Authors: Jason Q Nguyen and Quan V Le, Vin University
With a supply chain that over relies on only a few key partners, Vietnam’s textile and garment industry is among the country’s hardest hit by the COVID-19 pandemic.
Vietnam has traditionally focussed on garment production with little capacity for fabrics manufacturing. It is estimated that Vietnam imports up to 89 per cent of fabrics — 55 per cent from China, 16 per cent from South Korea, 12 per cent from Taiwan and 6 per cent from Japan. US and EU markets account for more than 60 per cent of Vietnam’s garment exports.
Vietnamese garment manufacturers predominantly focus on the simplest cut-make-trim (CMT) model where buyers control and own all the pre- and post-production processes. CMT production contributes 65 per cent of Vietnam’s total exports, while the more advanced business models, like Original Equipment Manufacturer (OEM) and Original Design Manufacturer (ODM), that allow for higher profit margins account for only 35 per cent.
When the coronavirus pandemic struck in January, Chinese fabric manufacturers suspended production, disrupting fabrics supply to Vietnam. As the pandemic centre shifted west from China in March, many orders from the European Union and the United States were cancelled, causing significant damage to Vietnam’s garment manufacturers.
Vietnam’s Textile Association reported that 70 per cent of garment manufacturers started reducing shifts and rotating workers in March, with an additional 10 per cent following in April or May. By June 2020, the estimated loss to the industry could reach US$508 million. Data from Vietnam’s Customs Agency suggests that imports and exports of all textile and garment products fell massively in the first quarter of 2020. Exports of garments totalled US$7.03 billion, a 1.4 per cent year-on-year reduction compared to 2019 and 34 per cent lower than the expected growth of 50 per cent prior to the pandemic.
Despite the devastating impact of COVID-19, the pandemic provides some valuable lessons for the industry on recovery and ways to move forward.
First, it is essential to establish a resilient supply chain of fabrics and other raw materials, which relies on the development of domestic fabric production. Having a reliable domestic supply of fabrics will mitigate disruptions and help capitalise on free trade agreements (FTAs) that impose rules of origin. For example, in order to enjoy preferential tariffs under the recently signed European Union–Vietnam FTA (EVFTA), Vietnamese garment manufacturers must satisfy the fabric-forward rule that requires the use of domestically produced fabrics (with the exception of fabrics imported from South Korea).
Second, it is important to diversify the demand base to reduce over reliance on a few key customers. Vietnam should leverage FTAs, especially the newly signed Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), to explore new export markets. This could also help drive industry growth.
Manufacturers should also pay more attention to Vietnam’s promising domestic market and explore new product offerings. Domestic and international demand for antibacterial masks and protective gear has proven an effective and important relief measure during the crisis.
Third, Vietnamese garment manufacturers should consider making the necessary investments to advance from the labour-intensive CMT model towards more capital-intensive models that allow for higher profit margins and more control and resilience to external shocks. OEM and ODM capable firms have proven to be more resilient and better equipped to quickly respond to the pandemic.
TNG, an OEM company based in Thai Nguyen, has stockpiled enough fabric for production until the second quarter of 2020. TNG has also arranged alternate sourcing from Pakistan and other domestic suppliers. This, together with agile management, enabled TNG to start producing antibacterial masks in just three days, helping the company record a 65 per cent increase in revenue compared to 2019, despite cancelled overseas orders.
Despite this severe yet temporary setback, Vietnam’s textile and garment industry should be optimistic about the future. In 2019, more than 80 per cent of Foreign Direct Investment (FDI) in the textile and garment industry shifted towards manufacturing fabrics and other raw materials.
TAL, a Hong Kong-based company, was approved to build a US$350 million fabric plant in Thai Nguyen province in early 2019. In February 2020, Texhong, another Hong Kong-based company, committed another US$500 million (in addition to an existing US$500 million investment) to expand yarn and fabric production capacity in Quang Ninh province. These FDI firms are expected to provide competition pressure and spill-over benefits that could stimulate innovation and growth of domestic and state-owned fabric producers.
The government is also supporting Vietnam’s textile sector with the construction of dedicated textile industrial parks. Rang Dong Textile Industrial Park in Nam Dinh province, the largest of its kind, is expected to be operational from 2022.
Despite the economic shock of COVID-19, all signs are pointing in the right direction for Vietnam to take its place as the world’s third-largest textile and garment exporter after China and India.
Jason Q Nguyen is Assistant Professor of Operations and Supply Chain Management at the College of Business and Management, Vin University, Hanoi.
Quan V Le is Associate Professor of Economics at the College of Business and Management, Vin University, and Visiting Scholar at the SC Johnson College of Business, Cornell University.
This article is part of an EAF special feature series on the novel coronavirus crisis and its impact.