Nov 22, 2021
While supply chain disruptions are impacting all industries, the recent closure of factories in southern Vietnam have become a particular roadblock for many in the apparel and footwear sector.
Vietnam has grown in recent years to become the second biggest supplier of apparel and footwear to the U.S. after China. Among those with high exposure, more than half of Nike’s footwear manufacturing and a third of its apparel is sourced from Vietnam, while Gap and Lululemon each source roughly a third of products from the country.
Due to a COVID surge, Vietnam went into a prolonged lockdown that closed factories in mid-July. Openings slowly began in late September.
On the positive side, the 10-weeks of lost productivity and continued under-capacity production isn’t expected to impact U.S. holiday shopping season because production for holiday was completed before the COVID surge, according to a recent report from BofA Global Research.
BofA predicted, however, that U.S. retailer inventories will be significantly disrupted in the first half of 2022 and the return to full-production capacity will take longer than many expect. BofA argues that the return of workers to factories will be slowed by the gradual removal of restrictions, complicated factory guidelines, low vaccination rates and worker apprehension.
Rising input prices and port congestions may further lead a slower resumption of production activity, according to BofA. In the note, Mohamed Faiz Nagutha, BofA’s ASEAN economist, said, “There have been efforts to overcome these difficulties, such as shifting shipments to air freight and proposals to relax the over-time work cap. But these are not permanent solutions. Therefore, we believe a full recovery of productivity and utilization will take longer than expected.”
In reducing their guidance in recent quarterly calls, Nike and Adidas both said the impact of the Vietnam production disruption would start during the holiday quarter and run into early next year.
Nike’s CFO Matt Friend told analysts, “Lost weeks of production combined with longer transit times will lead to short-term inventory shortages in the marketplace for the next few quarters.”
DISCUSSION QUESTIONS: Do you see a minor or major impact on the apparel and footwear sector from the Vietnam factory shutdowns? What mitigation steps should affected firms be exploring in the near-term to limit the fallout as well in the long-term to reduce risks?
“Do you see a minor or major impact on the apparel and footwear sector from the Vietnam factory shutdowns?”
