Vietnam's Textile Industry - Opportunities and Challenges
Vietnam's textile suppliers have increased
significantly since normalizing relationships with the United
States in the 1990's. Vietnam was granted most favoured nation
status (MFN) in December 2001, which led to a dramatic reduction
in import tariffs in the US market. Vietnam's induction to the
World Trade Organization (WTO) in 2007 and the Vietnamese
government's strong support of the textile and garment sector,
have provided strong incentives to attract foreign investors. The
textile industry is now the second biggest exporter in Vietnam
and is expected to become the biggest in 2009. However the
financial crisis has had a severe affect on Vietnam's textile
industry, which has suffered from a slump in demand from key
export markets in the US, Europe and Japan.
Labour cost advantage
In the textile processing
industry, companies are increasingly looking for
lower cost countries that can provide outsourcing opportunities.
The rising cost of land and labour are diminishing China's labour
cost advantage and Vietnam is increasingly seen as a low cost
sourcing alternative to China. Estimates are that wage levels in
Vietnam are about one third of those in China's coastal region.
Companies that are chasing lower labour costs are increasingly
moving production to Vietnam. In a 2008 Booz Allen Hamilton
survey 88 percent of companies originally chose China for its
lower labour costs. Of the companies surveyed, 55 percent believe
China is losing its competitive edge to countries such as
Vietnam. The survey also indicated that 63 percent named Vietnam
as their top low cost sourcing alternative to China. However,
costs may be rising. The Navigos Group, a leading recruitment
solutions provider in Vietnam, announced early in the year that
there had been a 16.47 percent increase in Vietnamese workers'
average gross salaries between April 2008 and March
2009.
Low cost location
However, low cost labour is hardly a competitive advantage in the
long term. Labour cost keeps changing and today's low cost
location is not necessarily tomorrow's viable outsourcing
location. If it is not China or Vietnam, it could be Bangladesh
or Cambodia. Ig Hortsmann, a professor of business economics at
the University of Toronto's Rotman School of Management notes
that Nike originally off shored manufacturing to Japan. As labour
costs increased, manufacturing was later moved to South Korea and
Taiwan. When labour cost increased in South Korea and Taiwan, it
was moved to China and later also to Vietnam. Justin Wood, a
Director of the Economist Intelligence Unit Corporate Network in
Singapore makes the point that in the last 15 years Vietnam has
moved from a low to a middle income country. The move towards a
middle income will likely put additional pressure on Vietnam's
low cost labour status.
The Vietnam advantage
Elisabeth Rolskov, founder of ER-Couture in Vietnam, notes that
manufacturing advantages in Vietnam go beyond labour cost and the
country has some competitive advantages compared to China.
"Vietnam has very good embroidery skills and needle work", says
Rolskov. "A lot of designers and manufacturers need embroidery
skills and Vietnam has kept in touch with its traditional roots,"
she adds.
However, for local designers, Vietnam has limitations as a
sourcing location. "Sourcing material, buttons and zippers from
Guangzhou is much better," says Rolskov. In Guangzhou you can
find everything in air-conditioned shopping areas and the
shopping experience is less hectic." This can have a negative
impact on a designer's creativity as the designer is restricted
by what is on offer in the local market.
Rolskov thinks Vietnam is currently a great location for smaller
manufacturers as the market is more flexible. "China is more
volume focused", adds Rolskov, a view supported by Rebecca
Lebold, director of apparel product and technical development at
Lilly Pulitzer. "Vietnam has higher production minimums than many
other countries. Lower minimums would allow smaller companies to
source their product in Vietnam", Lebold notes.
Intellectual property threat
For many companies outsourcing to Vietnam, intellectual property
(IP) remains a concern. Within the fashion industry, IP is not as
enforced as it is within the film and music industries. Designers
can "take inspiration" and it is seen as a major driver for
setting trends in the industry. The World Intellectual Property
Organization (WIPO) has called for stricter intellectual property
enforcement within the fashion industry to better protect
companies and promote competitiveness within the textile and
clothing industries. "It is a hard thing to take care of and you
just have to be faster than everybody else", says Rolskov. For
smaller designers and labels it is much easier to switch
manufacturing. However to prevent the copying of designs is a
challenging undertaking.
Infrastructure development
For Vietnam to advance as an outsourcing location, the textile
industry supply chain needs to be considered. Local logistics are
influenced by direct and indirect cost. In Vietnam's
textile consulting
industry raw materials are often imported, which increases cost
compared with those countries able to source locally. Managing
reverse logistics can also be a challenging undertaking in
Vietnam. Procedures, processes and infrastructure are sometimes
not in place to manage repairs, returns and
warranties.
According to a new market research report from Transport
Intelligence (Ti) entitled Vietnam Logistics 2009, the high cost
of logistics remains one of the biggest stumbling blocks in
Vietnam. According to TI analyst John Manners Bell, logistics
costs are estimated at 25 percent of Vietnam's GDP. Even with
cheap labour cost, poor infrastructure remains a major barrier
for entry. This is largely due to Vietnam being in the early
stages of infrastructure development.
Many experts believe that China's advanced infrastructure gives
it a major competitive advantage. Electricity and transportation
costs will likely come down even further and and this will have a
significant impact on the total cost, even if their labour is
more costly. The Vietnamese government is aware of this dynamic
and has invested billions of dollars in the country's
infrastructure. The government is actively encouraging foreign
direct investment in the country's infrastructure. This is
visible with projects such as the Cai Mep Container Port in the
Mekong River Delta and the new Long Thanh airport that's
projected to be completed by 2015.
Through assessing the overall supply chain, rather than a
singular focus on labour costs, it is easier to identify where
Vietnam's opportunities and challenges lie in the textile
fabric inventory
management industry. While small scale designers and
manufacturers take advantage of a flexible environment,
infrastructure and logistics processes will need further
investment to make Vietnam an outsourcing destination and source
for tomorrow's fashionista
wardrobes.
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Tielman Nieuwoudt has extensive supply chain and
operational experience, covering more than twenty
emerging market economies in Asia and Africa. He has
managed end-to-end supply chains, from forecasting
through order entry, control, inventory management, and
Go-to-Market planning and implementation.
He is also an accomplished corporate trainer, and has
been engaged in the development and implementation of
various training programs in Asia and Africa. Tielman is
a Certified Supply Chain Professional (CSCP APICS) and
has a Bachelors degree in Marketing (SA) and a MBA in
International Business from the University of Edinburgh
in Scotland.
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