Vietnam Has Now Become a Leading Sourcing Destination

Vietnam Has Now Become a Leading Sourcing Destination
A courtesy of AQM, an expert of quality textile solutions

1986: the renewal of Vietnam

It is no coincidence if the Đổi mới, the economic reform undertaken by Vietnam in 1986, means “renewal” in Vietnamese. Since then, Vietnam has been experiencing a rapid growth and is now one of the most opened economies in the world. Indeed, exports account for two-thirds of the GDP and the international trade for more than 100%, twice as much as China.

By lifting the embargo on Vietnam, the US has also become the first trade partner of Vietnam: exports to the US accounted for 16% of Vietnam’s total exports in 2014.

In addition, for some years now, there are more and more free trade agreements between Vietnam and developed countries. Some important agreements have now entered the last negotiation phase and confirm the huge potential of Vietnam as a leading sourcing destination.

The textile industry in Vietnam

Since 2005, the textile industry has undergone rapid and sustained expansion, in 2015 the Vietnam is expected to achieve an export turnover of more than $28 billion, which represents a 16% annual increase over 2014. Furthermore, textile is the second most exported product and the sector accounts for 25% of the total industrial employment of Vietnam. Regarding the footwear market, Vietnam has nothing to envy to its neighbors, it is the third largest global producer with more than 800 million of pairs of shoes produced each year.

The opening up to international trade has been a key development factor, however, even before that opening, the country had lots of strengths : a skilled and cheap workforce, a stable sociopolitical environment, factories which have experience with subcontracting and developed handicrafts.

In addition, it should be emphasized that the Vietnamese textile industry does much more than attracting brands’ buyers, it moves their sourcing strategy away from China… Although China remains the largest producer of textile in the world, its role of “workshop of the world” is more and more contested and Southeast Asian countries greatly benefits from that. It is especially the case for Vietnam which has the most developed textile industry in the region. As a consequence, Vietnam is now regarded as the main competitor of China for low added value textiles.

Other benefit: in addition to an abundant and cheap workforce, in line with that of its neighbours, Vietnam tries to differentiate itself by putting in place a true social dialogue. The government understood that a low labour cost is not enough to attract buyers seeking new sourcing destinations. Brands now pay close attention to the working conditions of their suppliers, therefore the Vietnamese factories strive to create a good working environment in order to attract international buyers and to be more competitive than their counterparts in neighbouring countries.

The only weakness of Vietnamese factories seems to be that until now they were active only in the CMT (Cut, Make and Trim) stage which means that they are not really expert in technical textile manufacturing or accessories. However, they are modernizing their infrastructures and integrating processes which allow them to manufacture more complex and technical garments.  

Some very promising free trade agreements

Despite the difficult international economic context of the past years, Vietnam keeps expanding into the biggest foreign markets and this phenomenon is expected to accelerate. Indeed, the recent popularity of Vietnam as a “sourcing destination” is hiding the growing interest of buyers for the Free Trade Agreements (FTA) which are going to be concluded by Vietnam in the next months:

-  The Tans-Pacific Partnership (TPP): with 12 signatory countries including Vietnam, Japan and the US
-  The Free Trade Agreement between Vietnam and EU

Those agreements will benefit to importing countries which will be able to import products from Vietnam without paying taxes on them; and to Vietnam which should further significantly increase its export sales.

Experts offered the view that it is the textile and apparel industry which will benefit the most from the FTAs. The majority of Vietnamese textile products will be free of customs duties, which is significant when one considers that they are currently taxed at 12% in the EU and at 18% in the US. It gives buyers more reasons to outsource in Vietnam. Furthermore, with a cheaper labor cost and such profitable customs tariffs, transfers from China to Vietnam are expected to continue and even to increase.

Given that it is signed with the two biggest textile markets of Vietnam (Japon and US), the TPP is expected to have a significant impact the Vietnamese textile industry. Concerning the FTA between the EU and Vietnam, it will strongly encourage European brands to adopt the “Made in Vietnam”.

However, those agreements will not happen without a few sacrifices on the part of Vietnam. Indeed, they are based on the rules of origin… For instance, the TPP stipulates that “exporting companies will be exempted from taxes only if they can justify that the raw materials they used come from Vietnam or from one of the signatory countries”. It can become problematic if Vietnam keeps importing its raw materials from China.

In any case, with the signing of those agreements, Vietnam becomes the only developing countries to be part of the TPP, the ASEAN and the Generalized System of Preferences of the EU. The agreements only reinforce the numerous strengths of Vietnam as a leading sourcing destination.