Thailand floods stall OEMs' supply chain

Takashi Nagai, HSCI president and CEO, said: “HSCI is making concerted efforts to resume full production as soon as possible.”

Honda is also trying to identify alternate sources in China and Japan to import components that are being currently bought from Thailand. “We are always discussing how we can improve our hedge against future risks. Our first priority is the recovery of our suppliers in Thailand and to minimise the impact of the disruption in supplies on deliveries to our customers,” says the spokesperson. Honda was just about recovering from the impact of the March earthquake in Japan and supplies from Japan were expected to reach required levels this month.

While Honda has borne the maximum brunt of the recent Thai floods, other Japanese carmakers have also been affected. The companies, which have been affected by the floods are Toyota, Nissan, Mitsubishi, Auto Alliance (Ford-Mazda), General Motors and Isuzu, which have operations in Thailand.

Toyota, which recorded a 63 percent growth in India in October, will also be hit. It sources engines and other critical parts for almost all its models. “We have inventory for a week,” a spokesperson told Autocar Professional on November 9.

Ford says that it is “monitoring the situation on day-to-day basis, but the India production is not affected at this time.’’

Almost 900,000 units of vehicles representing 54-55 percent of total vehicles assembled in Thailand were exported in 2010. The impact of the floods will affect 100,000 units to be exported in 2011. The main export destinations were Australia, New Zealand, Europe, Middle East, Mexico, and South Africa.

The vehicles currently exported to these regions include Honda’s Jazz, Civic, Accord, and Toyota’s Hilux. Toyota has stopped production at its Samrong, Gateway and Ban Pho plants from October 10 as some suppliers were hit by floods. Toyota has told a news service that the floods will mean continued production adjustments at plants in the United States, Canada, South Africa, Indonesia, the Philippines, Vietnam as well as Pakistan and Malaysia.” A decision on production from November 14 onwards will be made based on an assessment of the situation as it develops.

Nissan Motor said production at its Thailand will remain halted until November 14. The plant has not been hit directly by the flood, but Nissan is also facing parts supply shortage. Reportedly, the company said its loss in production in Thailand is estimated to be around 40,000 units. Due to shortage in supply of parts, plant operations have been suspended, but Nissan will work on some of its models from November 14.

Ford has resumed its passenger vehicle production after a stoppage but its pick-up vehicle production is still suspended. General Motors, which makes Chevrolet vehicles, is the least affected carmaker, mainly due to its Rayong plant and its supplier base in southeastern Thailand, which is outside the flood-affected regions.

Natural calamities like the earthquake in Japan and the floods in Thailand also mean that it could be time to take a re-look at some modern production systems in the auto industry. Toyota’s Just-In-Time or JIT, which is part of its famed Toyota Production System, is a much-replicated operation at most automakers. It comprises a set of techniques designed to improve the return on investment by reducing in-process inventory, and its associated costs. When implemented properly, it hugely reduces costs by cutting inventory levels to the absolute minimum. However, in the absence of additional inventory, the supply chain is adversely affected. All this makes it rather critical that OEMs start developing suppliers in the markets they operate in.

To compensate for the loss in production in their Thai assembly plants, the carmakers are making a short-term shift to ASEAN countries like Indonesia and Malaysia where they have assembly operations for some of their models.

With two natural calamities affecting vehicle production businesses globally, OEMs would do good to diversify their sourcing bases. Japanese OEMs may also look at building strong vendor bases in India. A company like Honda imports some of the components from Thailand as they are not available in India. This could be an opportunity for Indian suppliers.

“There’s a significant opportunity for India. It needs to market itself well,” says Vinnie Mehta, executive director of Automotive Component Manufacturers Association (ACMA). At present, for Honda, Thailand is the designated hub for its production in India. But as Honda’s sales go up, the time has come for it to look for a base in India with suppliers capable of catering to its requirements.

Incidentally, a 23-member ACMA delegation, led by its president Arvind Kapur, will travel to Japan for a week-long trip shortly. The delegation will meet executives from companies like Toyota, Nissan and Suzuki. The issue of expanding vendor bases in India by Japanese OEMs is also likely to be discussed during the tour.

Thai for thought

As Thailand comes to terms with the worst floods it has ever faced for the last 70 years, the impact will be felt across the board. Dealers for Honda are now a worried lot and are increasingly concerned about the future viability of their businesses, as they face a prolonged period of supply disruption due to the floods.

Over the long term, Thailand has to think of a permanent solution. Thailand’s science and technology minister, Plodprasop Surasawadi, has been quoted in a local newspaper as saying that he was “one million percent sure” there would be flooding again next year.

The Thailand floods provide an opportunity for suppliers and their logistics partners to look at possible disruptions from acts of nature. Supply chain experts have said that the disaster could have been averted if companies had not focused on saving money with lean supply chain set-ups. Newspaper reports suggest that Thai authorities bear some responsibility for the disaster for allowing development in low-lying places that do not have adequate drainage.

Thailand has had its share of domestic problems in recent years. Internal strife has affected this country, which is a popular tourist destination in South and South Asia.