As has been previously reported, the people of Thailand have been suffering through the worst flooding to hit the country in more than 50 years. As the weeks pass, the situation seems to be getting worse. The Wall Street Journal, for example, reported that some 350 people have sought refuge at the old Don Muang airport, ignoring a government order to evacuate the airport. More continue to arrive, and brave chest-high floodwaters to cross what used to be a six-lane highway.
There is naturally, a supply chain element to this as well. That’s because Thailand has become a major production and export hub for global auto makers. The floods—stemming from a combination of mudslides, unusually high tides, and monsoon rains—have heavily damaged the country’s main rice-producing areas and several key industrial areas that are home to a large number of international auto component suppliers as well as other export-oriented factories. Many of those companies have been forced to suspend production.
Indeed, according to an IHS report last month, almost all automotive plants in Thailand are now closed during what the prime minister declared a “national crisis.” The analyst firm notes that with a near complete shutdown of the Thai auto industry, the country’s annual vehicle production target of 1.8 million units for 2011 will now almost certainly be missed. Consequently, major automakers’ output in Japan and other Association of Southeast Asian Nations (ASEAN) countries will most likely be effected as well.
As the flooding spread across Thailand, Mitsubishi, Nissan, Aisin Seiki, Toyota, Honda, Isuzu, and Hino were all forced to close, and in some cases, evacuate, plants. Honda, however, appears to have been hit the hardest. According to an Agence France-Presse article on IndustryWeek, Honda announced its net profit for the fiscal first half fell 77.4 percent year-on-year, as the company struggles with effects from the March earthquake in Japan, a strong yen, and now the flooding in Thailand.
Having seen that news, it wasn’t really surprising to see a follow-up Agence France-Presse story on IndustryWeek yesterday noting that Honda will reduce production at its North America plants by 50 percent because the suppliers in Thailand are unable to deliver parts. In making the announcement, Honda released a statement that a number of Honda suppliers in Asia currently are unable to maintain parts production, which is disrupting the flow of parts to production operations in North America. While most of the parts for Honda and Acura vehicles are sourced from North American suppliers, “a few critical electronic parts” do come from Thailand, the automaker said.
That statement about electronics raises an interesting point. It isn’t just the automotive supply chain that has felt an impact, because Thailand is lso home to a number of electronics factories. Indeed, a Reuters story that recently ran on MSNBC notes Thailand is the No. 2 maker of hard drives used in laptops, servers, and TV set-top boxes. Damage caused by flooding could also keep those factories closed or constrained for months. If that happens, the result may be a shortage of hard drives that potentially could disrupt computer manufacturers and those in the high-tech market as early as next month. The story additionally notes that world output of hard drives could fall as much as 30 percent in the final three months of 2011, and manufacturers that need them are now scrambling to purchase existing inventories, according to market research firm IHS iSuppli.
What’s interesting is how events half a world away can have a profound impact on the supply chain. What’s more interesting, however, will be how companies in the automotive and electronics supply chain react. Will a temporary slowdown and use of existing inventory be enough for the short term? Will they, in the long term, make sourcing and other supply chain strategy changes? What do you think?