Doubts have been cast over whether Vietnam will be able to make the most of the impending duty-free era

Doubts have been cast over whether Vietnam will be able to make the most of the impending duty-free era

Clothing and textile industry specialists have warned just-style that the Vietnam-European Union (EU) free-trade deal struck earlier this month may ease exports, imports and investment - but that Vietnam will be a tough base from which to operate in the impending duty-free era.

The European Commission and Vietnam's Ministry of Industry and Trade have initialled a comprehensive and ambitious free-trade agreement (FTA) that will eliminate EU import tariffs for most Vietnamese textile garment products to zero, from the current rates of between 9% and 12%.

At the same time, Vietnamese trade negotiators are believed to have reached the homestretch for the Trans-Pacific Partnership (TPP) agreement, which is projected to give Vietnamese textile and garment exports duty-free access to a common market comprising 40% of the world's GDP.

Still, what seems like two tremendous opportunities will not necessarily translate into a huge boost for the competitiveness of Vietnam's textile and garment sectors, observers warn. They see many remaining issues that cast serious doubts over whether Vietnam will be able to make the most of the impending duty-free era.

One concern is rising wages in Vietnam, which could wipe out cost reductions created by these FTAs. For example, Diep Thanh Kiet, vice chair of the Association of Garments, Textiles, Embroidery and Knitting (AGTEK), says he expects wages to rise by 10% this year, "worrying" AGTEK members.

Sim Thai Ha Phuong, deputy director of Thai Son SP Co Ltd, a medium-sized knitwear manufacturer in Ho Chi Minh City, also warns just-style that the positive effects of duty-free treatment could come too late for many manufacturers. "This month, we have raised our workers' and export office employees' salaries by 5-7% and 5-10% respectively," Sim says.

"We had no choice because lots of Chinese companies are flocking into Vietnam [in anticipation of EU and TPP duty-free market access], hunting our staff at all levels, from rock bottom to the top," she explains.

Meanwhile, Germany's Deutsche Bank in early August warned that Taiwanese clothing and textile manufacturer Eclat Textile Co, which invested heavily in Vietnam in anticipation of the TPP, is stranded in "no-man's-land," as it must weather rising wages in Vietnam before reaping any TPP benefits. While stressing that there would be a 12-18 month waiting period required for the TPP to clear the legislative processes in participating nations, Deutsche Bank predicted that Eclat's Vietnam division's direct labour costs would increase by 30% this year, and to climb by 23% and 16% next year and in 2017 respectively.

The EU deal is also expected to take until 2016 at the earliest to clear its ratification hurdles. Officials are now working on a detailed legal draft of the agreement, and it is expected some technical difficulties may need to be overcome before the text is presented to the EU Council of Ministers, the European Parliament and the Vietnamese national assembly.

Difficult business environment

And while European companies with production facilities in Vietnam should have much to gain from a ratified EU-Vietnam FTA, even they point to serious difficulties in the country's business environment. Forced at present by Vietnam's weak domestic backward linkage to source yarns and fabrics abroad, there is a real risk that the current share of finished garments will not meet the FTA's rules of origins. EU companies could in theory opt for investing in technology upgrades to design and produce yarns and fabrics themselves in the country. But this would not be straightforward, a main hindrance being Vietnam's import restrictions on expat technicians and managers.

"Based on a decade of management experience in Vietnam, I would say that it has not in any way become easier to obtain work permissions in Vietnam," says Thomas Bo Pedersen, managing director of Mascot International Vietnam and Mascot International Laos, Denmark-based Mascot being one of Europe's largest workwear brands.

"In some key areas it has actually become more difficult, [the processes being] very time consuming, costly and occasionally frustrating," he adds.

Fielding some examples, Pedersen says foreigners being employed in Vietnam now need to have a university degree and/or five years of documented relevant professional experience; work permits are now being issued for only two years instead of the previously issued three years; work permits are now being linked to a number of conditions, including a training programme for a subsequent Vietnamese replacement; and the government has scrapped visa requirement exemptions for company senior executives.

"The Vietnamese government has recently hinted that they realise the conditions might have become too tight if Vietnam wants to be attractive for foreign investors, and that some relaxation of the regulations are considered, but detailed information and timelines on this are still unavailable," Pedersen says.

Lack of local know-how

Meanwhile, Mascot's CEO Michael Grosbøl recalls that Mascot gave up on its idea to buy a dye house in Vietnam "due to the complete lack of local know-how". This experience played a role in making Grosbøl forecast that Vietnam's upstream and middle stream textile industry will "take at least ten years" to supply enough raw materials to meet demand resulting from the EU-Vietnam FTA and TPP. Furthermore, he says he has seen several "hundreds-of-million-dollar textile projects" failing in Vietnam in recent years.

"Most people think textiles are fairly simple, but especially some dyeing processes and finishing are rather complex, at least if you want do it in an environmentally right way and care about CSR [corporate social responsibility]," Grosbøl explains.

"It is not just something you do, you also need consistent quality, and the Chinese have spent many years to get to that point, but they still are not at the same level as European suppliers of fabrics," he elaborates.

Mike Flanagan, CEO of Clothesource, a UK-based consultancy working with major fashion retailers, also stresses that the EU FTA's effect on Vietnam and competing outsourcing countries "is really about the relative competence of Vietnamese manufacturers and its government".

Significant improvements in management and technology would generate more trade than a trade deal, he says, although Pakistan's EU GSP+ status has created real gains for its clothing exporters.