Hope springs eternal

The possible end of the TPP may not be as bad for Vietnam’s textile and garment sector as it first appears.

The future of the TPP is well and truly up in the air following the announcement from US President-elect Donald Trump on November 21 that the country would withdraw from the trade deal on the first day of his presidency and instead pursue free trade agreements (FTAs) on a bilateral basis. Vietnam’s textile and garment sector was set to be one of the major beneficiaries of the TPP, but now no one is quite so sure. “Mr. Trump may have killed the TPP, and while Vietnam’s textile and garment industry may be affected there are still benefits to be had,” said Mr. Nguyen Xuan Duong, Chairman of the Hung Yen Garment Corporation (Hugaco). “We are always ready for investment to boost production, not just because of the TPP but because of our own need to expand in scale.”

Year of difficulties

Mr. Duong told VET that the company has focused its investments on upgrading machinery and equipment and has cooperated with a number of foreign companies on material supply. “Business remains stable, growing at 4 per cent due to us expanding our scale,” he said. “Exports to the US, however, are down, at just 70 per cent of last year’s.” Tough competition with foreign companies and the Vietnam dong being anchored to the dollar present difficulties, he said.

Likewise, the Garment 9 Joint Stock Company saw exports fall by 30 per cent in the first half of the year compared to the same period last year. “Export turnover from men’s vests fell between 40 and 50 per cent,” said Mr. Nguyen Xuan Quang, Chairman of Garment 9. “In the EU and in Asia, export turnover is down significantly.”

The reason for the decline, according to Mr. Quang, is falling consumer demand around the world and competitive pressure from other markets such as Laos, Myanmar, and Bangladesh. While Laos, Cambodia and Myanmar enjoy a tax rate of zero in the EU under the Generalized System of Preferences (GSP) for underdeveloped countries, Vietnam is still subject to a rate of 9.6 per cent.

The lower-than-expected business results of Hugaco and Garment 9 reflect the overall performance of Vietnam’s textile and garment sector in 2016. The Vietnam Textile and Apparel Association (VITAS) announced that textile export turnover was $28.5 billion, less than the targeted $1.5 billion and equal to 92 per cent of the plan. Exports to the US stood at $11.4 billion, up 4 per cent year-on-year. Other main markets are the EU, Japan, India, Brazil, Russia and Canada. 

2016 has indeed been a difficult time for textiles. According to Mr. Le Tien Truong, CEO of the Vietnam National Textile and Garment Group (Vinatex), business performance among textile enterprises has been disappointing and seen the lowest growth for the last six years. “The difficulties stem from the general difficulties in global markets,” he said. “Global demand did not increase in 2016, while demand in main markets such as the US, Japan and EU were all down.”

The UK’s Brexit vote had an indirect effect. As the British Sterling has since been devalued, imports are more expensive than domestic products, eating into demand. “Demand for garments will fall, and the growth of 6 to 7 per cent recorded in the first five months of the year will be hard to maintain,” said Mr. Truong. “But the overall impact will not be significant as most garments sold in the UK are imported, so the ability to replace them with domestic equivalents is limited.”

Technically, despite low growth, absolute value was higher than in previous years. A few years ago growth stood at 12-15 per cent but absolute value was only some $1.5 billion. “Growth is only around 5 to 6 per cent now but absolute value is approximately $2 billion,” Mr. Truong explained.

Uncertain future

The slowdown in global markets and the possibility of the TPP collapsing have triggered widespread concern among textile and garment enterprises. Vietnamese exports would have eventually been subject to zero tariffs under the TPP compared to the current average of 11 per cent and up to 32 per cent on some categories. This prompted the World Bank to issue a now-meaningless forecast that Vietnam’s textile and garment exports to the US and Japan under the TPP would play a major role in lifting the country’s GDP by 2020.

But many dreams may now be shattered, especially for enterprises looking to take advantage of the “yarn-forward” rule of origin requirement in the TPP. The Thanh Cong Textile Garment Investment Trading JSC (TCG) expected a great deal from the agreement. In 2015 its share price increased strongly, especially after negotiating sessions for the agreement. In 2013 its shares were trading at VND6,000 ($0.2) then increased sharply to VND40,000 ($1.8) in 2015. They now stand at VND15,000 ($0.6). 

For 2016 TCG targeted revenue of over VND3.2 trillion ($140.8 million), up 16.9 per cent year-on-year, and after-tax profit of VND160 billion ($7.01 million), up 3.58 per cent, with an eye on the TPP being ratified. Its targets are now history. Revenue in October was just $10 million, with a gross profit margin of 13 per cent. In November and December revenue was $10.5 to $11 million in each month and gross profit margins 13.5 to 14 per cent. Its monthly average in the first nine months of 2016 was $11 million and its profit margin was 14.79 per cent in the third quarter.

Like many textile enterprises around the country, TCG faces fierce competition in labor costs from Myanmar and Cambodia. The minimum wage policy and new social insurance policy in Vietnam have resulted in labor costs in the textile sector becoming less competitive than elsewhere, and customers have begun to shift orders to Myanmar and Cambodia.

While enterprises that can meet the “yarn-forward” rule of origin like TCG are now in trouble because of doubts over the TPP, other enterprises believe their exports will be fine with or without the agreement. “To benefit from the TPP, enterprises must ensure the whole production chain, from yarn and dyeing to finished products, which involves a huge amount of investment,” Mr. Duong said. “Most yarn in Vietnam is imported from China, fiber from South Korea, and components mainly from Southeast Asian countries. If the TPP goes ahead without the US, Vietnam will have time to better prepare.” He added that most enterprises focus on OEM/FOB (Original Equipment Manufacturing / Free on Board) and ODM (Original Design Manufacturer) so would have benefitted greatly from the TPP.

Agreeing, Mr. Truong Van Cam, General Secretary of VITAS, said the future of the TPP will not overly affect Vietnam’s textile sector, especially exports to the US. In fact, export turnover to the US has increased 12-13 per cent recently while imported textiles in the US increased just 3 per cent, meaning Vietnam’s market share in the country has been improved and potential remains.

Mr. Nguyen Duc Thanh, founder and Director of the Vietnam Institute for Economic and Policy Research (VEPR), said the textile, leather and footwear sectors were undoubtedly going to benefit from the TPP but if the US withdraws then exports won’t be irreparably damaged as companies can approach the markets of other members of the agreement. “Vietnam will still benefit from the TPP, with or without the US,” he said. “Exports to the US are already on track.”

Luster remains

No major FDI projects came to the textile and garment sector in 2016 after two years of surging investment. In 2015 it attracted around $1 billion in FDI in three major projects: Hyosung Dong Nai from Turkey, Polytex Far Eastern from Taiwan, and Worldon Vietnam from Hong Kong.

Mr. Nguyen Hong Giang, General Secretary of the Vietnam Cotton and Spinning Association, said that 2015 was a record high for investment in the sector as investors hoped to take advantage of the opportunities presented by new FTAs. The decline in FDI should be no cause for concern, he believes, as it is still receiving attention from foreign investors. “Foreign investors will continue to keep an eye on the sector until 2018,” he said. “The future of the TPP is not yet known but other free trade agreements with the EU, South Korea and Japan will promote foreign investment in the textile sector.”

Opportunities from FTAs mean opportunities for FDI capital to come to the textile and garment sector as Vietnam still lacks a textile support industry. This is a key point for investors because they wish to take advantage of Vietnam’s low cost labor to build a supply chain for export to other markets. Experts with a close eye on Vietnam’s textile and garment sector concur. Dr. Tomoo Kikuchi, Senior Research Fellow at the National University of Singapore’s Centre on Asia and Globalization, was quoted as saying that the considerable amount of investment by foreign multinationals in the upstream supply chain triggered by the TPP’s yarn-forward rule has upgraded the value chain in Vietnam.

He expects the trend continue. “The rule of origin gave the industry an incentive and thus momentum to invest in upstream textiles, which is a natural thing to do when labor costs rise,” he said. “Sure, no TPP is disappointing, but whether that will slow down the trend, I’m not sure.”

Mr. Achim Haug, the Hong Kong-based Chief Representative of Germany Trade and Invest, a government agency assisting FDI in Vietnam, pointed out that Vietnam’s structural advantages for the export-oriented manufacturing sector remain high, so investors will keep coming with or without the TPP. “Particular opportunities also arise from the FTA between Vietnam and the EU, which has been signed and is now awaiting ratification in the EU,” Mr. Haug was quoted as saying. “We hope for quick clarification on this, so that the agreement can come into effect in 2018.”

by Nguyen Quynh / VET