Vietnam’s Garment Makers May Face Bankruptcies, Viettien Says
By Linus Chua and Stephen Engle
Bloomberg
Aug. 30 (Bloomberg) — Vietnam’s $3 billion garment industry, which supplies Nike Inc. and Limited Brands Inc., may see a surge in bankruptcies because of rising labor costs and competition from China, the nation’s biggest apparel maker said.
Half of Vietnam’s 2,000 garment factories could file for bankruptcy in the next two years, said Le Viet Toa, vice general director at Viettien. That may offer acquisition opportunities for the state-owned company and help increase its market share ahead of a planned share sale next year, he said.
“Only the big companies will survive,” Toa said in an Aug. 25 interview at his office in Ho Chi Minh City.
Vietnamese workers are leaving garment factories for better-paying office jobs, hurting an industry that’s facing increased competition from Chinese rivals who have moved production to the mainland’s western provinces where costs are lower than in Ho Chi Minh City. The apparel industry is Vietnam’s second-biggest foreign-exchange earner after crude oil, and its decline may curb growth in an economy the government projects will expand 8 percent each year in the next decade.
“Vietnam has done very well through very good workmanship and lower labor costs, but the lower labor cost is a thing of the past,” said Horst F. Geicke, chairman of VinaCapital in Ho Chi Minh City, which manages about $600 million of investments in Vietnam. “It’s a sunset industry.”
Vietnam’s 1 million apparel-factory workers make about $100 a month, almost twice the $55 minimum wage. More are turning to higher-paying jobs in banks and hotels, Toa, 59, said.
Cost Comparison
VinaCapital estimates labor costs in Vietnam are about 20 percent lower than coastal cities in China. Wages in China’s rural areas, though, are about 10 percent to 15 percent lower than in Ho Chi Minh City.
To cut costs, Viettien said the company and other garment manufacturers are expanding into rural provinces, where labor costs are about 70 percent of those in Ho Chi Minh City, the country’s biggest city.
Viettien, which makes shirts and other apparel for American Eagle Outfitters Inc. and Nike, said it has bought two failed Vietnamese factories this year, adding to its 36 manufacturing sites in the country. The new sites will help increase its factories in the provinces to 70 percent of its manufacturing locations in three years, from about half now, Toa said.
“Our intention is to buy cheap, get the good management, skilled workers, and get more orders,” he said.
Sales Forecast
Viettien expects sales to increase 19 percent this year to $250 million. Exports make up 90 percent of the company’s revenue. Vietnam’s apparel shipments to the U.S. rose 31 percent to $1.51 billion in the first half.
Still, gains from efforts to cut costs and from consolidation may not be enough to boost the competitiveness of an industry that lacks a domestic textile manufacturing base. Vietnamese apparel makers have to import most of their fabric, paying more than rivals in China who can source materials locally. Viettien said it imports 70 percent of its fabric.
“Frankly, the textile in Vietnam is still very weak, weak in quality and quantity,” Toa said. “My big worry is the textile problem.”
Apparel buyers such as Limited Brands, which owns Bath & Body Works, Victoria’s Secret and Express chains, say not having the raw materials produced in Vietnam is a disadvantage. The Columbus, Ohio-based company farms out contracts to factories in Vietnam and other Asian countries.
“Everybody would give you a good price, everybody would give you good quality,” said Jocelyn Tran, Ho Chi Minh City- based country manager at Limited Brands’ unit, MAST Industries Inc. “There’s nothing that Vietnam makes that China or India cannot make. It’s going to be tough.”
The lack of competitive advantage makes Vietnam’s garment industry unattractive to investors such as Dominic Scriven, who says he won’t buy the shares Viettien plans to offer next year.
“It’s a sector, where as an investor, it’s rather difficult to catch the value,” said Scriven, director of Ho Chi Minh City-based Dragon Capital, whose portfolio of $800 million of investments in Vietnam makes it the country’s biggest non- state stock market investor.
To contact the reporter on this story: Linus Chua in Singapore at lchua@bloomberg.net .
