Japanese producers recover from Thai floods

Japanese factory output rose more than expected in January, in a sign that manufacturers have largely recovered from the Thai floods that last year disrupted supply chains and severely hit the electronics industry.

Industrial production rose 2 per cent from December, buoyed by strong growth in iron and steel and fabricated metals, and in transport equipment where sales have been galvanised by the revival of government subsidies for fuel-efficient cars.

But Japan’s world-leading producers of electronic parts – the resistors, transformers and motors that go into every computer – are still showing the tide marks caused by the floods in Thailand. The sector has followed up weak industrial production in November and December with an even poorer performance in January, according to government data released on Wednesday.

Overall, Japanese manufacturing has returned to within 3 per cent of the level recorded before the earthquake hit north-east Japan last March. But production of electronic parts is still 18 per cent lower, mainly because of the sector’s heavy exposure to the flood-damaged industrial parks of Bangkok.

The Thai floods affected 64 out of 77 provinces in Thailand, with total damage estimated at about Bt1.4tn ($46bn). Pongsvas Svasti, Thai industry minister, said last week that four-fifths of the 838 businesses affected would be operational by the end of the third quarter.

A survey of Japanese companies in Thailand released on Wednesday found that business confidence plunged in the second half of 2011 because of the floods. But the Japanese Chamber of Commerce in Thailand report said 85 per cent of Japanese companies – which overall account for half of the foreign direct investment in Thailand – intend to resume business in the same location.

While confidence has bounced back, however, Japanese executives say it remains fragile. Much depends on the Thai government’s ambitious flood defence plans ahead of the next rainy season due to start in June, according to Setsuo Iuchi of the Japanese Chamber of Commerce in Thailand who also heads the Thai branch of Jetro, the Japanese government’s business promotion arm.

“It’s very natural to see such strong recovery after such a sharp decline last year. It doesn’t necessarily show the real extent [of confidence],” he said.

The Japanese government data released on Wednesday showed producers predict a 1.7 per cent month-on-month rise in production in February – better than the forecast released one month ago – and another 1.7 per cent increase in March. This is strengthening hopes that the fragile economy will return to growth this quarter after contracting by 0.9 per cent last year, the third decline in the past four years.

“We see production increases gaining traction little by little as strong post-quake reconstruction demand materialises and global manufacturing recovers,” said Chiwoong Lee, an economist at Goldman Sachs.

However, the enduring weakness in electronic parts and devices, which account for about one-eighth of Japan’s manufacturing sector, is a concern. Production in January showed a 1.3 per cent contraction from December and a steep 17 per cent fall on a yearly basis, wider than the 15 per cent year-on-year falls in November and December. Manufacturers say restoring facilities damaged by the floods is a long and complicated process.

Both plants owned by TDK, the electronic components maker, in an industrial park about 70km north of Bangkok, for example, were inundated, forcing a shutdown in production of rare-earth magnets and sensors from October.

While some manufacturing has been shifted to unaffected plants in other parts of the country, full production of magnets is not expected until April, while the sensors business is awaiting the arrival of new machinery.

“We’re still operating at about 30 to 40 per cent the normal run-rate in Thailand,” said TDK.

Nidec, the world’s biggest maker of hard-disk drive motors, is hoping to restore full production by the end of March, having replaced machinery damaged by the floods with newer, more efficient models. Last month, Shigenobu Nagamori, chief executive, told investors he hoped the broader Thai-based hard-disk industry would be back to normal “in the first half of the next fiscal year”.

Ceramics and electronics group Kyocera says it has not yet returned to full production at one Thai manufacturing plant and has blamed the floods in part for a “difficult” fourth quarter to March.

Separately, South Korea on Wednesday also recorded an improvement in factory output for January after three consecutive monthly declines. Output increased 3.3 per cent from December.