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NOT THE STRONGEST SUPPLY CHAINS THAT SURVIVE BUT THE MOST ADAPTABLE

How Supply Chains In Vietnam Have Responded To The Impacts Of Covid-19
By Julien Brun, Managing Partner, CEL

Global Demand & Supply Disruptions

Early February 2020, in the mind of most of us, Covid-19 was still a China-specific problem. Yet, the strict lock-down imposed early in China generated rapidly an unprecedented chaos in the global supply chains. We realised how weak were these global networks, and how much every economy is dependent on China’s manufacturing sector. 

Chinese supply of goods stopped abruptly or got significantly delayed. Available inventories dried up quickly and shortages started to happen all over the planet. Everyone outside China was urging to find alternative production and/or transport capacity to serve customers orders. In a recent survey conducted by CEL at the end of March, 83% of companies in the physical value chain (retailers, transporter, traders, manufacturers) in Vietnam had suffered from supply issues over the past two months. 47% of them had issues specifically with China supplies and a large majority of what came missing were raw materials.

Delays started to accumulate and even though one would eventually find a new supplier, planes slowly got forced to the ground and import-export flows got slowed down due to the lack of manpower to run operations on the floor: the warehouse picker, the truck driver, the factory operator…

The workers were missing out.

From the perspective of early April, things have drastically changed and History has accelerated.

The pandemic is affecting every single country regardless of the level of development. Nearly one million people are officially infected on the planet, with almost 100,000 new cases every day. 3.4 billion people are locked up and beyond the basics, consumption has almost frozen in the EU and US or significantly dropped in most markets.

In Vietnam whereas there were categories where demand clearly surged, i.e. packaged food (+26%*), in dairy (+10%*), in personal care (29%*), the purchase baskets got significantly bigger as people started to visit markets and stores as less frequently. This surge in demand on specific items looked like more of a “just in case” purchase decision, a stock-up behaviour, not a healthy increase of consumption. It is obvious that some lucky companies in specific sub sectors are still trying to cope with much bigger orders than what they can deliver. But this rush on basic consumer commodities – toilet paper being a global symbol now – had biased our perception.

Most companies, in other sectors, were initially in a wait-and-see mode, hoping for China to recover and hope for a quick recovery. Two months later, the sky is darker for these businesses. Currently, the reality is that the actual demand (volume of order) is at its bottom low. Sales in beverage, fashion, electronics, vehicles, agriculture, furniture, footwear, and many other categories had started to vanish both locally and globally.

The consumer is now missing out.

As we speak, in Vietnam and elsewhere, manufacturers and retailers’ current sales volumes are too low to absorb fixed costs, leaving thousands of businesses with negative margins and thin reserves of cash. Export dependent companies are seeing orders cancelled every day, particularly the one from EU and US. As a consequence, the global transport sector is also being affected and freight forwarders in Vietnam are seeing their volume drop by 25 to 70%.

A number of SMEs have already declared bankruptcy and for others the impact on human resources, the main adjustment variable, are being felt strongly and unemployment is threatening multiple industries. Also further pressure is made on rents as retailers’ cash erodes and the real estate and construction sectors are under stress. Government measures are expected to release such immediate tension as the end of the crisis is still yet not clearly visible.

As we stand today, we’re put in front of a hard yet simple reality: despite recent noise around digital transformation, consumers and workers remain at the heart of the modern economy. Lock them up and things start to shake.

Channel Shift

As people spend more time at home, household spend has both reduced and shifted.

Consumers are generally more cautious spending given the lack of visibility on the mid and long term future. B2C product companies are generally selling less of their goods. CEL has found that companies operating in retail, distribution and logistics services (excluding e-commerce and last mile delivery) report a loss of revenue vs. target of 25% in Q1 2020 and don’t expect to recover this loss this year.

But as confinement becomes a more pressing reality, urban consumers seek convenient and safe shopping alternatives for their daily family needs. E-commerce and home delivery services have become central to this evolution. It allows people to get what they need and want but also helps small businesses and restaurants to maintain a certain activity as their physical outlet is closed to the public.

Figures are still not officially published in Vietnam, but Lazada reported a 300% increase in the number of orders in Singapore and Grab delivery surged by 200% in Bangkok. We can assume that comparable growth is being seen in the main cities in Vietnam.

So overall, a large amount of volumes has shifted from offline to online distribution channels and Last mile delivery companies are barely able to cope with the surge of delivery orders. One of the main challenges that this shift creates in the domestic distribution is the ability to transfer goods over long distances, i.e. between North and South Vietnam as airfreight and rail transport are constrained. Long haul trucks become scarce and lack of transport capacity generate delays and extra disruptions.

As people start to be accustomed to more systematic online purchase and home deliveries, it is likely that this becomes a habit and it is likely that the post crisis situation will still benefit the e-commerce and delivery sector while the offline retail sector will slowly recover. This is certainly a fundamental new trend in the consumer goods industry that we have to keep in mind. The crisis will also further accelerate the e-government initiative allowing the population to fulfil their administrative duties online and thus avoiding long physical queues. Once the crisis ends, it is likely that the implementation of digital solutions for consumers and citizens will spur drastically.

Outlook

As the global demand crisis deepens, we start seeing countries with promising results in their fight against mass contagion, namely Korea, Taiwan, Japan and China. However, as we speak, it appears that the EU will still face lock down for at least until June-July 2020 to, in the best case scenario, recover slowly over Q3 and Q4 2020.

On the other side, the US has been hesitant in taking clear containment measures and the pandemic is spreading faster and faster every day in the American population. First estimates predict hundreds of thousands of deaths in the US only. It is now pretty clear that the US will be under massive tension for the next 2 quarters at least. The stock markets are erratic, and despite a massive injection of cash from the Fed to support the real economy, experts and economists seriously worry about a global economic crisis. Regardless how fast other countries tend to recover, if the US is affected the world economy will face severe challenges in the months to come. As we speak, the American consumer is currently already reducing expenditures in shoes, phones, appliances, clothes, cars, tools…  Most of which are made in Asia and for a large portion in Vietnam.

Practically today, orders are being cancelled from the grocery store in Spain to the red wine trader in US, from the fashion brand in Italy to the garment manufacturer in Vietnam, from the retail chain in US to the shoes factory in India, from trader of coffee in UK to the farmer cooperative in Ethiopia. And despite remaining disruption in the supply of goods globally, we are now entering into a consumer demand crisis.

More than ever, for companies, cash is king. Without cash, the story ends. And to survive with very tight demand volume decision-makers have already initiated rationalising their product portfolio, developing complete new services for their remaining customers, conducting massive promotion campaigns, and cutting unessential costs. The CEL survey shows that 80% of businesses have already or are considering launching special promotion programs to ensure a minimum of sales, and 60% of them have already made changes in their product range. We are in a phase where companies NEED to innovate and realign themselves with new demand volumes, patterns and trends. A Darwinist effect that will let on the side the businesses that were not able to adapt fast enough.

Even if it’s early to predict how the world will be post-covid19, our global economy and global supply chains will certainly have to evolve significantly. A few trends start to emerge:

  • Online ordering becomes a more common habit of consumers and the prevalence of e-commerce channels in the long run should be confirmed, including for the grocery category.
  • Mature markets will develop autonomy with localised and renationalised supply chains and thus reduce their dependency to export markets. Free trade agreements may be challenged. Consumers will put higher preference to local products vs. imported ones, also for environmental reasons. As an illustration of such a trend, in early April, 84% of French people have expressed the wish to have more local products and reduce imports from Asia.
  • Consumers will increase expectation for transparency leading to tighter control on the origin of goods and compliance to hygienic standards. More quality controls will be required earlier in the chains.
  • SMEs in the chain would have suffered a lot or even disappeared, leaving holes in the chains and forcing companies to find other, more resilient partners.
  • Faster deployment of digital solutions to allow better visibility on business performance and more interconnected value chain partners.
  • Further acceleration of outsourced services (e.g. logistics, manufacturing) for companies to lighten their asset base and become more agile against uncertainty.

Regardless of our level of anxiety or optimism, It is important to remind ourselves that the weakest among us are going to most suffer. People living on daily wages in the streets of Lagos, Alger, Manila, Hanoi, Santiago, etc. are the most exposed to very hard times to come.  As business people, we may be worried but we are still comfortable. We still can feed our beloved ones, we still can enjoy quality time with our families.

That’s not a detail these days, and one must remember that some will need more support than others to cope collectively with this dire period to come. Solidarity is what we have left to emerge stronger together once the tsunami has passed.

Reference

CEL Vietnam – Covid-19 impact Survey – 20-30 March 2020
Kantar WorldPanel Vietnam: 4 Urban Key Cities – Fast Moving Consumer Goods – 23 February – 3 March 2020
www.cel-consulting.com

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