Thailand Floods Plague Honda, Toyota
By Dale Buss November 8, 2011
It’s a nightmarish possibility to consider, but the record flooding in Thailand that has wrenched apart electronics supply chains for both Toyota and Honda could yet disrupt their business on a catastrophic scale approaching that of the earthquake and tsunami in Japan in March. Not even eight months after the March 11 tsunami and earthquake devastated the big Japanese brands’ supply lines stretching from their native country to North America and around the world, executives are confessing that they still don’t know quite how badly their companies will be nicked by the flooding that has inundated more than 1,000 factories across central Thailand in the worst disaster in the region in at least a half-century.
The most immediate impact for Honda has been on production of vehicles for Southeast Asia markets, because it has an assembly plant in Thailand that is under water. For North America, Honda issued an update early on Tuesday announcing that the company “has made significant progress finding alternative manufacturing facilities and new suppliers for the parts flow that was disrupted” and the also-cheery news that “some Honda plants in North America will produce at rates above the previously announced 50-percent adjustment level.” Previously, Honda had said that its North American production rates could be cut by as much as half in the flood’s aftermath. Honda also said today that its all-new 2012 Honda CR-V will, indeed, still be launched by the end of the year after the company earlier had said the launch date was in doubt.
Beyond this week, Honda said, it would continue to adjust vehicle production at all six Honda plants in the U.S. and Canada and would have to do so “for the next several weeks.” Specific production rates will vary from plant to plant, Honda said, but will be at about 50 to 75 percent of the original plan through November 23 in the United States and November 25 in Canada. Honda also has slated a shutdown of its North American production capacity for November 18 in addition to the previously announced shutdown this Friday. The company said it planned “no layoffs at any of our North American facilities.”
Seeking Visibility
But while Honda may be gaining more visibility in the flood’s effects on its supply chain, Toyota apparently remains more in the dark. Already, Toyota, which Tuesday reported falling second-quarter profits and scrapped its full-year forecast as Honda also did last week, has cut back on overtime and Saturday schedules through the end of this week at its U.S. facilities. And the difficulties could deepen into a global crisis akin to March’s disaster. “So far no one knows the extent” of the possible effects, Brian Smith, vice president of marketing for Toyota’s Lexus brand, told AutoObserver.com. “We don’t know yet” if the outcome could be as bad as what happened in March, he conceded. “In the early days this kind of thing is very, very difficult to assess. It feels a lot like [March] to me. But I don’t think it’s the same.”
Toyota North American manufacturing spokesman Javier Moreno added that “it’s too early to tell what kind of impact we’re looking at.” But at this point, it could soon prove that, in some sort of karmic game of Monopoly, Mother Nature has rolled extremely bad dice for Toyota and Honda twice in the same year, forcing them to not pass “Go Back to Market” and instead to proceed directly to “Supply Chain Jail.”
Sitting Ducks
“The industry is still reeling from the Japan situation, and unfortunately still getting its legs, and now their legs are swept out from under them again,” observed Michael Robinet, managing director of IHS Automotive Consulting, in Detroit. “It may be [disastrous] to a lesser extent. Everything is still developing. Some core suppliers may be affected that are important to the global production systems. It’s just not 100 percent understood yet.” But overall, he expects the Thailand flooding “not to be as impactful globally as the Japan situation. It’s just a different kettle of fish.”
Ivan Drury, U.S. industry analyst for Edmunds.com, said, “They’re being very vague as to what the end result of this is going to be. For one thing, Thailand isn’t as easy a place to examine as Japan. There was lots of information coming out of Japan about what was going on there in March, but with Thailand being more of a parts supplier than an end manufacturer [of vehicles than Japan], it’s difficult to get straightforward information.” Both analysts said that General Motors, Ford, Nissan and other automakers don’t appear to be in for any significant disruption, unlike Toyota and Honda.
More than three weeks after monsoon run-off left industrial areas throughout the region in waters up to several feet deep, manufacturers in two crucial global industries – automotive and electronics – have been quickly trying to figure out how much they’ll be crimped. External-hard-drive makers, for instance, were hit especially hard, and analysts have predicted price increases of at least 10 percent worldwide in those electronic components. Other electronic components produced there became vital to automotive manufacturer worldwide during the Eighties and Nineties, when Japanese car makers located operations and suppliers in Thailand to help escape the cost penalties of the rising Japanese yen.
Déjà Vu
So while the flood waters did deluge the Honda plant but didn’t reach Toyota’s own plants, they did badly affect suppliers in Thailand that ship electronic components for its vehicles to both automakers’ factories around the world. And while the companies are still calculating the ultimate effects, already it’s clear that the timing of this new disaster couldn’t have been worse for them. Largely because of the last of the aftereffects of their previous supply disruptions, Honda posted 1-percent lower U.S. sales for October while Toyota actually could muster only an 8-percent sales decline compared with a year ago.
But last week, both Honda and Toyota executives were signaling that their inventories were getting back to the point that their dealers could do business as “normal” in the U.S. market again beginning this month. Depending on the length and severity of whatever the toll from Thailand turns out to be, this disaster has the potential to hurt Toyota’s and Honda’s brands and market share significantly as well. “At the very least, they may have to re-evaluate incentive levels and advertising because inventory will be very lean again, and it could even affect some vehicle launches,” Robinet said.
At the same time, Toyota’s Moreno insisted that there were positive aspects to the situation. For example, he said that Toyota has second and third sources of many of the electronics that are produced for it by affected Thai companies; on the other hand, “single-sourcing” of many of the affected parts was one huge reason that the earthquake and its aftereffects were so devastating to Toyota’s supply chain after March 11. The Toyota spokesman also noted that the company learned some important lessons from dealing with the aftermath of the natural disaster in Japan. For one thing, Toyota began immediately to curb overtime at its North American plants even before understanding the full extent of its supply-chain disruption from the Thailand floods. “We’re curtailing overtime already to conserve parts,” Moreno said. “The idea is to not stop production and to keep the line going. We hope that will pay off as we go through this."
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