Vietnamese textile and apparel industry moving towards US$50 billion by 2020

Akhi Akter       
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Introduction

Vietnam textile and clothing industry has a long tradition and history. From hundreds of years ago, women of the country knew sericulture, weaving thread into beautiful silk and to do this they used elementary tools but clothes had full of sophisticated touches and high value. Vietnam’s textile industry however started developing in 1958 in Northern region and in 1970 in Southern region. During this time, French built some big factories in Nam Dinh, HaiPhong, and Hanoi.

Still now, the industry is one of the most important sectors in the country’s economy, which serves the basic needs of people and creates huge job opportunity. The sector is a biggest export earner that creates conditions for economic development, contributing to the balance of imports and exports for the country. The sector played a vital role even during the years of crisis, as the market is always wide open. Now there are about 6,000 textile and apparel manufacturing companies working with 2.5 million employees while the population in Vietnam is about 90 million. In 2016, Vietnam has been recognized as the third top garment exporters in the world where the top two apparel exporters were China and Bangladesh. The apparel exports account for 16% of the country’s total exports (2017).

Figure 1: Vietnam's Textile & Apparel is giving a great momentum at their economy and at the life of people.
Figure 1: Vietnam’s Textile & Apparel is giving a great momentum at their economy and at the life of people.
Figure 2: Textile and apparel industry of Vietnam at a glance.
Figure 2: Textile and apparel industry of Vietnam at a glance.

Export trend

The apparel and textile products of Vietnam are exported to 180 countries and territories around the world. Garment manufacturing accounts for 70% of the total businesses in this sector in Vietnam with CMT (Cut, Make, Trim) being the main method (85%) of export. Main market for Vietnam textile and garment products are U.S., Europe, Japan and South Korea. For a long time the U.S. has remained the largest importer of Vietnamese textiles and garments, followed by Europe, which has led to rapid development of the country’s textile and garment industry.

Figure 3: Major export destinations of Vietnam apparel and textile products.
Figure 3: Major export destinations of Vietnam apparel and textile products.

Despite several challenges and pressures from the abandonment of the Trans-Pacific Partnership (TPP) trade deal last year, Vietnam’s textile and garment industry exceed its 2017 target of $30bn with an export turnover of over $31bn, an increase of 10.23% on the prior year. Major markets of the United States, the European Union, Japan and South Korea maintained good growth, while there were breakthroughs in exports to other markets such as China, Russia and Cambodia, according to Le Tien Truong, Deputy Chair of the Vietnam Textile & Apparel Association (Vinatas).

The South Korean market jumped and came close to the Japanese market, reaching an export value of $2.7 billion in 2017 while Vietnam’s textile and garment exports to China reached $3.2 billion, the same as the export value to Japan.

Figure 3: Apparel export of Vietnam from 2012 to 2016 (in USD billion).Source: ThreadSol
Figure 3: Apparel export of Vietnam from 2012 to 2016 (in USD billion).Source: ThreadSol

Domestic market

Vietnam’s domestic market demands are also growing powered by young aged consumers, increasing urbanization, and growing disposable incomes. Now these markets are attracting major international brands. Country’s retail sales are rising at a rate of 20% annually, and spending on apparel is the second highest category in Vietnam, following closely behind spending on food items. According to Vietnam Textile & Apparel Association, the domestic textile and garment market has gained a year-on-year growth rate of 10 per cent in 2017.

A strong growth prediction has been done by a recent report from ‘Textiles Intelligence’, which shows the production capacity of the industry is predicted to rise by 12-14% p.a. from 2016-2020. The export potential is also forecasted to rise by 15% p.a. during this period, and the Vietnamese textile and apparel industry will reach US$50 billion by 2020. Le Tien Truong opined that the balance in development of the domestic market and the foreign market has been an important point for the local textile and garment industry to ensure jobs for the employees and to maintain development of the enterprises.

Challenges of the industry

According to research by the Ministry of Labor, every $1 billion of export value generated from Vietnam’s textile and apparel industry can create an additional 250,000 jobs, moreover, the textile labor cost in Vietnam is still relatively low compared to many other countries in the region. In 2016, the minimum wage of garment manufacturing industry in Vietnam was about USD 108 per month. The advantage of the lower labor cost has resulted in lower production cost, thus being price competitive in the global market, which helps Vietnam to attract global attention in apparel sector. However, the growing prices of electricity and transportation, along with an increase in minimum wages are now becoming bigger causes of headache to the industry players. Therefore, despite remaining global demand, the industry faces many challenges.

Figure 4: Showing the wages of garments industry in Vietnam.
Figure 4: Showing the wages of garments industry in Vietnam.

Most of the manufacturers in Vietnam do not own their brands. They produce for foreign brands as outsourcing partners, which makes it vulnerable to global fluctuations. Most of garment manufacturing factories in Vietnam are OEM/ODM enterprises catering to foreign brands. Since big brands give priority to already established manufacturers, this industry is tough for new entrants, especially for the small-scale enterprises.

On the other hand, Vietnam’s garment industry is highly dependent on imports for its machinery equipment, raw materials, and accessories, which not only decreases its profit margins but also keeps it in harms reach against foreign cost fluctuations.

A CRI report said, in 2016, over 80% of products of garment manufacturing industry in Vietnam were exported, which also makes the industry overly dependent on exports for its earnings and foreign investments. The risks of this dependency were seen when recently the TPP with US government was canceled, and the Chinese players willing to invest in the country to take advantage of the TPP took out or froze their investments in Vietnam’s garment industry. Vietnam also faces tough competition from Cambodia and Bangladesh, as the wages there are lower than that of Vietnam.

Initiative to overcome the challenges

qouteTo overcome the high cost of raw material the government has already started investing heavily in the development of support industries in Vietnam and in the 2006-15 period, Vietnam was the second biggest investor in the development of shuttle less looms and the biggest investor in ring spindles and open-end rotors, amongst the ASEAN countries. The country has also shown a marked expansion in its knitting sector. A cotton manufacturing plant, known as “Rang Dong Industrial Park” at a size of 1,500 hectares and worth US$400 million has been established in Vietnam’s Ninh Thuan province, with production value of US$3 billion on an annual basis.

Government has also given the apparel manufacturers in the country opportunities to enhance their value-adding capabilities, develop their own brands, become original design manufacturers (ODMs) rather than function only as subcontractors, etc. Analysts said that if Vietnamese enterprises make input materials, their products would be able to replace Chinese products and can compete with Chinese products in price.

FDI in Vietnam’s textile and apparel industry

The first 11 months of the calendar year 2017 witnessed a steep 11.9 percent spurt in Foreign Direct Investment (FDI) in Vietnam as compared to the previous year, according to a government release, where Vietnam received a sum of USD 16 billion in FDI, mainly driven by manufacturing sector. FDI in Vietnam’s flourishing textile and apparel industry is increasing rapidly, which is making the country one of the most popular destinations in Asia for textile investment. According to the data from Vietnam’s Foreign Investment Agency (FIA), FDI investments in Vietnam were up 152.78% year-on-year in the first two months of 2017, and investment in Vietnam’s textile and apparel industry now accounts for 21% of the country’s total FDI.

FIA also reports that Chinese investors have registered 123 investment projects in Vietnam between January and February of 2017. One of the largest among these Chinese investments is the $220 million invested in a Vietnam polyester synthetic fiber plant in central Tay Ninh province.  Chinese investment in Vietnam’s textile plants will enable it to have more advanced technology and increased capacity in its textile and apparel productions.

In the meantime, textile investment from South Korea in Vietnam is also increasing. By early 2017, South Korea’s Sea-A Group has committed a total of $2 billion in capital in Vietnam’s textile and garment industry.

Conclusion

Vietnam’s apparel and textile industry plays an important role in national socio-economic development of the country. The industry is facing several problems, however, day by day, the industry is expanding as the skills of the workers are being improved, productivity is improved, and the quality is getting better. Very soon, it may attain the second position in apparel exporting throughout the world.

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