ANALYSIS BY SECTOR
1. Analysis of current status
2002 was a record year for export turnover in the garment and textile industry, estimated at around USD 2.6 billion. The US was the biggest export market, with a turnover of USD 900 million, the European Union came second with export turnover of USD 560 million and third Japan with around USD 520 million. South Korea, Taiwan, Canada, Turkey and Russia followed.
At the same time, quota restrictions and increasing competition from China and other Asian countries pose new challenges. The benefits of opening the US market in the wake of the BTA with a 20-fold increase of export turnover to the US might prove a short-term success. In February 2003, negotiations on a garment and textile agreement with the US started. China, already a member of WTO, will soon be able to export to third markets free of quota restrictions and sell more and more of its products on the domestic market. Quota restrictions applied by the EU, however, might be reduced if an agreement on market access negotiated in February 2003 enters into force. On 25 April 2003 a Textile Agreement was signed by Vietnam and the United States establishing quotas for the sector.
So far, the industry is made up of about 600 companies, mostly in the state-owned sector. Of these, 100 are large and medium-sized companies (i.e. VINATEX which accounts for 30% of all produced garments and textiles in Vietnam) and 178 foreign invested enterprises (FIE) with a total registered capital of USD 1,804 million of which textile accounts for about 40% and the rest are garments. The main investors are Taiwan, South Korea, Japan, Hong Kong, Malaysia and Germany. One of the biggest projects is of Taiwanese Formosa Group with a total investment capital of USD 420 million built in Dong Nai Province (South Vietnam). The sector has registered an average annual growth rate of more than 10 per cent over the past few years. The state-owned enterprises and FIEs are generally better equipped than their private counterparts.
Within the industry, the needle knitting branch is developing rapidly to meet domestic and foreign demand. Most investment in the needle knitting branch in non-state enterprises is intended to satisfy the local and Eastern European markets, while investment in state-owned enterprises at central and local level is mostly aimed at the markets in the EU, Japan and the USA.
Many textile and garment businesses are now investing also in shuttle knitting technology which has a large scope for development. The thread-spinning branch of the industry is also being developed by state-owned enterprises and a small number of foreign invested enterprises.
Although the sector has a rather fast development, it shows an imbalance in the growths between textile and garment. So far, the textile sector can meet only 20-30% of fabric needs of the garment sector. In addition, 80% of exports are through intermediaries, mainly from Hong Kong, South Korea, Taiwan. A large quantity of fabric (high quality) and accessories are imported (for instance, Vietnam has to import 400 million sqm of fabric/year).
Exports of Vietnam garments typically follow a "triangle" manufacturing arrangement whereby importers place orders with East Asian intermediaries which, in turn, provide raw materials, machinery and management (quality control & packaging) to Vietnamese companies.
Vietnam’s cotton industry is still importing some 60,000 tons of raw materials, worth USD 80-100 million/year to meet the demand of garment and textile sectors. The cotton processing plants now have a capacity of 30,000 tons/year. Due to the increasing need for raw materials to feed Vietnam’s cotton mills nationwide (so far the sector can provide only 10-15% of the textile industry’s demand), around USD166 million will be invested over the next 10 years in expanding cotton production from the current 30,000 ha to 115,000 ha by 2005 (equivalent to 80,000 tons of raw cotton per year) and 230,000 ha by 2010 (equivalent to around 180,000 tons of raw cotton per year). This will meet 50% of the sector's demand for cotton by 2005 and 70% by 2010. Besides, two polyester fibre factories, each with a capacity of 30,000 tons per year, will be built at a cost of USD 50 million. Investment for producing garment accessories is estimated at USD40 million.
There are currently 19 state-owned natural silk processing plants and more than 100 private plants with a total capacity of 2000 tons/year of which 40 per cent are high quality silk for export. The sector also produces about 5.5 million meters of silk per year and nearly 800,000 silk products/year.
Some facts and figures:
Table 1.1 - Textile and Garment Export Turnover
Source: General Department of Customs, General Department of Statistics, Trade Statistics –January 2003;
Source: General Department of Statistics
Table 1.3 - Garment & Textile Machinery and Equipment Market*
Source: Vietnam Textile & Apparel Association (VITAS)
*Market (in this context): amount of money spend by Vietnamese Textile and garment sector every year to import textile and garment machinery & equipment from foreign companies and local manufactures
In order to meet the export turnover target of USD 5 billion by 2005 and USD 9 billion by 2010, the sector needs a total investment capital of USD 2.4 billion for the period 2001-2005, including of VINATEX USD 860 million (the investment during the period 2003-2005 accounts for USD 500 million), of which USD1.3 billion will be used for equipment and machinery.
By 2005, VINATEX will invest an additional USD 870 million in state-of-the-art printing, dyeing, knitting and sewing facilities. The industry relies on imports of machinery from Germany, Japan, Singapore, Taiwan, Switzerland, the Netherlands, France, Britain, Italy and Spain. In order to support development of the garment and textile industry, the Government has recently pledged capital from the State budget and Official Development Assistance (ODA) funds to bankroll textile industry projects
In the 2006-2010 period, around USD 2 billion of investment will be required, including VINATEX USD 655 million. Between 2001-2005, the sector will build 10 new textile plants focused mainly on textiles and dyeing. The 10 new complexes, 4 in the north, 2 in the central provinces, and another 4 in the southern region, will comprise fibre, textile and dyeing factories equipped with the latest, environmental friendly machinery.
To cope with the fact that Vietnam garment price is 10%-15% higher than in the region, in 2003 alone, VINATEX will implement 23 important projects with a total investment capital of over USD 200 million such as:
Table 1.5 - Vietnam and VINATEX Total Investment Capital 2005–2010
Source: Vietnam Textile & Apparel Association (VITAS)
The Vietnamese textile and garment industry has been plagued by poor investment and planning. Vietnamese companies need to pay more attention to pattern making, fashion-design and market research. The industry needs to create more backward linkages and invest in the production of raw materials. The textile industry should also develop the large domestic market and compete more effectively against cheap imports, many of which are smuggled, mainly from China
A variety of investment projects have been undertaken by local garment and textile enterprises to increase the competitiveness of made-in-Vietnam clothing exported to foreign markets. Several local garment and textiles enterprises, like Hanoi, Thanh Cong, Vite Thang, Thang Loi, Vinh Phu, Hue, Phong Phu and Hoa Tho are all developing projects and upgrade production chains.
Vietnamese companies need to pay more attention to pattern making, fashion-design and market research. The industry needs to create more backward linkages and invest in the production of raw materials. The textile industry should also develop the large domestic market and compete more effectively against cheap imports.
To increase the potentials in the garment and textile industry, support industries should be developed. At present, around 80% of materials used for garment and textile exports are imported. The equitisation and restructuring process of garment and textile enterprises should continue to be pushed up in order to increase the competitiveness of local garment and textile enterprises.
Competition from neighbouring countries like Indonesia and Bangladesh is strong, offering labour costs which are only 50 – 70% of those of Vietnamese companies. Wages came down also in China, Thailand and South Korea as a result of the Asian financial crisis. Output in several major companies has dropped since customers have transferred orders to companies in countries with cheaper work forces.
1. Analysis and current status
Such sharp growth in Vietnam’s footwear export has however slowed markedly since 2000, together with the Asian crisis, which hit Vietnam at a later stage.
At present, annual sales volume in the domestic market makes up nearly 10 million pairs of leather shoes and nearly 30 million pairs of women and sport shoes. The domestic market is challenged by a severe competition from smuggled products made in China.
According to LEFASO yearly report , in the year 2002 export turnover was USD 1,846 billion, a robust 17.2% increase with respect to the 2001 figures consolidating the footwear industry’s position as Vietnam’s third largest currency earner. In 2002 the total number of workers was over 400,000 and 80% were women. As a whole, the footwear industry currently has more than 240 manufacturers of shoes and sandals, bags and briefcases and material of footwear production. On this total, 76 are State Owned Enterprises, 84 are private enterprises and 80 are Foreign Invested ones.
Between 1998 and 1999 the European Commission’s anti-fraud services (UCLAF) had undertaken several missions to Vietnam aimed at investigating instances of fraudulent exports of Vietnamese footwear to EU. It was suspected that a share of Chinese products were illegally exported to EU by using counterfeited Certificates of Origin (C/O form A) for Vietnam footwear exports in order to enjoy the GSP system. The European Commission decided to introduce an automatic double-checking system for Vietnamese footwear, similar to the one already in use for garment exports. It is now required that export and import certificates are jointly issued by the Vietnamese Ministry of Trade and by the European Commission. The EU-VN Agreement has been in force since January 2000. To date, it has been effective. As a matter of fact no further instances of fraud have been recorded.
The Vietnamese footwear industry is relatively young. Practically it has been fully operating under market conditions only after 1993. It enjoys low labour cost and relatively efficient and cost-effective international transport and shipping facilities. The industry requires minimum investment for owners and, being highly labour intensive, has generated and still generates employment.
However, it still presents many weak points, which result from a lack of experience and poor technical skills of its local management. Still the majority of technical employees was trained in the former Soviet Union and East-European countries and has not been supplemented in recent years. At present there is no technical school for the industry in the country. Skilled workers are mainly trained by enterprises on a sporadic basis.
Vietnam footwear current tariff regime (the Nominal Rate of Protection –NRP-) is considerably higher than other footwear-producing countries (the Vietnamese NRP average tariff on footwear is 50%). However, a more indicative measure of the degree of protection than the NRP is the Effective Rate of Protection (ERP), which takes into account the extent of protection that affects the price paid for inputs into the production process. The ERP of the Vietnamese footwear sector considerably differs from the NRP, due to the high percentage of imported materials used in the production process that is also subject to import tariffs. For example the ERP of Vietnamese footwear produced for export is negative (-14%); this tariff structure continues to subsidy a highly inefficient industry . Moreover Vietnam also suffers a high incidence of administrative trade barriers that hinders the full deployment of export potentials.
This process must be controlled (and not passively witnessed) by European companies whose entrepreneurial expertise and know how remain of utmost importance for the new orientation of Vietnamese footwear industry.
Starting from January 1st 2002 ASEAN members countries under the CEPT-AFTA scheme reduced import duties on ASEAN origin commodities down to 0-5% (this deadline has been postponed for some not-yet-developed members like Vietnam). Therefore Vietnam will have good short-term opportunities for its footwear products within the AFTA market (particularly Singapore), which will be opened with low tax rates while footwear production is still being protected in Vietnam until 2006, when Vietnam phased out period will be ended.
The entry into force (December 2001) of the Vietnamese-US bilateral agreement on goods, services and investment (BTA) had brought a lot of expectations among the Vietnamese shoemakers. Vietnam is now being granted by America the MFN status; therefore footwear products are now exported to the US market at very low tariffs (from 5.1% to 17% depending on shoe category). In 2002, annual footwear export to US has increased by 72.3% on annual basis and reached USD 196.5 million. This trend may rise up in the near future and may be also accompanied by an increase of investors from US and other countries (including European) to take advantage of such preferential treatments with a view to boosting exports to the US. However, being sophisticated and differentiated, the American market is characterised by complex import procedures and diverse consumer’s tastes, which will require substantial efforts of the Vietnamese enterprises to ensure a sustainable presence.
China full accession to WTO has granted Beijing unconditional MFN treatments in relations with other members. China is undoubtedly perceived as Vietnam’s primary competitor by domestic businesses . Nonetheless, differences in the types of shoes that Vietnam and China produce and differences in production methods suggest the need for further analysis to assess whether or not China is a real competitor, and if so, what actions Vietnam should undertake for achieving a comparative advantage.
Since Vietnam’s entrance to the WTO is still being discussed, it is unclear whether Hanoi before its accession will obtain from third countries the elimination of remaining quota and non-tariff barriers on Vietnamese shoe products.
The 10-year strategy for 2001-2010 drafted by LEFASO Vietnam and submitted to the Vietnamese Government for approval is very ambitious and aims at expanding footwear production and upgrading equipment through heavy investments totalling USD 380 million for the first 5 years and an additional USD 500 million for the following 5 years. The Association will encourage businesses to shift to independent production rather than processing footwear components as it does now. Under the set strategy, the industry will strive to rake in USD 3.1 billion per year in export by 2005. For the upcoming ten years a steady average annual growth of footwear export turnover is expected so as to achieve USD 6.2 billion in the year 2010. By 2005 the number of workers is targeted to reach 580,000, or 180,000 more than today’s figure.
At the level of industrial associations, taking into account that Europe is still Vietnam’s reference market, the EU may play a leading role in meeting Vietnam training’s demands. Schools or faculties of leatherwear and footwear at polytechnics or universities can be established based on the undisputable supremacy of the European experience in this sector. Apart from bilateral aid, the financial schemes offered by the European Commission for supporting the implementation of technical assistance projects in favour of Vietnamese companies or business Associations (i.e. Asiainvest) might be extremely helpful.
Finally European enterprises have a clear interest in helping the establishment of a sound and self-sustainable footwear industry in Vietnam. Europe should primarily encourage investment in machinery of European origin. The development of a local production of soles, upper materials, tanned leather and accessories, while creating new opportunities and higher revenues for Vietnamese enterprises, will give them better conditions for complying with European Union rules on locally manufactured components. European shoemakers should also provide assistance to Vietnamese enterprises, with special focus on the private sector, aimed at strengthening management capabilities, marketing knowledge and information on fashion trends. This could pave the way for an increasingly important participation of European footwear industry (of which most are SMEs) in the direct management of Vietnamese companies.