Vietnam, currently the world's no. 4 in terms of garment exports, is poised to overtake Bangladesh in due time. The small but powerful Southeast Asian nation is benefiting from the fact that many buyers are looking for alternatives to China and Bangladesh. Orders are coming in, mainly from the US, but also other traditional markets like the EU (with Germany and the UK as main garment importers), Canada, Japan, Korea and Australia; Russia and the Middle East are emerging as two non-traditional markets. "Vietnam's garment industry is having its best time," confirms Nguyen An, general director of Saigon Garment Manufacturing Trading.
Garment exports reached a volume of 14.1 billion US dollars in 2012, an increase of close to ten percent compared to 2011, and the sector is a vital one for Vietnam (together with food processing, cigarette and tobacco, chemicals and electrical goods), employing around 1.5 million workers.
Vietnam's RMG landscape is diverse
Of Vietnam's close to 2,000 companies producing ready-made garments – divided into state-owned, private and foreign-owned enterprises – about half are located in and around Ho Chi Minh City (HCMC), around one third in Hanoi, 15 percent in Da Nang and the rest in other cities and regions. The country's garment industry has a long tradition of consisting of “cut and sew operations” but has more recently begun to invest heavily in spinning and weaving.
Two changes are mainly responsible for Vietnam's growth. First, the nation of 90 million people transitioned from central planning to an open-market system and second, becoming a member of various trade agreements like the Association of Southeast Asian Nations (ASEAN), ASEAN Free Trade Area (AFTA) and the World Trade Organization (WTO) has helped the country's integration within Asia.
The eighth most populous Asian nation is currently waiting for the Trans Pacific Partnership (TPP) to take effect. Slated for 2015, the TPP will phase out tariffs on most goods traded between the eleven member countries Australia, Brunei, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore, US and Vietnam over the next ten years. The garment sector would benefit from zero percent tariffs to the US market, which currently average 17.2 percent.
Vietnamese wages in comparison
Wages in Vietnam are calculated based on cost of living, living standard and also depend on the type of business (state-owned, private or enterprise with foreign investments). There is also a north-south and rural-urban divide with minimum wages in the south being higher than in the north.
While some international buyers are already looking at Vietnam as an alternative to Bangladesh, Vietnamese companies feel the shift would not be significant as Bangladesh's wages are about two to three times lower than Vietnam's. Lower-priced competitors in terms of wages like Cambodia, Laos, Myanmar pose an additional threat.
Better Work Vietnam benefits workers, factories and buyers
Initiatives like the ILO's Better Work program were created to improve working conditions in garment factories while promoting productivity and competitiveness. "Before joining Better Work Vietnam, we didn't assess risks (on the factory floor). Now we know how to undertake risk assessments. The number of costly accidents has decreased significantly, down 40 percent from the same time last year,"confirms Nguyen Thanh Trai, vice director general of Viet Thinh and six other garment companies.
"There are changes each year. The managers are paying more attention to the needs of the workers. ... It's really good that customers pay attention to the quality of life of workers like us," says worker Dang Thu Hoan who has been with Viet Thinh for 15 years. For a nine-hour-shift, she earns about eight US dollars, which is twice the daily minimum wage, and also receives benefits.
About 150 factories are currently participating in the program; by 2014, that number is supposed to increase to 500 factories employing 500,000 workers. A team of advisors who perform assessments and help factory owners and employees with the implementation of targets is crucial to the program's success. International buyers appreciate the role of the advisory team and its assessment reports.
"Because Better Work Vietnam has transparent procedures and processes for assessing factories and then monitoring and advising them to ensure compliance, and because these procedures are similar to our own, we feel Better Work is good value for us because it avoids duplication and multiple factory visits by us,"states Kanwarpreet Singh, chief representative of Puls Trading Far East Ltd, H&M's representative office in Vietnam. Currently, 33 international buyers are part of the program.
Challenges and opportunities for Vietnam
One of the challenges the Vietnamese garment industry has to resolve is unstable material supplies. Given its own limited resources, about 70 percent of Vietnam's garment materials have to be imported, many of them from China. To overcome the economic slump, Chinese suppliers still offer competitive prices but at the cost of material quality. Thus, some past shipments had to be sent back due to quality defects, delaying projects and endangering deadlines and repeat orders (if the material supplier was not picked by the buyer).
Another challenge that Vietnam shares with other developing countries is the need for further development in terms of machinery, equipment, technology and labor skills. In terms of highly qualified workers, the demand currently exceeds supply because the rate at which workers acquire skills is not as rapid as the speed of the country's economic growth. The government is tackling the problem by investing in education but in the meantime, the phenomenon of "job hopping" can be observed among technically skilled workers, and the apparel industry also lacks well-trained and experienced fashion designers.
Interesting is the development of Vietnam's own demand for ready-made garments: "Traditionally, local demand for clothing was met by individual tailors; however, in the late 1990s [when Vietnam opened its economy to the west], ready-made garments gained popularity. While some domestic demand for ready-made garments was met by imported (smuggled) products from China, domestic private garment suppliers started producing garments for their local markets, and now there is significant agglomeration of such suppliers, particularly in HCMC. Some of the well-known apparel brands have established their own retail stores in major business districts and department stores, not just in HCMC and Hanoi but in other major cities across Vietnam,"finds Kenta Goto in his December 2012 disussion paper "Is the Vietnamese garment industry at a turning point?".
This quick adaptation and building up of its entire RNG sector in only 15 years shows the strengths of Vietnam's garment industry: its ability to react quickly and flexibly to new orders and circumstances as well as a supportive government policy.
In the future, the development of non-traditional markets like Russia and the Middle East are promising for Vietnam, especially in view of a slowdown of orders from North America and Europe. Greater product differentiation and specialization - for example in functional work wear - could also give the industry a boost.
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