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SE Asia and the Covid Impact to Supply Chains

Covid, the pandemic, and the ongoing spread of the Delta variant are resulting in continued and in some cases increased production and supply disruptions. SE Asia was a beneficiary of the ongoing USA / China trade war as we entered Covid with many companies diversifying operations to countries like Vietnam, Thailand, Malaysia Indonesia and others. With the spread of Covid and the continuing production disruptions in Southeast Asia we expect to see even more diversification to the global supply chains operating in SE Asia.


Vietnam

Let us look to some specific data. Data according to the Vietnam General Statistics Office (GSO) reports that more than 85,000 businesses across the country are reported to have suspended operations in the first eight months of the year. This represents an increase of suspended operations up just shy of 25% over the previous 8 months of last year, 2020. A significant COVID-19 outbreak and social distancing severely affected business activities, particularly in the south, it said.


Of this seemingly large number half have temporarily suspended operations while the balance ~ 43,000 are shutting operations for good and are completing or have completed dissolution procedures. The good news here is that this is offset to a large degree as the GSO reports that some 81,600 enterprises have registered to do business in the same period and another 32,400 resumed business. So net is 43K closing, 42K idled, 32K restarted, 82K new = a net position of 39K new businesses and 10 idled. That is an 8% decrease in new business registrations over the same 8-month period last year. Interesting times in Vietnam right now that is dynamic and rapidly changing.


The extended and now surging Covid spread has created difficulties for the continued uninterrupted operation of companies in the trading and service sectors. Based on varying sources, and due to many factories having to reduce their capacity or stopping work, a disruption of raw material supply, it appears that overall Vietnam's industrial production declined by 7.0 percent year-on-year in August 2021.This was the second month of fall in industrial output with output decreasing for both manufacturing and mining.


The ASEAN Region


Overall the SE Asia region had successfully contained the coronavirus for most of 2020, they have however as a region failed to prevent large outbreaks driven by the delta variant over the past few months. This is due to low immunization levels and a shortage of vaccines which has only exacerbated the problem. This has caused supply chain headaches for some of even the largest manufacturers, many of which rely on auto parts and electronics made or having final assembly done in low-cost bases such as Vietnam, Thailand, and Malaysia.


Thailand had managed to keep the virus under control and not spreading for most of 2020, which perhaps led to believing they would miss the impact. Due to this the Thai government failed to secure timely and adequate supplies of COVID-19 vaccines. The country has only recently started a vaccination drive, which has been plagued by mismanagement, and accusations of corruption and bribery. To date approximately only 11% of Thailand 66 million population has been fully vaccinated.


Next door to Thailand Vietnam reports that they have fully inoculated less than 3% of their 98 million people. Like Thailand Vietnam originally opted for containment and they too did not plan or execute the procurement of vaccines and is now scrambling to secure more.


Malaysia went into a lockdown in May, however both case numbers and deaths have surged. Latest data states that a quarter of the nation's population of 33 million has been fully vaccinated and approx. 57% of the population have received at least one dose of the vaccine.


Rajiv Biswas, Asia-Pacific chief economist at IHS Markit, recently highlighted that large companies like Samsung and Toyota had faced production disruptions. He said Samsung had managed to offset the disruptions by shifting production to other parts of their global supply chain, but Toyota was forced to temporarily halt several auto assembly lines due to the disruption to supply chains in Southeast Asian manufacturing hubs.


In Thailand, we have experienced an exodus of migrant workers since the beginning of the pandemic which has resulted in labor shortages. "This is impacting the labor-intensive manufacturing sector, notably food, textiles and some rubber producers," said Sian Fenner, lead Asia economist at Oxford Economics in a recent interview with DW.


Near and Long-Term Normalization


We expect that the ongoing supply chain disruptions, combined with price pressures should start easing early next year. However we expect that disruptions will continue longer in some sectors such as the semiconductor industry, which we have seen have a negative impact on automotive production. Late in August Ford announced that its factory in Cologne German would pause production of Fiesta models because of a shortage of semiconductors which are sourced from Malaysian factories which had production upsets due to Covid.


Short term we see some pessimism. A quick synopsis of the latest PMI index reflects the change in outlook for the near term.



Not surprisingly countries hardest hit by Covid have

the more pessimistic outlook with respect to the PMI index.





It is not a stretch of imagination to expect that in many boardrooms there is a review of supply chains. The lockdowns and vaccination failings has demonstrated how stretched and delicate global supply chains are. Having many key industries like electronics production concentrated in a few low-cost countries has been disruptive for many businesses.


Although this pandemic may potentially lead to a diversification of supply chains we think that SE Asia will is still and will remain an attractive destination for companies to base supply. Vietnam, although going through some pains today still has a favorable labor market, favorable trade, sound FDI policies and a supplies a rising regional consumer demand.


This does not mean we will not see some reshaping of global supply chains. We do expect some global diversification of supply chains and to see some reshoring of capacity in critical industry segments.


Overall investment and expansion in the region continues. We believe there is still tremendous upside in making investments in Asean and can assist anyone looking for current or future investment strategies. Contact Viet-Thai Consulting for a free review.




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