All eyes are on Vietnam, a country described as the potential champion of the TPP

All eyes are on Vietnam, a country described as the potential champion of the TPP

It is no secret that Vietnam's textile and clothing sector is widely expected to be one of the biggest beneficiaries of the recently-agreed Trans-Pacific Partnership (TPP) free trade pact. But some industry observers are questioning whether the Southeast Asian country is really ready to reap the benefits that will come its way once the deal goes live.

The recently-agreed Trans-Pacific Partnership (TPP) will phase out tariffs amongst the 12 member nations over a period of five to ten years. It is also seen as a huge opportunity for companies to move production from high cost locations like China, to places such as Vietnam; a country that has a great advantage over other Asian manufacturing destinations thanks to its low-costs and direct access to the US and Japan – both part of the TPP. 

Indeed, a Global Economic Prospects report published by the World Bank Group earlier this year suggested Vietnam will see the largest GDP gains from the agreement – at 10% – by 2030. 

However, while acknowledging this potential, a number of industry executives are expressing a degree of scepticism about whether Vietnam will be sufficiently prepared to fully appreciate any benefits from countries investing in its economy – and more specifically, it's textile and clothing industry. 

Robert Sinclair, chief operating officer of LF Sourcing, told attendees at this year's Prime Source Forum conference in Hong Kong that Vietnam – TPP or no TPP – remains a good sourcing destination, but warns that it has its limitations. "We have to be realistic about the expectations of Vietnam and its advantages through the TPP, assuming it goes through."

He compares the country's population of just over 90m to that of China's Guangdong province, which has a labour pool of 104m. "At what point in time is Vietnam going to optimise and totally maximise that labour pool? We have to factor that in. There is a cap, there is a limitation on what they're going to be able to produce and therefore benefit from TPP as a manufacturing country."

Sinclair believes this uncertainty means the door is left open for the Asian subcontinent in general, and India in particular. "TPP or no TPP, it's about capability and the reliability of a manufacturer to its customers. You have to look at political ramifications, geography, distance, time to market. I can guess that Vietnam has real and significant opportunities".

Between 2014 and 2015, Li & Fung grew its business in Vietnam by 50%, making it the company's second-largest sourcing destination after China. It employs 325 staff in the country and is obviously "a big proponent of it". But even so, Sinclair reiterates concerns over its threshold and limitations.

Infrastructure challenges

This was a sentiment echoed by Raphael Madarang, director of global trade compliance and supply chain solutions for APL Logistics. He also believes Vietnam faces a number of challenges if it is to take on the volume of business expected as a result of the fall-out from China, particularly from an infrastructure perspective. 

"You would think of Vietnam as being in a very sweet spot, as part of the TPP also straddles the EU-Vietnam FTA," Madarang explains. "But one of the challenges is how would Vietnam be able to cope with the influx of production? Does it have sufficient labour, for example? There has been news that Vietnam could experience a manpower shortage by 2017 and 2018, so they may not have enough people to run the factories and the mills."

One of the unique features of the TPP for textiles is that it has a yarn-forward rule of origin, which means the yarns used in the products should only be sourced from member countries. Vietnam, however, sources a large amount of yarn from China, a non-TPP country. Ultimately, this means Vietnam will have to make up for that production with a substantial investment in domestic spinning and dyeing facilities. 

"From a logistics standpoint, there is going to be a lot of moving these raw materials around," Madarang says. "There is also a lot of yarn production in the US, so we are seeing possible movement of raw materials from the US to Vietnam in order for them to capture this benefit."

Foreign investment solution

The answer – or maybe part of it – could lie in foreign investment. Cotton yarn, fabric and garment supplier Texhong Textile Group, sees itself as a potential solution to the problem. 

The China-based company began investing in Vietnam in 2006, and last year invested in 500,000 new spindles, bringing its total in the country to 7m. In 2015 around half of Texhong's capacity came from Vietnam, making it one of the first enterprises in China to have more capacity abroad than at home. 

Hong Tianzhu, CEO of Texhong, explains that in order for Vietnam to enjoy TPP arrangements – and avoid a shortage of fabrics – there is a need for more weaving plants. In a bid to meet that potential demand, the company is building a 3,300 square foot integrated industrial park in Quang Ninh Province to support the future development of Vietnam's textile industry. The so-called Vietnam Galaxy project will include weaving, dyeing and apparel production facilities, and is due to begin production in 2017.

"Some larger enterprises have started investing in Vietnam, especially in the past two years," he explains. "We started in Vietnam ten years ago so we have a foundation of ten years. We also have more impressive capacity; our capacity is our strength. Looking into the future for TPP, I trust Texhong will benefit from the new normal. We will become a major supplier."

Texhong's investment will not only serve Vietnam's needs, but also help alleviate some of the pressure from higher costs in China. "Some of the Chinese textile industry players are struggling to survive because along the supply chain the situation is a bit fragmented; some operators have more profit margins," Tianzhu says.

"When you look at where the orders are being placed, they are all going to Southeast Asia. So we need to transform and add value to the supply chain. This is a one-time opportunity in history and is not something we can avoid. We believe that the future path of this industry will be moving towards higher end and higher quality, because that is the way to leverage on our strength because we are innovative and able to differentiate our products. In China you have to go down this path to survive."

Tianzhu, nonetheless, also has confidence in the consumer market in China – and so, in a further strategic move, is positioning the industrial park on Vietnam's north-eastern border in order to serve both markets. 

"We believe some capacity will go to Vietnam and other Southeast Asian countries, but in five to ten years time the demand in mainland China will be huge and that is why we are planning ahead of time. We are planning to set up this industrial park near the border so that we can respond more swiftly to market changes. We can then turn our products around and have them delivered to many coastal cities in China in short lead times. This location in Vietnam will be the only place enjoying advantages both for land transportation and sea transportation, and it will be very conveniently located to important markets."

Tianzhu says the industrial park will be "highly efficient", with facilities including sustainable water and power supplies, and natural gas. And he admits that pollution problems in China contributed to the decision on where to locate the park. "Vietnam is not a developed country but they adopt European standards when it comes to environmental protection."

But despite Texhong's promise to offer Vietnam a sizeable supply of fabric and yarn, one Malaysian manufacturer believes it is in high end apparel that the country is still lacking. 

"The service level in China is well-established, as is R&D," says Prabakaran Kesavan, founder of Venlaakwear International. "These things take time to be copied into other markets like Vietnam. So there is a time gap. But China is not going to be replaced by the TPP. Gradually maybe, and it will start with the downstream. But we are not in competition with China."

He offers some advice: "Vietnam has a life expectancy and we are monitoring its manufacturing capability and capacity. Don't put all your eggs in one basket. Make some intelligent decisions about when to back off. The other litmus test is wage inflation; you can start to anticipate your threshold with wage inflation. You've got to look at the deck of cards you've been dealt and the various criteria to make intelligent sourcing decisions."