Economy - November 26, 2023 | 03:05 pm PT

Vietnam businesses lose on home turf

Nguyen Cao Phuong, a garment industry executive working in HCMC’s District 12, tried to replace Chinese suppliers with Vietnamese ones but was thwarted by buyers.

During his 30 years in the garment industry Phuong (name changed at his request), production manager at Viet An garment company, has never felt as helpless as he does now.

In 2020, when the Covid-19 pandemic broke out in China, the garment industry faced the consequences of its inherent flaw: focusing solely on processing and completely outsourcing material production to a foreign market.

He realized this was an Achilles heel years ago but could do nothing.

Viet An’s importers would refuse to buy products if the materials used, down to the glue, lining, buttons, etc., were not from specific suppliers.

It also hit profits as there was no room for negotiating raw material prices.

The only cost they could control was of labor.

Viet An was established in 1994, taking advantage of the first big FDI wave in Vietnam.

With large orders from foreign businesses, Phuong harbored ambitions of one day leading the biggest company in the country, one that was like the successful Korean and Chinese behemoths.

One of Vietnam’s objectives in attracting foreign investment at the time was to create a stepping stone for domestic firms to take off.

But after three decades, though the company’s workforce has reached the 1,000 milestone, Viet An is still stuck at the bottom of the garment industry value chain.

Thirty five years after opening its economy to the world, exports have become increasingly important to Vietnam’s economy.

In 2022, exports as a ratio of GDP topped 90%, a remarkable leap from 3% and 45% in 1986 and 2000 and putting the country just behind Singapore in ASEAN.

However, Vietnam has also become dependent on FDI, with foreign firms accounting for 74.4% of its exports in the first five months of this year.

Perpetually stuck

The three main models of garment manufacturing, in order of increasing profitability, are CMT (cut, make, trim), which involves simply processing inputs from supplier, FOB (free on board), in which manufacturers procure their own materials, process them based on clients’ designs and deliver the products, and ODM (original design manufacturer), where manufacturers also design the products.

After 30 years Viet An has not moved past the CMT model and is confined to materials that its partners specify.

Securities firm FPTS’s in-depth research in 2017 into the Vietnamese garment industry found that the CMT model only delivered profits of 1-3% of order value, the lowest rate in the whole industry’s value chain.

But Viet An is hardly the only company in this situation: some 65% of Vietnam’s garment exports are CMT orders, 30% are FOB and only 5% are ODM.

"We [Viet An] once decided that it was unreasonable to import lining fabric from China when Vietnam [companies] also sells these fabrics and at cheaper prices, and bought them locally."

Vietnamese garment factories depend on the imports of materials from other countries, especially China. Inside the fabric warehouse of Viet Thang Jean company, November 2013. Photo by VnExpress/Thanh Tung

This was 10 years ago when Phuong thought that importers were merely suggesting which suppliers to buy from and would accept products as long as they met quality criteria.

But they were extremely critical of the decision and returned the products without bothering about quality.

After that Phuong had little choice but to only use materials prescribed by importers.

Hoang Linh, a factory manager with five years of experience working for a Japanese fashion company, says international brands rarely if ever let manufacturers choose their raw material suppliers.

Besides quality and cost requirements, brands often ensure raw materials suppliers are environmentally and socially responsible to avoid scandals, she explains.

"If manufacturers are allowed to procure their own materials, then the brand would need to hire an independent audit firm to review their suppliers. This process can take at least a few months, while production schedules are tight and usually planned a year ahead."

Unable to break away from the CMT model, Viet An has been in a tough situation since mid-2022, with small order volumes and pressure to maintain low prices sinking its profits.

"The factory needs orders to continue providing jobs to thousands of workers even if it is operating at a loss," Phuong says.

Viet An has had to lower prices further and extend workers’ hours without overtime pay.

Besides, low cash flows have made expansion or a move up the industry value chain impossible.

In the past decade Vietnamese garment businesses have barely grown though the industry’s exports have risen steadily.

Foreign firms account for upwards of 60% of garment exports despite accounting for only 24% of market share.

Similarly, they account for 80% of footwear exports.

30 years of continuous losses

"Vietnamese garment firms have lost on their home ground," concludes Nguyen Thi Xuan Thuy, an expert with 20 years of experience in researching into supporting industries, which encompass a gamut of industries that supply raw materials, parts and components to the manufacturing sector.

Unfortunately, Vietnam used to have a complete garment industry supply chain, meaning it had capability in the whole process from producing fibers and fabrics to stitching garments, but economic integration has pushed the industry towards the CMT model to fully utilize the country’s biggest advantage – cheap labor.

Thuy believes it was the right choice at the time when the country first opened up its economy since it had outdated technology and could not compete with Japanese and Korean fibers and fabrics.

But nothing has changed in 30 years.

"At first we agreed to use imported fabrics, but we should have continued developing the domestic garment industry and acquiring new technology to catch up."

She notes that the industry has cut off its own supply chain.

She laments that it is a perfect example of the consequences of Vietnam participating in new-generation international free trade agreements like the EVFTA and CPTPP.

Vietnamese garment workers have yet to reach higher places in the value chain. Photo by VnExpress/Thanh Tung

The government should have offered tax breaks only to "made in Vietnam" products that were made with locally sourced materials, she says.

"The ones who benefit the most from these agreements are foreign firms because they have vast resources to create a synchronized supply chain."

From 2015 to 2018, just before the EVFTA and CPTPP took effect, Korean, Taiwanese and Chinese garment firms were the biggest foreign investors in Vietnam.

Most developed countries started industrialization with the garment industry but always aimed to gradually move up the value chain.

For example, Germany never stopped improving fibers and weaving technologies, while the U.S. still provides grants to cotton farmers and has been for decades one of the world’s biggest suppliers of fiber and cotton.

Japan has developed a slew of garment technologies like heating, cooling and anti-wrinkle fabrics.

Thuy notes that these countries have retained and promoted their highest-value activities, while Vietnam’s garment industry squandered away the last 35 years on manufacturing without any breakthrough developments.

Of course, businesses are not blameless, he insists.

"Short-sighted policies aside, Vietnamese companies focused too much on short-term profits."

As soon as their clients increased orders, garment companies quickly got out of all other parts of the supply chain to focus solely on manufacturing.

Only a few, decades-old garment firms like Thanh Cong Group and subsidiaries of the government-owned Vietnam National Garment and Garment Group still have a complete supply chain, and the industry is skewed towards manufacturing.

The number of businesses that make clothing and garments is double that of companies that make fibers, fabrics, dyes or other raw materials, according to data from the Vietnam Garment and Apparel Association (VITAS).

Disposable industries

"If the entirety of HCMC’s economy is visualized as a fish [on a chopping board], then the garment industry is the fish’s head, always at risk of getting chopped off," Pham Van Viet, CEO of garment firm VitaJean, says.

Recently HCMC announced plans to restructure its export processing zones and industrial parks to attract more high-technology industries, forcing labor-intensive industries like garment and footwear to either move elsewhere or reform.

"Everywhere we go, we hear ‘high technology,’ it makes us feel very inferior and discriminated against to be labeled as ‘labor-intensive’ and ‘very polluting,’" Viet says.

A worker is seen in a factory of Viet Thang Jeans. Photo by VnExpress/Thanh Tung

To survive, VitaJean decided to automate its laser wash, bleaching and dyeing processes to reduce water and chemical usage by up to 85%.

Viet says garment businesses are on their own if they want to reform.

To get a loan, a company has to mortgage assets, which are valued at 70-80% of their actual worth. The bank then gives a loan of only 50-60% of that reduced value.

Only very dedicated businesses take the risk of investing in the industry as new technologies and equipment are very costly, Viet says.

Pushing the garment industry up the value chain is not a task that businesses can accomplish on their own and without any assistance from the government, he says.

Establishing a center to train quality staff, research into fiber technologies, promote garment products, and others require cooperation between regulators, industry trade groups and businesses, he points out.

If businesses cannot reform, they have to move out of the city or downscale, both of which affect their workers.

The government has included older industries like garment and footwear in its plan for 2030, which requires them to focus on smart production and automation.

But businesses looking to invest in fabric production face a myriad of difficulties, especially in getting projects approved, Tran Nhu Tung, vice president of the VITAS, says.

"Many cities and provinces think weaving and dyeing are highly polluting and so reject these projects. In reality, advanced technologies safely process waste."

This prejudice severely impedes the garment industry’s efforts to develop a supply chain, he says.

The garment sector creates jobs for 2.6 million people. Workers at a garment company in HCMC's Binh Tan leave work. Photo by VnExpress/Quynh Tran

Vietnam cannot blindly follow the trends

Vietnam, especially HCMC, has very high expectations of the green and circular economies and "new-generation" industries, notably semiconductors, Assoc. Prof. Dr. Nguyen Duc Loc, head of the Institute of Social Life Research, which studies contemporary social phenomena, says.

"This is not inherently wrong as these are global trends. But in Vietnam’s current situation, following trends should be carefully considered as it can be a double-edged sword."

For example, the semiconductor industry requires an estimated 50,000 workers, but can only find 20% of that number, he says.

So foreign investors will either bring in manpower or not invest in the country at all, he says.

"We get the short end of the stick either way: If they [foreign investors] bring their workforce to Vietnam, the country will be offering its resources for nothing, but if they choose not to invest, our development will be delayed."

The solution is to not focus too much on trending high-technology industries, he says.

Traditional industries, including garment, still contribute significantly to Vietnam’s exports, and so helping them move up the value chain is a necessity, he says.

In addition to supporting older industries, the government must also guide them and their workers through reforms, he says.

He suggests that the Vietnamese government should learn from its Korean counterpart and establish labor funds to help workers with education, healthcare and finance.

Thuy, the supporting industries researcher, says policymakers need to acknowledge that Vietnam will soon lose its cheap labor advantage, and prepare its workforce for newer industries and push the country up the global value chain.

She points to Singapore’s policy of building career centers near industrial zones to survey workers’ career aspirations and find ways to help them realize them.

If the demand is big enough, the government can also create courses to help workers learn new trades, she says.

As for Vietnam’s position in the global value chain, the country can still attract FDI because of three other advantages: its large market thanks to a population of nearly 100 million and favorable geopolitical conditions, the global supply chain shifting away from China and the European Union’s move toward sustainability causing businesses to restructure their supply chain.

"We have wasted a lot of time. But with the right mindset, Vietnamese businesses can still catch up to foreign firms."

Story by Le Tuyet, Viet Duc

Data compiled by Viet Duc

Graphics by Hoang Khanh, Thanh Ha