverging views are important because they will play a crucial role to shape manufacturing in the country, and therefore to form the wider supply chain network on which so many companies depend globally.
How quickly the economy can recover is "tricky stuff", says HSBC economist Frederic Neumann. "On the surface, price pressures are up and the economy is likely to rebound over the first half of 2012. On the other hand, [Thailand-based] companies will face major new investment outlays and steeper production costs, at least in the short term. However, as the water recedes, the economy will [probably] bounce back swiftly, spurred by a jump in public and private investment."
Japanese companies, such as Toyota, Honda, Sony and Toshiba, and a handful of US groups, including hard-disk drive maker Western Digital, must import costly new machinery and await repairs to damaged infrastructure in addition to paying higher premiums for flood insurance.
Some, such as Japan's Nidec, a maker of hard-drive components, are reconsidering the location of their plants within Thailand or outside the country while ON Semiconductor, which acquired a Thai subsidiary of Sanyo Electronics this year, said it would close most Thai operations.
However, most Japanese companies still see the country as a preferred manufacturing location, according to a recent survey of 55 Japanese companies with flood-damaged plants by Jetro, the Japanese government trade body. None intends to leave the country, and 70 per cent to date have decided to restart production in the same locations.
Indeed, the alternatives for manufacturers are limited, according to Sriyan Pietersz of JPMorgan Thailand research, as few countries can offer the same skilled labour force, convenience and relatively low manufacturing costs. "The question one has to ask is: where would they go? There is nowhere comparable in the region."
The critical challenge for Bangkok is to restore investor confidence. The Thai government estimates overall flood-related damage at about Bt1,300bn (USD41.4bn). To boost investor confidence, the Thai Cabinet approved a Bt350bn budget to repair infrastructure and add to flood defences and a separate Bt50bn for insurance funding. There were no decisions about how the budget would be financed but the main proposal under consideration is for a Bt350bn issue of government "flood bonds".
The budget is in addition to the government's pledge of Bt130bn for general flood recovery initiatives, of which an emergency package of Bt 20bn was approved in mid-December. Industry groups call for firm spending commitments on flood protection and water management plans, as well as fast-tracked infrastructure repair.
Post-flood insurance is vital, most Bangkok-based analysts agree, as the top insurers await government commitments to build costly new flood defences and to help manufacturers recover before they decide premiums and policies for coming years. "We are all trying to get back up and running here, but for the future outlook, it seems to be entirely up to whether companies can be assured this won't happen again," said Judy Benn, executive director of the American Chamber of Commerce in Thailand.
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The Financial Times, 13.01.2012
© 2012 The Financial Times,
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