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Supply chains disrupted by delta blues in Asia

Asia supply chain disrupted
Automobile Manufacturing Plant, China (Source: Jenson / Shutterstock.com)

The resurgence in coronavirus cases and the spread of the Delta variant are threatening to deepen Asia’s supply chain disruptions, amid fresh announcements of lockdowns in the region.

Asia is hitting new pandemic highs driven by the Delta variant of the coronavirus, due to slower progress on vaccinations than in the US and Europe. The big five of the Association of Southeast Asian Nations (ASEAN) — Indonesia, Thailand, the Philippines, Singapore, and Malaysia are turning into Covid hotbeds and struggling to recover from the global economic downturn.

Tighter restrictions in the Asia Pacific region have included factory closures in some cases, which is threatening more supply chain issues and rising prices for western manufacturers, according to Goldman Sachs. The investment banking company said that the new restrictions constrain semiconductor or auto production in the region and added that any setbacks in the region could also pose an upside inflation risk.

Mixed manufacturing PMI data across Asia

Across Asia, PMIs numbers in July were very much a mixed bag, but factory activity across Southeast Asia fell sharply. The Southeast Asia region, particularly, has emerged as one of the world’s worst-hit pandemic areas in recent weeks, with fresh outbreaks concentrating mostly in developing countries with unvaccinated populations.

The official manufacturing purchasing manager’s index (PMI) in Indonesia collapsed to 40.1, Malaysia to 40.1, and Vietnam declining to 45.1 last month, due to a resurgence in infections and stricter restrictions. Thailand’s activity also fell to 45.7.

China – the region’s largest economy – also witnessed activity shrink in July at the slowest pace in 17 months to 50.4, well below the 50.8 expected and from 50.9 a month earlier.

Meanwhile, factory activity in South Korea rose to 53, Taiwan to 65.2, and Japan to 53.

Resurgence of cases and new lockdowns

The latest resurgence and its led tightening of restrictions in countries such as Australia, Japan, South Korea, Indonesia, and Vietnam are likely to hurt the factory sector from the region and affect supply chains further.

With a total of 10 million cases, Southeast Asia’s leading economy – Indonesia – has turned it into a new Asian virus epicenter. Currently, Indonesia has extended restrictions outside Java island by another week. Meanwhile, Thailand – Asia’s fourth-largest auto exporter- is planning to extend its strict curbs until the end of August, fuelled by the highly transmissible Delta and Alpha variants. A threefold rise in infections led by the delta variant has prompted Vietnam’s capital, Hanoi, to extend coronavirus restrictions until August 22.

Hammered by the Covid-19 crisis, one of three defined metropolitan areas in the Philippines – Metro Manila – is also entering a two-week strict lockdown.

Besides countries from Southeast Asia, China has also introduced mass travel restrictions as the country grapples with a worsening outbreak of the Delta variant posing a major challenge to its much-heralded “zero-tolerance” approach toward infections.

Amid nervousness over the surge in the delta-driven Covid-19 infection numbers, South Korea has also extended its social distancing curbs by two weeks. Japan has also decided this week to expand curbs to more than 70% of its population. Meanwhile, Australia’s state capital Sydney is nearing its seventh week of a hard lockdown to contain an outbreak of the delta variant.

Restrictions disrupt supply chain in Asia

Outbreaks in these economies have disrupted the global supply chains of goods such as rubber gloves, semiconductors, and SUVs, dragging down the overall growth outlook of developing Asia.

Due to lockdowns in Thailand, Toyota was forced to suspend operations at all three of its factories in phases from July 20 onwards. Meanwhile, Honda Motor chose to suspend operations at one plant for three days through Thursday in Thailand. Nikon’s factory in Thailand also halted work for six days through July 25 due to outbreaks.

In Vietnam, factories have been shuttered to meet new restrictions, where several big techs like Samsung, Foxconn, Apple and Nike have production operations. Hoya, the Japanese lens maker, also faced factory activities decline in both Thailand and Vietnam to decline by about 10% on average.

Due to new restrictions in Indonesia, Honda plans to shut the Suzuka factory in Mie Prefecture for seven days this month. Meanwhile, Toshiba has ordered Japanese employees stationed at or visiting Indonesia to work from home. Moreover, Panasonic’s Indonesian facilities were staffed at less than half of normal capacity as of last week, and its operations in Malaysia were less than 60% staffed.

According to Stephen Foreman, Lead Industry Economist, Oxford Economics, the global industry recovery has encountered headwinds from material and component shortages as well as transportation bottlenecks, with several sectors not able to increase production fast enough to accommodate the strong rebound in demand.

Foreman added in a recent report, “In Asia, low vaccination rates, combined with low tolerance to the virus in several places, mean there are still risks to global supply chains from potential outbreaks of the virus.”