Vietnam has traditionally focussed on garment production with little capacity for fabrics manufacturing. It is estimated that Vietnam imports up to 89 per cent of fabrics — 55 per cent from China, 16 per cent from South Korea, 12 per cent from Taiwan and 6 per cent from Japan. US and EU markets account for more than 60 per cent of Vietnam’s garment exports. CMT production contributes 65 per cent of Vietnam’s total exports, while the more advanced business models, like Original Equipment Manufacturer (OEM) and Original Design Manufacturer (ODM), that allow for higher profit margins account for only 35 per cent. When the coronavirus pandemic struck in January, Chinese fabric manufacturers suspended production, disrupting fabrics supply to Vietnam. As the pandemic centre shifted west from China in March, many orders from the European Union and the United States were cancelled, causing significant damage to Vietnam’s garment manufacturers.
Vietnam’s Textile Association reported that 70 per cent of garment manufacturers started reducing shifts and rotating workers in March, with an additional 10 per cent following in April or May. By June 2020, the estimated loss to the industry could reach US$508 million. Data from Vietnam’s Customs Agency suggests that imports and exports of all textile and garment products fell massively in the first quarter of 2020. Exports of garments totalled US$7.03 billion, a 1.4 per cent year-on-year reduction compared to 2019 and 34 per cent lower than the expected growth of 50 per cent prior to the pandemic.
Despite the devastating impact of COVID-19, the pandemic provides some valuable lessons for the industry on recovery and ways to move forward.
First, it is essential to establish a resilient supply chain of fabrics and other raw materials, which relies on the development of domestic fabric production. Having a reliable domestic supply of fabrics will mitigate disruptions and help capitalise on free trade agreements (FTAs) that impose rules of origin. For example, in order 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 (with the exception of fabrics imported from South Korea).
