Analysts’ estimates of the effect of the Thai floods on automakers’ bottom lines are starting to flow in as the Japanese and Thai governments and central banks plan collaboration to help Japanese firms. Moody’s forecast a 2% hit to Thai GDP and Honda has now been forced to stop motorcycle output as well.
Detroit of Asia
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Thailand, known as the ”Detroit of Asia,” is a major manufacturing foothold for a number of Japanese automakers, which represent more than 90% of local production.
But the production equivalent to 6,000 units a day has been halted as the country faces the worst flooding in 50 years due to heavy rain, and the situation is increasingly looking like a threat to their earnings that have been eaten up by the recent upsurge of the yen against other major currencies, Kyodo News reported.
Kohei Takahashi, an auto analyst at JPMorgan Securities Japan, estimated Toyota Motor may suffer a JPY23bn drop in profits if its production in Thailand stops for a month, while Honda Motor could suffer a roughly JPY10bn loss and Nissan Motor approximately a JPY6bn decline.
”This is not something that will end in a month…We understand that this is headed for an expansion rather than an end,” he said, adding the floods’ impact could spread to other members of the Association of Southeast Asian Nations (ASEAN) as Thailand has been a key hub of exports to the region.
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By GlobalDataToyota, with its largest Southeast Asian production site located in Thailand, last Friday said it would cut down on production in Indonesia, Vietnam and the Philippines for five more days from last Monday (24 October) as parts supply from Thailand may be disrupted.
The main impediment to Japanese automakers’ output is not the flooding itself, but rather the resulting supply chain disruptions, which are similar in nature to those caused by the quake and tsunami that marred northeastern Japan.
Toyota only announced in early October that its production in Japan had normalised a month earlier for the first time since the quake, but it was forced to halt its three Thai plants until next Friday (28 October), with the situation expected to continue for at least an additional week, as it cannot obtain parts from its suppliers.
Meanwhile, Honda, which launched in Thailand and India low-priced models of its Brio hatchback targeting Asian market this year, has become the single Japanese automaker directly hit by the flooding, with its Ayutthaya plant inundated since 4 October and no resumption in view.
Some analysts say Honda may need at least three months and up to one year for recovery, as the facility will require rebuilding after the water recedes.
”We’ve worked hard to recover from the impact (of the quake), and now it’s the flood. This is very discouraging,” an employee at the automaker told Kyodo.
Other automakers, including Nissan and Isuzu Motors, have similarly decided to suspend operations at their plants in Thailand as floods continued to spread and hit the seventh major industrial complex in the country last Friday.
Despite the setbacks, Japan Automobile Manufacturers Association Chairman Toshiyuki Shiga has offered a relatively positive outlook, saying the impact of the supply chain disruptions may be limited compared to the ones triggered by the March disaster in Japan.
”It is a bit different from the situation where orders were concentrated on single suppliers that cannot be replaced,” he said at a recent press meeting.
”Automakers and parts makers are taking emergency measures at the level equivalent to those against the earthquake…I am hopeful that we can recover soon,” he said.
But some analysts doubt whether other suppliers can produce a sufficient number of parts, even if they have the same technology, and say bringing production from Thailand to Japan spells a major increase in costs and subsequently can only be a short-term measure.
Shigeru Matsumura, an automotive industry analyst at the SMBC Friend Research Center, also warned of other factors pressuring the automakers, such as uncertainties about the fiscal health of Europe, which he says have hit the share prices of automakers more than worries about the flooding.
”There are too many factors to worry about, and it is difficult to foresee what will happen,” he said, adding consumer demand may fall with worries about the global economy.
Government and bank aid to affected Japanese firms
Meanwhile, the government and Bank of Japan announced Tuesday a set of emergency measures to support Japanese firms hit hard by the massive floods in Thailand, including help for them to raise funds and acceptance of Thai workers in Japan.
The BOJ said it was preparing to collaborate with the Bank of Thailand to provide emergency liquidity to troubled companies through Japanese and other financial institutions. The program, details of which will soon be finalised by the Thai central bank, will allow Japanese lenders to extend baht loans to the affected companies while borrowing necessary funds from the BOT using Japanese government bonds as collateral.
The BOJ will hold the bonds put up by the financial institutions in trust under the account the BOT holds at the Japanese central bank.
”Thailand has long been a recipient of Japanese investment, which has contributed to integrating Thai manufacturing into the global production chain,” the BOJ said in a statement cited by Kyodo News.
As for assistance to Thai engineers working for local Japanese factories, the government will accept and help train them, while expecting to make it easier for the manufacturers to conduct alternate production in Japan with the Thai workers.
As financial support for smaller businesses, the government is planning to use state-backed lenders and help them raise funds to renew equipment as well as operating money. It also eyes collaborating with insurance companies to cover business risks taken by Japanese firms in Thailand.
In addition, Tokyo decided to send a team of experts on water prevention measures to Thailand to give advice on how to move overflowing floodwaters downstream. The government will also offer free financial assistance to Bangkok, aiming to help the country’s reconstruction and support the victims of the flooding.
”The flooding in Thailand could continue to affect the country and the region down the road,” chief cabinet secretary Osamu Fujimura said at a press conference, adding, ”We’re going to consider additional support measures.”
2% hit to Thai GDP seen
The flooding in Thailand is likely to cost 2% of the country’s 2011 gross domestic product, but the government has ample fiscal space to absorb related expenses, reports by Moody’s Investors Service found.
The articles, in the Weekly Credit Outlook, predicted that the country’s economic output would expand 2.8% in 2011 overall, after a quarterly and annual contraction in the October-December period, with growth climbing back toward its trend rate of over 4% in 2013.
“Although credit negative for Thailand, we do not expect the deluge to undermine the government’s creditworthiness,” analyst Christian de Guzman said, repeating earlier comments to Dow Jones Newswires.
A separate report in the WCO highlighted the risks to Japanese car and electronics firms that have operations in Thailand.
“A stoppage of several months at Honda Motor’s flooded Thai facilities, for example, would reduce its forecast JPY270bn operating profit for the current fiscal year by 10%,” the analysts wrote, adding that the firm’s global market share would likely continue to fall.
“Likewise, Isuzu Motors has just introduced a new model light commercial vehicle and most of the production is in Thailand.”
Nissan Motor and Toyota Motor are unlikely to lose much money so long as they find alternative parts suppliers, they added.
Honda stops motorcycle output too
Honda on Tuesday said it would suspend production of motorcycles at its plant in the eastern part of Bangkok from Tuesday to Saturday as it is feared the area could be flooded, company officials said on Monday.
The factory in the Ladkrabang area of the capital will halt operations as it is facing difficulties in securing parts and workers are finding it hard to commute to the plant, they said.
Honda’s automobile plant in Ayutthaya, central Thailand, which has capacity to produce around 240,000 vehicles annually, was also hit by flooding earlier this month.
Monday’s decision came just hours after Bangkok governor Sukhumbhand Paribatra warned of possible flooding at the Ladkrabang Industrial Estate, which houses the motorbike plant of the Thai Honda Manufacturing, and the Bang Chan Industrial Estate, which is also in eastern Bangkok.
The governor called for volunteers to help make sandbags to reinforce sandbag walls around the two industrial complexes.
The suspension of operations at large industrial parks due to Thailand’s worst flooding in more than five decades has given rise to concern about the economic impact on the country.
The flooding since late June has affected almost a third of the entire country. At present, 27 of Thailand’s 76 provinces are affected, with those worst affected – Ayutthaya and Chainat – sitting just north of Bangkok.
According to figures reported by the International Federation of the Red Cross, more than 2.3m people have been affected, with 283 confirmed dead, and at least 3.8m acres of farmland have been inundated.
Authorities are now working to protect the central business district of Bangkok from the worst of the flooding, with flood barriers being erected or reinforced in three vulnerable locations in the city’s north, though there is concern for communities living in the city’s east.
An expatriate Briton living in Bangkok told just-auto on Tuesday the flooding in the city was mainly near the river but the city authorities had just announced a five-day business closure, starting on Thursday (27 October).
