Toyota Philippines Affected - Thai Investments Put Japan Inc. in Flood’s Path

Japan, Thailand's biggest foreign investor, may also be the largest overseas economic victim of record floods forcing companies including Toyota Motor Co., Hitachi Ltd. (6501) and Canon Inc. (7751) to halt output in the country.

Toyota, Asia's biggest carmaker, scrapped its annual profit forecast yesterday, saying it needs more time to assess the financial toll from Thailand's worst floods in almost 70 years. Canon, having shifted some camera production to the southeast Asian nation, cut its full-year profit outlook last month because of damage to output from the disaster.

Japan's most profitable exporters built up factories in Thailand in the past three decades to cut labor costs and stem the erosion of profit caused by the yen's appreciation against the dollar. Japanese direct investment in Thailand jumped 35 percent to about 100 billion baht ($3.4 billion) in 2010, led by the auto, metals and machinery industries, according to the Thai Ministry of Industry's Board of Investment.

"Japan has shifted production to Thailand and other Asian nations because of the stronger yen, so among the G-3 nations, Japan faces the biggest impact from the Thai floods," said Takahiro Sekido, chief Japan economist in Tokyo at Credit Agricole CIB. "Looking at the increase in trade and direct investment in Thailand in recent years, connectivity is rising and the floods will have an impact on Japan's economy."

Japan's mainstay manufacturers, in particular, will be hit hard by the floods, Junichi Makino, chief economist at SMBC Nikko wrote in an Oct. 25 report. Full-year profits of listed Japanese non-financial companies may be cut by 3.9 percent this fiscal year as a result of the disaster, Makino estimates.

Toyota Hit

"If the Thai floods continue to reduce production for three months, Toyota's operating profit may be cut by 200 billion yen," said Koji Endo, an auto analyst at Advanced Research Japan. Toyota was already producing at full capacity to recover from the impact of the March earthquake in Japan, so there is a limit to what it can do to recover from losses from the Thai floods, he said.

The renewed threat to factories as water courses toward Bangkok's central business district may worsen the effect of floods that have prompted Thailand's central bank to slash its 2011 economic growth forecast and damped the earnings outlook for Japanese companies including Sony Corp. (6758), Nikon Corp. (7731) and Isuzu Motors Ltd. (7202)

Flooding across the region may also lead to "serious food shortages," the United Nations Food & Agriculture Organization said in a report dated Oct. 21.

Damaged Farmland

About 12.5 percent of rice farmland in Thailand has been damaged, along with 6 percent in the Philippines, 12 percent in Cambodia, 7.5 percent in Laos and 0.4 percent in Vietnam, as storms hit the region since September, according to the report.

Toyota and rivals including Isuzu are still unable to determine when they can restore production in the country as damages from the flood are still being assessed. Isuzu extended its production halt until Nov. 11 because of parts shortages, it said in a statement yesterday. Separately, Toyota said it will extend output reductions until Nov. 18.

The floods may push back expansion plans at Toyota and Honda until the first quarter of 2012, Tracy Handler, a Troy, Michigan-based analyst at IHS Automotive, said Nov. 5.

Japanese manufacturers including Toyota may have more difficulty shifting output away from Thailand, where they have more concentrated supply chains than U.S. and European rivals including Ford Motor Co., said Sekido of Credit Agricole.

Thailand-Centric

"Ford, for instance, can probably shift production to North America or Mexico, but Thailand probably plays a more important role for Japanese companies," he said. "American and European companies also have production lines in Thailand, but Japan is the closest geographically."

Japan is the largest investor in Thailand, representing 57 percent of projects that were granted investment incentives last year, according to Thailand's Board of Investment.

The setbacks come just as Japanese automakers and electronics manufacturers are restoring output after the March 11 earthquake and tsunami led to parts and power shortages that slashed output. The country's exporters are also reeling from the yen's gain to a postwar high on Oct. 31.

Nobuyuki Nakahara, a former Bank of Japan (8301) policy board member, urged the central bank to boost monetary easing 10-fold to weaken the currency.

"The Japanese economy will collapse unless the yen weakens to 100 yen per dollar," Nakahara, a policy board member between 1998 and 2002, said in a Nov. 4 interview in Tokyo.

Third Recession

Japan fell into its third recession in a decade after the record earthquake and tsunami on March 11. Industrial output declined 4 percent in September from August, a sharper drop than analysts surveyed by Bloomberg News forecast. Export growth slowed to 2.4 percent from a year earlier in September from 2.8 percent in August, while retail sales also fell more than expected.

The Thai disaster is affecting the global supply chain at Japanese auto and electronics makers, further disrupting output. After Toyota halted output at its Southeast Asian production base, a shortage of parts prompted the company to cancel plans to run factories overtime in North America, where it had intended to make up for production lost because of the March 11 quake.

"This will not only impact Japan's exports to Thailand, but also affect global supply chain of Japanese companies," said Yoshimasa Maruyama, a chief economist at Itochu Corp. (8001) in Tokyo. "Production of Japanese firms in the U.S., Japan and other areas may also decrease."