VIETNAMS GARMENT INDUSTRY OVERVIEW I.

THE NUMBER Over the last many years, Vietnam textile and garment (T&G) industry has witnessed strong development. The annual average capacity of the garment alone was 2,000 million pieces in 2008 and increased to 2,400 million pieces in 2009. Products made in Vietnam have penetrated to the world market, thus it is contributing to the economic development of the country. The export values have increased rapidly and the sector is one of the industries that for many consecutive years has ranked very high with respect to the countrys key export product. In the world market, Vietnam T&G has been enhanced its position. In 2006, Vietnam T&G sector was ranked at 16th position with export turnover valued US$ 5.2 billion; yet by the end of Oct 2007, the sector increased and occupied the 10th position. In present, Vietnam has ranked fifth among the worlds major T&G exporters. In spite of the world crisis from 2007-2009, Vietnams garment sector stood firm. While the global T&G industry dropped out by 12-15%, Vietnam still maintained its export turnover and increased its share in the three markets (the US, the EU, and Japan). Since 2009, the T&G sector has taken the lead in Vietnams key export industries, but still constituted a very small proportion of the world total T&G export turnovers, at about 2.69% in 2008 and decreased to 1.6% in 2009. In 2009, Vietnams garment products made up only 5.8% of the USs total garment import values of US$ 86.7 billion (Source: www.trademap.org). This fact implied a large market for garment products and potential opportunities of further development for Vietnams garment industry. The US has remained as the most important partner of Vietnams garment industry for many years. The export values to this market has accounted to more than 50% of Vietnams total garment export, followed by the EU (18%) and Japan (11%), South Korea (3%), and ASEAN member countries (2%). Of the three major markets, the sector attained the highest growth rate in the US market (19% per year in

average). The corresponding figures in the EU and Japan were 17% and 12% respectively. Figure 1 illustrates Vietnams garment exports to these markets from 2005 to the first 5 months of 2010.

Figure 1. Vietnams garment exports to the EU, the US, and Japan from 20052009 and the beginning 5 months of 2010 (Unit: US$ mil.) Source: Vietnam Customs In 2010, the sector earned an export turnover of more than US$11.2 billion. Vietnam became the 2nd and 7th largest garment suppliers for the US and the EU markets respectively. Refer to Table 1 and Table 2 to see Vietnams T&G export by market and by categories in 2010.
Market USA EU Japan Korea ASEAN Canada 2010 (USD) 6,117,914,847 1,883,486,831 1,154,491,648 431,633,581 242,535,343 217,032,786 Change to 2009 (%) 22.48 17.50 21.01 78.00 23.13 21.55 Dec/2010 (USD) 591,648,930 239,990,884 120,088,749 51,560,362 25,848,869 21,383,982 Change to Change to Nov/2010 Dec/2009 (USD) (%) 23.85 32.95 -4.79 2.97 9.62 23.11 20.65 50.76 25.22 145.87 44.96 35.45

Taiwan China Turkey Russia Hong Kong UAE Australia Mexico India South Africa Arab Saudi Brazil Panama Ukraine Switzerland Norway Cuba

181,468,817 93,551,932 87,031,576 76,063,105 49,080,764 44,125,149 43,977,333 64,943,709 21,473,167 18,419,673 29,850,981 18,760,383 14,152,888 15,331,759 2,373,830 10,574,659 924,725

-15.83 102.68 51.46 35.72 40.91 26.20 42.56 21.80 52.34 79.86 -1.06 67.46 39.80 23.71 -76.81 49.36 -91.28

17,342,027 11,695,767 11,079,583 9,551,123 5,985,809 5,529,337 4,867,728 5,637,599 475,621 1,852,272 2,054,582 2,633,751 1,946,281 2,861,180 989,903 1,996,023 318,205

0.20 -10.76 30.82 56.42 22.34 19.62 12.84 35.28 -83.05 -29.04 -17.29 9.10 37.51 131.12 3.63 156.40 102.24

6.10 128.86 102.59 50.17 84.79 39.18 75.57 62.32 31.12 21.85 -8.48 18.57 127.51 196.98 50.80 193.30

Table 1. Vietnams T&G export by market in 2010 Source: www.vietnamtextile.org

Cat. T-Polo shirts Shirts Jan - Nov /2010 (USD) 2,083,084,335 552,976,947 Change 2009 (%) 17.53 16.88 Nov/2010 (USD) 202,525,452 54,611,000 Change Change Oct/2010 Nov/2009 (%) (%) -1.28 6.40 30.44 37.85

Trousers Shorts Jackets Skirts Underwear Swimming wear Sport wear Sleep wear Children wear Fabric

1,551,770,005 315,278,733 1,837,588,796 445,196,680 378,652,442 75,313,304 94,071,391 101,461,532 403,954,114

16.85 7.26 20.89 21.40 33.80 32.71 0.49 1.22 30.95

147,057,841 23,625,668 181,502,155 42,513,353 41,059,623 9,996,863 7,586,284 9,807,970 34,692,143

-5.76 90.05 -16.00 41.48 0.64 0.06 -1.69 -22.97 -19.94

38.06 5.36 52.98 39.38 56.81 -0.10 -25.27 17.80 23.37

39.52 14.26 541,052,376 62,277,074 Table 2. Vietnam's Textile and Garment Export by Categories in January - November 2010

Source: www.vietnamtextile.org Right from the beginning months of 2011, the sector has seen positive signs. Specifically, garment exports increased by 27.9% to US$2.8 billion in the 1st quarter of 2011 compared to the same period last year. Many businesses have signed contracts for the 3rd quarter of this year. It is possible for Vietnam to expect to export over US$13 billion of garments in 2011. This was resulted from Vietnams traditional competitiveness such as relatively inexpensive labour cost. Besides, established partners have recently agreed to a price increase of between 15-20%. Domestic suppliers, therefore, still received large orders from foreign importers. Regarding the three main market, the Vietnam Textile and Apparel Association (VITAS) estimated that Vietnamese garment share in the US would increase 4.6 5.1% in 2011. Vietnamese faced a lot of challenges in the EU (sovereign debt crisis), yet they still experienced an 18% growth in export value from last year to US$ 1.8billion. It is estimated that Vietnamese T&G sector will have many development opportunities in this market in the few next years. In terms of Japanese market,

Vietnamese businesses have not received any unfavorable signals from Japanese importers/exporters. Some garment products as shirts, jackets, vestons, trousers, etc. still remained the performance. Especially, after the earthquake and tsunami, Japans demand for Vietnams protective clothing has surged. Therefore, Vietnamese businesses can adjust the orders exported to this market if there are some negative impacts in the future as a result of natural disaster. II. INDUSTRY ISSUES AND TRENDS 1. The current situation of the industry Vietnamese garment industry has been witnessing the scale expansion of many garment enterprises. Whereas the supplier base does not have any significant changes, existing garment businesses have been carried out many new projects to build new plants so that they can control more phases in the production process. 2. Challenges and responses 2.1. Challenges - Labour shortage is the biggest issue facing the garment sector. Each business lacked around 18% of the total workforce, especially after the traditional Lunar New Year Festival (Tet). The reason is that the salary for workers in the garment sector is quite low compared to other industries. In addition, the proportion of skilled, experienced labour is low. - Increases in interest rates and surging price of many raw materials pushed production costs up by 15-20%. For example, the price of cotton imported from the US had increased by 74.1% in comparison with the same period last year. The cotton fiber price from domestic sources has increased by 50-60%. - The costs of labour, transportation and power have also gone up. This is a part of the world common price

increase in garment raw materials and a consequence of recent high inflation in Vietnam in particular. - As the domestic materials cannot meet production demand in terms of either quantity or quality, the heavy reliance on imported materials leads to low profit margins compared to total export values (Table 3). The design industry for the garment sector is till underdeveloped, so the majority of the garment production for exports in Vietnam is under a contractual agreement (doing outsourcing tasks for foreign partners). In other words, garment production under this agreement involves only the labor intensive assembly processes of cutting, sewing (making), and trimming while input materials including textile and accessories as well as designs are provided by buyers. This high import intensity of production is due to the relatively weak domestic textile and accessory industry, which are perceived by buyers as weak particularly in terms of quality, price and timely delivery. - Massive investment of foreign companies in the garment sector has created a lot of challenges for local suppliers, especially a shortage of labour when FDI companies are increasingly competitive in attracting labour. - Tough competition from other countries such as China, India, and Bangladesh.
No. 1 2 Export Import Cotton Fibre/yarn Fabric Accessories 3 4 5 Import to Export Balance Ex - Im (1-3) Value added Rate (4/1) Category 2007 7,780 6,356 268 744 3980 1364 4,844 2,936 37.7% 2008 9,130 7,064 468 788 4454 1354 5,317 3,813 41.8% 2009 9,070 6,692 392 811 4226 1263 4,826 4,244 46.8% 2010 11,210 8,912 664 1,164 5,378 1706 E Q1/11 2795 2553.1 338.5 403.6 1410 401 Change Q1/10 27.9% 49.3% 126.6% 70.9% 42.0% 21.1% 61.3% -7.8%

6,562 1820.386 4,648 974.6136 41.5% 34.9

Table 3. Vietnams T&G industry export-import until Q1/2011 Source: www.vietnamtextile.org

2.2. Responses - Stabilize the workforce and improve their skills - Recruit labour in remote areas - Apply advanced technologies to increase productivity and sharpen competitive edge. - The Ministry of Industry and Trade has passed a development plan until 2015 and a program for training human resources for the industry. - Material importers have negotiated reduced prices, helping domestic producers overcome difficulties. - Many businesses decide to obtain growth in-depth rather than focus on quality by investing in supporting industries like materials processing, textiles and dying to switch from subcontracting for foreign partners to selling products of their own designs. For example, Nha Be Garment Corporation has been initiating a series of projects to expand production that may cost thousands of billions of dong. Of the new projects, two are especially notable: the expansion of An Nhon Garment Company in Binh Dinh Province, which specializes in making suits for women, sportswear, and the extension of Tam Quan Garment Company, which specializes in making trousers, jackets and shirts. These two alone have investment capital of over 200 billion dong. - To promote exports in 2011, the Vietnamese garment and textile sector has outlined key tasks to obtain stable growth in 2011-2015 such as maintaining existing clients and continuing assisting businesses to seek markets for high added value products. Apart from taking advantage of trade agreements, Vietnamese garment and textile businesses will continue expand exports to other potential countries in Asia and Africa. In addition, to guarantee business efficiency, businesses should enter into long-term contracts related to production capacity and establish prices for each quarter as opposed to permanent prices, in order to avoid losses caused by unstable market prices. Apart from developing export markets, garment and textile businesses

should attach importance to the domestic market, make concrete strategies for expanding domestic market, branding and establishing distribution chains to promote domestic consumption. - The industry has made best effort to increase the localization rate as a way to decrease the dependence on imported sources of materials and world material price fluctuation. In accordance with the garment and textile development plan in 20102015, the industry will meet about 45% of the domestic fibre demand in 2011, and this figure will increase to 70% in 2020. In 2015, the localization rate is expected to be 70-80% (See Table 3).
Strategies Turnover Export Revenue Labour Fabric Production Fiber Production Localization 2010 13 - 15 bil. USD 10 - 12 bil. USD 2.5 mil 1000 thousand tons 2015 18 - 21 bil. USD 14 - 16 bil. USD 3.5 mil 1500 thousand tons 2020 27 - 30 bil. USD 20 - 22 bil. USD 4.5 mil 2000 thousand tons

350 thousand tons 500 thousand tons 650 thousand tons 50% 60% 70%

Table 4. Strategies of Vietnam Textile & Garment from 2015 to 2020 Source: www.vietnamtextile.org 3. Major trends As mentioned before, one of the main trends in Vietnameses garment sector is businesses scale expansion and in-depth investment in an effort to switch from subcontracting to undertaking various phases of the production process for international orders by 2015. This trend is mainly adopted by large companies due to the requirement of initial huge investment. Vietnam Textile and Garment Group (Vinatex) Vietnams garment market leader, is a typical example of following this

trend. The group will particularly focus on investment strategies, namely building important plants, especially in terms of textile production and dying; developing plans of cotton production; investing in machinery and technology, moving plants to remote areas to stabilize workforce and create employment opportunities for local labour; investing in ecologic inspection department to inspect both the input and output of garment products, putting plants with the core investment in high addedvalue products into operation. The group intends to produce high-end veston products with the introduction of four new factories. III. INDUSTRY COMPOSITION 1. An overview of supplier database By 2009, the number of garment enterprises was 3,719 with the classification by capital and geographic location as indicated in the Table 4. More than 70% were small and midsize enterprises with the workforce of under 300. The enterprises with the workforce of 300-1000 accounted for about 20% and only 6% of garment enterprises had the workforce of more than 1000 people. Vietnams garment sector was a highly export-oriented industry and had a dual structure depending on the market orientation - domestic or foreign. Suppliers for the global markets were enterprises including SOEs, joint ventures, private enterprises and foreign firms. These were typically large enterprises in terms of number of workers and capital endowments. The domestic garment market, on the other hand, was catered primarily by smaller private firms, of which a significant proportion operated in the informal economy (Goto 2005). The suppliers in the export oriented industry were also much more advanced in terms of production processes, accessed to formal financial resources and to foreign markets1.

Textile & Garment industry in Vietnam: Research on Garment Producers in Vietnam (International Business Research Vietnam 2008).
1

The focus of the sector was classified to be on massive quantities of low to mid-level quality. These massive quantities were needed because the main reason for customers to go to Vietnam for production of garment was its low prices, which had the interest of huge corporations mostly from the USA. There was a little market for the production of small, fashionable orders. This situation may be improved in the future when large firms perform their in-depth investment strategies2. 2. Industry leaders The industry leader is Vinatex - a complex that is owned by companies including Vietnam Textile Garment Group (the mother company), the centers for research and training, and nearly 120 sub-companies. These sub-companies are joint stock companies that do business in different fields, e.g., produce textile garments and run commercial services. They also have their distribution systems including wholesale and retail dealers. They invest in finance and in supporting main garment textile production. Vinatex is one of the largest and the most competitive textile garment corporations in Asia. Top 20 largest T&G enterprises in Vietnam are presented in Table 5. As seen from the table, nearly one half of these companies are foreign-based companies, all of which are from South Korea and Taiwan. Vietnams garment industry has recently attracted more and more foreign investment, mostly from Hong Kong, Taiwan, Korea companies. Cheap labor and high skills were the two main temptations that led foreign firms to choose Vietnam as a new place to do business. Although they were warned that Vietnamese labor market wasnt as cheap as it had been the past, a market with the capacity to succeed in the clothing industry like Vietnam still attracted them like months to a flame. 18 FDI garment industry projects, worth US$20 million, were licensed in the first four months of 2008. Vietnams clothing exports to these markets have increased as most investors are also traders or
Textile & Garment industry in Vietnam: Research on Garment Producers in Vietnam (International Business Research Vietnam 2008).
2

importers. Vietnams garment export turnover in the first two months of 2011 was US$ 1.8 billion with the export turnover of FDI companies accounting for about 63.2% (US$ 1.4 billion).

Table 4. Classification of Vietnams garment enterprises Source: www.vietnamtextile.org

No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

G1000 Ranking 21 92 151 192 196 253 317 326 374 389 392 413 441 467 489 493 499 511 515 517

Company VIETNAM NATIONAL TEXTILE & GARMENT GROUP - VINATEX HUNG NGHIEP FORMOSA COMPANY LIMITED HANSOLL VINA COMPANY LIMITED HANSAE VIETNAM COMPANY LIMITED PHONG PHU JOINT STOCK CORPORATION TAINAN SPINNING COMPANY LIMITED 10/10 TEXTILE JOINT STOCK COMPANY GIA DINH TEXTILE & GARMENT CORPORATION HA NOI GENERAL PRODUCTION & IMPORT- EXPORT COMPANY HUNG LONG GARMAY & SERVICE JOINT STOCK COMPANY ALL SUPER VIETNAM COMPANY LIMITED INTERNATIONAL CHUTEX COMPANY LIMITED NAMYANG INTERNATIONAL VIETNAM COMPANY LIMITED NHA BE GARMENT JOINT STOCK CORPORATION VIET TIEN GARMENT JOINT STOCK CORPORATION HA NOI TEXTILE & GARMENT CORPORATION SONG HONG GARMENT JOINT STOCK COMPANY SHINWON EBENEZER VIETNAM COMPANY LIMITED NOBLAND VIETNAM COMPANY LIMITED EINS VINA COMPANY LIMITED

Location Hanoi Dong Nai Binh Duong HCMC HCMC Dong Nai Hanoi HCMC Hanoi Hai Phong Dong Nai Binh Duong Dong Nai HCMC HCMC Hanoi Nam Dinh Vinh Phuc HCMC Binh Duong

note

foreign company foreign company foreign company

Foreign company Foreign company Foreign company

Foreign company Foreign company Foreign company

Table 5. Top 20 largest T&G enterprises in Vietnam

IV. PRODUCTION HUBS Production activity of Vietnam textile namely focuses on two key economic areas of the country, the Northern Delta and the Sothern Delta. Over 80% of production capacity is located in the Southern Economic Area, primarily in Dong Nai, Binh Duong, Long An and Ho Chi Minh City. Major reason for this distribution of production activity at these two main regions is that infrastructure there is much better than other regions: near sea port, convenient traffic, abundant and skilled labor force. There are many foreign-invested enterprises operating there with their factories because of advantages of competitiveness and policies of investment and production encouragement.