Supply chain pains: Identifying the damages

Vietnam’s challenges lie mainly in the footwear and garment sectors amid COVID-19 pandemic. Photo: Quoc Tuan

Mr. Yun Liu, Economist of the Hongkong and Shanghai Banking Corporation Limited said that the most evident challenge lies in the footwear and textile sectors, as Vietnam’s southeast region is a main global hub. According to Vietnam’s Textile and Apparel Association, over 30% of related factories were closed. Not surprisingly, these two industries were the main drags on August’s 5.4% year on year decline in exports.

On footwear, Vietnam has doubled its global market share to 15% in the last ten years, despite mainland China’s dominance of 30%. With the upcoming holiday season in the West, consumers in the US and Europe will increasingly feel the pain. Take Nike as an example to illustrate Vietnam’s significance in the global textile supply chain: 88 of Nike’s 112 factories in Vietnam are located in the southeast region, in total producing 50% of Nike’s branded footwear.

Similarly, Vietnam is also the world’s largest garment producer after mainland China and Bangladesh. The severe supply chain disruptions will likely hit US consumers particularly hard, as the US alone purchases close to half of Vietnam’s garment exports. Global brand Adidas is facing a hiccup in its production, as Vietnam accounts for almost 30% of its global production. For Manchester United fans who bought Adidas jerseys with the signing of Cristiano Ronaldo, they will have to wait for a couple of months to receive their orders, said Mr. Yun Liu.

However, Mr. Yun Liu said the impact on electronics exports would show some divergence. Similar to footwear and textiles, exports of computer electronics saw a 12% y-o-y fall in August. That said, phone exports remained surprisingly resilient, defying recent Delta headwinds with 11% y-o-y growth. It may seem odd at first glance, but this is largely due to the geographic distribution of the electronics clusters. Samsung, the single largest foreign investor in Vietnam, produces its smartphones in two factories in the north, one in Bac Ninh and one in Thai Nguyen. While the Delta outbreak first started in the north in May, key industrial zones have gradually returned to normal operations. Thai Nguyen province is even among other 10 provinces that have seen no new COVID-19 cases for the past 14 days. That said, Samsung’s facility in Saigon Hi-Tech Park that produces household electronics has been hard hit. Although the company has set up on-site sleep   ing facilities for workers, the plant is reported to be operating only at 30-40% capacity.

On a larger scale, the Delta wave also raises questions on Vietnam’s supply chain resilience, particularly among tech giants. Apple and Google are just among a few examples that are reported to have slowed their supply chain relocation to Vietnam. However Mr. Yun Liu said, despite imminent challenges, Vietnam remains an attractive investment destination in the mediumterm. Vietnam’s robust fundamentals should help investors to look through near-term COVID-19 volatilities. Indeed, South Korean investors are already starting to make the move. Samsung is set to expand its phone plant as early as 2H21, aiming to ramp up its foldable phone production by 47% to 25 million. Meanwhile, LG Display has just received approval for an additional investment of USD1.4bn in its Hai Phong plant, aiming to boost its monthly OLED display output from 9.6-10m to 13-14m.