Textile, Garment Firms Face Tough Challenges

Textile and garment companies have struggled to weather the storm in the first half of this year as consumer demand declined and the import market showed no signs of prosperity.

Vietnam's textile and garment companies are hard hit by inflation and global economic recession

According to the Vietnam National Textile and Garment Group (Vinatex), in April, Vietnam's textile and garment exports fell 20.6% year on year to US$3.06 billion (versus US$3.86 billion in the same period of last year), bringing the January-April value to US$11.7 billion, down 20% year on year (or a drop of nearly US$3 billion).

By market, export shipments to key markets such as the US, the EU, China, and South Korea all slipped from a year earlier. The US and China witnessed an over 30% decline. Shipments to the EU slumped 12% year on year to US$1.17 billion. Only Japan saw a 6.6% growth from a year earlier to surpass the EU to be the second-largest export market of Vietnam's textile and garment.

Mr. Truong Van Cam, Vice Chairman of the Vietnam Textile and Apparel Association (VITAS), said, the gloomy economy is causing consumers to cut spending and companies to reduce orders. Textile and garment companies are hard hit by inflation and global economic recession. Both their orders and unit prices sank by 20-30%, with some items suffering 40-50% declines.

They have never experienced a serious and sudden drop in orders as recently. Orders are enough for them to work month by month and they cannot choose customers as in previous years. Even, many accept unprofitable outsourcing to maintain production and retain workers.

A representative of Garment 10 Corporation said: “Now, we do not have the right to choose. We accept anything that we can manufacture regardless of their class as long as we can stay on until the market revives.”

Besides insufficient orders for production, labor cost is no longer an advantage of Vietnam, said a VITAS representative, adding that orders are being redirected to countries with cheaper labor like Bangladesh. Furthermore, companies are having very high levels of inventories, with many brands at 25-30%.  The high cost of capital becomes a burden for businesses. Recently, the electricity price was raised by 3%. Although the hike is not big, it adds more burden to companies amid a sharp decrease in orders.

Additionally, high logistics costs, rules of origin from free trade agreements, requirements for sustainable development, and climate change have made all countries committed to reducing their carbon footprint. Some major export markets of Vietnam's textiles and garments have made strong moves on these issues: The EU is trying to impose duties on products that cause greenhouse gases and requires a certain percentage of products made from recycled materials. Germany already has a law on supply chain tracing that will come into force in 2023.

Mr. Cam said that the decline in orders and export value of the textile and garment industry may last until the third quarter and at least to the fourth quarter to gradually recover. According to the VnDirect report, it is not until the fourth quarter of 2023 that garment makers will be able to recover when inflation in the US and the EU cools down.

According to experts, for the textile industry to overcome challenges to regain recovery momentum, the government should have more supportive policies; continue to keep the 8% VAT policy, introduce employee support solutions, and preferential policies on prices of electricity, coal, transportation, gasoline and seaport services.

The Government and relevant ministries should soon introduce a capacity development plan to boost active domestic input supply to ease dependence on imported sources, and ensure traceability criteria to take advantage of preference mechanisms in free trade agreements (FTAs), thus sharpening the competitiveness and expanding consumer markets.

Solutions for textile and garment companies are to diversify markets, customers and brands, apply advanced automated technology, adopt green environment and sustainability criteria, use electricity economically and efficiently, reduce electrical energy consumption and switch to rooftop solar power.

By Huong Ly, Vietnam Business Forum