The surge in Covid-19 infection rates across southeast Asia has forced the closure of factories and halted supplies, incurring a manufacturing slump and leaving international investors operating in the region rattled.

Despite successfully weathering the pandemic in 2020 through strict lockdowns and effective contact tracing, manufacturing hubs such as Vietnam and Malaysia have been stung by Covid-19 outbreaks, driven by the Delta variant. 

Case rates have soared in July and August, notably in Malaysia and Indonesia. Coupled with other supply chain constraints, such as container shortages, this has resulted in the worst dip in manufacturing output for Association of South-East Asian Nations (Asean) countries in 13 months, according to IHS Markit.

“We continue to find the Delta variant-driven surge in Covid-19 and supply constraints hampering production in the Asean region, which is in turn fuelling further global supply problems and resulted in record supply delays in July,” Jingyi Pan, economist at IHS Markit, told fDi.

Some five of the seven ASEAN economies’ manufacturing sectors tracked by IHS Markit were shown to be in contraction in July, with Indonesia registering the most severe decline since June 2020 — falling by more than 10 index points.

Supply chain pressures

Earlier in August, Toyota announced that it will slash its global vehicle production by 40% and suspend nearly all its lines across its 14 plants in Japan due to a parts shortage stemming from the spread of Covid-19 in south-east Asia. Toyota declined to comment further.

US-based Ford Motors has also suspended operations at a US plant owing to a “semiconductor-related part shortage as a result of the Covid-19 pandemic in Malaysia”. STMicroelectronics, which makes semiconductor products, closed its plant in the Malaysian state of Johor in July.

German sports apparel company Adidas has also been caught short — its CEO, Kaspar Rorsted said in an earnings call on August 5 that external factors, such as mandated factory shutdowns in Vietnam and a hike in freight costs, have weighed on the company’s top line to the tune of €500m.

Daniel Bernbeck, member of the board and CEO of the Malaysian–German Chamber of Commerce, says that in Malaysia, where very strict lockdowns were imposed due to the swelling number of cases, suppliers were not considered “essential” and so were forced to shutter operations. 

“International supply chains, especially in the electric, electronic and semiconductor industries, have come under huge pressure,” he says.

But despite the difficulties triggered by the pandemic, Mr Bernbeck believes the country’s attractiveness will outlive the present headwinds.

“The fundamental factors that have made Malaysia an attractive destination for foreign investment in the past decades will survive the current crisis,” he says, citing the country’s high command of English, infrastructure and strategic position.  

Ton van den Bosch, partner and head of the Singapore office at Addleshaw Goddard, who advises companies operating across the region, also sees this as a “temporary delay”.

“I think many countries in south-east Asia have a lot to offer, with a booming consumer market and a very young population. It’s relatively stable. It’s still a good alternative to manufacturing in China,” he says.

Game of vaccinations

But it remains to be seen just how long these suspensions and disruptions will last, especially in countries whose primary weapon against the virus has been lockdown compliance, not vaccination rollouts. 

Aparna Bharadwaj, managing director and partner of Boston Consulting Group, says that what the Delta variant outbreaks have underscored is that vaccinations are the “new game”.

“Pre-Delta, the success or failure of a country was dependent on how well they are able to identify and isolate cases,” she explains. “With Delta, the criteria for success has changed: it’s a lot more about how fast you can vaccinate.”

With the exception of Singapore and Malaysia, Asean countries fall below the world average of 25% of people fully vaccinated against Covid-19, according to Our World in Data. The share of people fully vaccinated against Covid-19 in Vietnam stands at a meagre 2%, as of August 25 2021, while in Singapore and Malaysia it stands at 74% and 43% respectively. 

In light of the low vaccination take-up and strict lockdowns, Ms Bharadwaj is less optimistic about the region’s short-term recovery. “We saw the fallout in India, which took an entire quarter to recover. In Asean, it’s going to be country by country, but for Indonesia, Malaysia and the Philippines it’s going to be a tough ride,” she says.