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Several new trade pacts such as the one with EU and Trans-Pacific Partnership are expected boost Vietnam’s economy as many foreign investors are already showing keen interest in making investments in the country. These pacts will also let Vietnam take advantage of low tariffs, which will benefit its exports to top markets like the EU, the US, Japan and Australia.
The newly-signed FTA with the EU, for instance, will remove more than 99 per cent of tariffs on goods traded between the two economies over a period of seven years. And the TPP is expected to boost shipments within the bloc of 12 Pacific-rim nations, which accounts for 40 per cent of the global economy. Negotiations on the deal have been recently completed and it is now pending the approval of the countries' legislatures.
With manufacturing in China becoming expensive due to high labour costs and government policies, US investors' interest in Vietnam is on the rise, which was proved after more than 30 business executives seeking investment opportunities in construction visited the country. Also many leading US companies like Nike and Mast Industries are contemplating building their manufacturing activities in Vietnam.
New FDI pledges between January and November rose 1.1 per cent to $13.55 billion from the same period last year, while the additional funds for existing projects were estimated at $6.67 billion in the period, according to the General Statistics Office.
However, experts are of the opinion that while Vietnam is emerging as the next hot investment destination, its government must resolve issues around customs and tax procedures and introduce investor friendly policies.
In its recent Outlook Update, Moody’s Investor Service lowered the 2016 growth forecast for the apparel and footwear industry to the 3-5 per cent range from 5-7 per cent in 2015, moving from a positive outlook to a stable one. Analysts also lowered their 2015 constant-currency growth forecast from 7-9 per cent.
“While the hedges taken this year will partially protect margins, the strong US dollar will continue to have negative foreign currency translation effects on the industry’s gross profits for the rest of this year,” said Scott Tuhy, a Moody’s Vice President, Senior Credit Officer.
Once 2015’s hedges have rolled off next year, provided foreign exchange rates stay the same, Moody’s said companies will experience a roughly 40 basis point drop in operating margins because of higher sourcing costs at current exchange rates. Revenue growth for the sector, however, will remain a moderate 4-6 per cent through next year.
“Apparel companies will also continue to benefit from low cotton and oil prices this year, which could help the industry’s operating margins,” Tuhy added, though negative currency effects have offset most of those benefits. When it comes to retail, he said, “The strong dollar has discouraged spending by tourists to the United States, impacting sales at brands such as Ralph Lauren and Calvin Klein, dragging on apparel sales.” And those brands are blaming part of their lackluster performance on reduced department store spend.
Sales for department stores have fallen 24 percent since 2002 and more and more apparel companies are realigning their focus and growing their online and direct-to-consumer offerings. Nike has benefitted from a shift away from department stores—the retailer has opened more of its own branded stores, and according to Moody’s, grew direct-to-consumer sales by 25 per cent in fiscal 2015 to more than $6.6 billion, or close to 22 per cent of total sales. VF Corp also grew its direct-to-consumer sales by 11 per cent in the first half of fiscal 2015 to 25 per cent of its total revenue.
“We anticipate apparel companies, particularly big names like Nike, Ralph Lauren, VF Corp and PVH, to grow sales and expand operating margins through their organic growth initiatives, which will be more recognizable in the long run without FX noise,” Moody’s said.
Nike, VF Corp and Hanesbrands have been the primary revenue and income growth drivers for the apparel sector this year, and they all sell athletic apparel, which points to the continued trend toward athleisure-focused sales. The demand for athletic wear has weighed a bit on denim, but Moody’s said denim sales from companies like PVH and Levi’s will recover. E-commerce sales in the apparel sector should grow 15.3 per cent this year, 14.2 per cent next, and online penetration will reach 16 per cent of total sales by next year. Despite China’s currency fluctuations and its economic slowdown, Moody’s said the country will still be a big growth opportunity.
www.moodys.com
The International Cotton Advisory Committee expects lower cotton production next year owing to low values. It anticipates China's output to hit a 12-year low.
The group has warned that "low prices are expected to persist" for the rest of the 2014-15 – as it cut its forecast for the season-average value, as measured by the Cotlook A index, by 4 cents to 68 cents a pound. The low prices – the weakest in six years – will, in making cotton less appealing to growers, cut world plantings for 2015-16 by 6 per cent to 31.6 million hectares.
"Cotton is likely to be much less attractive to plant due to falling prices while prices for competing crops such as corn and soybeans have recovered from price downturns last September and October," the committee said. Chinese output will slump by some 700,000 tonnes to 5.7 million tonnes (26.2m bales), the lowest since 2003-04. While the committee did not detail the reasoning behind this estimate, it follows subsidy reforms which have prompted a particularly steep slide in China's cotton price - which plunged by nearly 60 per cent to 13,605 yuan a tonne in the last nine months of 2014, according to the China Cotton Association's price index.
The drop in China's production will, for a second successive season, keep at second place in the world cotton production table behind India, whose own output will fall by some 300,000 tonnes to 6.5m tonnes. Cotton area in the US, meanwhile, the top cotton exporting country, will drop by 10 per cent to 3.6m hectares. US production will fall by 7 per cent to 3.3 million tonnes (15.2m bales). Nonetheless, production will in 2015-16 fall only narrowly behind consumption, whose growth will be constrained to 2 per cent.
www.icac.org
Of the 2,090 textile processing units identified in Erode, Namakkal, Salem and Karur districts, 1,007 units have given their consent to join the integrated textile processing park that would have a common effluent treatment plant (CETP) facility set up at a cost of Rs 700 crores. Discharge of untreated industrial effluents into the Cauvery, Bhavani and Amarvati rivers has long been a problem. The CETPs would be set up in the four districts to prevent further pollution. The objective was to establish integrated textile clusters and bring in units under one roof in their respective areas so that effluents can be treated in CETPs.
The proposed cost for establishing CETPs along with power generation units have been worked out at Rs 1,118 crores for the Erode (Rs 784 crores) and Namakkal clusters (Rs 334 crores). The proposal is yet to be prepared for Salem and Karur clusters.
Once the feasibility report is submitted, the textile dyeing clusters should establish a special purpose vehicle, purchase land and execute the shareholders agreement. Later a detailed project report would be prepared with details including effluent sampling and analysis and technology options for CETPs. Other stages include an environmental impact assessment, financial closure and finally implementing the projects, operations and maintenance.
Knitwear exports from Tirupur have increased by 15.52 per cent in rupee terms and 15.94 per cent in terms of foreign currency. Backed by favorable cotton yarn prices, a strong infrastructure, pro-active players and buyer confidence, the Tirupur hub has set a target of reaching a Rs one lakh crore turnover by 2020.
China, Bangladesh and Vietnam are the major competitors for Tirupur exporters. Tirupur is the first textile cluster in the country to have the zero liquid discharge technology. Known as the knitwear capital of India, it accounts for about 50 per cent of the total knit garment production of the country and contributes 44.29 per cent to the total knits export basket.
The focus of the industry is now on non cotton based fabrics such as viscose, polyester, polymate etc, as the hub is now predominantly catering only to the summer/spring market. Once blended fabrics are added to the profile, the industry is expected to see a significant jump in business as buyers can explore options for the autumn/ winter market segment too. This will mean a steady inflow of business throughout the year.
Tirupur has about 800 garment manufacturing and exporting firms and 1,200 merchant exporters.
Textile conglomerate Alok Industries posted a net loss of Rs 242.2 crores for the quarter ended September 30, 2015, whereas the net profit was Rs 45.36 crores for the quarter ended September 30, 2014. Total income for the quarter ended September 30, 2015, stood at Rs 3235.53 crores whereas the same was of Rs 3790.48 crores for the quarter ended September 30, 2014.
Short term borrowings were up 12.7 per cent to Rs 6810 crores during the quarter ending September 30, 2015, over borrowings of Rs 6044 crores in the quarter ending March 31, 2015. However, long term borrowings fell 19 per cent to Rs 5832.7 crores from Rs 7223.5 crores during the same period.
Alok has a dominant presence in the cotton and polyester segments. It was established in 1986. The first polyester texturising plant was set up in 1989. Over the years, it has expanded into weaving, knitting, processing, home textiles and garments. It has integrated backward into cotton spinning and manufacturing partially oriented yarn through the continuous polymerisation route.
It has evolved into a diversified manufacturer of world class home textiles, garments, apparel fabrics and polyester yarns, selling directly to manufacturers, exporters, importers, retailers and to some of the world’s top brands.
www.alokind.com/
"Many western brands, which sourced from the country owing to low wages and other benefits, moved away to other sourcing destinations. And the conclusion of recent TPP agreement would further move sourcing to Vietnam, leaving Bangladesh to think and act fast amid rising competition"
After incidents like the Rana Plaza building collapse and fire calamity in Bangladesh’s apparel industry that claimed several lives, there was a question mark on its safety and compliance eligibility. Many western brands, which sourced from the country owing to low wages and other benefits, moved away to other sourcing destinations. And the conclusion of recent TPP agreement would further move sourcing to Vietnam, leaving Bangladesh to think and act fast amid rising competition.
Strengthening raw material base
Bangladesh has been a leading global exporter of readymade garments (RMG) and earns around 76 per cent of its foreign exchange through exporting textiles and readymade garments. Presently, almost 100 per cent export-oriented knitted fabrics are being produced in the country but more than 60 per cent of the export-oriented woven fabric is imported making its RMG expensive. Also other raw material requirements such as 100 per cent of dyes, chemicals, spare parts and machinery are also imported. So in order to become competitive against its rivals such as Vietnam and Cambodia, Bangladesh will have to look into strengthening its raw material base to offer better price points.
Another aspect, is value addition. Bangladesh should simultaneously try to increase the export price by adding value to its products. Another most important point that can bring down costs significantly is the eliminations of middleman.
Directly dealing with the importers
The three-way process that involves transaction between the manufacturer to middleman and then middleman to importer leads to significant rise in costs. Now, while manufacturers are trying to reach out to suppliers directly skipping the agents on one hand to bring down cost on raw material, on the other they are directly negotiating with the importers to offer competitive price-points by eliminating the middleman.
While the process has begun, industry experts feel that the manufacturing companies need to invest in improving skill-sets of their marketing executives and a marketing strategy to deal with overseas buyers directly. The sector has hired many Sri Lankan, Indian and Pilipino production and quality control executives to gain confidence of the buyers. In fact, Bangladesh is relying on buyers' agent for orders. However, they need to train domestic employees to become the trusted marketing agents.
The country’s RMG exporters, instead of completely depending upon the traditional importing markets such as the US and EU must also explore markets like Japan, Australia, Russia, Eastern Europe, the Nordic countries, Central Asia, Africa and the Middle East to establish their presence in the global market. Its time, serious investment and effort is made to combat the competition.
According to a recent World Bank study, in the event the local RMG industry in Bangladesh is able to capture the attrition of about 20 per cent of China's apparel exports, Bangladesh's export volume will increase by at least $29 billion creating 5.4 million new jobs and 13.5 indirect employments.
While the National Textile Policy is yet to reach its final conclusion, various Indian states have announced policies to boost their respective textile sectors. In May, the Textiles Minister in a written reply to a question put up in the Rajya Sabha said, “The expert committee has since submitted a draft vision, strategy and action plan. The new National Textiles Policy is currently under finalisation.” The much awaited new policy aims to achieve $300 billion textiles exports by 2024-25 and expects to create 35 million jobs.
On the other hand, the state governments did their bit to support the segment by announcing policies. Andhra Pradesh, for instance, announced capital subsidy on the investment to the extent of Rs 10 crores to standalone garmenting and apparel units, financial assistance of up to 50 per cent of expenditure on common facilities in the case of textiles/apparel parks are among the other facilities. And for the employees working in these units, the government has announced extended training fee and the transport subsidies. It would provide a host of other incentives including 12.5 per cent interest subsidy and a power subsidy of Rs 1 per unit for spinning and Rs 1.50 per unit for ginning units. Refund of VAT on purchase of intermediate products and reimbursement of tax to the extent of 100 per cent of the eligible fixed capital investment in plant and machinery for a period of five years are also provisions provided for in the policy.
In May 2015, West Bengal Chief Minister, Mamata Banerjee also announced state’s plans to invest over Rs 26,000 crores to develop MSME and textiles sectors. A separate textiles policy of the state is also shaping up to encourage joint ventures and PPP model of garment factories to create employment opportunities for six lakh people in the state. Also, Karnataka government tweaked its Javali Neethi (Textile Policy) 2013-18 to strengthen textile value chain activities in October this year. Since Karnataka is very strong in garmenting; the policy centres on the dual approach of development, i.e. strengthening of existing value chain activities and filling the gaps in creating the facilities for value chain activities. The aim is to attract Rs 8,000 crores investment by 2018 and create four lakh employment opportunities in the state.
And the new Minister of Industries in Maharashtra, Subhash Desai announced plans to introduce a new textiles policy to boost the sector. Even the Government of Tamil Nadu, at a Global Investor’s conference in September this year, announced that the state would soon announce a new textiles policy, making the already successful industry a top destination for investment.
Texmin.nic.in
Since Korea is not a part of the Trans-Pacific Partnership agreement, it’s likely to suffer huge export losses over the next 10 years. Korean companies' exports to 12 member TPP nations, made from their manufacturing bases in Vietnam, are expected to drop $620 million a year and their shipments via global supply networks in Mexico are also expected to drop $290 million.
The estimated export losses for the textile industry are $420 million. Although Korea has already signed FTAs with 10 of the 12 TPP members, the price competitiveness of Korean exporters, applied by complicated rules of origin, cannot help but lag behind those of their counterparts in member nations, which are applied by a uniform set of completely cumulative rules of origin.
The US-led free trade agreement is expected to abolish all import duties among its signatories. If Korea is excluded from the Asia-Pacific global supply networks to be created by the TPP, it would adversely affect the nation’s export of parts and materials, directly and indirectly.
Korea’s reliance on global value chains has increased since 2008. If the country joins the FTA, it will help Korean exporters make the most of their supply networks and set up new business models.
Vietnam’s textile-garment exports are up 10 per cent in 2015 as against 2014. Apparel shipments to the US have climbed nearly 13 per cent this year while exports to the EU have grown six per cent, to Japan by eight per cent and to South Korea by 8.77 per cent.
However, despite a jump in apparel exports this year, profits remained low as firms have had to cut prices to compete with rivals amid a global economic slump and fall of many currencies against the US dollar. For instance, China, India and Indonesia devalued their currencies, making exports more competitive. Therefore, Vietnamese manufacturers have had to cut prices, leading to lower profits. On the other hand, cotton prices have plunged below 60 cents per pound and filament polyester prices dipped to their lowest in October. This left a negative impact on cotton producers, who had to lower prices or suspend deliveries.
The textile-garment sector will have to cope with a slew of challenges in 2016 as the exchange rate with the dollar will likely fluctuate. This will affect firms’ export prices, revenue and profit. However, Vietnam’s participation in bilateral and multilateral free trade agreements has made the country’s textile-garment products attractive to importers.
