(OTEXA, 2006). This is very likely because, given its close proximity to China, Vietnam is considered the “second supplier country of choice” to China and India for US importers, who attempt to reduce the risks (e.g. in terms of political stability) associated with sourcing from only one country (Informant 25, 2005). Vietnam shipped abroad nearly US$4.81 billion worth of garments and textiles in 2005, thus becoming the world’s 16th biggest garment and textile exporter and 10th biggest garment exporter (Business-in-Asia, 2005).
The following analysis of private business owners’ export market participation is based on fieldwork conducted mainly in 2000 and 2001. It should therefore be noted that the major changes that have occurred since this time (the opening of the US market and the ATC phase-out) are not reflected in this analysis. However, some consideration is given to how these matters affect the empirical results in the discussion and concluding remarks.
Direct export
Respondents generally considered exporting directly to retailers, importers or wholesalers the best way to export, regardless of market destination, first of all because it eliminated the costs of using intermediaries. Other advantages mentioned included better feed-back from some buyers, and thus better learning opportunities, and (at least the feeling of) greater security of contract. However, direct orders were considered difficult to obtain and subject to strong competition. The number of direct orders placed in Vietnam was small due to the unavailability of quality fabrics on the local market,31 combined with Vietnamese enterprise owners’ general lack of financial and managerial ability to source fabrics abroad. As a consequence, direct export orders were more common for non-quota and lower quality- and volume-demanding Asian and Eastern European end-markets than, for instance, the EU market. For Eastern Europe, enterprise owners also sometimes had one of their otherwise rare opportunities of selling f.o.b. and sourcing fabrics on their own rather than merely performing CMT functions. This was possible mainly because Eastern European buyers were generally satisfied with products made of Vietnamese fabrics.
However, margins were generally still low due to the low sales prices in such markets.
Difficulties in exporting directly also partly derived from the limited experience of private companies in this regard, since they were only allowed export licenses on their own account in 1998. Prior to this they were obliged to export through state enterprises or state agents. When fieldwork for this study was conducted about three years later, some barriers for export still existed even for those private enterprises with greater financial and managerial capacity that had export licences. This often had to do with officials at different levels of the state system creating or inventing obstacles which businesses had to circumvent, including obstacles to the physical transportation and customs clearance of finished garments. One respondent explained how customs kept containers waiting in the ports until they were paid to release them:
“Money for customs is basically paid to speed things up, but not only for this, because without paying the goods will never get through. I don’t have a choice. When I import and export directly (…) they pretend to find a mistake in the papers, and we have to pay (Respondent 66, 2001).
In competing for direct orders (at the time of fieldwork, especially from the EU), the main obstacles mentioned during interviews were a combination of capacity-related factors and bureaucratic obstacles, namely:
31 A Taiwanese company, Formosa, is currently building a textile mill in Vietnam, which may improve this to some extent in the future (Financial Times 22 July 2004).
Access to capital
Scholars of Vietnam widely believe that loans at low interest rates from the mainly state-owned banks are extremely difficult for private enterprises to obtain. Credits are largely allocated to SOEs, and the official credit system lacks transparency and information (see Appendix I for details) (e.g. Cortés and Berggren, 2001). In relation to exporting, this is particularly an obstacle in terms of being able to produce on a f.o.b. basis, in which case the necessary capital would be mainly working capital, first, to order and pay for stock, fabric and components, and secondly, to produce on the basis on what are usually ninety-day payment terms, since buyers are increasingly reluctant to finance production on the basis of Letters of Credit. Likewise, working capital was required for wages and salaries in between orders. As shown in Paper 3, since private enterprise owners generally lacked ownership rights (Red Books) over land and buildings, they had few possibilities to offer collateral against loans from the official banking system.
Access to export quotas
Officially, clothing export quotas are mainly allocated on grounds such as the amount of quota received by businesses in the preceding year, and also their production and export capacity, while a smaller proportion is distributed on the basis of open bidding among businesses across the whole country. According to the law, businesses with allocated quotas may commission other enterprises to export for them, but the goods must be produced where the quota has been allocated. Quotas that are not used by a quota-owning company must be given back to the ministry/Peoples’ Committee in order to be re-allocated to other companies (Ministry of Trade, Ministry of Planning and Ministry of Industry, 2000).
However, it has often been pointed out that this system is not transparent (see e.g. Mallon, 1999), and quotas are commonly traded on the black market, so that private companies that do not receive enough quotas in the official allocation sometimes also buy on the black market either from other (state and private) enterprises or from the authorities. At the time of fieldwork, quota restrictions for Vietnamese garments were mainly important for the EU and also Canadian markets, while at present they apply to the US market only, as explained above.
Contact with buyers
Respondents often described entering into contact with foreign (especially EU and US) buyers as being impeded by several factors, including the fact that business owners often did not possess market knowledge or the capital to travel. More importantly, state institutions commonly mediated contacts between buyers and Vietnamese producers.
Producers that obtain orders through the state system are more likely to be state-owned or
at least state-connected than private ones, as we shall see below. The reasons for this include the fact that, for buyers coming to Vietnam, finding suppliers on their own was often seen as difficult due to, for instance, language and infrastructure barriers. Also, “red tape” and bureaucracy were mentioned as being difficult to overcome, especially in cases in which buyers had tried to find other suppliers than those suggested by officials.
Therefore, these buyers found it easier to go through the official system, through which they were also provided with interpreters and other types of assistance. Foreigners in the industry were also sometimes convinced that, when the official system appointed their suppliers, these were also more likely to have access to the necessary resources, such as quotas and capital (Informant 8, 2000; 16, 2001).
Subcontracting
It has been estimated that 60% of clothing from Vietnam reaches the outside world via Hong Kong, Taiwanese or South Korean contractors (see Appendix I for details) (MPDF, 1999). Most producers interviewed for the present study also worked on subcontracts.
These were the only sources of business for those who did not have the resources necessary to export directly themselves, and they were an important secondary source for others as a complement to direct orders. These subcontracting arrangements took different forms. First, subcontracts were often obtained from East Asian contractors who exported to the EU or the US. In this so-called triangular manufacturing (Gereffi, 1994), the East Asian contractors usually supplied materials (which were from East Asia anyway), while the producers undertook CMT. Secondly, some producers subcontracted for Vietnamese SOEs that exported directly – usually to the EU – because foreign investment in Vietnam is first and foremost channelled to SOEs (see e.g. Freeman, 2002; MPDF, 1999). A third group of suppliers had subcontracts which combined the first and second variants, that is, subcontracting for SOEs, which were themselves subcontracting for East Asian contractors exporting mainly to the EU. The reasons subcontracting enterprises gave for specialising in this market channel included the fact that “the East Asians have a lot of relations in the EU, while we cannot meet the buyers’ demands” (Respondent 7, 2000). While market knowledge may be generally difficult for developing country producers to obtain, the transitional nature of the Vietnamese context may have further increased this difficulty, since knowledge about foreign markets, and even knowledge about how to obtain information, is hard to find and politically problematic (see also Knutsen, 2004).
Respondents usually subcontracted for East Asians without knowing the end-markets or the types of buyers the products were destined for. Conversely, in such subcontracting
arrangements, products were not always even traceable back to Vietnamese producers, who often stated that they were not allowed to label their products “made in Vietnam”:32
“I am not allowed to label the products “made in Vietnam”. It happens a lot like that.
The contractors just export the products, which are then considered foreign, for instance, products made in Korea (Respondent18, 2000).
Subcontracting was apparently not always subject to an agreement between the European buyer and the East Asian contractor, or else it was concealed for other (for instance, quota-related) reasons:
“For example, a German buyer has a big order and prefers it to be produced by one single company. So he gives the order to a large SOE, since he thinks big companies are able to fulfil his demands. After that we can get a share of it as subcontractors for the SOE”
(Respondent 9, 2000).
Subcontracting for Vietnamese SOEs that were exporting to the EU either directly or via East Asian contractors was common for enterprises in the sample, but usually for relatively small orders. In general, respondents did not perceive as important the difference between obtaining orders from an SOE that had a direct order from an EU buyer and obtaining them from an SOE that was only a subcontractor; they usually stressed that their piece rates were not affected by the margin earned by the SOE.