Vietnam wants to shift its clothing manufacturing sector from its current low-cost model to an added value sector

Vietnam wants to shift its clothing manufacturing sector from its current low-cost model to an added value sector

The Vietnamese government has said it wants to shift the country's clothing manufacturing sector from its current low-cost model to an added value sector that includes design and branding.

Vietnam's Prime Minister, Nguyen Xuân Phúc, is behind the change in direction, releasing a government decision signalling the formal policy change, although details of specific actions are still to be published. Its initial goal is to significantly improve the competitiveness of Vietnamese export products as soon as 2020, with a longer-term vision of further change to 2030.

Comprehensive policy

Decision 1137/QÐ-TTg is a comprehensive trading policy covering a wide range of sectors, but it explicitly covers garments, textiles, footwear and handbags in the short-term, while products to be improved in the 2021-30 period include raw materials for the garment and footwear sectors.

The decision lacks financial allocations from government budgets, but it broadly calls for the export-oriented industries to operate across a wider range of the supply chain, with more value-added. It says this should include additional research and development; better use of existing technology applications and transfers; improving human resources for high-value manufacturing; and active market development actions.

The new strategy will see the government develop export sector supporting industries – widening the Vietnam-based supply chain where possible - shifting from exports under free on board (FOB) delivery conditions to cost, insurance and freight (CIF) delivery conditions.

A shift from FOB to CIF would entail a change from the current focus on pure original equipment manufacturing (OEM) to the original design manufacturing (ODM) and original brand manufacturing (OBM) schemes needed for higher added value chains.

Although the share of apparel in Vietnam's total export mix has been declining (hitting a record low of approximately 6% in 2016, with electronics' share rising), industry observers in Vietnam are somewhat confident that Decision 1137/QÐ-TTg will help reverse this trend.

"Over the long term, it is a reality that locations such as Bangladesh will take on a greater share of the labour intensive and low-value textile manufacturing that has characterised Vietnamese exports in years past," says Maxfield Brown, business intelligence senior associate at business support services provider Dezan Shira & Associates Vietnam, which has assisted several clients in the garment and textile industry.

"But this is not to say that textile manufacturing in Vietnam is dead in the water; Vietnam is still well-positioned to retain more complex textile processing flowing out of China in the years ahead," he added.

Improve competitiveness

An analyst with a multinational textile machinery-maker, who asked not to be named, noted that the policy change followed the Vietnamese government launching a campaign to improve the competitiveness of garment exports by facilitating more local sourcing of yarns and fabrics, while also upgrading dying and printing capabilities.

"Specifically, the Vietnamese government are talking about opening up more to [South] Korean textile investors - making it easier to get their operations up and running without the usual bureaucratic delays," the source said.

"The Korean FDI they are targeting, as I understand, is small-mid-sized and envisioned to operate in several textile parks that are being built specifically to accommodate foreign enterprises in Hanoi and Da Nang," he added.

Nevertheless, illustrating that there is still some way to go until Decision 1137/QÐ-TTg meets its goals, a recent study by Vu Thanh Huong, an economist at the University of Economics and Business in Hanoi, found that Chinese garment and textile exports are still well ahead of Vietnam's in terms of competitiveness. Published in February 2016, the study showed that Vietnam was less competitive than China regarding appropriate wages, labour supply, productivity and R&D expenditure.