Vietnam’s factory operations hit as supply chain snags multiply

Manufacturing PMI dips as labor shortages and input costs weigh on recovery

Trinh Khanh Ha wasn’t able to get circuit boards from China for the prosthetic arms her company makes next door in Vietnam, so she went back to an older model before finally finding a domestic supplier. It is just one of many ways producers in Vietnam are adapting as supply chain snags — from shipping delays to war-fueled materials inflation to a COVID labor crunch — weigh on manufacturing.

A top exporter of goods in sectors from textiles to technology, Vietnam is bouncing back from the pandemic, but several headwinds are slowing down its factories. Vietnam Electricity recently warned of power disruptions, and the spread of the omicron variant, while less severe, sent swaths of the workforce home to self-isolate. The state responded to the tight labor market by raising the overtime cap, a dramatic move that the ruling communist party had long resisted in order to protect workers.

Ha viewed pandemic-related shutdowns as a chance to rethink how Vulcan Augmetics, where she is chief operating officer, does business.

“The lockdown triggered this situation,” she said by phone. “Right now we prioritize working with suppliers from Vietnam and other countries.”

Though robust demand is buoying industries, Vietnam’s output in March fell for the first time in half a year. Last week the World Bank slashed more than a percentage point off its forecast, expecting the economy to grow 5.3% in 2022 versus its previous 6.5% forecast.

The biggest threats to Vietnamese manufacturing come from abroad.

After Russia invaded Ukraine, Hanoi warned of downstream shocks to supplies, which were already suffering from China’s move in December to tighten its land border with Vietnam. Added to that now is a recent COVID shutdown in China that includes the world’s busiest port, in Shanghai.

A smaller risk for Vietnam is the workforce.

A garment maker that supplies Nike and Adidas said as many as 40% of its staff had COVID at one point. The virus quickly spread through the country as workers returned from the lunar new year holiday in February, averaging 250,000 daily cases in mid-March, according to Johns Hopkins.

Widespread vaccination kept the cases mild, but at the peak it was not uncommon for a large factory to have thousands out sick. Bac Giang, a vital province for companies like Apple suppliers Foxconn and Lens Technology, said 22,000 workers stayed home with COVID in early March.

“Labor is not abundant,” SacredEarth Furniture CEO Richard Whybrow told Nikkei, adding that the situation is putting pressure on wages.

“Staff shortages [due to infections] meant that firms were unable to maintain production volumes, with output falling for the first time in six months,” S&P Global said on April 1, noting its purchasing managers’ index dropped to 51.7 in March from 54.3 in February.

Looking ahead, the shortages will have less to do with COVID, which is subsiding, and more with the demands of a rebounding economy, Whybrow said.

Workers skittish about the disease flocked to their hometowns in October, when movement controls ended, and though some stayed in the countryside even after the holiday, most have returned to industrial zones. The labor force added 441,100 people in the first quarter versus the prior quarter, totaling 51.2 million, the General Statistics Office said.

But the additional hands are not enough. Another 51,000 workers are needed in Long An alone, an industrial neighbor of Ho Chi Minh City, according to a survey reported on the website of the state-run national labor union.

In response, businesses increased overtime, salaries, and perks, including stock options, and had one employee do the work of two.

“Other staff take the handover of the vacant position until the roles can be filled,” East West brewery founder Loc Truong told Nikkei.

Harder to overcome is the dearth of shipping containers and production inputs. Companies fret about the energy and supply chain chaos from the Ukraine war, but even more so from the uncertainty in China.

“Prices have risen a lot. In terms of materials, it’s not just us, but all companies, not just Vietnam, but the whole world,” An Phong construction CEO Nguyen Khac Dong said on a chestnut-colored tract of land outside Ho Chi Minh City, where he’s building a constellation of factories.

From steel that props up warehouses to circuit boards in Vulcan prosthetics, Vietnam’s biggest source of supplies is China, which is battling a COVID wave of its own.

Overall imports fell 13.8% between January and February, Vietnam’s Customs Department said.

Economic growth slowed to 5.03% in the first quarter compared with the same period a year earlier, the Statistics Office said. That was down from 5.22% for the previous three months.

Operations now run the gamut, from many factories back at full tilt to one South Korean supplier to Samsung running at less than 20% of capacity, a source told Nikkei.

The disruptions are starting to affect consumers, too, with companies passing on the rising costs of everything from grain to gears.

“The major supply disrupter has been the [cross-border] access to ingredients,” Truong said. “We have had a lot of challenges to balance between pricing, consumer and business operations.”

By Lien Hoang – Nikkei Asia – April 11, 2022