Supply chain in Southeast Asia less vulnerable after Delta-driven disruptions

by John Immont | Updated December 06, 2021 07:40 am EST

Vaccination has increased and COVID-19 strategies have shifted in some of the major manufacturing countries in the region

A delta-driven wave of infections wreaked havoc on the supply-chain when it broke out in Southeast Asia this summer, disrupting production of everything from semiconductors to sneakers, and raising prices for Western consumers.

But countries like Vietnam and Malaysia have learned from that experience and are better prepared for fresh waves of the virus, economists and factory operators say, as the new Omicron variant spreads globally.

Some countries in the region, including Vietnam and Thailand, have turned away from aggressive COVID-19 containment strategies to boost their economies. That move has been aided by a rapid increase in vaccination.

Trinh Nguyen, a senior economist at Natixis, said, “Government calculations have “changed to tolerate a very high level of cases.”

Still, economists and business owners are cautious. Scientists are still studying the new Omicron variant, including its infectivity and virulence. They are also trying to determine whether it can survive existing vaccines, although some scientists believe they will still provide protection.

The new version comes as conditions in the global supply chain are improving but still face challenges. Even as factories across Southeast Asia have been reopened for months, a major source of pressure for Western companies has eased, labor shortages are limiting production in countries such as Vietnam and Malaysia. Factories in the region are also grappling with high freight rates and shortage of raw materials. All this adds up to the higher prices and longer wait times for Western consumers.

Still, the companies hope Omicron won’t back things up too much. One factor that could cause less disruption in any future wave of the virus is Vietnam, which has changed its approach towards managing the spread of COVID-19.

To prevent a spike in cases over the summer, Vietnamese officials ordered factories in their southern production hub to close for about two and a half months or operate with far fewer workers than usual, leaving a huge gap for clothing, furniture and footwear companies. Disruption occurred on the scale. However, it failed to eradicate COVID-19, and in late September Vietnam’s government formally abandoned its zero-Covid policy, saying that authorities should refrain from taking “excessive measures”.

So far, the government has stayed the course, despite a recent increase in cases, to about 14,000 a day – roughly equivalent to its summer peak. During this latest wave, which is not linked to the Omron version, businesses say the government has generally allowed manufacturers to continue working when some employees test positive.

“The government is not doing anything with factories right now,” said Jonathan Moreno, head of the American Chamber of Commerce in Vietnam’s Manufacturing and Supply-Chain Task Force.

Enabling Vietnam’s less restrictive policies has led to an increase in vaccination. As of early August, the US had fully vaccinated half of its population, according to Our World in data, while Vietnam had vaccinated less than 1%. The situation in Vietnam was so hopeless that more than 80 shoe and apparel companies, including Nike Inc. and Gap Inc., wrote a letter to President Biden asking them to expedite vaccine donations to Vietnam.

Today the vaccine gap between the US and Vietnam has disappeared. About 55% of Vietnamese are fully vaccinated, compared to 59% of Americans. About 75% of Vietnamese are at least partially vaccinated, compared to 71% of Americans. The Covid-19 death toll in Vietnam has averaged around 150 per day in recent weeks, almost half that of early September.

It’s a similar story in Malaysia, where strict shutdowns in early summer strangled key manufacturing sectors, even affecting production in the country’s globally important semiconductor industry. Only 3% of the country’s population was fully vaccinated in early June, when the massive lockdown began. Now about 78% of the country’s population has been fully vaccinated, which is much higher than the rate in the US or the European Union.

Tan Thien Poh, a Malaysian factory owner and president of a textile industry association, said he felt the current high vaccination rate did not mean Malaysia’s government would impose a mass shutdown. “We cannot afford another lockdown,” he said.

Malaysian government officials have said it is too early to draw firm conclusions about the new version, but do not want to exaggerate. “We also want to make sure that our response is proportionate to the risk. We still don’t know the full extent of the risk,” Malaysia’s Health Minister Khairi Jamaluddin said last week.

Vietnam’s government has said it is closely monitoring the Omicron version.

The variant can still cause problems for supply chains. The new border restrictions could prolong the return of foreign workers to Asian manufacturing countries, leaving factory production depressing.

In Vietnam, businesses are concerned that migrant workers who have returned to their rural villages during the height of the summer pandemic will be less likely to return to urban factory jobs if the new version causes a further increase in cases, or that Government may tighten domestic travel restrictions.

Some factory operators have lost faith in the local authorities. “It is during challenging times that you learn who your real friends and partners are,” said a senior member of an Asian construction company with operations in Vietnam. He said the government has hurt businesses by offering. No flexibility during summer lockdown. On the possibility of the government reviving restrictions due to Omicron, he said, “I will not put it behind them.”

Mr Moreno of the American Chamber of Commerce in Vietnam said the new version did not seem to have prompted the government to take a tougher stance yet. But that could change, he said, if the number of people in critical care or dying of Covid-19 rises.

While no one ruled out the possibility, many economists and analysts said they thought governments like Vietnam and Malaysia would try to avoid that outcome, so as not to further strain relations with foreign companies.

Louis Kuijs, head of Asia economics at Oxford Economics, said: “Both Vietnam and Malaysia have decided to move towards living with the Covid approach. Will shut it down.”