Thailand's Floods Felt Around the World, Disrupting Global Manufacturing

The floodwaters may be slowly — agonizingly slowly — receding, but like ripples on a pond, the ramifications of Thailand’s recent floods are spreading around the globe and forward in time.

According to Businessweek, at least 533 people have been killed since late July, when monsoon rains began lashing Thailand. Flooding worsened in October, when rainfall (about 40 percent more than the annual average) filled dams north of Bangkok to capacity, prompting authorities to release more than 9 billion cubic meters of water down a river basin the size of Florida.

Advancing waters have swamped seven industrial estates north of Bangkok with 891 factories, and threaten two others in the capital where Honda, Isuzu Motors Ltd., and a unit of Mitsubishi Heavy Industries Ltd. have operations. Half the world’s hard-disc-drive manufacturers are either closed or on restricted working status, and automotive parts manufacturers, particularly Japanese supply chain firms, are particularly hard hit. Honda had to cut output at some North American plants this month as a result of disrupted parts supply, and a NY Times news service report said the flooding has forced Toyota to slow production in factories in Indonesia, Japan, Malaysia, North America, Pakistan, the Philippines, South Africa and Vietnam.

As the ripples spread, Japanese steel mills are trimming steel production in anticipation of slowing or delayed steel demand from the auto industry. The FT reported this week that car manufacturers have been asking mills to delay deliveries of steel sheet, causing Nippon Steel and JFE to shut capacity and revise production forecasts for the next quarter.

Although Hurricane Katrina was a case of weather pushing sea-waters inland past city defenses, it bears some similarity to Bangkok’s monsoon rains falling inland and causing flooding as the waters build on their way to the sea. In both cases, man-made defenses were thought to be adequate, but wholesale destruction of natural defenses has shown the weakness of relying on recent history as a guide to future expectations.

The monsoon rains were said to be the worst in 70 years, but the frequency is expected to increase as weather patterns change. The NY Times explains a large share of the industrial growth in Thailand has occurred on the floodplain north of Bangkok. Rice paddies were paved over to make way for factories, suburban housing and shopping malls, blocking the natural path and absorption of water during the monsoon season. Experts feel the Thai government will be given one chance and one chance only to make the necessary investments to provide canals, drainage and other defenses before foreign investors (particularly Japan as the largest) start to look for new sites to put their money in Vietnam, Indonesia, India and elsewhere in Southeast Asia.

As for us, we can expect to pay more for electronics containing hard-disc drives, particularly external HDD, as prices charged by those not affected rises. Car deliveries may also be delayed, although the supply chain was reasonably well-stocked and most manufacturers do have redundancy elsewhere to keep them going; but as an example, the new Honda Civic launch in the UK has been postponed by a month due to parts disruption from Thai factories.

As if we didn’t need any reminders after the Japanese earthquake of the global market’s interconnectedness, along comes yet another natural disaster to remind us that lowest cost is not always lowest cost.

–Stuart Burns

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