Textile and garment sector needs mending

Unfavorable foreign exchange rates, increases in basic salaries, crises in export markets and resulting drops in orders all caused the textile and garment sector to lower its 2016 export target. The industry’s 2016 export growth is expected to be the lowest of the past decade.

Export difficulties

Domestic textile and garment enterprises have been working hard to obtain orders, but the resulting number has fallen short of their production capacity.

The Hung Yen Garment Corporation is no exception. Management Board Chairman Nguyen Xuan Duong said that in previous years, between January and June, sufficient orders were received for production until the end of the year, whereas in the same period of 2016, many subsidiaries of the corporation didn’t even receive enough orders for production to last them until the fall.

While scrambling for additional orders to maintain production, manufacturers were dealt an additional blow: outsourcing prices fell 10-20 percent compared to 2015.

According to the Ministry of Industry and Trade, the outsourcing price drop stems from a shifting of large, simple outsourcing orders to Bangladesh and Cambodia, where labor costs are lower than in Vietnam. Meanwhile, the demand for textiles and garments in such major markets as the US, Japan and the EU also decreased, causing the number of orders for Vietnamese enterprises to continue declining.

Domestic companies point to fierce competition from rivals in countries that have adopted policy changes to promote textile and garment development. Cambodia, for example, signed a free trade agreement (FTA) with the EU, zeroing out export tariffs on Cambodian textiles sold to EU member states, while Vietnam’s garment exports to this market bear a 19.6-percent tax. India has reduced import duty on some key raw materials, including fibers, from 5 to 2.5 percent. Pakistan currently applies a zero percent tax to raw materials, semi-finished products and energy serving export textile and garment production.

The above-mentioned difficulties led the textile and garment sector to lower its 2016 export target from US$31 billion to US$29 billion. The deputy general director of Vietnam National Textile and Garment Group (VINATEX), Hoang Ve Dung, said that although Vietnam exported textiles and garments worth US$28.023 billion in 2016, up five percent from 2015, this is the lowest growth over the past 10 years. The country’s textile and garments exports to major markets including the US, the EU, Japan and the Republic of Korea (RoK) in 2016 grew less than 10 percent. VINATEX reached estimated export revenues of US$3.5 billion, lower than expected, and was expected to maintain a 10 percent growth like in 2015.

Domestic markets

According to Hoang Ve Dung, 2017 will be another hard year for domestic textile and garment enterprises. Apart from lower outsourcing prices, importers have toughened deadlines so that orders must be accomplished within three months, rather than five or six as before. With the overall number of orders decreasing, domestic companies will have to be highly competitive to get them. Domestic enterprises need to prepare flexible and appropriate business plans and have quick responses if they are to take advantages of opportunities, Hoang Ve Dung said.

Having acknowledged this, VINATEX will soon focus on trade promotion to seek additional markets. The market is showing signs of saturation, while domestic businesses will become less competitive if they continue depending on intermediaries rather than finding customers directly to minimize cost.

Domestic businesses should gradually shift from outsourcing to other forms of production that yield a higher value added, such as FOB (free on board) and ODM (original design manufacturer). They should also improve their transaction capability and satisfy importers’ requirements on offering, delivery and other supply services. This will help them become more competitive in terms of price, production cost and investment incentives.

VINATEX representatives said that FTAs not only provide great opportunities but also present challenges for domestic businesses. For example, as soon as the EU-Vietnam Free Trade Agreement (EVFTA) takes effect, Vietnamese exports to the EU will benefit from 70 percent of the EU’s preferential tariffs, and they will enjoy 99 percent of the preferential tariffs 10 years after that. On the other hand, EU exports to Vietnam will also benefit from the same incentives under the EVFTA and given their high capabilities and quality will become major rivals of domestic businesses.

Thus, domestic market development should be a key solution of the textile and garment sector in 2017, Hoang Ve Dung stressed.

Hoang Ve Dung said that in 2017, Vietnam is expected to export textiles and garments worth US$30 billion, seven percent more than in 2016. The domestic market is expected to be an important driving force to ensure the Vietnamese textile and garment sector’s growth in 2017.

The domestic trade in textiles and garments has amounted to US$4-5 billion annually. Apart from product design improvement and construction of distribution networks throughout urban and rural areas nationwide, domestic businesses should apply and strengthen modern modes of distribution, like electronic commerce (e-commerce), to expand and develop their domestic markets.

Viet Nga / VEN