When On Holding launched its IPO this week, the headlines focused on the Swiss sportswear brand’s $6 billion target valuation. But buried in the company’s filing was a detail with wider relevance for the industry: the supply chain for the brand’s performance running shoes is mostly locked down.
Almost 70 percent of the company’s factories in Vietnam — where On manufactured all its footwear in the six months ending Jun. 30 — were shut down, the company said in a public filing. Due to restrictions leading up to its listing, On declined to comment further.
Vietnam is in the throes of a severe outbreak of Covid-19′s Delta variant. In July, both Hanoi and Ho Chi Minh entered strict lockdowns that are still in place. Though factories were allowed to continue to operate if they provided on-site accommodation or transport for workers, many were unable to take on the expense or had to shutter after employees tested positive.
The disruptions have had a severe impact on an increasingly crucial manufacturing hub that has come to dominate the global sneaker market; Vietnam was the world’s top exporter of sports footwear in 2019, according to the Observatory of Economic Complexity, an online data platform.
Businesses accounting for 62 percent of the Vietnamese textile and apparel sector’s total export value have had to suspend production, the Vietnam Textile and Apparel Association (VITAS) said on Aug. 4. “The current shutdown in Vietnam could be the [longest] in a major manufacturing hub that has happened over Covid-19,” said Winnie Leung, a professor at Toronto’s George Brown College with a focus on sustainable fashion production.
The extended closures have significant implications for major brands. Vietnam was Adidas’ top sourcing country in 2020, accounting for 28 percent of the brand’s total production volume, according to its Q2 2021 results. Almost half of US seaborne imports tied to Nike products in the second quarter of 2021 came from Vietnam, according to data from Panjiva, a division of S&P Global Market Intelligence. Around 15 percent of Puma’s global production volumes come from the country, senior manager of corporate communications Robert-Jan Bartunek said.
The current shutdown in Vietnam could be the longest in a major manufacturing hub that has happened over Covid-19.
A recent report from S&P warned that Nike was at risk of running out of sneakers made in Vietnam. Nike did not respond to a request for comment.
It’s unclear whether the current crisis will result in a global sneaker shortage. “This will depend on how deep [a brand’s] capacity goes and how lean their supply chain is,” said Andy Halliwell, senior director of retail at digital consultancy Publicis Sapient, adding that players with diversified manufacturing bases will fare better than others.
American brands have been hit especially hard — Vietnam accounted for roughly 40 percent of US seaborne imports in the year to Jul. 31, according to Panjiva. In August, the American Apparel and Footwear Association (AAFA), an industry trade group, urged President Biden to accelerate America’s supply of vaccines to Vietnam and other “partner countries.”
“The success of the US apparel and footwear industry, and our 3 million American workers, is directly dependent on our suppliers around the world having healthy workforces,” the AAFA’s letter to Biden read.
In the meantime, brands like On, Puma and Adidas are reallocating resources to other centres and regions. “Costs might increase in the short-term, but for companies like Nike, meeting demand is more important than a stock-out situation,” said Leung.
Vietnam’s government is aiming to curb the outbreak by Sept. 15. But Puma’s management expect the shutdown to be extended by at least two weeks, said Bartunek. The company isn’t discounting the possibility of a four, or even six-week, delay, he added. Adidas foresees a chance the shutdowns last until the end of the third quarter, chief executive Kasper Rørsted told analysts during the company’s most recent earnings call last month.
The outbreak adds to a litany of disruptions, such as port closures in China and shipping delays in the US, that are already squeezing supply chains and adding to costs. They’re also adding to uncertainty that is likely to stalk the market through next year, with securing inventory likely to prove a bigger challenge than rising freight rates, according to investment bank Cowen. Brands will face ongoing pressure to diversify and adapt.
“This is yet another disruption in a world of deepening supply chain disruptions,” said Halliwell. Brands and retailers’ “leaner supply chains with reduced working capital simply can’t absorb the impact of a series of ‘black swan’ style events like this.”