Warwick ASEAN Conference

No More Nike Shoes this Shopping Season?

Nike faces a supply bottleneck as their major manufacturing supplier in Vietnam closed down their production due to the rapid spread of Covid-19 in the country.  According to the S&P Market Intelligence, Vietnamese factories account for half of Nike’s total footwear manufacturing. 

Nike Footwear Suffer Supply Shortage 

Nike’s major footwear supplier, Chang Shin Vietnam Co. and Pou Chen Corp has halted their manufacturing production between July to September to combat the rising Covid cases in Vietnam.  This hinders Nike’s supply chain significantly.  Based on Nike’s fiscal report, the Vietnam manufacturing firm not only accounts for roughly 50% of Nike’s footwear manufacturing, but it is also responsible for 49% of Nike’s total seaborne imports between the 1st of April to the 30th of June, 2021.  Moreover, due to the strict travelling and logistic regulations, and the shortage of cargo and containers, Nike requires double the duration – from 40 days to 80 days – and much higher transactional cost to complete a supply chain cycle to put the sneakers onto the shelves.  Such supply chain delay and high logistic costs are likely to persist throughout the 2022 fiscal year, especially during the holiday purchasing season, forcing Nike to cut sales and reduce supply.  Nike is expecting its full-year sales to drop from $50.34 to $49.81 billion.  Though, it is unlikely that this shortage will drive the loyal customers away, on the contrary, according to Nike’s CFO Matt Friends, “the demand from consumers has in many instances been outstripping supply.”  Currently, Nike, like all other international enterprises that heavily relies on Vietnamese manufacturing, is seeking potential solutions, including but not limited to the reallocation of their manufacturing hub to Bangladesh, India, Sri Lanka or Indonesia that has more lenient pandemic restriction and accelerated production. 

What is at stake for the Vietnamese Economy?

 In October, Vietnam announced its lift on the manufacturing lockdown, factories like Chang Shin Vietnam Co. and Pou Chen Corp finally resumed their production.  Even better, the Vietnam government claims that Nike considers expanding their collaboration with Vietnam.  It might have been optimistic, except for the fact that Vietnam’s inefficient vaccination rollout – 12% out of the 98 million people – and rising public dissent that drove the mass exodus of migrant workers away from the central city, caused roughly 35% of 37% labour shortage in the garment factories.  Companies expect the labour force to only return to normal output by the second half of 2022.  Whether or not this poses a deceleration of supply chain integration between Vietnam and Nike is worthy of serious examination.

What is implied in the Nike case study is one crucial obstacle along Vietnam’s quest of transition from a low GDP per capita state to a high-income country, one goal they aspire to achieve by 2045: the heavy reliance on foreign investment and export.  To put things into context, let’s retrace Vietnam’s past 30 years of economic development.  Vietnam has witnessed unprecedented growth in decades primarily attributed to the massive foreign capital that constitutes on average 6% of the country’s GDP and manufacturing export that is responsible for 90% of Vietnam’s overall GDP.  Vietnam’s low-cost labour and low exchange rate made it consistently the attractive destination for foreign investors.  Yet, among the 30 years of skyrocketing growth, foreign firms establishment outpace the infancy of domestic firms in almost all aspects.  As trading surged, domestic industry exports expanded by 137%, while foreignly owned companies’ exports volume rose by 422%.  That is, Vietnam’s local firms can hardly compete with their foreignly owned counterparts.  Worse yet, the extensive trade liberalisation and the upcoming RCEP and CPTPP trade agreement severely restrained the government’s capability to establish protectionist measures to stimulate domestic growth.  In short, Vietnam is handicapped between a spectrum of options that are equally unsustainable: on one side, Vietnam can enact protectionism measures to stimulate domestic firms while dampening the contemporary rate of rapid growth, or the other hand, Vietnam can retain its current degree of trade liberalisation, and leave their service sector uncultivated and their manufacturing sector competitiveness undermined as the wage progressively improves.  The pandemic adds even more weight to the consequence of the dilemma.  Vietnam’s GDP growth was down by 4%, from 7% to 3% in 2020, primarily attributed to Vietnam’s drastic fall in manufacturing export trades.  Localisation takes forms not only as sentiments but also as an actualised policy to combat the pandemic.  Rapid digitalisation, financial reforms, and domestic private sector restructuring, with particular emphasis on the service sector, seems to be urgent and necessary for Vietnam to maintain its pace of development and realize its competitiveness. 

Implications for the Entire ASEAN Region

Vietnam is not the only country that struggles during the pandemic.  Countries like Malaysia, Indonesia and the Philippines all play crucial roles in the global manufacturing supply chain, all are notably reliant on export manufacturing of semiconductors, electrical appliances, machinery, textiles, and clothing. Most importantly, these ASEAN countries all face significant economic challenges in confronting the drastic increase in the number of cases, and the low vaccination rates.  In September, the Asian Development Bank published a revised prediction of ASEAN, positing the annual economic growth from 4.4% to 3.1%, where almost all members growth, except the Philippines and Singapore, were evaluated significantly lower than the previous account.  

In November, countries like Malaysia, the Philippines, and Indonesia started to see a decline in the number of cases, indicating the ending phase of one pandemic wave.  On the other hand, succeeding the opening, Vietnam perceives a momentous rise in the number of cases again, casting doubts upon its economic outlook.  To what extent this adversely impacts its local and foreign manufacturing firms remains unclear, but it is definitely worth exploring.   

References:
  • Thomas, Daniel. “Nike and Costco Warn of Product Shortages and Delays.” BBC News, BBC, 24 Sept. 2021, https://www.bbc.co.uk/news/business-58685889. 
  • Person, and Uday Sampath Kumar. “Nike’s Vietnam Supply Hurdles in Focus Ahead of Quarterly Results.” Reuters, Thomson Reuters, 22 Sept. 2021, https://www.reuters.com/business/retail-consumer/nikes-vietnam-supply-hurdles-focus-ahead-quarterly-results-2021-09-22/. 
  • Laurenthomas. “Nike Could Run out of Sneakers Made in Vietnam as Covid Crisis Worsens, S&P Global Warns.” CNBC, CNBC, 19 July 2021, https://www.cnbc.com/2021/07/19/nike-could-run-out-of-shoes-from-vietnam-as-covid-worsens-sp-global.html. 
  • Mody, Seema. “Companies Scramble to Shift Manufacturing out of Covid-Crushed Vietnam in Time for Holidays.” CNBC, CNBC, 22 Sept. 2021, https://www.cnbc.com/2021/09/22/companies-race-to-shift-manufacturing-out-of-covid-crushed-vietnam-for-holidays.html.
  • Petty, Martin. “Vietnam Says Its Nike Manufacturers Back to Full Operations.” Reuters, Thomson Reuters, 3 Nov. 2021, https://www.reuters.com/business/cop/vietnam-says-its-nike-manufacturers-back-full-operations-2021-11-03/.
  • “Update 1-Vietnam to Miss Garment Export Target, Faces Labour Shortage.” Reuters, Thomson Reuters, 5 Oct. 2021, https://www.reuters.com/article/vietnam-garments-idUSL4N2R11SY.
  • “’We Are Tired’: Workers Flee Vietnam’s Largest City as Long Lockdown Eases.” Reuters, Thomson Reuters, 4 Oct. 2021, https://www.reuters.com/article/health-coronavirus-vietnam-labour-idCNL4N2QX12O.
  • “The Economy That Covid-19 Could Not Stop.” The Economist, The Economist Newspaper, https: //www.economist.com/finance-and-economics/2021/08/30/the-economy-that-covid-19-could-not-stop.
  • Trinh Nguyen, Senior Economist at NATIXIS, et al. “ASEAN Economies Are Starting to Falter Because of COVID.” BRINK, 22 Aug. 2021, https://www.brinknews.com/asean-economies-are-starting-to-falter-because-of-covid/.
  • World Bank Group. “Vietnam’s Economy Is Forecast to Grow by about 4.8 Percent in 2021: WB.” World Bank, World Bank Group, 24 Aug. 2021, https://www.worldbank.org/en/news/press-release/2021/08/24/vietnam-s-economy-is-forecast-to-grow-by-about-4-8-percent-in-2021.
  • YenNee_Lee. “Southeast Asian Economies Will Recover ‘Much Slower’ Due to Covid: Asian Development Bank.” CNBC, CNBC, 23 Sept. 2021, https://www.cnbc.com/2021/09/23/southeast-asia-economies-will-recover-much-slower-due-to-covid-adb.html.

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