Dual Demand Promotes Rapid Development of Vietnamese Home Industry

Dual Demand Promotes Rapid Development of Vietnamese Home Industry

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Faced with Vietnam, a booming emerging market, China has two opportunities: one is to set up factories in Vietnam and sell products to the United States; the other is to sell products to Vietnam as a Chinese brand.

Vietnamese household consumption can be divided into two major components: mass products and high-end products.

In the furniture field, popular products come from carpenters’shops and local small furniture factories, while high-end products usually have the descent of overseas enterprises or well-known domestic enterprises. Vietnam’s home decoration includes handicraft, home textiles, glassware, pottery, rattan knitting, bamboo products, etc. Among them, mass products come from Vietnam’s local handicraft towns, while high-end products come from overseas and domestic well-known enterprises.

  1. Popular Products

In the field of Vietnamese furniture, the price of mass products is lower. The average price of a set of tables and chairs is around 200 euros, the average price of a bed is around 250 euros, and the price of chairs is as low as 16 euros.

Domestic furniture factories in Vietnam are mainly located in three areas: Hung Yen, Vinh Phuc, Bac Ninh, Hai Duong, Quang Nam, Binh Dinh, Gia Lai, Dak Lak and southern coastal areas (Ho Chi Minh City, Binh Duong, Dong Nai, etc.). There are a large number of small, medium and large timber processing enterprises in these areas, including foreign direct investment and joint ventures. Foreign direct investment and joint ventures are usually located in industrial parks.

Most home decoration products in Vietnam market are produced by handicraft villages and towns. Handicraft villages and towns have formed industrial clusters, and each village and town focuses on specific products. These villages and towns are mainly located in the northern part of Vietnam, where Hanoi enjoys an important position and is regarded as the cradle of Vietnamese handicraft industry. 90% of the output of home decoration comes from handicraft industry, and about 13 million workers are engaged in the handicraft production of home decorations nationwide. In Vietnam, 90% of the household decoration industry is local small and medium-sized enterprises, while the proportion of foreign-funded enterprises is relatively low, about 10%, usually from mainland China, Taiwan, Germany and Russia.

  1. High-end products

Vietnam’s high-end furniture prices are high, well-known brands are BoConcept, AA Corporation, Nha Xinh and so on. The average price of chairs sold by these brands is around 500 euros, a set of tables and chairs can be as high as 4,000 euros, and the average price of beds is more than 1,000 euros.

Home decoration and furniture imports mainly come from China, Malaysia and Thailand. According to EVBN, Vietnam’s home decoration and furniture imports grew rapidly between 2014 and 2015. The import of household furniture CAGR is as high as 40.9%, and the import of household decoration products CAGR is 14.4%. Home textile is the main import of home decoration, accounting for more than 90%.

Free trade agreements are a major factor in promoting Vietnamese furniture and home decoration imports. Vietnam Customs Law stipulates that unless the exporting country reaches a free trade agreement with Vietnam, it must impose a 25% tariff on imported furniture and household decorations. China and Vietnam have concluded a free trade agreement to enjoy tax exemption when exporting home decoration and furniture to Vietnam. The entry into force of the EU-Vietnam Free Trade Agreement (EVFTA) in 2019 will drastically reduce tariffs on high-end furniture and household products exported to Vietnam by EU Member States to 0, which is expected to further reduce product prices and make imports more pro-people.

At present, IKEA has entered Vietnam, spending more than $500 million to build retail networks and warehouses in Hanoi.

With the economic development, per capita disposable income and consumption escalating, industry analysts estimate that more than 1.5 million Vietnamese have the ability to consume high-end home decoration and furniture products, and the overall level of household consumption is also rising.

Vietnam’s real estate industry is expected to achieve an annual compound growth rate of 6% between 2015 and 2020. The process of urbanization is accelerating, which drives the demand for urban housing. Similar to the situation in China, Vietnamese consumers also believe that real estate is a long-term investment, which tends to obtain long-term returns by renting to young people and foreigners after buying a house. Therefore, the size of the home market is expected to expand further. In addition to the increase in commercial housing construction, office building construction is also increasing, high-end office building construction has brought a large demand for office furniture.

Foreign Demand: Industrial Transfer, Chinese Enterprises “Going to Nanyang”

Vietnam ranks first in Southeast Asia, second in Asia and fourth in the world. In 2017, the turnover of Vietnam’s timber processing industry reached 8 billion US dollars, an increase of 10% over 2016; as of July 2018, the turnover of Vietnam’s timber processing industry was 5.3 billion US dollars, an increase of 13.6% compared with the same period last year. Growth is expected to remain unchanged in the coming months, reaching $9 billion in export transactions in 2018.

This year, Vietnam’s furniture export scale has further expanded. According to the General Administration of Customs, the export volume of timber and wood products reached nearly $3.12 billion from January to April 2019, an increase of 18.3% over the same period last year, much higher than the growth rate hovering around 10% in previous years. According to the ranking of export volume, the top ten export markets are the United States, Japan, China, Korea, Britain, Germany, Canada, Australia, France and the Netherlands. The United States is Vietnam’s most important export market. In 2015, the United States alone accounted for 38% of Vietnam’s household exports, while Japan, China and the European Union combined accounted for only 40%.

Similar to furniture exports, the United States is the most important destination for Vietnamese home textile exports, followed by the European Union. Vietnam exports most of its ceramics to the United States, followed by the European Union.

Vietnam has been able to become a rapidly rising star in the ranks of home exporters. Its comparative advantage lies in:

(1) Strong attraction for foreign investment.

According to data released by the Foreign Investment Bureau of the Ministry of Planning and Investment of Vietnam, Vietnam approved new foreign investment, capital increase and financing funds of 35.5 billion US dollars in 2018, equivalent to 99% of the same period in 2017. 2018 is the third consecutive record year for foreign direct investment (FDI) capital arrival rate, which is $19.1 billion, an increase of nearly $2 billion compared with 2017. Foreign investors have invested in 18 areas of Vietnam, of which processing and manufacturing industries are the areas that attract the most foreign investment, with investment capital of 16.5 billion US dollars, accounting for 47% of Vietnam’s foreign direct investment. Second is the real estate sector, with a total investment of 6.6 billion US dollars; wholesale and retail industry ranks third, with a total investment of 3.6 billion US dollars.

(2) Free trade agreements come into force one after another.

The entry into force of the European Union-Vietnam Free Trade Agreement (EVFTA) and the Comprehensive Progress Agreement of the Trans-Pacific Partnership (CPTPP) in 2019 will provide Vietnam with broader opportunities. These two agreements are expected to reduce export barriers and enhance the global competitiveness of local enterprises. Immediately after the implementation of the EU-Vietnam Free Trade Agreement, the EU will exempt textiles and most furniture from Vietnam from tax, provided that exporters can ensure that raw materials come from legal logging and comply with the provisions of the Voluntary Partnership Agreement on Forest Law Enforcement, Governance and Trade (VPA-FLEGT). This not only brings opportunities for local enterprises, but also makes Vietnam an attractive production place in the eyes of many Chinese and American enterprises.

(3) State support for furniture and home decoration manufacturing.

In recent years, the Vietnamese government has introduced various policies and measures to help manufacturers promote, win customers, occupy the market, and promote the development of home decoration industry. The establishment of Hanoi Design Center and Vietcraft Excellence is a good example. Hanoi Design Center is the first design center in Vietnam. It is organized by Vietcraft and the Institute of Industrial Design of Lund University in Sweden. It aims to improve Vietnamese handicraft products by training handicraft designers and craftsmen on product design, commodity marketing and international standards. International competitiveness. The national brand Vietcraft Excellence was founded by the Ministry of Trade in cooperation with the Vietnamese Handicraft Exporters’Chamber of Commerce. From the cultural and external propaganda sense of official trust, it can be described as “state-owned enterprises in state-owned enterprises”. The brand contains a variety of handicraft products with Vietnamese characteristics.

(4) Labor is abundant and cheap.

China’s labor costs are rising, while those in Southeast Asia are cheaper. Vietnam has a population of more than 90 million. At the same time, it imports labor from Cambodia, Myanmar and Laos, which have a population of more than 100 million and a relatively young industrial population structure, which is suitable for the development of manufacturing industry.

However, one obvious disadvantage is that Vietnam’s labor quality is not high. In terms of skills, most of the workers belong to “washing their feet and going to the fields”, lacking professional skills, and the universities and training institutions are seriously inadequate. In terms of professionalism, the workers are lazy, and the acceptance of overtime is not high. Zhao Minmin, an analyst who works in overseas investment consultancy services in Southeast Asia, once told Sanlian Life Weekly that: “Workers in Southeast Asia are generally reluctant to work overtime. Working overtime for two hours a day is the upper limit, and no more money is given. It is simply unthinkable for them to work 24-hour shifts in order to catch up with the construction period, as in China.”

(5) For the Chinese furniture manufacturing industry, the most important reason to promote some of the players to “go to the South China Sea” is the tariff imposed by the United States on Chinese furniture.

Earlier, when the tariff rate was 10%, Chinese manufacturers and U.S. retailers began negotiating to share tariffs, each bearing 5%, but now up to 25% of tariffs have touched the bottom line of profits. According to an insider who has worked in Williams Sonoma, the fourth largest furniture retailer in the United States, and has rich experience in furniture manufacturing industry, the tariff is generally 12.5% for both sides, but the net profit margin of furniture factories is generally more than 10%. Williams Sonoma’s agent factories in China are still relatively high profit margins, some companies will even “big shoppers” and relying on the order volume advantage to reduce prices year after year, the agent factories suffer terribly. In such an environment, “going to Nanyang” has become a win-win solution for factories and furniture retailers in the United States.

Driven by the above five factors, Vietnam’s home manufacturing industry has accelerated its development.

Opportunities and challenges coexist under double demands

Faced with Vietnam, a booming emerging market, China has two opportunities: one is to set up factories in Vietnam and sell products to the United States; the other is to sell products to Vietnam as a Chinese brand.

The first opportunity has been mentioned above. I think this is an opportunity, but it is also the “helpless” choice of some furniture enterprises that mainly export to the United States under the pressure of tariffs.

Firstly, when Chinese furniture enterprises set up factories in Vietnam, they will inevitably face the problem of low quality of Vietnamese labor force. Vietnam’s labor force is indeed cheap, but if the technical level and professionalism of workers are also included in the evaluation system, to take into account the cost-performance ratio, input-output ratio, perhaps those “going south” enterprises will still miss Chinese workers.

In addition, since May 2019, both American and Vietnamese media have been reporting a lot about the capacity migration of Chinese furniture enterprises to Vietnam. Once Chinese enterprises set up a large number of factories in Vietnam, they will inevitably become strong competitors of local enterprises, which is not the situation expected by the Vietnamese government.

Finally, from the total point of view, although China is the world’s largest exporter of furniture, the export value of furniture only accounts for less than 20% of the total output value. In addition, the low quality of labor force, the local government’s vigilance against the competition between foreign-funded enterprises and local enterprises, destined that “home enterprises set up factories in Vietnam” is only a partial phenomenon.

In the second opportunity, Chinese enterprises should grasp the opportunities brought by Vietnam’s consumption upgrading and the embarrassing situation of Vietnam’s lack of local design power.

At present, the design ability of Vietnamese household enterprises is basically zero, and most of the products exported are brand-designed, reflecting the lack of design talents in Vietnamese household enterprises. At the same time, Vietnam lacks high-level art colleges and universities, and in the short term, it is not able to cultivate talents that can meet the needs of the industry.

However, with the increase of residents’income, the improvement of consumption capacity and the renewal of the main consumption force, people are more willing to pay for high-quality, high value-added goods. In the past, consumers mainly focused on the function of products, but now consumers are beginning to expect products to conform to their personal style and lifestyle, and at the same time to be of better quality. In addition, Vietnam’s younger generation is accelerating westernization and is interested in Western design styles and even lifestyles, which brings opportunities for foreign furniture companies to succeed in Vietnam. At present, some foreign-invested brands (such as UMA, JYSK, etc.) have rushed into Vietnam. JYSK and BoConcept provide furniture and home decoration in Nordic style, while UMA mainly combines high-quality, Nordic design and low-cost. IKEA from northern Europe also has high hopes in Vietnam.

China’s household industry is better than Vietnam in design ability as a whole. After more than 30 years’development, China’s household industry has settled down various styles, such as American style, pastoral style, Nordic style, modern style, etc. In addition to well-known traditional large enterprises and listed companies, a number of home-grown designers with high design ability have emerged in recent years. With new brands (such as fabrication, squeaky tone, etc.) and a number of SPA brands (such as Mingchuang, Nomi, etc.), we believe that Chinese enterprises are fully capable of opening up another world in Vietnam as “brand” rather than “factories for factories”.

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