As Prices Keep Rising in China, a Shirtmaker Turns to Vietnam

By Bruce Einhorn October 17, 2014

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Photograph by Daniel J. Groshong/Bloomberg

A TAL Apparel employee at the company’s factory in Hong Kong

In May, a long-simmering territorial dispute between China and Vietnam turned particularly hot. With Chinese and Vietnamese ships confronting one another in the South China Sea (known in Vietnam as the Eastern Sea), Vietnamese protesters furious with China went on a rampage at home. They attacked companies with Chinese workers or Chinese names, including businesses that were owned not by mainlanders but by companies from Taiwan or other places in Asia.

Despite worries that the anti-Chinese violence would hurt Vietnam’s ability to attract investment dollars from overseas, the unrest hasn’t dissuaded a
major Hong Kong-based manufacturer from making Vietnam its top focus for growth. TAL Group is one of the world’s biggest producers of menswear, selling shirts to brands such as Brooks Brothers, L.L.Bean, Eddie Bauer, and Burberry (BRBY:LN). One out of every six dress shirts sold in the U.S. comes from a TAL Group factory, the company says. Today, Vietnam accounts for only 12 percent to 15 percent of its production, but in two years that percentage should grow to 25 percent, according to TAL Chief Executive Officer Roger Lee.
The company’s commitment to Vietnam isn’t limited just to making garments. TAL is also investing in a new business to make textiles in the country. “We believe in Vietnam,” Lee says.

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As Vietnam rises in importance for TAL, China is falling. Like many companies now looking at Vietnam, TAL relies on Chinese factories for the bulk of its production. Out of a total workforce of 25,000 people, TAL has about 7,000 to 8,000 workers in China, and the country accounts for about one-third of the group’s total production.
Costs continue to go up in China, however, especially in the Pearl River Delta in Guangdong province. TAL has a large manufacturing center in the southern Chinese city of Dongguan, where the minimum wage has been rising 15 percent to 20 percent for “at least five years,” says Lee. “I think next year will be the same [increase],” he says.
As labor costs in China surge, though, TAL should still be able to benefit from falling cotton prices. But even as worldwide cotton prices last month fell to a five-year low, the Chinese government announced it was limiting imports, another of the country’s attempts to prop up prices for local cotton growers. Over the past four years China’s cotton inventories have increased almost sixfold, Bloomberg News reported on Oct. 8.

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There might be some relief ahead. Last month a website backed by the government of Xinjiang, the western region that’s a center of China’s cotton-growing industry, said the government would allow the market to set cotton prices. Still, Lee doesn’t see TAL growing any more in China. “Our goal is to keep the current China production, not expand it,” he says. The group’s reliance on China “will slowly go down as our production increases” elsewhere.