Quite how serious is still being assessed by multinationals left high and dry by a global supply-chain shock. While only one Honda plant in Ayutthaya was submerged, a shortage of parts held up assembly lines in Japan, Thailand and the U.S. Production in Thailand, the largest auto manufacturer in Southeast Asia, is expected to fall to 1.5 million units in 2011, compared with a pre-flood forecast of 1.8 million.
The biggest ripple is being felt in the PC industry, which sources disk drives, integrated circuits and other parts from Thailand. A cascade of profit warnings from Apple, Dell and others over tightening supplies of hard disk drives (HDD) has underscored the industry’s reliance on a handful of factory zones outside Bangkok, where skilled labor, affordable land and tax incentives have enticed companies like Western Digital, Toshiba and Nidec. Factories in Thailand spit out nearly one in every three hard drives, half in Toshiba’s case. Seagate, where Alan Lim used to work, also manufactures HDDs in Thailand, but its two facilities are located outside the flood zone.
By contrast, Western Digital-owned plants on two industrial estates were inundated along with those of its nearby suppliers, such as Foamtec. Nidec, which makes 80% of the spindle motors used in disk drives, suffered flooding at six of its seven plants in the area. Other affected suppliers include Hitachi and Seiko.
Thomas Coughlin, a consultant on data-storage systems, predicts that global hard-drive output could drop this year by 50 million to 60 million units, close to 10%, with a further 3% fall in 2012, as shortages persist into the second half of the year. While PC manufacturers hold inventory and have already shipped products for Christmas sales, a supply crunch could bite hard early next year.
Even if PC manufacturers can secure the necessary volume of hard drives, says Fang Zhang, an analyst at IHS iSuppli, they will be paying more. At the same time consumers are buying more notebooks, tablets and ultrabooks, which use flash memory instead of traditional disk drives. Shares in SanDisk, one of the largest suppliers of solid-state drives, climbed sharply in the wake of the floods. Some analysts predict increased demand from PC manufacturers for flash drives, despite higher unit costs.
Should companies relocate their plants, and if so, does it make sense to stay in Thailand? In the HDD sector alone the total cost of replacing damaged machinery could exceed $1 billion, according to Coughlin. To replace lost capacity, firms have already shifted orders to plants in China, Malaysia and the Philippines, all of which are vying for more foreign investment.
A survey of U.S. companies found that none had plans to relocate outside Thailand as a result of the flooding, says Judy Benn, executive chairman of the American Chamber of Commerce (AmCham) in Thailand. But industry sources in Thailand and Malaysia say Western Digital is reluctant to reinvest in its Thai plants, with one seeing a ramp-up outside Kuala Lumpur. CEO Tim Leyden said in October that capacity would be constrained for several quarters and that Western Digital was “pursuing all possible options to maximize our Malaysian facility’s throughput.” Seagate also has large operations in Malaysia, making it an attractive option for suppliers to both companies.
In fact, a wider supply chain, both inside and outside Thailand, is arguably smarter than a production cluster in Ayutthaya. Companies prefer suppliers to set up in the same area since it cuts delivery time, but this is risky, says Brent Bargmann, who ran Seagate’s Thailand operations until 2007. “The question is whether you can live with a slightly higher cost by gaining a broader supply chain with more risk aversion,” says Bargmann, a lecturer at the Asian Institute of Technology in Bangkok.
Insurance claims from this year’s disaster could reach $20 billion. Without proper flood defenses, high insurance premiums could make it unprofitable to manufacture in the central floodplains. The government seems to recognize the danger: The chairman of a reconstruction panel said he would travel to London and Tokyo to explain mitigation plans to reinsurance companies.
Bargmann says that Thailand remains attractive to disk-drive manufacturers, which will be loath to leave a pool of skilled workers and associated suppliers. Some may relocate to less flood-prone areas in the east and northeast. But he says future expansion would be a tough sell to tech corporations. “How is Thailand going to look for your next country expansion after your plant has been under putrid water for six weeks?” he asks.
Supply chain and crisis, IB, insurance, cost cutting, locations and competition among ASEAN nations for FDIs