Domestic textile and garment industry faces uncertainty in the face of FDI wave.

Due to their heavy reliance on imported raw materials, Vietnamese textile and garment businesses are vulnerable to market fluctuations.

Illustrative image, source: Internet

Foreign capital has poured into Vietnam's textile and garment industry since the beginning of 2015, helping to rapidly increase the industry's scale and export volume. However, from the perspective of domestic businesses, they cannot help but feel disheartened and uncertain in the face of the increasing investment from FDI enterprises.

Since 2014, a wave of FDI has begun investing in the textile and garment industry to capitalize on major trade agreements that Vietnam is participating in, with 83 FDI projects and a total registered capital of US$1.64 billion. As negotiations for the Vietnam-EU Free Trade Agreement (FTA) and the Trans-Pacific Partnership (TPP) concluded, the FDI wave in the textile and garment industry intensified. In the first six months of 2015, the industry attracted over 50 FDI projects with a total registered capital of US$1.12 billion, and the total for the whole year is expected to exceed US$2 billion. This represents a record high investment level.

At the 5th Congress of Vitas, assessing the development of the textile and garment industry from 2011 to 2015 and setting directions for the 2016-2020 period, the Vitas Executive Board frankly acknowledged that, despite a series of important FTAs ​​being signed and taking effect, all with textiles and garments as core benefits and tariffs reduced to 0% in many markets, the domestic textile and garment industry still faces numerous problems stemming from its incomplete development. According to the Vietnam Textile and Garment Association (Vitas), FDI inflows into Vietnam during this period differed significantly from previous years. While the number of projects was small, the total investment capital was substantial; for example, a project licensed in early 2015 reached US$660 million, and several projects had investments of US$300 million.

"Although exports are growing rapidly, the supporting industries are underdeveloped. Imported fabrics currently account for 80%, with 40% coming from China, continuing to create a 'bottleneck' in the dyeing and weaving stages, leading to unbalanced development and making domestic businesses vulnerable," said Mr. Vu Duc Giang, Chairman of Vitas.

In 2014, textile and garment exports reached $24.5 billion, but statistics show that up to 70% of total export revenue came from contract manufacturing. Exports where raw materials and components are sourced independently, or exports finished products to partners, accounted for 20%, while the remaining 10% was produced under the ODM (Original Design Manufacturer) model.

Meanwhile, looking at the amount of foreign currency spent on importing raw materials and components for the production of export textiles and garments is staggering. To achieve an export value of $24.5 billion in 2014, the cost of importing raw materials and components reached $15.461 billion, an increase of 11.3% compared to 2013. Of this, fabric imports were the largest, approximately $9.5 billion, cotton also reached $1.45 billion, fibers $1.559 billion, and other raw materials and components over $3 billion…

Ms. Nguyen Thi Doan, Deputy Director of Kinh Bac Garment Joint Stock Company, stated that as an export enterprise, with 90% of its production destined for South Korea, although the rate of utilizing preferential tariffs when exporting to South Korea is higher than other TPP and EU markets, Kinh Bac Garment Company still faces fierce competition from South Korean FDI enterprises in Vietnam, due to their advantage in closed-loop production chains. According to Ms. Doan, currently only about 70 Vietnamese textile and garment export businesses are able to take advantage of preferential tariffs, due to the rather complex procedures for certifying origin.

The textile and garment industry's export target of $28 billion in 2015 is nearly achieved. After 11 months, textile and garment exports have brought in $25.58 billion. However, according to Vitas, the projected import cost of raw materials and accessories for the entire year of 2015 is expected to reach $17.566 billion.

According to Investment