Regardless of when the TPP is signed, local textile and garment producers will struggle to stay in the game let alone prosper.
Export turnover in the textile and garment sector continued to grow at double-digit figures in the first half of this year, by 10.26 per cent compared to the same period of 2014 and reaching $12.18 billion. The US remained the largest export market, with turnover of $5.1 billion, or 42 per cent of the total, while Japan followed with $1.3 billion, or 11 per cent of the total.
According to figures from the Vietnam Textile and Apparel Association (VITAS), export turnover of textiles and garments to countries that will be part of the Trans-Pacific Partnership (TPP) increased 69.66 per cent in the first half compared to the first half of 2014 and accounted for over 66.8 per cent of the total.
When the TPP is approved and comes into effect about 1,000 textile import tariffs now standing at an average of some 18 per cent will be gradually reduced and then removed. Authorities have calculated annual export growth of 15 per cent, or double the current average of 7 to 8 per cent.
With rich experience from exporting to the US and Japan for a long time, the sector should be more than confident in a brighter future. Reality, though, paints a somewhat different picture, with domestic firms struggling to strategically retain their medium-term advantages over other neighboring textile and garment producing nations and find a solid place in global supply chains.
Hard road to hoe
One of the greatest challenges the TPP may present is the “yarn forward” rule, or rule of origin (ROO). “This is a typical barrier, which is regularly used in many free trade agreements (FTA) the US has signed,” according to an executive from the Vietnam National Textile and Garment Group (VINATEX). “The rule requires that all textile and garment products be produced from inputs that are imported from other TPP partners in order for the tariff to be waived.”
Vietnam’s textile and garment sector currently depends too much on foreign raw materials. Its fabric and yarn producing capacity can barely meet 20 per cent of domestic demand and the sector had to import $4.7 billion worth from China last year while imports from other TPP partners were insignificant. In an article in late 2013 VET reported that Vietnam had to import approximately 50 per cent of the fabric, 30 per cent of the yarn, and 20 per cent of the fashion accessories used as inputs for exports from non-TPP countries. Nearly two years have passed and not a great deal has changed.
In almost all major exporting firms in the industry, approximately 80 per cent of inputs are imported, primarily from non-TPP members, such as South Korea and China. The Binh Duong Apparel Company, for example, must import 75 to 80 per cent of its raw materials, of which 50 to 60 per cent are from China.
VINATEX is one of very few to have already invested in raw material production. Since 2013 it has invested in 51 projects (including 14 yarn projects and 15 textile projects) totaling more than VND8 trillion ($380 million). Nevertheless, when construction is completed next year these projects will only meet 50 to 60 per cent of the company’s demand. This shows that Vietnam’s textile and garment industry is suffering a considerable shortage of raw materials, which limits the industry’s production capacity.
A number of domestic enterprises have invested in support industries for the textile and garment sector recently but their output is neither sufficient nor stable. With such unstable sources of raw materials, no enterprise would rely on domestic suppliers. Consequently, not only small and medium-sized enterprises (SMEs) but also domestic giants that lack sufficient capacity to develop their own raw material supplies are extremely concerned about their products being disqualified from TPP tariff cuts due to the ROO.
In addition to the ROO, quality is another severe technical barrier that must be given due consideration by Vietnamese firms in order that they pass standards to enter such fastidious markets as Japan and the US. Many experts and government officials anticipate that quality barriers will simply replace tariffs. Moreover, an official from the Ministry of Industry and Trade (MoIT) has warned garment and textile firms to be fully-prepared to meet environmental standards, which may possibly involved them replacing their entire production facilities.
Over the years Vietnam’s textile and garment industry has been one of the country’s largest foreign currency earners. But growth in export value has been attributed to the contribution of foreign-invested enterprises (FIEs) rather than local endeavors. Ms. Dang Phuong Dung, Vice Chairman of VITAS, said that the country has 7,000 textile and garment companies, of which about 1,600 enterprises are FIEs, or about 25 per cent. But the proportion of exports by these FIEs is more than 70 per cent of the total. Vietnam has become something of a land of opportunity for foreign textile and garment companies and they understand that the sooner the TPP is signed the sooner they will reap the benefits.
Taking advantage of the ROO, many foreign investors from China, Hong Kong and South Korea with strong finances and expertise have poured a substantial amount of capital into Vietnam to set up their own production of yarn, weaving, dyeing, sewing, etc. They want to take the initiative in producing and providing raw materials for Vietnam-based foreign companies and also for companies in their home country.
Foreign direct investment (FDI) fell dramatically overall in the first half of this year but the exact opposite was seen in the textile and garment sector. Of the total of $5.85 billion in FDI flowing into Vietnam the sector attracted $1.12 billion, with the appearance of three giant projects. The “largest ever project” in the country came from a Turkish investor, with total capital of more than $660 million. The two others were a $300 million apparel project in Ho Chi Minh City from a British investor and a $160 million yarn and fabric project in southern Tay Ninh province from a Hong Kong investor. Even now, with Vietnam desperate to attract FDI, the dominance of FIEs in the textile and garment industry has analysts concerned.
Mr. Roger Lee, Managing Director of TAL Apparel from Hong Kong, said his company is building a $240 million project in northern Hai Duong province and he expects construction to be completed before 2017 in order take a timing advantage. Raw material suppliers in other TPP countries do not have a competitive advantage in price and are burdened by transport costs, he explained, while domestic companies in Vietnam will need at least five years to build up an industry that can even meet domestic demand. The case of TAL is not unique, as many other FIEs are investing heavily to set up new plants and expand their existing facilities.
So in the textile and garment sector the large number of domestic companies with fairly strong operations are being outpaced by FIEs. Many domestic enterprises primarily perform procedures of low added value and have little capital and use backward technologies. These enterprises may not be able to compete with FIEs in the future in terms of price and quality.