Challenges facing Vietnamese footwear

factories in 2017 and beyond

Challenges facing Vietnamese footwear factories in 2017 and beyond: Over-saturation Excessive competition Trade assessment Currency issues Pricing pressure Maintaining a quality work force Better security and faster to market

Next step - facing the challenges: Broadened scope Automation and efficiency Retaining a strong workforce Innovation Conclusion

Over-saturation spurred by strong customer demand Posted on May 26, 2014 by Vietnam Briefing HANOI – The General Statistics Office of Vietnam (GSO) has announced that the country’s footwear exports have increased 21.9 percent year-on-year, reaching US$2.85 billion. Vietnam factories capture greater share of China’s footwear market – 2015 2016 - Strong Growth Continues for Vietnam’s Footwear Industry RNCOS’ analysts, in their latest research report, “Vietnam Footwear Outlook to 2017”, have identified that the country’s footwear industry has been growing significantly from the past with rising exports in the international market. Footwear production is anticipated to grow at a CAGR of around 8% during 2013-2017. VIETRADE - According to the statistics of the General Department of Vietnam Customs, the export of Vietnam’s footwear of May 2015 earned US$1.16 billion, up by 25.38% in comparison with May 2014. Total export revenue of footwear in the first 5 months of 2015 hit US$4.68 billion, rising by 21.03% over the same period of the previous year.

Vietnam - Footwear industry targets 20% growth in 2016

FNA | 22 January 2016

Press in Vietnam have reported that the footwear industry expects a 20% growth

in exports this year, due to a number of new Free Trade Agreements including

the Transpacific Partnership (TPP), reports Leatherbiz.

"To take advantage of those agreements, the local leather and footwear industry

should prepare material at home to join preferential tariffs from the deal when

exporting their products to the US, the European Union and some other

markets," said Deputy Minister of Industry and Trade Ho Thi Kim Thoa at a

meeting with Viet Nam Leather and Footwear Association (Lefaso).

Exports of footwear and handbags grew 16% in 2015 to $15 billion, with $12

billion from footwear and $3 billion from handbags.

Excessive Competition The growing number of footwear factories in Vietnam and factory capacity expansion over the last several years was brought on by a number of factors. This growth now threatens factory profitability. Growth factors: The relatively easy access to a strong, intelligent and young workforce in Vietnam with wage

requirements lower than China and the industrialized West Social and economic stability in Vietnam Strong support of the Vietnam government A general brand euphoria over growing worldwide footwear sales from 2011 through 2015 Excessive optimism of the possibility of TPP and other trade deals with preferential duty structures

benefiting Vietnam footwear Continued shrinking of the China factory base as wages and the RMB increased annually from 2010 to

2015 The past annual depreciation of the Vietnamese dong, which helped off-set annual worker wage

increases in Vietnam Over optimistic brands encouraging factories to keep expanding their production capacities

WORLD FOOTWEAR REPORTS - International footwear trade declined in 2015

According to the latest edition of the World Footwear Yearbook this movement occurs after five years of double-digit growth rates The fifth edition of the World Footwear Yearbook ,developed by APICCAPS, the Portuguese Footwear, Components and Leather Goods Manufacturers’ Association, in partnership with GDS, is now available in paper version and presents the main conclusions regarding the footwear dynamics in 2015. The World Footwear Yearbook offers a comprehensive picture of the footwear industry worldwide, focusing on the main trends at international trade, consumption and production. Global information is enriched by dozens of individual country profiles, with 79 territories under analysis. The World Footwear Yearbook estimates that after five years of double-digit growth rates international footwear trade declined in 2015: the number of pairs exported fell by 4.7%, to 14.3 billion, and their value by 4.9%, to 127 billion dollars. In spite of the decline in 2015, over the last decade the value of the footwear exported worldwide doubled. A major contribution to this movement comes from China, whose footwear exports in 2015 came to just under 10 billion pairs, reducing the country’s share of the world total to a still very impressive figure of 69%. Moving in the opposite direction, Vietnam crossed the 1 billion pair threshold and achieved a share of 7% in worldwide exports.

Trade Assessment 1) A shrinking USA retail market According to the FDRA’s report in October 2016, the US registered a 6% decline in footwear

imports for the first half of 2016 Footwear retail operations in the US closed within the last 2 years include: Sports Chalet, Shoe

City and Sports Authority Footwear retail operations shrinking in the US within the last 2 years include: Footlocker,

Payless, and others Major US department stores with footwear departments closing a large number of stores

within the last 2 years: Macy’s, Nordstrom, JC Penny, etc. 2) A continuing flat, European retail footwear market GFK reported projected retail sales area increases of only 0.3% for 2016 and about the same

for 2017 GFK – in the EU a 1.1% nominal growth in 2016 with generally the same in 2017 3) A depressed footwear retail market in the UK brought on by Brexit and the subsequent de-valuation of the British pound

Currency Issues A strong US dollar As most Vietnamese made footwear destined for the export market is figured in US dollars, a strong US dollar has made for more expensive goods in both Europe and the UK and has placed additional margin pressure on the brands. A stable Vietnamese dong The Oxford Business Group recently praised Vietnam for maintaining the dong at a steady course, with the currency only depreciating by 1.2 percent against the dollar throughout the year (2016). The Good and the Bad Good - A stable Vietnamese dong helps when importing foreign materials and components as they are usually figured in US dollars Bad - A stable Vietnamese dong means that local wage increases will not be off-set by currency depreciation as was common over the last 5 years

Pricing Pressure Today, brands are refusing to pay any higher prices for footwear Highly competitive footwear sales in a crowded and shrinking retail environment.

Many reports have indicated that for the first time in 5 years, footwear sales actually shrunk in the USA

A strong US dollar is making footwear prices higher in worldwide markets Instead of asking for “volume discounts” as in the past, now brands are asking

for help in lowering existing prices Many brands are in the process of consolidating their factory base in order to

maintain meaningful relationships with “core” factories The reality of “supply and demand”. There are just not enough orders to fill the

present state of too many factories and too much capacity

Maintaining a quality work force Vietnam has rapidly developed from agriculture to light industry to a

modern industry and service economy

Factory workers are being given more and more viable work options

Skilled footwear workers are not only being drawn by competing footwear

facilities, but also by other industries that have recently been introduced into

Vietnam such as shopping malls

In order to continually improve, it is essential for footwear factories to have

a stable and knowledgeable work force willing to invest time and effort in

helping to grow its business

What Every Member of the Trade Community Should Know About:

Footwear

WORLD FOOTEAR REPORTS - Counterfeit goods make up about 2.5% of global imports Global trade in fake and pirated goods is estimated to be worth nearly half a trillion dollars a year, according to a report by the Organization for Economic Co-operation and Development (OECD) and the EU’s Intellectual Property Office (EUIPO) written in 2016. This same source estimated that up to 5% of goods imported into the European Union are fakes, originating mostly from middle income or emerging countries, with China as the top producer. Fake items can be found in the most varied categories of products, from handbags and perfumes to machine parts and chemicals, with footwear being the most-copied item.

Better security and faster to market Better security – Tougher border restrictions on imported goods are being imposed in both Europe and the

US Prevention of counterfeit goods According to a recent report by World Footwear, counterfeit goods make up to 2.5% of global imports. They went on to say that up to 5% of the total goods imported into the ECC are fakes with China as the top producer of “counterfeit” footwear. Brands are looking to reduce exposure to not only to counterfeit and stolen footwear being

exported, but also being sold here on the local market. I think anyone who has been in Vietnam any length of stay can say that between online sources, the Binh Tanh Market and even phone apps like Wechat access to stolen and counterfeit goods is common.

Faster to market In order to generate better retail sales, brands are insisting on a quicker turnaround of goods. This will not only replenish “hot” selling items, but bring new items to market in a more timely fashion. Brands are hoping to reduce order lead times to 60 days from order placement to delivery

Next step - facing the challenges

Broadened scope Don’t put “all of your eggs in one basket”. Have more than one customer Mitigate factory risks by focusing on worldwide brand customers a) Look for customers who are “multi-dimensional” meaning that they sell collections

of different shoes rather than simply one distinct style

b) Try to better understand current fashion needs, trends and directions when assessing potential customers

c) Recognize that footwear is a fashion business and that fashion changes periodically

d) Strive for a balanced portfolio of customers that fits not only your factory’s production capacity, but also its capabilities

Automation and Efficiency 1) Automate In order to be a factory for the future, facilities must upgrade production machinery. Using tools, like computer stitching machines, enable factories to produce consistent, high quality goods that add value to branded merchandise. In many cases, the proper use of automation can eliminate redundant workers, and make factories much more efficient. Additionally, this will make them more profitable. 2) Efficiency Factories must be vigilant in constantly looking for ways to improve efficiency and cut down on wasted time and man power. The time of cheap labor in Vietnam is over.

Retaining a strong factory workforce Understand that maintaining a quality workforce is essential to stable

factory growth Ensure that workers are given a friendly, clean and safe working

environment Ensure that workers are given opportunities of upward mobility within the

organization Providing health care, educational seminars and occasional entertainment

programs should be the “new norm” for factories looking to a brighter future in Vietnam

Innovation Thinking “outside the box”

Come up with creative ideas to re-configure existing production operations to be

more efficient. These should meet customer expectations such as

1) Cutting down on order lead times

2) Facilitating smaller lot runs

Look for realistic ways to cut down factory waste and redundancy

Remember to be “pro-active” and not “re-active”

Make sure that changes that are initiated are genuine and really work for your

factory

Conclusion

I think that all Vietnam footwear factories should seriously

consider all of the suggestions outlined in my presentation.

I sincerely believe that those factories that are dedicated, diligent

and determined to continually improve operations going forward

will have bright and successful futures.