New Boost Needed

The Ministry of Industry and Trade said Vietnam mainly exported leather-capped shoes to the former Soviet Union in the 1990s. The quality was not high and designs were simple at that time. Now, Vietnam ranks fourth amongst eight biggest footwear exporters in the world, after just China, Hong Kong and Italy, but up to 90 percent of its footwear is made to offshore contracts. The country has 812 active leather and footwear companies and most of them are engaged in the second and third layers of outsourcing process. More than 70 percent of big exporters are foreign-led or wholly foreign-owned companies and they heavily rely on foreign partners’ technical equipment, technologies, product designs, input supplies, accessories and markets. The sector now employs over 624,000 workers, of which women account for 75 percent. Footwear manufacturers account for 63.5 percent, followed by bag and wallet manufacturers with 32 percent and tanners with the rest.

 

In the 2010 - 2013 period, the average annual growth rate of leather, footwear and handbag sector was 10-15 percent.

 

In 2012, the sector earned US$8.764 billion from exports, accounting for 7.6 percent of the country’s total export turnover and 10.5 percent of the export revenue of processing industry. The EU market contributed US$3.084 billion, or 35 percent of the gross value. By item, footwear generated US$2.650 billion, accounting for 36.5 percent, and handbags fetched US$434 million, or 28.6 percent.

 

In 2013, this sector raked in US$10 billion from exports, including US$8.3 billion from leather footwear and US$1.7 billion from bags. The value made up 8 percent of the country’s exports in the year.

 

In the first four months of 2014, the sector’s export revenue totalled US$3.7 billion, representing a year on year increase of over 26 percent, of which footwear and handbags contributed US$2.9 billion and US$817 million, respectively. Shipments to the EU valued at US$984 million (up 26.7 percent year on year), to the US at US$947 million (up 26.5 percent), Japan at US$171 million (up 43.2 percent) and China at US$150 million (up 31.4 percent). Many leather footwear companies have received orders with works enough through the end of the third quarter. The impressive growth in export turnover of leather - footwear industry in the first months of 2014 was backed by the Generalised System of Preferences (GSP) from the EU. Besides, the export to the US also increased sharply because of its steady economic recovery. In addition, with political stability, abundant labour force and good product quality, Vietnam has caught a lot of orders from other footwear manufacturing countries. Vietnam holds advantage in exporting to the EU where it is the second supplier after China but it is facing growing competition from India and Indonesia.

For the time being, Vietnam accounts for a third of domestic market share. With 130 million pairs of shoes sold in 2013, the domestic market is a fertile land for footwear companies.

 

According to the master plan on Vietnam leather and footwear development to 2020, with a vision to 2025, the leather and footwear sector will become a spearhead export sector of Vietnam by 2020, create more jobs for the society, increase incomes for labourers, and seriously exercise social responsibility. Accordingly, the sector targets export turnover at US$9.11 billion in 2015 and US$14.5 billion in 2020 and strives to raise the localisation rate to 60-65 percent and 75-80 percent, respectively. Footwear will be a strategic product where sports shoes and canvas shoes will be given priority for production and export. Fashionable footwear and high-quality handbags will eye new markets, upscale markets and domestic market. The sector will apply advanced environment-friendly technologies to material development and supporting industry development to enhance product quality. It will upgrade product design capacity and new product development, mobilise all economic sectors to invest in leather and footwear production to for domestic and export markets; build industrial zones for leather - footwear manufacturers.

 

Leather - footwear is the third biggest forex earner for Vietnam, after just garment - textile and crude oil. As most companies are subcontractors to foreign firms, they make a small proportion of added value in their products while they cannot control orders and input supplies.

 

Every year, Vietnam can supply only 5,000 tonnes of cow leather and 100 tonnes of buffalo leather, 60 percent of which is exported to China and Thailand. Therefore, each year, Vietnam spends US$170 - 230 million to import artificial leather and US$80 - 100 million to import about 6 million square feet of leather from Thailand, Taiwan and South Korea. Tanners can meet less than 10 percent of leather demand and they are operating at only 25 percent of designed capacity on lack of raw materials. Less than 20 wholly Vietnamese-owned companies can supply products in the form of FOB. Export turnover mainly comes from foreign-invested manufacturers like Samyang, Pouchen and Pouyuen. Canvas shoes, which used to be a strong product of Vietnam, are being overwhelmed by China and Vietnam is now mainly exporting sneakers, footwear and indoor slippers.

In fact, Vietnam has supplied all input materials for canvas shoes and up to 30-40 percent of input materials for other products. But, 70 percent of manufacturers are still entirely depending on foreign material supplies, of which most come from China, South Korea and Taiwan and a tiny proportion from Italy and Spain. According to negotiated terms (not finalised), to enjoy zero tax instead of 3.5 - 57.4 percent of import duties as now in TPP-participating countries, the footwear sector must source 55 percent of materials from TPP nations. Trans-Pacific Partnership (TPP) Agreement, expected to be concluded and take effect at the end of 2014, will create new momentums and opportunities for the leather - footwear industry of Vietnam to develop. Nike chose Vietnam as its largest outsourcing destination for export to the US as its products will be subject to zero tax instead of the current 12 percent.

 

In addition, the sector will also enjoy huge opportunities when the Free Trade Agreement (FTA) Vietnam and the EU is signed because import duties will be reduced to zero from the current 12.4 percent in the 27-nation market with 499 million consumers.

 

FDI enterprises, with their advantages in financial capacity, market and customer base, are responsively and proactively deploying preparatory plans for TPP. Many companies have shifted their production bases to Vietnam to enjoy more export incentives while Vietnamese businesses remain quite lukewarm about TPP. Indeed, benefits of TPP, Vietnam-EU FTA and other trade agreements with other nations need to be further disseminated to Vietnamese businesses.

 

Particularly, Vietnam needs to plan big material zones for leather - footwear industry, including tanning industry, because production management, environmental protection, supporting industry development will be more favourable.

 

Besides, local firms need to diversify foreign input supply sources, develop design capacity, apply advanced technology, step up trade promotion to make made-in-Vietnam footwear better and more competitive in price.