How big is the Vietnamese Garment Industry?

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Vietnam is a Southeast Asian country, with more than 96 million inhabitants (July 2017), being world’s 14th most populous country. Bordering the Gulf of Tonkin, Gulf of Thailand, and the South China Sea, as well as China, Laos, and Cambodia, Vietnam lies in a lucrative geographical location from trade perspectives.

Country’s 61.79% of the population belongs to the age group of 15-54 years, making the median age of the country 30.5 years. Also, with 34.9% urbanization, 94.5% literacy (age 15 and over can read and write), and a stable political system, Vietnam is has become an attractive investment destination.

It is a densely populated developing country, transitioning from a rigid centrally planned economy to a more industrial and market-based economy. Country’s GDP was $201.3 billion in 2016, with 32.7% of it being an industrial contribution. Vietnam’s 2016 GDP growth was 6.2%, reflecting its strong domestic demand and manufacturing exports.

Vietnam joined the WTO in January 2007. It also concluded several Free Trade Agreements (FTAs) in 2015-16, including the EU-Vietnam Free Trade Agreement, the Korean Free Trade Agreement, and the Eurasian Economic Union Free Trade Agreement, as a part of its commitment towards country’s global economic integration. Vietnamese government also acknowledges the need for a second wave of economic reforms, including reforming state-owned-enterprises, reducing red tape and increasing business sector and financial sector transparency.

Apparel Manufacturing Industry in Vietnam

Vietnam is an emerging giant in the global textile and apparel industry. Vietnam’s garment sector has seen speedy and sustainable development over the last few years which have played a crucial role in the country’s socio-economic development.

There are around 6000 textile and garment manufacturing firms operating in Vietnam, 84% of which are privately owned, 15% FDI, and remaining 1% are state-owned. This industry employs around 2.5 million people in the country on an average wage of $239 per month. Garment manufacturing accounts for 70% of the total businesses in this sector in Vietnam with CMT (Cut, Make, Trim) being the main method (85%) of export. The apparel exports account for 11.5% ($24.61 Bn) of the country’s total exports (2016). 

Source: ThreadSol

Vietnam owned 7% of the global apparel export trade in 2016. Vietnam’s major trade partners are USA, Japan, Korea, UK, and Germany. Vietnam imports its textiles majorly from China, Korea, USA, Japan and other Asian countries.

Vietnam’s Textile and Apparel Trade Partners

Source: ThreadSol

Labor Laws in Vietnam

Vietnam passed its new labor code in 2012 with the aim of improving the labor market and industrial relations in the country. It includes many developments related to labor contracts, working hours, labor outsourcing laws, internal labor rule, working conditions and foreign employees. As per Vietnam’s labor laws, normal working hours should not exceed 10 hours in one day and 48 hours in one week. Employees are not allowed to work more than 50% of the official working hours in a day, 30 hours in a month, or 200 hours in a year, as overtime. Foreign investors are allowed to recruit only foreign citizens to work in Vietnam, through prior approval in writing from the competent state authority. The trade union law in Vietnam also assures the employee the right to freedom of association.

Trade with Vietnam

Vietnam has already eliminated many non-tariff barriers under the 2001 United States-Vietnam Bilateral Trade Agreement (BTA) and through its accession to the WTO.  It implemented the 2006 Customs law (WTO Customs Valuation Agreement), significantly improving its customs valuation process. Import rights are granted to all goods except certain product categories like weaponry, ammunition, military technical equipment, types of publications and cultural products, etc.

Vietnam has 6 regional FTAs signed as a member of ASEAN, including ASEAN Free Trade Area (AFTA), five FTAs with China, Japan, South Korea, India, Australia and New Zealand, and 4 bilateral FTAs with Chile, Japan, South Korea and the Eurasia Economic Union (EAEU). EU is also one of the most important trade partners of Vietnam, and the EU-Vietnam FTA plays an important role in this partnership. All these FTAs make Vietnam an attractive location for foreign investments.

World Ranking Among the Top Garment Exporting Countries

Vietnam held the 4th position in the top garment exporters in 2016, globally. The top three apparel exporters were China, the EU, and Bangladesh, who all together accounted for 69.1% of world garment exports. Vietnam’s export value has increased by 5% from its 2015 status. (Source: WTO Reports World Textile and Apparel Trade in 2016)

Apparel Trade Events in Vietnam

Vietnam hosts a multitude of trade fairs and garment expos in the country to showcase and attract new technologies, talent and investment into the country annually, like the Vietnam Textile & Garment Exhibition (VTG), IFLE Vietnam (International footwear and leather products exhibition), the Vietnam’s textile and apparel machinery fair, Saigontex: Saigon Fabric & Garment Accessories Expo, and the Vietnam Expo: Vietnam International Trade Fair.

Challenges faced by the Vietnam Garment Industry

Vietnam enjoys global attention in apparel sector due to its low labor and rent costs and favorable policies like the Vietnam’s Foreign Investment Law, but the industry faces many challenges. Most of the manufacturers in Vietnam do not own their brands, they produce for foreign brands as outsourcing partners, which makes it vulnerable to global fluctuations. Most of garment manufacturing factories in Vietnam are OEM/ODM enterprises catering to foreign brands. Since big brands give priority to already established manufacturers, this industry is tough to for new entrants, especially for the small-scale enterprises.

Moreover, Vietnam’s garment industry is highly dependent on imports for its Machinery equipment, raw materials, and accessories, which not only decreases its profit margins but also keeps it in harms reach against foreign cost fluctuations.

As per a CRI report, in 2016, over 80% of products of garment manufacturing industry in Vietnam were exported, which also makes the industry overly dependent on exports for its earnings and foreign investments. The risks of this dependency were seen when recently the TPP with US government was canceled, and the Chinese players willing to invest in the country to take advantage of the TPP took out or froze their investments in Vietnam’s garment industry.

Vietnam also faces tough competition from Cambodia and Bengal, as the wages there are lower than that of Vietnam. Vietnam attracts customers due to its lower labor cost advantages over countries like China and India.

Vietnamese Apparel Industry’s Growth Prospects

Vietnamese apparel industry is attracting a lot of global attention lately. It is partly due to the various free trade agreements it has signed and partly due to the lower cost advantage it can offer to the buyers. Since the labor cost advantages with China and India are diminishing, Vietnam is gaining the business they are losing.

To overcome the high cost of raw material (as 90% of it is imported), the government has already started investing heavily in the development of support industries in Vietnam. In the 2006-15 period, Vietnam was the second biggest investor in the development of shuttleless looms and the biggest investor in ring spindles and open-end rotors, amongst the ASEAN countries. The country has also shown a marked expansion in its knitting sector.

Government is also giving the apparel manufacturers in the country opportunities to enhance their value-adding capabilities, develop their own brands, become original design manufacturers (ODMs) rather than function only as subcontractors, etc.

Domestic Market

Vietnam’s domestic market demands are also growing. Powered by young aged consumers, increasing urbanization, and growing disposable incomes, these markets are attracting major international brands. Country’s retail sales are rising at a rate of 20% annually, and spending on apparel is the second highest category in Vietnam, following closely behind spending on food items.

A recent report from ‘Textiles Intelligence’ shows strong growth predictions for the Vietnamese apparel industry. According to this report, the production capacity of the industry is predicted to rise by 12-14% p.a. from 2016-2020. The export potential is also forecasted to rise by 15% p.a. during this period, and the Vietnamese textile and apparel industry will reach US$50 billion by 2020.

A CRI report also points towards a similar picture for a period of 2017-2021:

Source: ThreadSol

Note:  You can also download the apparel trade data report of Vietnam here

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