Critical mass
As long ago as 2001, the Vietnamese government set out a program to raise the competitiveness of the country's textile industry, with a goal of sharply increasing self-sufficiency in raw materials by 2010. The government created incentives for foreign firms to directly invest in mid- and upstream operations like fibers, fabric making, dyeing and finishing. So long as the investment is in new equipment or new technology, investors will receive special benefits, with the hope being that Vietnam can reach self-sufficiency of 75% in major raw materials like chemical fibers and cotton by 2010 (the current level is 25%).
Although it will be difficult to achieve such a high self-sufficiency target in such a short time, it cannot be denied that many mid- and upstream enterprises from around the world have found Vietnam attractive for investment. Such firms include Pamatex Berhad of Malaysia, Daewon of Korea, and Taiwan's own Formosa Plastics.
Let's look at the case of Formosa Industries Corp., part of the Formosa Plastics Group. For their new factory-a capital commitment of NT$10 billion-they chose the Nhon Trach Industrial Park in Dong Nai Province. The project includes a power station and textile plant, with a complete series of operations (long fibers, short fibers, spinning, yarn formation, knitting, dyeing and finishing) on the textile side.
Moreover, changes in the global trade environment have also caused major firms to turn their eyes to ASEAN.
In 2005, under the leadership of the World Trade Organization, the 30-year-old "curse" of the textile trade-the quota system-was dissolved. With the loss of their protective umbrella, ready-to-wear clothing manufacturers around the word entered into a no-holds-barred war of all against all. Vietnam, following its entry into the WTO in 2007, was therefore even more attractive to investors.
Makalot Industrial Co., one of Taiwan's blue-chip listed textile firms, used to have nine or 10 centers of production scattered around the world. With the demise of the quota system four years ago, there was no longer any need to scrounge around for quota shares, and the company has already closed its factories in Central America. Now it is it concentrating its energies on five Asian locations.
Makalot spokesperson Wang Tay-chang says, looking at the two most important inputs of this industry-raw materials and manpower-Asia is still the region with the most to offer. And when you see that everybody who is anybody in Taiwan's textile sector is in Vietnam by now, there should soon be a "critical mass" effect, and it is by no means impossible that Vietnam will become, after mainland China, the second most important overseas bastion for Taiwan's textile firms.
One giant production base
"ASEAN integration means companies can wander freely through the region. Each of the 10 member states has its own advantages, creating one enormous production center!" enthuses Kang Shu-teh, senior manager at Tuntex Textile (Thailand), which invested in Thailand in the early 1990s and now has the third-largest cloth making operation in the country. The key considerations in corporate investment decisions, he reminds us, are access to raw materials, markets, and human resources, and each country in ASEAN has its own assets. If you enter any one of these states, it is like getting a regional travel pass-you can utilize the resources for which each given country has a competitive advantage and thereby make the most competitive product possible.
Kang, who came to live in Thailand in his teens when his father moved here and who speaks Thai fluently, offers Tuntex's ASEAN deployments as a case in point. The material in the men's suit pants they produce is 100% long-fiber cloth, and therefore the factory has been set up in Thailand, where textile technology is more advanced. Ready-to-wear clothing operations, on the other hand, are situated in Indonesia and Vietnam, where labor is abundant. They have also recruited managerial personnel from Malaysia to help manage in Indonesia, since both countries share an Islamic heritage. But because no country in ASEAN has the right conditions to produce long-fiber yarn, the most basic input, production remains at the parent plant in Taiwan.
Leaving Taiwan to help Taiwan
In sum, a number of shifts in the economic environment-incentives offered by national governments, the dissolution of economic barriers among ASEAN members, the demise of the quota system, and so on-have created the conditions for enterprises from around the world to flock to ASEAN. Yet the Taiwan firms that have long been giving it their all abroad have never forgotten their original vision: the goal of relocation of branches of the firm is to make the roots back in Taiwan even more stable and enduring.
Take Eclat for instance. They set up a cloth factory in Vietnam in order to diversify and raise the competitiveness of the corporation as a whole. They took knitted fabric production, which has low profit margins and low barriers to entry, out of Taiwan and moved it to Vietnam, while leaving the kinds of textiles that have high unit prices, small and diverse production runs, and short delivery times in Taiwan. For the company's core cloth-making business as a whole, this is a kind of horizontal integration, allowing more flexible allocation of resources.
The success story of Tainan Spinning Co., a historic 50-year-old firm that came to invest in Vietnam 12 years ago, provides even stronger evidence of how the "children working overseas" support the "parent" back home.
At that time the firm found that it was unable to compete with mainland China's high-volume low-cost yarn formation, so they moved all the equipment in an entire yarn plant to Vietnam, while the parent firm kept the upstream chemical fiber plant as well as other yarn production facilities in Taiwan.
To everyone's amazement, this yarn formation facility, whose components could only have been sold for scrap in Taiwan, was completely revitalized in its new home. As all the elements fell into place one after another, production capacity increased by a factor of 10 over as many years. Now it is Vietnam's largest yarn plant, with capacity of 520,000 spools, accounting for one-fifth of the whole nation's production. Moreover, recently, in addition to investing in cloth and dyeing operations, the firm has branched out into construction and other sectors.
Spinning out profits
In the main office, located in the Bien Hoa Industrial Zone in Dong Nai Province, Tainan Spinning (Vietnam) assistant general manager Lo Yao-tang, with the rapid rhythms and to-the-point manner of speaking so typical of Taiwanese businesspeople, analyzes how the Vietnam plant has become so dominant. Yarn formation, he explains, requires large capital inputs (a 100,000-spool plant needs an investment of US$80 million), and costs for raw materials are also high. They have their own methods for keeping cash flow going, and they take advantage of the production advantages offered by Vietnam. What gilds the lily, moreover, is that "our customers are precisely ASEAN+3!" At present, whether selling with any of the 10 ASEAN member states, or from ASEAN to mainland China, Japan, or Korea, so long as there is a certificate of origin, such sales are entirely exempt from tariffs. "If we were selling out of Taiwan, we would have to pay tariffs of 4-8%, which is just like taking all your profit and handing it over in taxes!"
Besides its own achievements in ASEAN, Tainan Spinning (Vietnam) also serves as "fireman," absorbing excess demand for short fibers that the headquarters in Taiwan can't handle. They also carry on a parallel division of labor with the parent firm: Taiwan does the high-tech long-fiber spinning, while Vietnam is the site for the more time-consuming, labor-intensive short fibers.
"We increase the profits of the whole company by NT$300-400 million annually, which is 50% more than the core enterprise back in Taiwan," says Lo with satisfaction.
It is early Saturday morning, and by 7:00 the hardworking Vietnamese employees have already started their day. Inside the Tainan Spinning (Vietnam) factory, machines are whirring away and cotton is dancing through the air. Workers wearing protective masks, working with the dexterity that comes of experience and skill, process the cotton and feed the tireless machines. Outside the factory, in the middle of a flower-dotted lawn, there is a tall, snow-white Chinese-style ceremonial arch, looking unusually striking in the dusty industrial park.
Some say that the outstanding performance being turned in by Taiwanese firms in Southeast Asia is the weapon by which Taiwan will avoid marginalization from regional economic integration. As ASEAN takes off, the story will certainly get more complex and exciting in the future!