Joint Research on Enhancement of Vietnamese Textile and...

Copyright (C) IPSI and Mitsubishi Research Institute, Inc.

Joint Research on Enhancement of Vietnamese Textile and Garment Industry

Work Shop presentation

21st, September 2016

Table of Contents1. Introduction

1-1. Brief introduction of IPSI

1-2. Brief introduction of MRI

2. Purpose of the Research

2-1. Background

2-2. Purpose

2-3. Methodology

2-4. Overall Schedule

3. Research result.

3-1. Current status of textile and

garment industry in Vietnam

3-2. Opportunities and Challenges of

Vietnamese T&G industry leveraging the

participation into FTAs

3-3. Position of Vietnamese T&G

industry for Japanese companies

3-4. Challenges Japanese T&G industries

are facing in Vietnam

3-5. Vietnam- japan win-win

cooperation potentials in T&G from

Japanese point of view

3-6. Policy recommendation to both

Government

Appendix.

1.Introduction. 1-1. Brief introduction of IPSI

3

General information• Name Industrial Policy and Strategy Institute

• Abbreviation IPSI

• Address 23 Ngo Quyen Street, Hoan Kiem District,

Hanoi, Vietnam

Tel.: +84-4-39388426; Fax: +84-4-38253417

• Date of foundation December 13, 1996

• Representatives General Director, Dr. Nguyen Anh Son

• Annual budget 700,000 USD

• Number of employees 77 (up to date)


4

1. Formulating policy, strategy, and master plan for industrial development by

sectors and regions

2. Conducting research/studies and making consultancy and proposal on various

issues concerning trade, industry, and environment impact assessment,

investment, etc.

3. Conducting studies commissioned by the government, local public bodies,

companies, other organizations, reporting results of independent research,

making policy proposals

4. Providing supports, capacity building and consultancy services to industrial

enterprises.

5. Holding research meetings, seminars, workshops on trade and industry related

topics

6. International cooperation in trade and industrial policy studies, entrepreneur

promotion

7. Holding training courses on trade and industrial promotion, production

management, entrepreneurship, etc.

Activities


5

On-going projects• EU market oriented mechanical export promotion

(EU-MUTRAP)

• A new approach for manufacturing industry to avoid low value added trap (WB)

• Strengthening supporting industry for automotive sector in Vietnam (JICA)

• Shaping the future of global production system (WEF)

• Master plans for industrial sectors and provinces (MOIT, provinces)


6

Ministry of Industry and

Trade (MOIT)

Ministerial Units

Foreign Trade Offices

Administrative Units

Industrial Policy and Strategy

Institute (IPSI)

IPSIGeneral Director

Institute Office (1)

Professional Divisions (7)

Research Mngmt/ Environment/ Integration/

Planning/ Energy/ Information/ E&T

Centers (3)

Consultancy/ Supporting Industry/ IT

Deputy GDs

Organization structure

1.Introduction. 1-2. Brief introduction of MRI

7

Corporate Name Mitsubishi Research Institute, Inc.

Head Office 10-3, Nagatacho 2-Chome, Chiyoda-Ku,

Tokyo 100-8141, Japan

President Kyota Omori

Chairman of the Institute Hiroshi Komiyama

Raid-up Capital 6.3billion yen

Foundation May 8, 1970

Number of Employees

(Consolidated)

3,659 as of September 30, 2015

Sales (Consolidated) 85.3 billion yen (FY2015/9)

Listing First section of the Tokyo Stock Exchange.

(Stock Code:3636)

Major Shareholders Mitsubishi Corporation

Mitsubishi Heavy Industry Corporation

Mitsubishi Electric Corporation

Mitsubishi Chemical Corporation

Head Office

8

Trigger for the Foundation

As part of 100th anniversary of the founding of the first Mitsubishi company,

our company was established to introduce the function of “Think Tank” in Japan and

leads the way to Information Society.

the 100thanniversary

of MITSUBISHI

Foundation

1970

Established in 1970, our company has a history of more than 40 years as a

leading think tank in Japan

19701970

The number of projects per year

Our company has conducted more than 1,800 projects a year for government and

private companies

1,800Approx.

The number of researchers

The most important asset of our company is abundant human resources covering a

wide range of expertise. Our company has always strived to recruit and develop highly-professional human resources.

720Approx.

Degree holders

Over 80 % of researchers have master’s or doctor’s degrees.

80%Areas of Expertise


9

� Mitsubishi Research Institute is “a leading Think Tank” in JAPAN

Think Tank

Future oriented and a collaborative,

interdisciplinary approach for policy

making

IT Solutions

Systems integration and outsourcing

services that effect management change

Consulting

Analytic approach to top management

decision-making

□□□□



10

�MRI Group is building a knowledge value chain based on the “Think &

Act” approach as the starting point for policy recommendation.

11

Environment/

EnergyIndustries

Science/

Security

Society/

Public affairsMedicine/

Welfare

Education

Disaster prevention

ICT

Business Fields

� Conducting services ranging from policy recommendations to project development support

for Japanese government ministries and local governments.

Policy-makingPolicy-making

Institutional DevelopmentInstitutional Development

Program/Project

(F/S)

Program/Project

(F/S)

EvaluationEvaluation

What We Do

Mitsubishi Research

Institute, Inc.


12

� Vietnamese T&G industry is one of the very important and prioritized

industries in Vietnam.

� Free trade agreements (FTAs), especially, TPP, are expected to provide

Vietnam with precious opportunities such as accessing new markets,

increase of export, increase of raw materials initiative, restructuring of the

T&G industry, attracting investment and improvement of the industry’s

added value.

� At the same time, there are challenges and bottlenecks in the industry, and

thus, Vietnam is keen to have a collaboration with Japan in this sector.

� Under the background above-mentioned, IPSI and MRI agreed to launch

their Joint Research with the aim of identifying a possible collaborative

area between Vietnam and Japan.

2.Purpose of the Research. 2-1. Background

13

� The purpose of the Joint Research is illustrated in the following

manner:

� Identifying areas within the Vietnamese T&G industry on which

both Vietnamese and Japanese government and companies can

cooperate,

� Exploring hypothetical solutions for cooperative area,

� Proposing policy recommendations to accelerate Vietnamese –

Japanese cooperation.

2.Purpose of the Research. 2-2. Purpose

14

� The Joint Research was conducted in line with following

methodologies:

� Literature survey (desktop research), existing knowledge of both

parties (IPSI and MRI),

� Interview survey with Japanese companies and Vietnamese ones

as well as Vietnamese industrial association,

� Quantitatively identifying the impact of TPP for Vietnam replying

on GTAP analysis,

� Face-to-face meeting (including teleconference) ,

� Organizing a workshop in Japan and Vietnam for gaining inputs

and suggestions from relevant stakeholders with an aim of

enhancing the Research.

2.Purpose of the Research. 2-3. Methodology

15

� The Joint Research started in January and completed in September 2016. The

timeline of each Step is illustrated in the figure below.

2.Purpose of the Research. 2-4. Overall Schedule

16

3.Research result. 3-1. Current status of textile a nd garment industry in Vietnam.3-1-1. Overview of Vietnamese T&G Industry

A key job-creating sector

Source: GSO

17


A key export sector

Source: Trademap

18


Trade pattern doesn’t change, but value doubles

Source: Trademap

19

3.Research result. 3-1. Current status of textile a nd garment industry in Vietnam.3-1-1. Overview of Vietnamese T&G Industry� Vietnam’s textile and garment exports depend largely on the fabric

and materials imported from abroad

Source: OECD

20


Heavily relies on China’s sources

Materials/Fibers

Yarns

Fabrics

Source: Trademap

21


SpinningWeaving/

KittingDyeing/Finishing

Fabric

Branding DesigningMaterial

resourcingCutting/Sewing

Marketing/Distributing

Textile (95% SME)

Garment

85% SME

74.5%

% of firms: 1.8% 8.4%

CMT 70%

OEM/FOB 25%

ODM 4%

OBM 1%Source: GSO, WB,

Trademap

Ex: 2.4 bil USD 0.7 bil USD

Im: 1.1 bil USD 8.2 bil USD

Ex: 21.0 bil USD

Im: 0.5 bil USD

Vietnam’s T&G value chain

22

3.Research result. 3-1. Current status of textile a nd garment industry in Vietnam.3-1-2. Vietnamese T&G policy

• Targets:

– General targets:

• Key export sector; domestic market; job creation...

• Sustainable growth with advanced techs

• Reasonal regional location

• To 2020, build up some national brands

– Specific targets:

• Growth rate: 12-13% (2016-2020); 9-10% (2021-2030)

• Sectoral structure: T/G: 47/53 (2020); 49/51 (2030)

23


Vietnam’s MP on T&GUnit 2020 2030

Export Bil USD 36-38 64-67

% of total export % 13-14 9-10

Labour 1000 prs 3300 4400

Main products

Cotton 1000 tons 15 30

Synthetic yarn 1000 tons 700 1500

Yarn (from short fibers) 1000 tons 1300 2200

Fabrics Mil m2 2000 4500

Apparels Mil pcs 6000 9000

Localization ratio % 65 70

Source: MP on T&G

24

Vietnam’s MP on T&G• Measures to implement MP:

– Development orientations: Export orientation; Fabric production for export; Develop materials for T&G according to advantages of provinces

– Policy measures:

• Market diversification: Signing FTAs with potential markets, simplify im-ex procedures, disseminate market information

• Investment incentives in T&G material production

• HRD

• Quality management, testing capability…

• Develop material regions


25

Vietnam’s MP on T&G

• Situation of MP implementation:

– Complete negotiation of key FTAs (VKFTA, TPP,

EVFTA…)

– Supporting industries in T&G are included in list of

priority sectors in Investment Law

– Announcing map of provinces/regions promoting

for T&G material development (in the MP)

– Build up national standards for T&G products


26

Map of T&G promoting regions

Source: MRI illustrated based on the master plan

• Zone 1: textile cluster, with

design/fashion center in Hanoi

• Zone 2: cotton fields, garment

industry dev.

• Zone 3: Upstream activities

• Zone 4: cotton fields, textile

cluster

• Zone 5: T&G cluster with

design/fashion center in HCMC

• Zone 6: garment clusters

• Zone 7: cotton fields, garment

industry dev.


27


Vietnam T&G policy

• New investment projects in SI in T&G sector:

- Trade and investment promotion (Article 8, Decree 111/2015/ND-CP dated November 3, 2015)

- Import tax preference (Article 15, Investment Law and Article 16, Import-Export Tax Law)

- Preference in using land (Article 15, Investment Law and Article 110, Land Law year 2010)

- 10% CIT in first 15 years (Item 1, Article 11, Circular 96/2015/TT-BCT dated June 22, 2015)

• HRD programs for all T&G enterprises (Circular 32/2010/TT-BTC dated March 9, 2010)

28

3.Research result. 3-2. Opportunities and Challenge s of Vietnamese T&G industry leveraging the participation into FTAs.3-2-1. Oppor tunities

• Still have labor advantage; Demographic dividend period until 2030

• Low cost for CMT establishment, and good CMT quality

• Known as a world class exporter of clothes

• Increasing investment in upstream to utilize new generation FTAs

• Stable growth in traditional markets (the USA, EU, Japan, Korea)

• New FTAs provide chances to expand markets and attract more

investments

29

3.Research result. 3-2. Opportunities and Challenge s of Vietnamese T&G industry leveraging the participation into FTAs.3-2-2. Chall enges

• Dependence from imported materials

• Labor skills shortage

• Lack of horizontal and vertical linkages in the value chain

• Limit awareness and understanding of global and regional value

chains; new FTAs…

• Low productivity, low added value

• Insufficient financial resources

30

3.Research result. 3-2. Opportunities and Challenge s of Vietnamese T&G industry leveraging the participation into FTAs.3-2-3. Evalu ation of the impact of :GTAP simulation

� With an attempt to quantify the impacts of the TPP and EVFTA to

Vietnam’s T&G industry, the simulation based on GTAP model is

considered to be effective.

� Two scenarios have been developed, the first one considers impacts

from the TPP only, and another one considers aggregated impacts

from both the TPP and EVFTA .

� Scenario 1: Impacts from TPP only

� Tariff elimination of traded goods among TPP countries,

� 10% reduction in Non-Tariff Barriers on Trade

� Scenario 2: Impacts from TPP + EVFTA

� Tariff elimination of traded goods among TPP countries,

� 10% reduction in Non-Tariff Barriers on Trade,

� Tariff elimination of traded goods among Vietnam and the EU-25 countries

31


� The aggregate impacts:

� As described in the following tables below, both results of two

scenario of the simulation indicate positive impact of FTAs on the

GDP of Vietnam. Comparing TPP+EU-VN FTA with the TPP scenario,

the impacts are notable for Vietnam, but insignificant for all other

regions.

� Real GDP increase by 0.3% (from 1.3% to 1.6%),

� Welfare increase (EV) by about 2 billion USD (from 6 to 8

billions),

� Total exports fall further, from -4.8% to -6.1%,

� Total imports increase further, from 9.4% to 12.8%

32


EV RGDP (%)RGDP ($) Exp (%) Exp ($) Imp (%) Imp ($)Vietnam 6032.8 1.3 1726.9 -4.8 -4662.8 9.4 11390.4Australia 2521.6 0.1 1458.4 0.3 813.6 3.0 7686.8NewZealand 715.4 0.1 173.4 0.5 236.2 2.6 1119.6Japan 9359.3 0.1 5259.0 2.1 19953.7 3.2 30209.3Brunei 125.6 0.3 48.2 -0.2 -16.9 1.8 88.3Malaysia 1439.6 0.4 1250.4 1.7 4103.5 4.0 8585.6Singapore 1169.5 0.1 131.6 0.3 933.2 0.8 2185.3Canada 2632.5 0.2 2936.8 1.8 8767.1 2.2 10317.7USA 9365.7 0.0 2530.0 0.8 14617.3 1.1 28079.3Mexico 1512.5 0.2 1702.1 0.9 3134.0 1.1 3435.3Chile 422.3 0.1 285.3 0.2 180.5 0.5 372.7Peru 220.1 0.1 136.4 0.9 429.2 2.0 775.8Cambodia -109.5 -0.2 -19.5 0.4 39.2 -1.2 -124.9Indonesia -782.4 0.0 -138.9 0.1 202.6 -0.7 -1347.5Laos -5.9 0.0 0.1 0.4 11.5 -0.1 -3.2Phillipin -316.4 0.0 -42.4 0.4 245.1 -0.4 -392.0Thailand -1667.5 -0.1 -346.0 0.2 425.0 -0.9 -2115.2RoSEA -42.8 0.0 -5.0 0.6 58.6 -0.4 -44.9China -7076.6 0.0 -1830.0 0.0 634.8 -0.5 -9123.6Korea -2040.9 -0.1 -685.8 0.1 391.3 -0.4 -2345.1India -1139.3 0.0 -269.6 0.2 624.8 -0.2 -1276.9EU_25 -6694.3 0.0 -1308.0 0.1 9730.0 -0.2 -12060.0RestofWorld -3907.6 0.0 -1099.0 0.1 4307.0 -0.2 -10242.0

Table: Aggregate impacts on regions/countries: TPP only

Source: Authors

33


Table: Aggregate impacts on regions/countries: TPP+EVFTA

Source: Authors

EV RGDP (%) RGDP ($) Exp (%) Exp ($) Imp (%) Imp ($)Vietnam 8166.8 1.6 2159.9 -6.1 -5920.5 12.8 15540.2Australia 2499.4 0.1 1449.5 0.3 843.9 3.0 7625.8NewZealand 712.6 0.1 172.9 0.5 239.2 2.5 1114.3Japan 9131.8 0.1 5256.5 2.2 20426.4 3.1 29798.6Brunei 126.1 0.3 48.2 -0.2 -16.8 1.8 88.4Malaysia 1421.8 0.4 1248.5 1.7 4086.9 4.0 8525.5Singapore 1160.1 0.0 131.0 0.3 987.0 0.8 2224.3Canada 2616.8 0.2 2930.6 1.8 8802.9 2.2 10287.5USA 9067.6 0.0 2514.0 0.8 14902.4 1.0 27208.0Mexico 1492.1 0.1 1693.6 0.9 3142.3 1.1 3395.8Chile 419.7 0.1 284.4 0.2 185.6 0.5 366.3Peru 219.7 0.1 136.4 0.9 433.9 1.9 772.3Cambodia -136.7 -0.2 -24.4 0.5 49.3 -1.4 -154.1Indonesia -823.7 0.0 -143.3 0.1 220.0 -0.7 -1422.3Laos -8.1 0.0 0.1 0.4 13.5 -0.2 -7.4Phillipin -339.7 0.0 -50.2 0.4 262.8 -0.5 -419.7Thailand -1692.3 -0.1 -353.9 0.2 443.7 -0.9 -2145.8RoSEA -43.2 0.0 -5.0 0.7 62.7 -0.4 -46.1China -7410.8 0.0 -1828.5 0.0 956.3 -0.5 -9433.8Korea -2122.3 -0.1 -691.3 0.1 466.9 -0.4 -2418.9India -1240.7 0.0 -293.9 0.2 676.8 -0.3 -1362.4EU_25 -6994.1 0.0 -1148.0 0.2 12295.0 -0.2 -10776.5RestofWorld -4085.3 0.0 -1170.0 0.1 4577.0 -0.3 -10708.0

34


� Impacts on Textile, Garment and Leather products :

� As described in the tables below, both two scenario of the simulation

indicate positive impact of FTAs on the sectoral aggregates of

Vietnam too. However, there are some characteristics as follows,

with the analysis on simulation results on each sector

� The largest impact of EU-Vietnam FTA is on the leather sector (mainly

footwear, travel good and son). Production of Leather products increase by

50% (compared with 27.7% in the TPP scenario). Increase in export and

import of leather almost double the increase in the TPP scenario.

� In the garment sector, changes in production and exports is marginal, but

imports increases by another 8% point (in value terms, it is about 0.2 billion).

� In the textile sector, production and exports drops by 2.8% and 3.8% (which is

about US$0.3 billion) compared with TPP scenarios. At the same time, import

expands by another 5%, equivalent to about US$0.5 billion. There is a clear

move from domestic production to import of textile to meet increasing

demand for textile after EU-VN FTA.

35


Table: Aggregate impacts on sectors: TPP only

Source: Authors

Production Exp Imp Production Exp Imp

AgriForesFis -3.0 -5.9 5.7 -1451.2 -544.1 359.0Food -12.4 -20.2 8.9 -2154.6 -1492.7 806.0MineFuels -4.9 -8.7 7.5 -789.8 -745.0 47.0Textile 7.8 12.2 17.3 877.0 811.6 2207.9Garment 16.0 28.9 31.8 3019.3 3170.9 896.0Leathers 27.7 30.9 38.1 3540.9 2936.6 633.1WoodPaper -17.0 -22.3 10.9 -1682.1 -1271.5 379.4Metal -15.3 -18.9 0.1 -769.9 -626.5 9.5Electronics -16.6 -17.9 1.1 -2009.0 -1730.8 101.9TransEquip -7.0 -13.9 17.6 -539.0 -208.6 1169.2ChemiRubPlas -11.7 -18.7 4.3 -1895.6 -1086.2 780.3MineralProd -2.0 -14.4 8.6 -314.1 -277.7 1178.5OtherManufac -17.3 -19.1 10.7 -2576.4 -1923.1 2213.3ConstUtility 13.6 -25.7 31.0 5653.8 -123.0 200.5TransComm 2.5 -20.1 17.2 758.4 -444.8 459.9OthServices -1.8 -31.1 19.4 -615.2 -976.4 814.1

% change value change

36


Source: Authors

Table: Aggregate impacts on sectors : TPP+EVFTA

Production Exp Imp Production Exp Imp

AgriForesFis -4.2 -10.2 8.5 -2000.6 -948.2 534.2Food -13.1 -18.9 13.4 -2271.1 -1398.9 1207.9MineFuels -6.9 -12.3 9.6 -1119.9 -1058.3 59.9Textile 5.0 8.4 21.7 561.3 556.2 2772.0Garment 17.0 30.9 39.8 3195.2 3394.3 1121.8Leathers 50.5 56.7 70.9 6461.8 5388.0 1179.4WoodPaper -22.7 -29.8 14.3 -2241.9 -1696.7 495.0Metal -20.8 -25.7 -0.4 -1044.9 -849.1 -59.9Electronics -22.8 -24.5 0.9 -2754.9 -2367.9 85.7TransEquip -10.2 -17.5 24.1 -781.1 -263.6 1600.9ChemiRubPlas -15.2 -25.4 6.6 -2467.7 -1471.5 1206.7MineralProd -2.5 -19.3 11.1 -394.3 -360.9 1522.6OtherManufac -23.9 -26.8 13.8 -3571.3 -2706.8 2860.1ConstUtility 17.7 -33.4 42.2 7357.2 -159.9 273.1TransComm 3.4 -20.9 24.3 1007.2 -660.7 651.7OthServices -2.2 -39.6 27.2 -754.4 -1243.4 1139.1

value change% change

37

3.Research result. 3-2. Opportunities and Challenge s of Vietnamese T&G industry leveraging the partici pation into FTAs.3-2-4. Vietnam – Japan win-win cooperation potentials in T&G from Vietnamese enterprises’ point of view

Source: Authors

Table: Potential cooperation between Japan and Vietnam in T&G industry

Type of upgrading Description Cooperation potentials

Functionalupgrading

Move up from CMT to OEM/ODM/OBM

- Investment promotion in textile

- Trade promotion - HRD

Product upgrading

- Increase unit value by producing morecomplex products;- Move from low-cost commodities to highervalue added fashion goods

- Cooperation in producing high-end products

- HRD and capacity building, especially in quality control, production management.

Process upgrading

- Improve productivity through new capitalinvestment;- Improve efficiency of activities related toinformation, logistics, marketing, etc.

- Trading of T&G’s machines and equipment

- Providing services in logistics, marketing, information analysis, etc.

Win-win cooperation

38

3.Research result. 3-3. Position of Vietnamese T&G industry for Japanese companies 3-3-1. Previous situation of Japanese interest to Vietname se T&G industry� T&G, especially, garment products constitutes one of main export items in Vietnam, and raw material

on this sector depends heavily on foreign countries.

� In addition, T&G occupies an important position in Vietnam-Japan trade relation.

Source:JETRO

Telephones and parts thereof

Main export items of Vietnam, 2013

132,1 billion USD Textiles and garments

Computers, electrical products,

spare-parts and components thereof

Foot-wearsCrude oil

Main import items of Vietnam, 2013

Fishery products

Machine, equipments, tools and instruments

Wood and wooden products

Trasportation, parts and accessories

thereof

Rice

Others


Computers, electrical products,

spare-parts and components

thereofWoven fabrics and cloth

Telephones and parts thereof

Petroleum productsIron and steel

Plastics

Textile, leather and footwear materials

Animal fodders and animal fodders

materials

Chemicals

Others

132,1 billion USD

Main export items to Japan, 2013

13,6 billion USD

11,6 billion USD

Main import items from Japan, 2013

Textiles and garments

Crude oil

Trasportation, parts and accessories

thereof


Fishery products

Others


Iron and steel Computers, electrical products, spare-parts and

components thereof

Auto parts

Others

Woven fabrics and cloth

Figure: Bilateral export/import relationship between Vietnam and Japan

39

3.Research result. 3-3. Position of Vietnamese T&G industry for Japanese companies 3-3-2.Japanese FDI in the Textile industry (Flow base)

Source: Bank of Japan

� In general trend of Japanese FDI flow in the Textile industry, the FDI has been

below zero.

� From the year 2014, it has changed into plus. However, Vietnam is not main target

of Japanese FDI in the textile industry, in comparison to ASEAN rivals such as

Indonesia, Malaysia and Thailand.

100 mn Yen

-450

-350

-250

-150

-50

50

2008 2009 2010 2011 2012 2013 2014 2015

China

100 mn Yen

Figure: Japanese FDI flow to China Figure: Japanese FDI flow to Asian countries

40

3.Research result. 3-3. Position of Vietnamese T&G industry for Japanese companies 3-3-3. Japanese FDI in the Textile industry (Asset base)

Source: Bank of Japan

� From the perspective of Japanese FDI in the textile industry which is evaluated in asset base,

China remains top 1 (170 billion yen).

� Vietnam is relatively small (8.6 billion yen), in comparison to ASEAN counterparts in terms

of FDI asset too.

0

200

400

600

800

1000

1200

1400

1600

1800

China Thailand Indonesia Malaysia Vietnam

100 mn Yen Figure: Japanese FDI asset to China and ASEAN countries

41

3.Research result. 3-3. Position of Vietnamese T&G industry for Japanese companies 3-3-4. FDI inflow in the T&G industry in Vietnam� Vietnam has seen a large inflow of investments from US companies like Huntsman Group, Avery

Dennison, etc, in recent years. Textile and garment manufacturers in Vietnam manufacture for the US

brands like North Face, Adidas, Nike, etc.

� Chinese, Korean and Taiwanese textile and garment investors have also been active in investing in

Vietnam to benefit from the 'yarn forward rule' in TPP, cheap labor and abundant natural resources.

� Japanese companies such as Kuraray Trading, Itochu, Toray Industries and Shikibo have been investing in

setting up production units in Vietnam.

Source:Nikkei, April 19 2016, Mizuho Research Institute, Mizuho insights, March 15 2016

Country Company’s name Investment Value(USD mn)

Activity area

USAHuntsman Group N/A Weaving/Knitting, Dyeing/Finishing

Avery Dennison 30 Cutting and Sewing

China(include,HK)

Pacific and Crystal 550Spinning, Weaving/Knitting, Dyeing/Finishing, Cutting and Sewing

Texhong 500Spinning, Weaving/Knitting, Dyeing/Finishing, Cutting and Sewing

Bros Eastern 400 Spinning

TaiwanFar Eastern New Century

Corporation590

Spinning, Weaving/Knitting, Dyeing/Finishing, Cutting and Sewing

South KoreaHansoll Textile 200 Weaving/Knitting, Dyeing/Finishing

Hyosung 660 Spinning

Japan Itochu 80 Weaving/Knitting, Dyeing/Finishing

Table: Recent large FDI cases in Vietnam

42

3.Research result. 3-3. Position of Vietnamese T&G industry for Japanese companies 3-3-5. Business opportunity of utilizing TPP

Source: Authors

《Hypothetical case for Japanese company（OEM provider US brands）》Spinning Weaving/Dy

eingCutting/Se

wing

Case

１

Case

２

Case

３

Destination

Japan Vietnam US

USJapanMalaysia

（Japanese or local）

Vietnam（local,

China/Taiwan/Korea）

USVietnam（China/Taiwan/Korea）

USVietnam（local）

Export yarn from Japan and cutting/sewing in Vietnam. Export the products to US market

Japanese trading houses receive orders from Western Brands and utilize the production facility in Vietnam

Japanese textile makers participate establish JV with Vietnam locals and provide technical transfer

JV byJapanese companies

Vietnam（local,

China/Taiwan/Korea）

� The TPP provides for “accumulation,” so that in general, inputs from one TPP Party are treated the same

as materials from any other TPP Party, if used to produce a product in any TPP Party.

� The TPP creates a common TPP-wide system of showing and verifying that goods made in the TPP meet

the rules of origin, to ensure businesses can easily operate across the TPP region.

� Japanese companies, utilizing the rule, are to reformulate their business model as follows:

43

� Many Japanese T&G related companies are doing their business in Vietnam.

However, those companies are facing various challenges.

� Regarding the business environment and regulation, Japanese companies pointed

out as challenges the logistics issue, transparency and elimination of regulation (i.e.

application of environmental regulation, prohibition of overtime job, elimination of

ENT, approval of business license, access to information and so on).

� In addition, as for production side of the local companies, there are difficulty of

ensuring the production capacity of garment factories, a large gap of QCD level

between Japanese and Vietnamese side, rising cost of workforce and lack of

management skill and mind-sets.

� And above all, the Vietnamese production is considered to remain in the position

of CMT and is not capable of manufacturing high value added products in the

Japanese eyes. As there is a huge gap of production lot between Vietnam and

Japan.

3.Research result. 3-4. Challenges Japanese T&G ind ustries are facing in Vietnam

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3.Research result. 3-4. Challenges Japanese T&G ind ustries are facing in Vietnam

Source: Yano Research Institute, and MRI’s interview

� As for the evaluation of production capability of foreign countries from Japanese companies, the Vietnam is relatively

inferior to other countries. Gaps exist between Vietnam and others for production capability in the Japanese viewpoint.

Technology Production lot Raw material Lead time Produc tion control systemCost

competiveness

China

・Possible to pass a whole task・Flexible tovarious items

Flexible to smallto large lot

Realize the full local procurement(cotton,yarn,texile,accessories)

Production to shipping:3~5 days(China to Japan)

・Many Japanese speaking staff・Accustomed to Japanese way・Many Japanese inspectioncompanies

Already lostlabor costadvantage

Thailand

･Some factorieshas a capability ofplanning・Matured sewing techniques

1,000~3,000 pertype

Realize the full local procurement(cotton,yarn,texile,accessories)

Production to shipping:8~10 days(Thailand to Japan)

・Many Japanese speaking staff・Accustomed to Japanesebusiness

Relatively higher labor cost in comparison to other ASEAN, however reached the plateau

Indonesia

・Proficient in knit and thin products・Weak in winter items

3,000~10,000 pertype

Flexible to synthetic fiber, knit, cotton

Production to shipping:12days(Indonesia to Japan)

・Some Japanese speaking staff・Need to prepare a set ofproduction material・Need to establish inspectionsystem

Gradually lose labor cost advantage

Vietnam

・Proficient insports item, but weak in textile・Need to followthe work

・1,000~3,000 pertype・Reluctant to small lot, requested by Japanese companies

Mainly, dependon import(cotton,yarn,texile,accessories)Few items from local

Production to shipping:6~10days(Vietnam to Japan)

・Few Japanese speaking staff・Need to prepare a set ofproduction material・Many companies notaccustomed to Japanese way・Few Japanese inspectioncompanies

Relatively maintain labor cost advantage, however, cost is gradually rising

Table : Japanese companies’ evaluation of production capability of Vietnam

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� Vietnam is expected to upgrade its business T&G value chain.

� In MRI’s understandings, in order for the shift the position as CMT into other forms such as FOB, OEM and ODM and

finally into OBM to be realized, Japan and Vietnam cooperation play a role.

� In this regard, MRI considers that in the joint research , we will identify the win-win cooperative possibilities between

Japanese and Vietnamese T&G companies.

3.Research result. 3-5. Vietnam- japan win-win coope ration potentials in T&G from Japanese point of view

1. Assembly/Cut, Make, and Trim (CMT): Apparel manufacturers cut and sew woven or knitted fabric or knit apparel directly from yarn.2. Original Equipment Manufacturing (OEM)/Full Package/Free on Board (FOB): The apparel manufacturer is responsible for all production activities, including the CMT activities, as well as finishing. The firm must have upstream logistics capabilities, including procuring (sourcing and financing) the necessary raw materials, piece goods, and trim needed for production.3. Original Design Manufacturing (ODM)/Full Package with Design: This is a business model that focuses on adding design capabilities to the production of garments.4. Original Brand Manufacturing (OBM): This is a business model that focuses on branding and the sale of own-brand products.Source: MRI, based on Duke Center on Globalization, Governance & Competitiveness, The Apparel Global Value Chain

Cotton, wool, silk,etc

Synthetic fibers

Current status

Partially realized

Raw materials

MarketingDistributing

Cutting/Sewing

FabricDyeing/Finishing

Weaving/Knitting

Spinning

Raw Material sourcing

DesignBranding

OBM

ODM

OEM/FOB

CMTFuture orientation of Vietnam

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� This is a tentative collaborative area between Vietnam and Japan.

� However, as there are challenges from Japanese perspective, IPSI and MRI expect to have a discussion

with you for searching possible solutions.

3.Research result. 3-5. Vietnam- japan win-win coope ration potentials in T&G from Japanese point of view

Type of upgrading

Description Cooperation potentials

Functionalupgrading

Move up from CMT toOEM/ODM/OBM

-Investment promotion from JP to VN in textile-Trade promotion between JP & VN-Workforce dev.

Productupgrading

-Increase unit value by producing more complex products;-Move from low-cost commodities to higher value added fashion goods

-Cooperation in producing high-end products-Workforce dev., esp. in quality control, production management.

Processupgrading

-Improve productivity through new capital investment; Improve efficiency of activities related to information, logistics, marketing, etc.

-Trading of T&G’s machines and equipment-Providing services in logistics, marketing, information analysis, etc.

-Little incentive for Japanese upstream companies to newly invest in Vietnam-Difficulty of finding good factories

Challengesfrom Japanese viewpoint

-Vietnam’s reluctance to adapt to Japanese request: low lot production of high brand products-Development of the domestic market

-Regulatory barrier :restriction on the import of used machines, and so on-Transfer of implicit knowledge and know-hows

Source: IPSI’s presentation material and MRI’s interviews

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Strengths• Skilled labor• Labor cost is lower than China’s• Low cost for CMT establishment• Good CMT quality • Known as a world class exporter of clothes• Be able to implement large orders

Weaknesses• Lack of management skills• Lack of labor in weaving, dyeing and finishing

sectors• High dependence in import materials• Local brands are not able to enter foreign

markets• Low productivity• Weak linkages in local VC, low added value• High proportion of CMT• Weak capability in fashion, design, R&D

Insufficient financial resources

Opportunities• Demographic dividend period until

2030• Increasing investment in upstream

to utilize new generation FTAs• Stable growth in traditional

markets• New FTAs to expand markets and

attract more investments

S-O• Improve quality of training and education

training in T&G, focusing on designing, weaving, dyeing and finishing

• Shift to higher value added activities (FOB, ODM, OBM…) or higher value added products

• Promote trade and investment in targeted markets

• Implement commitments for the FTAs

W-O• Improve quality of training and education

training in T&G, focusing on designing, weaving, dyeing and finishing

• Shift to higher value added activities (FOB, ODM, OBM…) or higher value added products

• Building capability, esp. on management skills• Introduce financial support program • Develop business linkages services

Threats• Competition pressure from

emerging countries (Cambodia, Myanmar…)

• Stricter non-tariff barriers on trade (ROOs, TBT, labor, environment, etc.)

• Raising minimum wages• High local logistics costs

S-T• Shift from cost competition to QCD competition• Strengthen trade and investment promotion in

targeted markets• Provide government supports through better

public services and business climate to help enterprises to cut costs and eliminate negative effect from raising wage

W-T• Capacity building to strengthen competitiveness • Move up the value chains through improvement

of technology transfer, human resource development, management skills

• Improve business and investment climate, speed up administration reforms and equalizations

• Introduce support to market exit firms/labors to shift to other activities

� The evaluation of Vietnamese T&G industry is as follows, relying on the framework of SWOT analysis.

3.Research result. 3-6. Policy recommendation to bo th Government 3-6-1. evaluation of Vietnamese T&G industry

48

� Vietnam is expected to follow the development steps of the industry, considering the current status and conditions specific to Vietnam.

� First of all, the development of the domestic market is expected to lead the industry. The development of the domestic market will require Vietnamese T&G companies to upgrade the position of CMT into OEM/FOB one. In this stage, Vietnamese companies are able to take on a broader range of tangible, manufacturing-related functions, such as sourcing inputs and inbound logistics, as well as production. In fact, especially, with respect to the procurement of raw material, the Vietnam has received a variety of FDIs such China, Taiwan and South Korea in past few years.

� Subsequently, the Vietnamese industry find it necessary to develop and sell its own products upon request of the developed domestic apparel market. To do so, the industry is expected to conduct the process upgrading with the enhancement of design capability and the sophistication of marketing and merchandising. For the point, with the possible governmental supports including Japanese, the training on human resource development is required. In addition, the management skill and mind-sets of Vietnamese are also to be enhanced.

� As a result of proposed story line above, Vietnam will generate ‘excellent’ companies even from the evaluation of foreign companies including Japanese ones. Furthermore, as foreign companies operating in Vietnam consider there are challenges in the business environment, i.e. the logistics, transparency and elimination of regulation (i.e. application of environmental regulation, prohibition of overtime job, and elimination of ENT), approval of business license, provision of information and so on, the governmental measures on the area contribute to maintain the business of FDIs in Vietnam.

� Finally, in case the scenario above be realized, the Vietnamese T&G industry is capable of strengthening its competitiveness in the GVC and of making business over the globe.

3.Research result. 3-6. Policy recommendation to bo th Government 3-6-2. Proposed development scenario of Vietnam’s T&G industry

49

� In order for the development scenario above to be realized, the current challenges Vietnam’s industry is facing will be explained and the possible governmental support along with their effects will be proposed as policy recommendations from IPSI and MRI.

� Please refer to the attachment A3 sheet on the recommendation above.

3.Research result. 3-6. Policy recommendation to bo th Government 3-6-3. Proposal on policy recommendations

Appendix: Appendix:

50

51

Appendix: Methodology and Model description of GTAP�Economic impacts of trade liberalization can be evaluated by several methodologies such as partial

equilibrium, gravity and general equilibrium models. Each method is suitable for some particular research

objectives. Partial equilibrium and gravity models have the advantage of simplicity and tractability. It also

allows for detailed analysis of complex policy instruments or different production systems. However,

these models ignore inter-industry trade and production linkages; they cannot capture the indirect effects

between sectors or regions.

�A CGE model is an empirical tool that is well suited for assessing impact of trade policy changes. The

model has several advantages over partial equilibrium and gravity models.

�First, it takes into account inter-industry linkages between sectors and trade linkages between countries

and regions and thus can capture extensive indirect effects.

�Second, it can assess the impacts of removing trade barriers on welfare, resource allocation and structural

adjustment in each country.

�Third, it can depict the impacts on both member and nonmember countries and thereby better clarify

implications for all trade partners. For the purpose of evaluating impact of TPP on the textile and

garment industries of Vietnam, this study uses a static CGE model, which is the standard GTAP model.

This is a multi-region, multi-sector model. In each region, there are three institution blocs, namely

household, enterprises (or producers) and the government.

�The standard GTAP model assumes perfectly competitive markets, constant returns to scale production

technology, fixed endowments of factors of production and full employment, factor mobility across sector

but immobile across borders. Goods and services are perfectly mobile across borders.

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Appendix: Methodology and Model description of GTAP�Figure below presents a simplified framework of the economy-wide linkages between different

institutions of the national economy in the GTAP model. The figure outlines income flows among

institutions within a region and with the rest of the world (other regions)1. Since it is impossible to draw

the linkages between all institutions in all regions in a 2-dimentional framework, we focus on one region

with all other regions as the rest of the.

Figure: Economy-wide circular of income flow

Note: Transfers to household and government from the rest of the world are not shown in the figure to make it simpler to readSource: MRI

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Appendix: Data and aggregation of GTAP�Most of the data used in the model come from the GTAP database, version 9, which

is the latest version with base year of 2011. The version 9 of the GTAP database

includes data for 140 regions and 57 sectors. In each region, data on flows of goods

and services including input-output flows, capital stocks, population and saving are

provided. It also has data on bilateral trade, tax and subsidy. Because most flows are

measured at both tax-free and tax-paid prices, it implicitly covers indirect taxation.

�All data in the GTAP database are in value term, not price or quantity. In addition, it

does not include time series data but is a cross-section of consistent data on

consumption, production, and trade.

�For the purpose of the present study, the database is aggregated into 23 regions and

16 sectors as follows in the next pages:

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Appendix: Data and aggregation of GTAP

No. Region Corresponding economies/regions in the GTAP database version 111 Vietnam Vietnam2 Australia Australia 3 NewZealand New Zealand4 Japan Japan5 Brunei Brunei6 Malaysia Malaysia7 Singapore Singapore8 Canada Canada9 USA The United States

10 Mexico Mexico11 Chile Chile12 Peru Peru13 Cambodia Cambodia14 Indonesia Indonesia15 Laos Laos16 Philipin The Philippines17 Thailand Thailand18 RoSEA Rest of Southeast Asia (Myanmar and Timor Leste)

19 China China and Hong Kong20 Korea Korea21 India India22

EU_25Austria, Belgium, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece,Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Slovakia,Slovenia, Spain, Sweden, United Kingdom.

23 RestofWorld All the other economies/regions.

Table: Regional aggregation

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Appendix: Data and aggregation of GTAP

Table: Sectoral aggregation

No. Sector Corresponding commodities/sectors in the GTAP database version 7

1 AgriForesFisPaddy rice, wheat, cereal grains nec, vegetables, fruits, nuts, oil seeds, sugar cane andsugar beet, plant-based fibers, crops nec, cattle, sheep, goats, horses, animal productsnec, raw milk, wool, silk-worm cocoons, fishing, forestry

2 FoodMeat: cattle, sheep, goats, horses; meat products nec, vegetable oils and fats, dairyproducts, processed rice, sugar, food products nec, beverages and tobacco products.

3 MineFuels Coal, oil, gas, minerals nec4 Textile Textiles5 Garment Wearing apparel6 Leathers Leather products7 WoodPaper Wood products, paper products and publishing,8 Metal Ferrous metals, metal nec, metal products9 Electronics Electronic equipment

10 TransEquip Motor vehicles and parts, transportation equipment nec

11 ChemiRubPlas Chemical, rubber and plastic products12 MineralProd Petroleum and coal products, mineral products nec.

13 OtherManufac Machinery and equipment nec, manufacture nec14 ConstUtility Construction, electricity, gas manufacture and distribution, water

15 TransComm Trade, transport nec, sea transport, air transport, communication

16 OthServicesFinancial services nec, insurance, business services nec, recreation and other services,Public Administration/ Defense/Education/Health and dwellings,

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Appendix: Some attention in interpreting the Result s �CGE model, in general, and the GTAP model that have been described above are very useful tools that

allow users to numerically explore a huge range of issues on which econometric estimation would be

impossible; in particular to analyze the effects of future policy changes. Despite of its usefulness, it is

important to take into account some features and limitation of the model when reading simulation results.

�First, CGE simulations are not unconditional predictions but rather through experiments about what the

world would be like if there are policy changes in the assumed circumstances and year. This study uses

GTAP database version 9 which has 2011 as the base year. As a consequence, all values are in 2011

constant US$. Thus, in measuring the effects of policy shock, the results should be read as changes in

comparison with the baseline (i.e. in the absence of policy shock), not as forecasted value.

�Second, foreign direct investment is exogenous in the model due to limitation of FDI data. The inability to

endogenize FDI into the model could lead to under-estimation of the positive impact, especially in the

case of Vietnam.

�Third, the use of Armington assumption in the model implies a reduction in the terms of trade of the

liberalizing countries. This leads to lower estimated welfare gain than would have been if the terms of

trade remain constant.

�Finally, specification of the labor market assumes that labor is fully mobile between sectors in domestic

markets. This assumption means that labor will move freely from declining sector to expanding sector,

resulting in strong structural adjustment in the economy. In fact, there are many obstacles in changing

jobs, especially in developing countries, making the structural changes less robust and may take longer

time than estimates.

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