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Textile and apparel: industrial transfer is the general trend

Vietnam’s foreign trade exports in March were US$34.1 billion, up 14.8% year-on-year; exports in the first quarter were US$88.6 billion, up 12.9% year-on-year. The rapid increase in Vietnam’s foreign trade data has sparked much concern. However, despite the large export data, Vietnam’s trade surplus in the first quarter was only 1.46 billion U.S. dollars, and the added value of the economy was not high.

Among them, in the first quarter, Vietnam imported goods from China 27.6 billion U.S. dollars, as of the end of the first quarter, Vietnam’s trade deficit with China 14 billion U.S. dollars, Vietnam many parts, raw materials or imported from China, processed in Vietnam and then exported to Europe and the United States and other places.

Securities Times reporter investigation found that China’s order outward migration is mostly concentrated in the textile and garment, home building materials, consumer electronics and other industries, while the textile and garment, home building materials industry chain to Southeast Asia early and there, the outbreak of the epidemic in Southeast Asia last year only slowed down the process, now more like the process restarted.

Moreover, although many orders have been transferred to Southeast Asia, but still Chinese enterprises are undertaking. CITIC Securities analyst Han Jun believes that certain specific aspects of China’s industry “spillover” is inevitable, China and Vietnam industrial chain is more of a complementary relationship. As Vietnam and other ASEAN countries participate in deepening the international division of labor, China’s international division of labor to enhance the status of the future is expected to promote the overall export trade in Asia.

Vietnam’s manufacturing competitiveness recovered

“Vietnam has basically returned to normal, but residents still wear masks on a daily basis. When the epidemic was at its worst last year, production and operation were really difficult. With the increase of vaccination ratio, the daily life of residents and production of enterprises in all regions of Vietnam have now basically returned to normal.” Zhao Qian said in an interview with the Securities Times.

Zhao Qian is the president of Ho Chi Minh City branch of Vietnam China Chamber of Commerce. He came to Vietnam as early as 1995 to engage in trade business and is currently the head of JAC Vietnam Automotive Joint Stock Company. Vietnam China Chamber of Commerce Ho Chi Minh City Branch was established on December 10, 2001, and currently has nearly 400 effective members, with member companies covering various industries. Among them, three well-known Chinese electrical brands, TCL, Midea and Gree, are the vice president of the association. It can be said that Zhao Qian has witnessed the development and growth of Chinese enterprises in Ho Chi Minh City.

According to Zhao Qian, there are basically three stages of Chinese enterprises investing in southern Vietnam:

The first stage was from 2000 to around 2006, mainly textile labor-intensive enterprises such as shoes and clothes; the second stage was from 2005 to around 2018, concentrating on wood and household enterprises; the third stage is from 2018, mainly consumer electronics enterprises related to Apple and Samsung, etc. In recent years, there is a trend of gradual increase in the scale of investment and production of Chinese enterprises in Vietnam.

Although it has been two years since he returned home, Zhao Qian has concerns about the hotly debated order transfer in the country. “This phenomenon exists and is a normal business behavior. Because the export orders in the hands of enterprises need to be delivered on time, and the management of the epidemic in two countries is not synchronized.

When the epidemic was serious in Vietnam last year, the domestic epidemic was better controlled. If a business group has factories in both countries, it will let the domestic factories in China produce more. This year, Vietnam gradually returned to normal and the factories were able to produce normally, so they let the Vietnamese factories produce more.”

A research report by Ming Ming, chief economist at CITIC Securities, also confirms this view. The report argues that the substitution effect of labor-intensive products represented by garments and shoes and hats is more likely to occur, and that there is a strong substitution relationship between China and Vietnam in the export of garments and shoes and hats to the United States.

He measures the share of U.S. imports of related goods from Vietnam and China, represented by apparel, shoes and boots, and hats, and finds that there is a significant substitution relationship between the two countries on exports of corresponding goods.

In the second quarter of 2021, the share of U.S. imports from Vietnam gradually falls back against the backdrop of the domestic shock of the Delta variant virus and shifts to increased imports of related commodities from China. from the fourth quarter of 2021 to the first quarter of 2022, the share of U.S. imports of apparel, shoes, boots, and hats from Vietnam returns to an upward path as Vietnam’s production capacity is gradually repaired, with the share of shoes, boots, and household/lighting/ Bedding’s share rose by more than 8%.

During the same period, the share of U.S. imports of related goods from China showed a clear downward trend, with the corresponding shares of apparel, shoes and boots, and hats falling by 7% or more.

Textile and garment: industrial transfer is the general trend

Securities Times reporter investigation found that many orders, although transferred to Southeast Asia, but still Chinese enterprises in undertaking. For example, in the field of consumer electronics, China’s position in the global consumer electronics industry in the past decade or so has been rising, experienced from the production of low value-added parts, OEM for foreign terminal brands to cut into the high value-added production links, domestic terminal brands among the world’s leading transformation, some leading consumer electronics companies have formed a global layout of Southeast Asia manufacturing + Asia, Europe and the United States R & D, sales.

“Earlier indeed part of the domestic orders transferred to Southeast Asia, one reason is the local epidemic eased, there is the ability to take orders; another reason is the former section of China’s cotton, yarn price increases, and overseas price difference widened, some downstream customers in order to reduce costs to transfer orders to the past.”

A garment factory in the Pearl River Delta said to reporters, but with the recent surge in foreign cotton prices, domestic cotton weakness, domestic and foreign cotton yarn spread narrowing or even inverted, the order outflow pressure or will be improved.

But he also said, textile and apparel orders to lower cost Southeast Asia is the general trend, “the domestic manufacturing cost of a T-shirt is about several times that of Southeast Asia, as the peripheral epidemic gradually get under control, the global textile and apparel manufacturing will continue to accelerate the transfer to Southeast Asia and other places.”

Miss Liu’s company is a foreign trade company of clothing, mainly from the domestic purchase of raw materials, while handed over to the factory for OEM, in recent years is mainly sent to Vietnam or Myanmar and other Southeast Asian OEM factories. According to her, since the global outbreak of the epidemic, Vietnam factory orders have increased significantly, the OEM price also rose sharply, the price of different products rose by different rates, the price of these two years rose by about 10% to 30%.

Last year, because of the seriousness of the epidemic in Southeast Asia, some orders flowed back to the country, but after the local epidemic eased, orders immediately returned to Southeast Asia, the main reason for this is the cost advantage of Southeast Asia.

2021 epidemic under the global supply chain crisis, had brought a large number of orders back to the Chinese textile industry. According to the General Administration of Customs statistics, 2021 the country’s textile and apparel exports 315.47 billion U.S. dollars, an increase of 8.4%, a record high, but the industry’s operating margin of less than 5%, after the cost advantage is no longer, domestic textile and apparel enterprises through technology, design, creativity to improve the added value of products and technology content, in order to have room for development.

However, even if orders are transferred overseas, many or Chinese companies are undertaking, a large number of domestic textile and garment enterprises have long been laid out in Southeast Asia. Tianhong Textile, one of China’s largest manufacturers of cotton textiles, began laying out its overseas production base in 2006, mainly in the Vietnam region, where it purchased land to expand its production capacity.

In addition, the company has also built factories in Uruguay and Turkey. The company has started to build Vietnam Haihe Industrial Park since 2014 to create a whole industrial chain covering raw materials, spinning, manufacturing, dyeing and finishing, garment making and branding. Up to now, Tianhong subsidiaries Tianhong Galaxy, Tianhong Dyeing and Finishing, Tianhong Technology and Lanyan Denim Garment have all completed their occupancy in the industrial park.

Blum Oriental is one of the color spinning yarn double oligarchs in China, and has started to build production projects in Vietnam since 2013. 1 million spindles of yarn total capacity has been formed in Vietnam, accounting for 60% of Blum’s total capacity. 2021 July, the company built another 390,000 spindles of yarn project in Vietnam, and the capacity is expected to be gradually released in 2022~2023. In terms of revenue, Vietnam has also accounted for about 60% of Blum Oriental’s total revenue.

On March 30, Lutai Textile disclosed that its wholly-owned subsidiary, Wanxiang Textile, has planned a total investment of about US$210 million in Vietnam’s Tay Ninh Province for the construction of a production base for woven and knitted fabric products. Lutai Textile said that the investment is intended to efficiently integrate domestic and international resources and effectively avoid the impact of potential trade barriers, etc.

Behind the battle for orders: the complementary relationship between the two countries’ industries

Does the fact that more and more Chinese companies are shifting their production capacity to Vietnam mean that the competitiveness of Vietnamese manufacturing is beginning to surpass that of China?

According to Zhao Qian, compared to Chinese manufacturing, Vietnamese manufacturing has two major advantages at this stage: one is the low price of land and labor costs, and the other is the market access convenience and tariff advantages brought by the free trade agreements (FTAs) signed between Vietnam and major economies.

He cited the 50-year land in the industrial park in Binh Duong province near Ho Chi Minh City as an example: the price five years ago was about US$60/sqm, and currently it is about US$200/sqm; the monthly salary of an average factory employee has gone from about RMB1,500/month to about RMB3,000/month now.

Overall, although land and labor prices are rising relatively fast, the advantages are still relatively obvious when comparing with domestic, especially Guangdong Province.

Another advantage of Made in Vietnam is the product access and tariff advantages brought by the FTAs between Vietnam and major economies. Among them, the EU-Vietnam Free Trade Agreement (EVFTA), which will take effect in 2020, will cut bilateral tariffs by 99% within ten years.

In addition, under the framework of the Regional Comprehensive Economic Partnership Agreement (RCEP), Vietnam also has significant access and tariff advantages for exporting to the U.S. market. These two countries and regions are also the main export direction of Chinese enterprises, which is the reason why more and more Chinese enterprises choose to build factories in Vietnam.

However, Zhao Qian believes that Vietnam’s manufacturing industry is still more in the stage of product OEM, or assembly and export. At present, Chinese enterprises hardly set up product R&D institutions in Vietnam, and foreign enterprises in other countries are almost the same. Vietnamese local manufacturing companies also have limited global competitiveness.

He took the example of a local Vietnamese auto brand that is about to go public in the US. The brand does not have any R&D and manufacturing capacity for core automobile technology, and the three major components (engine, transmission and chassis) are purchased from outside. At the same time, Vietnam’s entire national industrial system is not complete, and many basic raw materials need to be imported, which will also limit the upgrading and development of Vietnam’s manufacturing industry.

Han Jun also believes that there is more of a complementary relationship between the manufacturing industries of China and Vietnam. According to Han Jun, the compound growth rate of container shipping volume from the Far East to the U.S. in the past decade (2011-2021) is 4.90%. Among them, Vietnam to the U.S. consolidation volume ranks second after China, accounting for more than 11%.

The growth rate of Vietnam-US consolidation volume in 2019 is as high as 33.1%, and all other ASEAN countries achieve higher growth rates, also stemming from China’s re-export trade under the US-China trade war.

Assuming that the increase in the trade balance between China and Vietnam in 2019 is all due to re-export trade from China to Vietnam, and also assuming that the final flow of re-export trade is to the U.S., about 20% of the total exports from Vietnam to the U.S. in 2019 is Chinese re-export trade, and excluding the Chinese re-export trade part, the total exports from Vietnam to the U.S. in 2019 is the same as in 2018. Other ASEAN countries are in a similar situation with Vietnam’s re-export trade.

The U.S., the largest buyer of Vietnamese products, accounts for about 29% of Vietnam’s total exports. In contrast, about 33% of Vietnam’s total imports come from mainland China, with imported goods mainly being textile materials and parts. 56% of textiles, leather materials, etc., 48% of machinery and equipment, and 42% of telephones, cell phones and parts are imported from China.

After processing, about 63% of wood and products, 46% of textile and clothing, 42% of machinery and equipment, etc. exported to the United States.

Han Jun believes that the “spillover” of some specific aspects of China’s industry is inevitable. In addition, China has joined the RCEP, and is not too worried about the so-called manufacturing transfer problem. Vietnam and other ASEAN countries to join the international division of labor, China’s international division of labor to enhance the status of the future to promote the overall export trade in Asia.

Zhao Qian is equally confident about the future of Made in China. He believes that there are three competitive advantages of Chinese manufacturing in the international arena: firstly, the industrial chain is very complete, secondly, the cost advantage brought by the large unified domestic market of 1.4 billion people, and thirdly, the production efficiency improvement brought by the application of Industry 4.0. It is the trend that Made in Vietnam will replace Made in China in certain industries or products, and China has to compete and eliminate some uncompetitive industries, but on the whole, Made in Vietnam will not replace Made in China. He also hopes that Vietnam will continue to encourage foreign companies to invest and improve their processes to promote social progress together.