Southeast Asia's COVID-19 Surge May Bring Manufacturing Orders Back to China — What Lessons for Packaging Companies?

The COVID-19 Delta variant has swept the globe with formidable force, and new infection cases in many Southeast Asian countries continue to hit record highs, making the region one of the hardest-hit by the pandemic worldwide. Southeast Asia, with its low vaccination rates and inadequate pandemic control, has dealt a huge blow to the global supply chain. Manufacturing industries such as apparel and textiles and semiconductors face the risk of disruption, and orders continue to flow out, exerting a huge impact on China's economy and the global supply chain.

More manufacturing closures in Vietnam, over 35% of garment factories shut down

This round of outbreak in Vietnam has reached its most critical state. The lockdown of the capital Hanoi has been confirmed to be extended to August 22, and Ho Chi Minh City will be locked down until September 15. As of the 18th, Vietnam had 180,272 active confirmed cases, 302,101 cumulative confirmed cases and 6,770 deaths. Hit by this wave of COVID-19, the number of manufacturing enterprises going bankrupt in Vietnam has surged. In the first half of the year, the number of businesses that closed down in Vietnam reached 70,209, up 24.9% year on year. Among them, Vietnam's pillar textile industry has been severely damaged, with 35% of enterprises forced to suspend operations.

Indonesia extends restrictions for the fifth time, micro and small businesses fold one after another

As the world's fourth most populous country and the largest economy in Southeast Asia, Indonesia suffered its second major outbreak this summer. As of the 18th, Indonesia's COVID-19 confirmed cases rose to 3,908,247, with 15,768 new confirmed cases and a cumulative death toll of 121,141. The Indonesian government announced a fifth extension of emergency restrictions, which will remain in effect until the 23rd of this month. According to data from the Indonesian association of micro, small and medium enterprises, the pandemic has caused more than 30 million MSMEs to go out of business. The largest cross-border fast-fashion giant, the Chinese brand SHEIN, ceased operations in Indonesia on July 29.

Malaysia's movement control order, semiconductor manufacturing under strain

Malaysia's latest wave of the pandemic has surged since July, and the current lockdown is being extended indefinitely. In the global semiconductor market, Southeast Asia accounts for 27% of the industry share, while Malaysia alone accounts for as much as 13%. Due to the control policies, some semiconductor companies still need to shut down part of their production lines as required by the government, further worsening the situation for a supply chain that is already tight on capacity.

The virus spreads across the Philippines, lockdown underway

The Delta variant has now spread across the entire Philippines. The capital Manila re-entered lockdown on August 6. As of August 19, the Philippines had 105,151 new confirmed cases, 1,776,495 cumulative confirmed cases and 30,623 deaths. In the locked-down Philippines, only businesses in essential sectors of daily life may operate and work normally. During the lockdown, only one person per household is allowed to go out to buy necessities, and many residents face unemployment.

Thailand imposes highest-level pandemic controls in 29 areas

On August 16, Thailand's government COVID-19 situation administration center announced the extension of "lockdown", curfew and other control measures until August 31 in 29 maximum-level pandemic control areas nationwide, including the capital Bangkok. In terms of work arrangements, employees are required to continue working from home, internal quarantine facilities must be put in place, and enterprises with more than 100 employees must implement closed-loop management. On August 20, a mini free trade agreement was signed with China's Hainan Province, which will create more business opportunities for Thai enterprises, especially small and medium-sized ones, not only in traditional trade and investment but also in broad cooperation in cross-border e-commerce.

As the pandemic rages across Southeast Asia, for China it is both a crisis and an opportunity. Although the pandemic has brought factory operations in Southeast Asia to a standstill and increased risks at the end of the global supply chain, China's industrial chain is known to have the world's most complete industrial system, and its upstream and downstream supporting capabilities are second to none globally. Combined with the scale effect and clustering effect of China's entire manufacturing sector, its competitive advantages are very clear. In the face of the pandemic, the strict and efficient prevention and control measures taken by the Chinese government have not only won the heartfelt support of the Chinese public but also quickly brought the spread of the pandemic under control. With the pandemic now raging in Southeast Asia, China is naturally the best choice for buyers to shift orders to, and a considerable number of Southeast Asian orders have already flowed back to China.

Not long ago, Adidas said that the capacity of most of its suppliers in Vietnam has been unavailable since mid-July, and it expects to lose 600 million USD in sales in the second half of the year as a result.

Meanwhile, US footwear provider Wolverine World Wide has already shifted part of its capacity back to China this year. A company executive said the supply situation in Southeast Asia is now highly unstable.

Reports say Apple moved its AirPods production lines from China to Vietnam starting in 2020, but due to the impact of the COVID-19 pandemic, Apple had to return to China to mass-produce AirPods 3.

Normally, the packaging industry would never suddenly pick up pace, but the COVID-19 pandemic has clearly brought about an incredible transformation in the carton industry, which holds an important position in the packaging sector.

Over the past 18 months, city lockdowns of varying degrees have forced millions of people to shift from offline consumption to online buying. This outcome has also brightened the prospects of the paper packaging industry, worth as much as 350 billion USD, which sits at the core of the e-commerce economy. According to data from consulting firm Smithers, the amount of cardboard used to ship goods from retailers to households surged by nearly 40% last year.

Carton packaging companies that were once obscure now see their shares eagerly sought after by all kinds of investors. Since the stock market hit its low in March 2020 because of the COVID-19 pandemic, the share price of London-listed Smurfit Kappa Group has risen 84%, that of its competitor Mondi has risen 58%, and the share price of New York-listed International Paper has nearly doubled.

Investors enthusiastic about the industry's prospects say they are not counting solely on the pandemic to accelerate the industry's shift to e-commerce. Paper packaging is also seen as an environmentally friendly industry, as consumer-facing companies replace plastic packaging with more sustainable alternatives. Companies are enjoying a structural tailwind from e-commerce demand, and the industry is witnessing a shift in customer preferences and investment toward sustainable packaging solutions.

Under the trends of policy direction and market consumption, environmental sustainability will become a key focus for the future development of the packaging industry. At the same time, as the raging pandemic brings inconvenience to production in multiple regions, the consolidation of packaging companies will also become a key focus of future development. Through consolidation, companies can operate in multiple regions, which not only improves their stability in withstanding risks but also enables their own innovation and development.

——This article is reprinted from China Packaging Network (pack.cn). Original link: http://news.pack.cn/show-378107.html