Nike, Adidas, GAP and H&M worry about high processing fees when massive technology giants enter Vietnam - VnReview

Nike, Adidas, GAP and H&M worry about high processing fees when massive technology giants enter Vietnam – VnReview

In the context of complicated war, many large companies poured into Vietnam as an alternative to China. The garment manufacturing industry in our country is therefore facing the worry of rising labor costs.

Many companies do garment processing for big global firms such as Nike, Adidas, Uniqlo, H&M, … are located in Vietnam, which can be considered their biggest production base. However, due to rising tariffs on imported goods from China, technology companies Apple, Microsoft, Dell, Google, Amazon, … began asking suppliers to move out of Chinese territory. And Vietnam is heating up because it is becoming their "promised land", making competition for human resources expected to increase.

The garment industry was worried when technology firms flocked to Vietnam because of the pressure of war

Makalot Industrial, a leading clothing manufacturer for GAP, Walmart, Zara, and H&M firms, said it is reducing its expansion. Frank Chou, CEO and Chairman of the company told Nikkei: "More and more companies are coming here, a future is not difficult to predict. We think that it will soon fall into labor shortages, may even cause fierce competition for human resources.". He stressed that the company would have to adjust to fit a more harsh environment. Because, the time of gold to invest in Vietnam is probably over, especially for the garment industry.

Vietnam is Makalot's largest production base, accounting for 37%. But Chou said the company will focus on expanding positively in Indonesia and expects to make it a major contributor to production, in the next three to five years. Eclat Textile is Taiwan's largest supplier of sportswear, serving Nike, Under Armor and Lululemon, and said it would stop expanding in Vietnam. Vice President President Roger Lo told the Nikkei newspaper that they would seek expansion elsewhere, though not specifically mentioning which country. "From this year, we will stop increasing capacity in Vietnam, and seek investment opportunities in another country.". Currently, most of their production takes place in Vietnam and their hometown of Taiwan.

The golden time for the garment industry to invest in Vietnam is probably over

Vietnam's advantage is that the population of 95 million, its geographical position is close to China, thus attracting companies in the garment industry who want to find cheap young labor. Both Makalot and Eclat Textile have very little or have abandoned the Chinese market. Pou Chen, the world's largest contract manufacturer, has also narrowed its size in China. Starting from 2014 with 29% to 13% in the first quarter of 2019, considering the total delivery. Vietnam used to be a promising destination for such firms.

However, the minimum wage has increased to VND 4.18 million per month in 2019, according to the National Wage Council. Although still lower than China, the Vietnamese government has asked all producers to increase wages every year by more than 10%. Most foreign companies are willing to pay more than the prescribed basic rate. And despite rising wages, Vietnam is still benefiting greatly from war. Our exports to the US increased by 38% in the first four months of the year. While many companies shift their lines to Vietnam to avoid tax imposition.

Labor costs increase, land prices rise, while competition for labor resources becomes more severe

However, this also leads to the risk that the US may impose taxes on Vietnam. US President Donald Trump had such a warning in an interview with Fox Business. Expert Ethan Harris working at Bank of America Merrill Lynch also warned the same. "I think the number one goal will be Vietnam.".

Going back to the garment industry, Pouchen, the sports empire behind Nike, Adidas, and the Nikkei brand, it is hard to come back. The land price in Vietnam keeps increasing year by year and there is no sign of stopping. They think that there is not much room for future development here. During 2018, the company produced 46% of the 326 million pairs of shoes in Vietnam. In the first quarter of this year, this number fell to 43% while in Indonesia, increased from 37% to 41% in the same period.

Vietnam's garment industry has many concerns, making them afraid to expand production

This does not mean they have to move because it is very unrealistic. According to the company spokesperson, instead of doing that effort, they will need to shift themselves to more automation. Reducing labor costs will help ensure competition, simply adjusting the productivity level flexibly. This may not seem very good for Vietnamese workers. But another Taiwanese shoe company has similar thoughts. "We are a bit worried that technology companies pull together here, only increasing the recruitment costs and the ability to recruit people becomes more difficult.".

The director said that they are aware of many companies in traditional industries looking to Cambodia, Indonesia and other countries outside Vietnam, with lower wages. However, considering the overall quality of labor resources, performance, infrastructure, Vietnam still appears to be quite competitive for the footwear industry, despite labor costs rising by 10% annually. "Costs are really rising. But we will drive investment in automation, more efficient management thereby improving productivity. It is not easy to find any effective workplace like this anymore.".

Footwear companies fall into an awkward situation: Where to go if you have to leave Vietnam?

Simon Shen, president of New Kinpo Group, supplier of Dyson, Casio and HP, told Nikkei that basically with the current population, Vietnam cannot afford a major shift from China. He hinted that President Trump was eyeing our country and could impose taxes. Major corporations need to pay attention if they want to move here. They have production facilities in the Philippines, Thailand, Brazil and China.

Most companies in the garment industry fall into a dilemma: Where to go if you have to leave Vietnam? Currently, they have very few positive options, since Laos and Indonesia have not reached the level equivalent to Vietnam, in terms of infrastructure and quality of labor resources.

Ambitious Man

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