As one of four largest footwear producers in the world together with China, India and Brazil, the leather and footwear industry of Vietnam is seeing a good opportunity for a strong boom in the near future when the ASEAN Free Trade Agreement (AFTA), Trans-Pacific Partnership (TPP) come into effect. The Vietnam Leather, Footwear and Handbag Association (LEFASO) forecast that the leather and footwear industry will grow 15 - 20 per cent in 2016.
Impressive figures
Currently, Vietnam's footwear has been exported to over 50 countries and territories in the world, and is expected to increase its market shares in the United States, the European Union (EU) and Japan, where it is second only to China. Its export value will go up in the near future when the Trans-Pacific Partnership (TPP) takes effect since the duties will be brought to zero from current 3.5 - 57.4 per cent. LEFASO forecast that the leather and footwear industry will grow 15 - 20 per cent in 2016.
Footwear is the third largest export of Vietnam. The sector, which employs 1 million workers in 600 companies, produces 800 million pairs of shoes each year. The impressive figure comes from the investment redirection of foreign companies from China and Bangladesh to Vietnam to take advantage of cheap labour, stable exchange rate and strategic location and to enjoy special tariff treatments before free trade agreements (FTAs) to which Vietnam is a signatory come into force.
However, domestic enterprises will also face mounting pressures as foreign companies investing in Vietnam also take advantage of benefits from tax elimination. Notably, foreign companies are proven to make better use of tariff preferences than Vietnamese firms. Currently, 77 per cent of footwear export value in Vietnam is contributed by foreign direct investment (FDI) companies.
Moreover, the localisation ratio in the industry is very low. Domestic sources meet only 38 per cent of the demand.
Input sources need a solution
LEFASO General Secretary Phan Thi Thanh Xuan underlined two persistent issues of the leather and footwear industry of Vietnam: Rising labour costs and heavy dependence on foreign inputs, especially from China. These two existing issues have affected the status, opportunities and competition of Vietnamese footwear industry compared to other countries like India, Bangladesh and China.
Currently, added values in leather products and handbags made by Vietnamese companies are quite low since the rate of locally sourced inputs currently meets only 45 - 50 per cent.
According to a survey by the Ho Chi Minh City Leather and Footwear Industry Development Support Project for the 2016 - 2020 period, 65 per cent up to footwear and handbag producers use materials and designs supplied by foreign customers and use brands provided by them while only 25 - 30 per cent use their own designs, purchase inputs on their own and use their own brands.
According to experts, to enhance the added value of Vietnamese footwear, Vietnam needs to develop the tanning industry which is believed to hold great potential. However, tanning industry emits a lot of pollutants into the environment. The disposal of industrial wastes discharged by the tanning industry requires expensive modern treatment systems which are beyond the financial capacity of small and medium-sized enterprises (SMEs). Meanwhile, Vietnam lacks clear standards on waste, thus inhibiting investors, including foreigners, from upgrading waste treatment technologies and facilities.
Meanwhile, the Ministry of Industry and Trade has planned to build two tanning industrial zones, one in the south and one in the north, with modern waste treatment systems to support companies to treat environmental pollution. The Vietnam leather and footwear industry development overall plan to 2025, approved in 2010, also referred to this content but these tanning industrial parks have not been carried out yet.
Mr Truong Thanh Vu, Research Director of the South Vietnam Economic Studies Centre (SVEC), said that the biggest difficulty is seeking out suitable locations for centralised tanning industrial areas and finding out best models and methods for companies to get long-term support and commitments from the Government of Vietnam and local authorities.
In fact, FDI companies are somewhat reluctant to invest in the tanning industry because of low profitability and long payback period. Besides, weaknesses in supporting industries, including hide material areas, chemical industry, engineering, human resources, traffic, electricity supply and water supply hinder the development of tanning industry.
It is time Vietnam sets environmental standards and comprehensive solutions to develop supporting industries to facilitate the development of leather and footwear industry.
Giang Tu
Vietnamese
