Asia’s Motown Meets Waterworld--The Global Water Supply Chain Crisis

by Lakis Polycarpou | November 9, 2011

Since July, an almost unceasing torrent of rain has soaked Thailand, flooding farms, roads, factories, and finally Bangkok itself, a city of some 12 million people; so far at least 500 people have died. To date the government has ordered evacuations of 12 of the city’s 50 districts, even as water continues to creep through the city from the north. Latest reports suggest floodwaters are now threatening the city’s rail transportation network.

By all accounts the floods are a humanitarian and economic disaster for the country, another apparent sign of the emerging dangers embedded in a variable and changing climate.

The floods, however, are also emblematic of something else—one of the clearest examples of the unprecedented water resource and climate dangers the global economy faces in an ever-more interconnected world.

One example: if you are reading this on a computer, there is a 40 percent chance that the hard drive you are using was manufactured in Thailand. With over a 1,000 Thai factories now closed due to flooding, hard-drive production in the country could be reduced by 25 to 40 percent according to IDC, a market research firm. Apple CEO Tim Cook told investors in an earnings conference call that he “is virtually certain there will be an overall industry shortage of disk drives as a result of this disaster.” Industry leader Western Digital, which produces some 60 percent of its hard drives in Thailand, expects output to drop by half.

But computers are not the only industry hit – auto companies, particularly big manufacturers like Toyota and Honda will take enormous production hits from factory shut-downs in the country. As the Nation, the national Thai newspaper put it, “the ‘Motown’ of Asia has become ‘Waterworld’ overnight.”

According to MarketWatch, Toyota will produce 30 percent fewer vehicles than initially planned in November. The shutdowns are expected to hammer an already weak industry—as an article in USA Today put it, “Any chance that Toyota and Honda would be able to salvage a horrible 2011 appears to have been dashed by Thailand flooding.” The companies were already suffering from last spring’s earthquake and nuclear catastrophe, which cut production by almost 75 percent in April.

This is not the first time that water and climate have had major impacts on supply chains recently. In the summer of 2010, the deluge of Pakistan and climatically connected drought/wildfires of Russia hit global apparel and grain markets respectively. It’s likely these disruptions have had distant and yet-unfinished effects; many analysts believe, for instance, that a global spike in wheat prices attributable to Russian drought and a ban of wheat exports was a direct contributing factor to initial protests leading to the Arab Spring revolutions.

But while commodity price disruptions may have life and death implications for millions of poor people, they are (at least to date) relatively easily absorbed by economies in the developed world. What’s notable about the Thai floods, is how dramatically they have impacted high-tech and industrial supply chains—illustrating that climate and water risks are not limited to the poor.

What are the likely impacts? It’s hard to tell for sure, but at the moment it seems likely that the manufacturers will weather the storm. A bigger question is, what if these kinds of events continue to happen with greater frequency?

Ironically, Toyota is the pioneer of the “just-in-time” approach to inventory—an approach which, when it works properly, dramatically reduces costs by cutting inventory to a bare minimum. The downside is that without an inventory buffer, companies are much more vulnerable to supply shocks. Having a limited number of suppliers is a common cost-cutting approach in “just-in-time” supply chains.

It goes without saying that globalized supply chains are a hallmark of the globalized economy – but what happens when climate and water risks make those supply chains less tenable? To put it another way, is there a point at which the economic risks of globalized supply chains outweigh the benefits?

To be sure, water and climate are far from the only risks that can affect supply chains; peak oil and the resulting energy price volatility along with political and economic instability are only a few of the risks that global production faces. Assuming that these risks are not going away, it seems likely that businesses will need to adjust their supply chain strategies.

Fortunately—at least for climate risks—recent advances in climate understanding hold the potential to let companies develop risk management plans that can make supply chains both more nimble and resilient.

For example, recent work has connected the probability of extreme flooding in specific locations around the world with quasiperiodic global climate patterns such as the El Niño/La Niña-Southern Oscillation and the Pacific Decadal Oscillation. Coupled with a better understanding of more local hydrometeorology—daily cycles of energy and land surface moisture—scientists are closer to making more accurate forecasts about how much risk a particular area faces, both at a specific time and over the coming decades.

These forecasts could be used in a multitude of ways. It turns out, for instance, that the global “teleconnections” of flood and drought risk mean that a greater risk for a flood in one place may mean a lower risk in another. Having this information could help manufacturers to hedge risks through insurance or other financial mechanisms and diversify supply chain locations based on the same understanding of risk. Governments and relief organizations, on the other hand, could use this information to target humanitarian interventions for the most at-risk populations at a lower cost.

There is still much work to be done; and even the most accurate forecasts can’t prevent floods and droughts from happening or eliminate the incredible economic and social hardships they cause. But there is no question that a better understanding of when and where extreme events will strike could make the difference between weathering the storm and being washed away by the flood.

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