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China’s Zero-Covid Policy Triggers Raw-Material Scramble in Vietnam

China’s zero-Covid policy is doing a number on Vietnam.

The Vietnam Textile and Apparel Association (VITAS) told Sourcing Journal that many of its members are facing difficulties—albeit temporary ones, it insisted—due to logistical bottlenecks that are tying up much-needed raw materials from China.

Vietnam’s garment industry, the trade group said, is taking a “flexible adaptation” approach, the same one it employed during the crippling Covid-19 wave last year, when widespread factory closures sharply curtailed the availability of products for brands such as Adidas and Nike.

Some affected businesses are working with their Chinese partners to transport raw materials by sea, which takes longer. Others are negotiating with their customers to push back delivery times or prioritizing orders with enough materials to produce first “so it does not affect the production of textile businesses that much,” VITAS said.

In a note issued by Oxford Economics Monday, the contraction of China’s economic activity in April was the “most severe” since the first wave of Covid-19 in 2020’s first quarter.

The prolonged Shanghai lockdown and logistics delays resulting from highway controls in parts of China, have “severely affected” domestic supply chains, the economic forecaster said, adding that industrial value added fell 2.9 percent year over year.

“The disruption to economic activity could well extend into June,” wrote Tommy Wu, lead China economist at Oxford Economics. “Even though Shanghai will gradually resume shop operations starting from today as new Covid cases have fallen significantly in recent days, the resumption to normalcy will likely be very gradual at the beginning. Also, the logistics recovery will likely take weeks as the government continues to smooth highway controls and Covid testing in various parts of China.”

Adidas cut its profit outlook earlier this month after noting that supply bottlenecks in Vietnam have reduced the availability of products, affecting sales. The country’s shoe factories obtain some 60 percent of their inputs from China, according to the Vietnam Leather Footwear and Handbag Association. Overall, Vietnam’s imports from China rose 30 percent last year to $110 billion, with machinery, electronics and fabrics among the biggest shipments.

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Vietnam has been in this predicament before. When the coronavirus first shut down China two years ago, the nation was besieged by the same shortage of raw material that left suppliers scrambling. Critics have said that Vietnam’s reliance on China, with whom it has a tremendous trade deficit, has disincentivized local businesses from shoring up their manufacturing capacity.

“Textile providers need to get their [expletive] together to facilitate raw materials produced in Vietnam,” Greg Fleming, a supply chain expert in Vietnam and former chief operations officer of Elise Fashion, told Sourcing Journal. While up to 99 percent of all materials that “anyone would want” can be made in Vietnam right now, there is a dearth of R&D from spinners and fabric makers to pave the way for more wholesale business, he said.

“There is still an old-school mentality in Vietnam, which is still derived from CM manufacturing,” he said, meaning that the buyer is responsible for fabrics, trims and accessories. “So until the ecosystem in Vietnam is developed from a brand sourcing office scenario in Vietnam to a factory in Vietnam and then back to the design teams offshore, we will continue to have these problems.”

At a parliament meeting in March, Nguyen Hong Dien, Vietnam’s industry and trade minister, said that the country needs to diversify its source of materials from China, though he added that this “is a challenge for the global economy, not only for Vietnam.”

He said that the ministry is working with Chinese authorities to maintain a “green lane” for trafficking goods between the two countries, and that local firms must also be encouraged to increase their production of materials. “Chinese materials and equipment are important for Vietnam’s manufacturing sector, especially for garment and footwear production,” Dien said.

VITAS is still bullish about the sector’s outlook, however. Textile exports in the first four months of 2022 are still projected to increase by 20.5 percent compared with the same period last year, it said.