Vietnam's "three on the spot" (T3) production model - to produce, eat and sleep "on the spot" in the factory - has led to rising costs and low production volume. Coupled with the obstruction of the distribution of goods, businesses in Vietnam are concerned.

According to a survey conducted by the European Chamber of Commerce in Vietnam (EuroCham), 18% of European manufacturing companies have already transferred a portion of orders and/or production to other countries with another 16% considering doing the same. Nearly 60% of French companies in Vietnam said that the last six months have been difficult for business. Around 56% of those surveyed said that they have had to temporarily stop or reduce production by 80% in the last two months.

A quick survey conducted by the American Chamber of Commerce in Vietnam (AmCham Vietnam) also found that 13% of respondents said their company has already ceased operations or is down to the most basic manpower. Close to 50% of respondents are operating at 50% below normal capacity. Additionally, the pandemic has resulted in 20% of US companies cutting their business by 51% to 75%.

Vietnam plays a vital role in the global supply chain. As of April 2021, semiconductor products from Vietnam accounted for 30% of the total semiconductor products imported by the US.

During her August visit to Vietnam, US vice president Kamala Harris talked about the issue of upgrading Vietnam's supply chain. This move will help Vietnam's electronics and automotive manufacturers overcome the current crisis.

The focus of Harris's visit was to help Vietnam control the spread of the epidemic and support Vietnam in resuming production, especially of semiconductors, in order to reduce supply chain disruptions. This included resuming production at Intel's Vietnam factory.

Although short-term difficulties due to chip shortages will still be felt by the electronics and automotive manufacturing sectors, Harris's visit sends a positive signal to the recovery of semiconductor production in Vietnam. It may also attract the US to become a major investor in the new wave of semiconductors manufacturing companies going to Vietnam. This may help minimize the impact of the global chip shortage crisis on Vietnam.

Vietnam takes a beating from COVID-19 and chip shortage

Vietnam has become an important manufacturing hub. This development has had a big impact on the country's consumer electronics manufacturers and automakers, who now find themselves in competition over the delivery of chips. Both industries are working hard to cope with the rapidly growing demand for chips and global supply chain disruptions.

The resurgence of COVID-19 in April wreaked havoc in many countries and regions. Lockdowns and travel restrictions caused factories in Southeast Asia to suspend production or close, which severely hindered the chip and automotive supply chains.

In July, Toyota, Subaru and Nissan all announced they would suspend production, each of which lasted from one week to several weeks. These automakers indicated that more suspensions were likely to occur in the future.

Since Vietnam's auto industry is only one-third the size of Thailand's and one-fourth of Indonesia's, the impact has not been as obvious as it has been in other countries. Some manufacturers in Vietnam, such as Toyota and Honda, said that the impact of the chip shortage on their business activities has been small. Other manufacturers, such as Suzuki and VinFast, have been forced to cut production.

In terms of consumer electronics, due to the large-scale shift to remote work and in home entertainment during the pandemic, the demand for electronics products ranging from virtual office equipment to home appliances has grown sharply. This has put even more pressure on chip manufacturers already struggling with the chip shortage and they now must also deal with an increasing number of purchase orders from retailers.

The chip shortage and transportation blockages have resulted in extended delivery times, price increases, and the purchase of chip stocks. The local lockdowns in Vietnam have forced manufacturers to either close factories or operate with lower business efficiency in order to ensure social distancing, especially in southern Vietnam.

In addition, the shortage of raw materials and the lack of new supply networks are hindering all manufacturers from large global factories to small Vietnam-based companies. Large-scale foreign-invested manufacturers like Intel, Samsung Electronics and LG Electronics are feeling the brunt of pressure due to the tremendous demand for semiconductors and the low flexibility of alternative supply.

Shipment difficulties cause panic as year-end shopping season arrives

Soaring freight rates are a global phenomenon, according to Bloomberg. Since more than 80% of the world's goods are transported by sea, soaring freight rates may cause the prices of all commodities to rise, intensifying concerns in a global market that is already prepared for accelerated inflation.

As the year-end shopping season approaches, both local Vietnam-based companies and foreign-invested companies are worried about blocked and delayed shipments.

The shipping container crisis is also causing headaches for exporters that are frantically trying to meet year-end shopping season delivery deadlines. Since the global demand for shipping containers far exceeds the supply, local steel manufacturers in Vietnam plan to use even more empty containers to support the market. However, this is only a small sliver of hope for container transportation.

The reopening of the Meishan Wharf at Ningbo-Zhoushan Port in China on August 25 had Vietnam-based exporters feeling optimistic. With the wharf reopened, they hoped that the turnaround time of containers would be shortened, bringing a swift end to the container shortage.

After a container ship ran aground in the Suez Canal in March, Vietnam-based manufacturers increased spending on deliveries to foreign buyers and the impact is still being felt today.

The global flow of goods mainly goes from Asia to the US and Europe. Transportation back to Asia has visibly slowed, resulting in the reduced flow of shipping containers, which is one of the reasons for the container shortage.

According to Vietnamese exporters, the current freight rate from Vietnam to Germany is equivalent to the value of the goods, which only adds to the difficulty of the current situation. Additionally, companies usually need to make multiple appointments before they even receive containers.

Experts pointed out that deepwater ports have a limited ability to receive empty containers. There are around 50 empty container yards in Ho Chi Minh City, Dong Nai Province and Binh Duong Province, but only one-fifth of them can directly receive empty containers from deepwater ports.

Then there is also the price increase for container rentals, which is mainly attributed to two factors. The first has to do with the pandemic and social distancing, which caused a drop in container processing capabilities at ports throughout the EU and North America. This led to shipping companies cutting shipping lines and the shortage of shipping containers. Also, because of the different quarantine policies in every country, the turnover time for containers rose from 60 days to over 100 days.

The second factor has to do with increased imports from China and Vietnam by the US and EU, which was a result of reduced production capacity in Latin America, Eastern Europe and South Asia due to the pandemic.

Before the pandemic, freight rates only accounted for a small portion of the value of goods. For example, it only accounted for 6% to 7% of electronic goods and 15% to 20% of agricultural goods. Currently, freight rates from port to import destination are equivalent to or exceed the order value. The overall effect of the transportation bottleneck has been detrimental to the transport of Vietnamese goods.

IHS Markit pointed out that rising freight rates are one of the main reasons for the increased cost burden on Vietnamese manufacturers. It is also one of the reasons for the surge in global investment prices.

Vietnamese manufacturers worry about losing orders

Global container handling capacity is expected to set a new record high in 2021, reaching more than 4.7 million 20-foot equivalent units (TEU), according to UK-based Drewry Shipping Consultants. This exceeds the previous high of 4.42 million in 2018 and is a 52% increase over the 3.1 million in 2020.

To cope with rising costs and supply chain disruptions, some companies have started to store up raw materials to avoid supply shortages. In recent months, companies have been continuously increasing their purchasing power, which has resulted in an increase of purchasing inventory.

In addition, along with climbing transportation costs, some of Vietnam's main exports are under threat of not being able to enter their normal markets. Several companies are working hard to export their products; however, some have no choice other than to suspend their operations. Many of these companies are also facing competition and will likely lose business to overseas competitors.

Shipping analysts believe that the increased supply of new ships in 2023 will allow freight rates to decline, but rates will still remain higher than pre-pandemic levels.

Vietnam's prospects look impressive: the economy will grow 6% in 2021, with some experts predicting it could be as high as 7%. Still, pressure is mounting to resolve the global supply chain blockage and avoid curbing foreign interest in this vibrant region.

By Alex Chen, Taipei; Eifeh Strom, DIGITIMES