W

e find Thailand’s severe flooding labeled a “slow-motion tsunami” interesting, as its effects can be just as devastating with the latest death toll approaching 400 people. Thus far, the deluge, the worst in five decades, has destroyed more than 10 percent of the country’s rice fields, disrupting food supplies in Bangkok, damaging some 400 factories and even canceling flights in the capital’s second airport. The Thai authorities warned that the capital could be swamped by up to 1.5 meters of water if flood barriers fail and declared public holiday in flood-afflicted areas to deal with the disaster.

Reportedly, Toyota and other major automakers have begun cutting back production on the back of parts shortages from suppliers in Thailand. This has prompted producers to rethink of how risks could be mitigated by selecting more parts manufacturers in the region. In our view, such consideration could undoubtedly result in production plants being set up in Indonesia, further raising Indonesia’s already rapidly growing foreign direct investment (Chart 1).

Nissan was quoted as saying that it was still assessing the damage from the Thai flooding, but its vehicle plant near Bangkok has been so far unaffected. Toyota, which uses Thailand as its key production hub, has not been as lucky. According to Toyota’s spokeswoman Shiori Hashimoto, four Japan-based Toyota factories and seven group companies (assemblers of cars and trucks) have suspended overtime work, estimating lost of 6,300 units due to the scale back. Additionally, three assembly plants have been closed down since Oct. 10, resulting in more than 40,000 units in lost output.

Other Japanese auto makers like Honda Motor have temporarily halted production for both motorcycles and autos at its Thai and Malaysian factories due to parts shortages. On Mazda, vehicle production has ceased at its Thai joint venture with Ford Motor Co. For Mitsubishi Motors Corp., production has stopped at its Thai plant, which manufactures pickup trucks, sedans and a sports utility vehicle.

Our channel check on the ground with Astra International reveals that production delays involving 3,000 to 5,000 vehicles per month could materialize due to Thailand’s flood disaster. These include both impact on components and completely built-up (CBU) cars such as Camry and Yaris.

Bahana’s auto analyst mentioned that Astra usually carries parts inventory worth two to three months’ production. This suggests that shortage impact will only be felt sometime in December 2011 or January 2012. We note that vehicles accounted for the single largest imports from Thailand at 27 percent of total (Chart 2).

At this stage of the cycle, we still maintain our 10 percent growth forecast on domestic car sales next year. However, this will obviously hinge on the severity of the impact stemming from Thai’s flooding. Nevertheless, we believe that sales of both two-wheelers and four-wheelers will be supported by the recent interest rate reduction by the central bank coupled with plentiful availability of lending from banks and multi-finance companies.

The writer is Senior Vice President and Head of Research at PT Bahana Securities