Vietnam’s textile supply chain in urgent need of restructuring

13:00 | 26/06/2020 Industry

(VEN)-   The Covid-19 pandemic has seriously affected the garment and textile industry because of its heavy dependence on imported raw and auxiliary materials, requiring speedy restructuring of the textile supply chain.

vietnams textile supply chain in urgent need of restructuring
Raw material shortage has reduced 20-30 percent of the garment and textile industry’s production capacity

Dependence on imported materials

Although the garment and textile industry is a top export revenue earner, its added value is limited because it imports too much raw material from foreign markets, especially China.

Data from the Vietnam Industry Agency under the Ministry of Industry and Trade (MoIT) show that every year, Vietnam imports from China up to 60 percent of fabric, 55 percent of fiber and yarn, and 45 percent of auxiliary materials for production. Most cotton and fiber are also imported from the US, India, Australia and Uzbekistan.

Domestic enterprises themselves have been seeking alternative suppliers from India, the Republic of Korea and Japan, but those materials are not diversified and their costs are high.

Since early this year, Covid-19 has hit domestic enterprises hard with the disruption of raw materials for production, delayed export orders, and risk of fines for failure to comply with contract terms. A representative from the Vietnam Textile and Apparel Association (VITAS) said the shortage of raw materials has reduced 20-30 percent of the industry’s production capacity.

Deputy Director of Thanh Binh Textile and Garment Trading Co., Ltd Nguyen Thi Binh said she is worried about the source of fabric, buttons, and zippers, which are all imported from China. Raw material shortage is also a matter of concern for the Garment 10 Corporation JSC as its member units have signed orders of more than 500,000 products, which require production until the end of June.

Expectations of new-generation FTAs

According to economic experts, attracting domestic and foreign investment to develop fiber, weaving and dyeing is still an effective and sustainable solution for the domestic textile industry. The recent ratification of the European Union-Vietnam Free Trade Agreement (EVFTA), the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the EU-Vietnam Investment Protection Agreement (EVIPA) will also provide greater opportunities to attract capital and modern technologies to further develop the industry.

Already during the negotiating process, both the EVFTA and CPTPP drew foreign direct investment (FDI) to Vietnam’s textile supply chain. Cao Huu Hieu, Executive Director of the Vietnam Textile and Garment Group (Vinatex) said total registered FDI in the country’s garment and textile industry during the 2013 to 2018 period reached approximately US$9.6 billion, far exceeding the total FDI figure for the entire 24-year period preceding it. The FDI sector has therefore made great contributions to the growth of Vietnam’s garment exports, accounting for 60 percent of overall turnover.

FTAs have also yielded a sharp increase in foreign capital inflows into the textile industry in recent years. Specifically, eight projects with a total registered capital of US$46 million in May 2018 increased to 11 projects and a total registered capital of US$190.5 million a year later. However, Hieu warned local garment manufacturers to avoid outsourcing for FDI firms, noting that investment in producing raw materials remains the key to long-term success amid fierce global competition.

Roadmap for innovation

Although the FTAs facilitate capital and technology flows for the development of the textile and garment industry’s supply chain, the quality of capital sources and technology is a different issue. Particularly, it is also important to strengthen connectivity between domestic enterprises and FDI firms in order to develop a strong supply source, while also using locally produced raw materials in production.

The government has issued many policies to encourage and attract investment. The MoIT has also built a roadmap for innovation and modernization of textile technology, after which the technology level and innovation roadmaps will be analyzed and appropriate policies issued on technological application for each fiber, yarn categories or sub-sectors.

VITAS Chairman Vu Duc Giang proposed that the MoIT urgently develop planning for the garment and textile industry with a vision to 2035-2040, featuring local governments’ role in attracting investment to the weaving and dying industry. The MoIT must be a pillar in the development strategy of the textile industry, creating a legal foundation to attract investment, and facilitating the breakthrough development of the industry.

The director of the MoIT’s Industry Agency Truong Thanh Hoai emphasized the need to develop the design stage and trademarks suitable for the garment and textile industry, adding that in order to optimize the benefits of FTAs, enterprises must invest in modern production lines to meet the stringent requirements on raw materials of global fashion supply chains.

For the first time in recent years, Vietnam’s textile and garment exports in April experienced negative growth. As a result, the textile and garment industry’s export value in the first four months of this year dropped 6.6 percent year on year.

Viet Nga