Vietnam leather industry faces tough challenges

Vietnam is now the fourth largest leather and footwear manufacturing country based on volume behind China, India and Brazil, shipping products to more than 800 customers in 50 countries, and the third largest in terms of value after China and Italy.

Manufacturers ship more products to the US, EU and Japanese markets, second only to China and in addition have gained a solid footprint in many other key markets around the globe.

In the six months leading up to July of 2015, export revenues for the industry expanded 18% year-on-year to US$7.10 billion, of which leather accounted for US$1.45 billion, up 27%, and footwear accounted for US$5.70 billion, up 16%, according to the General Department of Vietnam Customs.

However, competitiveness of domestic manufacturers in the industry remains weak and they face innumerable but not insurmountable problems reports the Vietnam Leather and Footwear and Association (LEFASO).

“The leather and footwear industry is facing more challenges than ever before,” said Diep Thanh Kiet, vice president of LEFASO.

On the one hand, global consumers are demanding in terms of expecting new experiences through product development, design and functionality, and domestic manufacturers are weak in these areas.

On the other hand, the lack of a well integrated supply chain and all of the problems associated with sourcing and procuring raw materials is a critically important problem holding the industry back, Kiet said.

As it relates to the availability of raw materials, the industry has access to only a small fraction, about 20% of their needs and must rely heavily on imports from other countries in the region to fill the gap, which adds significant cost and reduces profits in the industry.

Domestic manufacturers are also noticeably lacking in their trade promotion and marketing activities and they must pick up the slack to tap into new markets and get more competitive in this area.

The Vietnam government has also signed free trade agreements (FTAs) with ASEAN, China, Japan, the Republic of Korea, India, Australia and New Zealand and is actively negotiating others.

Deciphering or determining the exact requirements of these FTAs and complying with them poses tremendous challenges for those in the industry, Kiet said.

Most of the FTAs are not expected to have any discernable impact on total exports for 2015 but as they take effect over the next one to two years and tariff reductions are phased in, hopefully things will pan out and the industry will see profitable growth.

Last but not least, the ASEAN Economic Community (AEC) is currently on track to come into existence by December 31, 2015, and its formation may pose the greatest challenge for the industry.

Other ASEAN member countries are currently strong rivals for domestic manufacturers and the tariff reductions brought about by the AEC will augment their competitiveness.

The leather and footwear industry could lose out on their home turf as manufacturers from other ASEAN nations seek to tap into and compete in the domestic market, Kiet underscored.