Vietnam is evolving as an attractive sourcing destination for clothing and footwear retailers, even against the broader shift to “near shoring” for speed to market. Drapers finds out why
Although mainland China is still the most established market for the UK for clothing imports, accounting for £4.1bn in 2016, it is cooling as labour and operating costs rise.
As brands and retailers diversify their production resources, neighbouring Vietnam is becoming more appealing as an alternative to its rivals in Asia. Since the south-east Asian country joined the World Trade Organization in 2007, it has steadily expanded its export capabilities in clothing manufacturing.
A free trade agreement with the European Union is set to take effect in 2019, so sourcing from the region will inevitably accelerate. Its stable economic and political environment, and relatively clean record on compliance with safety and other corporate social responsibility (CSR) obligations could give it an edge on nations such as Bangladesh and Turkey.
H&M, Uniqlo and Marks & Spencer are among the retailers to have turned to Vietnam for their core suppliers. It is a relatively new market for M&S, which opened a direct sourcing office in Vietnam in 2015, focusing on footwear and tailoring.
In March M&S reported it employed around 41,800 workers across 21 Vietnamese factories for clothing, footwear and accessories. Its clothing and home suppliers employ a total of 766,717 workers in 960 factories globally.
Vietnam has long been a key sourcing market for US retailers. The UK shares deeper ties with India, Bangladesh and Pakistan, but Vietnam is starting to gain ground. In the UK Fashion and Textile Association’s (UKFT) first clothing import rankings in 2016, Vietnam was 13th with a value of £492m. Figures previously reported by Drapers put the value of the country’s imports at £435m in 2015, growing from £226m in 2010.
Vietnam is entrepreneurial and seems to have a stable government
Paul Alger, UKFT
UKFT international business development director Paul Alger predicts it will climb further up the top 20 this year: “Retailers will seek the cheapest possible option,” he says, observing that businesses have been turning to Vietnam in particular for finer work such as bridalwear and occasionwear.
“Sourcing from Vietnam in the UK has been coming along over the past five years as other countries, namely China, have become increasingly expensive. It also seems to be more flexible than China, which is more of a volume player and not as good with smaller orders. Vietnam is entrepreneurial and seems to have a stable government.”
Nevertheless, its population of around 90 million and relatively underdeveloped infrastructure means Vietnam has a way to go before it can compete with China and India on scale and efficiency.
“Vietnam’s capacities are limited compared with China and India,” says Alger. “While it has expanded exponentially, it’s not a big country. Other challenges are transport and logistics costs: it doesn’t fit with the near-shoring agenda.”
A renewed ethical focus is also starting to make Vietnam relatively attractive as a sourcing destination. After a string of high-profile scandals, including the 2013 Rana Plaza factory collapse in Bangladesh, western brands and retailers are profoundly aware of the need for thorough CSR and compliance policies at production sites.
Only China has more factories requesting accreditation for compliance from US-based independent certification programme World Responsible Accredited Production (WRAP) than Vietnam.
Laura Morroll, senior manager at Berkhamsted supply chain consultancy LCP Consulting, says although the scales are tipping towards Europe as the pace quickens on near-shoring, Vietnam remains “a sensible bet” for retailers’ core product ranges with predictable demand profiles, where speed to market might not be as much of a factor.
“In terms of the criteria for apparel retailers in deciding where to source from, price is key, but so is the capability and ability to manage production and risk,” she notes. “From a CSR point of view, Vietnam is a fairly safe and established market to source from – it’s a safe pair of hands compared with other emerging markets.”
The UKFT’s Alger agrees: “I can see UK brands and retailers looking at Vietnam and wondering if it will solve their problems, as concerns over ethical issues in Bangladesh continue.”
Increasing labour rates may have implications in rising costs in Vietnam
Laura Morroll, LCP Consulting
Social and business compliance, however, carries a premium, and labour costs in the country are set to rise. Vietnam’s National Wage Council announced in August that the minimum wage may rise by 6.5% in 2018 to VND2.76m-VND3.98m (£92.10-£132.93) per month.
One boss at a supplier that sources textiles from Vietnam also suggests certain “political difficulties” have led to higher-than-expected costs: “Businesses had turned to Vietnam in recent years for cheaper prices, on the promise that there would be 0% [import] duty rates, but that hasn’t happened,” says the source, who does not wish to be named.
Morroll believes this will not deter retailers, as the cost increase will be offset by the benefits made from government-led investment in transport links and infrastructure, on top of foreign investment in new plants and manufacturing facilities. Improved infrastructure would also help to reduce the longer lead times caused by the market’s need to import most raw materials to cut and sell.
“Increasing labour rates may have implications in rising costs in Vietnam, but as a country it is making significant investment in technology and infrastructure, so the increase in labour rates would be balanced with this efficiency gain,” she says.
US sourcing gains
Vietnam is now second only to China for garment sourcing in the US. It grew by 18% to account for $1.1bn (£842m) of US clothing imports in January 2017, and by 17% to $495m (£379m) in footwear imports, the US Department of Commerce’s Office of Textiles and Apparel reports.
US manufacturing trade show Sourcing at Magic chose Vietnam as its focus country for its latest edition in August, citing its rapid export growth, and showcased more than 40 Vietnamese manufacturers.
Sourcing at Magic president Christopher Griffin says: “We see tremendous quality, great needlework and attention to detail. The entrepreneurial spirit is robust, especially in the south and Ho Chi Minh City.”
Griffin adds that for the US, Vietnam is particularly strong in producing footwear and clothing for the burgeoning athleisure market.
Despite the US’s well-documented withdrawal from the Trans-Pacific Partnership free trade agreement earlier this year, which dampened Vietnam’s hopes for a meaningful export boost, Griffin is confident that Vietnam will remain a key global sourcing player. He argues its position on compliance has played a significant part in ensuring its competitiveness.
“Looking at the safety record of [factories in] Vietnam, the facts speak for themselves,” he says. “In Bangladesh in particular, there are issues with worker safety where the industry has tried to band together and address them, but they continue.
“And for any brand, even without the human aspect regarding safety, it’s a PR nightmare to have tags in a factory that isn’t safe. Statistically, Vietnam has been proactive on compliance and safety issues, so it hasn’t been caught in this.
“Vietnamese sourcing can be quite bureaucratic and a bit slow. But when you weigh out the risks, Vietnam represents a very evenly balanced market.
“It has low domestic strife, is stable, has an established base in the south and is growing in the north. I believe more brands and retailers will look at it in the short term. Its momentum shows no signs of slowing.”
The Drapers verdict
Businesses should factor in growing concerns surrounding transparency in Vietnam when it comes to subcontracting, as manufacturers continue to seek ways of offsetting rising wages. As with most developing markets, detecting illegal subcontracting or unethical practices could prove tricky.
Aside from this, businesses must balance the need for the most affordable option with the assurance of compliance, as well as relative political security and reduced risk of civil unrest among other key factors. With this in mind, Vietnam’s sourcing market could offer a more compelling solution than its competitors.