Vietnam garment makers face rising bankruptcies

Singapore, Ho Chi Minh City, Aug 30 | Updated: Aug 31 2006, 05:30am hrs
Vietnams $3 billion garment industry, which supplies Nike Inc and Limited Brands Inc, may see a surge in bankruptcies because of rising labour costs and competition from China, the nations biggest clothing maker said.

Half of Vietnams 2,000 garment factories could file for bankruptcy in the next two years, said Le Viet Toa, vice-general director at Viettien. That may offer acquisition opportunities for the state-owned company and help increase its market share ahead of a planned share sale next year, he said.

Only the big companies will survive, Toa said in an August 25 interview at his office in Ho Chi Minh City.

Vietnamese workers are leaving garment factories for better-paying office jobs, hurting the industry as Chinese rivals cut costs by moving production to poorer inland provinces. The industry is Vietnams second-biggest foreign-exchange earner after crude oil, and its decline may curb growth in an economy the government projects will expand 8% annually in the next decade.

Vietnam has done very well through very good workmanship and lower labor costs, but the lower labor cost is a thing of the past, said Horst F Geicke, chairman of VinaCapital in Ho Chi Minh City, which manages about $600 million of investments in Vietnam. Its a sunset industry.

Vietnams 1 million apparel-factory workers make about $100 a month, almost twice the $55 minimum wage. More are turning to higher-paying jobs in banks and hotels, Toa, 59, said.

VinaCapital estimates labor costs in Vietnam are about 20% lower than coastal cities in China. Wages in China's rural areas, though, are about 10% to 15% lower than in Ho Chi Minh City.

To cut costs, Viettien said the company and other garment manufacturers are expanding into rural provinces, where labour costs are about 70% of those in Ho Chi Minh City, the countrys biggest city.

Viettien, which makes shirts and other apparel for American Eagle Outfitters Inc and Nike, said it has bought two failed Vietnamese factories this year, adding to its 36 manufacturing sites in the country. The new sites will help increase its factories in the provinces to 70% of its manufacturing locations in three years, from about half now, Toa said.

Our intention is to buy cheap, get the good management, skilled workers, and get more orders, he said.

Viettien expects sales to increase 19 percent this year to $250 million. Exports make up 90% of the companys revenue. Vietnams apparel shipments to the US rose 31% to $1.51 billion in the first half.

The industry may also benefit from the Vietnams expected entry into the World Trade Organisation this year.

Still, gains from efforts to cut costs and from consolidation may not be enough to boost the competitiveness of an industry that lacks a domestic textile manufacturing base.

Vietnamese apparel makers have to import most of their fabric, paying more than rivals in China who can source materials locally.

Viettien said it imports 70% of its fabric. Frankly, the textile in Vietnam is still very weak, weak in quality and quantity, Toa said. My big worry is the textile problem.

Bloomberg