Thai ‘Credibility’ at Stake as Factories Soak

By Daniel Ten Kate - Oct 31, 2011 12:00 AM GMT+0700

Hana Microelectronics Pcl is among the thousands of Thai companies with factories swamped by record floods calling on the government to help ensure it never happens again as waters slowly recede north of Bangkok.

“Thailand’s credibility is on the line here,” said Hana Chief Executive Richard Han, whose Bangkok-based company makes parts used in digital music players and mobile phones. “A complete review of how to protect these industrial estates needs to be conducted and it needs government support.”

More than 9 billion cubic meters of water released this month from dams filled to capacity have swept down a river basin the size of Florida, inundating seven industrial parks that helped transform Thailand from an agriculture-based economy to a manufacturing hub since the first one was built four decades ago. The worst floods since 1942 have shuttered 10,000 factories, put 660,000 jobs at risk and caused damage of 140 billion baht ($4.6 billion), government figures show.

Factory owners are concerned the disaster may repeat itself as water defenses fail to keep pace with the development of roads, housing estates and business complexes in Bangkok and its vicinity, which accounts for about half of Thailand’s industrial output. Prime Minister Yingluck Shinawatra must now convince companies such as Honda Motor Co. and Canon Inc. that the flood plain remains a reliable production base.

‘Main Challenges’

“One of the main challenges to whether Thailand can develop into a high-income country is how we can mitigate the economic impact of natural disasters that are likely to continue to occur more frequently with greater intensity over the next several years,” Korn Chatikavanij, a former finance minister with the opposition Democrat party, said in an interview. “If we don’t learn lessons and don’t find ways to control the impact, then we will remain a poor country.”

Slowing export growth and flood costs that Moody’s Investors Service estimates at 200 billion baht, equivalent to 2 percent of gross domestic product, may compel Thailand to cut interest rates. The disaster may wipe as much as 3 percentage points off GDP growth this year, according to Credit Agricole CIB strategist Frances Cheung.

Thai stocks this month have climbed 6.2 percent and the baht advanced 1.5 percent, mirroring gains in the region after European leaders agreed to expand a bailout fund to stem the region’s debt crisis. Thai Reinsurance Pcl and Muang Thai Insurance Pcl, both Bangkok-based insurance providers, fell more than 20 percent in that time.

Rising Temperatures

Rising temperatures and sea levels in the coming decade will increase the risk of floods in Bangkok four-fold by 2050, the World Bank said in a report last year. The capital sits on the bottom of the Chao Phraya River Basin, which has an average elevation of less than two meters (6.6 feet) above sea level.

Southeast Asia’s second-biggest economy may expand 2.6 percent in 2011, down from an earlier forecast of 4.1 percent, and 4.1 percent next year, the Bank of Thailand said Oct. 28.

A growing insurance industry in Asia will create “a market-based incentive for redirecting construction away from areas that are flood prone,” said David McCauley, lead climate change specialist at the Asian Development Bank. "Many across the region will be paying closer attention to Bangkok’s experience and will incorporate climate change risks in future urban planning."

Location and Access

In 1971, Thailand built its first industrial park in Pathum Thani, a province on Bangkok’s northern border. The location seemed ideal given its access to the river and railways to transport goods, said Praipol Koomsup, who served as executive board director of the Industrial Estate Authority of Thailand in the early 1990s.

“At the time it never occurred to us that flooding was going to be a major risk,” said Praipol, now a professor at Bangkok’s Thammasat University. “We were caught unprepared.”

Over the next two decades, more estates popped up in Pathum Thani and further up the Chao Phraya in the former capital of Ayutthaya province, 76 kilometers (47 miles) north of Bangkok. Annual floods helped the city, now a United Nations World Heritage Site, repel Burmese invasions in the 16th century.

Thailand offered greater tax incentives to invest in Ayutthaya and other provinces outside Bangkok, helping to attract Japanese manufacturers such as Nikon Corp., Sony Corp. and Hitachi Ltd., particularly after the 1985 Plaza Accord strengthened the yen against the dollar. The country makes about a quarter of the world’s hard-disk drives and serves as the Southeast Asian production hub for Japanese carmakers.

Water Demand

Increased demand for water to grow crops during the dry season prompted authorities to keep more water in upstream dams this year, said Chaiyut Sukhsri, a water resources engineering professor at Bangkok’s Chulalongkorn University. Since the 1950s, more than 300 dams have been built to hold water from Thailand’s monsoon rains from July to October for use the rest of the year.

The largest of these, Bhumibol and Sirikit, can irrigate 400,000 hectares (1,544 square miles) in the Chao Phraya basin, an area six times bigger than Singapore. The added production has helped Thailand remain the world’s top rice exporter each year since 1981, according to the U.S. Department of Agriculture.

“Normally there is always a lack of water to distribute to all parties,” Chaiyuth said. “It’s a difficult balancing act.”

Rainfall about 42 percent more than average this year filled upstream dams to capacity, prompting authorities to release large amounts of water earlier this month. Government efforts to reinforce dikes protecting the estates proved futile against a wall of water as high as 3 meters (9.8 feet).

‘No System at All’

Unlike Bangkok, which is protected by a series of canals and dikes, “there is no system at all” in Ayutthaya and Pathum Thani to divert water flowing through rice fields, said Bhichit Rattakul, a former Bangkok governor who helped develop the city’s flood defenses. “When the water comes, it just flows into the industrial estates.”

Yingluck said Oct. 29 that waters in Nakhon Sawan and Ayutthaya provinces have started to recede. The government will start pumping out water from flooded industrial parks on Nov. 10, and expects plants to resume operations around the middle of December, Industry Minister Wannarat Charnnukul said on Oct. 28 after meeting with companies affected by floods.

Building Walls

The government will seek to build walls around industrial estates that are 50 percent higher than the top water level this year to protect them from flooding before next year’s rainy season, Energy Minister Pichai Naripthaphan, who is advising Yingluck on recovery efforts, said by phone.

“That way even if more water comes, there won’t be any problem,” Pichai said. “Investors can be sure they don’t need to move out.”

About 100 billion baht will need to be spent in the next 12 months to renovate flooded industrial estates, he said. A second project to solve long-term water-management problems will cost as much as 800 billion baht, he said.

The cost of helping companies recover and build new infrastructure to divert water could be as much as 500 billion baht, according to Pongsak Assakul, vice chairman of the Thai Chamber of Commerce.

“All investors are asking how can we be sure this will not happen next year or the year after,” he said by phone. “That assurance has to be given.”

To contact the reporter on this story: Daniel Ten Kate in Bangkok at dtenkate@bloomberg.net

To contact the editor responsible for this story: Peter Hirschberg at phirschberg@bloomberg.net