The COVID-19 pandemic has brought several changes in the garment manufacturing industry across the world. From alterations in sourcing strategies to attractive product segments, these trends are here to stay even after the pandemic. A major change that was hastened during the pandemic is the buyers across the globe moving out of China and sourcing from other countries. The buyers are looking for new destinations that appear reliable and portray other advantages in terms of cheap labour and duty-free access to major markets. This has given newfound hope in garment manufacturing hubs, each trying its best to grab the attention of the various buyers by showing their respective strengths.
Vietnam is the third-largest garment exporter in the world, after China and Bangladesh. Its share in the total garment exports to the world has been increasing continuously over the past few years and has increased from 5% in 2015 to 7% in 2019. In 2020, Vietnam has been portraying itself as a strong contender for setting up new textile and garment manufacturing units and fast-emerging alternative to companies who are shifting their bases from China. The Vietnamese government is building an image of their country as a competitive garment manufacturing nation with high-quality goods and services.
Vietnam's Garment Exports (US$ Billion)
Vietnam has been a viable option for various buyers for several years, but the COVID-19 pandemic has accelerated the action of buyers to move a large part of their production and sourcing to Vietnam. This may give a boost to Vietnam’s garment industry, which had come to a standstill in the early months of 2020 when thousands of garment industry workers were left unemployed due to temporary shutting of factories because of raw material unavailability and low sourcing of garments in major markets.
What will help Vietnam win the tussle of increasing its share in the global garment exports?
1. EU-Vietnam trade agreement enters into force
The long-awaited trade agreement between EU and Vietnam has come into force on 1st August 2020, which will scrape off duties on 99% of all the goods and traded commodities between the two sides. This move has also opened the doors for European companies wanting to invest in Vietnam. Under the new agreement, the economic benefits go hand in hand with buyers guaranteeing respect for labour rights, and manufacturers assuring environment protection under the Paris Agreement on climate, through strong, legally binding and enforceable provisions on sustainable development. The agreement stands for 10 years and is likely to give a huge boost to Vietnam’s growing garment industry and contribute to its increasing share in the European market, which has been increasing at a CAGR of 10%. The agreement will also benefit Vietnam in increasing its capacity as incentivised procurement of machinery will help in building vertically integrated facilities, which the country currently lacks.
2. Vietnam is seizing the dragon’s share
Taking advantage of the ongoing trade wars
In recent years, the US-China trade war and the deteriorating bilateral relations have been the most important reasons for China to lose a large chunk of its share in the US garment exports. Majority of this share has been taken up by Vietnam, making it the largest garment exporter to the US. From 2015 to 2019, Vietnam’s garment exports to the US increased at a CAGR of 6% accounting to about 15% of the total garment imports in the US in 2019. The increasing trade tariffs and policy changes by the US government post the COVID-19 crisis have led to American buyers moving their orders out of China, to its friendly next-door neighbour Vietnam.
Small steps make a big difference
Buyers found an added advantage in their move to Vietnam in the form of lower wages. When it comes to the garment industry, which is a highly labour-intensive ecosystem, Vietnam has low and competitive wages. Even though the wages in Vietnam are slightly higher than that of low-cost nations like India and Bangladesh, they are much less in comparison to that of China. Wages in China have been increasing over the past 10 years due to the increasing cost of living and extensive up-skilling that has taken place in the country.
3. Increasing investments in the textile and garment industry in Vietnam
A large number of companies from China, Hong Kong, Singapore and South Korea have invested in Vietnam to build new textile and garment manufacturing units to cater to the EU and US markets. Foreign companies that invested in Vietnam made up 70 percent of total garment and textile exports in 2019. In recent years, foreign investment has shifted from mainly cut-make-trim activities to more upstream sectors such as fabric production and dyeing. In 2019, more than 80 percent of foreign investments in the industry was in the manufacturing of fabrics and raw material projects. The increasing investments, especially in the textile sector, will scale up the capacity of the finished goods by building a vertically inclined ecosystem for the textile and garment industry. This move is crucial for Vietnam, especially after the COVID-19 pandemic, which had left them devoid of raw material, as both China and India were under lockdown.
4. Vietnam promises to fulfil buyers’ requirements
Buyers are keen to have certain differentiating factors other than the usual cost competitiveness, quality, timely delivery and compliance in garment manufacturing. These differentiating factors include service orientation, design and product development, and integrated largescale setups. Vietnam is preparing its textile and garment industry to cater to these differentiating factors and eventually lure buyers. The presence of these additional factors is likely to give Vietnam an edge over the cost-competitive manufacturing nations, Bangladesh and India.
Vietnam’s ability to react fast to the COVID-19 crisis in 2020 may help it to increase its textile & garment exports. By learning at an early stage of the pandemic and acting quickly to focus on moving up the value chain and building the national brand image of being competitive and quality-driven, Vietnam is portraying its reliability better than other manufacturing hubs. Even though the year 2020 has been uncertain and unprecedented, Vietnam has not let opportunities pass by and therefore, ensured that it becomes a winner by gaining a foothold in the global garment exports.