subject: Thailand Floods Raise Doubts Over Industrial Clustering In Asia [print this page] One month after flooding finally hit Thailands industrial zones, Hondas managers are still riding on rubber boats to their mega-plants in central Thailand, passing the tops of cars submerged in a meter and a half of fetid flood water.
The sustained flooding in Thailand that began in July with heavy monsoon rains lasting more than three months has prompted manufacturers in the country to reevaluate the distribution of their production bases. Specifically, businesses are questioning the viability of concentrating in emerging markets that feature cheap labor given that many such regions are also vulnerable to natural disasters. With one quarter of the worlds external hard disk drives and a significant number of auto parts being churned out of Thailand, even smaller enterprises clustered in Thailands industrial zones have expressed doubt about the advantages of agglomeration.
While Bangkok remains the country's commercial and financial center, it is the seven large industrial estates built in the central provinces of Pathum Thani and Ayutthaya regions inundated with one meter-plus floods for over two weeks that are the foundation of Thailand's manufacturing sector.
These industrial estates were state-led developments that attracted investors with modern infrastructure, a highly-skilled workforce, tax incentives, and the apparent advantages of industrial agglomeration. Beyond considerations of profitability, the beautiful surroundings and affinity for Thai culture are often cited as additional draws for foreign investors.
However, 2011 has seen intensifying doubts about this agglomeration model due to unforeseen natural disasters. This recent bout of floods is Thailands worst in the last half century, and comes on the heels of nearby Japans triple disaster in March a massive 9.0 earthquake, the subsequent tsunami, and an ensuing nuclear crisis. The disasters effect on the countrys electronics, auto-manufacturing and high-tech industries are far-reaching, as much of the global economy is still affected by the countrys resulting energy shortage and lessened outputs.
In March, experts immediately expressed words of caution against the wisdom of the globalized supply chain. The global consulting firm Frost & Sullivan described it as a double-edged sword, with the losses almost nullifying the gains.
Leading risk management researcher, Paul Kleindorfers advised companies following the crisis in Japan to focus on finding alternative sources of supply that will be able to stand in for your regular suppliers in a pinch that pinch being a natural disaster or even a man-made crisis. Kleindorfers likens this to a war room infrastructure, where companies will have the ability to respond and to ascertain and rehearse and switch and tell their customers and their boards what they can expect.
Nonetheless, there has not been enough time for the Thai government to heed such warnings, or those of the World Bank, which released a report just last year projecting a four-fold increase in the risk of floods in Bangkok. Comments made by Thailands Minister of Science and Technology are far from reassuring. According to Minister Plodprasop Suraswadi, flooding next year is one million percent sure.
And despite the ministers calls for the construction of canals, drainage systems, and adjustments to crop-planting and irrigation, it is doubtful whether or not this awareness is enough for state leaders to overcome bureaucratic infighting and the vested interests of landowners two obstacles that David Lyman, chairman of Bangkok-based law firm Tilleke & Gibbins, says prevent swift and effective state action in flood management.
With most countries throughout Asia prone to natural disasters such as flooding, earthquakes, tsunamis and landslides, it is the state response to natural disasters that concerns investors. The Thai governments management of the industrial estates in this crisis certainly called into question its responsiveness, as many enterprises were only given two or three hours advance warning before flood waters began to creep onto the grounds of the estates. Despite promises from local authorities of a minimum 24-hour warning, many companies had no hope of salvaging any of their equipment.
Despite pledges from the Thai government of 100 billion baht (US$3.24 billion) for short-term reconstruction of the estates and 800 billion baht (US$25.89 billion) for long-term flood management, foreign investors may not be sufficiently satisfied.
We appreciate the great efforts by the Thai government, but expect further appropriate measures as the situation changes, the Japan External Trade Organization has said of these government reassurances. There are currently 1,800 Japanese manufacturing facilities and representative offices in Thailand, 450 of which are factories directly affected by flooding in the industrial estates.
Estimates on the full extent of losses from industry experts and enterprises with operations in Thailand continue to escalate, which begs the question: Could any of this have been predicted? Thailands Industrial Estate Authority severely underestimated the risks, with its former executive board director Praipol Koomsup explaining that the current location of the industrial estates near rivers and railways seemed ideal.
