Economy - April 19, 2022 | 05:35 pm PT

Industry fears bumpy recovery path

Industries are recovering after two years of Covid-19, but problems such as labor shortage and increased raw material and transportation costs are threatening to delay it.

Japanese sewing machine manufacturer Juki Vietnam resumed full operations by the end of last month after almost three quarters of operating below capacity due to Covid-19.

The HCMC-based factory had to cut its workforce down to 20-50 percent of its usual strength in the third quarter of last year when the city went through its worst period of the Covid-19 wave with strict social distancing rules imposed on manufacturing companies.

Workers of Juki Vietnam are seen at the company's factory in Ho Chi Minh City. Photo by VnExpress/Le Tuyet

The situation started to improve when over 90 percent of the factory’s workers were vaccinated by October, and the majority of them returned to work soon after.

"We have now secured enough orders for the first half of the year," said Dao Quoc Cuong, Juki Vietnam’s standing director.

But the company is having a hard time recruiting people to complete all the orders as many workers are hesitant to return to major industrial hubs after having stayed in their hometown for months due to Covid-19.

A similar situation faces most factories as they seek to speed up recovery after two years of Covid-19 imposed difficulties.

Apart from workers’ reluctance to return to industrial hubs, rising input costs are a barrier.

The country’s purchasing managers’ index, which indicates whether manufacturing operations are expanding or contracting, rose to 54.3 points in February, compared to the nine-year low of 32.7 points in April 2020 (an index of more than 50 points indicates expansion).

The nation’s GDP rose by 5.03 percent in the first quarter, compared to 4.72 percent in the same period last year.

Several sectors have been predicting positive figures.

Le Tien Truong, chairman of the Vietnam National Textile and Garment Group (Vinatex), said the sector could see export value reaching $43.5 billion this year, up 11.5 percent from last year.

Earlier this year, Vietnam was ranked as the most attractive apparel sourcing locations, surpassing Turkey, Peru and China, he said, citing a report by fashion data provider Just Style.

Other industry insiders have said big buyers have started reordering from Vietnam and many factories have received sufficient orders for full restoration of production.

The expected three percent rise in global demand, and Vietnam’s ability to remain a key part of the global supply chain, will help the country achieve its $43.5 billion exports target, Truong said.

Many wood exporters in HCMC have also been able to secure contracts for the first three quarters, according to the Handicraft and Wood Industry Association of HCMC (HAWA).

In Binh Duong, the country’s "wood capital" where 1,200 wooden product manufacturers are located, there is rising recruitment demand as the province stands poised to contribute half of Vietnam’s wood export target of $18 billion this year.

Do Thi Kim Loan, CEO of wood exporter Sao Nam, said factories in the province were racing to recruit enough workers to fulfill the increasing orders.

"Manufacturers in Europe and the U.S. have high confidence in Vietnamese products and so they have made large orders. But most factories are seeing worker shortages."

Binh Duong’s job center data shows that 54,000 workers are needed in various sectors including wood processing, garment and electronics production.

No desire to return

Even as export order increase, finding the right people to work is proving to be a challenging task.

Taiwanese bag producer Virtue King Vietnam has been struggling to find the remaining 500 workers it needs to restore production in its factory that has a capacity for 2,000 employees.

"During the severe Covid-19 wave, many workers returned to their hometown and they do not want to come back," said Nguyen Thanh Can, labor union chairman at the Binh Duong-based company.

At the end of last year several production lines had no workers as many contracted the novel coronavirus, and even now people are having to stay home for the same reason.

The company has reduced its recruitment qualifications to the bare bones. One only needs to be 18 years of age. No experience is required, and even during probation, workers will receive full pay and benefits.

"But it is still very hard to recruit. People come in and go out in just a few days," Can said, adding that his recruitment team has set up desks and chairs at the gate to welcome job seekers but there are days when no one shows up.

He said the company has contracts until August, and its parent company in Taiwan has been sending orders over due to the Covid-19 situation there, which makes the recruitment task even more urgent.

"The board of directors want productivity increased but we are short of people."

Inputs inflation

Another major challenge factories face is rising input and transportation costs.

The rate of input cost inflation in Vietnam was the fastest in close to 11 years in March due to higher costs of oil, gas, shipping and raw materials, according to a report by S&P Global.

A range of factors including labor shortages and China border restrictions led to longer delivery times in March for supplies.

The conflict in Ukraine has also played a role in delaying deliveries, with lead times lengthening to the longest since last October, the report said.

Juki Vietnam has seen the prices of raw material increase by around 50 percent, with a surge of 80-90 percent seen in steel and oil.

With some orders needing urgent deliveries after last year’s delays last year, the company has been shipping goods by air instead of sea, a far more costly proposition (up five times).

Furthermore, the average price of shipping a container from Vietnam to the U.S. East Coast has surged 3.4 times to $16,333 since January last year, according to the Vietnam Logistics Association.

"There have been times when a container of wood is valued at $25,000, but transportation prices to the East Coast was almost that much," Vo Thi Phuong Lan, head of the association’s transport and delivery division, said at a recent forum.

The surging prices have raised concerns about inflation and slower economic growth.

Standard Chartered Bank expects inflation of 4.2 percent this year, higher than the central bank’s cap of 4 percent, driven by the geopolitical situation and higher commodity prices.

"Over the medium term, demand-push inflationary factors are likely to kick in as the economy recovers," the lender said in a note, adding that supply-side factors pose upside risks to inflation, particularly given the ongoing geopolitical situation.

The World Bank has cut its GDP growth forecast for Vietnam from 5.5 percent to 5.3 percent, due to surging Covid-19 infection in Q1 and economic slowdown in its major export markets.

"Additional shocks could lead to a low case scenario where GDP grows 4 percent in 2022, recovering to 6 percent and 6.5 percent in 2023 and 2024, respectively".

These forecasts lay heavier burdens on factories, which are struggling to ensure rapid growth despite high demand.

Cuong of Juki Vietnam is concerned that his factory might see even more rising costs as Vietnam is set to increase its minimum wage by six percent starting July.

"Factories have not fully recovered; they are like a body getting back up after falling very sick. Another expense will therefore be very challenging."

Dat Nguyen, Le Tuyet