September 30, 2016 11:00 am JST

Vinatex leads Vietnam's rise as textile exporter

MANABU ITO, Nikkei staff writer

Nearly 2,000 workers make pants, skirts and other clothing items at this Vinatex group plant in Danang. (Photo by Manabu Ito)

DANANG, Vietnam -- As Vietnamese clothing companies rapidly expand exports, Vietnam National Textile Garment Group is becoming their standard-bearer by taking advantage of the Southeast Asian country's trade policy as well as a partnership with Japanese trading house Itochu.

The state-owned textile company, also known as Vinatex, invested roughly $30 million to set up a fabric factory outside the central Vietnamese city of Danang. The plant began operating in 2014, producing fabrics using more than 100 Belgium looms and also dyeing those fabrics at the site.

The facility, which the company regards as a strategic production base, ships fabrics to a nearby sewing plant belonging to a Vinatex group company. There, about 2,000 workers churn out more than 5 million articles of clothing annually, such as chino pants and jeans. Some 90% of the plant's output is exported to the U.S. and Europe. In the U.S., these garments are sold at J.C. Penney department stores, the Express casual clothing chain and other retailers.

"Thanks to integrated production, we can export a product as quickly as 25 days after receiving the order," Nguyen Thi Thu Trang, branch director at the sewing plant, said.

The textile plant intends to add more looms in October, after which the facility's production capacity will rise to 1.7 million meters per month, nearly two and a half times the current figure.

Yearning to grow

The Vinatex group, which consists of more than 80 companies, increased exports by 11% to $2.38 billion in 2015. That amount accounted for a little more than 10% of Vietnam's overall textile exports, which had doubled over the five preceding years.

The group is particularly impressive in sewing, with a nationwide network capable of producing 240 million articles of clothing a year. But it is not as strong in upstream operations, such as production of yarns and fabrics.

The Vinatex group procures less than 60% of its garment materials from local suppliers, importing the rest from China and elsewhere. The group thus has difficulty responding quickly to changing fashion trends, and efforts are underway to bolster upstream operations.

One of those efforts is a yarn factory in the northern province of Nam Dinh.

"It's an important yarn production base, a first in the northern region," Vinatex CEO Le Tien Truong said at the opening ceremony for the factory in July. The facility has bolstered the group's monthly yarn capacity by 240 tons.

The group plans to spend 3.8 trillion dong ($170 million), or 70% of its investment budget for the 2015-17 period, on yarn and textile production facilities, including the Nam Dinh plant.

Riding the free trade bandwagon

The drive by Vinatex to expand operations fits with the government's strategy to boost exports via free trade agreements. The fate of the Trans-Pacific Partnership deal looks increasingly uncertain, but Vietnam has signed bilateral FTAs with the European Union, Japan and South Korea. Vinatex executives have accompanied government officials to trade negotiations and worked with them to tailor trade strategies.

China's dominance as a supplier in the global textile market has been increasingly eroded by Bangladesh, India and Vietnam. But Bangladesh is quickly losing momentum as its labor costs, a key factor behind the country's rise as a textile exporter, continue to increase, with factory workers in the capital Dhaka now earning double the wage from five years ago.

Vietnamese textile exporters are benefiting from the government's trade policy. Once the TPP and the agreement with the EU come into effect, U.S. and European Union tariffs of 9-18% on Vietnam's textile exports will be removed.

But Vinatex faces growing competition from mainland Chinese, Taiwanese and South Korean businesses that have been setting up shop in Vietnam, attracted by the former French colony's advantageous position as a textile export base. Vinatex beats those foreign businesses in terms of the domestic production network, but it trails in the cultivation of overseas markets.

In tandem with Itochu

This is where the partnership with Itochu proves valuable. The pair signed capital and business tie-ups in January 2015, and Vinatex is working with the trading house to attract new customers in the U.S., Europe and Japan.

The partners kicked off operations of a joint venture undergarment plant in the northern Vietnamese province of Nghe An in early September. The $5.7 million facility will work hand in hand with the Vinatex group's other plants to boost annual output of undergarments, including high-performance thermal underwear, by fourfold to 20 million units within a few years. Big retail chains in Japan are among the key targets for this undergarment business.

Vinatex and Itochu also seek inroads into China's consumer market. They have won orders from apparel makers there through the Citic group, a Chinese state-owned investment firm with which Itochu has capital and business ties.

Vietnam has embarked on economic reforms that encompass privatization of state-owned enterprises and promotion of business tie-ups with foreign companies. Vinatex serves as a pilot case of the efforts. Whether it succeeds in the global market may even influence the direction of Vietnam's reforms.

ITOCHU Corp.

Japan

Market(Ticker): TKS(8001)
Sector:
Industry:
Distribution Services
Wholesale Distributors
Market cap(USD): 24,049.40M
Shares: 1,662.88M
Asia300

CITIC Ltd.

Hong Kong

Market(Ticker): HKG(267)
Sector:
Industry:
Distribution Services
Wholesale Distributors
Market cap(USD): 45,500.15M
Shares: 29,090.26M

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