Chinese Textile Giant Charging Ahead In Vietnam Despite TPP Uncertainty

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Chinese Textile Giant Charging Ahead In Vietnam Despite TPP Uncertainty

For Texhong Textile Group, investing in Vietnam was a strategic move to circumvent the adverse impact of its home country not being part of the Trans-Pacific Partnership. But now, even as uncertainty looms over the free trade pact amid open opposition by both major-party US presidential candidates, the Chinese company is firmly committed to further expansion in its southern neighbour.

Texhong, one of the world's largest yarn suppliers, has been aggressively building up production capabilities in TPP signatory Vietnam. Founder and Chairman Hong Tianzhu has said one of the main intentions of investing there is to deal with the trade agreement. Execution of the TPP "will pose new challenges to China's textile and apparel enterprises," so the company is building up its Vietnam operation "with respect to the cost advantages" and prospects of the pact, he said in its latest annual report this March.

The company is staying the course in Vietnam despite the dark clouds hanging over the agreement. Co-CEO Zhu Yongxiang said that even without the TPP, the competitiveness of the Vietnam operation "is very strong, among all Southeast Asian nations and even compared to Chinese production bases." Vietnamese production has at least three advantages besides the TPP, Zhu pointed out.

One is relatively favourable trade relations with the world vis-a-vis China. Even before the TPP, tariffs on yarns exported from Vietnam to Japan, South Korea and Europe were lower compared with exporting them from Chinese factories.

Production costs are another advantage. "Compared to China, its labour, electricity and other costs are lower in Vietnam," Zhu said. In addition, the factory's location is "very good" for the group's overall operation. Its Vietnamese production complex sits in Quang Ninh Province, which is adjacent to China's Guangxi Zhuang Autonomous Region. This enables the company to include its Vietnamese factory in a production chain already established in southern China. And being close to the port makes exporting convenient.

Indeed, the company's expansion in Vietnam continues. The new yarn production line there will be in full swing during the second half. Upon completion, the company's yarn production in Vietnam is expected to become almost on a par with its Chinese operation. Manufacturing is going downstream beyond yarn. Production equipment with an annual capacity of 60 million meters of gray fabric, 40 million meters of woven dyed fabric, and 7 million pieces of garments will be installed by around November and begin full operation early next year.

The productivity of a number of lines in Vietnam has exceeded that of those in China, Zhu said. In the meantime, studies of other Southeast Asian locations have only reinforced Vietnam's advantages. The co-CEO acknowledged that Vietnam will be the future first choice for further production expansion.

First-half revenue came to 5.82 billion yuan ($877 million), up 20% on the year. Net profit attributable to shareholders grew 56% to 456 million yuan. Segment revenue from yarn in Vietnam, including internal transactions, now accounts for 21% of the total. In terms of assets, the Vietnam operation adds up to more than 4 billion yuan, constituting a third of the group as a whole.

But what about the risk of excessive exposure in Vietnam, where bilateral relations have been strained over the territorial dispute in the South China Sea?

"I have considered somewhat on this, but it has not become a major consideration," Zhu told the Nikkei Asian Review. This is because Vietnam, following in China's footsteps, has already come a long way on the path of economic reform and has accepted so many foreign investors. "Therefore, I believe the government will act in a rational manner. ... I don't think politics will destroy the economy," he said.

Zhu said he has not felt any influence derived from Sino-Vietnamese political tensions and holds that separating politics and business "is a big global trend."