Challenges Facing the Garment Industry in Vietnam: Omen or Opportunity?
Garment and textile factories in Vietnam see lower-than-expected orders from key trading partners. This has led factories to scramble to make ends meet, including laying off some workers. Is this a sign of bigger problems or a unique opportunity for savvy investors?
Vietnam’s manufacturing industry fell 1.9 points S&P Global Vietnam Manufacturing Purchasing Managers’ Index (PMI), in September. From 52.5 the previous month, it fell to 50.6 points, still in growth territory but barely – anything below 50 signals a contraction.
This reflects a 13-month low in new orders.
A particularly large drop was seen in the clothing and textile sector, where exports in September were down 31.9% from the previous month.
This has raised concerns about the manufacture of garments and textiles, which are essential to Vietnam’s economic development. In 2020, Vietnam has become the second largest ready-to-wear exporterthe sector employing around 2.5 million people.
Why are textile and apparel orders falling?
The decline in orders was largely attributed to external factors beyond the Southeast Asian nation’s control, namely rising inflation in the Western Hemisphere which is hitting consumers hard.
Frugal Christmases in the West, however, may only be temporary.
In the euro area, for example, inflation is expected to rise a little further (currently 8.1%), but the The European Central Bank expects this will recover by the end of the year. He predicts inflation of 5.5% next year and 2.3% in 2024.
Meanwhile, slow order flow could create an opportunity-rich environment.
Vietnamese labor could become easier to find
Job growth slowed in the manufacturing sector in October, according to the S&P PMI employment index.
As orders slowed, many workers found their reduced hours or themselves completely out of work – Taiwanese shoemaker Ty Hung Co. Ltd., terminated the contracts of 1,185 workers last week.
With many factories grouped together in Vietnam’s industrial zonesfor hiring managers of garment and textile companies that are still receiving orders, this could be a boon.
It can also impact wages as the supply of labor increases.
The average factory worker currently earns about VND 8 million (US$321) per month, according to the most recent figures from the General Statistics Office. The average minimum wage (there are different rates for different regions), however, is just under 4 million VND (161 USD).
Domestic consumption of imported goods could decline
However, less work and lower wages may result in workers being able to shop less, which could affect importers’ earnings.
Most basic consumer goods are produced locally. Alternately, imports are largely discretionaryexpensive items: electronics/computers, machines and telephones.
Sales of luxury goods have also seen tremendous growth in Vietnam in recent years. From cars to wine to fashion, a burgeoning middle class has been source high quality imports.
Therefore, if Vietnamese middle-class factory workers are forced to tighten their belts, importers could see their profits erode.
Investing in Vietnam can become cheaper
In the past, the State Bank of Vietnam (SBV) had a stranglehold on the Vietnamese dong. However, as the US dollar appreciated to record highs, the SBV has begun to relax exchange controls.
This means that the dong should move more in line with other world currencies which have weakened significantly against the US dollar.
In this regard, foreign investors looking to move funds to Vietnam can benefit from a better exchange rate than they could have a month earlier.
Foreign garment manufacturers already present in Vietnam and exporting goods in US dollars are also expected to see increased revenues.
Prospects for Vietnam’s Garment and Textile Sector
In an interview with Reuters Earlier this week, Vietnam Textile and Garment Association Secretary General Truong Van Cam said hopes were not high for Vietnam’s garment and textile sector as it approached. of the new year.
“We are concerned that companies will face further difficulties in the fourth quarter of this year and the first quarter of 2023 due to the effects of weakening demand globally,” he said.
Typically the busiest time of the year, apparel and textile manufacturers often rely on bumper sales in the fourth quarter to weather lean times.
Therefore, lower-than-expected sales volumes may not bode well for apparel and textile manufacturers in 2023.
That said, the Eurocham business climate index survey for the third quarter of 2022, revealed that 59% of respondents still plan to increase their investments in Vietnam to some extent.
In addition, on January 1, 2023, customs duties on a range of clothing and textiles shipped to the EU will be reduced by 2-4% under the EVFTA. It could also boost demand.
What about the current state of Vietnam’s garment and textile industry?
This leaves Vietnam’s garment and textile sector to wait patiently.
External factors are driving the decline in orders, particularly inflation in developed markets. Over this, Vietnamese textile and clothing manufacturers have no control. Their only real gesture is to fight against the decline by reducing production costs, such as their workforce.
This could benefit new market entrants seeking labor or other segments of the manufacturing sector that continue to grow. Lego, for example, is investing $1 billion to build a state-of-the-art factory in Binh Duong, and Apple suppliers Pegatron and Foxconn are investing $1.3 billion to expand operations in Vietnam.
A devalued dong and increased production capacity could also provide savvy investors with the opportunity to pick up bargains.
Apart from that, however, Vietnamese garment and textile manufacturers can’t do much but wait.
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