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With their facto­ries in central Thai­land submerged under as much as two me­tres of fetid flood wa­ter, some automotive compo­nent makers have been trying to hire divers to res­cue their production moulds, which are expensive and diffi­cult to replace.

The country’s worst floods for half a centu­ry, which con­tinue to creep clos­er to the cap­ital, Bangkok, have tak­en a heavy eco­nom­ic and human­itar­ian toll. More than 400 are dead, hun­dreds of thou­sands have been displaced and one-quar­ter of the crop in the world’s biggest rice-exporting nation has been wiped out. Sev­en of Thai­land’s biggest indus­trial estates are awash and more than 700,000 people have been put out of work.

The ex­tent of the disruption under­lines how Asia in general - not just the more high-pro­file manufac­tur­ing countries in the region such as China and Japan - has become more central to mul­ti­national production busi­nesses’ strate­gies as a result of expanding de­mand in the region, plus the search for lower-cost suppli­ers.

From large mul­ti­nationals to niche facto­ries, most manufac­turers have some sort of contin­gency plan to cover nat­ural disas­ters and po­lit­ical risks. But while the phrase “supply chain risk man­age­ment” has become firmly estab­lished in the man­age­ment lexicon, the more than 1,000 manufac­turers af­fected had not envis­aged a sit­uation so bad. “No one thought about such a worst-case scenar­io,” says Somboon Pr­a­sitjutrakul, pres­ident of the Thai divi­sion of DKSH, a diversi­fied Swiss manufac­tur­ing, dis­tri­bution and retail group.

Three of his group’s fa­cilities at the Bang Pain indus­trial estate in Ayutthaya province, central Thai­land, have been inundated: a factory produc­ing Levi’s jeans, a pharma­ceuticals plant, and a food dis­tri­bution centre the size of three football pitches that was supplying retail­ers across the country. “In fu­ture we will need to re­consid­er the flood risk and consid­er whether we need to raise our facto­ries high­er up or look at indus­trial estates that have better pro­tection,” he says.

Just as with the dev­astating earth­quake and tsunami that hit Japan in March, the eco­nom­ic and financial impact of this disas­ter has reached far be­yond the shores of the af­fected country. It shows, moreover, how planning for such nat­ural catas­tro­phes is becom­ing a more important part of the brief for those who devise production strate­gies. Daniel Corsten, a supply chain expert at IE Busi­ness School in Madrid, says: “A few years ago if you were a supply chain man­ag­er you could prob­a­bly go to your boss and explain an event like the Thai flood­ing as force majeure - an event which cannot be foreseen and over which you don’t have any con­trol. Today you don’t have that excuse any more.”

Now, says Prof Corsten, compa­nies are guilty of “irresponsible” behaviour - from the perspective of both sharehold­ers and customers - “if they don’t have some planned way of re­acting when emergencies hap­pen”.

Over the past 20 years Thai­land, south-east Asia’s sec­ond-biggest econ­o­my, has become a glob­al hub for the electron­ics and automotive indus­tries, with many compa­nies clus­tered in the central plains that now look more like a vast lake. From Honda, the Japanese car manufac­turer whose plant in Ayutthaya has been under wa­ter since October 4, to Ac­er, the Taiwanese com­put­er maker re­liant on hard disk drives produced in Thai­land, large mul­ti­nationals have warned that sales and prof­its will suffer because of the disruption. Compo­nent short­ages have forced Honda to cut production around the world, from the Philippines to Swindon in the UK.

Timing has com­pounded the dam­age: the floods struck only half a year af­ter the earth­quake and tsunami disrupted out­put in Japan. As Japan’s compa­nies have been among the most enthu­sias­tic investors in Thai­land, they have again been hard hit, with more than 450 out of the 2,000 Japanese facto­ries there flood­ed.

The wa­ters are unlikely to drain away for weeks, accord­ing to even the most opti­mis­tic as­sess­ments, so exec­utives say they are un­able to pre­dict the full scale of the dam­age and the cost of rehabili­tation. Thirachai Phuvanatnaranubala, the finance min­is­ter, pre­dicts that the dam­age from the floods is likely to cost more than 1.7 per cent of gross do­mes­tic prod­uct. That com­pares with an impact of 0.3 per cent of GDP in Thai­land from the Indian Ocean tsunami of 2004 and 0.1 per cent of GDP in Japan from the March earth­quake.

But questions abound. Will for­eign investors be scared away from Thai­land? Will manufac­turers switch from a low-cost model based on the proximity of suppli­ers, customers and dis­trib­utors and just-in-time production to a more diversi­fied, lower-risk approach? Should compa­nies invest in expensive nat­ural disas­ter pro­tection plans or merely accept that they cannot pre­dict such unprecedented calamities?

Fol­lowing two big shocks to the glob­al supply chain in quick suc­ces­sion, and amid growing fears that cli­mate change will lead to more frequent, more unpre­dictable nat­ural disas­ters, mul­ti­nationals are com­ing under increas­ing pressure to re­think the way they produce and dis­tribute.

Al­though they were meant to be giv­en at least 24 hours’ no­tice by the local au­thor­ities, some Japanese compa­nies had only two or three hours’ warning of the impending del­uge, says Setsuo Iuchi, pres­ident of the Thai office of Jetro, Tokyo’s trade promotion organ­i­sa­tion. In such circum­stances, there was lit­tle they could do to salvage doc­u­ments and com­put­ers, let alone clunky indus­trial mach­inery, much of it fixed to the floor.

But the impact goes way be­yond those manufac­turers that were inundated. Oth­er compa­nies such as Ford, the US carmaker, and PC produc­ers around the world are suffering from a short­age of compo­nents produced by suppli­ers in central Thai­land.

As in Japan in March, the prob­lem has been exac­erbated by the pref­er­ence for clus­tering similar indus­tries in one area, where they can cre­ate production syner­gies, reduce trans­port costs and jointly devel­op a more skilled workforce. The con­centration of compa­nies produc­ing cars and automotive parts as well as hard disk drives and oth­er electron­ic goods helped Thai­land to attract for­eign invest­ment and become a mid­dle-income country. But with big indus­trial estates awash, this speciali­sa­tion has left Thai­land and the manufac­turers op­erating there brutally exposed.

“Compa­nies need to re­think the clus­tering model,” says Richard Lit­tle, an aca­dem­ic from the Uni­versity of South­ern California who specialises in disas­ter prepa­ration and mit­igation. “Yes, you get ben­efits but you also have common vulnera­bilities for an entire indus­try or sector. If all your chipmakers are in one place and they get hit by a nat­ural disas­ter, you lose all the ben­efits of clus­tering.”

As roughly one-third of glob­al hard disk drive production is located in Thai­land, many PC makers have said they expect sales in the fourth quar­ter of this year to be impacted by supply constraints. Ac­er expects rev­enues to be down by 5 to 10 per cent on the third quar­ter and says hard disk drive prices have risen by 5 to 20 per cent.

The recovery in hard drive production will depend not just on West­ern Dig­ital, the world’s biggest produc­er, whose Thai plants have been shut since mid-October, but also on lit­tle-known parts suppli­ers such as Taiwan’s Min Aik Technology. Min Aik has said its two Thai sub­sidiaries suffered losses of up to US$90m when its factory and ware­houses in Rojana indus­trial park, also in Ayutthaya province, were flood­ed.

J.T. Wang, the chairman of Ac­er, ex­presses concern that the indus­try’s supply sources have become too con­centrated and vulnerable. “We have to encour­age our supply chain to have better dis­tri­bution,” he says.

Jonathan Guyett, vice-pres­ident for the supply chain at DKSH, the Swiss group whose flood­ed fa­cilities will not be up and running for months, agrees. Events such as the Thai floods and the tsunami in Japan “are likely to have major and last­ing impacts on how supply chains are designed, especially in relation to risk man­age­ment, and will be driv­en by the differ­ent needs of customers and suppli­ers, and by govern­ment reg­u­lations”, he says.

But manufac­turers re­main under pressure from customers, com­petitors and investors to cut costs . “The hard disk drive indus­try is high­ly com­pet­itive,” says one exec­utive. “Consequently, all compo­nents of the supply chain focus very heav­ily on cost in or­der to meet the price pa­ram­e­ters de­manded by our customers. Our sourc­ing strategy is in­tended to somewhat mit­igate the risk.”

Many af­fected compa­nies will have had in­sur­ance against prop­erty dam­age, equip­ment replace­ment and busi­ness disruption. But, warns Brent Bargmann, a lec­turer at Thai­land’s Asian In­stitute of Technology and the for­mer country head of Seagate, the US disk drive maker, manufac­turers cannot eas­ily in­sure for the loss of pres­ence when prod­ucts do not make it to mar­ket.

One example is Sony’s high-end NEX-7 cam­era, whose launch has been delayed because of flood­ing at its Thai facto­ries. The Japanese electron­ics group this week gave the del­uge as one rea­son for a loss expected in its current year to March.

Accord­ing to the finance min­is­ter, in­surers are re­luc­tant to re­new policies until they see a comprehensive plan from the govern­ment to reduce the risk of flood­ing. The unpre­dictable way in which the cri­sis has devel­oped, and the fear of fur­ther climat­ic woes ahead for the production centres of Asia, suggests it will be hard for in­surers, govern­ments and compa­nies to agree on any cast-iron guar­antees.

Will compa­nies therefore spend more on preparing for the un­expected? USC’s Mr Lit­tle, who has advised the World Bank on the dan­gers of big infras­tructural fail­ures, argues that there is a slim window of opportunity for govern­ments to tight­en disas­ter reg­u­lations for compa­nies, which oth­er­wise tend not to invest to pro­tect against catas­troph­ic risks. “There’s a huge spike in awareness af­ter some­thing bad hap­pens and we want to do some­thing to feel safer,” he says. “Over time, that awareness set­tles down under a lev­el where you get any pos­itive action.”

He suggests it is dan­ger­ous to leave it to cost-conscious manufac­turers and their sharehold­ers to pro­tect them­selves and their employees from calamities: “Mar­kets don’t reward prudence. Investors won’t val­ue compa­nies that do it right - they’ll prob­a­bly pun­ish them.”

Additional reporting by Pe­ter Marsh, Chris Nuttall and Jonathan Soble

Govern­ment response

Yingluck al­lows politics to com­pound a cri­sis

When Yingluck Shinawatra became Thai­land’s first woman prime min­is­ter in Au­gust, many wondered how this po­lit­ical novice, who came to power on the back of the popular­ity of her exiled broth­er Thaksin, would fare, writes Ben Bland. The floods have pro­vided the 44-year-old for­mer exec­utive with a stern early test.

The govern­ment’s crit­ics have accused it of man­aging the del­uge poorly and lacking co-or­dination in its response, with of­ficials reg­ularly issu­ing con­tra­dictory state­ments about the need to evac­uate certain ar­eas.

As filthy wa­ters con­tinue to accumulate on the out­skirts of Bangkok, which accounts for around 40 per cent of Thai­land’s eco­nom­ic out­put, Ms Yingluck has also become embroiled in an unseemly po­lit­ical tus­sle with Sukhumb­hand Parib­atra, the gover­nor of Bangkok. He is a member of the oppo­sition Demo­crat party, whose support­ers in the military helped oust her broth­er from the prime min­is­ter­ship in 2006.

While Mr Sukhumb­hand has tried to save inner Bangkok from inundation at all costs, Ms Yingluck, whose support base is in the country­side, has sided with res­idents in the out­skirts. They want to open flood­gates in their dis­tricts to re­lease the build-up of wa­ter downstream, to­wards the city.

“It’s obvi­ously not just a nat­ural disas­ter any more - it has become a po­lit­ical issue,” says Pavin Chachavalpongpun, an expert on Thai politics at Singapore’s In­stitute of South­east Asian Stud­ies. “Yingluck has failed in showing leader­ship, because of her lack of cri­sis man­age­ment skills. She is un­able to come up with an integrated approach and no one lis­tens to her, including the Bangkok gover­nor, the military and some in her own cab­i­net.”

Thirachai Phuvanatnaranubala, the finance min­is­ter, concedes in an inter­view with the Financial Times that mis­takes were made in wa­ter man­age­ment and that the govern­ment needs to devel­op a more holis­tic approach for fu­ture nat­ural disas­ters.

From a min­istry building that has been turned into a temporary dis­tri­bution centre for re­lief supplies, with food, drink­ing wa­ter and boats piled high in the lobby, he says the govern­ment will do what­ev­er it takes to re­assure investors that this will not hap­pen again.

“If we can’t give these as­sur­ances to indus­trial compa­nies, then they will leave,” he acknowl­edges.

Thai­land will have to raise mon­ey through a bond issue to cover the recovery costs. With public debt at around 40 per cent of gross do­mes­tic prod­uct, Mr Thirachai says the country has ample “room to borrow”.

Copyright The Financial Times Lim­ited 2011