US embassy cable - 05HOCHIMINHCITY1146

UNCLAS SECTION 01 OF 03 HO CHI MINH CITY 001146 
 
SIPDIS 
 
SENSITIVE 
 
DEPARTMENT PLEASE PASS USTR, ELENA BRYAN 
DEPARTMENT FOR EAP/MLS AND EB/TPP/ABT/BTT 
USDOC FOR OTEXA 
BANGKOK FOR CUSTOMS ATTACHE 
USDOC ALSO FOR 4431/MAC/AP/OPB/VLC/HPPHO 
TREASURY FOR OASIA 
 
E.O. 12958: N/A 
TAGS: ETRD, ECON, KTEX, VM, BTA, WTO, LABOR 
SUBJECT: VIETNAM TEXTILES: COMPETING IN A QUOTA-FREE WORLD 
 
REF:  A) HANOI 2390 B) HCMC 178 
 
SUMMARY 
------- 
 
1. (SBU): Vietnam's apparel exports to the United States have 
boomed since the entry-into-force of the BTA.  However, the 
Vietnamese garment industry is beginning to feel the pinch of 
being one of the only countries still subject to textile quotas. 
Vietnam is not reaping any benefit from safeguard actions in 
China, as originally anticipated.  According to industry experts, 
rising labor costs, labor shortages in the HCMC area, and high 
transport and input costs have affected the volume of Vietnam's 
exports in 2005.  At the same time, other Asian nations not bound 
by quotas, like Indonesia and Bangladesh, have done a better job 
than Vietnam at filling the gap created by safeguards against 
China.  Industry representatives report that the benefits to 
Vietnam of entering the WTO to escape quotas may not be as great 
as previously expected. END SUMMARY. 
 
BOOMING APPAREL EXPORTS WITH BTA 
-------------------------------- 
 
2. (SBU) According to the Vietnam Textile and Apparel Association 
(VITAS), Vietnam's garment exports to the United States went from 
less than USD 50 million in 1999, the year prior to the signing of 
the U.S.-Vietnam Bilateral Trade Agreement (BTA), to USD 2.7 
billion in 2004.  Industry experts have traditionally cited 
Vietnam's low labor costs combined with production of consistently 
high-quality goods as the main reasons for Vietnam's high degree 
of competitiveness world-wide, a competitiveness that continued 
following the imposition of U.S. quotas.  According to one U.S. 
buyer who has been based in Vietnam for 11 years, the Vietnamese 
adopted their high standards in product quality originally to meet 
the demands of Japanese buyers, and these standards have aided the 
Vietnamese in developing a U.S. market for their goods. 
 
3. (SBU) While the majority of garment factories are located in 
the Ho Chi Minh City area, increased exports to the United States 
have been a boon to factories located elsewhere, including 
factories clustered in central Vietnam.  For example, General 
Director Tran Van Pho has transformed the Hoa Tho Textile-Garment 
Company (HOTEXCO) from a run-of-the-mill state-owned factory and 
spinning mill to one of the region's largest textile and garment 
concerns.  HOTEXCO, which is part of the national state-owned 
enterprise (SOE) Vinatex, operates six factories in Danang City 
and Quang Nam province that employ 4,000 workers and produce 
dresswear, sportswear and outerwear for the likes of Perry Ellis, 
Nautica, Haggar, Puma and Target.  In 2000, the year before the 
BTA entered into force, HOTEXCO exported USD 2.4 million in 
garments.  In 2004, the company exported USD 34 million and is 
likely to top USD 40 million in exports in 2005.  Sixty percent of 
the company's products are exported to the United States.  Mr. Pho 
credited the BTA as the key to HOTEXCO's rapid growth and noted 
that limits imposed by U.S. quotas have not dramatically affected 
HOTEXCO since some of its apparel products are not subject to 
quota.  He is looking forward to equitizing the company in the 
near future. 
 
GARMENT EXPORTS TO THE UNITED STATES WEAKENING IN 2005? 
--------------------------------------------- ---------- 
 
4. (SBU) The boom in garment exports to the United States of the 
last five years may be easing, however, even as Vietnam is poised 
to enter the World Trade Organization and benefit from the removal 
of U.S. quotas.  VITAS reported to EconOff that in the first half 
of 2005, Vietnam has not adequately met its garment export 
targets, and exports to the United States and European Union are 
down from the same period in 2004.  According to VITAS, Vietnam 
exported a total of USD 4.4 billion in garments in 2004 and set an 
export target of USD 5.2 billion for 2005.  In the first six 
months of 2005, garment exports reached USD 2.05 billion, less 
than half the national target for the year.  The lower-than- 
expected numbers can be traced in part to the fact that, in the 
first six months of 2005, exports of garments to the United States 
fell by 2.8 percent and exports to the EU fell by 10.4 percent, 
compared to the same period in 2004.  However, exports to Japan 
rose by 12.8 percent in this period.  VITAS reported that May to 
September is the peak season for garment exports in Vietnam and 
that export numbers are usually higher in the second half of the 
year, compared to the first half. 
 
5. (SBU) Underutilized U.S. quota reflects the decline in exports 
to the United States in the first part of the year, according to 
HCMC-based U.S. buyers.  These buyers forecast that only a handful 
of the 38 garment categories subject to quota in Vietnam would by 
fully utilized by year's end.  U.S. Customs reported that as of 
October 26 less than 50 percent of quota had been filled in 15 of 
38 categories. 
 
DECLINING VIETNAMESE COMPETITIVENESS 
------------------------------------ 
 
6. (SBU) HCMC experts reported that underutilized quota is not the 
main reason for the decline in exports to the United States in the 
first half of 2005.  In their view, Vietnam's competitiveness in 
the apparel industry has declined in the face of increased 
competitiveness from other Asian nations, including Indonesia, 
Bangladesh, India and Sri Lanka.  Many thought Vietnam would 
benefit from safeguards imposed on China, but other Asian nations 
have leveraged the situation better than Vietnam, taking advantage 
of the lifting of quotas worldwide and the existence of integrated 
supply chains to drive down costs.  In the words of one U.S. buyer 
in HCMC, "world garment prices are falling, and Vietnam cannot 
compete." 
 
7. (SBU) The success of Vietnam's apparel industry has derived, in 
part, from low labor costs.  Other costs, such as inputs (e.g. 
fabrics) and transportation, have always been higher in Vietnam 
than in other nations, but the combination of low labor costs, the 
high quality of Vietnam's production, and the worldwide quota 
system served to offset input and transportation costs in Vietnam. 
Now that quotas have been lifted for most of the rest of the 
world, Asian nations are using vertical supply chains to take 
advantage of domestic inputs to produce faster and at lower cost. 
Vietnam remains hampered by the fact that it still must import 
most of its inputs, which drives up costs and slows delivery of 
finished goods. 
 
8. (SBU) At the same time, labor costs are rising in Vietnam. 
VITAS reported that a survey conducted by Vinatex showed that 
salaries of garment workers rose by 15 percent in the first six 
months of 2005, compared to the same period in 2004.  One U.S. 
buyer said factories in HCMC and neighboring provinces of Dong Nai 
and Binh Duong were facing a labor shortage; these factories are 
stuck between increasing wages to attract workers and keeping 
costs down to compete with world garment prices. 
 
9. (SBU) The result is that U.S. buyers are sourcing less of their 
product in Vietnam.  MAST Industries, a subsidiary of The Limited, 
has reduced its production in Vietnam by 20 percent.  Most of that 
production has shifted to Indonesia, which produces fabric 
domestically, in contrast to Vietnam.  Li & Fung Trading Limited, 
a Hong Kong-based company that sources apparel for companies like 
Levi Strauss, Wal-mart and Target, is relocating its HCMC-based 
expatriate garment buyer to India. 
 
MINISTRY OF TRADE AND QUOTA ALLOCATION 
-------------------------------------- 
 
10. (SBU) VITAS and the HCMC Association of Garment-Textile- 
Embroidery-Knitting (AGTEK) agreed with U.S. buyers' view that 
Vietnam's Ministry of Trade (MOT) has not managed quota allocation 
as well as it could have and is partially to blame for under- 
utilized quota.  Only on October 17 did MOT announce that 
manufacturers would be granted automatic visas - which speed up 
quota utilization - for certain categories; industry experts said 
MOT should have allowed automatic visas much earlier in the year. 
 
11. (SBU) U.S. buyers are generally satisfied with MOT's 
responsiveness to their concerns.  MOT still declines to issue 
quota based on past performance - the method supported by U.S. 
buyers - and instead prefers to reserve a small percentage of 
quota for discretionary allocation, for example to factories in 
remote areas.  However, in September MOT agreed in principle to a 
proposal put forward by the Textile Committee of the American 
Chamber of Commerce that companies applying for quota in high- 
demand categories be required to submit a bank guarantee of 25-30 
cents per piece in order to secure quota.  Requiring a bank 
guarantee will discourage companies from hoarding quota, another 
cause of underutilization. 
 
COMMENT 
------- 
 
12. (SBU) In the short-term, the decline in garment exports to the 
United States may diminish the strength of the textile industry's 
pressure on the GVN to quickly accede to the World Trade 
Organization (WTO).  One of the main drivers of Vietnam's WTO bid 
has been the potential for Vietnam's garment exports following WTO 
accession and the elimination of quotas.  The decrease in exports 
and competitiveness, combined with underutilization of U.S. quota, 
casts into doubt the degree to which Vietnam's garment industry 
needs WTO membership in the short term.  As one U.S. buyer noted, 
SOEs receive the lion's share of U.S. garment quota; if orders are 
not likely to increase significantly following the elimination of 
quotas on Vietnam, the powerful SOEs have less motivation to 
encourage the GVN to accelerate its WTO bid. 
 
13. (SBU) In the long-term, Vietnam's apparel industry needs to 
focus on the niches of the worldwide market where it can remain 
competitive.  U.S. buyers agree that Vietnam is still the best 
place to source high-quality garments that require special 
embroidery and detail work, even if prices are higher and delivery 
slower.  Certain industry leaders understand this, according to 
the buyers, but the rest of the industry and MOT are still - with 
an increasing lack of success - trying to compete directly with 
large-scale producers like China and India.  Vietnam's textile and 
apparel industry directly and indirectly employs as many as two 
million workers.  Textile and apparel exports in 2004 were 
Vietnam's second-largest export, after crude oil.  Given the size 
and importance of the textile and apparel industry in Vietnam, its 
ability to maintain competitiveness has serious implications for 
the health of Vietnam's economy more broadly. 
 
WINNICK