November 3rd, 2011

Update: Floods in Thailand

Posted at 9:33 AM ET

thai-floods-6-smallThailand has experienced its worst flooding in years over the last few months, leaving more than 420 people dead and causing severe damage across northern and central regions of the country. The floods have severely damaged and disrupted manufacturing operations in Thailand. Flooding has forced at least seven huge industrial estates in central regions to close, prompting the Federation of Thai Industries (FTI) to warn that damage to the industrial sector will be in the billions of dollars. It is interesting to note that none of the industrial plants in Thailand have been flooded in the past 40 years or so. The last major flood occurred in 1995, but the dykes in the industrial parks kept floodwaters out on that occasion. During this year’s flooding, heavy machinery was reportedly not brought in to raise the height of dykes for fear of damaging them. Instead sandbags were used, which ultimately gave way to the floodwaters. As the floods have severely impacted manufacturers in central Thailand, insured losses from the event are expected to be significant. This report summarizes the damage caused to industrial areas in Thailand and assesses the likely impact on the (re)insurance industry.

Manufacturing Disruption

Damage and disruption to the manufacturing sector has been massive after defenses protecting several industrial estates were breached. The Labour Ministry said that more than 14,000 businesses nationwide have had to close because of the floods. Factories in the provinces of Ayutthaya and Pathum Thani were particularly badly hit (see map below). Reports said around 1,300 factories across central Thailand have been affected by the floods, disrupting manufacturing supply chains inside and outside of Thailand. Many of these industrial estates house both local and international factories and businesses, with large numbers making electronic components and car parts.

thai-floods-6-big

Hazard data illustrated in the CAT-i map was taken from i-aXs®, Guy Carpenter’s web-based risk management platform. i-aXs users can view impacted areas on any map as well as see how their portfolios were affected. Please contact your broker or GC Analytics (SM) representative for assistance or go to www.i-axs.info for further information.

The production of cars, electronics and other goods has been suspended as hundreds of factories are under water. Disruption to supply chains has also halted operations, raising fears that the flooding may have a knock on affect on global manufacturing. Indeed, officials expect disruption to operations to last several months and are warning the floods could have a similar impact on production as the Tohoku earthquake in March. Thailand plays a critical role in the global supply chain and companies are therefore seeking alternative production facilities or supply routes for parts.

thai-floods-7

Affected Industrial Estates

Five industrial estates (Bang-Pa-in, Hi-Tech, Factory Land, Rojana and Saha Rattana Nakorn) in the badly-affected province of Ayutthaya have been flooded. At Hi-Tech, reports said all 130 factories have been inundated by floodwaters of up to 3.4 meters deep. The Nava Nakorn industrial estate in Pathum Thani Province, one of Thailand’s oldest and largest industrial estates with a high concentration of Japanese manufacturers, has also been evacuated after floodwaters submerged several factories. A seventh big industrial estate was overwhelmed on October 20 when flood defenses were breached at the Bang Kadi estate in Pathum Thani Province. Reports said the industrial estates of Lat Krabang, Bang Chan, Bang Phli and Bang Poo remain at the risk of being flooded. Around 1,000 factories have reportedly been forced to close in total, prompting the FTI to warn that the damage to the industrial sector could be between THB300 billion and THB 400 billion (USD9.8 billion and USD13.1 billion).

Officials at the Hi-Tech Industrial Estate said they were aiming to resume operations by mid-December if the floodwaters recede in early November. They added that it will take up to 10 weeks to drain away 12 million cubic meters of water in their facility. Officials at Nava Nakorn plant, meanwhile, said it will take 90 days to clean up after the water has receded and about one year to fully rebuild its infrastructure.

 

Affected Industrial Estates (Source: Guy Carpenter, Bangkok Post)

Industrial Park

Region

Number of companies

Companies impacted (examples)

Reported flood height

Bang Pa-in

Bang Pa-In, Ayutthaya

90

Western Digital

>1.0m

Bangakdi

Mueang Pathum Thani, Pathum Thani

50

Nidec, Nissan, Sony, Toshiba Semiconductor

3.0m

Factory Land

Wang Noi, Ayutthaya

99

Canon Engineering, HDK, Sony

1.5m

Hi-Tech

Bang Pa-In, Ayutthaya

143

Canon Engineering, HDK, Sony

3.4m

Nava Nakorn

Khlong Luang, Pathum Thani

227

Western Digital, Toshiba, Casio, Fujitsu, JVC, Seiko

2.0-3.0m

Rojana

Uthai, Ayutthaya

198

Honda, Furukawa, TDK, Nidec, Canon, Nikon, Panasonic, Sanyo Semiconductor

3.0m

Saha Rattana Nakorn

Nakhon Luang, Ayutthaya

43

Yamamoto

>1.0m

 

Car Manufacturing

Reports said Japanese car manufacturers Honda, Toyota and Nissan are likely to suspend production for several weeks because of flood damage and component shortages. All nine of the Japanese car manufacturers with operations in Thailand have been forced to suspend production, according to reports.

According to the Japan Automobile Manufacturers Association, production of 6,000 units has been affected on a daily basis. Several Japanese companies have been increasingly moving production to Thailand to negate the strong yen and the power shortages that continue to affect Japan following the Tohoku earthquake, according to reports. Around 450 Japanese manufacturers have been affected by the floods in Thailand, reports said.

Honda halted operations at its factory in Rojana, Ayutthaya Province, on October 4. The factory is the company’s largest in Southeast Asia, annually producing 240,000 cars. Reports indicate that Honda is likely to be forced to keep the factory shut for up to six months because of the flooding. Output at a second Honda plant in Thailand has been halted due to part supply shortages. The impact on Honda’s production has also been felt outside of Thailand. On October 31 Honda said a shortage of electronic parts caused by the floods in Thailand would force it to scale back its North American production in November. The company said the production cuts could delay the launch of its new 2012 CR-V crossover. The Japanese carmaker also withdrew its financial guidance for the year after delivering weaker than expected second quarter results, in part, because of the Thai floods.

Toyota has also suspended production at its Thai factories due to supply shortages caused by submerged roads and factories (the floods have had no physical impact on the plants so far). The situation is a serious blow for Toyota, whose production in Thailand is its third-largest outside of Japan. In 2010, it produced about 630,000 vehicles in Thailand. The floods have also started to affect the company’s output outside the country, with Toyota cancelling overtime at all its Japanese vehicle plants, causing a production loss of 7,000 vehicles this week alone. Toyota has also cut back work in Indonesia, Vietnam and the Philippines and plans to trim production in the United States, Canada and South Africa next week. A Toyota spokeswoman said the company does not yet know how much production would be reduced in all the regions.

Nissan, meanwhile, halted its production in Thailand on October 17 after the floods inundated about 120 of its suppliers (the floods have so far spared Nissan’s factories in the region). Nissan said it would try to partially restart work from November 14 by procuring substitute parts through its global supply network, thereby limiting output losses to 40,000 vehicles in Thailand. Nissan said it had plans in place to prevent any production impact spreading to North America, Europe and China due to a more robust supply chain strengthened after the Tohoku earthquake.

Electronics

Several electronics firms and chipmakers have also suspended output at factories in Thailand because of the flood damage (two Toshiba factories in the industrial parks of Bang Kadi and Nava Nakorn have been inundated by floodwater of up to 1.5 meters deep). Other companies have been affected by supply shortages.

The impact on electronic companies in the region has been severe. Sony slashed its full-year operating profit outlook by 90 percent on November 2 as the floods disrupted its camera production (Sony manufactures all of its digital SLR cameras in the industrial area of Ayutthaya). The company also scrapped its prediction for a profit after reporting an unexpected third quarter loss of JPY27 billion (USD345 million). It now forecasts a JPY90 billion (USD1.2 billion) annual loss, the company said.

Nikon’s Thailand plant, which produces low to mid range single lens reflex cameras and account for 90 percent of the company’s SLR camera production, has been damaged by the floodwaters. The company said the first floor of the plant is currently submerged by floodwaters of up to 2 meters high. Production at the factory was suspended on October 6 and there is currently no estimate on when the facility will reopen. Canon has also been affected by the floods, saying the event could cut annual sales by JPY50 billion (USD657 million) and reduce its operating profit by JPY20 billion (USD255 million) for the financial year to the end of December 2011.

Elsewhere, Nidec suspended production of hard disk motors at its factory in Thailand on October 10, causing concerns about supplies to other companies. Research by IHS iSuppli suggests the floods are set to cause a slump of up to 30 percent in hard disk production in the last three months of this year compared to the same period last year and warned supply shortages may continue throughout the first half of 2012.

Insured Losses

Due to the fact the floods are on going, insured loss estimates released to date have a high degree of uncertainty. The OIC has said the damage caused by flooding so far is estimated to be THB140 billion (USD4.5 billion). The OIC added that the seven major industrial estates of Bang Pa-In, Hi-Tech, Factory Land, Nava Nakorn, Rojana, Saha Rattana Nakorn and Bang Kadi Industrial Park have a combined insurance coverage of THB450 billion (USD14.5 billion). Thailand’s Permanent Secretary for Finance, meanwhile, said the seven industrial estates have insurance coverage of around THB600 billion (USD19.5 billion), 30 percent of which may eventually be paid out. As of October 24, about THB100 billion (USD3.3 billion) insurance claims had been filed, mostly by businesses located in the submerged industrial complexes, according to the OIC.

Separately, Fitch Ratings, citing the OIC preliminary loss estimate so far of THB140bn (USD4.5 billion), said Japanese non-life insurers registered in Thailand are likely to be more exposed to the flooding than local insurers given their high exposure to industrial all risk and business disruption coverage for Japanese manufacturers in the affected industrial estates. The OIC estimates that about 80 percent of the commercial losses are expected to be covered by Japanese insurers. But Fitch said they in turn are unlikely to be significantly affected given that about 85 percent of their coverage is ceded to foreign reinsurers.

Thailand’s General Insurance Association (GIA), meanwhile, has confirmed that large businesses in the industrial estates have insurance coverage for floods and business interruption and most multinational firms buy coverage with foreign insurers rather than Thai companies. Residential losses, meanwhile, are expected to be limited as reports quoted the GIA as saying that less than 1 percent of households in Thailand have insurance that covers flooding.

Sources: USGS, Reuters News, Associated News, Agence France Presse, CNN News, BBC News, Thai News Service, Bangkok Post, Xinhua News Agency, Thailand Flood Monitoring System, Pitney Bowes StreetPro, Financial Post, Bloomberg, Toshiba, Nikon, Livemint

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Guy Carpenter publishes CAT-i reports for major natural catastrophes worldwide. These reports cover catastrophes including worldwide tropical cyclones, earthquakes, major UK and European floods and any other natural event that is likely to incur a significant loss to the (re)insurance industry. Please email CAT.i@guycarp.com if you wish to be added to the free email distribution list.

Guy Carpenter compiles RISK-i reports for major technological or man-made events worldwide. These reports cover risks to property, transport and life including explosions, fires, crashes, engineering disasters and terrorist attacks that are likely to incur a significant loss to the (re)insurance industry. Please email RISK.i@guycarp.com if you wish to be added to the free email distribution list.

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