Vietnamese Garment Makers Hit Snag: Omen or Opportunity?

Garment and textile factories around Vietnam are reporting lower than expected orders from key trading partners. This has led to factories scrambling to make ends meet, including laying off some workers. Is this a sign of bigger problems or a unique opportunity for astute investors?

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Vietnam’s manufacturing industry fell 1.9 points on the S&P Global Vietnam Manufacturing Purchasing Managers’ Index (PMI), in September. From 52.5 the month before, it dropped to 50.6 points, still in growth territory but only just—anything below 50 signaling a contraction.

This is reflective of a 13-month low of new orders.

A particularly big decline has been seen in the garment and textile sector where exports in September were down 31.9 percent over the month before.

This has caused some concern with garment and textile manufacturing pivotal to Vietnam’s economic development. In 2020, Vietnam became the world’s second largest exporter of ready-made garments, the sector employing around 2.5 million.

Why are orders of textiles and garments falling?

The drop in orders has largely been attributed to external factors beyond the Southeast Asian nation’s control—namely rising inflation in the Western Hemisphere that is hitting consumers in the pocket hard.

Frugal Christmases in the West, however, may be only temporary.

In the Euro Area , for example, inflation is still expected to rise a little further (currently 8.1 percent), but the European Central Bank expects this to turn around by the end of the year. It’s forecasting inflation of 5.5 percent next year, and 2.3 percent in 2024.

In the meantime, slow order flows could create an environment ripe with opportunities.

Vietnamese labor may become easier to find

Employment growth eased in the manufacturing sector, in October, according to S&P’s PMI Employment Index.

As orders have slowed, many workers have found their hours reduced or themselves out of work entirely—Taiwanese shoe maker Ty Hung Co. Ltd., ended the contracts of 1,185 workers just last week.

With many factories clustered in Vietnam’s industrial zones, for hiring managers of garment and textile businesses that are still receiving orders, this could be a boon.

This also has the potential to impact wages as the labor supply increases.

The average factory worker currently makes around 8 million VND ($US321) per month, according to the most recent numbers from the General Statistics Office. The average minimum wage (there are different rates for different regions), however, is a little shy of 4 million VND (US$161).

Domestic consumption of imported goods may decline

Less work and lower pay, however, may result in workers being able to make fewer purchases and this could impact revenues for importers.

Most staple goods for consumption are produced domestically. Alternatively, imports are largely discretionary, big-ticket items: electronic goods/computers, machinery, and phones.

Sales of luxury goods have seen huge growth in Vietnam in recent years, too. From cars, to wine, to fashion a burgeoning middle class has been lapping up high-quality imports.

Ergo, if Vietnam’s middle class factory workers are forced to tighten their belts, importers could see their profits erode.

Investing in Vietnam may be becoming cheaper

In the past, the State Bank of Vietnam (SBV) had held a tight grip on the Vietnamese dong. As the US dollar has appreciated to record highs, however, the SBV has begun to relax currency controls.

This means that the dong should move more in line with other currencies around the world that have weakened considerably against the US dollar.

In this respect, foreign investors looking to move funds into Vietnam may benefit from a better exchange rate than they might have even just a month earlier.

Foreign garment makers already operating in Vietnam and exporting goods in US dollars should also see their revenues rise.

The outlook for Vietnam’s garment and textile sector

In an interview with Reuters earlier this week, Vietnam Textile and Apparel Association General Secretary Truong Van Cam, said that hopes were not high for Vietnam’s garment and textiles sector in the lead up to the new year.

“We are concerned that firms will face more difficulties in the fourth quarter this year and first quarter of 2023 due to the impacts of weakening demand globally,” he said.

Typically, the busiest time of the year, garment and textile manufacturers often rely on bumper sales in the fourth quarter to see them through leaner times.

As a result, lower than expected sales volumes now may not bode well for garment and textile manufacturers in 2023.

That said, the Eurocham Business Climate Index survey for Q3 2022, found that 59 percent of respondents still planned to increase their investment in Vietnam to some extent.

Furthermore, on January 1, 2023, tariffs on a range of garments and textiles shipped to the EU will be reduced by 2-4 percent as part of the EVFTA. This could also stimulate demand.

Where does this leave the current state of Vietnam’s garment and textiles sector?

This leaves Vietnam’s garment and textiles sector waiting patiently.

External factors are driving the decline in orders, specifically inflation in developed markets. Over this, Vietnamese textile and garment makers have no control. Their only real move is to tackle the decline by reducing production costs, like their workforces.

This could benefit new entrants into the market looking for labor or other sections of the manufacturing sector that are continuing to grow. Lego, for example, is investing US$1 billion with which it will build a state of the art factory in Binh Duong and Apple suppliers Pegatron and Foxconn are investing a combined US$1.3 billion to expand their operations in Vietnam.

A devalued dong, and increased production capacity, could also provide astute investors the opportunity to snap-up some bargains.

Aside from that, however, there is not much more Vietnamese garment and textile manufacturers can do other than wait.

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