The COVID-19 pandemic, along with its resulting shutdowns and supply chain disruptions, has made once dependable production hubs less reliable. While many parts of the world are rebounding from the pandemic, fashion brands now face the uncertainty of the war in Ukraine, which has resulted in rising costs for both production and raw materials.
The ongoing global turmoil has understandably left many fashion brands reconsidering where to locate production. In Vietnam, the future is looking brighter. The country’s economy is growing, and many factories are operating at full strength. For the first quarter of 2022, Vietnam’s textile and garment industry recorded an export turnover of $8.84 billion, which represented an increase of 22.5% over the same period last year. Yet, challenges remain, including rising costs, labor shortages and supply chain disruptions.
Rebounding Amid the Pandemic
Over the past 10 years, Vietnam has become a popular alternative for fashion companies looking to reduce their exposure to China. However, production came to a screeching halt last year when the country was ravaged by COVID-19, forcing companies like Nike and Lululemon to shift production elsewhere. In August 2021, a staggering 30% to 35% of textile and garment factories in Vietnam were closed, according to the Vietnam Textile and Apparel Association (VITAS). In many cases, factory closures dragged on for months, as the country battled the Delta variant.
In February 2022, COVID-19 infections rose again; however, factories remained open this time around, thanks to widespread vaccination and more relaxed government restrictions.
“More lockdowns would hurt businesses like ours, as we wouldn’t be able to deliver products to customers,” Ninh Thi Ty, chairwoman of Ho Guom Group, which produces goods for CK, Mango, Zara and H&M, told The Business of Fashion.
With its robust manufacturing sector reopened, Vietnam’s economy is recovering. According to the country’s General Statistics Office (GSO), Vietnam’s economy in Q1 2022 expanded by 5.03% compared with the same period last year. However, its gross domestic product growth was down from 5.22% in the fourth quarter, suggesting that the recovery may have bumps along the way.
Production Challenges in Vietnam
While Vietnam appears to be rebounding, it is important to recognize that no country is immune to the current global challenges. For instance, COVID-19 continues to impact factories, particularly those located in Asia. While whole facilities are no longer facing lockdowns, labor shortages are ongoing as workers who test positive must quarantine. According to a garment manufacturer that supplies Nike and Adidas, approximately 40% of its workers had COVID-19 at one point during the omicron wave.
Some factories have also not returned to full staffing levels after workers who returned to their hometowns during the lockdown elected to remain there. Accordingly, manufacturers have reported that while orders have increased, recruiting enough workers to fill them is a significant challenge. In addition to offering incentives to recruit more workers, factories are changing shifts, paying overtime wages and rotating workers to ensure production and other business activities can continue with existing staff.
Disruption to supply chains also remains a challenge, including a shortage of containers. According to the Vietnam Logistics Association, the average price for shipping containers from Vietnam to the east coast of the United States has increased three-fold to approximately $16,300 USD.
Vietnam’s apparel and textile industry must also contend with rising inflation, which has resulted in higher energy, materials and shipping costs. Its government is also considering an increase in the minimum wage, which may further increase challenges for businesses in Vietnam.
As a result of the pandemic, the Government of Vietnam has postponed the annual increase of the regional minimum wage for employees for the last two years. Ngo Duy Hieu, vice president of the Vietnam General Confederation of Labor, argued that higher wages will not only support workers, but also help fuel the country’s economic recovery. “This increasing of wages, both to support employees to overcome difficulties, and at the same time is a driving force to increase labor productivity, help businesses recover quickly and thrive,” he said.
Under the proposal, which must still be approved by the prime minister, the minimum monthly wage would be raised to between 3.25 million dong and 4.68 million dong ($142.00 – $204.47). If the minimum wage hike does become law, it would take effect on July 1, 2022.
The Importance of Diversification
Countries like Vietnam are seeing economic growth and approaching pre-pandemic production levels, though natural disasters and geopolitical conflict can cause uncertainty for businesses worldwide. To lessen the impact of these events and those that will undoubtedly follow, it is imperative to diversify supply chains, as well as plan for potential production disruptions when negotiating contracts and making other key business decisions.
Howard D. Bader is a NYC attorney who serves as general counsel for clients in a wide range of industries on an international scale. With over three decades of legal experience, he has represented clients in numerous legal matters, including commercial litigation, intellectual property, bankruptcy and creditor’s rights, and mergers and acquisitions, as well as numerous corporate transactions and business law matters.
Howard D. Bader
hbader@sh-law.com
(212)784-6926
www.sh-law.com
