Japanese companies, Thailand’s biggest foreign investors, may spend more to build factories in neighboring Indonesia and Vietnam after the worst flooding in 70 years disrupted global production.
“Executives recognize the concentration risk after the floods,” said Takahiro Sekido, chief Japan economist at Credit Agricole CIB in Tokyo. “The recent trend of accelerating investment into Thailand will cool despite the fact that Thailand was such an ideal destination.”
Prime Minister Yingluck Shinawatra has proposed spending 130 billion baht ($4.2 billion) on reconstruction and steps to prevent future floods. She seeks to reassure investors that Thailand remains a safe place for business, as companies including Pioneer Corp., Honda Motor Co. and Toyota Motor Corp. scrapped profit forecasts after the floods shut factories.
The disaster has rippled through the supply chains of Japanese auto and electronics makers, as parts shortages affected operations across the globe.
Honda said Monday it will continue output reductions at its plants in the U.S. and Canada until Nov. 30 and will operate normal production shifts on Dec. 1 and 2 as it recovers from shortages of parts from Thailand. It had to cut output in North America this month after floods forced parts production halts at some facilities in the Southeast Asian nation.
“Right now, we can’t announce anything beyond Dec. 2,” Ed Miller, a Detroit-based Honda spokesman, said in a phone interview.
Honda Chief Financial Officer Fumihiko Ike said Oct. 31 that he hopes the Thai government will improve infrastructure, including water-drainage systems.
The company plans to flexibly manage production at factories in neighboring nations, Ike told reporters in Tokyo. Canon Inc., Nissan Motor Co., Hitachi Ltd. and Toshiba Corp. all halted production at Thai factories because of the floods.
“We acknowledge the need to consider diversifying investment inside Thailand and to other countries in the future,” Pioneer spokesman Hiromitsu Kimura said by telephone on Nov. 10, a day after the company withdrew its forecasts for full-year earnings because of the disaster in Thailand.
The distribution of Japan’s supply chain across the region may shift as well amid increasing local consumption and plans to unify the region’s economies.
The 10-member Association of Southeast Asian Nations is targeting 2015 for the creation of a single-market economic zone modeled after the European Union, without a common currency. Japan was the biggest investor in the bloc from 2008 to 2010, topping the U.S. and China, according to ASEAN statistics.
Indonesia and Vietnam, which both attracted more foreign direct investment than Thailand last year, look set to attract more Japanese investment, said Tohru Nishihama, an economist at Dai-ichi Life Research Institute Inc. in Tokyo.
“Indonesia has a large population and its domestic demand is quite strong, while Vietnam’s population is increasing,” he said. The two countries account for more than half of the 591 million people in the countries that comprise ASEAN, the organization’s statistics show.
Indonesia imports as many as 200,000 vehicles from Thailand annually, and some factories have temporarily shut because of a parts shortage caused by the Thailand floods, according to the Indonesian Automotive Industry Association. Still, Indonesia, Southeast Asia’s biggest economy, must do more to improve roads, electricity, ports and airports to attract investors, said Sudirman Maman Rusdi, the auto industry association’s chairman.
“At a glance, this is an opportunity,” Rusdi said. “But are we ready?”
Thailand’s infrastructure and industrial clusters make it an easier place for many Japanese companies to operate, Yoichi Yajima, business support center representative for the Japan External Trade Organization, said last week.
“I don’t expect a big withdrawal of investment from Thailand,” Yajima said. “As long as big firms like Toyota, Nissan, Honda, Toshiba or Hitachi stay here, their suppliers won’t leave.”
Japanese direct investment in Thailand jumped 35 percent to about 100 billion baht in 2010, led by the auto, metals and machinery industries, according to the Thai Ministry of Industry’s Board of Investment.
Thailand accounted for about 3.2 percent of Japan’s cumulative foreign investment in the past two years, the second-largest after China’s 12.6 percent among Asian nations and compared with 2.7 percent of the five-year total, according to data from Credit Agricole and the Finance Ministry.
“Japanese investors are the most important for Thailand,” former Finance Minister Virabongsa Ramangkura said last week, after Yingluck appointed him as the head of a new committee for reconstruction and development. “I will go to talk to them and ask them what they need us to do.”
Still, the floods may have cut interest in investing in Thailand down to a trickle, according to JETRO.
Queries to JETRO in Bangkok about new investment dropped to about 30 in October and one in November from more than 50 in each of the previous few months, said Yajima.
At least 533 people have been killed since late July, when monsoon rains began lashing Thailand. Flooding worsened last month, when rainfall about 40 percent more than the annual average filled dams north of Bangkok to capacity, prompting authorities to release more than 9 billion cu. meters of water down a river basin the size of Florida.
Advancing waters have swamped seven industrial estates north of Bangkok with 891 factories, and threaten two others in the capital where Honda, Isuzu Motors Ltd. and a unit of Mitsubishi Heavy Industries Ltd. have operations.
Yingluck said Tuesday the floods are beginning to ease as water levels stabilize.
Eastern districts of Bangkok should be flood-free before the end of the year, though water may take longer to drain from western districts, Yingluck said.
Toyota President Akio Toyoda said last week the company isn’t considering reducing investment in Thailand, where the automaker suspended production at three factories starting Oct. 10 because of parts shortages.
While those with flooded factories have little choice but to rebuild and start production as soon as possible, persuading new Japanese investors to choose Thailand over neighboring countries will be more difficult, said Pongsak Assakul, chairman of the Thai Chamber of Commerce. The government must develop a plan to prevent flooding and implement it as fast as possible, he said.
“Japan is our major investor,” Pongsak said. “Once we can convince them, others will follow.”
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