US embassy cable - 03HOCHIMINHCITY605

UNCLAS SECTION 01 OF 02 HO CHI MINH CITY 000605 
 
SIPDIS 
 
STATE FOR EAP/BCLTV AND EB/TPP/ABT/BTT BOYNTON 
STATE ALSO PASS TO USTR BRYAN/SPOONER/MILLER/CLATANOFF 
USDOC FOR 6500 AND 4430/MAC/AP/OPB/VLC/HPPHO 
USDOC ALSO PASS OTEXA LEONARD/FOOTE/MARTELLO 
CUSTOMS FOR RICHARD CRICHTON 
LABOR FOR ANA VALDES 
 
 
E. O. 12958: N/A 
TAGS: ECON, ETRD, KTEX, VM, SOE 
SUBJECT: QUANG NAM GARMENT FACTORY:  TRYING TO MAKE IT IN THE 
MIDDLE OF NOWHERE 
 
Summary 
------------ 
1.  Quang Nam Province is the home of the Quang Nam Garment 
Company, a small state-owned enterprise with about 800 employees 
and revenues of VND 20 billion per year (about US$1.3 million). 
On a brief visit to the company by DPO and Econoff, they saw a 
clean, well-lit, well-ventilated factory producing its last U.S. 
order for the year.  The visit provides a glimpse of how a small 
factory far from Vietnam's commercial and industrial centers is 
dealing with U.S. quotas, competing with larger firms in Hanoi and 
Ho Chi Minh City areas, and handling social accountability issues 
and economic reforms. Interestingly, the company director was 
enthusiastic about the possibility of equitization, or partial 
privatization in this case. 
 
Quang Nam - One of the Poorest Provinces 
---------------------------------------- 
2.  Located south of Danang along the central coast of Vietnam, 
Quang Nam is one of the poorest provinces in the South, with an 
average per capita income of US$230 per year.  The province does 
draw relatively large numbers of foreign tourists to its two 
UNESCO World Heritage Sites, including the picturesque town of Hoi 
An and the ancient Cham ruins at My Son.  It is also the province 
with the highest number of "Mothers of Revolutionary Heroes," 
that is, mothers who lost children fighting in the war - against 
us.  Outside of Hoi An, the province is relatively poor and has 
little industry.  Quang Nam is working actively to change this, 
with the development of the Chu Lai Open Economic Zone at the 
southern edge of the province (more to come Septel). 
 
Company Does Assembly Only and is on Its Last U.S. Order 
--------------------------------------------- ----------- 
3.  Unlike most textile/garment firms in the Ho Chi Minh City 
area, the Quang Nam Garment Company is a state-owned enterprise 
(SOE).  It is one of three subsidiaries of the Hoa Tho Textile 
Company based in Danang and is part of Vinatex, the huge textile 
conglomerate controlled by the Ministry of Industry.  Quang Nam 
Garment Company Director, Mr. Do Ngoc Phuong, showed us around the 
facility.  He noted that the factory simply filled orders provided 
by the mother company in Danang and did not have a separate sales 
or marketing function.  Its traditional markets were Japan, Korea, 
and Taiwan.  Marubeni, a well-known Japanese trading firm, is a 
particularly large customer.  The company cuts and assembles 
garments using fabric and other accessories coming directly from 
the buyer.  The only components sometimes sourced locally are 
thread and packaging materials.  Quang Nam Garment Company has 
about 800 employees and generates revenues of about 20 billion VND 
(about US$1.3 million), which amounts to only about US$1600 per 
worker per year. 
 
4.  Director Phuong stated that after the BTA went into force the 
company began to receive U.S. orders and had gradually shipped 
more and more to the American market.  So far this year the 
company had shipped 250,000 pieces to the U.S., he said.  But due 
to U.S. quotas, the factory was finishing up what he expected 
would be his last U.S. order for some time - a shipment of Dickies- 
brand trousers.  Mr. Phuong stated that the parent company had 
told him not to expect any additional quota or U.S. orders this 
year.  (Note: It is not clear whether the parent company does not 
expect to be allocated additional quota or if it just plans to 
allocate what it receives to other subsidiaries.  End note.)  Mr. 
Phuong said his company would once again focus on its traditional 
export markets, even though these orders were less profitable. 
 
Low Pay, Reasonable Conditions Equals Good Jobs 
--------------------------------------------- -- 
5.  Quang Nam Garment Company is located right up against busy 
National Highway 1A.  Our meeting with the director was in a 
shabby, drab administration building.  The factory itself, 
however, was surprisingly clean, well lit, well ventilated, and 
relatively cool on an extremely hot afternoon.  Some parts of the 
factory were air-conditioned.  For the first time Econoff saw 
Vietnamese men working at the sewing machines.  Typically in 
factories near Ho Chi Minh only women fill these jobs.  Salaries 
in Quang Nam are low, however.  Director Phuong reported that 
workers earn VND600,000 per month (less than US$40), which he 
believes is about 70% of the going rate in Ho Chi Minh City.  Mr. 
Phuong noted, however, there was low turnover rate, because in 
Quang Nam, these were considered good jobs with competitive 
salaries.  Many of the factory workers in the Ho Chi Minh City 
area come from places like Quang Nam.  But according to Mr. 
Phuong, these workers -- even with lower pay -- would much rather 
stay close to home where the cost of living is cheaper and 
surroundings more familiar. 
 
6.  When asked about social accountability issues, Director Phuong 
said the parent company handled any necessary certifications, 
although he only knew of the firm obtaining an ISO certification, 
not about meeting any social accountability standards.  He went on 
to say, however, that the company had made a number of changes to 
improve worker conditions for the U.S. market.  He particularly 
noted improved lighting, ventilation, air-conditioning and 
"modernization of some of the production." 
 
7.  Quang Nam Garment Company's low wages and stable workforce 
give it a small competitive edge over firms in more expensive Ho 
Chi Minh City.  But Mr. Phuong also noted his central Vietnam 
location makes it more difficult for him to reach customers and 
that shipping is slower and more expensive from there, than from 
HCMC.  As other firms have also told us in central Vietnam, it is 
easier and faster for a company to truck its goods down to Saigon 
Port, rather than use port facilities in Danang, where ships call 
much less frequently. 
 
Plans to Equitize 
----------------- 
8.  When asked about development or expansion plans, Director 
Phuong stated the company was planning to be equitized by 2005, a 
move he strongly supported.  He said he believed it would make 
management and workers feel more personally responsible for the 
company and its success, and would improve its financial position. 
Equitization would only go so far, however.  When asked if he was 
worried about his company going it alone when it had yet to build 
up the most basic sales and marketing functions, he stated that 
even after equitization the parent company would retain a 50% 
interest in the company and would continue to perform those 
functions. 
 
Comment 
------- 
9.  In a poor, relatively remote provincial location, a steady job 
paying less than US$40 per month is considered good. 
Unfortunately, that appears to be this company's only competitive 
edge.  Quang Nam Garment Company, even with its successes, 
exemplifies the problem of many of Vietnam's garment firms.  They 
are basically assembly operations capturing only a small portion 
of the value of the final garment.   Although Director Phuong 
realizes he could increase his revenues dramatically if his 
company could do more than just assembly, he does not appear to 
have any plan or means to do so.  Nonetheless, this little textile 
firm in the center of Vietnam is able to compete in the global 
market successfully and be an important employer in an 
economically depressed area of the country.  And while the quota 
on U.S. goods is limiting his ability to get higher profit orders, 
Mr. Phuong seems confident that he can find buyers in his 
traditional Asian markets. 
 
YAMAUCHI