Groundbreaking Development Needed for Leather and Footwear Materials

 

The leather, footwear and handbag industry of Vietnam now has 812 enterprises and over 624,000 workers. It occupies a third of domestic footwear market share and generates over US$10 billion of export turnover a year, accounting for 8 percent of the country’s total exports. It was the third largest forex earner of the nation in 2013 after garment and crude oil.

 

Vietnam also ranks 5th in the world in production output of leather, footwear and handbag and 4th in export revenue. It is also the second biggest exporter of footwear and handbag to the European Union (EU), the United States (US) and Japan. In 2013, Vietnam’s leather footwear and handbag export turnover reached US$10.3 billion (US$8.4 billion from leather footwear and US$1.9 billion from handbags), up 18.4 percent over 2012 and 35 percent over 2011. In the first seven months of 2014, the value rose 21.9 percent year on year to US$5.7 billion.

 

According to the Vietnam leather - footwear development plan to 2025, the output is expected to expand 10-15 percent annually. In the 2015-2025 period, Vietnam hopes to turn out 1,172 million pairs of footwear in 2015; 1,698 million pairs in 2020 and 2,272 million pairs in 2025. Respective volumes of handbags, wallets and briefcases will be 170 million units, 285 million units and 438 million units. According to the plan, key products will be footwear, with priority given to sports shoes, canvas shoes, fashionable leather shoes, briefcases, handbags and wallets of high quality. The sector will also focus on input material production, accessories, tanned leather and leatherette. It will also attach importance to product designing and development. The sector’s export revenue was projected at over US$9.1 billion in 2015 and more than US$14.5 billion in 2020. The localisation ratio will reach 60-65 percent in 2015 and 75-80 percent in 2020.

 

Vietnam’s footwear and handbag exports are forecast to take long strides in the coming years when FTAs to which Vietnam is a signatory take effect.

 

For years, Vietnam has struggled with limitations in footwear material production. As of early 2014, the country had 129 material producers, including 35 tanners (21 private companies, 11 FDI companies, two State-owned enterprises - SOEs, and one joint stock company. 18 companies in Ho Chi Minh City, eight in Binh Duong, five in Dong Nai, and the rest in Hanoi, Can Tho, Khanh Hoa, Thai Binh, Lang Son, Hai Phong and Vung Tau), and 95 material, accessory and equipment companies (70 percent are Vietnamese), including 23 sole producers, 11 adhesive manufacturers, four textile firms, five mould manufacturers, six leatherette producers, 11 accessory producers, four paper and package manufacturers, and one equipment and machine manufacturer. Other companies export and import materials, machines and equipment for the leather and footwear industry. Material producers concentrated in some localities, including 47 in Ho Chi Minh City, 27 in Binh Duong, 17 in Dong Nai and five in Hanoi. Besides, supporting industry companies (fabrics, label, zipper, button, elasticised ribbons, etc), and chemical and mechanical companies are engaged in leather and footwear industry. The value of industrial production of supporting industries of leather and footwear industry rose 16.5 percent a year on average in the 2006-2011 period. The localisation rate was just 20.3 percent in 2011, a relatively low in comparison with supporting industries of other industries (garment - textile, electronics and mechanics).

 

According to the General Statistics Office (GSO), materials account for 68-75 percent of footwear production costs. However, the localisation ratio is now only 40-45 percent. Key materials like leather, artificial leather and canvas are mostly imported. In reality, Vietnam is importing leather from South Korea (18 percent), Taiwan (14 percent), Thailand (11 percent), China (9 percent) and other countries and importing other materials from China (60 percent); Taiwan (20 percent), South Korea (10 percent), and other countries (10 percent). The country also imports machinery and equipment from Taiwan (49 percent), China (36 percent), South Korea (9 percent), and other countries (6 percent).

 

In general, Vietnam can supply enough materials for canvas shoe production and meet 30-40 percent of materials for other product lines. Tanneries fail to cater for 10 percent because they run at only 25 percent operational capacity on hide shortages. 90 percent of leather footwear made in Vietnam is for foreign outsourcing contracts and 70 percent of companies totally rely on equipment, technologies, product designs and materials from foreign customers. Every year, Vietnam spends some US$300 million on leatherette materials and leather. Less than 20 percent of Vietnamese companies can manufacture products in the FOB basis. Offshore outsourcing typically has low added value and subcontractors have to rely on orders and resources from foreign customers. In other words, Vietnam’s leather and footwear industry makes what foreign customers order and inputs are supplied by them. Besides, locally sourced materials sometimes fail to meet standards for export, particularly physical and mechanical property, aesthetic value and colour durability. Even when they can meet these criteria, they fail to ensure delivery schedules and meet design change requirements.

 

This reality is partially attributed to the lack of specific and practical policies to encourage domestic material production for export, insufficient personnel training, poor coordination of many industries (mechanics, automation, polymer chemistry and environment), and inadequate investment for environmental issues. The country also lacks planning for material production like hide, cotton, fibre and chemicals.

 

Production development to increase the independence and reduce material costs is an important driving force for the sustainable and effective development of Vietnamese leather and footwear industry. First and foremost, the country must soon have plans to set up large-scaled leather and footwear zones, which will be more favourable for developing tanning industry, protecting the environment, organising centralised production, and developing supporting industries. Initially, it should mobilise resources from all economic sectors and introduce specific support policies on land, tax and loan incentives for investors building tanning zones, material zones, dyeing industrial zones. It also needs to build modern solid and liquid waste treatment facilities and charge companies on their waste treatment.

 

In addition, Vietnam should also introduce consistent and synchronous preferential policies for leather and footwear supporting industries as it has done for other industries, particularly incentives for market development, science and technology, infrastructure and human resource training, trade promotion, investment credit support, export credit support, tender security and export contract execution guarantee to manufacture leather, leatherette, soles, adhesives, chemicals for leather tanning, shoe laces, labels, shoe-sewing threads, machines, equipment and materials for leather and footwear industry. It also needs to raise cattle to supply hides for tanning industry.

 

Specially, Vietnam needs to build and apply common technical regulations in leather and footwear industry to meet international economic integration requirements and Vietnamese laws; study solid, liquid and gas waste processing technologies in tanning, footwear production and leather processing to boost environment-friendly development; expand the competency in material, product and environment analysis and evaluation; launch websites to update information about material and supporting industries; encourage FDI companies to strengthen cooperation and transfer technologies to Vietnamese companies to uplift the localisation ratio.