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Garment
Vietnam's garment and textile industry

The rise in exports has been quite dramatic since the turn of the century. The export value has increased from $1.9 billion in 2000 to $7.8 billion in 2007. The early figures for 2008 show increasing volumes and values, particularly to the United States which is Vietnam’s largest single export market for garments and textiles, accounting for approximately 54 per cent of Vietnam’s garment exports. Total industry exports for the year are expected to be greater than $9 billion. Some industry experts predict that exports in this sector will reach $25 billion by 2020.

In addition to being a highly significant contributor to export earnings, the garment and textile sector employs around two million people, of whom 80 per cent are female, many are migrants from the poorer rural provinces. As migrant workers are often responsible for supporting extended families in the countryside, there are potentially millions of lives dependent on the sector’s performance. Significant changes in the sector can have major social impact.

Recent data (2006) from the Ho Chi Minh City Association of Garments, Textiles, Embroidery and Knitting (Agtek) and the Vietnam Textile and Apparel Association (Vitas) indicate that there are around 2,000 garment and textile enterprises in Vietnam, including 50 state-owned enterprises (SOEs), 1,400 private enterprises and 450 foreign direct-investment (FDI) enterprises.

Of these, approximately 1,100 companies, including some 200 foreign-invested companies, are based in and around Ho Chi Minh City. Out of 2,000 companies, 1,280 are garment enterprises, 120 are spinning companies, 340 are textile ventures, and the remaining 260 are commerce and service businesses.

The state still plays an important role in the textile sector through its share in the Vinatex group and other SOEs whilst the garment sector has become an increasingly private sector-based industry as SOEs equitise and foreign companies increase their investments.

However, whilst the sector may be large and significant in many ways, the ‘value added’ of the garment industry is low as most raw materials such as fibres, yarns, fabrics and garment accessories are imported. In 2006, fabric imports were worth $2,954 million. Most of the imported textiles have been re-exported as garments.

Buyers from a number of the world’s leading textile and apparel companies have sourced apparel from Vietnam including Express, Hucke, Itochu, JC Penney, Jupitar, Kmart, Kowa, Lee Cooper, Li & Fung, Mast Industries, Nichimen, Nissho Iwai, Otto, Sara Lee, Seidensticker, Sumitomo, Tomen, Tommy Hilfiger, Victoria’s Secret, and Wal-Mart. However, the proportion of domestic inputs in final products is still low. In the textile industry, domestic inputs make up only 10 to 15 per cent of total inputs, while the ratio is around 30 per cent in the garment industry.

The government has a clear strategy of increasing the supply of domestically produced inputs such as raw cotton, yarns, fabrics and garment accessories. Its overall aim is to reduce import content to less than 25 per cent by 2010. Investment in modern machinery has soared in recent years, demonstrating convincingly the move towards modern textile manufacturing technology.

The majority of textile and garment exports are destined for the US, followed by the EU and Japan. The increase in export revenue is the result of Vietnam’s integration into the global supply chain in line with the shift in sourcing by retailers from high labour cost centres to low labour cost centres. According to research by PricewaterhouseCoopers, Vietnam ranks amongst the most attractive manufacturing locations, not only in Asia but in the whole world.

Export markets for Vietnam’s textiles and garments

In 2007, the US represented 58 per cent of Vietnam’s textile and garment exports, growing at a Compound Annual Growth Rate (CAGR) of 23 per cent during the 2003-2007 period. The European Union and Japan represented 19 per cent and 9 per cent of the exports, growing at a CAGR of 27 per cent and 8 per cent respectively. Germany and the UK are two largest markets in the EU.

The markets are different. The US buyers often require large orders (over 100,000 pieces per order), the EU buyers are looking for small or medium orders (thousands to ten thousands of pieces per order). China is the biggest exporter to the US as it has many large-scale manufacturing facilities capable of producing large orders with significant economies of scale. The US was the toughest in terms of applying quotas and anti-dumping tariffs to exporters, and implemented a monitoring system when the quotas were abolished. The economic recession in the US may result in slowing the growth of exports to the US and, hence, total exports this year.

In the EU market, Vietnam faces increased competition from Eastern Europe, which, although wages are higher than in Asian countries, has no import tax within the EU, has strong design capabilities, allows for fast delivery and has much lower transportation costs.

How much value is added by Vietnamese garment exporters?

Of the $7.8 billion export value in 2007, $6 billion was spent on raw materials. Most exports by the biggest Vietnamese exporters (Vinatex, Viettien, Thanh Cong, 10 Garment and Nha Be) are CMT (Cut-Made-Trim) products, with insignificant contribution by Vietnamese-branded products.

CMT (Cut-Made-Trim) refers to a production practice whereby the buyers, buying agents and buying offices provide Vietnamese firms with all inputs for design, materials and transportation arrangements, while Vietnamese garment manufacturers only cut, make and trim. CMT is the simplest production practice for export and only requires manufacturing capacity and a little designing capacity in making counter-samples.

The CMT production modality allows Vietnamese garment producers to strengthen their operational capacity without committing scarce financial resources or encountering exposure to market risks. Substantial room to improve product quality and delivery conditions exists even under the CMT modality. While Vietnam currently is competitive in the production of garments, productivity of CMT is still low by international standards primarily due to inadequate management practices. Customers for CMT business are usually intermediary agents based in South East Asian countries and territories such as Hong Kong, Taiwan, Korea and Thailand.

Garment exports are a key element of the export strategies of many emerging economies, including Vietnam. In all cases garment exports started with CMT types of business (a model of work often driven by a lack of available working capital) and a plan to move away from CMT to various levels of Freight On Board (FOB) manufacturing within a five-year period. However, most Vietnamese garment manufacturers (93.6 per cent) are still involved in the CMT or other low value-added operating models where fabric suppliers are appointed by multinational retailers or foreign customers, as they want to ensure the use of the right fabric, consistent quality and timely delivery – demands which cannot be met by Vietnam’s manufacturers.

There are only a few companies working at FOB levels which are successfully exporting to developed markets. In general, they are either foreign or foreign-invested companies. Successful FOB companies also tend to be larger organisations or micro-companies driven by owner-designers. In the highest value adding operating model (called FOB 3), companies produce garments based on their own designs and are responsible for all input elements. This model requires skills and experience that are not normally prevalent in Vietnamese garment companies.

Domestic companies find moving to FOB 3 level particularly difficult as they lack design and branding capacity and have little experience in the international sourcing of appropriate materials. There are, of course, some major exceptions which are successful in ‘designing’ and production for the domestic market, including Saigon 2, Nhat Tan and Hanosimex. These brands tend to be targeted at the low to medium-end of the market, although Viet Tien also has higher-end brands, San Sciaro for men and T-T Up for women, some of which are designed by design consultants rather than a fully skilled, full-time, in-house design team employed by the company.

Other key challenges and opportunities for the industry?

Operating margin squeeze and declining profitability are other key issues facing Vietnamese garment manufacturers. The following trends contributed to declining profitability. The increasing costs of labour as a result of repeated increases in the minimum wage in line with continuing GDP growth, increasing costs of raw materials and utilities as a result of increasing oil prices and inflation; increasing costs of financing due to the increased interest rates brought in by the government to fight inflation and revenue reduction due to the depreciation of the US dollar.

According to an official from Agtek, many Vietnamese garment producers are reconsidering the future potential of their industry. An estimated 50 per cent of Agtek members have no plans to expand their operations, while 20 per cent want to slash garment production.

Currently 65 per cent of the domestic production of garments is intended for foreign buyers. Facing increasing competition in the global market, Vietnamese garment companies are now shifting their focus from conquering export markets to the domestic market, realising that they had ignored and thereby missed local opportunities for many years.

Garment imports increased by 30 per cent in 2007 as a result of the tax cuts on clothing imports implemented as part of Vietnam’s WTO commitments. Most competition was from cheap and deluxe garments from China, Thailand, Malaysia, South Korea and Singapore. More competition is expected in 2009, when the retail industry will be deregulated and global retailers are expected to enter the market en masse, importing branded garments manufactured in other Asian countries.

As mentioned earlier, the garment companies in Vietnam rely heavily on imports, reducing the flexibility and competitiveness of Vietnam’s garment industry. It is clear that domestic garment manufacturers would prefer to source fabric locally if it met their specifications. It is this unsatisfied demand from the local garment producers that provides an opportunity for domestic textile companies to upgrade their manufacturing capacity and target the large domestic market.

While Vietnam’s garment technology is not far from international standard, 30 per cent of textile equipment is 20 years behind, according to industry experts, requiring massive capital investment if domestic textile manufacturers want to become internationally competitive. Hence, the majority of future investments are intended for the textile, rather than the garment sector.

While the government plans to invest around $3 billion in developing the textile and garment sector during the run-up to 2010, Vinatex plans to invest an additional $1 billion to develop its production and distribution systems, fashion design and infrastructure. Vinatex, together with the Vietnamese petroleum giant, PetroVietnam, has already commenced building a $200 million synthetic fibre plant in northern Haiphong, a port city. The plant would initially produce 500 tonnes per day, aiming to provide a spectacular 40 per cent of the materials for domestic yarn production by 2011.

Vietnamese government efforts to increase domestic production of fibre have also resulted in an increase in foreign investment in this sector. Taiwan’s Formosa Chemicals and Fibre Corporation, for example, has invested $309 million in expanding its textile base in Vietnam. It is aiming to add nylon fibre and yarn production – which is, in turn, expected to attract Taiwanese downstream textile manufacturers to form a production cluster.

Phong Phu and International Textile Group (Burlington Worldwide) have also entered into a $80 million joint venture to build a state-of-the-art cotton manufacturing complex in Danang. A local textile manufacturer that can produce high-quality fabric acceptable to foreign buyers of Vietnamese-produced garments will have a huge domestic customer base to serve.

Such companies need to have a strategy to identify their target markets and to initiate and develop long term co-operative relations with domestic customers. They should also cultivate importers’ confidence in their products by upgrading quality, improving client contact, reducing delivery times and becoming more transparent in terms of labour and environmental practices.

Zoya Vassilieva is a director at PricewaterhouseCoopers, leading its strategy practice in Thailand and Vietnam. She welcomes your comments and questions at zoya.vassilieva@th.pwc.com

Source: Vietnam Investment Review  

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