Cablegate: Quang Nam Garment Factory: Trying to Make It in The

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 02 HO CHI MINH CITY 000605

SIPDIS

STATE FOR EAP/BCLTV AND EB/TPP/ABT/BTT BOYNTON
STATE ALSO PASS TO USTR BRYAN/SPOONER/MILLER/CLATANOFF
USDOC FOR 6500 AND 4430/MAC/AP/OPB/VLC/HPPHO
USDOC ALSO PASS OTEXA LEONARD/FOOTE/MARTELLO
CUSTOMS FOR RICHARD CRICHTON
LABOR FOR ANA VALDES

E. O. 12958: N/A
TAGS: ECON ETRD KTEX VM SOE
SUBJECT: QUANG NAM GARMENT FACTORY: TRYING TO MAKE IT IN THE
MIDDLE OF NOWHERE

Summary
------------
1. Quang Nam Province is the home of the Quang Nam Garment
Company, a small state-owned enterprise with about 800 employees
and revenues of VND 20 billion per year (about US$1.3 million).
On a brief visit to the company by DPO and Econoff, they saw a
clean, well-lit, well-ventilated factory producing its last U.S.
order for the year. The visit provides a glimpse of how a small
factory far from Vietnam's commercial and industrial centers is
dealing with U.S. quotas, competing with larger firms in Hanoi and
Ho Chi Minh City areas, and handling social accountability issues
and economic reforms. Interestingly, the company director was
enthusiastic about the possibility of equitization, or partial
privatization in this case.

Quang Nam - One of the Poorest Provinces
----------------------------------------
2. Located south of Danang along the central coast of Vietnam,
Quang Nam is one of the poorest provinces in the South, with an
average per capita income of US$230 per year. The province does
draw relatively large numbers of foreign tourists to its two
UNESCO World Heritage Sites, including the picturesque town of Hoi
An and the ancient Cham ruins at My Son. It is also the province
with the highest number of "Mothers of Revolutionary Heroes,"
that is, mothers who lost children fighting in the war - against
us. Outside of Hoi An, the province is relatively poor and has
little industry. Quang Nam is working actively to change this,
with the development of the Chu Lai Open Economic Zone at the
southern edge of the province (more to come Septel).

Company Does Assembly Only and is on Its Last U.S. Order
--------------------------------------------- -----------
3. Unlike most textile/garment firms in the Ho Chi Minh City
area, the Quang Nam Garment Company is a state-owned enterprise
(SOE). It is one of three subsidiaries of the Hoa Tho Textile
Company based in Danang and is part of Vinatex, the huge textile
conglomerate controlled by the Ministry of Industry. Quang Nam
Garment Company Director, Mr. Do Ngoc Phuong, showed us around the
facility. He noted that the factory simply filled orders provided
by the mother company in Danang and did not have a separate sales
or marketing function. Its traditional markets were Japan, Korea,
and Taiwan. Marubeni, a well-known Japanese trading firm, is a
particularly large customer. The company cuts and assembles
garments using fabric and other accessories coming directly from
the buyer. The only components sometimes sourced locally are
thread and packaging materials. Quang Nam Garment Company has
about 800 employees and generates revenues of about 20 billion VND
(about US$1.3 million), which amounts to only about US$1600 per
worker per year.

4. Director Phuong stated that after the BTA went into force the
company began to receive U.S. orders and had gradually shipped
more and more to the American market. So far this year the
company had shipped 250,000 pieces to the U.S., he said. But due
to U.S. quotas, the factory was finishing up what he expected
would be his last U.S. order for some time - a shipment of Dickies-
brand trousers. Mr. Phuong stated that the parent company had
told him not to expect any additional quota or U.S. orders this
year. (Note: It is not clear whether the parent company does not
expect to be allocated additional quota or if it just plans to
allocate what it receives to other subsidiaries. End note.) Mr.
Phuong said his company would once again focus on its traditional
export markets, even though these orders were less profitable.

Low Pay, Reasonable Conditions Equals Good Jobs
--------------------------------------------- --
5. Quang Nam Garment Company is located right up against busy
National Highway 1A. Our meeting with the director was in a
shabby, drab administration building. The factory itself,
however, was surprisingly clean, well lit, well ventilated, and
relatively cool on an extremely hot afternoon. Some parts of the
factory were air-conditioned. For the first time Econoff saw
Vietnamese men working at the sewing machines. Typically in
factories near Ho Chi Minh only women fill these jobs. Salaries
in Quang Nam are low, however. Director Phuong reported that
workers earn VND600,000 per month (less than US$40), which he
believes is about 70% of the going rate in Ho Chi Minh City. Mr.
Phuong noted, however, there was low turnover rate, because in
Quang Nam, these were considered good jobs with competitive
salaries. Many of the factory workers in the Ho Chi Minh City
area come from places like Quang Nam. But according to Mr.
Phuong, these workers -- even with lower pay -- would much rather
stay close to home where the cost of living is cheaper and
surroundings more familiar.

6. When asked about social accountability issues, Director Phuong
said the parent company handled any necessary certifications,
although he only knew of the firm obtaining an ISO certification,
not about meeting any social accountability standards. He went on
to say, however, that the company had made a number of changes to
improve worker conditions for the U.S. market. He particularly
noted improved lighting, ventilation, air-conditioning and
"modernization of some of the production."

7. Quang Nam Garment Company's low wages and stable workforce
give it a small competitive edge over firms in more expensive Ho
Chi Minh City. But Mr. Phuong also noted his central Vietnam
location makes it more difficult for him to reach customers and
that shipping is slower and more expensive from there, than from
HCMC. As other firms have also told us in central Vietnam, it is
easier and faster for a company to truck its goods down to Saigon
Port, rather than use port facilities in Danang, where ships call
much less frequently.

Plans to Equitize
-----------------
8. When asked about development or expansion plans, Director
Phuong stated the company was planning to be equitized by 2005, a
move he strongly supported. He said he believed it would make
management and workers feel more personally responsible for the
company and its success, and would improve its financial position.
Equitization would only go so far, however. When asked if he was
worried about his company going it alone when it had yet to build
up the most basic sales and marketing functions, he stated that
even after equitization the parent company would retain a 50%
interest in the company and would continue to perform those
functions.

Comment
-------
9. In a poor, relatively remote provincial location, a steady job
paying less than US$40 per month is considered good.
Unfortunately, that appears to be this company's only competitive
edge. Quang Nam Garment Company, even with its successes,
exemplifies the problem of many of Vietnam's garment firms. They
are basically assembly operations capturing only a small portion
of the value of the final garment. Although Director Phuong
realizes he could increase his revenues dramatically if his
company could do more than just assembly, he does not appear to
have any plan or means to do so. Nonetheless, this little textile
firm in the center of Vietnam is able to compete in the global
market successfully and be an important employer in an
economically depressed area of the country. And while the quota
on U.S. goods is limiting his ability to get higher profit orders,
Mr. Phuong seems confident that he can find buyers in his
traditional Asian markets.

YAMAUCHI

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