Some of the bustle isn’t coming back to Thailand.
A year after massive floods in the country disrupted the global supply chain for cars and electronics, most factories are at work again, but not always like before. Some foreign companies – having learned hard lessons about concentrating too much of their production in one country – are shifting to other parts of Southeast Asia.
Western Digital Corp., WDC -0.01 percent one of Thailand’s largest foreign employers, moved some manufacturing of hard-disk drive components from Thailand to Malaysia. The company, based in Irvine, Calif., also asked some suppliers to take similar steps, hoping to avoid a components shortage like last year.
Excluding its Hitachi Global Storage Technologies unit, acquired in March, Western Digital now employs 25,000 people in Thailand, compared with 37,000 before the floods.
Meanwhile, Japan’s Omron Corp. shifted some production of relays – electromagnetic switches for automobiles and motorcycles – to Japan and China, although this shift accounts for less than 1 percent of overall relays produced by Omron.
Nidec Corp., also based in Japan, moved part of its production of hard-disk-drive motors to China and the Philippines. This production “will not be coming back to Thailand,” said Kuniyasu Tampo, president of the Nidec Electronics division in Thailand.
“It doesn’t mean businesses are not investing in Thailand, but they may not put all of their investment in the country,” said Pimonwan Mahujchariyawong, deputy managing director of Kasikorn Research Centre, a think tank in Thailand.
The impact of last year’s floods, a weak global economy and a higher minimum wage that took effect this year in Thailand have pushed the country’s historically low unemployment rate to 0.85 percent in the second quarter from 0.6 percent a year ago. With more than 334,000 people out of work, the government is offering corporate income-tax breaks, waiving tariffs on imports of some new machinery and accelerating infrastructure projects to keep jobs in the country.
Yet Thailand’s worst floods in 50 years, coming just seven months after Japan’s earthquake and tsunami, exposed the danger of relying on narrow, concentrated supply chains. While Thailand remains a vital link in the global production of hard disk drives and automobiles, foreign companies are hedging their bets by building facilities and finding suppliers in other regions so they can quickly resume operations if disaster hits.
The moves come as parts of Thailand are submerged again due to seasonal rains that typically end this month, arousing fears that business could grind to a halt in low-lying districts in and around Bangkok.
The Thai government said it is releasing more water from the dams this year, rather than storing them in case of a drought, to reduce flooding risks. It has also committed $11 billion to dredging canals and building flood walls.But it is unclear whether these measures, some of which have yet to be completed, will be enough to give foreign businesses confidence that their investment is safe, said Monsinee Keeratikrainon, Thailand’s country manager for Frost & Sullivan, a consulting firm.
Certainly, Thailand’s economy is rebounding, with gross domestic product expected to increase 4.5 percent this year compared with a 0.1 percent increase in 2011. Foreign direct investment is also rising as companies use the country as a base to access the rest of Southeast Asia. An escalating dispute between Tokyo and Beijing over islands in the East China Sea could make Thailand more appealing to Japanese companies, the largest group of investors in the country.
Ford Motor Co., F +0.49 percent which temporarily suspended two production lines last year at its joint venture with Mazda Motor Corp., opened a facility in Thailand this year to make cars for the domestic market and to export to other Southeast Asian nations.
Seagate Technology Inc., STX -1.35 percent a maker of hard disk drives, added 1,000 employees in Thailand since the floods. Seagate now has 16,500 workers in the country and plans to increase its head count 25 percent over the next five years. “Thailand remains a strong investment country, but it’s not without its foibles,” said Joseph Mannix, president of the American Chamber of Commerce in Thailand.
Honda Motor Co., 7267.TO -0.45 percent one of the hardest-hit auto makers in last year’s floods, is looking at ways to diversify its business, but has no plans to shift production out of Thailand, according to Nobuyuki Shibaike, a vice president for the company in Thailand.
Thai Finance minister Kittiratt Na-Ranong, in an interview in August, said the country remains appealing to foreign companies. If Japanese companies wanted to leave, they would have done so after last year’s floods, he said. Yet most companies have chosen to stay, according to Kittirat.
Thailand has “skill and technology that overcomes other issues,” said Tampo, president of Nidec Electronics.
Even so, Nidec, which suffered damage to eight of its Thai factories last year, has cut production of disk drive motors in the country to protect against another disaster. Nidec now makes between 50 percent and 55 percent of these motors in Thailand, compared with as much as 65 percent before the floods. Nidec used to make 80 percent of a related part, base plates, in Thailand. Now that portion is down to 70%.
Omron has moved manufacturing equipment to the second floor after floodwaters up to 8-feet high destroyed its machines last year. Rojana Industrial Park in Ayutthaya, where Omron’s factory is located in the valley of the Chao Phraya River, is completing a 77-kilometer flood wall to ward off another disaster.
Meanwhile, Western Digital is working with suppliers in the Philippines and China to procure components for its hard disk drives. It has also moved key equipment to the second floor and is spending $20 million to build a 9-foot concrete wall around the company’s 24-acre property in Bang Pa-Industrial Estate, a business park north of Bangkok that is erecting its own 12-foot flood barrier.
Last October, Western Digital’s hard-disk-drive production in Thailand ground to a halt when nearly two-foot-high floodwaters rushed through the 1.1 million square-foot facility, turning Western Digital’s parking lot into a lake and destroying manufacturing equipment. Production restarted at the facility six weeks later, but the company is now facing soft demand due to the weak global economy and consumers’ growing use of tablets and smartphones.
Joe Bunya, a senior vice president at Western Digital, said the steps the company has taken should keep it safe from another disaster. But they aren’t a cure-all. “We would like to continue investing in Thailand, but we are also quite cautious about being able to sustain our investment,” said Bunya.