Apparel makers head for Vietnam
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Apparel makers head for Vietnam
By KRISHNA KUMAR VR in New Delhi
|Workers at a garment factory in the outskirts of Hanoi on Oct 20 last year. Vietnam’s garment and textile industry is a key contributor to the economy, accounting for 15 percent of GDP and employing more than 7.7 million people in 4,000 enterprises. (AFP)|
Smart Shirts, a Hong-Kong based apparel maker known for its dress shirts and sportswear, believes the company made the right choice when it set up a factory in Vietnam.
The company, which supplies clothes for global brands ranging from luxury fashion line Ralph Lauren to Japanese retailer Uniqlo, started a manufacturing unit that can accommodate more than 3,000 workers in the Southeast Asian country’s northern Nam Dinh province in 2013.
“We made the right decision to set up a factory in Vietnam,” a production manager at Smart Shirts told the Nikkei Asian Review in an earlier interview.
Ever-increasing wage hikes in China mean that garment manufacturers and global clothing brands are increasingly shifting their production bases out of the country.
Alex Malley, CEO of accounting body CPA Australia, told China Daily Asia Weekly that the lower cost of labor, proximity to China and easy access to global distribution networks make Vietnam an ideal choice for those wishing to relocate.
Vietnam’s various trade deals are another attraction for manufacturers looking to move production to the Association of Southeast Asian Nations (ASEAN).
TAL Apparel, a Hong Kong-based company which makes one in six dress shirts sold in the United States, is building a $240 million textile plant in Vietnam, which it hopes to complete by 2017.
South Korea’s Dong-Il is building a $52 million yarn factory in southern Vietnam, while Taiwan’s Forever Glorious has announced plans for a $50 million weaving and dyeing factory. The Chinese mainland’s Jiangsu Yulun Textile Group is also in the process of building a large textile plant in the country.
Vietnam is one of the 12 nations included in the Trans-Pacific Partnership (TPP) agreement, signed last month and expected to be implemented within about two years. According to a study by the Peterson Institute for International Economics, Vietnam may stand to gain the most under the TPP framework.
By eliminating tariffs and other trade barriers, the TPP aims to bring the largest and fastest growing economies around Asia Pacific together with the US into a single trading community. The partnership will represent approximately 30 percent of the world’s GDP.
Likewise, a few months ago the European Union and Vietnam reached a free trade agreement (FTA) that removes nearly all tariffs on goods traded. The deal is expected to take effect in late 2017 or early 2018.
The global competitiveness of Vietnam as a manufacturing hub for textiles and garments will receive a considerable boost from these key agreements, said Rajiv Biswas, Asia-Pacific chief economist at consultancy IHS.
It is estimated that completion of the TPP will increase Vietnam’s garment and textile exports to the US to $30 billion by 2020, compared with $8.6 billion exports recorded in 2013.
“The trade deals will give Vietnamese garments duty-free access to the US and EU markets, significantly improving the competitive advantage of the industry compared to other low-wage competitors such as Bangladesh, Sri Lanka and Pakistan,” Biswas told China Daily Asia Weekly.
He added that the agreement is likely to contribute to a surge in foreign direct investment in the country.
Youngor Group, a Chinese apparel maker with a factory in Nam Dinh province, is looking to source more textiles from Vietnam rather than from its own factories in China, with an eye on exporting to the US.
Vietnam’s garment and textile industry is already one of the country’s leading sectors, recording growth of more than 15 percent annually between 2001 and 2014. It is the key contributor to Vietnam’s economy, accounting for 15 percent of the country’s GDP and employing more than 7.7 million people in 4,000 enterprises.
The EU is the second largest importer of Vietnam’s textiles and garments. And the FTA between the two would boost exports to the EU during 2013-2020 from $2.7 billion to $3.2 billion.
Vietnam’s FTA with South Korea is expected to almost triple bilateral trade value during 2015-2020, to reach $20 billion by 2020.
Apparel products from Vietnam get shipped to more than 180 countries across the world.
Relatively low wages are undoubtedly a major competitive advantage. While the minimum monthly wage in Vietnam is between $90 and $130, the average wage of textile workers in China has touched more than $650 a month.
“Vietnamese manufacturing wages are still considerably lower than in China’s major manufacturing hubs in southern China,” said Biswas.
Chris Devonshire-Ellis, chairman of consultancy Dezan Shira & Associates, explained that Vietnam also has a lower corporate income tax base and lower operating costs than China. This will have a large impact on China’s textiles industry, he added.
“China has already lost a lot of its industry to Bangladesh. Now the rise of Vietnam will accelerate the relocation of the garment industry. It is a large industrial migration from China since reform and opening-up.”
However, Devonshire-Ellis pointed out that the process will not happen overnight. Vietnam needs to upgrade its machinery and tooling to reduce the current productivity gap it has with China. China still holds a commanding share of 37 percent of the global textiles market, worth around $300 billion.
Venkatachalam Anbumozhi, senior economist at Jakarta-headquartered Economic Research Institute for ASEAN and East Asia, said that the trade deals and lower cost of production will make Vietnam the clear winner.
“But lack of capital and unclear environmental and energy efficiency standards may affect the competitiveness in local content requirement for exports,” Anbumozhi said.
The initial surge of investment is likely to be focused on additional low-wage textiles and garment production factories.
Biswas of IHS noted that over the medium term, Vietnam will need to develop a strategy to move into higher value-added segments of the industry over the next decade.
“This will be a key challenge for Vietnam, as eventually its wage levels will also rise over time, as occurred in southern China,” he said. “Vietnam needs to begin preparing for a transition to higher value-added segments of the textiles and garments industry.”
For the period 2015-2020, the industry in Vietnam targets a production growth rate of 12-14 percent annually, additionally employing 3 million more people in the industry. The export revenue target is $25 billion by the end of 2020.
For this to be achieved, Malley of CPA said that a strong focus on innovation, the development of design capability, investment in upskilling the workforces and a focus on the business fundamentals are required.
“These elements will attract more companies into the country,” he said.