For Further Step Into World Market

A leather and footwear exhibition in HCM City: The development of Vietnam's leather and footwear industry in the years to come depends largely on the Government's policies

The leather and footwear industry is expected to see 2011 as its successful year, with its first six months’ export sales reaching nearly US$3 billion, a 31% year-on-year growth.

The sector, according to Nguyen Duc Thuan, chairman of Vietnam Leather and Footwear Association (Lefaso), may earn export revenue of US$6.2 billion this year, nearly US$1 billion higher than last year. This will, therefore, be the second consecutive year that footwear export enjoys an annual growth rate of over 20%. As it is a big difficulty to maintain such a high growth rate over a long period, Lefaso has set annual growth of just 8.2-9.4% for the next 10-15 years’ target.

At present, Vietnam ranks fourth among the world’s top five footwear exporters. The country has, however, just been relatively strong in the low market segment of the value-added chain of the products. Compared with China, which accounts for 70% of the global footwear import market, Vietnam still lags far behind, accounting for less than one-tenth.

Breakthrough change

Lefaso’s statistics show that 70% of Vietnam’s leather and footwear businesses still produce export items under subcontracts for an added value of 10-15%.

According to Nguyen Tien Vi, head of the Ministry of Industry and Trade’s planning department, the next 10-15 years’ target for the leather and footwear industry is to create a breakthrough change. This change will be focused on developing the production of materials and accessories, and supporting industries; raising the added values for products; improving productivity and product quality; shifting from subcontracting to manufacturing; and increasing design capability and developing new products.

Among the four segments in the product value chain, except for the distribution in foreign markets, which will remain out of reach for Vietnamese businesses, the leather and footwear sector will focus its development in the three remaining segments: marketing and designing, developing products; developing human resources (for supporting industries); and organizing production. The marketing-designing and new product development segment will help the sector seize a 50-70% local market share, and the number of products developed by local design companies will account for 70% of the market share.

Meanwhile, the other two segments, which local businesses can undertake, help expand export markets. The success or failure of human resources development will play a decisive role in increasing the production value and the competitiveness for footwear export.

For the time being, the localization rate of the leather and footwear sector has reached some 50%. The figure is expected to escalate to 60-65% in 2015 and 80-85% in 2025. This target is not too high because the Vietnamese market, with its annual capacity of about 750 million pairs of shoes and more than 80 million handbags, has been big and attractive enough for manufacturers of materials and accessories. If the sector can maintain the growth target of 8.2-9.4% per year as planned, within the next 10 years the country will be able to turn out at least 1.6 billion pairs of shoes and 300 million leather products annually, mainly suitcases, wallets and handbags.

Up to State policies

It can be said that the domestic market has been mature enough to attract investments in leather and footwear supporting industries, the onus falls on State policies.

In late February this year, the Prime Minister issued Decision 12 featuring the policy on developing supporting industries for six sectors, including the leather and footwear industry. As analyzed by Nguyen Tien Vi, incentives and supporting schemes under this decision are fairly broad, covering land, premises, loans, import and corporate income taxes, and other forms of financial support. Most were, however, noted in documents issued earlier, so it will be less likely for Decision 12 to bring a breakthrough change for developing supporting industries. The most interesting issues to businesses and investors—incentives for land and premises, and investment credits—are only stipulated generally. Some, for instance, are “given priorities to have support and get suitable land for the project in terms of the area, location, land rental” and “allowed to borrow part of the investment credit for development from the State Bank in line with the Government’s regulations.”

In fact, what matters is the possibility to carry out these incentives. Take an example with the program on developing key mechanical engineering products. One of the attractions to businesses participating in this program is that they can get State Bank’s soft loans for their investment projects. However, as from 2009 only three projects are eligible for soft loans from the Vietnam Development Bank, and they all belong to State-owned enterprises.

Undoubtedly, policies with incentives and support for supporting industries are fairly appealing but it is still a long road ahead for investors to benefit from them. If the Government can clear this bottleneck rapidly, it will not be difficult to fulfill the localization target, especially in big sectors such as textile and garment, and leather and footwear.