No matter how many orders local textile and garment producers fill, they'll continue losing big so long as they rely on increasingly expensive imported materials.
A surge in orders over the first quarter pushed textile and garment exports up 18.9 percent to US$3.04 billion, putting the annual target of $10.5 billion well within reach.
But as the cost of material increases, Vietnamese producers, who rely heavily on imported material, are facing huge losses on orders previously agreed to at lower prices.
Local producers say India's ban on cotton exports last month has prompted global prices to jump to $1.9 per kilogram, compared with $1.3-1.4 earlier this year. Yarn prices have also surged 34.3 percent yearon-year, they said.
Though export prices have increased by between 5 and 7 percent since the end of last year, they have not been able to keep up with the escalating material costs.
This pressure has made local producers very wary of signing new export contracts for 2011, which could make for a large drop in shipments next year.
Textiles and garments are key Vietnamese export products that generated $9.1 billion last year, according to the Vietnam National Textile and Garment Group (VITAS).
While the global garment market shrunk by around 15 percent last year due to the economic downturn, Vietnamese garments and textiles managed to expand their share in major markets like Japan and the US.
The largest advantage the local textile and garment industry has is low prices, but when input costs surge, this competitive edge begins to fade.
Some companies have asked the Ministry of Industry and Trade to help them buy local materials in an attempt to lower input costs. However, domestic materials only account for 10 percent of what the industry needs. In particular, local cotton output is able to meet just 2 percent of total demand.
The lack of domestic sources cost the industry nearly $7.4 billion in material imports last year, according to VITAS. Textile and garment material imports cost $738 million in the first quarter this year, behind only steel and car imports in terms of value.
The dependence on imported materials has also hurt the profitability of the footwear and furniture industries, two other export staples of Vietnam.
Diep Thanh Kiet, vice chairman of the Vietnam Leather and Footwear Association, said Vietnamese shoemakers imported up to 80 percent of leather used in the industry. Wood and woodwork businesses, meanwhile, could only domestically source nearly 3.9 million cubic meters of timber last year, and had to import another four million cubic meters, the Vietnam Timber and Forest Product Association said last month.
Nguyen Chien Thang, chairman of Ho Chi Minh City Handicraft and Wood Industry Association, said the reliance not only damaged the competitiveness of Vietnamese exporters but could also destroy the wood industry.
A report on the industry ministry's Industrial and Commercial Information Center's website in March estimated that the import of materials made up 60 percent of all imports in Vietnam. Imports grossed 68.7 billion last year and reached 6.95 billion in the first four months of this year.
What's in store?
If Vietnam's garment and textile industry cannot become less dependent on imported materials, it will lose big customers, Jocelyn Tran, chairwoman of American Chamber of Commerce, said at a conference in HCMC last month.
Large buyers in the US, Japan and Europe now prefer producers who are involved in the entire production chain, from spinning and weaving to making clothes. By choosing these producers, buyers save time as they do not have to supply designs and materials, she said.
Vietnam is the only country among the five largest garment exporters to the US that does not use locally produced materials. The lack of local materials is why Vietnamese producers mostly do contract work for foreign companies, instead of controlling their own fate, Tran said.
If local garment and textile firms cannot overcome this problem, they will be surpassed by foreign rivals, she said. Indonesia, for example, has sufficient materials, highly skilled workers and better production facilities than Vietnam.