Supply chains suffer as virus surges through Vietnam

With Ho Chi Minh City as its commercial hub, Vietnam vies with China for the status of the world’s factory. But rapidly rising delta infections have hit manufacturing, amid strict lockdowns.

Every day, from their base in Ho Chi Minh City, Lyndal Hugo and her partner struggle to get trucks laden with their vegetables into the city. The Australians have been in Vietnam for five years, pursuing a passion for cost-effective food production with zero greenhouse gas emissions that leaves no chemical residues.

Their business now employs about 50 people, split across production that’s located 300 kilometres north, and packing and distribution in the city.

Right now, though, the link between the two parts of the business is broken. Ho Chi Minh City is locked down and ring-fenced, and the transit pass system that’s supposed to let essential supplies in isn’t working.

“It’s chaos. Trucks are getting turned around. There’s already food shortages in the city, and they’re getting worse,” Hugo tells AFR Weekend.

Still, she and her partner count themselves “extremely lucky to be living where we are”. She adds: “The real tragedy is that the pandemic, now concentrated in the cities, is moving out to other regions of Vietnam, to the villages.”

In April last year, Vietnam sent 450,000 protective suits to US hospitals that lacked the resources they needed to deal with a pandemic. This week, the US returned the pandemic favour, rushing in another million vaccine doses on top of 5 million already sent.

A low vaccination rate is Vietnam’s Achilles heel. As of Thursday, 16.1 per cent of people had received at least one dose but only 1.9 per cent were fully vaccinated. The country of roughly 100 million people reported 79,262 new cases in the past week, a record number. It’s logging fewer new cases per million people than Malaysia or Thailand – but unlike those countries, which have higher vaccination rates, Vietnam’s new cases are trending up.

“Just as you stood with us during the earliest days of the pandemic … we are now here for you in this moment of need,” US Vice-President Kamala Harris told the people of Vietnam at a press conference in Hanoi on Thursday night.

The Vice-President’s visit was rich in symbolism, with many comparing the frantic withdrawal from Afghanistan to the famous scenes of helicopters leaving the roof of the US embassy before the fall of Saigon in April 1975. For those living in Ho Chi Minh City, as Saigon is now known, this week started with another, more forcible reminder of that time.

Once again, military forces from the north of the country have rolled into the south. This time the enemy was not those fighting the losing battle against communism. Rather, it was the virus that causes COVID-19.

Like Australia, Vietnam did a good job of keeping COVID-19 cases low last year, got complacent, and has been caught out by delta. Unlike Australia, though, Vietnam vies with China for the title of the world’s factory. Its pandemic emergency is reverberating across the globe.

In recent decades Vietnam has excelled in reeling in the big fish in electronics, footwear and clothing. Low labour costs, reliable infrastructure and a smooth bureaucratic process have attracted the likes of Samsung, Foxconn, Nike, Adidas, Gap and Levis. All are now scrambling for a plan B, with many factories that are still open struggling to maintain the “3 in 1” policy whereby employees eat, sleep and work on site.

On Thursday Simon Fraser, executive director of the Australian Chamber of Commerce (AustCham) in Vietnam, was marvelling at the view from his apartment in normally bustling Ho Chi Minh City. “This is usually a colourful, loud and lively place, full of people. Now it’s totally deserted. I’ve never seen anything like it.”

While some expats, particularly those with children who haven’t been in school for months, have cleared out, many others have stayed, Fraser says. “The small and medium-sized business owners who have investments here have stayed. Most are not panicking. They want to be here, so their companies can recover as soon as possible.”

Surge in infections, from north to south

The surge in cases began in mid-July and has marched south. A big outbreak in the Saigon Hi-Tech Park that included Samsung’s $US1.4 billion CE Complex proved to be a watershed moment.

To reduce transmission, the government announced workers would have to stay on company sites or reside in a common facility. But these measures, now extended until at least September 15, have failed to arrest the increase in new infections. So, the government of Prime Minister Pham Minh Chinh has shut down Vietnam’s commercial hub.

On Monday, Ho Chi Minh City neighbourhoods were divided into green, yellow, orange and red zones. Residents in green and yellow zones are allowed to leave home once a week to buy food. The military is dropping off food for those in orange and red zones. These arrangements too will stay in place until at least the middle of next month.

Vietnam is the second largest producer of footwear and clothing in the world and a big player in electronics and smartphone-related assembly. Nike and Foot Locker are among the companies that have confirmed the Vietnam shutdown will have longer-term knock-on effects on supply.

Earlier this month, it was the turn of Adidas chief executive Kasper Rorsted. “Since July, we’re now experiencing an additional challenge within our sourcing network due to a surge in COVID-19 infections in south-east Asia,” Rorsted said on an earnings call on August 5. “The most impacted country is Vietnam, where the government mandated large-scale factory lockdowns.”

‘Rosy’ prospects for recovery

In the short-term, China is the winner. Many US companies started shifting operations from China or taking planned expansion elsewhere during the Trump presidency. Apple and Google have recently delayed plans to shift production of earphones and smartphones from China to Vietnam.

The big-picture story, though, of Vietnam being a favoured destination for foreign investment is not expected to change. Even as they trim forecasts, economists have faith the nation will bounce back.

HSBC, for example, has cut its economic growth forecast from 6.1 per cent this year to 5.1 per cent. Still, wrote HSBC economist Yun Liu, “despite near-term challenges Vietnam’s recovery prospects still look rosy with strong fundamentals”.

In Ho Chi Minh City on Friday, Hugo agrees. Her food production business will survive the crisis, and so will most others, she says.

“Vietnam will bounce back because it has such a competitive advantage in labour costs. However, the experience will have changed some perceptions,” she says. “This has given companies an insight into how the government manages risk.”

By Emma Connors – The Australian Financial Review – August 27, 2021