Analyze the exported garment value chain of vietnamese companies in ho chi minh city from 2010 to 2017

UNIVERSITY OF ECONOMICS AND LAWMai Thuy Tra Giang ANALYZE THE EXPORTED GARMENT VALUE CHAIN OF VIETNAMESE COMPANIES IN HO CHI MINH CITY FROM 2010 TO 2017 Major: International economics ID

UNIVERSITY OF ECONOMICS AND LAW

Mai Thuy Tra Giang

ANALYZE THE EXPORTED GARMENT VALUE CHAIN OF VIETNAMESE COMPANIES IN HO CHI MINH CITY FROM 2010 TO 2017

Major: International economics

ID: 8310106

ECONOMIC MASTER THESIS

SUPERVISOR: PhD HUYNH THI THUY GIANG

HO CHI MINH CITY – 2018

Firstly, I want to express my deep gratitude to Dr Huynh Thi Thuy Giang for herkind guidance, support, advice and encouragement to help me complete this thesis.She has been an outstanding advisor, always very flexible and willing to let herstudents work at their own pace, while making sure that things are going all right.Under her consistent, conscientious and patient supervision, I have gained insightunderstanding of how to approach an academic research I always found her highlyaccessible and I thank her for the regular meeting that kept me motivated andsuggested idea to complete my thesis

Secondly, without the kind support of some apparel experts, managers andemployees of Vietnamese garment companies in Ho Chi Minh City, both local andforeign suppliers and the buyer office in Ho Chi Minh, my thesis never becomessuch a real case So I would like to express my great acknowledge to them whospend their time for my interview as well as the survey

I also want to express my thanks to my family and my friends who gave me

enthusiastic support during the time I am doing the thesis

Ho Chi Minh City

06th March, 2019Mai Thuy Tra Giang

LIST OF ABBREVIATIONS AETS An international consulting company that works alongside

governments and the private and public sectors to offer sustainable solutions for improving living conditions in Europe and in developingand emerging countries

AGTEK Association of garment, textile and embroidery of Ho Chi Minh City

ASEAN Association of Southeast Asian Nations

CAD Computer-aided Design

CAM Computer-aided Design and Manufacturing

CEO Chief executive officer

CMP Cut – Make – Pack

CMPT Cut – Make – Pack – Trim

CMT Cut – Make – Trim

DFID Department of international development

FAO Food and agriculture organization

FDI Foreign direct investment

FOB An export mode that the companies import raw materials and sell

finished goods

FPTS FPT Securities joint stock company

FTA Free trade agreements

GDP Gross domestic product

GTZ German technical cooperation agency

ILO International labor organization

M4P A model provides the tools to analyze the value chain

NGO Non-governmental organization

ODM Original design manufacturer

OTEXA Office of textile and apparel

PESTEL Political – Economic – Social – Technological – Environmental –

Legal

R&D Research and development

SDC Swiss agency for development and cooperation

SWOT Strength – Weakness – Opportunity – Thred

US United State

VITAS Vietnam textile and apparel association

LIST OF FIGURES

Figure 0.1 Research framework of the thesis ……… 4

Figure 1.1 Porter’s generic value chain ……… 12

Figure 1.2 Value system of Porter ……… 14

Figure 1.3 Four links in a simple value chain ………14

Figure 1.4 The market system in M4P approach ………16

Figure 1.5 The smile curve of apparel value chain ………19

Figure 1.6 Apparel value chain ……… 21

Figure 1.7 Generic elements of a basic linear value chain map ……….22

Figure 2.1 Apparel export turnover of FDI enterprises and Vietnamese companies from 2013 to 09/2017……… 32

Figure 2.2 Vietnam garment exports by leading destination, 2010 – 2017 …… 33

Figure 2.3 Export form of garment industry in Vietnam in 2010 and 2017 …… 35

Figure 2.4 Vietnam and Ho Chi Minh City apparel exports, 2010 – 2017 ………36

Figure 2.5 Garment exports in Ho Chi Minh City, 2010 -2017 ……….37

Figure 2.6 Export form of garment industry in Ho Chi Minh, 2010 and 2017 … 39

Figure 2.7 Position of Vietnamese garment value chain of Ho Chi Minh City in the global apparel value chain using smile curve framework ……… 42

Figure 2.8 The order and communication of Vietnamese garment factories in Ho Chi Minh City ……… 44

Figure 2.9 Imported fabric in Ho Chi Minh City from 2011 to 2017 ………44

Figure 2.10 Fabric importation from China of Vietnam, 2012 – 2017 ………… 45

Figure 2.11 Product life cycle of exported garment of Vietnamese factories in Ho Chi Minh City ……… 51

Figure 4.1 Core processes of exported garment value chain of Vietnamese garment factories in Ho Chi Minh City ……….65

Figure 4.2 Maps of related actors in the apparel value chain of Vietnamesecompanies in Ho Chi Minh City ……… 67Figure 4.3 Flow of products from raw materials to finished goods ……… 68Figure 4.4 The exported value chain of Vietnamese garment factories in Ho ChiMinh City ………71Figure 4.5 Model of supplier relationship management ……….74

LIST OF TABLES

Table 1.1 Other researches of the garment value chain in different aspects …… 26

Table 2.1 Top categories of Vietnam’s apparel exports to the USA in 2016 (by value) and the market competition ……… 34

Table 2.2 Employed population aged 15 and over by residence in Ho Chi Minh City from 2012 to 2017 ………53

Table 3.1 Research process ………61

Table 4.1 The result of identifying the prioritized value chain to analyze ……….64

Table 4.2 Sources of suppliers ……… 66

Table 4.3 The cost structure of the CM business ………84

Table 4.4 The cost structure of the nominated FOB companies ……….85

Table 4.5 The cost structure of FOB full package companies ………86

Table 4.6 The cost structure of ODM full package companies ……… 87

Acknowledgement ……….i

List of abbreviation ……… ii

List of figure ……….iv

List of tables ……….vi

Index ………vii

Introduction……… 1

Chapter 1: Literature review ……… 10

1.1 Definitions ……… 10

1.2 Theories of the value chain ………11

1.3 Models used to study the exported value chain ……….15

1.4 Some experimental researches of the exported garment value chain …….23

1.5 Recommend model for the research ………28

Chapter 2: Overview the current situation of garment value chain of Vietnamese companies in Ho Chi Minh City in the period 2010 – 2017 …… 1

2.1 Overview of garment industry in Vietnam from 2010 to 2017 ………… 31

2.2 Overview of garment industry in Ho Chi Minh City from 2010 to 2017 36

2.2.1 Export turnover ……….36

2.2.2 Export market ………37

2.2.3 Export form ……… 38

2.3 Analyze the position of Vietnamese garment value chain in Ho Chi Minh City from 2010 to 2017 by using the smile curve framework ……… 40

2.3.1 The position of Vietnamese garment companies in Ho Chi Minh City in the global apparel value chain ………40

2.3.2 Ordering procedure and communication ……….43

2.3.3 Sources of inputs for apparel industries ……… 46

2.3.4 Production management ……… 49

2.3.5 SWOT matrix analysis ……….54

Chapter 3: Research methodology ……… 55

3.1 Model of research ……… 55

3.1.1 Tool 1 – Select prioritized value chains to analyze ……… 55

3.1.2 Tool 2 – Mapping the value chain ………56

3.1.3 Tool 4 – Relationships, Linkages and Trust ……….58

3.1.4 Tool 5 – Analyzing options for demand driven upgrading: Knowledge, Skills, Technology and Support services ……… 58

3.1.5 Tool 6 – Analyzing Costs and Margin ……… 59

3.2 Research process ………60

3.3 Samples of the research ……… 62

Chapter 4: Analyzing the Vietnamese garment value chain from 2010 to 2017 using M4P model ………63

4.1 The result of identifying the prioritized value chain to analyze in Ho Chi Minh City ……… 63

4.2 Mapping the exported apparel value chain of Vietnamese factories in Ho Chi Minh City ……… 65

4.2.1 Mapping the core processes in the value chain ……… 65

4.2.2 Identifying and mapping the main actors involved in the process …65 4.2.3 Mapping flow of products ……….67

4.2.4 Mapping the exported apparel value chain of Vietnamese factories in Ho Chi Minh City ……… 71

4.3 Relationships, Linkages and Trust ……….71

4.3.1 Horizontal linkages ……… 71

4.3.2 Vertical linkages ……… 73

4.4 Analyzing options for demand driven upgrading: Knowledge, Skills, Technology and Support services ……….75

4.4.1 R&D, Design and Branding stages of the apparel value chain …….75

4.4.2 Manufacturing process of the apparel value chain ……… 78

4.5 Analyzing Costs and Margins ……… 79

4.5.1 Components of garment costing ……… 79

4.5.2 Stages in costing ……… 81

4.5.3 The cost sheet ……… 82

Chapter 5: Conclusion and recommendations ……… 88

5.1 Optimize lead time to maximize profits ……….88

5.1.1 Apply the modern technology ……… 88

5.1.2 Set up a production progress control and provide the training to workers ……… 90

5.1.3 Efficient material storage and handling ……… 92

5.2 Focus on the design activity ……… 93

5.3 Improve the sourcing activity ……… 95

5.4 Invest in the marketing activity and improve the services ……… 96

References ……… 94

Appendix 1 ……….97

Appendix 2 ……… 113

1 Necessity of the research

“The increasing spread of global value chain worldwide has been one of the mostprominent features of the global economy for the last three decades.” (Galar, 2002) Vietnam is said to be the most competitive garment exporting countries in theworld However, Vietnamese factories only implement the manufacturing stage -the lowest value added stage in the apparel value chain So that, despite the bigquantity of exported garments every year, the profit of apparel companies do nothave any positive signal to increase Vietnam becomes an ideal destination for manywell-known brands due to the low labor cost in comparison to other nations in Asia

In addition, many buyers are switching their production from China to Vietnam due

to the increasing labor cost and strict regulation nowadays Some emergingcountries are ready to compete with Vietnam in terms of the manufacturing costsuch as: Myanmar, Bangladesh, Cambodia, etc Thus, the strength of cheap laborcost will be gradually replaced by other factors To maintain the position,Vietnamese garment companies must have a proper understanding of the globalvalue chain, change their strategic management to have a breakthrough and achievethe stable development Ho Chi Minh City is mentioned as the “capital” of Vietnamgarment industry, gathering a large number of factories conducting different type ofgarments However, as the general situation, most of them conduct the businesswith CMT method It means that they just involve in cutting, making and trimming.Other processes are performed by the buyers For some companies have betterworkforce, they upgrade their chain into FOB method Thus, the position ofVietnamese factories is extremely weak in the whole global apparel value chain.The most effective way to increase the profit for exported companies is emerginginto the buyer chain, upgrading to the higher level as much as possible, trying tograb and handle well every stages which can be affordable so as to gain the profit

As the biggest city in Vietnam, Ho Chi Minh City gathers a huge number ofworkers with high quality, knowledge, skills, etc There has the possibility to

become the pioneer and will achieve the outstanding results with upgraded valuechain and the thorough revolution in the apparel industry The learning curve duringthe working with global brands absolutely helps Vietnamese companies accumulateexperiences to manage the chain, then apply into their own chain and has apossibility to develop further From then, the result from Ho Chi Minh City willbecome the typical case study and expand to other regions This will have anextensive influence for the entire industry.

With above reasons, the topic “Analyze the exported garment value chain of Vietnamese companies in Ho Chi Minh City from 2010 to 2017” is chosen to be

my thesis

2 Objectives and research questions

This thesis aims to analyze the exported garment value chain of Vietnamesecompanies in Ho Chi Minh City from 2010 to 2017 in order to make suggestions,recommendations to improve and develop the current Vietnamese apparel valuechain in Ho Chi Minh City Specific objectives will be as below:

1 Systematize theories and experimental models related to the value chain, theexported garment value chain and the global apparel value chain to recommend thesuitable model for Vietnamese garment companies

2 Analyze the exported garment value chain situation of Vietnamese companies in

Ho Chi Minh City from 2010 to 2017

3 Assess the exported garment value chain of Vietnamese companies in Ho ChiMinh City by using the result of M4P model

4 Conclusion and recommendations

To achieve above research objectives, the content of the thesis must answer thefollowing research questions:

1 Which model related to the exported garment value chain that can apply toanalyze the Vietnamese garment value chain?

2 How is the value chain situation of Vietnamese companies that export garments

in Ho Chi Minh City from 2010 to 2017?

3 How is Vietnamese exported garment value chain in Ho Chi Minh City afterM4P analysis?

4 Which suggestions to improve the export garment value chain of Vietnamesecompanies in Ho Chi Minh City?

3 Object and scope of research

This thesis focuses on analyzing the exported garment value chain of Vietnamesecompanies in Ho Chi Minh City from 2010 to 2017

Thirdly, the descriptive statistical method uses the questionnaire to collect theopinion of stakeholders as follow:

(1) Statistics to describe the assessment of experts of how important and necessary

to analyze the exported garment value chain as a solid basis for research reasons ofthe thesis

(2) Statistics to describe the results of the survey of participants in the garmentvalue chain in terms of cost, revenue and other related indicators as the basis for theanalysis of exported garment value chain (objective 3)

Minh city to ensure the necessity of the thesis and choose the suitable model toproceed the research.

+ Step 3: Use the secondary date to analyze the situation of the exported garmentvalue chain of Vietnamese companies in Viet Nam as well as Ho Chi Minh City

+ Step 4: Establish different questionnaires of each stage in the value chain based

on the analysis content The questionnaire focuses on procedure, cost, profit,production process and linkage of actors in the value chain Then, conduct thesurvey with different parties such as: fabric suppliers, garment companies, trimsuppliers, etc to collect the data After that, analyze the survey results

+ Step 5: Suggestions

Figure 0.1: Research framework of the thesis

Research objective

Analyze the exported garment value chain in Vietnamese garment companies in Ho

Chi Minh City from 2010 to 2017

Literature review

Using the analysis, synthesis and comparison method to analyze theories and

experimental models of exported garment value chain

Expertise method

Adjust the research model

Analysis, synthesis and comparison

Analyze the value chain situation of Vietnamese exported garment companies in

Ho Chi Minh City from 2010 to 2017

Descriptive statistical

Analyze the M4P method to identify the value chain position of Vietnamese

garment companies in Ho Chi Minh City

Conclusion and recommendations

5 Previous researches related to the garment value chain

Apparel industry is important for all countries, especially for developing countrieswhich have labor abundance Therefore, there is a huge number of researchconducted in this field, in many different aspects However, according to author’sresearch, most of them focused on national scope There are no domestic or foreignprojects that conduct the research specifically in Ho Chi Minh City

5.1 Foreign researches

Garment manufacturing almost proceeds in the developing countries which haveabundance of labor to take advantage of the cheap labor cost Asia countries areideal destination for the buyers who control the apparel value chain Thus, it is easy

to realize that a large number of researches were conducted in different aspects toanalyze the garment industry in those countries to improve the value chain as well

as achieve higher profit and sustainable development

Regarding to the sustainability initiatives in the garment, AETS (2016) analyzed

the apparel value chain of 29 countries such as India, Vietnam, Sri Lanka,Bangladesh, Pakistan, etc to have an overall idea Those are focusing on the socialaspect, environment, upgrading from voluntary standard to partnership Theopportunities to make the garment value chain more sustainable and responsiblewere proposed to pay attention to the transparency, gender equality, environment,workers’ right and improve the existing issues of each value chain

The importance of backward linkages was mentioned by Asgari (2013), Trade

development authority of Pakistan (2016) after mapping the value chain from rawmaterial to retail outlet and analyzing the garment export They recommended thatthe backward linkages need to be considered and promoted to develop the strongapparel value chain Besides, the design capacity for product development wasimportant since it created quick turnaround from samples to trial orders

The difficulties and challenges which each apparel value chain had to cope with

were identified and properly recognized in the researches of Natsuda (2009), Yusuf(2012), Kimsey (2011), Hossain (2016) They analyzed the problems of growth for

the apparel value chain such as: economy and political stability, compliance, leadtime, skills shortage, exported market, etc

The differentiation is an integral part to make the apparel value chain survive.

Dopico and colleagues (2011) investigated the sources of differentiation in anapparel value chain and concluded the brand, image, design play a fundamental role

Nowadays, people focus on the sustainable development Garment industry is not

an exception John and colleagues (2010), Hossain and colleagues (2015), Nachumand colleagues (2015), Caixia and colleagues (2017), Samah (2018) analyzed theopportunities for sustainable development in the global apparel value chain such asupgrade the current chain to a higher profitable chain, social upgrading and workingconditions, increase the technical know-how, improve soft and hard infrastructure,support unique indigenous design skills, encourage local production and developingtechnical capacity and knowledge base, raise awareness on sustainable developmentgoals, together with partners, etc

Generally, there are various approaches that can be used to analyze the garment

value chain Based on the foreign research results, the product development, designand distribution which are proceeded by the buyers occupy the most profit along theglobal apparel value chain In addition, for the exported garment value chain, there

is a variety of challenges needs to be taken into account to address properly tocreate more added values The sustainable development is unavoidable for anyapparel value chain This thesis inherited the approach of ILO to conduct theanalysis to meet the objectives of the research

5.2 Local researches

Textile and garment industry contribute the large portion in the GDP of Vietnam.Therefore, this industry draws an attention of researchers to analyze, thenrecommend the suggestions for improvement There are various analysisesregarding to different fields

Angie (2012) examined the development of textile and garment manufacturing in

the context of the prevailing arguments on pursuing market oriented liberalizationand state directed domestic linkages, and the impacts of these developments onunions and workers in Vietnam A shift to upgrading activities, including learningand skills training, is essential to support improvements in wages and workingconditions of labors

Hoi (2012) investigated difficulties that Vietnamese garment value chain had to face with in terms of input supply, manufacturing, exporting Then, there are some

suggestions of increasing the value within the chain such as: clearly identify themarket segment, proactive input supply to prevent the unstable changing oversea,ensure the labor force, more participate into the global apparel value chain,understand the regulations and compliance of exported products

Christine (2015) analyzed the China’s factor in Vietnam’s value chain development since 70-80% of raw material that Vietnamese garment companies

used was imported and China occupied 28% in 2013 Any changes in China’sregulation will affect the Vietnamese garment industry

Ha and Duong (2016) aimed to assess the development and competitive level of the Vietnam garment and textile industry in relation to Vietnam garment and textile

export enterprises in global value chain The product categories, export markets,factors of development, opportunities as well as challenges were investigateddeeply They also assessed the concept of value chain and links of the garmentexport enterprises in Vietnam

Nham and Wang (2017) found that how technology changes was the determinant for productivity growth and undeveloped technology caused a huge barrier They

used the grey prediction to forecast future data for 20 largest enterprises in six years(2016–2021) based on actual indicators The paper also used Talmudist productivityindex and its decomposition into efficiency and technical change to measure thepast productivity growth Finally, window analysis was applied to significantlydetect the trends of performance in 12 years (2010–2021) from large number ofinputs and outputs

Generally, in the effort of author, the Vietnamese garment value chain was analyzed

to identify the opportunities to gain higher profit and enforce the position in theglobal apparel value chain However, most of researches focused on particularaspect, do not have an overall analysis of the whole value chain In addition, thetextile and garment industry were often assessed together which lead to generalconclusions rather than specific suggestions can be applied for the apparel valuechain separately Therefore, this thesis will have another approach to analyze theVietnamese exported garment value chain that is more entire and pervasivealthough the range is limited in Ho Chi Minh City

6 Meaning and limitation of the research

6.1 Meaning of the research

In terms of practice, this thesis analyzes the current situation of Vietnameseexported garment value chain in Ho Chi Minh City from 2010 to 2017, identify theposition of Vietnamese value chain in the global apparel value chain From then,this thesis recommends some suggestions to gain the sustainable growth

6.2 Limitation of the research

This dissertation remains some limitations as below:

- The research samples are quite small in the total related parties of the apparelvalue chain Therefore, the result does not reflect all sides in the reality of thegarment value chain in Ho Chi Minh City In addition, M4P model contains eighttools, due to timing, this thesis only applied five tools to analyze the Vietnameseexported garment value chain in Ho Chi Minh City

- Data used in this research are collected from 2010 until 2017 Any changes afterthat will be collected and adjust to update the research

Further researches conducting later will overcome those limitations

7 Structure of thesis

Apart from introduction and conclusion, the main body of this thesis is divided into

5 chapters as below:

Chapter 1: Literature review

Chapter 2: Analyze the situation of Vietnamese garment value chain in Ho Chi

Minh City in the period 2010 - 2017

Chapter 3: Research methodology

Chapter 4: Analyzing the Vietnamese garment value chain from 2010 to 2017 using

M4P model

Chapter 5: Conclusion and recommendations

CHAPTER 1: LITERATURE REVIEW

“Value chain analysis is increasingly important in this era of rapid globalizationbecause it plays a key role in understanding the need and scope for systemiccompetitiveness” (Kaplinsky and Morris, 2003) Thus, a comprehensive awareness

of the value chain can help apparel companies improve their operation and build asustainable position in the domestic as well as global market This chapter aims toprovide some fundamental theories, definitions and experimental models used inthis thesis to easily understand following chapters

1.1 Definitions

There are various concepts of the value chain from a large number of researchesrelated to this field However, below are some outstanding definitions which werewidely applied in most of researches

The value chain for any product or service extends from research and

development, through raw materials supply and production, through delivery tointernational buyers, and beyond that to disposal and recycling Porter (1985)determined “the value chain dis aggregates a firm into its strategically relevantactivities in order to understand the behavior of costs and the existing and potentialsources of differentiation A firm gains competitive advantage by performing thesestrategically important activities more cheaply or better than its competitors” Afirm is profitable if the value it commands exceeds the costs involved in creating theproduct Creating value for buyers that exceeds the cost of doing so is the goal of

any generic strategy According to Vecchio (2004) a value chain is "a string of

companies working together to satisfy market demands." The value chain typicallyconsists of one or a few primary value (product or service) suppliers and many othersuppliers that add on to the value that is ultimately presented to the buying public

The exported value chain belongs to the international value chain which there are

at least two countries participating in the chain The integration of a company intothe value chain increases from local, to domestic, to international, to regional and

finally to global chain (Sturgeon, 2001) At first, a local value chain is limitedwithin a commuting area and known as an industrial district or a specializedindustrial cluster Then, a domestic value chain operates within a single country and

is also known as a supply base or as a national production system In a widergeographical area, an international value chain is often referred to as a cross-borderproduction network since more than one country involve in this chain This kind ofvalue chain can be the imported value chain or exported value chain or combination

of both chains After that, a regional value chain is confined to countries within aparticular trade bloc and is known as a regional production system

Finally, a global value chain comprises actors that coordinate activities across at

least two continents or trade blocs This is referred to as a global commodity chain.The global value chain expresses the highest level of cooperation among actors inthe chain

According to Gereffi (1994 and 1999), there are two types of global value chainwhich can be called “producer-driven” and “buyer-driven” global commoditychains Producer-driven commodity chains are those in which large manufacturersplay the central roles in coordinating production networks (including their backwardand forward linkages) This is the characteristic of capital and technology intensiveindustries such as automobiles, aircraft, computers, semiconductors and heavymachinery In contrast, buyer-driven commodity chains refer to those industries inwhich large retailers, marketers and branded manufacturers play the pivotal roles insetting up decentralized production networks in a variety of exporting countries,usually located in the third world

Generally, the apparel industry is a quintessential example of a buyer-drivenproduction chain marked by power asymmetries between the producers and globalbuyers of final apparel products Profit in buyer-driven chains derives from uniquecombinations of high-value research, design, sales and marketing

1.2 Theories of the value chain

Global value chain analysis offers a theoretical framework to understand the

integration of firms into viable market system Value chain approach is widely used

as a tool to facilitate the process of market integration Adopting a value chainapproach could help companies gain the benefit from integration into high valuemarkets and improve their competitiveness There are various theories of valuechain which were proposed to be used in particular cases

1.2.1 The value chain theory of M Porter

In 1985, Michael Porter discussed this theory in his influential book “CompetitiveAdvantage”, in which he first introduced the concept of the value chain A valuechain is a set of activities that an organization carries out to create value for itscustomers Porter proposed a general-purpose value chain that companies can use toexamine all of their activities, and see how they are connected The way in whichvalue chain activities are performed determines costs and affects profits So, thisconcept can help to understand and analyze the sources of value in a corporation

Figure 1.1 Porter’s generic value chain

Source: Porter (1985)

Primary activities relate directly to the physical creation, sale, maintenance andsupport of a product or service They consist of, firstly, inbound logistics which areprocesses related to receiving, storing and distributing inputs internally Thesupplier relationships are the key factor in creating value in this stage

Secondly, operations that change inputs into ouputs sold to the customers Here,operational systems create value The more efficient operating system is, the morevalue added is generated

Thirdly, outbound logistics are mentioned to deliver products or services to thecustomer These functions combine collection, storage and distribution systems.This stage can be used internal or external department

Marketing and sales is the next step These are the processes a company uses topersuade clients to purchase from them instead of other competitors The benefit theproduct can offer, how good the communication is, how fast the delivery is, etc areall sources of value

Finally, activities related to maintaining the value of products or services tocustomers once it has been purchased It can be called services after sales Thisstage creates the trust and satisfaction in the customers Then, build up the largenumber of loyal clients

Besides primary activities, a value chain consists of supportive activities To get theresources for operation, a corporation conducts procurement activities includingfinding vendors and negotiating best prices to cut down the cost of inputs Not onlythe cost but also the lead time is considered thoroughly in the selection of suppliers

In order to manage well the chain, human resource management plays an importantrole How well a company recruits, hires, trains, motivates, rewards, and retains itsworkers affects the final results as people are a significant source of value Sobusinesses can create a clear advantage with good human resource practices

In the modern world, the technological development relating to managing andprocessing information, as well as protecting a company's knowledge base iscompulsory for the growth of a business Minimizing information technology costs,staying current with technological advances, and maintaining technical excellenceare sources of value creation

Finally, the infrastructure of an enterprise allows it to maintain the daily operation.Accounting, legal, administrative, and general management are examples ofnecessary infrastructure that businesses can use to their advantage Companies usethese primary and support activities as "building blocks" to create a valuableproduct or service

By taking a different approach to the value chain to find a better competitiveadvantage, Porter extends the initial value chain concept into a value system Thevalue system consists of activities undertaken by all companies involved inproduction, from raw material procurement to distribution to the final consumer

Figure 1.2 Value system of Porter

Source: Porter (1985)

There are three main actors in this system starting from the suppliers to theenterprises and the buyer Consequently, the concept of value system is broader andmore inclusive than the concept of value chain of an enterprise according to Porter'soriginal approach

1.2.2 The theory of value chain in the global approach

There was a large number of modern value chain analysis conducted by Gereffi(1994), Womack and Jones (1996), Raikes and colleagues (2000), Kaplinsky andMorris (2003) Despite a variety of titles, the content of these research mainlyfocused on the value chain and try to find the most reasonable definition about thevalue chain The value chain describes a full range of activities required to bring aproduct/service from conception, through different phases of production, delivery tofinal customers and even disposal after use

Figure 1.3 Four links in a simple value chain

Source: Kaplinsky and Morris (2003)

It is noticeable that in 2001, Sturgeon and colleagues made a distinction between

“chain” and “network” According to him, a “chain” maps the vertical sequence ofevents leading to the production, delivery, consumption and maintenance of goodsand services, while a “network” highlights the nature and extent of the inter-firmrelationships that bind sets of firms into the larger economic groups The integration

of a company into the value chain increases from local, to domestic, tointernational, to regional and finally to global chain (Sturgeon and colleagues,2001) At first, a local value chain is limited within a commuting area and known as

an industrial district or a specialized industrial cluster Then, a domestic value chainoperates within a single country and is also known as a supply base or as a nationalproduction system In a wider geographical area, an international value chain isoften referred to as a cross-border production network since more than one countryinvolve in this chain After that, a regional value chain is confined to countrieswithin a particular trade bloc and is known as a regional production system Finally,

a global value chain comprises actors that coordinate activities across at least twocontinents or trade blocs This is referred to as a global commodity chain

1.3 Models used to study the exported value chain

At present, many international development agencies have developed and proposedmethodological frameworks for value chain analysis Value chain studies indeveloping countries often apply the methodological framework proposed by GTZ,FAO and M4P for analysis In particular, GTZ and M4P value chain methodologyframeworks are widely applied in value chain studies in Vietnam

1.3.1 Value chain analysis framework of M4P.

The M4P approach (2008) which was developed by SDC and DFID is based onKaplinsky and Morris' ideas of the global commodity value chain According toM4P, it is necessary to implement the research in four aspects while conducting thevalue chain analysis

First, systematic mapping the participants The purpose of this stage is to identify

the link between the actors and the processes that create the product in a valuechain Then, indicate the inter dependencies between each other, create the

awareness among stakeholders for consideration their relevance in the chain.

Second, determining the distribution of benefits between participating actors The

purpose of this is to identify value added and benefits that are created anddistributed to actors in the chain

Third, analyzing the role of management This stage defines the role of governance

functions which will assist in the process of operating the value chain

Fourth, studying the upgrade role within the chain The objective of this activity is

to identify the basis and ability to upgrade the value chain to create higher prices forthe entire value chain based on the analysis of all above aspects

In order to carry out the process of value chain analysis according to the analyticalframework mentioned above, M4P has developed eight value chain analysis toolswhich are based on recent thinking about how to use market systems to meet theneeds and how to support the private sector through market mechanisms that bringthe sustainable change Depending on requirements and objectives of differentresearches, M4P recommends to use techniques and tools at different levels Theeight tools focus on changing the structure and characteristics of markets to increasethe participation of enterprises in the market Eight tools included in M4P modelsare described as below:

Tool 1 – select prioritized value chains to analyze

The goal of setting prioritized value chain to analyze is to find the most importantsector, product or commodity which actually impacts the development of localsocio-economic Choosing the right value chain to analyze helps to save resourcescompared to conducting various analysis, then conclude which value chain needsupgrading or improving

Tool 2 – Mapping the value chain

This is a vital step in guiding the analysis of selected value chains Making a valuechain map is a way of making what is seen and encountered more easily understood

Tool 3 – Governance: Coordination, Regulation and Control

The purpose of this tool is to investigate the rules operating in a value chain, the

system of coordination, regulation and control in which value is generated along thechain.

Tool 4 – Relationships, Linkages and Trust

Relationships are defined as a social connection between two parties playing a role

in certain value chain Linkages are the more common norm in most value chainswith varying degrees of trust between actors

Tool 5 – Analyzing options for demand driven upgrading: Knowledge, Skills, Technology and Support services

This tool aims to analyze the gap between the quality demand from the market,perception of quality from different actors along the chain and the current qualityprovided to the market by other producers After that, opportunities to upgrade theknowledge and skills as well as technology will be identified

Tool 6 – Analyzing Costs and Margins

The cost is the money that an actor in the value chain contributes while the margin

is the money that an actor in the value chain receives, minus the costs Actual costsand margins should be considered when a researcher aims to find out whether avalue chain is a goods source of income

Tool 7 – Analyzing income distribution

Understanding how income is distributed along the value chain provides thenecessary start to determine opportunities for income generation Analyzingdistribution of income is not only an analysis within a particular value chain butalso recognizes that individual actors participate in a number of different valuechains at the same time

Tool 8 – Analyzing employment distribution

Understanding how employment is distributed along the chain provides thenecessary start to determine opportunities for employment generation Thedistribution of employment and access to employment by different wealth classescan be analyzed to identify employment opportunities

Figure 1.4 The market system in M4P approach

Source: SDC and DFID (2008)

In the center is the core market which needs the necessary condition is the forces ofdemand and supply Demand is driven by consumers who wish to buy products andservices and have the means to do so The customers have different level of incomesthat drives to different level of willingness to pay In thin or distorted markets, onlythe needs of the better-off are met The demands of consumers are met by producerswho supply products and services to the market The market structure in terms ofnumber, size and type of participants will vary greatly among market sectors based

on their history, their stage of growth and the barriers to entry

The core market is supported by infrastructure, information, skills, technologies andservices that provide the physical requirements of a market, as well as services tomarket players and regulators These elements may be provided by government and/

or private providers through fee-based or ‘embedded’ services The provision ofinfrastructure and services are critical to a functioning market

Completing the overall context is the second component which is comprised of therules and organizations, including informal norms that coordinate human behavior.The institutional environment is not fixed To function well, the institutionalenvironment must be inclusive and capable of picking up feedback and signals fromdiverse market players It must balance interests by negotiating change andfacilitating agreement It must be able to implement solutions Institutions can vary

from trust and other forms of social capital at their most informal through toconventions and codes of private sector organizations through to the laws, rules,regulations, and regulatory enforcement capacity at the formal end of the spectrum.Common problems with institutions relate to the power of concentrated interests.

A well-functioning market reduces transactions costs and risks between buyers andsellers In such a market, while each component will differ in form, there will becertainty and basic stability about how the components fit together An inherentcharacteristic of mature markets is their constant evolution in response to changingcircumstances and the feedback effects from other markets

1.3.2 Framework of the smile curve

The apparel industry comprises three broad categories: basic apparel, fashion-basicapparel and fashion apparel (Abernathy and colleagues, 1999; Hunter andcolleagues, 2002) The basic apparel includes items which maintain popularity ofyears They represent basic and constant style with a low fashion element, lowseasonality and predictable demand forecasts, whereas the fashion-basic apparel issomewhat fashionable and generally has a product life of 20 weeks Finally, thefashion apparel is the apparel with a short product life of approximately 8-15 weeks

It presents the volatile demand, high seasonality and rapid style changes, requiringaccurate demand forecasts, which is extremely difficult According to Gereffi (1994and 1999), there are two types of global value chain which can be called “producer-driven” and “buyer-driven” global commodity chains Producer-driven commoditychains are those in which large manufacturers play the central roles in coordinatingproduction networks (including their backward and forward linkages) This is thecharacteristic of capital and technology intensive industries such as automobiles,aircraft, computers, semiconductors and heavy machinery In contrast, buyer-drivencommodity chains refer to those industries in which large retailers, marketers andbranded manufacturers play the pivotal roles in setting up decentralized productionnetworks in a variety of exporting countries, usually located in the third world Theapparel industry is a quintessential example of a buyer-driven production chain

marked by power asymmetries between the producers and global buyers of finalapparel products The most valuable activities in the apparel value chain are notrelated to manufacturing, but are found in the design, branding and marketing of theproducts These activities are performed by leading firms which are larger globalretailers and brand owners in the apparel industry In most cases, these leading firmsoutsource the manufacturing process to a global network of suppliers The apparelmanufacturing is highly becoming more consolidated with increasing barriers toupgrading One of the main characteristics of the firms that fit the buyer-drivenmodel, including retailers like Wal-mart, Sears Roebuck, athletic footwear like Nikeand fashion-orientated apparel companies like The Limited is that these companiesdesign and/or market – but do not make – the branded products they order They areparts of a new breed of “manufacturers without factories” separating the physicalproduction of goods from the design and marketing stages of the productionprocess Profit in buyer-driven chains derives from unique combinations of highvalue research, design, sales and marketing Manufacturing is the lowest valueadded stage through the chain In 2014, Alcaer and Oxley proposed the smile curveframework indicating which stages generate the most added value of the wholechain and which stages join the value chain at the lowest level The notion was firstdeveloped in 1992 by Acer who was the CEO of Chinese – Taipei hardware andelectronics corporation.

Figure 1.5 The smile curve of apparel value chain

Source: Alcacer and Oxley (2014)

R&D: This stage includes activities which aim to improve the physical product or

process through market and consumer research

Design: In this stage, the companies try to create an aesthetic appearance for

products and components throughout the chain Design activities are used to attractattention, improve product performance in order to gain a strong competitiveadvantage in the marketplace This intellectual intensive stage creates extremelyhigh profitability for apparel companies To penetrate and sustain in this phase, acompany has to develop a group of designers whose caliber can meet strictrequirements of the global market The designers are capable of catching newfashion trends of global customers or even create new trends to make the customersfollow and desire to have their products

Purchasing: This stage refers to the inbound processes involved in purchasing and

transporting raw materials Raw materials account for a large proportion of theapparel values and decide the quality of products There are two categories ofmaterials: fabric and accessories Fabric is the major input to create the apparel.Accessories link the fabric and make products become more aesthetic Purchasingincludes physically transporting products as well as managing or providingtechnology and equipment for both domestic and overseas coordination Logisticsplays an integral part for the success of this stage To speed to the market, aneffective logistics helps the chain to reduce the lead time, control the inventory,eliminate the wastage, etc

Production: This is the most labor intensive stage which is often used by countries

at the entry level of apparel industries They directly cut, sew and trim to producethe finished goods Whereas, countries with developed apparel industries havingalready integrated into the global value chain can subcontract this stage to othercontractors who have low labor costs because of the abundance of labor

Distribution: After manufactured, apparel products are distributed and sold via a

network of wholesalers, agents, logistics firms, retailers and other companies whoare responsible for value-added activities outside of the production phase The

outstanding feature of the buyer-driven value chain is the creation of traders withfamous brands without production They are in charge of connecting manufacturers,subcontractors and retailers The majority of values in the apparel chain belongs tothese traders although they do not produce any product.

Marketing and Sales: This intellectual intensive stage includes all activities

associated with selling a product such as branding or advertising Companiesresponsible for these activities frequently do not make any physical changes to theproduct Apparel products are marketed to enhance their popularity and sold toconsumers (via retail channels), institutions or to the government with a good price

In the world, this activity is dominated by many retailers and contributes a hugeamount of profit every year to their budget Expertise in apparel industries estimatedthat approximately 70% of profit is owned by these retailers

Services: services help companies distinguish themselves from competitors in themarket and then create the loyalty of the customers for the company’s products.This includes any type of activities a firm or industry provides to its suppliers,buyers or employees It can be a promotion program or services after sales

Figure 1.6 Apparel value chain

Source: Frederick (2014)

Red indicates highest value – added activities + control power over the chain

Percentages represent relative shares of apparel retail selling price attributed tovalue – adding activities

In the whole chain, intangible activities such as design, branding, retail etc whichare conducted in lead firms generate higher value added to product and create thedominant position in the global apparel value chain The production activity thatinvolves directly to create the finished product contributes the lowest added valuefor the whole chain while consuming the huge amount of investment The tangibleinput such as fabric, trims, machinery, etc accounts for the large portion of value,production of materials, the completion of production and, in some cases, thedelivery of the finished products to final customers together with the post-salesservices to satisfy their customers Then, they can create the customer loyalty totheir products Thus, the order allocation is stable and can be predictable It helpsthe factory to manage their supply chain effectiveness and efficiency

1.3.3 Value link framework

GTZ’s approach to private sector development was built on Germany’s ownexperience of developing a competitive small and medium-sized enterprise sectorwithin the overarching context of the social and ecological market economy.Analysing value chains comprises a whole series of different methods which aregrouped into three basic tasks The most essential method and the core of anyanalysis is value chain mapping

Figure 1.7 Generic elements of a basic linear value chain map

Source: GTZ (2007)

Value chain mapping means drawing a visual representation of the value chain

system Maps identify business operations (functions), chain operators and theirlinkages, as well as the chain supporters within the value chain Chain maps are thecore of any value chain analysis and therefore indispensable

Quantifying and describing value chains in detail includes attaching numbers to

the basic chain map such as: numbers of actors, the volume of produce or themarket shares of particular segments in the chain Depending on the specificinterest, specific chain analyses “zoom in” on any relevant aspect likecharacteristics of particular actors, services, or the political, institutional and legalframework conditions enabling or hindering chain development

Economic analysis of value chains is the assessment of chain performance in

terms of economic efficiency This includes determining the value added along thestages of the value chain, the cost of production and, to the extent possible, theincome of operators Another aspect is the transaction costs, which are the cost ofdoing business, collecting information and enforcing contracts The economicperformance of a value chain can be “bench marked” as an example the value ofimportant parameters can be compared with those of competing chains in othercountries or similar industries

1.4 Some experimental researches of the exported garment value chain.

The researches related to the garment value chain varied from different fields withthe big volume since this is the most important industry which affects directly to thelife However, recently most of articles or researches focus on two trends of thisvalue chain: how to make the apparel value chain grow sustainably and which areobstacles preventing the chain from the development

1.4.1 Experimental researches related to the challenges of growth in the exported garment value chain

According to Natsuda (2006), Kimsey (2011), compliance is the key factor inachieving business success Recently, buyers have started getting requirement aboutthe environmental compliance Besides, buyers want to expand their sourcing

product mix into more sophisticated categories Thus, the manufacturing companieshave to improve the performance and ensure the supply of skilled workers Laborstandards have become an increasingly important factor in the global garmentindustry, due to the growth of consumer consciousness about labor issues indeveloping countries, as well as campaigns of compliance with labor standards byinternational NGOs Only minimum wage competitiveness does not guarantee anyinternational business of this kind Hundreds of factories are closed, thousands ofworkers have lost their jobs, and many factories are running under-capacity evenafter accepting the business at the cost price For the first time growth, the exporthas fallen mainly on the compliance ground So, to ensure compliance there is noway to enforce an effective supply chain management, Hossain (2016) Also,existing challenges will multiply if companies are not able to fill higher skill middlemanagement positions who are a key factor limiting productivity improvement.Consequently, the low educational level of workers contributes to more inefficiency

in the garment factories

On the other hand, Gerrefi and Frederick (2010) proposed the suggestions toovercome the recession First, the company must provide quality in addition to lowprices, flexible production and service since the buyers will focus on reducing cost

In addition, firms are under pressure to make multiple products in small runs inorder to deal with decreased demand and niche market To survive in this valuechain, the garment factories need to offer full package options that expand theircapabilities to other parts of the value chain, including design, inventorymanagement and transportation of goods, etc

In sum, the supply chain management and compliance are the most critical

challenges that the garment companies have to overcome to survive global apparelvalue chain

1.4.2 Experimental researches related to the sustainable growth of the exported garment value chain

All value chains need to pay attention of the sustainable development rather thanonly focus on the profit AETS (2016) analyzed the social, environmental andeconomic indicators of different garment value chain (total 29 countries) such asIndia, Vietnam, Srilanka, Bangladesh, Pakistan, etc to draw an overview andcharacterization of key sustainable initiatives in the garment sector Focus on thesocial aspect was the first actor of the sustainable development Most initiativeshave focused on core labor issue such as child labor, low wages, excessive workinghours and obstruction of the right to organize Recently, many organizations havebeen discussing the alternatives or possible complement to social auditing due to theconcerns of non-technical labor standard The second aspect that the garment valuechain had to face with is the environment The textile sector has a very large impact

on the environment due to the nature of its processes which involve chemicals Thedirect impacts of garment producers are mainly related to energy use, waste andtransport Indirectly, the production of garments has a much larger impact because

of highly wasteful consumption patterns and logistical arrangements There aresome key trends in the sustainability initiatives: from voluntary standards topartnership programs, focus on one production country, focus on heath and safety

In another case, Hossain (2016) identified the impact of supply chain managementfor sustainable growth since the export-oriented garment value chain has somedistinctive features, which differentiate them from other businesses Nham andWang (2017) proved in-depth analysis can be conducted through combined modelsand provided recommendations for enhancing the sustainability performance of theindustry Firstly, the grey prediction is used to forecast future data for 20 largestenterprises in six years (2016–2021) based on actual indicators Then, the paperuses Malmquist productivity index and its decomposition into the efficiency andtechnical change to measure the past productivity growth Finally, window analysis

is applied to detect the trends of performance in 12 years (2010–2021) from largenumber of inputs and outputs The results are found that how technology changes isthe determinant for productivity growth and undeveloped technology causes a huge

barrier to industry In addition, the results are illustrated that textile companies arepredicted to be more stable due to the importance of supplying materials for theentire industry Shen and colleagues (2017) introduced the fifteen articles published

in the sustainable garment value chain field and summarized the key findings andfuture research directions in the area of textile and apparel sustainable supply chainmanagement Samah (2018) analyzed the opportunities for sustainable development

in global value chain with the case study of the garment value chain in Myanmar.The paper puts forward eleven policy recommendations: provide support to expandrelationships with “Western” buyers (US, EU) and “Eastern” buyers (Japan andKorea) as well as lead transnational garment firms, enhance cooperation andprovide support to attract Chinese foreign direct investment in the garment sector,encourage local production and developing technical capacity and knowledge base,Support unique indigenous design skills, support a global value chain perspective inthe policy dialogue between public and private sectors, access negotiation andmediation capacity building for both government and trade unions, change aspecific element of tax law, improve the financial system to be responsive to theneeds of this industry, improve soft and hard infrastructure, raise awareness onsustainable development goals, together with partners, raise early awareness ofenvironmental issues across the industry

Generally, the sustainable growth of the apparel value chain attracted a large

number of researches that emphasizes the importance of this matter This is theunavoidable trend requesting the garment companies to seriously pay attention

Table 1.1 Other researches of the garment value chain in different aspects

# Year Author Research object Methodology Detection

1 2011 Dopico,

Porral

Analysis of thevalue chain andsources ofdifferentiation inthe international

In depth interviewwith executivesincluding bothclosed questionsand occasional open

- Pattern, design andquality should becontrolled by the companywhile manufacturing can

be subcontracted

fashion market questions - Design is the most

important source ofdifferentiation

2 2015 ILO Analyze the

Myanmar’sgarment sub-sector valuechain

M4P approach - Secure public policies to

upgrade from CMP toFOB

- Substantially increaseproduction and exports

efficiency andreduce costs

- Achieve workerprotection andenvironmentalfriendlytechnologies

3 2016 Yilmaz,

Atilgan

Analyze theadded valuecreation process

of garmentindustry inTurkish

Interview withdepartment

managers andplanners of threedifferent kinds ofcompany

- Design servicecontributes 0% ofturnover

- Raw materialoccupies 10 -14%

of the final addedvalue and 35 – 50%

of the unit cost

- Labor contributes11% to the finaladded value

4 2017 Islam, Assess the - Correlation Total export is highly

Pattak impact of macro

environmentalfactors affectingthe exports inBangladeshgarment industry

andregressionanalysis,time seriesdata

- SWOT,PESTEL,Five forcesmodel,

Porter’sgenericmodelanalysis

correlated with thegarment exports inBangladesh

1.5 Recommended model for the research

From the research of value chain theories and experimental models, authorsummarized the content of some main models as below:

Porters’ value chain focuses on company systems instead of departments or

accounting costs as other theories He also researched how inputs are changed intooutputs purchased by the end customers In Porter's initial analysis of the valuechain, the concept of value chain formed from the idea of enterprise competitionthat can be analyzed through enterprise value chain research By this approach,finding the competitive advantage of the company by separating the company'sactivities into a series of activities and competitive advantages found in one orseveral activities such as design, procurement, delivery, production, marketing,

management, planning, etc Thus, the value link framework which was proposed

based on the approach of Porter applied only to the extent company which includesinput transformation into end product and consumer handled within the enterprise.Although the concept of value chain system covers all actors in the physicaltransformation process, the results of chain analysis of this idea mainly support for

management decisions and operational strategy at the enterprise level.

On the other hand, the global approach to the price chain is more comprehensive.

It can be understood both in a narrow sense to apply within the enterprise and in abroad sense to apply to both the physical process involving many enterprises Inaddition, compared to Porter's approach, this approach is broader than that since itrefers to post-delivery recycling activities and beyond the borders of one country It

is therefore possible to see the superiority of the global value chain approach andthe use of this idea in the study of the value chain of some organizations is

reasonable The M4P framework is based on Kaplinsky and Morris' ideas which

are more comprehensive In spite of this, the M4P value chain analysis frameworkhas been developed specifically for the three countries of Indochinese Peninsula,which are more relevant to Vietnam's conditions than others In particular, M4Pframework is widely applied in value chain studies in Vietnam Although M4P isconsidered as the model for the poor, it is still suitable to apply for any value chainanalysis due to some reasons Firstly, producers mentioned in this model arecommercial entrepreneurs participating in the market is a deliberate and focusedchoice Secondly, this tool is also a useful resource for local policy and decisionmakers Therefore, the M4P value chain analysis is fully applied in theimplementation of this research

Another framework which was based on the global approach is the smile curve The smile curve model separates the value chain into seven stages and clearly indicates

which stage generates the most added value This model helps identify the position

of a firm in the whole value chain as well as determine which phase create higheradded value After that, the suitable strategies will be proposed to gain high profitfor the enterprise

Therefore, after consulting the opinions of some apparel experts of buyer office,

vendors and manufacturing factories in Ho Chi Minh city, this thesis used the M4Pframework as the main model to analyze the exported garment value chain ofVietnamese companies in Ho Chi Minh City with some particular tools: tool 1-