Cost of the Thai Floods to Business

At 10 am on Nov. 11, Sukejawa Seiya, the vice president of the Japan External Trade Organization in Bangkok, made his daily measurement of the floodwaters covering hundreds of factories on the Ayutthaya plain north of Bangkok. The water was still 1.89 meters deep. The average Thai male is 1.67 meters tall. It will be awhile before anybody goes back to work.

“We are still unable to assess the damage,” Seiya said in an interview. “We will have to wait until the water drains off before we can do an assessment.” It is certain to run into the tens, perhaps hundreds of billions of US dollars.

Although many of the companies have temporarily relocated production to other sites around the world in an effort to maintain export figures, despite the damage they have suffered, they intend to rebuild their factories in the same place, Seiya said. That should be a relief for Thailand, which has been battered by a long series of political crises going back to the 2006 coup that ousted former Prime Minister Thaksin Shinawatra.

The floods since late July have killed at least 533 people and caused billions of dollars in damage to a region that, since the 1986 Plaza Accord agreement drove up the price of the yen, has become the manufacturing center of Southeast Asia, particularly in electronics and cars. The agreement helped to drive down the value of the US dollar against the yen by 51 percent between 1985 and 1987, with the result that first-line Japanese companies moved major segments of their production to Singapore and Thailand, sparking the first “miracle” development in Southeast Asia.

It is difficult to describe just how important this region has become to the world’s multinationals, and to the Thais themselves. Seiya estimates that at least 50,000 people have been put out of work in the 150-odd flooded Japanese factories alone. It is certain that no one will go back to work producing exports until 2012 and it is unsure when that will be.

Japan’s industrial plant has been particularly hard hit, a second blow after the Great East Japan Earthquake killed 20,000 people in Japan on March 11 and destroyed a large segment of the manufacturers’ supply chains. After that tragedy, some small and medium enterprises said they intended to follow the first-line companies overseas. The biggest foreign direct investor in Thailand, Japan’s manufacturers account for fully half of all such outlays, compared with 11 percent for the United States. Japanese Investment projects are in metal, machinery, transport equipment, electronics and electrical appliances, chemicals, paper and plastic.

Virtually all of the precision equipment that builds semiconductors, cars and electrical appliances has been ruined, Seiya said. The Japanese manufacturers are having to start over, shipping entirely new facilities to Thailand from Japan. However, he said, Japanese manufacturers are not giving up on the country and moving their plants elsewhere.

There are deep concerns in Thailand that the flooded semiconductor manufacturing facilities, which use heavy metals and other corrosive materials extensively, have exacerbated what was already an environmental disaster with a stew of poison still underwater. There have been demands that the companies provide details of their inventories and pay close attention to cleanup when the waters abate.

IHS iSuppli, an El Segundo, California based consultancy, said in a press release that some of the Japan’s and the US’s biggest semiconductor manufacturers have seen their test and assembly operations affected and have encountered indirect impacts from disaster-related disruptions among their domestic suppliers. HIS iSuppli estimated that the flooding would cut global hard disk shipments by 51 million units in the current quarter, to 125 million, driving prices up by possibly more than 10 percent for several quarters.

As with JETRO, Judy Benn, the executive director of the American Chamber of Commerce in Thailand, said a recent survey of Amcham’s members indicated that none has plans to relocate out of Thailand because of the floods.

Only about 20 US companies have been affected by the floods, Benn said in an email. Despite serious supply chain issues, she said, “our companies are coping well and have been heavily involved in the relief efforts.” US companies have invested about US$40 billion in Thailand, mostly in electronics, auto parts and industrial goods.

It is certain that no one will go back to work producing products until 2012, and it is unsure when in 2012 that will be. Foreign companies doing business in Thailand supply 40 percent of the world’s hard drives. Carmakers, particularly Honda, Mitsubishi and Toyota, stopped production in early October. According to the Associated Press, Toyota had to suspend production of 150,000 vehicles, 90,000 of them in Thailand and 40,000 in Japan because of the loss of ancillary supplies including resin and electronic parts.

The Thai government, anxious to keep the multinationals in Thailand, has struggled to help the devastated companies by granting tax holidays and other benefits to manufacturers and has given tax write-offs for damaged raw materials. It has also relaxed visa requirements to allow the multinationals to bring in personnel from overseas to work to rebuild the damaged facilities. Virabongse Ramangkura, a former finance minister, has been put in charge of a reconstruction and development committee to get the industrial plant moving in the wake of the floods.

Prime Minister Yingluck Shinawatra, who was sworn in* in July and almost immediately faced what may be her biggest crisis, has sought to reach out to Japanese businesses, going on an inspection tour of flooded industrial estates in Ayutthaya with Japan’s ambassador, Seiji Kojima.

corrected Nov. 12, 2011