Thailand Flooding Leaks into the New Year

Supply chains, earnings, and insurance policies are all affected by the natural disaster. Companies are just now getting a handle on the financial ...
Sarah JohnsonJanuary 26, 2012

The disastrous floods in Thailand continue to affect companies’ supply chains and their ability to fill customers’ demands, and it will affect their financial performance in other ways as well.

This week, half a year after the floods began, companies in the technology sector revealed that the impact has been bigger than first expected and is affecting their earnings. The lasting effects could take months more to figure out, as some companies are still seeing supply-chain disruption and will continue to experience higher costs for some components of their products. And many companies, even outside the tech sector, may be affected the next time they renew insurance lines.

The floods “caused a much more severe disruption to our customers’ supply chain than we initially expected,” Molex CEO Martin Slark said on Wednesday in a phone call with analysts. The company, which provides parts to telecommunications and automotive companies, lost  approximately $15 million in revenue during its most recent quarter, three times the amount forecast in the fall.

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Other executives have made similar concessions on earnings calls this week. Shortages of disk drives, for example, have slowed down sales for Sanmina-SCI Corp., which acknowledged in a regulatory filing that the problems in Thailand could continue to affect its sales and net income.

Indeed, research firm Gartner reported two weeks ago that shortages of hard disk drives will be felt in the technology market throughout the year, affecting sales of PCs and stalling industry growth. Other companies reporting problems because of non-operating factories and supplier woes related to the flooding include Intel, CTS, NVIDIA, NEC, and Western Digital.

Outside the technology industry, reinsurance company RenaissanceRe announced on Wednesday that the flooding will result in a $45 million loss for its fourth quarter. Any effect the disaster has on reinsurance companies will likely trickle down to commercial insurance buyers later this year, predicts John Eltham, head of North American business for brokerage Miller Insurance. Buyers may notice restrictions on coverage and demands for additional information about their supply chains.

In fact, the events in Thailand, on the heels of the Japanese earthquake and tsunami as well as a significant New Zealand earthquake, has insurance companies thinking about doing business differently. Some have cut back on their business-interruption coverage for natural disasters. And they are expecting commercial buyers to provide them with more information. “Underwriters are now realizing that they may have more exposure than they realized and may not be willing to share it as much,” says Eltham.

Higher rates are possible as well. Last year, half of companies saw rate increases in their property insurance, according to broker Marsh. For companies exposed to large catastrophes and that had significant losses in 2011, rates increased by 10% or more during the fourth quarter.

In some instances, insurance companies may cut in half the coverage they’re willing to give commercial clients, and they will likely ask for more information about suppliers and their locations. Traditionally, such information has not been shared for business-interruption insurance, says John Dempsey, managing partner at risk-consulting firm Dempsey Partners.

“The average company probably didn’t realize so much of the world’s hard disk drives come from Thailand and that so many of the manufacturers and the suppliers of those manufacturers were located in areas so prone to flooding,” he says.