Eclat Textiles — VietEcon

So some big news out about Eclat Textile. This is a Taiwanese textile company. For a long time it had operations in China (starting in 1998), and then it moved into Vietnam back in 2004 (with the factory starting production in 2006). So it has been in Vietnam for a long time. It is especially important because Eclat makes up 4.5% of the Vietnam ETF (VNM). We discussed Eclat a bit two weeks ago, when we talked about the performance of the index.

Eclat was actually up 14% in the first half of 2019, but the TWD was down slightly (1.4%), so some of this positive performance was offset. Overall, it probably increased the ETF price by about 0.6%, all included.

This stock was helped by good revenue growth in 2018 (13.8%), with an improved operating margin of 28.8% (it had been averaging around 28.0% and was just 27.5% in 2017), so operating profit was up a monster 19% in the year.

But of course, as Trump’s rhetoric against Vietnam heats up, the company is looking to diversify away from Vietnam (where most of its garments are sewn). It looks like Cambodia is the next frontier, with a garment factory already there. It also is looking at Indonesia, Bangladesh, India and Mexico.

Although, the headlines seem much worse than they actually are: the company is just not expanding in Vietnam over the next 3 years. I think one of the real reasons is that Vietnam is actually at capacity. A fellow CEO hints at this:

But the rush to nearby Asian nations is also reaching a saturation point. “Vietnam, for example, is full, completely full,” Spencer Fung, chief executive officer of Li & Fung Ltd., the world’s largest supplier of consumer goods, told Bloomberg earlier this month.

I am not sure if Fung is saying that there’s not room for more production because of real estate, logistics or staff. Maybe it’s all those things. Vietnam has not been completely underutilized - the unemployment rates aren’t crazy high, there’s not a ton of commercial inventory just sitting empty. We have talked before about productivity-weighted wages in Vietnam: they actually aren’t as low as people expect. So I can see why some are looking to other countries for production. It has the added effect of diversifying their manufacturing, in case the trade war consumes more countries.

It will be interesting to see what other companies do, particularly those that can divide their production easily.

Finally, the VNM index may need to change as well. Eclat was already 4.5% of the index in early July. It may make sense for this weighting to fall over time, although it will take years - until Eclat really moves production elsewhere.