Vietnam's Industrialization Strategy
in the Age of Globalization

Policy Recommendations
for the Textile and Garment Industry

Yasuhiro Ohta, Tokuyama University
Kenta Goto, Kyoto University

The development scenario for the Vietnamese textile and garment industry has been manifested in its master plan "The Speed-up Development Strategy for 2010.1" This master plan has two major policy objectives.

  1. Increase value-added of the Vietnamese garment industry -- shift production modality from CMT to FOB2.
  2. Increase domestic contents of garment exports -- actively invest in the cotton, spinning and weaving industries.

This paper firstly evaluates this plan, secondly suggests new roles of the state for further development of the industry, and finally outlines policy recommendations.

1 Chien Luoc "Tang Toc" Phat Trien Nganh Det May Viet Nam Den Nam 2010 -- Nham Giai Quyet Viec Lam Va Nang Cao Kim Ngach Xuat Khau -- ("Speed-up" Development Strategy for Vietnam's Garment and Textile Industry up to 2010 for Job Promotion and Increase of Export Turnover)

2 "CMT" refers to a production modality where Vietnamese firms are provided all input materials from foreign buyers, whereas under the "FOB" production modality they are purchased by Vietnamese firms. The term "FOB" in this context implies a form of garment production/distribution, and has practically no relationship with the one defined under Incoterm.

The "Speed-up Development Strategy for 2010"
--will it work?
1. On the Production Modality Shift - from CMT to FOB

"More FOB" should not be the policy objective.

The ratio of FOB contractual arrangements to total production, or the "FOB ratio," does not correctly reflect the magnitude of value-added or the content ratio of domestic input materials. The shift from CMT to FOB, therefore, does not necessarily guarantee increased value-added and competitiveness. Moreover, FOB refers to a diverse set of production modalities which includes a wide variation of value-added realized and obligation of manufacturing firms, therefore a superficial increase in FOB operations suggests little3.

The importance of CMT -- Increase management skills without committing resources and risks.

The CMT production modality provides Vietnamese garment producers opportunities to strengthen operational capacity without committing scarce resources and risks. Substantial room to improve product quality and delivery conditions exist even under the CMT modality. While Vietnam currently is competitive in the production of garments, productivity of CMT is still low by international standards primarily due to inadequate management practices.

The development path of the garment industry and priority issues.

Correctly identifying the main issues for increased competitiveness is key. Based on this, basic problems in areas such as quality control, delivery and productivity must be addressed for gradual but steady increase in value-added. Expansion into the domestic market must also be promoted, and this will serve as a building block in order to realize increased garment exports under the FOB modality. For this, management skills in product development, production and distribution must be upgraded, training of professionals in designing and product development conducted, commercial activities revitalized, and the domestic ready-made garment market expanded through the establishment of industry standards.

2. On Active Investment in the Upstream Industry - Cotton, Spinning and Weaving

Anxiety for reduced future demand for domestic input materials.

If import duties are reduced in 2006 for textiles, demand for domestic textiles may decline and the up-stream industry may face difficulties. With only a few exceptions, domestic textile producers are currently not able to satisfy foreign buyers' standards in terms of product quality and timely delivery. Moreover, the expansion of the domestic garment market is needed for the development of the domestic upstream industry. Unless domestic textiles gain international competitiveness, expansion of FOB type export will not result in an increased domestic content ratio.

Upstream investment -- limit to areas where quality and customer confidence can be enhanced.

For the time being, investment in the upstream industry should not aim quantitative expansion, but be limited to areas leading to enhancing quality and customer confidence. Problems in the dyeing sector are particularly critical, and must be given priority. Investment in state owned enterprises (SOEs) in the upstream sector must be chosen carefully according to future potentiality, and they should be restructured if necessary. Shortages in the garment sector labor force and the rapid increase in its wages must be addressed through measures including relocation of labor forces from other sectors of the industry.

Establish role models through inviting and promoting competitive enterprises.

On the other hand, the production base of export-quality textiles must be expanded. FDI and private firms are among the major potential players. To support their development, a better investment environment and an open and consistent institution are necessary.

Support coordinators and promote opportunities that facilitate production linkages.

Strengthening competitiveness of the upstream industry is not enough to increase the local content ratio. Opportunities for and facilitators of production linkages must exist as well. Commercial entities, exhibitions, external testing institutions and industry standards are all important in this respect.

3 The operations which Vietnamese firms call FOB vary significantly in the forms of the actual contractual relationships with foreign buyers, and they can be classified into the following three types. The first type is where Vietnamese firms purchase input materials for processing from suppliers that are designated by foreign buyers (FOB Type I). The second type is where Vietnamese firms receive garment samples from foreign buyers (FOB Type II). The third type is where the Vietnamese firms initiate production of garments based on their own design, with no prior commitment of any kind from foreign buyers (FOB Type III). For details, please see Kenta Goto (2002) "Coordinating Risks and Creating Value: The Challenges for the Vietnamese Textile and Garment Industry" NEU-JICA Discussion Paper No. 5

The Public Sector in the Industry
--the Roles of the Government and VINATEX
1. Restructure and Limit Roles of the Government and VINATEX -- Withdraw from Production, Focus on Enterprise Support

The Government and VINATEX must withdraw from direct involvement in the production of garments and textile. Instead, it should limit its focus on the provision of information, physical infrastructure and institutional support. Hindrance of information flow regarding government decrees and decisions is severe and requires immediate attention.

2. Realign the Roles and Functions of VINATEX

The functions of VINATEX must be restructured in light of needs and appropriateness as a government agency in a market oriented economy. Organizations under VINATEX include not only textile and garment firms, but also institutes related to education, testing and research, trade and design promotion. The demand of non-SOEs for the services provided by these organizations will increase in the near future. It is therefore necessary to realign functions of VINATEX, and separate some if necessary.

Policy Proposals
1. Organization of firms and the provision of information dissemination mechanisms.

Systematize statistical data collection and upgrading: Effective policy requires correct and detailed information on the industry. The textile and garment industry is composed of a large number of firms that varies vertically as well as horizontally, and changes in market conditions and enterprise activities are dynamic. Statistical data and analyses on the industry, however, are limited in scope and access. A system to collect information on a real time base is therefore needed.

Encourage information exchange and dissemination through the organization of enterprises: The Vietnamese textile and garment industry is expanding quantitatively, particularly in the non-state sector. The government must support revitalizing industry associations to encourage the organization of enterprises, and actively seek feedback on the industry's needs. While the most comprehensive association in terms of coverage in this industry is VITAS (Vietnam Textile and Apparel Association), its activities are limited due to constraints in financial and human resources, therefore subsidies should be provided for educational and research oriented programs.

2. Education and Training -- Strengthening Support for Managerial and Marketing Skills.

Upgrade education and training institutions: Enhanced managerial skills are urgently needed in all sectors of the industry to meet customers' quality and delivery conditions as well as to boost productivity. Moreover, the development of the domestic market requires effective marketing skills. Educational institutions must provide basic training in these skill areas.

Build systematic knowledge and skills through training managers: Training courses have so far been limited to operators, but this should be extended to managers. Courses offered by organizations including the JODC (Japan Overseas Development Corporation) have been administered under VINATEX and VITAS. The duration of such courses, however, has been too short to allow participants to acquire systematic knowledge and skills needed.

Provide training in marketing skills: Training professionals in marketing skills (including design, pattern and merchandizing skills) is critical for Vietnamese garment manufacturers to increase value-added. Educational support, including seminars, must be provided to facilitate these.

Address problems in the education system: The major problems in the education system are three fold. Firstly, management related textbooks specific for the industry is lacking. Textbooks should not be just translated versions of imported ones, but should be tailored to suit the Vietnamese context. Secondly, training opportunities for the trainers is lacking. Participation in seminars or study tours both domestic and abroad with some form of financial support is desirable. Thirdly, adequate training equipments are lacking.

Expanding the education and training system: While training and educational institutions under VINATEX are promoting curriculum expansion, their financial resources is severely limited. Moreover, budget allocation must allow development and upgrading of courses related to production management, product development and marketing. The establishment and operation of new training institutes must be pursued according to needs and potentiality.

3. Consultation and Material Testing and Analysis

Solve individual problems through consultation and material testing/analysis: Training programs and seminars have their limits because the problems each firm faces are diverse and concrete. In order to address these problems, individual consultations as well as technical support in the testing and analyses of input materials and machineries will prove effective.

Train the trainers and upgrading equipment: While advice from international experts is needed in the initial stages of consultation and material testing and analysis, this role should be gradually taken over by Vietnamese experts. In the long run, provision of such services must be done by testing and research institutes, VITAS and related educational institutes.

4. Upgrading and Investing

The spinning and textile industry -- invest in quality enhancing and pollution-free technology: It is critical that the spinning and textile industry adopt technologies that provide stable quality goods and are environmentally friendly. The dyeing sector deserves particular attention. The main source of low quality in this sector is because basic equipment is lacking or severely outdated.

The garment industry -- upgrade managerial skills, not machinery: While the garment sector is competitive internationally, it still suffers from problems including low productivity due to high deficiency rates in the production process. These problems, however, are purely managerial. On the other hand, signs of shortages in its labor force and the resulting increase in labor cost are becoming apparent. Increasingly many firms respond to this by automatizing the production line in hope to boost productivity. However, the garment sector is a labor intensive industry by nature, and better management practice is often more effective to increase productivity. Moreover, superficial encouragement of automatization runs the risk of increased depreciation cost and may worsen financial standing of garment firms.

5. Support Institution Building for Facilitating Domestic Production Linkages to Expand the Domestic Market

Encourage commercial activities and intra-industry linkages: Commercial and trading entities are key to develop domestic input sources as well as distribution channels. They have information on both producers and consumers, and some are actively engaged in supplying their own brand garments by organizing independent producers. While these activities are important for future development of the industry, information on those remains scarce. Detailed research is needed to provide effective policy support in this arena.

Enhance quality and customer confidence through establishing external testing organizations: Gaining customer confidence in the export market through the establishment of external testing organizations is important. The Textile Research Institute, however, lacks adequate testing equipment and financial support is needed.

Activate industry associations: Industry associations including VITAS play pivotal roles in bridging information between the industry and the government. Moreover, they provide the platform where industry quality standards can be set, information shared and successful role models developed. Common industry quality standard or specification measurements will play important roles in the expansion of the domestic market.

Support apparel firms with strong potentiality in product development: Creating opportunities where talented designers can meet apparel firms is important to produce garments with Vietnamese originality. While FADIN (Fashion Design Institute) is currently the main catalyst in this, most of Vietnamese talented designers work abroad. If garment firms operating under the CMT modality face difficulties in applying new and innovative designs to its own production, then alternative measures including supporting designers in enterprise establishment or facilitating linkages between designers and small-scale producers are necessary.

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