How Sourcing Managers Are Re-examining Vietnam After the Demise of a Free-Trade Agreement

Import/Export

As of Thursday, August 24, 2017

Six or seven years ago, Steve DiBlasi of Lanier Clothes decided to shift a fair amount of his company’s apparel production from China to Vietnam.

The reason was labor costs were slowly rising in China—which had been the world’s apparel manufacturing epicenter for years—and they were much lower in Vietnam. He also wanted to be in front of the line of sourcing managers searching for good apparel factories once the free-trade agreement known as the Trans-Pacific Partnership was scheduled to be concluded during the Obama administration. “We wanted to be ahead of the game of TPP,” said the vice president of global sourcing for Lanier, which makes men’s tailored clothing.

But that free-trade agreement, which would have given duty-free access to apparel imported into the United States from Vietnam, fell apart after President Trump took office. Now, Vietnam is still the No. 2 producer of apparel into the United States, but sourcing managers are not as eager to be in Vietnam as they were before.

DiBlasi was speaking on a panel held Aug. 14 during the Sourcing at MAGIC show at the Las Vegas Convention Center. The panel, called “Vietnam Continues to Lure U.S. Firms,” coincided with the sourcing show shining a spotlight on Vietnam, which had a pavilion at the show with 40 Vietnamese factories.

The moderator of the panel was Julie Hughes, president of the U.S. Fashion Industry Association, a Washington, D.C., organization that works to break down barriers to importing apparel and textiles into the United States.

Recently the organization commissioned a study on sourcing in Vietnam. It was conducted by Sheng Lu, an assistant professor of fashion and apparel studies at the University of Delaware.

The study, which surveyed 34 executives of large fashion companies with more than 1,000 employees, showed that this year only 36.7 percent of executives expected to expand their sourcing in Vietnam compared to 65.4 percent last year.

“Two factors are related to this,” Lu said at the panel presentation. “One is TPP, and the other is rising labor costs in Vietnam.”

Next year, the minimum wage in Vietnam, which is still relatively low, is scheduled to increase 6.5 percent. Currently the minimum wage ranges from $114 to $165 a month, depending on the region of the country. China’s minimum wage is around $350 to $400 a month.

For these sourcing executives, China is still the No. 1 go-to place to make clothing. “It is not about the price, but it is about the capacity and it is about speed-to-market that is keeping China relevant to the fashion world,” Lu said. “There is ease in doing business in China, and China is investing in technology.”

The executives who participated in the survey said that 30 percent to 50 percent of their sourcing is done in China while another 11 percent to 30 percent is done in Vietnam.

“Of the 106 categories of apparel products, China was the top supplier in 88 categories and Vietnam was No. 1 in five categories,” Lu said.

But Vietnam as a sourcing destination will continue to grow, just not as rapidly had TPP been enacted. “Vietnam is increasing its production and taking it away from China,” DiBlasi said. “Why is that? Its low labor costs and huge government investment in textiles. They want to employ their people.”

Also, it has been relatively easy to get goods in and out of the country through the various ports located in Hai Phong in the north, Saigon in the south and Da Nang in the central region. It is also easy to find factories through the various agents that work in the country. “That is how we got started in Vietnam,” DiBlasi said.

Another member of the panel was Avedis Seferian, president and chief executive of WRAP (Worldwide Responsible Accredited Production), a nonprofit that inspects apparel factories around the world to certify they are treating their employees fairly, are socially responsible and have a safe working environment.

Seferian noted that Vietnam has been taking social compliance in their factories very seriously. “They recognize that today’s market is far more transparent than before and you are far more at risk of bad news spreading, particularly with social media,” Seferian said. “When you post a video online and it spreads all over the world, you cannot un-ring that bell once it is rung.”

DiBlasi expects Lanier will continue sourcing in Vietnam over the next several years because Vietnam is committed to the apparel and textile industry. It also has a pro-business culture, is good on compliance, is working to protect its environment and is moving apparel factories to rural areas to reduce costs.

“But there are reasons to be careful, too,” DiBlasi said. “Samsung, LG and Panasonic are opening huge factories there. So there will be competition for workers.”

Raw materials are still imported from China, there is a lack of mills and dyeing houses, and Vietnam’s minimum wage is rising every year over the next decade. In addition, there is no free-trade agreement with the United States, but there is one between Vietnam and Europe, which goes into effect next year. That means more European apparel manufacturers, which typically pay more than U.S. manufacturers, will be heading to Vietnam to make their clothes.

In the past, countries were good sourcing areas for as long as 40 years. “Now that is speeding up to five to seven years when you come in and when you get out,” DiBlasi said. “I think Vietnam will be good for the next seven years.”