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Vietnam textile industry: Will it move to next level or lose competitiveness?
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Vietnam textile industry: Will it move to next level or lose competitiveness?

  • Categories:Company News
  • Author:
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  • Time of issue:2021-01-26 14:57

(Summary description)"Vietnam could be at the same income level that Malaysia is today by 2035 if the government embraced a number of further structural and institutional reforms", the World Bank predicts.

Vietnam textile industry: Will it move to next level or lose competitiveness?

(Summary description)"Vietnam could be at the same income level that Malaysia is today by 2035 if the government embraced a number of further structural and institutional reforms", the World Bank predicts.

  • Categories:Company News
  • Author:
  • Origin:
  • Time of issue:2021-01-26 14:57
  • Views:
Information
"Vietnam could be at the same income level that Malaysia is today by 2035 if the government embraced a number of further structural and institutional reforms", the World Bank predicts.

 

Washington based multi-lateral lender also forecasts that the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the landmark 11-country deal signed on February 4, 2016, will lift Vietnam’s GDP by 10 percent by 2030, according to the East Asia Forum.

Besides, according to the prediction made by the government in Vietnam, the South-East Asian country’s textile and clothing industry will grow 10% per year on average from 2018 to 2025.

 

Both Bangladesh and Vietnam are competing for neck and neck in terms of winning the opportunities shifting from China. Many companies in China are looking to expand their operations by adding another location of manufacturing in Asia.

Bangladesh has more than 4500 garments and around 1500 textile factories while overall garment and textile factories in Vietnam stand at 6000. Bangladesh has earned popularity for its big capacity and ability to manufacture low-end items at the cheapest rate of the world with an acceptable quality whereas Vietnam is more value-oriented with a strong backward linkage and more educated skilled workforce.


Changed from a poverty-ridden country to a middle-income nation, Vietnam has come a long way. In 1986, Vietnam undertook key structural reforms in various areas, including state-owned enterprise (SOE) reform, private sector development, financial reform, public expenditure management and trade liberalization. The textile and apparel industry, the country’s largest industrial employer, got benefitted from the structural reforms. The industry specializes in the lowest value-added segment in the middle of the global supply chain.


Workers from rural areas are trained to be specialized in cutting, trimming and making (CMT model) garments. Downstream sectors, such as marketing and distribution, are underdeveloped and depend heavily on foreign companies. Although small in number, SOEs have been the main producers and act as the gateway for foreign companies to tap into Vietnam’s low-cost labor force.


A conglomerate of SOEs called Vinatex was founded in 1995 to foster improved technology, modern management and diversified businesses, including investment and finance. Vietnam is at a crossroads: it can either move to the next level of industrialization or incur the risk of losing competitiveness. In the T&G industry, foreign investment contributes to 60 percent of export revenue.


In 2019, the revenue Vietnam earned through the textile industry stood at USD 39 billion. By the ongoing year, the country has set a target of raising USD 50 billion from its textile and apparel industry. The textile industry started developing from the northern part of the country. Because of skilled and low-cost workers, most of the foreign companies started investing in the textile industry. Vietnam pays much less salary to its workers compared to the US, Japan and even China. The quality of Vietnamese products is very good at low-cost.


The government policy is very flexible, helps the industry to grow at its best and attract foreign and local investment. With the help of this industry, Vietnam could become economically one of the Asian Tigers. Generally, the government policy allows duty-free imports of raw materials on the condition they are re-exported as clothing products within 90-120 days. The Vietnamese industry has shown the capacity to react quickly to new orders.


The development of non-traditional markets for Vietnamese clothing products also holds out promise. Vietnam’s joining the WTO in 2007 offered it a tremendous opportunity to develop. In the US markets, Vietnam is reaping the fruits of the CPTPP agreement of which Bangladesh is not part. The TPP trade pact has not influenced Bangladesh’s apparel export since Bangladesh’s apparel export to the US has not fallen. However, Vietnam apparel export is booming in the US market.

 

Barriers and ways

Due to their size and weather, Vietnam does not grow a lot of cottons they use. Rather, they import it from China and the US.


The country has little capacity for fabrics manufacturing. Vietnamese garment manufacturers predominantly focus on the simplest cut-make-trim (CMT) model in which buyers control and own all the pre- and post-production processes. CMT production contributes over 60 percent of Vietnam’s total exports, while the more advanced business models (considered more profitable) like Original Equipment Manufacturer (OEM) and Original Design Manufacturer (ODM) account for the rest.


Chinese fabric manufacturers suspended production, disrupting fabrics supply to Vietnam when the coronavirus pandemic for the first time struck in the country in January 2020. As the pandemic centre shifted west from China in March, many orders from the European Union and the United States were canceled, causing significant damage to Vietnam's garment manufacturers.


About 70% of garment manufacturers reportedly started reducing shifts and rotating workers in March, with an additional 10 % following in April or May. Data from Vietnam's Customs Agency suggests that imports and exports of all textile and garment products fell steeply in the first quarter of 2020.


Even though the Coronavirus pandemic has greatly impacted the industry, it provides some valuable lessons for the industry on recovery and shows them ways to move forward. First, it is necessary to establish a resilient supply chain of fabrics and other raw materials, which relies on the development of domestic fabric production.


Because a reliable supply of domestically produced fabrics will mitigate disruptions and help capitalize on Free Trade Agreements (FTAs) that impose rules of origin. For example, to enjoy preferential tariffs under the recently signed European Union–Vietnam FTA (EVFTA), Vietnamese garment manufacturers must satisfy the fabric-forward rule that requires the use of domestically produced fabrics (except fabrics imported from South Korea).


Second, it is important to diversify the demand base to reduce over-reliance on a few key customers. Vietnam should leverage FTAs, especially the newly-signed Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), to explore new export markets.


This could also help drive industry growth. Manufacturers should also pay more attention to Vietnam’s promising domestic market and explore new product offerings. Domestic and international demand for antibacterial masks and protective gear has proven an effective and important relief measure during the Coronavirus-induced crisis.


Third, Vietnamese garment manufacturers should make the necessary investments to advance from the labor-intensive CMT model towards more capital-intensive models that allow for higher profit margins and more control and resilience to external shocks. OEM and ODM capable firms have proven to be more resilient and better equipped to quickly respond to the pandemic.

 


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