Textile investments are picking up In Vietnam, Cambodia, Myanmar
China is losing its sheen with many Japanese companies preferring to relocate to Vietnam, Myanmar, Cambodia, Bangladesh, where costs are low. Chinese investors too are putting up manufacturing facilities in these countries
A new report by Tokyo Shoko Research reveals that 110 Japanese companies went bankrupt last year citing the challenges of doing business in China, or “China risk”, a combination of increasing production costs and heightened political tensions. That figure was an increase from 101 firms the previous year and the highest number since Tokyo Shoko Research began the annual survey in 2014.
The companies that went under left debts amounting to 71.84 billion yen (HK$ 4.96 billion), although that was a decline of nearly 67% on the previous year’s losses because only one company failed with debts totalling more than 10 billion yen (HK$ 691.08 million). The losses in 2015 were skewed by the collapse of shipping line Daiichi Chuo Kisen Kaisha with 120 billion yen (HK$ 8.30 billion) in debts.
The “China risk” bankruptcies caused the loss of 1,638 jobs, surpassing the 1,000 figure for the first time, the research showed. By sector, 63 of the failures were wholesale companies and 33 were manufacturing concerns. The hardest-hit industry was apparel, which reported 54 bankruptcies, nearly half of the 110 annual total.
“At the moment, the rise in costs due to soaring labour costs in China is a threat, in particular to Japanese apparel-related companies,” said Mitsuhiro Harada, who authored the report. “Apparel companies in Japan were previously attracted to China due to the low manufacturing costs, including labour costs, and raised the ratio of the products they produced in China and stepped up procurement there,” Harada said.
“However, this has faded with the subsequent rise of ‘fast fashion’ in Japan – inexpensive apparel products with impressive designs distributed outside conventional routes. Combined with rising costs due to increasing personnel costs in China, this was enough to bring down companies that were already struggling,” he added.
Firms did not have sufficient reserves to increase production efficiency and compete with fast fashion manufacturers such as Uniqlo, Harada said. Another factor was the average age of owners of Japanese apparel companies being higher than in any other industry, suggesting that they were reluctant or unable to innovate, and that they experienced problems finding successors to run their businesses as they reached retirement age.
Sadayoshi Tamura, a spokesman for the Japan Textile Federation, conceded that rising costs in China have hurt member companies’ operations, but he said that some companies that declare bankruptcy in China go on to raise fresh capital and set up new manufacturing facilities in Myanmar, Cambodia, Laos or Bangladesh, where wages are still relatively low.
Analysts believe the problems that Japanese companies are encountering in China are merely a fact of international business life. “This is completely market driven,” said Lam Peng Er, senior research fellow at the East Asian Institute of the National University of Singapore. “It’s normal. Whether companies can stay in business depends on whom they are competing with, which technology they use and how fast they can adapt to the dynamic of China’s economy. Uniqlo is very successful and it is sourcing from China.
“Some Japanese companies have already relocated their factories to Vietnam and Japan has announced a big investment plan in Myanmar. But China will remain important for Japanese companies; a small country like Myanmar can’t replace China. In the future, it would be China plus others. The others could be Vietnam, Myanmar or somewhere else.”
John Wong, fellow and academic adviser to the East Asian Institute of the National University of Singapore, warns that the worst may be yet to come. “One can say that in the future, if President [Donald] Trump were to slam a heavy import duty on Chinese manufactured imports into the US, China would have to cut back on its production,” he said. “This would also affect producers in Japan, Korea and Taiwan or even the US, for example, in the case of an iPhone.
Textile investments in Vietnam on the rise
Investments in Vietnam’s textile and apparel industry are growing, even as the TPP is being reworked without the US, an important textile and apparel market. Moreover, UK’s imminent exit from the European Union is slowing down the British economy. And while China remains Vietnam’s largest trade partner, there is a slowdown there too
Vietnam’s Phong Dien Scavi Company is building an industrial centre specialising in textile and garment at the Phong Dien Industrial Park Hue City. The first hub of its kind in Vietnam was run on a trial basis in 2015 and 2016.
The facility is due to be put into operation in the second quarter of this year, bringing together various segments involved in textile production such as feedstock, fabric accessories, design, fashion illustration and finally production of large volumes of finished products for exports.
This project is expected to scale up the country’s textile and apparel sector and attract foreign investment since many foreign apparel manufacturers are keen to invest in the Vietnamese textile industry where there are specialised models.
Besides focusing on exports, many companies including State and private ones have also drawn up ambitious strategies to expand their shares in the domestic market this year by enlarging distribution networks and consolidating their brand strengths. Among them, Viet Tien Garment Company plans to increase investments by 50 % to expand distribution systems.
It is not only such big companies but also many small ones, including start-ups, who plan to invest in production and business and their distribution networks this year.
Vietnam hopes to increase exports this year
Vietnamese industry is looking forward to the benefits of some of the upcoming free trade agreements this year, to boost exports. The International Monetary Fund (IMF) has predicted the global economy to grow by 3.5 % this year, while the World Bank believes 3.1% growth is likely.
According to the Vietnam Ministry of Trade and Industry, in 2017 Vietnam’s economic integration will gain further momentum. It will have to implement all commitments under the ASEAN Free Trade Agreement with China and with other ASEAN member countries, the ASEAN Economic Community (AEC), World Trade Organisation (WTO), and new generation free trade agreements. This is expected to create highly favourable conditions for the country’s economic development.
Vietnam cancels 40 FDI projects
The investment permits for 40 FDI projects have been cancelled. All of the projects were based in the southern Dong Nai province, not far from Ho Chi Minh City, and all had either been abandoned or subjected to excessive delays. The combined value of the projects was said to be some US$ 300 million. The move follows a commitment by the management of the Dong Nai Industrial Zone to rescind the licence of any FDI project that is not up and running within 12 months. In 2016, the Dong Nai province granted investment permits to around 100 FDI projects, together worth some USD 2.2 billion, making it Vietnams’ fifth most popular FDI destination. At present, the province has 32 industrial parks and is home to 1300 FDI projects with a collective value of USD 25.8 billion.
China increases investments in Vietnam
According to Vietnam’s Foreign Investment Agency (FIA), in the first two months of 2017, China registered USD 608 million worth of FDI, Foreign Direct Investment in Vietnam, accounting for 30 % of total newly registered capital, making it the biggest foreign investor in Vietnam. Singapore, the second biggest investor, registered capital of USD 167 million.
FDI in Vietnam reached USD 3.4 billion in the first two months of the year, up 21.5 % compared to the same period last year. Up to 47 localities nationwide received FDI in two months. The southern province of Binh Duong took the lead with USD 791 million or 23.2 % of the total FDI registered in the country. It was followed by the capital city with USD 519 million and southern economic hub of HCMC with USD 464.2 million.
Experts believe that China is increasing its political and economic involvement in the region, after the US withdrew from the TPP. RCEP – an economic agreement between the 10 ASEAN members and six other countries including China, is now the largest economic pact in the region.
Moreover, low investment rate in Vietnam is a great advantage China for Since Chinese equipment and machines are cheap, its products have low production costs and do not take much time to recover investment capital.
China remains biggest trade partner of Vietnam in January
China also remains the biggest trade partner of Vietnam. Vietnam’s exports to China went up 34.4 % year-on-year while imports hiked 0.4 %. South Korea and the United States were among main trading partners of Vietnam last month. Vietnam saw growth in its exports to and imports from South Korea, with respective rises of 29.4 % and 30 % year-on-year. The country’s exports to the United States rose slightly at 0.3 % while that of imports climbed 14.6 % year-on-year.
In January, Vietnam earned USD 14.34 billion from exports, down 13.5 % over the previous month. Major revenue earners included cell phones and accessories, accounting for 16.2 % of the national total exports, garment and textile making up 15 %, computers, electronic products and accessories, taking up 10.5 %, among others.
However, the United States topped markets for Vietnamese garment and textile with revenue of nearly USD 1.08 billion, up 5.8 % year-on-year, followed by Japan with USD 253 million, and South Korea with USD 215 million.
Cambodia records robust factory growth
Cambodia has seen a marked increase in industrialisation over the past five years, with the number of factories nearly doubling during that period and producing a broader range of goods for both export and domestic consumption, according to new unreleased government data.
In the yet-unpublished 2016 annual report of the Ministry of Industry and Handicraft, data show the total number of factories nationwide jumped 74 % during the last five years. Cambodia had a total of 1578 factories in 2016, compared to just 907 in 2012. Cambodia’s US$ 6 billion garment industry continues to dominate its industrial profile, accounting for over 10 % of GDP and providing 600000 jobs, recent years have seen strong growth in other industrial sectors.
The total number of garment factories grew by 60 % to top 1000 during the five years ending in 2016. Meanwhile, the number of factories producing food, beverages or cigarettes increased by 82 % to 135 during the same period, while metal processing factories surged by 141 % to 111. Mey Kalyan, senior adviser to the Supreme National Economic Council, said the government has adopted an industrial development strategy and is actively pushing to diversify beyond labour-intensive garment manufacturing toward higher value-added products.
The US dollar appreciation is making Cambodian exports more expensive – for example, compared to those of Vietnam, and at the moment wages are going up. In order to maintain the profit margin and keep employing people, there is a need to add value to the products exported. So, basically, moving a little bit from the cheaper garment exports to some exports with more value. He said the growth of non-garment manufacturing was a welcome development, as new factories producing electronics and automobile parts tend to generate higher revenue. They also bring in new technologies and expand the skill sets of the local labour pool while moving local industries up the value chain.
Kalyan said the government has recognised that a cheap and reliable electricity supply is crucial to industry, especially in special economic zones. The growth of factories has been accompanied by a surge in revenue from industrial products, according to the ministry report. Exports of industrial products including garments grew by 77 % over the past five years to reach USD 9.5 billion, while revenue from domestic production nearly tripled to reach USD 2.1 billion. Oum Sotha, spokesman of the Ministry of Industry and Handicraft, said the government’s 10-year industrial development strategy, which charts a course from 2015 through 2025, projects industry to expand by another 30-40 % in the coming five years.
“The government has set up a single direction for Cambodia’s industrial development in which all ministries must follow the same course,” he said. Over the past two decades, Cambodia has been the sixth fastest growing country in the world, with an average rate of 7.6 %. This has been accompanied by very significant poverty reduction. The population living in poverty has dropped from more than 50 % in 2004 to just around 13 % in 2014. In recent years, the growth has been around 7 %. The drivers have been agriculture, the garment sector, garment exports, tourism and construction
Myanmar attracts investments, need for international standards and labour legislations
Myanmar, a fast evolving apparel manufacturing hub in the region, is also witnessing a spate of investments. New factory sites are to be released within the Thilawa Special Economic Zone (SEZ) before the end of 2017. Set on the outskirts of Yangon, Myanmar’s commercial hub, the SEZ has already attracted more than USD 1 billion in investment, thanks in part to a number of government-backed incentives, including a seven-year tax holiday for export-oriented FDI projects and a five-year tax break for domestic-oriented production. These incentives will be extended to the tenants of the new sites.
Work has already commenced on a 101-hectare extension to the existing 405-hectare site. The additional section is scheduled to be completed by mid-2018.
Work begins on delayed Dawei Special Economic Zone project
Work is expected to commence on the delayed Dawei Special Economic Zone (DSEZ) project in south-eastern Myanmar. Initially mooted in 2008, the project has long been beset with financial difficulties. Now, though, the Myanmar government has appointed a high-level task force with a brief to deliver the proposed DSEZ.
Based in the country’s southern Tanintharyi region and set on the Andaman Sea coast, DSEZ is a joint project between the Myanmar government and a private consortium of mostly Thai companies. Once completed, the site will comprise a deep-sea port and an industrial estate, with road and rail links to Bangkok and the Greater Mekong region. The port will also offer Thailand, Vietnam and Cambodia faster access by sea to India than via the current routes through the Malacca Straits.
Experts however, urge the country’s textile and apparel industry entrepreneurs and international buyers to address the issues of worker’s rights which is expected to create over a million new jobs by 2024.
In the recently published report ‘The Myanmar Dilemma’, the Netherlands Center for Research on Multinational Corporations describes human rights and labour rights issues in the Myanmar garment industry. Working together with two Myanmar nongovernmental organizations (NGOs), Action Labor Rights and Labour Rights Defenders and Promoters, 400 workers from 12 factories and a wide range of stakeholders were interviewed.
The legal minimum wage is USD 2.65 per day. New workers are frequently paid below this minimum as Myanmar law allows for employers to pay workers apprentice or probation wages at 50 % or 75 % during the first six months of employment. To earn a living, they work for long hours, sometimes for up to 11 hours a day. Girls younger than 15 years old find employment in this sector. And to make matters worse, workers have very few opportunities to file complaints and get redress.
However, these conditions do not violate Myanmar labour law which allows for the payment of outright poverty wages, sets the minimum age for employment at 14 years and puts up barriers for workers to join and form unions and to engage in collective actions. Rights activists are demanding legislations that meet international standards to protect workers, and to create a stronger textile and apparel industry.