jas textile industry in vietnam 2480363
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Running Head: AN ANALYSIS OF VIETNAMS TEXTILE AND GARMENT INDUSTRY
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An Analysis of Vietnams Textile and Garment Industry
Running Head: an analysis of vietnams textile and garment industry
An Analysis of Vietnams Textile and Garment Industry
[name of the writer]
[name of the institution ]
[name of the Professor]
[Course]
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S. No.
Topic
Page No.
I
Introduction
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II
Industry History
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a
Background and History
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b
Political Changes
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c
Experience of industry
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III
Industry Analysis
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a
Clothing Export
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i
International Market
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ii
Competition with other Nations
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b
Reliance on the International Market
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i
U.S. The Largest Importer
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ii
E.U. Nations
9
IV
Competitive Nature
9
a
Advantages
9
i
WTO Member Privilege
9
ii
Incentive Trade Agreement with U.S. and the E.U.
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iii
Labor Force
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1
Low-cost Labor
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High level of Unemployment
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b
Disadvantages
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i
Outdated Machineries
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ii
Imported Natural Resources
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S. No.
Topic
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V
Government Policy
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a
Industry Investment
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b
Job Creation
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c
Competition with China
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d
Encouragement of Private Owners
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VI
Conclusion
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Reference
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An Analysis of Vietnams Textile and Garment Industry
I. Introduction
Vietnam was ranked as one of the poorest countries in the world after the end of Vietnam War with the U.S. in April 30, 1975. After the war Vietnam worked day and night to build up a war-affected country virtually from scratch. Besides putting their whole-hearted efforts in other industries Vietnam has also developed its agriculture, especially cotton. With the development of agriculture and increase in production of cotton the need for textile industry originated. Due to serious efforts of Vietnamese governments and the dedication of its people now Vietnam has a textile industry like a developed country. U.S. clothing imports from Vietnam grew from virtually nothing in 2000 to $3.2 billion in 2006. Vietnam was the 5th largest source of clothing imports for the United States in 2006, behind (in order) China, Mexico, Indonesia, and India. Much of that growth was the result of the gradual liberalization of U.S. trade policy towards Vietnam.
The project will begin with a brief history of the industrys existence in Vietnam. Then discuss the changes in Vietnams policies after the collapsed of USSR, and the resulting crisis. Vietnam has faced great challenges to improve its industry infrastructure to its present status, this part will also be highlighted.One of the major economic factors that impact Vietnams economy tremendously was its becoming WTOs 150th member after eleven years of negotiations in Jan. 2007. This factor is also Vietnams greatest economic opportunity since the end of the Vietnam War. Finally, this project will describe how Vietnam's top textile and garment exporters havedrafted a competition strategy in the aim ofbetter allocation quotas from the US, the nation's biggest garment importer, and to defend itself from increasing global competition.
II.Industry History
a. Background and History
The textile and garments industry has been there in Viet Nam for almost a century now, whereas other traditional handicrafts like embroidery and silk weaving have been there much longer. Viet Nam history mentions that many Vietnamese dynasties had to tribute different kind of valuable fabrics made locally to China. It is generally believed that the development of the industry began with the establishment of Nam Dinh Textile Complex in 1897. The industry grew rapidly after the World War II. In the southern parts of Viet Nam, firms were established by using modern European machinery. Where as in the northern parts, state enterprises were using machinery from China, USSR and Eastern Europe.
b. Political changes
After the reunification of Viet Nam in April 1975, the government took over a number of factories in the Southern parts. The industry started its exports, to various Communist countries, the next year. Viet Nams exports to the Former Soviet Union were done by means of a subcontracting cooperation. According to the terms of this arrangement Viet Nam used to receive cotton from USSR and delivered back finished goods. In 1979 Viet Nam expanded its operations and started similar arrangements with East Germany, Hungary, and Czechoslovakia. Between 1987 and 1990 the industry growth was phenomenal. Garment enterprises were set up everywhere throughout the country attracting hundreds of thousands of laborers and contributing significantly to State budget.
c. Experience of Industry
The textile and garment industry of Viet Nam went under crisis after the collapse of the USSR and other Iron Curtain countries. Many enterprises broke up and most were forced to reduce production. Viet Nams textile and garment industry has faced great challenges. Today, Viet Nam is trying to captures new opportunities and challenges, and is striving to become an active player in modern day world markets. Once Viet Nams textile and garments industry set-up its infrastructure and starts using domestically manufactured materials and modern equipments, Viet Nams textile and garment industry has the potential to become a highly effective and leading national industry.
During the past five years, the industry attained an annual growth rate of 10.7 percent, accounting for 9.14 percent of the industrial GDP. The industry now generates about 20% of Vietnam's total merchandise exports and 41% manufactured exports. Vietnams textile and garment industry has developed rapidly in recent years and has become a vital activity within the countrys economy. In 2004 it employed 2.1 million people directly (approximately 80% are women), representing 4.7% of total employment in the country (Tribune of Vietnams youth Association, May 2006).
III.Industry Analysis
a. Clothing Exports
i. International Market
Besides exporting garments and textile to the U.S., Viet Nam also exports to other countries like Japan, Korea, Canada, Taiwan, ASEAN and other European countries. In 2004, the biggest importers were the U.S. 57% and EU 17% of the total Viet Nam garment and textile export. Viet Nam, which was ranked 16th out of 153 garment exporters worldwide in 2006, is likely to become the 10th largest garment exporter in the world by 2010
ii. Competition with other Nations
One of the major economic factors is the global changes in the textile and garment manufacturing industries. Many Asian countries like Japan, Hong Kong, Korea, Singapore and Taiwan have shifted away from labor-based industries (textile and garment) to technology-based industries (automobiles, robotics etc.). As a result of which China has emerged as the worlds largest garments and textile exporter. Viet Nam is a part of the same race. Garments and textile will continue to be Viet Nams major industry and export in the years to come.
b. Reliance on the International Market
i. U.S.-The Largest Importer
The U.S. garments and textile market has a worth of around $70 billion. China has a share of roughly $40 billion. Viet Nam is considered as one of the few countries that can compete with China in this market. Presently, Viet Nam is struggling to meet U.S. demand due to Viet Nams lack of natural resources and outdated machineries.
The economic factor that had biggest impact on Viet Nams garments and textile industry is the U.S. removal of quotas trade with Viet Nam, which is expected to increases U.S. demand for Vietnamese made clothing. The garment exports to the U.S. market had increase considerably in the past, from $47.7 million in 2001 to $2.9 billion in 2005. In 2006 the U.S. had imposed quotas on Chinese textiles and clothing, therefore, Vietnamese exports increased by 20.8% to $5.8 billion. Viet Nam had set it goal to export to the U.S. $10 billion by 2010. In order to achieve its goal, the Vietnamese government is planning to invest $3 billion in developing the garment and textile sector.
Viet Nam's Garment & Textile Export to the US 1998-2006
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Buyers from a number of the worlds leading textile and apparel companies have sourced apparel from Vietnam including Express, Hucke, Itochu, JC Penney, Jupitar, Kmart, Kowa, Lee Cooper, Li & Fung, Mast Industries, Nichimen, Nissho Iwai, Otto, Sara Lee, Seidensticker, Sumitomo, Tomen, Tommy Hilfiger, Victorias Secret, and Wal-Mart (VINATEX, 2007).
ii. E.U. Nations
IV. Competitive Nature
a. Advantages
i. WTO Membership Privilege
WTOs arrival on the world trade scene effective from 2005; necessitated serious response actions from world governments, which in some cases required restructuring of the whole production process in some cases. The introduction of anti-dumping duties and quota restriction (besides several other measures) have also ensured that price competition takes a back seat and as a preventive measure to safeguard local markets. With quality as the major basis of world competition, countries that lagged behind in adopting the WTO framework, suffered as a natural consequence. To say the least, the international market has adopted cut throat competition coupled with threats of a global recession.
Considering this scenario, developing countries have been the hardest hit from these rules and regulations and most have slipped in terms of volume of exports. However, Vietnam has benefited significantly from WTO membership and adoption of the WTO framework in January 11, 2007. This move significantly strengthened its trading relationship with USA which had declined in 2005 due to the imposition of quotas by US government. USA had been Vietnams largest export market. However, USA had to implement anti-dumping measures against China and Vietnams WTO membership forced US to lift its quota restrictions against Vietnam. This move was expected to significantly boost Vietnams exports and it hopes to achieve the US$10 billion goal by 2010, which it is on course to achieve.
The WTO membership privilege means that Vietnam has the opportunity to develop other previously untapped markets as well. Prominent among these markets is the EU which has emerged as a powerful economic coalition during the last few years. Market diversification is a current necessity and participation in the WTO platform means that certain trade barriers are effectively removed. Dedicated marketing strategies are the key to launching successful brands worldwide especially in the textile sector.
ii. Incentive Trade Agreement with U.S. and the E.U.
Viet Nam had reached a bilateral agreement in principle with the United States in November 2006. The last among the 28 countries that have bilateral WTO talks with Viet Nam. After eleven years of preparation and negotiation, Viet Nam officially became the 150th member of the WTO on January 11, 2007. Viet Nam is opening its boundaries for more foreign trade and investment to transforms a Communist country into a Capitalist one.
iii. Labor Force
1. Low-cost Labor
In 2007, Vietnam planned a 200% increase in its workforce from 2 million to 4 million, by 2010. In order to achieve this figure the country planned to invest $200 million on trade centers and personnel development. The labor savings ensure that the exports are competitive when compared to similar nations like China, India and Bangladesh. Dampening commodity prices mean that countries that have space to bear shocks will survive to compete in the future. Poverty is a key factor in the low cost labor scenario with most families unable to send their children for higher children after class 11.
Labor intensive industries are the rule of the day with training and development on the government agenda as most of the workforce comprises of unskilled and semi skilled labor.
Many international companies like Nike utilize the low cost labor pools in countries like Thailand and Bangladesh. Although these practices are tough for the workforce, they bring in millions of dollars in investments and business for the local industries. The past practices of centralized planning meant that a significant portion of the population was derived of the basic facilities of life. Now these people have a choice to opt for a higher living standard and hope that their children can attend prestigious educational institutions.
2. High Level of Unemployment
The textile industry employed around 4.7% of Vietnams labor workforce and that figure is expected to increase dramatically. With unemployment a global norm, low cost labor is easily available. The textiles sector growth can be utilized to cater to the unemployment rates and arrest this figure. International collaborations and trade agreements ensure new business, which in turn creates more job opportunities. Similarly, women can be easily employed to achieve higher levels of productivity. Meanwhile, the high inflation rates mean that its labor workforce is secure in the textile industry and it has margin to increase this figure in the future.
b. Disadvantages
i. Outdated Machineries
Outdated machineries mean that the quality of goods is being compromised and that trading countries can raise objections on the production process. However, this area requires substantial capital investments and associated training of labor. Vietnam is also in needed to update its manufacturing machinery. Vietnams garment industry has made great progress, shifting from production of work clothes for export, simple products such as: blanket, pillow cover, sleepwear, and pupil uniform. However, the garment enterprises lack modern specializing machines, thus require intensive labor. That led to low productivity in comparison with other countries. Some high-ranking products, such as leather jacket still cannot be produced because of lack of specializing machines. In recent years the investment in modern machinery had risen tremendously. The extent of textile machinery investments can be understood by the following figures:
Investment in modern machinery has soared in recent years. During 2006 the industry added 171,720 new spindles and 5,840 open-end rotors. This followed an extended period of expansion during the ten-year period 1997-2006 when 840,132 spindles and 19,784 open-end rotors entered service. In the weaving sector the industry added 6,012 shuttle-less looms during 1997-2006, of which1, 357 alone were added to the industrys capacity in 2006 following the addition of 476 in 2005. This shows convincingly the move towards modern manufacturing technology (Textile Intelligence).
This area will require considerable time and attention, as the latest machinery will have to be imported causing pressure on the Balance of Payments and than the industry will have to be structured to absorb this technology. This may cause some labor layoffs and the government has to plan for all eventualities.
ii. Imported Natural Resources
The import of cotton, yarns and fabric is a significant area that requires government action. In 2004, the value of imports was US$4601 million, almost double from that in 2000. Expensive Imports negate the advantage attained through labor savings and finally cause decline in international market share. The government has to identify alternate means of production and attain self-sufficiency. Currently Viet Nam is heavily depend on the most important import item is fabric. Import fabric had risen by 288% in the last six-year period. These economic factors will determine the industry success. In order to supply its own expanding apparel industry, the government is planning to invest domestically produce raw materials, such as cottons, garments, fabrics and yarns. The government strategy is to reduce the import materials to less than 25% by 2010.
V. Government Policy
a. Investment in the Industry
The Government has planned investments of $3 billion in the textile sector to achieve its production and labor increase targets. Joining WTO and forming multilateral trade agreements show its dedication towards enhancing local trade. The labor and machinery investments mean that Vietnam is well poised to benefit from the global textile market. Its consistent double digit growth in the textile market exhibits its potential in the textile manufacturing industry with efforts aimed towards achieving production of finished clothing instead of semi-finished goods. This translates into higher revenues and volume for the government. The Textile and garment industry will need some $600-$700 million for in-depth investment and another $5.7 billion for investment technology renovations. As much as 90 percent of this amount is earmarked for the textile sector. From there, the existing 800,000 spindles which have been used for over 20 years will gradually be replaced and 400,000 spindles which have been used since 1979 will be upgraded with supplemental investments to improve the quality of fiber for the production of knitwear and top-grade fabrics (VINATEX, May 2006). Half of the existing 7,000 outdated textile machines will also be gradually replaced. According to Vinatex's plans, 65-70 percent of the $ 5.7 billion investment will come from overseas loans and just 25-30 percent from domestic sources.
b. Job Creation
The target of achieving 4 million jobs by 2010 is dependant on the production targets and is essential towards achieving economic balance. Unemployment creates economic unrest and appropriate policies restore investor confidence and assure a higher standard of living for the population. The development of the textile sector means that associated and tertiary industries also develop, thus creating more jobs for the people.
c. Competition with China
China is arguably the greatest threat to Vietnam with respect to US and EU markets and if it werent for safeguard measures by the US, China would still have the major stake in the market. In order to compete with the economic giant, Vietnam has to develop and follow policies of specialization and cater to selected markets. It should safeguard its export markets and develop them through collaborations with trade partners. Similarly India and Pakistan also pose threats to Vietnams markets and strategic policies should form competitive frameworks with respect to them.
d. Encouragement of Private Owners
Private ownership is the key to the success of free market economies and they should be allowed to function without government interference. The current Vietnamese government has instituted several measures to encourage private ownership form internal and external sources. Thus far, Japan and Spain have taken special interest with respect to investments in the Vietnamese textile industry. A strong corporate foundation will fuel Vietnams growth for the years to come.
Liberal rules and regulations will ensure that investors flock to the country and that all the sectors grow in tandem. Interest rate levels and liquidity must be maintained in the face of a global economic crisis and industries must be protected. Industry support at this time will ensure that targets are maintained on track and achieved in the future.
VI. Conclusion
With bright future prospects and the right blend of economic policies, Vietnam has certainly got off to the right track. Its growth credentials in the EU and US have been acclaimed by international experts and the future performance is expected to follow the same trend. The industry has achieved notable success. The rate of growth is relatively high. Exports of textile and garment have recently found niches in the export market, by taking over position as second largest exports, which used to be captured by rice and marine products. However, the two key concerns i.e. expensive imports and labor condition require urgent attention and corrective action by government bodies. The fact that the country has performed so well, after emerging from a communist framework, tells the story of the dedication of the government and people and that efforts are on the right path.
After 30 years of rebuilding the war-affected countrys infrastructures. Vietnam today is ready to be accepted into World Market Economy. The Vietnamese are very proud of their customs and culture. With a rejuvenated confidence the Vietnamese are ready to embrace the world.
Reference
Prospects for Textile and Garment Industry in Viet Nam. Textiles Intelligence in issue No. 129 (May-June 2007).