Thailand floods cause further delivery dalys for new car manufacturers

After a year of delays, delays and more delays from new car manufacturers' Thailand’s recent floods threaten to cause more chaos and increase delays.

Thailand has been inundated with severe floods in its recent history, and the automotive sector which has an annual production capacity of about 2 million units in 2010, is one of the hardest hit industries. The recent inundation of floods in Thailand has not only had a major effect on local automotive production and supply chain disturbances but is also likely to have a short term effect on the regional and global supply of automotive parts and vehicle exports.

Impact of the Flooding in Thailand – Current Situation: Halt of Automotive Production in Thailand Assembly Plants

Thailand is currently experiencing the worst flooding in the last five decades. 26 of the 90 provinces in Thailand have been affected by floods and automotive assembly plants and parts maker factories located mainly in and around Ayutthaya and Pathumthani provinces are suffering from it. Japanese OEMs such as Toyota, Honda, Mitsubishi, Isuzu, Nissan and American OEMs such as GM and Auto Alliance (Ford and Mazda) have assembly locations in Thailand with a combined annual production capacity of approximately 1.7 million – 1.8 million units.

Most of the heavy flooding is happening in the central province of Thailand with Ayutthaya and Pathumthani provinces, that have automotive assemblers and parts suppliers, being the most affected regions. The Honda assembly plant is located in Ayutthaya and hence has been the most affected OEM with flood inundation within the assembly plant. All other OEM assembly locations are outside the flood affected regions such as Chachoengsao (Toyota and Isuzu), Samut Parka (Nissan and Toyota), Chonburi (Mitsubishi), Rayong (Auto Alliance Thailand and GM).

Honda has stopped its production for the next one week mainly because the plant is submerged with water, while Toyota has stopped production for the next one week mainly due to supply chain disruption in Ayutthaya and Pathumthani province. Ford has resumed its passenger vehicle production from this week while its pick-up vehicle production has been halted as of now. General Motors is the least affected OEM mainly due to its plant location and its supplier base located outside the flood affected regions.

Supply Chain Disruption

The floods have had a severe effect on auto parts makers and as a consequence disturb the supply chain structure. The situation has had a cascading effect on automotive assembly and production in Thailand. Almost 10% of total auto parts for local production come from flood affected regions. Toyota, Auto Alliance Thailand, Mitsubishi Motors, Nissan are all dependent on auto parts makers in the flood affected region. Ayutthaya and Pathumthani provinces have around 40 auto parts suppliers supplying to most assembly plants in Thailand.

Impact of the Flooding in Thailand – Future Strategies Likely to Be Adopted by OEMs

Short Term Production Loss

The floods are likely to affect automotive assembly in the short term. The production halt might continue for the next few weeks depending on the severity of the flooding situation. Honda, which is the most severely affected OEM, is likely to have a production loss of about 10,000-15,000 units with the closure of its plant for about 5 weeks. Toyota and Isuzu are likely to lose the next 2-3 weeks of production due to shortage of parts supply with loss of estimated production volume to be approximately 30,000-35,000 and 10,000-15,000 units respectively. Frost & Sullivan estimate the overall production volume loss of approximately 80,000-100,000 units for all OEMs in Thailand, if they lose the next 2-3 weeks of production. However, OEMs are likely to recover from this production loss by increasing working hours and running the plants at full capacity for the next 2 months.

Short Term Production Shift to Other ASEAN Regions

To compensate for the loss of production in Thailand assembly plants, OEMs are likely to look for a short term production shift to other ASEAN regions, especially Indonesia and Malaysia. For example: Honda assembles Civic, Jazz, CR-V, City models in its Thailand assembly plant, but has the option to build the Jazz model in Indonesia which has already been assembling the model for years.

Impact on International Markets

In 2010 almost 900,000 units vehicles representing 54-55% of total vehicles assembled in Thailand were exported. The main export regions include Australia, New-Zealand, Europe, Middle East, Mexico, South Africa and Brunei. The vehicle models that are presently exported from flood affected OEMs include Honda vehicles such as Jazz, Civic, City, Accord and the Toyota Hilux pick-up truck.

Long Term Strategy Change Related to Supply Chain

Supply chain disruptions due to floods have been the main reason for many OEMs to stop their assembly lines. Some of the factors that are likely to be considered by OEMs in the future are:

1) Increase the stock-pile in terms of auto parts and re-visit the process of JIT (Just In Time) so that OEMs have enough stock for at least a month, if there are any disruptions related to auto parts supply.

2) Multi-sourcing strategy, involving not only sourcing parts from different suppliers but from different regions, which will have a lower impact, if this situation arises again.

3) Climatic de-risking of the supply chain involving OEM investments at geographic locations least impacted due to natural disasters. Japanese OEMs in India, especially Honda, have already started increasing their localisation content (80%-90%) and the remaining auto parts are likely to be supplied either from Japan or other ASEAN regions.

The automotive production in Thailand will be affected in the near term due to the lack of auto parts supply as a result of the floods but is not likely to have a medium-long term effect on Thailand as an automotive production hub in the region.