4. Honda Automobile (Thailand) and Its Supply Chain Disruption
Kraiwinee Bunyaratavej
Wesley College
Case prepared for classroom discussion as opposed to illustrating the effective/ineffective management of a situation.
In 2011, a once-in-a-generation flood engulfed large portions of Thailand. Honda Automobile (Thailand) Co., Ltd. (HATC), was not spared. Pictures of hundreds of cars in a lot submerged underwater were shown all around the world. Soon, it became clear that the impact of the flood had spread well beyond Thailand. Honda’s plants around the world that imported car parts from Thailand faced shortages causing a disruption of their global supply chain.
Honda Automobile (Thailand) History
Honda Cars (Thailand) Co., Ltd. (HCT), started its operation in 1983 and automobile production commenced in 1984. In 1992, HCT opened another plant in Min Buri, Bangkok, called Honda Cars Manufacturing (Thailand) Co., Ltd. Then in 1996, a plant at Rojana Industrial Park, Ayutthaya, was opened. Ayutthaya is located in the central part of Thailand and is about 40 miles from Bangkok, Thailand’s capital. The new facility in Ayutthaya is one of the most advanced facilities in the world, with fully integrated assembly lines. The plant produces the Jazz (also marketed as Fit), City, Civic, Accord, and CR-V models. In 1999, HATC was established and Honda Cars Manufacturing (Thailand) Co., Ltd., and Honda Cars (Thailand) Co., Ltd., were brought under the control of HATC. The manufacturing facilities in Thailand have received an ISO 9002 certification for quality management excellence in 1998, an ISO 14001 certification for environment management excellence in 1999, and an ISO 9001:2000 standard certification in 2001. Honda’s facilities in Thailand are the largest in Asia. Excluding Japan, the Thai unit is one of Honda’s three largest manufacturing facilities worldwide. In 2007, automobile production in Thailand reached one million units. Honda invested efforts jointly with Thai parts suppliers to develop car parts that meet the Honda standard, and Honda has more than 100 dealerships countrywide.
The Big Flood
Since the end of June 2011, heavy monsoon rains had poured down on Thailand and elsewhere in the Southeast Asia region. Thailand was hit by five storms—tropical storm Haima, tropical storm Nock-Ten, tropical storm Haitang, typhoon Nesat, and typhoon Nalgae. As a result, the abundant water from the northern part of Thailand rushed through the central plain area of Thailand on its way to the sea in the south. It destroyed more than 780 lives1 on its way and nearly 9.5 million people were affected.2 Hundreds of thousands of people were displaced and one-quarter of the nation’s crop had been 1damaged. The flood was the worst flooding the nation had seen in half a century.
1 CBS News, “Thai Flood Death Toll Hits 780,” December 30, 2011, www.cbsn1ews.com/8301-501712_162-57350068/thai-flood-death-toll-hits-780/, accessed February 7, 2012.
2 CNN, “Thailand Floods Stall Automakers,” October 28, 2011, http://money.cnn.com/2011/10/28/news/international/thailand_floods_automakers/index.htm, accessed February 7, 2012.
Four small rivers—the Ping, Wang, Yom, and Nan—combined to form the Chao Praya River, which is the main river that runs through the central plain area of Thailand including Ayutthaya. In addition to the Chao Praya River, Ayutthaya is surrounded by two other rivers—the Lopburi River and the Pa Sak River. These rivers were used as a fortification in the past as Ayutthaya was a former capital of Thailand for more than 400 years. However, the rivers make Ayutthaya very prone to floods. In fact, many rice farms were located in Ayutthaya because it floods regularly and rice grows well in flooded fields.3 Nowadays, Ayutthaya has expanded from its agricultural past and is currently a manufacturing hub for cars, automotive parts, hard disk drives, and other electronic goods.
3 Economist, “Counting the Cost of Calamities,” January 14, 2012.
Honda’s plants initially did not experience any impact from the flood directly. However, they faced an indirect problem due to disruptions in the supply of parts from affected suppliers located in another industrial park. These suppliers had experienced flooding and could not provide the parts to Honda. In addition, damage to roads and some key infrastructure disrupted deliveries. As a result, the company temporarily halted its operations on October 4. Meanwhile, the company implemented an emergency plan and relocated finished vehicles that were prepared to be delivered to customers. These vehicles were moved to Don Muang Airport in Bangkok and newly built cars were moved to nearby bridges and hills.
Don Muang was originally the main airport for all flights to and from Bangkok. It was replaced by the newer Suvarnabhumi Airport in 2006 and reopened in 2007 to handle only domestic flights. During the flood, Don Muang Airport was converted into an evacuation center and the headquarters of the government’s flood relief operations. Nevertheless, Don Muang Airport too was eventually flooded.
Despite an attempt to increase the height of the levee to 6.5 meters, the overflows from the rivers eventually broke through levees and damaged Ayutthaya. Rojana Industrial Park was completely inundated with 6 to 10 feet of water. On October 8, the flood entered the HATC’s plant, which has an annual production of 240,000 vehicles, approximately 5% of Honda vehicles worldwide. Approximately 1,055 vehicles at the plant were under water, and these vehicles had a combined value of about US$24 million. Yet the valuation of these lost vehicles does not include the parts and components stocked for new car assembly, machinery, and equipment. Thus, the overall damage was much higher. Due to the evacuation order, the company’s employees could not enter the area to assess the damage. About 4,000 people were employed at this facility. With their facility damaged, this large workforce was at risk of losing their jobs because of the flood.
Financial Impact
Due to the impact of both the tsunami that hit Japan in March 2011 and the Thai flood in October 2011, Honda’s production and its supply chain had become nearly paralyzed. Honda Motor Co., Ltd., experienced a year-on-year decrease in production for the first time since 2009 (see Exhibit 1). Worldwide production fell by 20.2%. The company estimated that the Thai flood caused the loss of production of 260,000 units worldwide. The net earnings in the last quarter of 2011 fell 41% to $625 million.4 Exhibit 2 shows the decline in production in the second half of 2011. In the month of November, automobile production was at its lowest in the Asia region. Overall production was at 73,132 units compared to 104,159 units in September. In Thailand, Honda’s car sales decreased from 114,056 units in 2010 to 83,952 units in 2011, while overall car sales in Thailand remained about the same at 800,000 units (see Exhibit 3). As a result, Honda’s market share in Thailand fell from 14.3% in 2010 to 10.6% in 2011. However, it still maintained its ranking as the third-largest seller of cars in Thailand after Toyota and Isuzu. Honda exports its vehicles from Thailand to more than 30 countries. Its exports from Thailand were expected to decrease by 7% to about $3 billion in 2011—the first time in 14 years.
4 ABC News, “Honda Sees Sharp Drop in Profit on Thai Floods,” January 31, 2012, http://abcnews.go.com/Business/wireStory/hondas-profit-drops-41-percent-thai-floods-15477186, accessed February 7, 2011.
Source: Honda, January 27, 2012, http://world.honda.com/news/2012/c120127Automobile-Sales/print.html, accessed February 7, 2012.
Source: Honda, January 27, 2012, http://world.honda.com/investors/financial_data/monthly/, accessed February 7, 2012.
Source: Adapted from Honda Automobile (Thailand), January 17, 2012, www.honda.co.th/en/newsrelease/index, accessed February 7, 2012.
Other Plants
Although Thai Honda Manufacturing Co., Ltd. (TH), which manufactures motorcycles and power products, was not flooded, the company suspended its power products manufacturing on October 6 and motorcycle production on October 11 due to disruptions in the supply of parts from affected suppliers and flood-control measures at the plant. Honda Malaysia SDN BHD faced the same supplier situation and also had to suspend automobile production on October 25. The supply chain disruption for parts also hit the Honda plant in the Philippines, which had to temporarily close down on November 3 due to limited parts supply. The Suzuka and Saitama factories in Japan, though not closed, needed to make some production adjustments on November 7 due to the supply chain disruption caused by the flood in Thailand. Similarly, six production facilities in the U.S. and Canada and Honda’s European manufacturing plants also carried out production adjustments due to the impact of the limited supply of parts such as some critical electronic parts from Thailand. In North America, it scheduled a nonproduction day in these plants on November 11, and canceled all Saturday overtime work in November. In Europe, the plan to launch its new Civic model was postponed for a month, and the plant in England needed to cancel work from November 3 to 4 due to a shortage of electrical and engine components from Thailand. Plants in India and Brazil also had to perform a production adjustment.
The challenge that Honda was facing did not seem to stop after the flood entered the plant as more water continued to come from the north. The Thai government said the water level at the Bhumibol Dam, the nation’s largest dam, was becoming critically high and needed to speed up discharges to cope with incoming water. The government expected the floodwater to recede in a few months. For Honda, the flood could not have happened at a worse time. The company had been trying to make up for the lost production after the earthquake and tsunami hit north-central Japan on March 11 earlier in the year. It already had lost market share to competitors in the U.S. because of its inability to supply enough cars. The flooding in Thailand that again caused the supply chain disruption was a second blow to Honda. The flood affected Honda’s 35 first-tier suppliers which make parts that go directly into its vehicles. To make the matter worse, Honda’s second- and third-tier suppliers that provide smaller parts for bigger components also were affected. The company’s global supply chain was halted. Although competitors Toyota and Mitsubishi also have plants located in Ayutthaya, Honda suffered the most.