Vietnam, the heir apparent to the wealth of apparel sourcing China could forgo as it navigates its own rising costs as well as a tenuous trade relationship with the United States, is ready to assume the position.
While concerns abound over whether Vietnam has the capacity to take on all of the manufacturing headed its way, HSBC Vietnam CEO Hai Pham says although the trade war has prompted a current keener focus on new sourcing options, the country has been working toward this point for the past 10 years.
“The supply chain diversification has been happening for a few years already, mainly driven by rising labor costs in China,” Pham said. “Even before the trade war, Vietnam has been getting more attention because of the proximity to China and because of the existing infrastructure in the country. The full supply chain has been set up in the country for the past decade already.”
What’s more, Vietnam has its government’s full support where manufacturing is concerned, and they’ve invested significant effort into building up the apparel sector in particular.
“We expect to export $40 billion [in textiles and garments] by the end of 2019. And there’s still a huge upside for growth,” Pham said. “By the end of this year, Vietnam will become the second largest exporter in the world.”
Next year, Pham said the country expects textiles and garment exports to reach $50 billion.
In 2018, Vietnam exported nearly $13 billion worth of textiles and apparel to the U.S. alone, a 6.19 percent increase over 2017, according to data from the U.S. Department of Commerce’s Office of Textiles and Apparel (OTEXA). Vietnam is currently the third largest supplier of textiles and apparel to the U.S. after China and India.
New trade deals haven’t hurt Vietnam’s cause either.
With the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)—formerly known as the Trans-Pacific Partnership (TPP), which President Trump temporarily stalled by withdrawing the United States from the deal in 2017—now in place, even more eyes are on Vietnam for sourcing. As part of the deal, made-in-Vietnam garments bound for Canada, Mexico, Japan, Australia, New Zealand, Peru, Singapore, Malaysia and Brunei either are already enjoying duty-free access, or will within 10 years as some tariffs get phased out in waves.
“A lot of this manufacturing in China moved to Vietnam to take advantage of that trade agreement,” Pham said.
The 11-member pact—which could ultimately include the European Union as the bloc already has negotiated, or is in the process of hammering out, trade deals with each CPTPP member—has also further fueled investments in the apparel sector.
“Because of CPTPP, we are seeing more investment into fully vertical supply chains, so you’re talking about yarn-forward for manufacturing,” Pham said. “As of today, you’re talking about 20 percent that are vertically integrated, so there’s still a lot more room to grow to make sure the whole supply chain is sustainable.”
Under the CPTPP agreement, garments must meet the yarn-forward rule of origin to enjoy trade preferences, meaning they have to made in CPTPP countries from the yarn stage forward.
Currently, Pham said, as much as 80 percent of the raw materials Vietnam uses for manufacturing are still sourced from China, a reliance the country is looking to scale back on, particularly as maintaining that level of input intake would mean it couldn’t enjoy the duty breaks the trade agreement affords. As such, Pham said, there’s a “clear focus” in the country, and among the government, in terms of investment in greater verticality.
“To really benefit from CPTPP, you need to benefit from the rule of origin,” Pham said. “A lot of investment has happened for the last two to three years already…and that will help to reduce the material sourcing from China.”
While the country’s capacity doesn’t seem to be a constraint keeping Pham up at night, he admits labor may prove an ill to contend with—both its rising cost and concerns around availability.
Though still cheaper than China, Vietnam’s minimum wage has climbed at least 5 percent (sometimes double digit increases) each year, climbing from 1.9 million Vietnamese dong ($81.71) on the low end in 2014, to the current 4.18 million dong ($179.77), which took effect in January. That’s a 120 percent increase in five years.
“I think because of the rising labor cost in Vietnam, a lot of suppliers have decided that for the high value-added items, they will keep in China. For the low value added, I think they will move to Bangladesh,” Pham said. “Vietnam is still competitive in labor cost, but labor cost is rising. That’s one of the constraints the garment sector needs to address.”
Many suppliers in Vietnam, as has long been the case in China, are relocating from major cities to more rural areas like central Vietnam and the Mekong Delta, teeming with potential talent.
“Sixty-five percent of people are still living in rural areas,” Pham said. “So, there’s still plenty of labor supply in the country.”
To combat the rising costs of that labor, however, manufacturers are embracing automation in a big way.
“They are looking at supply chain automation because they understand labor costs will keep rising,” Pham said. “A lot of suppliers are now talking about automation so there’s consistency of supply and you can manage the labor costs issue.”