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Vietnam’s status as manufacturing powerhouse is shaken by Covid surge

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The Delta variant is causing havoc in Ho Chi Minh City, disrupting business and supply chains of global brands.

When coronavirus first reached Vietnam in January 2020, its communist leadership undertook one of the world’s most successful containment policies. Officials likened the campaign to quash Covid-19 to fighting a war — a powerful metaphor in a country with a recent history of winning them. 

By introducing strict quarantines and an exhaustive track-and-trace system — aided by the tools and personnel of a police state — the country was by mid-year able to wipe out local infections and quash any new outbreaks. Vietnam’s apparent success in restoring business as usual bolstered its pitch to foreign investors as a less geopolitically fraught alternative to China.

A year later, the more contagious Delta variant of coronavirus is bringing new infections to record levels at more than 10,000 a day, raising doubts over the future of one of Asia’s premier manufacturing centres. Nikkei Asia now ranks Vietnam joint last, in 120th place tied with Thailand, on its Covid-19 Recovery index, whose criteria includes countries’ infection management and rollout of vaccines — an area in which Vietnam failed to plan adequately. “There had been several waves of Covid and each time they were able to contain it,” says Huong Le Thu, a senior analyst at the Australian Strategic Policy Institute and author of a paper on Vietnam’s coronavirus response. “But this time Delta has proved harder to bring under control.”

Vietnam’s model last year of meticulously tracking and tracing, then cordoning off people in infection clusters “wastes precious time”, says Alex Vuving, a professor at the Asia-Pacific Center for Security Studies in Honolulu, while providing the Delta variant “with a conducive environment to spread”. The outbreak has hit hardest in Ho Chi Minh City, Vietnam’s densely populated business hub, where authorities have enforced a 12-hour curfew, prohibited most movement and deployed thousands of troops. Brands including Nike and Adidas have had their operations disrupted, highlighting Vietnam’s growing role in global supply chains. Toyota has also announced the suspension of production on 27 lines at 14 of its Japanese plants because of a shortage of parts made in south-east Asia — mostly Vietnam but also Malaysia, which is struggling with surging cases too.

Prime Minister Pham Minh Chinh, named in February in the communist party’s five-yearly leadership reshuffle, and his new government are hastening to secure and administer more vaccines and get the economy back on track. In a one-party state whose leaders derive much of their legitimacy from delivering economic growth, this is a crucial task. 

With the country’s former zero-case strategy now moot, most of Hanoi’s focus is on containing infections and keeping business going. Some companies are employing a “three-on-site” model of having factory staff work, eat and sleep at work. But this is hard on employees and costly for companies.

Some multinationals have been putting up managers at downtown hotels.  VinaCapital, the Ho Chi Minh City investment manager, said in a note to clients last week that while big foreign companies could afford to pay for hotels, companies making lower value-added products such as garments, shoes, or furniture were “having a hard time maintaining their production”.

It noted that Vietnam’s exports of these products plunged in August and said the drop, combined with lower consumption, would be likely to “drag on Vietnam’s gross domestic product growth” this year. “The restrictions are seriously constraining the manufacturing capacity in the country,” says Nguyen Phuong Linh, associate director at Control Risks. “Some factories have been afraid to take new orders because they were worried they wouldn’t be able to complete them without enough workers.” However, she adds, the disruption is likely to be a “short-term issue because Vietnam is still an attractive option for foreign investors vis-à-vis other countries in Asia”.

The government has set a target of bringing the outbreak in Ho Chi Minh City under control by September 15, as defined by a 20 per cent reduction in daily Covid deaths and the number of Covid patients being discharged from hospital exceeding the number admitted. The bigger question is whether Vietnam can contain the crisis quickly enough to avoid alienating foreign investors. For now, there are few overt signs of divestment; the dong has been one of south-east Asia’s few currencies to appreciate against the dollar this year. As one economist puts it: “The US-China stuff is not going away.”

By John Reed – The Financial Times – August 31, 2021

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