Viet Nam’s success in the textile sector needs little introduction. After concluding a trade agreement with the United States in 2001 that pushed toward World Trade Organi-zation membership in 2007, Viet Nam is a powerhouse in garments and textiles. The country is consistently a top �ve global exporter in the sector (MOIT). However, Viet Nam has a reputation of being at the bottom of the manufacturing process—a low-value added contributor, principally the �nal CMT (Cut-Make-Trim) of garments and footwear. This reputation is being shredded. Viet Nam’s manufacturing is powering upstream to fabric and �ber produc-tion, creating incredible opportunities for foreign investors. The country is experiencing a boom in the textile sector as several factors converge. Membership in WTO leveled the tari� struc-ture for the country. The sector now has over ten years of experience, both in terms of the workers and regulations on the sector. And Viet Nam maintains stable wages at roughly half the cost of China. The result is an 178% increase in garment exports from 2009-13. And the rate of growth is accelerating. While the deals are still in negotiation, the Free Trade Agreement (FTA) with the European Union and the twelve country Trans-Paci�c Partnership (TPP) are set to give Viet Nam’s textile sector another major shake-up. This

Third Wave of trade deals will push for more capital intensive manufacturing and a signi�-cant deepening across the sector. Viet Nam’s shift from agriculture to textiles happened in a �ash, and the shift to higher value production is matching that pace. The major players in the sector all have a presence, with companies like Adidas, Nike, Puma, The Gap, and many others pushing from 20% up to 60% of their total product through the country. Viet Nam's government knows that in order to be competitive in the 21st century, the country must develop investment and trade policy that can fully leverage the coun-try’s natural advantages. At the close of the 2014 National Assembly session, the government rati�ed the third national investment law. The third iteration in the past decade and a half. A law that is built and rebuilt in collaboration with the thou-sands of foreign corporate partners active in the country. The country's legal framework is an evolving codex under constant evolution to match deeper and increasingly substantial trade agreements. Viet Nam's policy makers recognize the unique position of the country's economic pro�le: the only major East Asian country capable of providing cost competitive, labor intensive, high quality manufactured goods in the 21st century.

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Viet Nam: Swimming UpstreamOpportunities in Textile Manufacturing

Viet Nam is the largest exporter of garments in Southeast Asia—and the sector only really began in 2001. From 2001 to 2007, Viet Nam’s garment exports grew by 17% pa. As good as these number were, the numbers after 2009 are even better. After WTO mem-bership in 2007 and world demand normalized after the global �nancial crisis, Viet Nam’s garment exports accel-erated to 23% pa growth. The last �ve year’s performance �ips

In the decade ending in 2013, Viet Nam increased manufactured exports by 420% (€13bn to €83bn) o� the shift from agriculture to basic manufacturing. The result is Viet Nam climbed from the 7th largest exporter in ASEAN to the 4th. Viet Nam is on target to export over €200bn by 2020, making the country the 2nd largest non-oil exporter in Southeast Asia.

Viet Nam’s Manufactured Exports

Growth Potential

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conventional thinking on its head: only after the Global Financial Crisis has Viet Nam become a true player in global manufacturing. Today is the dawn of Viet Namese manufactured exports, and garments is the bedrock of the sector. Foreign investment is intensifying in Viet Namese manufacturing—a 17% concentrated increase in FDI from 2009-13. When most emerging markets saw a slowdown in foreign invest-ment, Viet Nam’s pro-investment markets has continued to attract overseas capital �ows. As a result, since 2009, Viet Nam’s manufactured exports had lift-o� from the launch pad.

US BTA WTO GF Crisis

Viet Nam Manufactured Export 2001-13

Endowments

Cái Lân, Quảng Ninh

Lạch Huyện, Đình Vũ, Hải Phòng

Nghi Sơn, Thanh Hóa

Cửa Lò, Nghệ An

Sơn Dương, Vũng Áng, Hà Tĩnh

Tiên Sa, Sơn Trà, Liên Chiểu, Đà Nẵng

Dung Quất, Quảng Ngãi

Quy Nhơn, Bình Định

Vân Phong, Khánh Hòa

Nha Trang, Ba Ngòi, Khánh Hòa

Cái Mép, Long Sơn Bà Rịa-Vũng Tàu

Long Sơn, Đồng NaiCần Thơ

Hiệp Phước,TPHCM

Hoang SaParacel Islands

Truong SaSpratlyIslands

Deep Water Ports (World Bank VDR 2012)

Geography With a long coast and easy access to China and the ASEAN region, Viet Nam’s location and geography are hugely bene-�cial. For most parts of the country, a water port is only a few hours away, accessible by road, rail or river. The country has several natural deep water ports and is building out more to promote development (listed on the map). Several areas are becoming clusters for textile and garments investment, in particular the suburbs of Hanoi, but the largest concentration of garment manu-facturing is in Ho Chi Minh City and surrounding provinces.

A principle draw for foreign investment in Viet Nam is the young, energetic work-force. The post-war baby boom means the majority of the population is under 35 years old. Investment in schools during the 90's created an environment of high levels of education relative to GDP per capita. Viet Nam has a 95% literacy level and scored a 16th on a global student OECD evaluation of student math scores. A country with an average annual income of US$1000 per year scored better on math education than France, the UK, and USA (PISA OECD 2012). Given Viet Nam’s low level of develop-ment, the country scores middle of the pack on most indicators on education (see table). Where the country excels are measures of pay and productivity, scoring 29 out of 144 countries in the WEF annual study. Viet Nam’s “basic unskilled worker wages of $130-150 a month are around half of what they have to pay in China.” (Financial Times May 2014). How much investment can Viet Nam’s labor pool absorb? Viet Nam’s new entrants to the workforce: 1,000,000 new workers, every year.

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Basic Education Stats

Secondary Education Enrollment (% of Pop) 75 Tertiary Education Enrollment (% of Pop) 25 Rankings out of 144 countries

Internet Access in Schools 47 Pay and Productivity 23 Cooperation in labor-employer relations 79 Flexibility of wages 60 Hiring and Firing practices 65 Women in the Workforce 23 Source: World Economic Forum 2014

Overall Heath and Primary Education 61

Primary Education (% of Pop) 98

Workforce

Infrastructure

Viet Nam’s Big Infrastructure Push

Road Transportation

The Global Financial Crisis caused a slump in GDP growth, from over 7% to 5%. In response the government launched a �scal stimulus, raising infrastructure investment from 9% to 11% of GDP—a higher rate of expenditure than any country in East Asia (Thanh & Pincus 2011).

Viet Nam made substantial progress in the last �ve years on road infrastructure with several major expressway projects. In addition, the country has massive public transportation projects in all key cities, such as high speed bus transit in Ho Chi Minh City and Ha Noi and light rail around the southern commercial hub.

Industrial and Economic Zones

Viet Nam currently has around 290 industrial zones and about 200 more approved to be built over the next decade. In addition, the country has 15 economic zones—essentially more devel-oped, larger industrial parks for heavy industry. Many hi-tech parks are located in Ho Chi Minh City, Hoa Lac (Ha Noi) and Da Nang City with substantial investment since 2009.

Ports According the World Bank (2012) Viet Nam is on track to have “the highest number of deep sea ports, international airports and industrial parks in the world relative to the size of the economy.” (VDR 2012 pg. 57). The country currently has 24 deep sea ports more on the way. The major deep water ports are located around Hai Phong in the north and Vung Tau in the south (see map on previous page).

Power Viet Nam’s power supply is a known bottleneck on growth, but the country is responding with full force. EVN, the country’s biggest power corporation, will invest $50bn in production and improved transmission from 2010 to 2020 and plans another $75bn from 2021 until 2030. The plans call for a “55 GW build-out between 2014 and 2030, with 29.5 GW of [additional] coal-�red generation targeted by 2020 alone.” (Financial Times 27/11/2014). Most power produc-tion is focused on coal and hydro. Gas, nuclear and renewable energy (principally wind) coming to the fore over the next decade. Ironically, perhaps the biggest problem in Viet Nam’s power grid is the easiest to �x. The single buyer model under EVN tends to deter most private investment, although several inde-pendent producers exist, due to below cost �xed price (part of a pro-growth subsidy program). This system is under constant revision and once the system is �nalized, there will be a boom in domestic and foreign investment in the sector. It is age old case of crisis being opportunity in disguise. Thankfully one that will soon be remedied by the stroke of a pen when the new system is rati�ed. Power supply might be a problem in Viet Nam today, but a problem only because of the country’s hyper growing demand and booming manufacturing.

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Key Expressway Projects Project/Location Amount Duration/Status

GMS Kunming–Hai Phong Transport Corridor: Noi Bai– Lao Cai Highway

$1,096 million

2008–2014 (Finished)

Ho Chi Minh–Long Thanh–Dau Giay Expressway (co-financed with JICA)

$410 mil-lion

2008–2015 (Finished)

Northern Delta Transport Infra-structure Improvement

$170 mil-lion

2008–2014 (Finished)

Saigon East–West Highway ¥55.0 bil-lion

2008–2012 (Finished)

GMS: Ben Luc–Long Thanh Ex-pressway

$636 mil-lion

2011–2017 (Under con-struction

Second Northern GMS Transport Network

$75 million 2011–2016 (Under con-struction)

Beyond WTO: The Third Wave of Trade Deals

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Viet Nam—21st Century Export Hub Key Current and Pending Trade Deals

Each trade deal creates a major change in Viet Nam’s economy. Normalization with the US kicked-o� agriculture in the 90’s. The US BTA in 2001 ignited the coun-try’s garment and foot-wear. And the WTO accession in 2007, produced a take-o� in electronics. For the most part, the accession to WTO leveled most barriers in the goods trade. Howev-er, this is not the end of the integration process. The two key deals in negotiations are the Trans Paci�c Partnership (TPP) and the Viet Nam - European Union Free Trade Agreement (FTA). Expectations from these are:

Improved foreign investor’s rightsBetter protection of intellectual propertyArbitration system for disputesIncentives for higher rates of localization.

While previous deals opened markets, the ’third wave’ of trade deals are about intensifying investment in Viet Nam. In the case of TPP, Viet Nam, as the least developed country in the negotiations, will be pulled by the other eleven members toward even faster growth. Furthermore, Viet Nam is intentionally layering trade deals to take advantage of commutative bene�ts. Trade deals between the Europe and Viet Nam, and Viet Nam and the US (or other TPP countries) equals European deals with the US. For example, a European investor in Viet Nam would have the privileges of the TPP deal when exporting to TPP countries, or the customs Union with Russia (and other members). It is this aggregate trade regime that will establish Viet Nam as a hub for global manufacturing.

After the US-BTA in 2002, Viet Nam’s entered a highly competitive, China dominated textiles market sector. China is the world’s largest producer of textiles and garments, a position estab-lished and held onto since the mid 1990’s. China will continue to hold this position for the fore-seeable future. Viet Nam was able to squeeze out a small portion of the market largely from the risk of over-concentration in the country. Viet Nam was, for a time, picking up only the lower-echelons of the market. That is changing. What we mean by the lower portion of the market, is garment production. Textile production can be divided into three phases to distinguish between the outputs, or the capital intensity of manufacturing.Upstream is �ber production, where raw materials are turned into threads and is the most capital intensive segment of the market.Midstream is fabric production. Fibers are woven into cloth and dyed.Downstream is garment production. The labor intensive, last-step in textiles.

Increasing Capital Investment

Increased Localization Since 2009, localization in the textile sector has intensi�ed. Wage pressure in China is pushing more investment into Viet Nam, and pushing Viet Nam into more capital intensive manufacturing. A snap-shot view of relevant exports versus imports shows a widening gap between the two. After small dip in 2008 from the �nancial crisis, the di�erence between downstream production (garment exports) and mid to up-stream inputs (fabric, �bers) is widening. This is indicates more fabric and �ber is being produced onshore relative to outputs. Furthermore, we’re seeing a sharp increase in cotton imports as companies invest in upstream �ber production.

Opportunities in the Textile Sector

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From a mix of investment incentives and preferential treatment in the sector, Viet Nam is edging into the high value phases of the textile industry. The Viet Nam Textile and Garment

Viet Nam Textile Estimates (VITAS, ACTIF, ITS) 2010 2015 2020 Export Revenue (US$ BN) 12.5 18 25 Labor (mil.) 2.5 2.75 3 Fabric Production (mil. tons) 1.0 1.5 2.0 Fiber Production (‘000 tons) 350 500 650 Localization 50% 60% 70%

Association (VITAS) has ambitious plans to promote the industry, and improving localization in manufacturing. The table provides a selection of �gures to highlight anticipated changes. In addi-tion, Prime Minister Nguyen Tan Dung is pushing for increased acreage for cotton, with plans to expand from 30,000 ha in 2015 to 76,000 ha by 2020.

Investment Incentives

Swimming Upstream

The TPP and EU-FTA are in closed negotiations, so exact details are unclear, however, it is well known that a core of the talks is to rethink tari�s across countries based on local content. Under these two agreements, companies that can show higher localization will receive preferential tari�s. This will be the engine for Viet Nam’s textile development over the next decade. Using a back of the envelop style estimate of historical and projected value added (the di�erence between garment exports and fabric/thread imports), there is a clear tendency for major trade deals to push Viet Nam upstream in textile production. The US-BTA really launched the sector in 2001. WTO membership, with a slight delay from the Global Financial Crisis, kicked o� the current phase of Viet Nam moving into Midstream production. While we anticipate the third wave of trade deals will propel Viet Nam into upstream �ber production.

Investment incentives in the textile sector will mostly apply to projects of a desirable size (+5000 workers or capital levels) or key locations (detailed list at http://�a.mpi.gov.vn/home/en). The following are brief description not to be taken as legal advice. Tax incentives-Viet Nam has a �at corporate income tax (CIT) of 22%, which will be reduced to 20% from 1st January 2016. Other than the standard rate, preferential rates of 20%, which will be reduced to 17% from 1st January 2016, and 10% apply to a number of projects which satisfy certain conditions such as investment in certain �elds of business and/or encouraged geograph-ical locations. In addition to preferential rates, companies may enjoy CIT exemption between 2 to 4 years and a 50% reduction in CIT between 4 to 9 years subsequently. Capital investment and Technology Transfer-Approved investors are exempt import duties on equipment, materials, and means of transportation. In addition, income related to technology transfer can be exempt from income tax in accordance with the law on tax.Carrying forward losses-Foreign investors can carry forward initial investment losses for up to 5 years.Depreciation of �xed assets—Select projects are eligible to apply an accelerated depreciation of �xed assets.Incentives of land use—Select projects can extend land use terms (from 50 to 70 years), receive automated renewal, payment exceptions or exemption or reductions on land use fees.

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Quick Value Added EstimateViet Nam Textile Exports less Imported Inputs

CONTACTS

European Trade Policy and Investment Support Project (EU - MUTRAP)Room 1203, Floor 12, O�ce Building, Ha Noi Tower, 49 Hai Ba Trung street, Hoan Kiem district, Ha Noi, Viet Nam Tel: +84 4 393 78472 | Fax: +84 4 393 78476http://mutrap.org.vn/index.php/en/homeEmail: mutrap@mutrap.org.vn

Foreign Investment Agency (FIA)Ministry of Planning and Investment6B Hoang Dieu street, Ba Dinh district, Ha Noi, Viet NamTel: +84 80 48461 Fax: +84 4 3734 3769Email: �avietnam@mpi.gov.vnhttp://�a.mpi.gov.vn

(FIA) Investment Promotion Center – Central Viet Nam103 Le Sat, Da NangTel: +84 511 3797 669/689/738/699 Fax: +84 511 379 7679Email: ipcmientrung@gmail.comhttp://centralinvest.mpi.gov.vn

(FIA) Investment Promotion Center – Southern Viet Nam178 Nguyen Dinh Chieu, Ho Chi Minh City Tel: +84 8 3930 6671 | Fax: +84 8 3930 5413Email: bbt@ipcs.vnhttp://ipcs.vn/en

(FIA) Investment Promotion Center – Northern Viet Nam65 Van Mieu Street, Ha Noi.Tel: +84 4 3747 5998 | Fax: +84 4 3843 7927Email: ipcn@mpi.gov.vnhttp://ipcn.mpi.gov.vn

The Investment Case for Viet Nam’s Textile Sector Viet Nam’s textile sector is primed to shift to higher-value production. Much as China supplied inputs to Viet Nam’s garment sector, Viet Nam will most likely be supplying the next wave of countries in the sector, Cambodia, Bangladesh, and Myanmar. The motivator is a work-force now proven in the sector, supportive government policy and the Third Wave of trade deals. We don’t know what the completed negotiations in the EU-FTA and TPP will be until both agreements are signed, but we know the direction the discussions are headed. Two key factors will have a major impact on the textiles sector: modernized corporate rights and incentives to increase localized content. The former will help insure corporate brand, intellectual property, and help streamline dispute resolution. The latter is a speci�c tari� reduction to promote localization within nations that are party to the agreement. In both cases, this means a movement away from the traditional out-sourced manufacturing to in-house production based in Viet Nam. The current trend is for companies to increase onshore manufacturing of proprietary fabrics and materials, and we expect this to intensify in the coming years, leading eventually to more onshore design and development. Businesses that increase their presence in Viet Nam continue to �nd a energetic workforce, a pro-business legal environment, and a government that wants to promote long-term partnership.

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Note on Data: All data not indicated from the General Statistics O�ce of Viet Nam or the World Bank development Indicators. All trade data used in graphs from ITC (http://www.intracen.org/)