Vietnam footwear industry receives boost from subcontracting

An Expert's View about Business Environment in Vietnam

Posted on: 27 Nov 2012

Registering sustained growth over much of the past five years, Vietnam’s footwear industry is one of the country’s leading export earners, trailing only textiles, crude oil and electronics. Annual foreign sales as of 2011 have exceeded $6.5 billion, the highest in a half-decade.

A crucial factor driving overseas revenue growth is the prevalent view of Vietnam being a viable alternative hub for subcontracted production in the Asia-Pacific region. A number of these clients are prominent brands that have established factories in the country. These include adidas, Nike and Converse.

Rising overseas sales have also been augmented by the removal of EU-imposed anti-dumping tariffs on footwear made in Vietnam. The regulation, which had been in effect from April 2006 to April 2011, was implemented to control the heavy influx of low-priced shoes from developing countries that were competing with those manufactured by EU suppliers.

With the rule lifted, Vietnam’s footwear exports in 2011 reached $6.5 billion, which was 27 percent higher than the previous year.

In 2011, the International Trade Centre ranked Vietnam as the third-largest footwear exporter in the world, representing 7 percent of global turnover.

Low labor cost

The industry’s primary strength is low manpower expenditure, which is a key factor attracting foreign investors to Vietnam.

Local salaries have been steadily increasing every year since 2008 because the government has taken steps to minimize the discrepancy between remuneration provided by locally owned and foreign-invested companies. Suppliers are currently mandated to pay their employees anywhere from $2.19 to $3.13 per day, depending on the location. This, however, is still comparatively lower within those in most countries in the region.

China has been raising basic salaries by an average of 22 percent annually for the past two years. In Indonesia and the Philippines, the daily minimum wage ranges from $2.50 to $5.66 and $4.90 to $9.67, respectively.

Challenges

Although overseas revenue has been generally improving, makers are still concerned about sustainability. A major hurdle is REACH compliance, which compels manufacturers to budget for chemical testing. The inspection is typically carried out in Hong Kong as suitable facilities are not available locally. In addition, enterprises have to employ more personnel for in-house QC to intensify checks over material processing.

Because of mounting restrictions and tougher policies from the EU, the Vietnam government is employing ways to reduce export dependency on the association. In 2010, the country entered the Trans-Pacific Strategic Economic Partnership Agreement, which promotes free trade among nations in the Asia-Pacific. One of its key objectives is to eliminate trade tariffs entirely among signatories by 2015. Other member countries are Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore and the US.

Another challenge facing the sector is the heavy reliance of manufacturers on imported raw materials. Although canvas, rubber and plastic are available domestically, high-grade genuine and synthetic leather are mostly bought from Taiwan, mainland China, South Korea and Italy.

According to Vietnam Customs, footwear components purchased abroad last year were valued nearly $3 billion. This amount represents more than two-fifths of total footwear exports. Due to the considerable proportion of expenditure on these inputs, product prices are significantly affected.

Pricing

Quotes generally depend on the materials used and design complexity.

The low end is mostly composed of children’s shoes such as sneakers and ballet flats. Men’s and women’s casual footwear with seagrass, bamboo, taffeta or cotton uppers, and EVA or rubber outsoles also fall under this category.

Midrange items have more intricate designs than those in the low end. Casual shoes such as women’s boots often utilize PU, cowhide or pigskin for uppers and satin or canvas for insoles.

High-end models feature top-grade leather for uppers, lining and insoles. Elaborate patterns and embroidery are incorporated. Upscale footwear is usually finished with wax imported from Italy.

Supplier survey

The majority of companies interviewed for this report will retain export prices of footwear over the next six months.

Fifty-six percent will maintain quotes in spite of the EU sovereign debt crisis to keep existing clients and attract new ones. The rest will increase prices due to rising labor and raw material costs, which have included a government-mandated minimum wage increase during the fourth quarter of last year.

Close to two-thirds of respondents who intend to push up quotes will do so by 6 to 10 percent of current levels. Nearly one-third will adjust prices by no more than 5 percent. The rest will raise quotes by at least 15 percent.

In spite of the sluggish world economy, most interviewed suppliers remain optimistic of their export performance for the rest of the year. Almost nine out of 10 expect revenue over the next 12 months to climb 20 percent or less. About one-tenth predicts foreign sales to increase more than 20 percent.

Read the full report on Vietnam footwear industry receives boost from subcontracting. Global Sources is a leading B2B portal and a primary facilitator of trade with China manufacturers and India suppliers, providing essential sourcing information to volume buyers through our e-magazines and trade shows.


Posted: 27 November 2012

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