Outsourcing Textile Manufacturing In Vietnam - An Essay On Global Supply Chains.

Describe the Outsourcing Textile Manufacturing In Vietnam.

Apparel Manufacturing Industry In Vietnam

Uniform Supplier is a textile company based in Brisbane Australia. It was established in 1960. It deal in supplying uniforms for school children and has a strong customer network link. Previously, the company enjoyed a lion’s share of the market till recently as there are other companies which have cropped up in the same industry. Entry of other firms has brought stiff competition since they are outsourcing their manufacturing to countries where labor costs are low thus reducing the cost of production and thereby selling their products at a lower cost than ours. Uniform Supplier had the idea of outsourcing but the idea was initially declined with reference to the Rana Plaza incident of 2013 in Bangladesh which hosted a textile company. The incident was caused by structural failure that led to the collapse of a three storey building (the Rama Plaza) and a death toll of 1,134. It is considered the most deadly structure accident of the modern era. But following the cut throat competition which could push Uniform Suppliers out of business, the company has to keep tabs with its competitors and thus has evaluated the idea outsourcing manufacturing from foreign countries in a bid to access low labor cost thus reducing the cost of production and lowering the price per unit of their products and thus competing favorably based on pricing and thus leveling the playing field. After evaluating the pros and cons of the, Uniform Supplier thus settled on outsourcing. On looking into various countries in Asia, that is; Pakistan, South Korea and Vietnam, the company settled on Vietnam as its choice country to outsource their manufacturing. . In order to gain more control of the manufacturing process and have a say in the running of the company, Uniform Supplier decided to co-own an already existing textile manufacturing firm which it scrutinized thoroughly to avoid any setbacks. This will reduce on cost related with establishing a new firm and also save on time.

Outsourcing refers to the situation where a company signs a contract with another foreign company to either manufacture in their firm or co-own part of their manufacturing firm or by establishing their own firm there. Profit is equated to total revenue less total cost (T.R – T.C). Labor is a major component of total cost and thus cutting on labor cost will increase the profits. Shepherd, (2015). 

 Vietnam is a country located in South East Asia and has an estimated population and has an estimated population of about 117 million as at July 2017 making it to 14^th most populous country in the world. 61% of the country’s population is aged between 15 to 54 which means that it has a working population meaning the country is well endowed with labor making it cheap. It a country that specializes in the textile industry and the industry accounts for about $ 201.1 billion of their GDP.

Advantages Of Manufacturing Textile In Vietnam

Vietnam is an emerging giant in the textile and apparel industry with a large portion of its GDP depending on it. Vietnam ranks third globally behind China and Bangladesh respectively in garment exportation. The industry is a major player in the socio-economic development of the country and also the main source of employment both directly and indirectly employing about 2.5 million people as its work force about 25% of all workers in the manufacturing industry. Vietnam hosts about 6000 apparel and garment manufacturing firms. Of the 6000 firms, 84% are privately owned, 15% are by Foreign Direct Investment, and 1% is state owned. The textile industry accounts for 16% of Vietnam’s exports as at 2017 of which translates to $ 30.1 billion. Vietnam also accounts for 7% of the textile exports globally as per 2016. The export of garments is expected to rise by 15% per annum leading to $50 billion contribution to GDP by 2020. Elliott, (2016).

It exports it textile to 180 countries around the world with their main importers being Japan, South Korea, USA and Europe. Also, the local market for garments is growing at a rate of 20% thanks to the urbanization, increase in disposable income and the increase in consumption of the garments by young aged population. Hamid and Aslam (2017).

However, with regards to raw materials for the industry, 60% is imported from China, Taiwan and South Korea with more than 50% of the 60% being from China. Only about 2% to 3% of the raw materials is sourced within the country from cotton farming. The Vietnam National Textile and Garment Group and the PetroVietnam-Vinatex Dinh Vu Joint Stock Company have merged to build a factory which will manufacture synthetic fabric locally accounting for 40% of domestic demand of synthetic fabric. This will further reduce the cost of production since raw materials will be readily available cutting on transport and export cost and also saving on time which fabric will be available. Fujita, (2017). 

There are numerous advantages of manufacturing in Vietnam for Foreign Direct Industries and they are as follows:

The main advantage of outsourcing in Vietnam is the cheap cost of labor available. Garment making is labor intensive than it is capital intensive hence labor cost should be highly considered. To make the business profitable, we have to cut on cost of production and this can be done by accessing cheap labor as a factor of production. Due to the high working population available in Vietnam, there is a surplus of labor and going by the law of demand and supply, it dictates labor cost will be low for a free economy like Vietnam. Low labor cost will lead to reduction in the cost of production making the price of finished products cheaper and thus Uniform Suppliers will be able to compete on the same level with other rivals who have their advantage based on price which will then translate to increased profits. Jones and Masters (2016). 

Government incentives are financial benefits accorded to private firms to encourage setting up their businesses in the particular country. Vietnam has numerous rural villages that depend on agriculture as their source of livelihood. Given the low output in agriculture, majority of the people who live in this rural area are poor. Imai, Gaiha, and Thapa (2015).

Garment industry being a lucrative industry but mainly based in urban setting can provide jobs to these people and improve their lives significantly. Hence, the Vietnamese Government has chosen to intervene by giving benefits to Foreign Direct Industries so that they can set up shop in the rural area. The benefits include; tax cuts or subsidies, tax exemption, tax holidays and extension of tax payment periods. Also, the government is beginning to develop infrastructure in rural areas like road networks to ease the movement of raw material and finished good. Nguyen, Saleh, and Safari (2018).

For any business to succeed there must a peaceful environment to ensure that there will be no fear of loss of property or interruption of business activities leading to losses. Vietnam is currently enjoying a stable political environment with no wars or political protests meaning it has a favorable environment for Uniform Suppliers to outsource it manufacturing. Jensen, (2015).

Given that Vietnam does not produce fabric for making garments and depends on exports, it thus can be said to be favorably geographically positioned. Its main importer of fabric is China (accounting for 60% of 50% of fabric imports) and given its vicinity in terms of being neighbors with China, this means the cost of importing the fabric will be significantly reduced thus also lowering the cost of production. Jacobs, et al (2016).

 Also, due to bulk buying, Vietnam enjoys economies of scale. The proximity of China also means that the fabric can be received within a short period of time and in business like the saying goes, “time is money”, this translated to financial gains. Pha, Ma, and Yeo (2016).

The inflation rate in Vietnam is 3.5% as at 2017 and has not been fluctuating much. As long as it below 4%, it means that it is feasible. Also, there has been lower rise in wage rate than previously where they were increasing rapidly as policy makers realized the danger of increasing wage rate and instituted measures to curb it in a bid to woo foreign investors. Also, wages and inflation are directly proportional. This means that manufactures can predict wages and having a stable inflation rate, they can plan for the future as the short term looks favorable for doing business. Gates, Noerlund, and Vu (2014).

This means that firms can produce goods at an economic cost which is lower than other economic actors. Vietnam has a large population of highly educated people. This means there is no need to import technicians to maintain machinery in companies making it convenient and cheaper in that there is no cost required to train them or import experts. Also, the government has also invested significantly in training skilled laborers in the textile industry meaning there are highly skilled laborers at no cost to the firms available. This also means quality of output will meet the required standards. Kieu, Singer and Gannon (2016)

In Vietnam, despite the government efforts to encourage Foreign Direct Investment and coming up with favorable policing, there has been set backs in entry requirements. The process of setting up a foreign company is long and tedious. Also, there are corrupt officials who delay the process purposely so as to extort the investors to have their paper work processed faster. Tromme, (2016).

By Uniform Suppliers relocating our manufacturing business to Vietnam, this means that we will have to close down our manufacturing industry in Australia. This will therefore lead to loss of employment in the Australian market since the workers will have to be laid off. This also means that the government will lose revenue in the form of from personal tax collected from the workers and also corporate tax from Uniform suppliers. Gurtu, Searcy, and Jaber, (2016).

Some unscrupulous business men recruit labor from underage in a bid to exploit them and maximize on profits.  Since the manufacturing company will be co-owned, recruitment will be done by our partners hence this is a factor that cannot be ignored. Binci, and Giannelli, (2016).

Vietnamese workers work under standard environment and conditions.  According to a survey done in 2015, 80% of workers failed the health and safety inspection. They complained of long working hours, inadequate breaks and low safety regulation. Most of them also complained of back pain. This means the labor will have a low morale leading to poor quality and quantity than expected. Also, it may lead to financial losses in terms of paying insurance for compensation. Alsamawi, et al (2017).

Conclusion

Vietnam is among the leading countries in the garment industry as it ranks third and has lots of experience and resources dedicated to the industry. As discussed in the literature review above, the advantages outweigh the advantages. This means that is a viable business decision for Uniform Suppliers to move its manufacturing industry to Vietnam.

References

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Binci, M. and Giannelli, G.C., 2016. Internal versus International Migration: Impacts of Remittances on Child Labor and Schooling in Vietnam. International Migration Review.

Elliott, K.A., 2016. Rules of origin in textiles and apparel. Trans-Pacific Partnership: An Assessment, 104, p.139.

Fujita, M., 2017. Vietnamese State-owned Enterprises under International Economic Integration. Research Institute of Economy, Trade and Industry (RIETI).

Gates, C., Noerlund, I. and Vu, V.C.D., 2014. Monetary Stabilization: The Vietnamese Experience Vo Dai Luoc. In Vietnam in a Changing World (pp. 81-94). Routledge

Gurtu, A., Searcy, C. and Jaber, M.Y., 2016. Effects of offshore outsourcing on a nation. Sustainable Production and Consumption, 7, pp.94-105.

Hamid, M.F.S. and Aslam, M., 2017. Intra-regional Trade Effects of ASEAN Free Trade Area in the Textile and Clothing Industry. Journal of Economic Integration, pp.660-688.

Imai, K.S., Gaiha, R. and Thapa, G., 2015. Does non-farm sector employment reduce rural poverty and vulnerability? Evidence from Vietnam and India. Journal of Asian Economics, 36, pp.47-61.

Jacobs, B., Simpson, L., Nelson, S. and Karpova, E., 2016. Matching Sourcing Destination with Fashion Brands’ Business Model: Comparative Advantages of Bangladesh and Vietnam Apparel Industries. Fashion, Industry and Education, 14(2), pp.11-23

Jensen, M., 2015. Speech to the Diplomatic Corps: Meeting with the Diplomatic Corps in Copenhagen on 10 March 2014. Danish Foreign Policy Yearbook, p.141.

Jones, S. and Masters, R., 2016. Conflict: Opening up to International Investment and Diversification–a case study of Vietnam (No. 2016/7).

Kieu, T.K., Singer, J. and Gannon, T.J., 2016. Education for sustainable development in Vietnam: lessons learned from teacher education. International Journal of Sustainability in Higher Education, 17(6), pp.853-874.

Nguyen, T.L.A., Saleh, A.S. and Safari, A., 2018. The impact of government policies on FDI decision of multinational corporations: an application to the Vietnamese service industry. International Journal of Economics and Business Research, 15(2), pp.204-222

 Pham, T.Y., Ma, H.M. and Yeo, G.T., 2016. A Strategic Positioning Analysis for Container Terminals in Northern Vietnam. Journal of Korean Navigation and Port Research, 40(5), pp.311-316.

Shepherd, R.W., 2015. Theory of cost and production functions. Princeton University Press.

Tromme, M., 2016. Corruption and corruption research in Vietnam-an overview. Crime, Law and Social Change, 65(4-5), pp.287-306