supply chain disruptions: first Fukushima, now Thai flooding

Chao Phraya River flooding

Thailand is suffering extensive flooding because of unusually severe monsoon rains over the past few months.   Several hundred people have been killed and a number of key industrial parks remain underwater.

Although the worst appears to be over, authorities warn that the Chao Phraya River would remain very high for weeks, as more rainwater from the north plus the water accumulated in flooded areas gradually makes its way south to the Gulf of Thailand.

Although the flooding hasn’t received anything close to the media attention outside Thailand that the nuclear plant meltdowns in Fukushima prefecture did outside Japan, it still may have have important investment implications, for two reasons:

–for many years, Thailand has been a big source of automotive components for Japanese auto firms, as well as a jumping-off point for the assemblers into the rest of Asia.

–Thailand produces a lot mechanical and low-end electronic parts that find their way into computers and consumer electronic devices.

effects on industry

Of the accounts I’ve read, the Financial Times has the best overall summary (I was surprised to find that Nikon makes the majority of its digital cameras in Thailand); Forbes has the most company-by-company information.  Nothing is really comprehensive, though.

Few companies have made public announcements about the effect of the flooding on their operations.  That’s partly, I think, because no one knows for sure, partly because the bigger, publicly listed firms are waiting for their subcontractors, who are the ones directly affected, to say something first.

There are two related issues:

–many roads have been knocked out, so people can’t get to work and parts suppliers can’t deliver shipments. Some areas have no electric power.  It sounds like this situation will last for a couple of weeks, at least.

–no one knows for sure how much damage has been done to factory machinery in the flooded industrial parks.  This could be a really serious problem, especially if machines are heavily customized or built entirely in-house.  The Bangkok Post seems to think that companies had enough warning that they could move machines to upper factory floors, where they would presumably be safe from damage.  But in most cases, it looks like no one has been able to get into the factories to check.

investment implications

Under normal circumstances, Japanese car firms would simply switch to alternate production sources inside Japan.  But those are most likely already running flat out to compensate for capacity lost to the Fukushima disaster.  So the Japanese auto firms will probably face production constraints for some time.  Their third-party component customers will, too.  That’s a mild positive for everyone else.

IT is a little bit trickier, since a lot of Thai companies make components that fly way below the radar.  We do know that Thailand is very important for hard disk drives, however.  And they’re in everything from iPods to set-top boxes to corporate and cloud servers.

If you own a tech stock that seems to be resisting the general uptrend that IT is now experiencing, chances are that if you Google your stock’s name + Thai flooding you’ll see that this is what’s holding the issue back.

What you should do with this knowledge depends on valuation and the extent of your stock’s dependence on Thailand (and your risk preferences, of course).  So you’re on your own.  For the one or two that I own, I think a daily trip to the Bangkok Post website is in order.  That will give the fastest indication, I think, that the flooding problem is not going to get any worse–which will probably be the time to decide whether to own more of the affected stocks.


Leave a Reply

%d bloggers like this: