Inflation hits Vietnam’s apparel, footwear sectors as China reopens
François Locoh-Donou, president and CEO of F5. Credit: F5
After weathering a Covid-impacted 2021, Vietnam’s apparel and footwear sectors rebounded in 2022, along with the rest of the economy, and while the country is looking forward to medium-term expansion, Michael Tatarski reveals why 2023 could be a rocky ride with China reopening its doors to the world.
Exports of footwear in the first half of 2022, for example, rose 13% by value compared to the same period in 2021, according to data released by the Vietnam News Agency (VNA), the state-run news agency. And while the clothing and footwear sectors expect this growth to continue, given Vietnam’s export-oriented outlook, one of the biggest issues facing local manufacturers is inflation in key destination markets.
This is having an impact – last Tuesday (21 February), Pou Chen Vietnam, a major shoe supplier for brands such as Nike and Adidas and the largest employer in Ho Chi Minh City, the country’s economic centre, reportedly announced it will cut 6,000 jobs due to a lack of orders.
This is because of inflation and cost of living problems in the US and the European Union (EU) dampening consumer demand in two of Vietnam’s largest export markets. The US accounted for half of apparel exports in each of the last two years.
“In the medium term, I’m optimistic, but in the short term, I do not see a pickup in the market due to the economics of the US and Europe,” said Daniel Karlsson, managing director of the advisory and consulting firm Asia Perspective.
“Inflation, especially in the west, affects the footwear and apparel industries, resulting in increased production costs and reduced profit margins,” added Rajkishore Nayak, an Associate Professor at RMIT University Vietnam focused on sustainability in fashion and textiles.
“The prices of raw materials, electricity, and water are increasing, but factories cannot proportionally increase prices, so they have to do cost-cutting like layoffs or shutting down facilities.”
Will China reopening benefit Vietnam’s apparel and footwear sector?
The sudden reopening of China following its years-long pursuit of a zero-Covid policy may provide some relief by expanding an important nearshoring market, but only to a degree.
“When it comes to big brands such as Nike, China is opening up, and that is a significant market for them, so that might be on the plus side of the scorecard,” said Karlsson.
But China presents a complicated overall dynamic for these sectors in Vietnam. Former US President Donald Trump’s trade war (largely continued under President Joe Biden), followed by the pandemic, pushed some clothing and textile manufacturers and their brand buyers to look beyond China as a base of operations.
Vietnam has become an attractive option given its proximity to China, improving infrastructure, and more affordable workforce. However, China remains competitive in many ways, and Vietnamese manufacturers need to keep a close eye on what remains a global supply chain powerhouse to the north.
“In China, they’re investing in automation, robots, and laser cutting, while in Vietnam, they have good equipment, but they need to invest for the next level, and that’s not really happening,” Karlsson added.
Vietnam’s challenge is its raw materials still come from China
“There’s a lot of ambition to Vietnam, and people want to move, but if you’re a sourcing company and all of the raw materials are still coming from China, you’re not really decoupling.”
Nayak agreed that this is a problem Vietnam needs to address: “Up to 80% of apparel businesses I talk to import woven fabric from China, while the machines and transportation networks there are really good,” he said. “Vietnam has a very old transportation system.”
These issues also feed into sustainability, given major western apparel and footwear companies have ambitious decarbonisation goals within their supply chains.
“Vietnam is still building coal plants, so it’s difficult to say they are decarbonising manufacturing,” Karlsson said. “Is the government ready to invest in new technologies and energy sources? A lot of solar and wind has been built, but the grid can’t take all that energy, so businesses can’t utilise it.”
Nayak added: “One of the most important ways the footwear and apparel industries should be greener is sustainable production and manufacturing practices, including reducing raw material consumption.” And companies that have invested to improve their competitiveness have seen the rewards.
“I visited a factory where the owner bought automatic cutting and sewing machines,” Nayak said. “She had to lay off about 400 people across two factories, but the quality, consistency, and productivity were so high that they had very few product rejections. Many businesses don’t realise that if you buy new technology, you can get better-quality products while using less energy.”
However, there aren’t any specific Vietnam government incentives or programmes to encourage improved efficiency.
It was not encouraging that the Vietnam National Textile and Garment Group – a state-run manufacturing major; the Vietnam Textile and Apparel Association; and the Vietnam Leather, Footwear, and Handbag Association did not respond to multiple requests for comment on how Vietnam’s clothing and textile industry might move forward.
Will Vietnam be the winner moving forward?
On the plus side, however, beyond China, Nayak argues that Vietnam is much more competitive than other peer countries in south-east and south Asia: “The regulations are more friendly to foreign direct investment than India or Bangladesh, while employees are better-educated and more skilled than in countries like Indonesia or Cambodia,” he said.
Karlsson, for his part, however, believes India will be the long-term winner of anticipated supply decoupling from China, and maybe not Vietnam.
“I’m not saying it will be easy, but it has its own supply chain for raw materials,” he said. “There will also be some nearshoring, with Europe moving some manufacturing to Turkiye. In the future, if it’s not Vietnam, it will be India or nearshoring.”
Main image credit: Sorbis / Shutterstock.com
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