Moody's: Thai Flooding is Credit Negative for Japan's Car Makers

Thailand’s worst flooding in fifty years stopped production at more than 400 Japanese firms in six industrial parks north of the Thai capital, Bangkok.


The final extent of damage is uncertain, but the rising flood waters have hurt all Japanese auto manufacturers and many electronics firms, either directly at flooded plants or via affected parts suppliers, and is credit negative, according to Moody's.


The affected issuers include Honda Motors (A3 stable) and Isuzu Motors (Baa1 stable). The digital-single-lens-reflection (DSLR) camera division of Sony (A3 negative) and camera maker Nikon (A3 stable) could both lose market share to the unaffected camera business of Canon (Aa1 stable). Other negatively affected issuers are the computer hard-disk-drive (HDD) fabrication of Toshiba (Baa2 stable) and the HDD devices of TDK (A2 stable).


Moody's sovereign credit team estimates that the floods will cost Thailand 2% of its 2011 gross domestic product (GDP). In comparison, Japan’s Kobe earthquake in 1995 cost 2.5% of its GDP.


Because global capacity utilization among Japanese car makers is still recovering from the country’s 11 March earthquake, tsunami and nuclear crisis, this further blow to their supply chain will delay a full return to pre-disaster output, with the extent of the delay dependent on the final damages and resolution of the situation in Thailand.


A stoppage of several months at Honda’s flooded Thai facilities, for example, would reduce its forecast ¥270 billion ($3.5 billion) operating profit for the current fiscal year by 10%, says Moody's.


The other two of Japan’s big three, Toyota (Aa3 stable) and Nissan (Baa1 positive), are unlikely to lose much money so long as they find alternative parts suppliers because their assembly plants did not suffer direct damage. All told, the floods have cut Japan’s targeted car output from Thailand by nearly 90%, but Thailand’s share of global car exports is just one tenth of Japan’s.



As the worst affected auto maker, both in Thailand and from the 11 March disasters, Honda’s global market share will likely continue to fall, notes Moody's.


Likewise, Isuzu has just introduced a new model light commercial vehicle and most of the production is in Thailand. US car competitors, such as Ford (Ba2 review for upgrade), have some facilities in Thailand, but disruption at their location is lower, while competing Korean issuers have no auto parts or operations based in the country or elsewhere in rain-drenched Southeast Asia.


Among Japanese camera makers, Canon should gain market share from Nikon and to a lesser extent from Sony, both of which produce high-end DSLR cameras in Thailand. Canon’s printer facility in Thailand has been little affected.


Nikon, in contrast, which has an extensive presence in Thailand, gets most of its profit from DSLR devices and controls more than a third of the global DSLR camera market.


Sony’s DSLR product line is small compared to its other businesses, but is strategically important and growing. Sony is trying to expand its market presence and earnings in this high-margin area. Thus, the flooding may delay Sony’s timeline for turning the business into a profit spinner.


In computer HDDs, Toshiba, the world’s fourth-largest producer, has half its capacity coming from Thailand, but it should fare better than Western Digital (unrated), the US-based global leader, which said that it may need several quarters to recover fully from the flood.


TDK, another leading Japanese HDD device maker, has plants in Thailand and sells HDD components to other major HDD firms. A prolonged delay in recovery at the plants of TDK and major HDD makers will hurt TDK’s earnings.





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