Taiwan should remain vigilant for fallout from COVID-19 in Southeast Asian countries, especially Vietnam, as many local manufacturers have production contracts or hubs in the region to sidestep US-China trade tensions and take advantage of the affordable labor. A surge in infections from SARS-CoV-2 variants has crimped business activity and shut factories in Southeast Asia, and could exert pressure on Taiwan’s manufacturing output over the next few months.
Vietnam has been a key destination for local manufacturers seeking to diversify their production capacity. The country has become a major manufacturing site for local makers of shoes, sports apparel and fiber materials due to its diligent workers and a cultural background similar to Taiwan’s.
However, local COVID-19 restrictions are threatening the growth momentum of Taiwanese firms in traditional industries, as production is disrupted and customers’ orders go unfilled.
Last week, Pou Chen Corp said that lockdowns in Vietnam’s capital, Hanoi, and neighboring provinces have since July mostly halted production at its shoe subsidiary Yue Yuen Industrial (Holdings). As Vietnamese factories contributed 45 percent of the shoes made by Yue Yuen Industrial in the first half of the year, Pou Chen expects the restrictions to “significantly affect” the subsidiary’s revenue this quarter. As Pou Chen makes sneakers for Nike, Adidas and New Balance, those well-known brands face a rising risk of supply disruptions.
Last week, another Nike sneaker maker, Feng Tay Enterprises Co, said that it was suspending operations at five of its factories in Vietnam for another 10 days. Vietnamese factories account for more than half of Feng Tay’s capacity, company data showed.
While the Vietnamese government allows manufacturers to run factories at the height of an outbreak if the workers are housed and fed in factory dormitories, most firms do not adopt that option, as it is costly and carries a high infection risk.
Apparel and fiber supplier Eclate Textile Co told investors last month that it had to spend US$200,000 to US$300,000 per month on rapid COVID-19 testing for its workers to keep production lines partially running. Eclate, which operates five factories in Vietnam, said that it is in talks with customers about canceling some orders.
Yesterday, in a bid to stop the spread of COVID-19, Hanoi extended restrictions for another two weeks as authorities launched a plan to test up to 1.5 million people for the virus in higher-risk areas of the capital, meaning that factories must stay closed longer.
Although Taiwanese manufacturers have tried to compensate by boosting utilization rates at factories outside Vietnam, the effect seems limited as the virus is surging in other parts of Asia.
Malaysia, which is also battling a surge in infections, is home to factories that supply Taiwan’s electronics industry, including chip testing and packaging services provider ASE Technology Holding Co and passive component maker Kaimei Electronic Corp.
Kaimei, a subsidiary of passive component giant Yageo Corp, last month said that its Malaysian subsidiary had to suspend production for one week after 24 employees tested positive for COVID-19. Monthly shipments would fall about 20 percent, the firm said, adding that it would aim to increase shipments from its plants in China to minimize the impact.
In July, COVID-19 began to weaken Taiwan’s manufacturing sector, a report released by the Taiwan Institute of Economic Research showed, with the manufacturing business index falling 1.16 percentage points to 16.52.
Taiwan has so far had robust growth in exports and manufacturing output thanks to demand from the US and Europe, but virus-driven production disruptions could dampen shipments and growth at local firms. It is worth watching whether the momentum will subside in the coming months.
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