Unrealistic target set for shoe exports

Vietnam has proved to be one of the major growth areas for footwear production and has recorded a rapid growth since 1992. Recent development has seen production rise from 206 million pairs in 1997 to 303 million pairs in 2000 with a corresponding growth in the leather industry. Despite its success, the industry is now facing government expectations of continuing high growth which may well prove unsustainable. Currently, Vietnam is the eighth largest producer and the fourth biggest exporter of footwear in the world, achieving an export turnover of more than $2.3 billion in the eleven months to mid November and this is predicted to have risen to $2.6 billion by the end of 2004. It should be remembered that Vietnam has a largely centralised economy, given that decision-making lies in the hands of the socialist government. For this reason, internal costs are totally different from any other country, be it a market or capitalist economy. In 2003, the local industry turned out around 35 million bags and handbags, and 32 million sq ft of leather. In the final quarter of 2004, Vietnam imported in the region of 104,600 raw hides from the USA, ranking them in eighth place. They did not purchase any wet-blue from the US during this time and seem to prefer raw. It is estimated that leather footwear production in the Dong Nai province alone increased by 20% in 2004. Ministry of Industry figures state that Vietnam's current production capacity is 400 million pairs per year (source: Vietnam Leather and Footwear Association). Despite this, the ministry has set an export target of 410 million pairs of shoes for 2005, rising to 640 million pairs in 2010. However, many believe that without substantial assistance, these targets are totally unrealistic. A major criticism of the industry is that it has no internationally known brand names in shoes or leather products. In fact, many well-known footwear producers have established their own factories in Vietnam or subcontract with Vietnamese and foreign-owned factories in the country to produce for export. They include: Adidas, Bata, Nike, Timberland, Reebok, Clarks, Puma, Diadora, New Balance, Cat. Over 90% of Vietnam's footwear output is exported. In 2003, Vietnam's footwear and leather product export value reached approximately US$2,267 million. Major export products include sport shoes (72%), ladies' shoes (19.3%), canvas shoes (2.5%), slippers and sandals (6%). Europe is the most important market, followed by the USA, Japan, South Korea and Taiwan. Vietnam exports 80% of its footwear production to the EU without quota limitation and benefits from further special incentives for developing countries, such as the Generalised System of Preferences. The United States is gradually becoming a more important market. Sales of Vietnamese footwear have increased rapidly thanks to Most Favoured Nation status, through which Vietnam pays a tariff to introduce its products onto the US market. Another influencing factor has been the Bilateral Trade Agreement between the two countries. According to the US Customs Service, in 2003 Vietnam exported US$324.8 million worth of footwear to the US, an increase of 45% over the previous year. According to Vu Van Minh, director of Vina Shoe Company, Vietnamese producers suffer from a lack of autonomy, and are over dependent on foreign investors. Around 80% of Vietnam's manufacturers have production contracts with large foreign companies and only 10-15% of export revenue is attributable to Vietnamese-owned firms. There are currently around 380 businesses involved in the production of footwear, 191 of which are private enterprises, 55 are state-owned and 134 foreign owned companies. The level of foreign capital is increasing rapidly. The share of exports contributed by these non-state companies has increased from around 73.5% in 2000 to around 83% in 2003. In the majority of cases, foreign partners are responsible for technology, imported machinery and finding markets and the Vietnamese producers lack contact with the end buyers. It was announced recently that the Taiwanese-owned sportswear company Pou Yuen Vietnam plan to build a factory in Dong Nai Province to make sport shoes for export. The Ministry of Planning and Investment is assessing Pou Yuen's project, which will be their second in Dong Nai and third in Vietnam. According to Dong Nai Industrial Zone Authority (DIZA), the company plan to rent land in Bau Xeo Industrial Park. They also want to build two more factories to make electronic components and clothing. Pou Yuen will invest US$190 million in the first phase of construction and will add more capital in two following phases. Their existing factory in Dong Nai produces sport shoes for Adidas, Reebok and Puma. The company are investing US$288 million in a factory in Ho Chi Minh City's Binh Tan District to make sportswear and materials. Besides Pou Yuen's project, the ministry is considering another capital-intensive project by a consortium of six Korean investors. The project, estimated to cost US$310 million, involves construction of a new urban centre west of Hanoi. In the first eleven months of last year, Vietnam attracted US$3.5 billion in foreign direct investment, surpassing the year's target of US$3.3 billion. The figure for the whole year is expected to increase to US$4 billion. Vu Van Minh believes that because Vietnam currently lacks strong brands and designers of its own, the country needs to invest in these areas and modernise production methods. He also highlighted the need for the following initiatives: better marketing to the EU, seeking trade partners, participating in international fairs as well as organising them within the country, and establishing trade centres for the promotion of the Vietnamese leather industry abroad. Businesses should invest in training to improve the skills of their workforce and modernisation of production lines is also recommended. Initiatives such as the proposed Ho Chi Minh City export fair, part of a major marketing programme, could help improve the sector's competitiveness. Another suggestion for the development of the leather industry and farming is diversification into ostrich skins. Conditions in central areas of the country are especially suited to the cultivation of ostriches as the dry land cannot be used for farming. Mature ostriches can then be sold to centres around the country. Director ofVietfarm, Hung Tien said that he would like more co-operation with local farmers to expand both international and domestic markets. The Chinese challenge Competitivity must be improved to meet the challenge posed by China, which currently produces 60 million pairs of shoes per year, representing 50% of world production. An important factor is that Chinese shoes cost on average 20-30% less than those produced in Vietnam.