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VITENAM: THE NEXT BIG GIANT IN APPARELS…. IS INDIA READY TO FACE CHALLENGES?

While on one hand India’s apparel sector is struggling for growth and orders, on the other our competitors especially countries like Vietnam, Cambodia, Bangladesh are achieving new milestones of growth in apparel sector. Volumes, innovation, technology, market share are being achieved at a very fast pace in these countries as compared to India, which is constantly sliding down in apparel exports over the last few years.

A fast emerging trend that has been observed by not only trade experts but also by many economies is that investments in low cost production centres like Vietnam is constantly increasing and thus it is clearly emerging as a winner in apparel export segment.

In Vietnam there are 7,000 enterprises, providing jobs for 3 million workers across the country. The industry maintained unceasing growth from 12 percent in 2010 to 16 percent in 2018. Vietnam’s garment and textile exports exceeded US$36 billion last year and was expected to top $40 billion this year. The industry’s trade surplus is expected to reach $20 billion this year. Employment will be ensured and income for 2.85 million workers would be increased.These targets were based on a successful year in 2018, when export turnover of garments and textiles products reached more than $36 billion, marking a year-on-year increase of 16 per cent. This level of growth would make the nation one of the top three largest exporters of textiles and garments in the world.Globally, the country has been showing a great impact on garment and textile supply chain for being the world’s second largest textile and apparel exporter. Many Vietnamese clothing brands including PhongPhu, Viet Tien and An Phuoc have gained positions in global market. According to economic experts, the garment and textile industry of Vietnam will advance further in global market because of existing advantages such as skilled laborers with sophisticated technique. Especially, with recently-signed free trade agreements, import tariffs will be gradually removed for Vietnamese garment and textile products.

Some time back Ministry of Planning and Investment in Vietnam announced that foreign direct investment in the country increased by nearly 70% year-on-year in the first five months of 2019, the highest increase since 2015. Much of that is due to U.S.-China trade tensions that have left the US firms and others much less certain about investing in the mainland. While Vietnam has been steadily poaching investment from its northern neighbours for years, businesspeople themselves have mentioned the discord between Beijing and Washington as a reason for moving to South.

FTAs, particularly the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the EU-Vietnam Free Trade Agreement (EVFTA) have created great attraction to foreign investors as they will bring huge opportunities for Vietnam’s garment-textile sector.  Once the CPTPP takes effect, Vietnam can increase shipments to CPTPP member countries, which spend up to US$40 billion on garment and textile products every year. The EVFTA, which is expected to take effect at the end of this year, will also offer ample opportunities for Vietnamese textile and garment products to ship to the European market due to tariff preferences.

According to Nguyen ThiTuyet Mai, VITAS’s secretary general, the EU is Vietnam’s second largest export market. Given the current tariffs ranging between 10 to 12% which will be slashed to zero, it will boost Vietnam’s goods to this enormous market. South Korea would overtake Taiwan to become the largest investor in Vietnam’s textile-garment sector in the near future as this country has clinched a two-way FTA with Vietnam and a cooperation agreement with the European Union.

Vietnam needs foreign direct investments in fiber, dyeing and raw fabric.

With the CPTPP(Comprehensive and Progressive Agreement for Trans-Pacific Partnership), 55 % of raw materials must be produced inside the bloc and businesses can import a maximum of 45% materials from outside to make a finished product. Therefore, raw materials need to be manufactured locally or imported from CPTPP countries instead of other countries. Enterprises have tried to limit imports of raw materials but still have to import over 60% of foreign raw materials, of which 50% comes from China.

With the strength of the country’s capital, experience, technology and labour force, many foreign-invested enterprises would establish production chains from yarn, fabric and garments in Vietnam. If businesses do not invest and improve capacity, it will be difficult for them to compete in the domestic market, especially with products coming in from CPTPP member countries. Moreover, they need to take initiative in producing raw materials and minimise dependence on imported materials to help the industry enjoy the benefits of CPTPP.

Many enterprises even invested at the last stage, comprising of assembly and packing, only to take advantage of the Vietnamese origin to receive preferential treatment when exporting.

Apparel encompasses one full chapter in the CPTPP, with both general and specific ­regulations. Contents of commitments on textiles and garments include the specific rule of origin (ROO) which requires using yarn and fabric from the CPTPP bloc to ­promote internal supply and ­investment chains, in order to ­increase the value of textiles produced in the bloc. There are also flexible ­regulations on the mechanism of supply shortages, allowing the use of certain fibres and ­fabrics currently unavailable in the region. Accordingly, for textiles, the ROO is set in stages: the entire process of spinning, weaving, dyeing, ­finishing, and sewing must be carried out ­inside the bloc.

VIETNAM BECOMING AN ATTRACTIVE DESTINATION

Recognising great opportunities, including the ROO, from the agreement, international investors have been pouring capital into ­expanding and investing in the apparel and footwear sectors in Vietnam as it is being seen as an appealing destination for foreign investors in textile and apparel sectors, especially Chinese firms.

Garment and textile export turnover of China posted negative growth with export turnover to the US and the EU market was minus 0.37 percent and minus 2.13 percent respectively. This was caused by trade barriers used by many countries on garment and textile products imported from China. Meanwhile, garment and textile exports of Vietnam grew robustly, especially in the US and the EU market, soaring 7.57% and 8.97% in tandem. This will urge Chinese garment and textile companies to shift investments to Vietnam in order to take advantage of the benefits and market gap that free trade agreements brought to Vietnam. It is estimated that Vietnam will receive an investment wave of up to $7 billion from garment and textile companies in China, $2.1 billion from South Korea, $1.6 billion from Taiwan and $0.75 billion from Japan.

The China National Textile and Apparel Council said that Vietnam has passed Malaysia, Thailand and the Philippines to become the biggest trade partner of China. Last year, export of garment and textile products of Vietnam to China reached $4.1 billion and China’s export turnover was $6.5 billion vice versa. Major clothing brands have set their feet in Vietnamese market, showing great potential of garment and textile industry in Vietnam.

Another investor from South Korea is Kyung Bang Vietnam. With the aim of becoming one of the leading high quality yarn factories in Asia and making use of the opportunities from the CPTPP, the company has recently been licensed for its expanding project in the southern province of Binh Duong. ­Accordingly, the investment was increased by $40 million, with the factory helping Kyung Bang Vietnam raise annual ­capacity to 9,000 tonnes of cotton yarn and 11,000 tonnes of blended yarn. The additional investment has increased the total registered capital of Kyung Bang Vietnam to more than $219 million.

Earlier in January, a Chinese investor was awarded an investment certificate for the Huanyu textile dyeing ­factory project, with the total registered investment capital of $60 million in the southeastern province of TayNinh.In addition, a range of ­projects in apparel and footwear were announced last year by investors from Germany and the United States, such as the Amann Group sewing thread venture for the manufacture of apparel and shoes; or the Kraig Biocraft Laboratories Inc., the venture on expanding mulberry production and developing high-quality silk in the country.

Vietnam since 2006 with six fibre factories in the northern province of QuangNinh and the southern province of Dong Nai, Hong Kong’s Texhong Group in 2016 began construction of another $300 million fibre factory in QuangNinh. Today, Texhong has become the biggest fibre producer in Vietnam.

Besides, Pou Chen Group, a Taiwanese footwear ­company producing products for big brand names like Nike and Adidas, currently has dozens subsidiary companies manufacturing footwear and handbags in Vietnam, with ­export revenue of $1.5 billion last year. Currently, the company has recruited thousands of workers to widen its ­production.

Furthermore there are projects from Japanese investors, ­including Itochu’s purchase of an additional 10 per cent stake in Vietnamese state-owned ­textile and garment conglomerate Vinatex. This brought its ownership to ­approximately 15 per cent, becoming Vinatex’s second-largest shareholder behind the Ministry of Industry and Trade.

CAN VIETNAM TAKE UP CHINA??

A combination of higher wages and increasing environmental regulations means China’s southern manufacturing powerhouse of Guangdong is no longer the low-cost hub it once was, and for many companies, Vietnam has been viewed as a logical alternative. The US-China trade war, which is set to ratchet up a notch on with a planned increase in tariffs on Chinese exports to the US from 10 per cent to 25 per cent, has accelerated this trend.

The first quarter of 2019 saw foreign investment in Vietnam rise by 86.2 per cent, to US$10.8 billion, with Chinese investment accounting for almost half of that, according to the Chinese state-run Securities Times newspaper.

While China’s main industrial hubs have become known for high quality manufacturing and top-class infrastructure, Vietnam is a less mature prospect. The Vietnamese workers were really not trained up to the level that the Chinese are, and that starts with the construction of your factory, or the road to get there. China has got so good at infrastructure, some people just take it for granted that everywhere there’s these eight lane roads with high-speed rail and everything. But in Vietnam, they’re just starting to build all that stuff. They have their first [underground train] lines coming online in the next year or two in Ho Chi Minh City.

But with rising costs of land and labour, bottlenecks at the ports, traffic jams on the roads and quickly diminishing manufacturing capacity, experts are warning that those who have yet to make the leap to Vietnam may have already missed the boat.

The land price back then was around US$60 per square metre (11 sqft). Those companies decided not to relocate to Vietnam because they thought the trade war risk had eased. They must be regretting their decision now because the land price has drastically gone up to over US$100 this year. Previously, it only went up by US$5 to US$10 per square metre each year.” Vietnam is roughly the same size of China’s Guangdong province, and while China’s southerly manufacturing base has a population of 104.3 million, Vietnam’s is 95.5 million. But while Guangdong can draw on massive pools of migrant workers from around the rest of China, Vietnam cannot. According to an official Vietnamese government database, there were 9.3 million workers in the country’s manufacturing sector in 2017.

Comparably, Guangdong province alone had a manufacturing workforce of 12.71 million in September 2018, accounting for 58 per cent of the total workforce, according to the Guangdong Statistics Bureau. Guangdong is China’s most populous province, while 10 other provinces have populations greater than 50 million people.

It means that companies that have already set up in Vietnam have already picked up the skilled staff, with high turnover rates and poaching of talent a cause of anxiety for many in the country, limiting the possibility that Vietnam can be “the new China”, or even “the new Guangdong”.

Wilkie Wong is a managing director at the world’s largest woven shirt maker, Esquel Group, which makes about 100 million shirts annually. The company is Chinese, but has had presence in Vietnam. Chinese manufacturers have been increasing investment in Vietnam in recent years, but there is a shortage of Chinese speakers also,” said Zhang Diansheng, general manager at Ho Chi Minh-based Hang Sinh Consultant Company. “It is getting more difficult to recruit workers around Ho Chi Minh City. Factories even fight against each other for more workers. It’s easier to find more labour in remote areas, but workers are less professional in less developed cities.”

This has driven companies farther out of the traditional manufacturing hubs to more remote parts of Vietnam, where the infrastructure is less developed. It has also led companies to look at alternative locations around Southeast Asia.

Among them is Malaysia – a fellow signatory to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which offers preferential access to markets such as Australia, Canada, Japan and Mexico – and Indonesia, where multinational companies have been setting up manufacturing bases in the free-trade zone of Batam, a small island an hour’s ferry journey from Singapore.

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BLURBS

It is estimated that Vietnam will receive an investment wave of up to $7 billion from garment and textile companies in China, $2.1 billion from South Korea, $1.6 billion from Taiwan and $0.75 billion from Japan.

In 2018, the export turnover of garments and textiles was $36.2 billion and ranked 4th among Vietnam’s largest export industries. It is ­estimated that the figure will increase to $50 billion by 2025. Last year, Japan and Canada were among Vietnam’s top export markets of garments and textiles with respective values of $398.2 million and nearly $70 million.

In addition, a range of ­projects in apparel and footwear were announced last year by investors from Germany and the United States, such as the Amann Group sewing thread venture for the manufacture of apparel and shoes; or the Kraig Biocraft Laboratories Inc., the venture on expanding mulberry production and developing high-quality silk in the country.

How is India’s Exports Getting Affected?

India’s apparel exports have fallen for two years in a row. Estimated at $16.2 billion in FY19, the country’s apparel exports fell by 1.2% from FY18, which in turn was 4% lower than the previous year. This comes after annual average growth of 5.7% between FY10 and FY16. The reasons for the slowdown range from issues on the domestic front to slackening global demand.the time taken by the industry to align to the new goods and services tax (GST) regime, downward revision of export incentives, and the credit squeeze particularly faced by small and medium enterprises adversely impacted exports.the recent slowdown in global demand has increased competition in the markets, which also coincided with taxation changes in India. Analysts say that there was a 6-7% impact on costs, which hurt profitability of garment makers too. CARE Ratings adds that India is projected to lose market share to Bangladesh and Vietnam for ready-made garment exports to the European Union (EU), because of lower competitiveness, as Bangladesh has duty-free access to the EU.

Exporters feel they would not be able to compete with Bangladesh and Vietnam and are now focussing on diversifying their markets to countries like Japan, Israel, South Africa, Hong Kong and others.

Indian exporters face higher trade barriers compared to countries like Bangladesh, Vietnam and Pakistan in key markets such as the United States (US) and the European Union (EU). Average tariffs levied on Indian textile exports are around 5.9 per cent in the EU, while it is 6.2 per cent in the US, compared to zero per cent and 3.9 per cent on exports from Bangladesh. The US and EU are the world’s largest apparel importers and account for 60 per cent of total global imports.Employee costs in India grew from 9 per cent in financial year (FY) 2010 to 13 per cent in FY 2018, while in other countries either it saw a stable or a marginal growth.

BOX

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India’s apparel exports grew at a CAGR of 5.7% from $10.7bn in FY10 to $16.7 bn in FY18. The growth in exports can be attributed to shifting of the apparel manufacturing base from the developed countries like the US and the EU to the low-cost countries such as China, Vietnam, India, Bangladesh and others. Multi Fibre Agreement phase-out at the end of 2004also helped India to increase its exports. After witnessing a marginal growth of 2.4% in FY17, RMG exports reported anegative growth rate of 3.8% during FY18 due to decrease in competitiveness of Indian players after implementation of GST.

 In FY18, India’s garment exports also reduced primarily due to competition from countries like Bangladesh, Sri Lanka, etc. which have low production cost and enjoy preferential duty access in key markets.

The exports for the eleven months for FY15-FY17 were fairly stable; however, the exports declined by 2.2% in FY18 and the exports have continued this decline in FY19 and worsening by 5.2% primarily due to depressed economic conditions-led lower demand and growth.

Garment industry of Vietnam brings great value in terms of employment and GDP, the industry enjoys ample facilities from the Vietnamese Govt., helping them to export their products at cheaper rates and lucrative terms to the countries shadowing the Indian market globally. On the other hand, certain developments of India have hampered the market and exporters are struggling to sustain in the global market for two years in a row. However due to the stable Govt., the situation is changing and the global demand is also increasing. With prompt support from the Govt. Indian exporters are in a position to compete with competitors effectively. Due to the tough competition from cheap products from Vietnam etc., Indian exporters are focusing to diversify their activities into countries such as Japan, Israel, South Africa, Hong Kong, etc. For maintaining quality, the Indian product rates are 10-15% costlier than other competitors and the exporters face higher trade barriers than these countries. Only with extended support from the Govt. it will be possible to expand the production/export and compete effectively.”

India is growing overall but exports are not growing. In year 2015 when quotas were taken away we were doing exports of USD5bn and Bangladesh was doing only USD 3bn; but our capacities and infrastructure did not support growth. If we talk about Vietnam it was not even in the picture. Some time back I got the chance to visit one of the largest factories in Vietnam where they were producing big volumes of shirts. The company claimed that they can produce 40,000 pieces of shirts per hour, 955,000 in a day and 2,75,000 pieces per month and doing a turnover of USD 6bn dollar. India has the technical skills but Government policies are not favouring us. With Europe, Vietnam has FTA and India does not have which is why we are lagging behind. Labour reforms are changing, manufacturing is moving to low cost centres ever since new Government has come but it is challenging especially for small exporters to move entire set up from one place to the other.

Vietnam enjoys duty free access in Europe. Plus, they have no restriction in import of fabrics. They can import from anywhere immediately and ship it out. Also their geographical location is so close to China, that they get help in shipment making their product cheaper and trade easier. The whole problem is that we are just trying anything and everything but unable to succeed in any. ROSL is still not coming, SME is almost dead and there is no improvement in the situation since last 4-5years. We are still heavily suffering.

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