FALLING U.S. CONSUMER DEMAND PROMPTS FACTORY

UNCLAS SECTION 01 OF 02 HO CHI MINH CITY 000011

SENSITIVE
SIPDIS

STATE FOR EAP/MLS, USAID/ANE, EEB/TPP/BTA/ANA
USDOC FOR 4431/MAC/AP/OPB/VLC/HPPHO
USTR FOR BISBEE
TREASURY FOR CHUN

E.O. 12958: N/A
TAGS: ECON ELAB ETRD SOCI PGOV VM
SUBJECT: FALLING U.S. CONSUMER DEMAND PROMPTS FACTORY
CLOSINGS IN THE SOUTH

REF: A) HCMC 972 "EXPORTS WILL GROW, BUT MORE SLOWLY" (10/28);
B) HANOI 1316 "VN SHIFTS FOCUS TO MAINTAINING GROWTH" (12/02);
C) HANOI 1391 "FURTHER EFFECTS OF THE U.S. FINANCIAL CRISIS" (12/22)

HO CHI MIN 00000011 001.2 OF 002



1. (SBU) Summary: Over 100 garment factories in southern
Vietnam have closed in recent months, leaving an estimated
60,000 workers jobless. The garment industry will be just a
drop in the bucket, according to the Taiwan Business
Association, which believes 800 to 1,000 companies are unlikely
to reopen after the Tet New Year holiday (January 26-29),
putting up to half a million laborers out of work. This could
increase the possibility of social unrest, even in unlikely
areas such as the Mekong Delta and central coast provinces,
because they are the source of much of Vietnam's migrant labor.
Many newspapers have quoted Prime Minister Nguyen Tan Dung's
December 22 public warning to Vietnam's public security services
to be vigilant in preventing demonstrations in the coming year.
End summary.

Exporting Companies Going out of Business
--------------

2. (SBU) Taiwan and Korea are two of the leading sources of
investment in low-value light industrial manufacturing for
export in Vietnam. According to the Ministry of Planning and
Investment, Taiwanese FDI from 1988 to December 2008 totals
1,940 projects worth $19.6 billion while Korean FDI accounts for
2,058 projects valued at $16.5 billion. Taiwanese and Korean
business associations report that a sharp downturn in demand for
Vietnamese exports is beginning to put their companies out of
business (reftel A). The Korean Consulate in HCMC confirms this
trend, adding that foundering Korean companies are being pushed
under by a sharp drop in orders from U.S. buyers, down anywhere
from 20 to 50 percent. The Taiwan Business Association in Ho
Chi Minh City (HCMC) estimates that 800 to 1,000 factories are
in danger of bankruptcy in the month leading up to the Tet
(Lunar New Year) holiday. Vietnamese newspapers have widely
quoted Nguyen Dai Dong, Head of the Employment Department of the
Ministry of Labor, War Invalids and Social Affairs (MOLISA) as
forecasting that some 300,000 laborers (0.65 percent of
Vietnam's current work force) will lose their jobs next year if
Vietnam's GDP growth rate falls to 6.5 percent in 2009 (reftel
B). The IMF expects GDP growth will be closer to 5 percent
(reftel C).

Garment and Footwear Exporters Lead the Way
--------------

3. (SBU) Vietnam's garment and footwear industries are dependent
on export markets, especially the U.S. market, for their
survival. According to Mr. Diep Thanh Kiet, Vice Chairman of
the HCMC Textile, Apparel and Embroidery Association, there are
2,000 garment enterprises in Vietnam employing nearly two
million workers and 500 footwear companies employing 600,000
workers. 70 percent of these enterprises are in Vietnam's
southern provinces, including HCMC. Nguyen Duc Hoan, Chairman
of the HCMC Garment, Textile, Embroidery and Knitting
Association estimated that a 20 percent drop in orders would
leave 400,000 Vietnamese garment workers unemployed.


4. (SBU) Roughly 70 garment and apparel export factories,
including approximately 20 Korean and 40-50 Taiwanese, have
closed in recent months, leaving approximately 60,000 workers
jobless, according to the Vietnam Textile and Apparel
Association (VITAS). HCMC Department of Labor, War Invalids and
Social Affairs (DoLISA) data support the VITAS estimates.
DoLISA says 21 garment, textile and footwear companies in HCMC
alone shut their doors in 2008, resulting in the loss of 6,000
jobs. It estimates that layoffs at another 50 businesses cost
the city another 4,500 jobs. Looking forward, DoLISA forecasts
another 5,000 garment workers will have lost their jobs by the
end of 2008. Provincial officials confirm nearby industrial
provinces have seen similar closures: 10 companies cut 2,600
jobs in Dong Nai province and 26 companies cut 2,500 jobs in
Binh Duong province, laying off nearly 1,000 more workers.


5. (SBU) VITAS's Head of External Affairs Pham Gia Hung says the
industry outlook has deteriorated significantly in recent months
(reftel A); VITAS now estimates Vietnam's textile export volume
this year at $9 billion dollars, roughly $800 million dollars
lower than the targets set by Ministry of Industry and Trade and
up 1.3 billion from $7.7 billion in 2007. Hung said the GVN
should cut taxes and make low-cost financing available to the
garment industry to help ease the present crunch.

Pressure Points Pushed to the Countryside
--------------

HO CHI MIN 00000011 002.2 OF 002



6. (SBU) Migrant laborers from the Mekong Delta and the central
coast fill many of the unskilled jobs in HCMC and the
surrounding industrialized provinces. Provincial officials from
Dong Nai and Binh Duong both estimate migrant workers account
for 70 to 80 percent of their workforce. When these workers are
laid off and unable to find new jobs in the city, they tend to
return to their home provinces. As Tet draws near, many workers
feel another economic pinch as employers cut back on traditional
"Tet" bonuses to their employees because of the downturn.
According to the most recent DoLISA survey of HCMC businesses,
Tet bonuses (for FDI companies in export processing zones) will
drop 11 percent this year to an average of $90 dollars.
Consequently, many, if not all workers, will have less pocket
money than they expected when they return to their home
provinces for the Lunar New Year, January 26-29, 2009. During a
recent trip to the Mekong Delta, Econoff heard from locals who
worried privately about what rising unemployment accompanied by
a swell of disgruntled workers returning to the Can Tho region
might mean for social stability.

Authorities Look to Head Off Trouble
--------------

7. (SBU) According to Vietnam's media, this concern goes all the
way to the top in the GVN. On December 22, Prime Minister
Nguyen Tan Dung publicly called on Vietnam's public security
forces to be proactive in preventing protests, riots and
terrorism in 2009. Declining economic conditions have also
caused the GVN to rethink the timing of various reforms, HCMC
newspapers have written, especially the new personal income tax
and unemployment insurance decrees taking effect as of January
1, 2009. Sources at the Ministry of Finance, however, tell the
Embassy that these measures will be implemented in a timely
manner.


8. (SBU) Vietnamese labor authorities are working to find new
jobs for the unemployed workers. In mid-December the Ho Chi
Minh City Labor Confederation reported that they were able to
find 3,500 jobs for those unemployed. HCMC DoLISA said it will
increase scrutiny of social and health insurance premiums by FDI
enterprises.

Comment:
--------------

9. (SBU) Southern Vietnam's export sector had hoped to ride out
the global economic storm (ref A) but is now facing a starkly
different reality. Exporters in the southern provinces of
Vietnam are seeing a significant drop in orders for exports and
this is forcing most to cut payrolls and some to close
altogether. Since low cost labor has been a significant
component of Vietnam's competitive advantage, falling overseas
orders have led directly to increased unemployment. While most
export-oriented companies expect to continue to lose orders and
shed jobs, a few very well-managed companies have found the
turmoil to be an opportunity to lower costs, increase efficiency
and build their share of Vietnam's exports as their competitors
flounder.


10. (U) This cable was coordinated with Embassy Hanoi.
FAIRFAX