Delta Variant Outbreaks in Sparsely Vaccinated Asian Countries Disrupt Production

Date: Wednesday, August 25th, 2021
Source: The Wall Street Journal

HANOI—The highly-infectious Delta variant has shut down factories in largely unvaccinated parts of Asia, throttling supply chains and contributing to rising consumer prices at a time when many thought the worst of Covid-19 supply disruptions were in the past.

A gap has formed between the demand for goods in the well vaccinated U.S. and the capacity of sparsely vaccinated manufacturing countries to meet it, building inflationary pressure. The outbreaks in Vietnam and elsewhere add to a long list of challenges—including outbreaks at ports, freight-container shortages and rising raw-material prices—that companies face in delivering goods at low cost and on time ahead of the holiday season.

Vietnam, which has given two vaccine doses to less than 3% of its population, has seen a surge in cases over the past six weeks driven by the Delta variant. The country’s strict Covid-19 containment policies—including locking down villages and quarantining tens of thousands of people in military barracks and other state-run centers—worked for the first 14 months of the pandemic, as it pumped out exercise equipment, electronics and pajamas for Western consumers.

But the Delta variant has slipped through Vietnam’s defenses—just as it has recently for other largely unvaccinated exporters including Indonesia, Sri Lanka and Thailand. The strain spreads so quickly that it is difficult to track, according to the government. Authorities have ordered some factories to shut and others to drastically reduce on-floor workers. That has left in the lurch Western brands—such as Adidas AG, Crocs Inc. , and Steven Madden Ltd. —that rely heavily on Vietnamese manufacturing.

Companies are trying to find alternative suppliers in China and elsewhere, and are paying for expensive airfreight to try to quickly shift product to Western markets to compensate for production delays.

“Vaccine inequality and the vaccination levels in these emerging markets are creating problems in those sectors and are adding to cost pressures,” said Louis Kuijs, head of Asia Economics for Oxford Economics.

Vietnam, which produces more than 30% of American shoe imports, is the second-largest supplier of shoes and apparel to the U.S. after China. In mid-August, more than 80 shoe and apparel companies, including Nike Inc. and Gap Inc. , wrote a letter to President Biden, asking him to accelerate U.S. vaccine donations to Vietnam. “The health of our industry is directly dependent on the health of Vietnam’s industry,” the letter said.

The White House said that it was donating an additional one million doses of a vaccine developed by Pfizer Inc. and BioNTech SE to Vietnam, a country of about 100 million people, after Vice President Kamala Harris met with government officials in Hanoi on Wednesday. Ms. Harris said the vaccines would start arriving in Vietnam in the next 24 hours. The donation brings the total number of vaccines the U.S. has given to the country to six million.

The White House also said it would provide an additional $23 million in assistance to Vietnam, bringing the total the U.S. has given to the country since the start of the pandemic to $44 million. The funding will be used for delivery of the vaccines and helping detect Covid-19 infections.

“They, unfortunately, don’t have access to or the ability to administer the amount of vaccine that we have in this country,” said Andrew Rees, chief executive of Crocs, a shoe maker, speaking about Vietnam in a late July earnings call. “They’re left with lockdowns and being judicious about how people interact. So we do expect temporary factory closures, which will obviously impact supply.”

A Crocs spokeswoman said the situation remains fluid.

Supply-chain experts say the added costs from lockdowns in Vietnam and other Asian countries will further increase the sales price of consumer goods like shoes, which rose 4.6% in July compared with a year ago in the U.S.

Adidas, a German shoe company that sources 28% of its product from Vietnam, said in early August that most of its supplier factory capacity in the country has been unavailable since mid-July. Adidas says that could contribute to roughly $600 million in lost sales in the second half of the year. The company said supply disruptions meant it wouldn’t be able to fully cater to the strong demand for its products and would look to raise prices.

To try to maintain production, Vietnam’s government has ordered factories to adopt strict measures, including a “three-in-one-place” policy that requires employees in some highly affected regions to eat, sleep and work in the workplace to avoid catching and spreading the virus.

One laborer at a paper manufacturer in Binh Duong province—an industrial region in Vietnam’s south, where there is a major outbreak—sleeps on a bed constructed from paper cartons in the factory’s conference room. A cup next to his pallet holds his toothbrush and toothpaste. He wears a mask 24 hours a day, including while sleeping, and all conversations with co-workers must be conducted at least 2 meters apart, he said.

The factory has decreased its workforce to 150 workers from around 600 to reduce density, and many of those who remain take on longer shifts of 12 hours in part because there is little else to do, said the laborer, who asked to be identified by his surname, Dao. “It doesn’t feel right to rest when others are working,” said Mr. Dao, 23 years old. Some workers can’t stand the isolation and leave for home, he said, although he would rather have this job than return home with no income.

Last week, Vietnam’s Ministry of Industry and Trade acknowledged issues with the three-in-one-place system. Many companies in Ho Chi Minh City had to stop production because their workspaces weren’t large enough to house large numbers of employees, and after a month, workers had tired of spending all their time confined to their workplace, the ministry said. Ho Chi Minh City has promoted alternatives, including a system where workers live in dormitories near factories but their movements are restricted to prevent infection.

Vietnam had a total of 81 Covid-19 deaths until July 1. Since then, there have been over 8,000 deaths from the disease and around 6,000 new cases a day on average and rising. The outbreak is worse in the south, including regions near Ho Chi Minh City, where much of the country’s garment and footwear industry is concentrated.

Vietnam began its inoculation campaign later than other countries in the region, which analysts say in part reflects the government’s lack of urgency, as it may have felt it had Covid-19 under control. Around 16% of Vietnamese have received at least one vaccine dose, according to Our World in Data, with a mix of vaccines from AstraZeneca PLC, Moderna Inc. , Sinopharm and others.

“Plan A worked so well, they just didn’t put effort into Plan B” said Maciej Boni, an epidemiologist at Penn State University who frequently conducts research in Vietnam. “In fairness to them, nobody predicted that SARS-CoV-2 was going to evolve this Delta variant that was going to be almost twice as transmissible. That’s a genuine surprise for the entire scientific community,” he added.

Economists and supply-chain experts say that Vietnam’s vaccine problems are prompting some companies that shifted electronics, shoe and apparel production from China because of rising prices and trade-war tariffs to reconsider how much they can rely on the country.

Wolverine World Wide Inc., a U.S. footwear company that produces a large share of its goods in Vietnam, said its production there had been disrupted amid factory closures, part of what Chief Financial Officer Michael Stornant called a “really choppy supply chain situation.” Mr. Stornant said the company has moved some of its production back to China this year to mitigate risk.

The disruptions are making it hard for companies to meet fall demand as students return to school.

Steven Madden, the fashion company, has seen huge interest in its midprice Dolce Vita brand, driven in part by TikTok videos of women rushing sororities saying they are wearing its braided block-heel sandals. Industry publication Footwear News called the Dolce Vita the “unofficial shoe” of the University of Alabama’s sorority recruitment drive.

There is only one problem for the brand.

“We make the majority of our Dolce Vita products, pretty much all of our first-tier products, in Vietnam,” said Edward Rosenfeld, Steven Madden CEO. “A number of their Dolce Vita factories are shut down.” A recent visit to the brand’s website showed that some of its shoes aren’t ready to ship for at least a week after ordering.

Danielle McCoy, director of corporate development and investor relations at Steven Madden, said the company has faced unprecedented disruptions to its supply chains this year because of Covid-19 outbreaks, container shortages, port congestion and other factors. She said challenges related to Vietnam production have continued into August and that many factories remain shut.


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