Material autonomy key for Vietnam to fully tap EVFTA

A garment factory at the Yen Lap Industrial Zone in the northern province of Phu Tho. (Photo: baophutho.com.vn)

Textile stocks have been on a temporary upswing thanks to the recent ratification of the EU-Vietnam Free Trade Agreement (EVFTA) but textile enterprises still face difficulties due to heavy dependence on imported raw materials and machinery as well as reduced demand worldwide.

In the latest trading sessions, from February 5 to February 14, shares of Duc Quan Investment and Development JSC (FTM) continuously increased with six session witnessing ceiling prices.

FTM soared by 38.01 percent. During the same period, Song Hong Garment Joint Stock Company (MSH) also increased by 9.5 percent, the Vietnam National textile and Garment Group (VGT) rose 21.2 percent.

According to Tran Xuan Bach, a stock analyst at Bao Viet Securities Co (BVSC), the ratification of EVFTA has boosted textile stock prices as the agreement is believed to offer a huge advantage to the industry.

“But this is only a short-term impact, textile firm can enjoy the benefits the agreement brings if they can meet market demand and expand production scale,” Bach wrote in a daily report.

“Under the tariff reduction plan, tariffs on most yarn and fabric products will be immediately exempted while tariffs on garments will gradually decrease to 0 percent in 6-8 years,” said Ngo Tri Vinh, a stock analyst at BVSC.

“Subsequently, Vietnam’s garment products will gradually decrease the price gap in line with Bangladesh (currently at 0 percent tax) and gain advantages over China (12 percent tax) while the preferential tax for Cambodia (0 percent) is currently discontinued due to recent labour rights violations,” Vinh wrote in a daily report.

However, EVFTA’s impact in the short term will be marginal due to limited capability of material autonomy while EVFTA includes “fabric-forward” rule of origin, which means to enjoy preferential tariffs, the products must be made from fabrics of Vietnamese origin, he noted.

“EVFTA only opens opportunities for businesses with material autonomy as well as those with large EU groups of customers, such as TNG Investment and Trading JSC (TNG) and Thanh Cong Textile Garment-Investment-Trading Joint Stock Company (TCM)."

"The EU is the largest market of TNG, accounting for 54 percent of sales. For TCM, EU currently contributes only about 5 percent of sewing revenue, however, with 60-70 percent material autonomy, TCM is expected to meet EVFTA rules of origin,” Vinh noted.

According to SSI Securities Joint Stock Company (SSI), Vietnam’s textile and garment industry is heavily dependent on importing of machinery and raw materials (60 percent).

“Free trade agreements, on the other hand, impose strict requirements on the origin of products, demanding capability of material autonomy. Since few of Vietnamese business can produce raw materials, they cannot fully exploit the benefits brought in by the FTAs”, SSI said.

The textile and garment industry will also face challenges caused by the novel coronavirus (COVID-19), the company said, adding that business activities of Vietnamese textile enterprises will be negatively affected as many China-based textile factories have been shut down since January. Currently, China is the largest raw materials supplier of Vietnam.

According to SSI, textile stocks dropped sharply last year as businesses did not perform pretty well.

The Vietnam National Textile and Garment Group (VGT) decreased by 10.9 percent in 2019 due to poor business results.

VGT's net revenue reached 18.4 trillion VND (792 million USD), down 3.4 percent compared to the same period last year. Pre-tax profit reached 671 billion VND, fulfilling 75 percent of the yearly plan.

Post-tax profit touched 628 billion VND, down 10.6 percent compared to 2018.

Duc Quan Investment and Development JSC (FTM) witnessed shares plunged 88 percent last year.

FTM net revenue recorded a decrease of 13 percent compared to 2018, reaching nearly 1 trillion VND. The company also recorded a net loss of nearly 95 billion VND in 2019. Therefore, FTM only fulfilled 66 percent of its revenue plan./.

VNA