Vietnam On The Move

The textile and garment sector in the Socialist Republic of Vietnam — the easternmost country on the Indochina Peninsula in Southeast Asia — is one of the country’s largest industries and a key contributor to its economic growth. In 2013, Vietnam’s textile and garment exports increased 18 percent year over year (YOY) to total approximately US$20 billion, accounting for 15 percent of the country’s gross domestic product and 18 percent of its total exports, according to the Vietnam National Textile and Garment Group (VINATEX). The textile and garment industry comprises some 4,000 enterprises and provides employment for more than 7.7 million people.

The industry’s main export market is the United States (US), and garment exports to that country in 2013 increased 14.2 percent to total US$8.6 billion, VINATEX reports. Exports to the European Union (EU) that year increased 8.8 percent to total US$2.7 billion; to Japan, 20 percent to total $2.4 billion; and to South Korea, 44 percent to total $1.87 billion.

Raw Material And Input Imports
Though the Vietnamese textile and garment sector is a major exporter of textiles and garments, it is heavily dependent upon imported raw materials and inputs, especially from China, to meet its production quotas. Vietnam’s cotton production satisfies only 1 percent of the sector’s demand, and its fabric production satisfies only about 12 to 13 percent of demand, VINATEX reports. According to data from the General Department of Vietnam Customs, in 2013, Vietnam imported 581,179 tons of cotton valued at US$1.17 billion, representing a tonnage increase of 39.1 percent YOY; 696,194 tons of yarn valued at US$1.52 billion in 2013, a tonnage increase of 7.7 percent YOY; and fabric valued at US$8.40 billion, a dollar increase of 19.3 percent YOY. China is the largest supplier of raw materials to Vietnam, providing approximately 50 percent of imported textile raw materials. According to VINATEX, Vietnam annually imports from China cotton worth US$7.5 million, yarn worth US$350 million and fabric worth nearly US$3 billion.

The Vietnamese industry is aware of the need to develop domestic raw material production and reduce its dependence on imports — especially in light of the Trans-Pacific Partnership (TPP), a regional free trade agreement (FTA) with a group of countries also including Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and the United States. The TPP negotiations recently stalled, but if finalized would allow Vietnam’s textile and garment exports duty-free access into the United States — potentially on the basis of the yarn-forward rule of origin, which would require that every stage of the garment production from yarn forward including weaving, dyeing, finishing and sewing, as well as the manufacture of other input materials — be done in Vietnam or other TPP member countries. Presently, Vietnam relies to a great extent on Asian countries that are not members of TPP — primarily China, as previously mentioned, but also Taiwan and South Korea — for its input materials.

VINATEX has initiated a strategy to help the industry decrease its raw material imports while still meeting export demand. In 2014, it plans to invest in 57 projects including two on cotton farming; 15 on yarn spinning; eight on weaving, and 24 on garment manufacturing. The organization plans to utilize 70 percent of domestic materials for garment production in 2014. And, the organization reports that after decades of relying on imports of garment accessories, Vietnam for the first time in 2013 exported garment accessories that were valued at US$700 million.

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Trade Agreements
As a member of the Association of Southeast Asian Nations (ASEAN), Vietnam has benefited from FTAs the organization has signed with Australia, New Zealand, India, Japan, South Korea and China. Vietnam also could benefit from the Regional Comprehensive Economic Partnership (RCEP), a broader FTA being negotiated among ASEAN member states and their above-named FTA partners. RCEP is expected to standardize the rules of origin from ASEAN nations as well as tariffs charged by other countries for ASEAN imports.

Vietnam is currently in negotiations to sign FTAs with four important markets: one with the Customs Union, which comprises Russia, Belarus and Kazakhstan; one with South Korea; one with the EU; and, as previously mentioned, TPP with 11 other countries. If signed, the FTAs could benefit Vietnam’s textile industry by improving the competitiveness of its exported goods and increasing foreign direct investment into Vietnam.

While Belarus and Kazakhstan are not big markets for Vietnamese textile and garment exports, in 2013, Vietnam’s exports of those items to Russia grew 11.02 percent YOY to US$135.6 million, according to data from the General Department of Vietnam Customs. VINATEX believes that Russia could become a key market for Vietnam’s garment exports in the future if the FTA with the Customs Union is signed. The organization notes that Russia offers great potential considering it has the fifth-largest economy in the world and a population of nearly 143 million people.

South Korea already is the fourth-largest importer of Vietnam’s textiles and garments, as mentioned earlier. If a FTA is established between the two countries, it would likely lead to South Korea purchasing even more Vietnamese-made garments.

The EU is the second-largest importer of Vietnam’s textile and garment exports, and the Vietnam Textile and Garment Association (VITAS) is optimistic that a pending FTA with the European Union will be a boon for Vietnam’s industry. The group has said that Vietnamese textile and garment exports to Europe could increase by as much as 20 percent once the deal is finalized.

Though the U.S. is the largest market for Vietnam’s textile and garment exports, those goods account only for some 8 to 9 percent of the market share in the U.S. Vietnam believes that once TPP goes into force and its goods can be imported duty-free into the U.S., its exports and its market share will increase to 12 to 13 percent. TPP also could help Vietnam’s textile and garment industry gain access to other markets, and increase investments in its industry. However, some economists have said that if the yarn-forward rule is implemented, the deal may benefit foreign textile manufacturers more than the Vietnamese, as once Vietnam’s exports can take advantage of duty-free entry into the U.S., textile and garment manufacturers from China and other Asian countries will rush to Vietnam to set up production so that their Vietnamese-origin products can take advantage of TPP. Vietnam hopes TPP will include a proposed short-supply list provision, which would allow countries with raw material shortages, such as itself, to continue importing raw material and inputs from non-TPP-member countries for domestic production for up to three years, giving it time to adjust before it has to comply completely with the yarn-forward rule.

Regardless, Vietnam believes that if TPP goes into effect soon, its textile and garment exports could reach approximately US$30 billion by 2020 and US$55 billion by 2030.

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A state-owned and -controlled conglomerate, VINATEX is Vietnam’s largest textile and garment corporation as well as its biggest garment producer and exporter. The group includes mother company Vietnam Textile Garment Group, research and training centers, some 120 sub-companies and 2.5 million employees. VINATEX also is one of Asia’s leading textile and garment groups, and does business with more than 400 companies from 65 countries and regions. In 2013, VINATEX’s textile and garment exports increased 12 percent YOY to total US$2.95 billion. The group is hoping its exports will grow more than 12 percent this year, and is aiming for them to reach US$5 billion by 2016.

VINATEX is expected finally to launch an initial public offering at the Ho Chi Minh Stock Exchange in the second quarter of 2014 after several unsuccessful attempts in recent months. The group will sell a 49-percent stake in the firm, with the government retaining a 51-percent share. Experts have said the pending TPP makes VINATEX highly attractive to investors.

The group is setting up three new textile and garment production facilities that it anticipates will help it take advantage of TPP once the pact goes into force. Early this year, VINATEX began constructing a textile complex in An Lão — a rural district of Hai Phong, Vietnam’s third-largest city — that will include spinning, weaving, sewing, dyeing and finishing facilities as well as a sewage treatment plant and worker housing. Once operational, the production facility is expected to employ nearly 5,000 people and have an export turnover of US$54 million its first year. VINATEX also began construction early this year on a new garment factory in Kien Giang that is expected employ 2,225 people and generate US$9.4 million in revenue.

VINATEX also is partnering with two Chinese companies to build a 1,500-hectare garment and textile industrial park that will be the largest of its kind in Vietnam. Once operational, the US$400 million park, located in Nam Dinh province, is expected to create 160,000 jobs and have a production value of US$3 billion to US$4 billion annually.

VINATEX expects the project to attract investors from China, Hong Kong and Taiwan. Construction is expected to commence by the end of 2014.

In addition, the Vietnamese government has allocated more than US$3 million in 2014 to support human resources training by VINATEX. The funds are part of the government’s textile industry development strategy until 2020 and involve turning the industry into the country’s leading export sector, meeting increasing domestic demand and creating more jobs.

The Future
According to Vietnam’s Ministry of Industry and Trade (MOIT), Vietnam is now among the top five textile and garment exporting countries globally. Its industry has maintained a stable growth rate, with exports increasing an average of 16 percent from 2008 through 2012; and it is expected to achieve a growth rate of more than 10 percent and an export turnover of US$23 billion in 2014. MOIT reports that in the first three months of 2014, the industry recorded a growth rate of 20.2 percent, and textile and garment exports grew 21.9 percent to total US$4.5 billion.

However, VINATEX has warned that many obstacles must be overcome for this target to be achieved. As previously mentioned, the industry needs to cut its dependence on raw material and other input imports, as that increases production costs. In addition, the textile and garment sector is dealing with other increased production costs such as electricity and transportation, as well as a recent minimum wage increase of 15 percent. The sector also lacks highly trained workers, and those that are highly trained are unevenly distributed throughout the country.

In spite of these issues, Vietnam’s textile and garment industry has attracted a great deal of foreign investment that is believed to have been made in anticipation that TPP and the FTA with the EU will soon go into force. Textile and garment companies based in China, Japan, Hong Kong, South Korea, Taiwan, Austria and Australia have set up new production or have expanded current production in Vietnam. In addition, several countries including Kyrgyzstan and India have been in discussions with Vietnam concerning textile and garment partnership opportunities as well as ways to strengthen trade and investment.

In addition, MOIT has said that Africa could represent a potential new growth market for the sector. Vietnam’s textile and garment exports to Africa in 2012 increased 17 percent YOY to total US$164.5 million.

April/May/June 2014