Strategic Positioning Of The Vietnamese Footwear Manufacturing Industry Economics Essay

The objective of this study is to assess the strategic positioning of the Vietnamese Footwear Manufacturing Industry in the international market and to determine a strategy and action plan to enhance the competitiveness of exports from the sector. Footwear is an active product in international markets. It is being delocalized from developed countries to developing ones. The beneficiaries of this process are Far East nations, in particular China, vietnam, india and the Central and Eastern European countries (CEEC). It is worth noting vietnam’s near neighbours; china and Thailand are quite successful in exporting footwear to the EU.

Vietnam has an advantage in international trade in that it has agreements with EU through Qualifying

Industrial Zones (QIZ) and a Free Trade Agreement (FTA), it also has an Association Agreement with the EU. These agreements allow duty free access to these markets, for footwear, providing certain stipulations are met These two markets therefore became the targets for vietnam exports.

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The world footwear market is estimated at 12,469 million pairs in 2002. The biggest consumers of conventional footwear (i.e. with leather uppers) are USA and Europe. Between them they consumed 5,823 million pairs in this year, 46.7% of the total. China produces 6.9 billion pairs per year and rising, it exports more than half of these.

Most of these shoes are synthetic (over 60%) and of low quality and price. The average price of exported shoes from China was US$2.46 in 2002. Other factories in the Far East produce more leather shoes, whereby china in paticular and India. These two countries would be direct competitors for vietnam shoes (Chinawith its product mix and trading practices is impossible to compete with directly).

In Europe and the Mediterranean zone, there are significant exporters of conventional footwear namely; Italy, Spain in EU , in a sense, are “tied” to Italy and Spain as they have due to sub-contracting agreements. These two blocks are also major competitors for vietnam. The European market for imports is wide and diverse. The market in each country has different characteristics, some are easier to operate in than others. Of the EU 15, UK as a primary target market and denmark as the secondary, emerged with the best potential for exports from vietnam. In the USA market, because of its large size,niche marketing is the only sensible way forward for the relatively small producers

in Jordan.

Although these markets are available and are import friendly, the shoe manufacturing industry in vietnam must be in a position in which to service them. During the research of companies, it became obvious that none of them was capable of exporting to sophisticated markets without outside help.

In recent years, shoe manufacturing in vietnam has gone into slight decline with factories closing or converting to importers. This is due to many factors; the cumulative result of these factors is that the local retail industry is dominated by cheap imports from China (It is alleged that some of them may have entered vietnam by dubious means). Local manufacturers have not been able to fight these imports. As a result, they have a very small market left to them. No doubt management have made mistakes in the past, now there is an opportunity to correct this and rehabilitate

the industry into a viable exporter.

With an estimated local market of between 7 and 9 million pairs, it is proposed that this be shared with imports on a 50-50 basis by restricting the imports from China through the WTO Safeguard Mechanism for an initial period of 4 years. Controls should also be exercised on publicising the material content and country of origin for the shoes sold at retail. This will create a market for local factories to sell into, they will be able to make profits once again and rebuild their capital base.

Company History

Latidee was incorporated 1963, located at bredebro Denmark and it mission is business driven, continous new idea, dynamism, capability and forward movement is one of the world’s top ten shoemakers and a worldwide leader in the “comfort” shoe segment. Based in Denmark, latidee is also one of the few fully vertically integrated shoemakers, controlling the entire shoemaking process from tanning to design to manufacturing and even retail sales. Employee of over 900, sales at 2002 $ 493.9 million. The company produces casual, classic, and sportswear shoes for men, women and children, as well as clothing and accessories. latidee’s production takes place in a number of factories around the world, including Denmark, Portugal, Brazil, I, China, Vietnam and Thailand. Together, the company’s plants turn out some 12 million shoes each year. In addition, latidee has long played a pioneering role in the use of automated production techniques, and its robot-equipped production lines have been compared to those of the automotive industry. To complement its manufacturing base, latidee operates research and development and design centers in Denmark and elsewhere. Its shoes are available at more than 1,000 retail stores worldwide, including some 500 franchised latidee branded stores. The company also owns and operates two flagship stores, one in London and the other in San Francisco. These two stores also serve as test-marketing outlets. The United States, Germany, and Sweden are the company’s major markets, and some 90 percent of its sales of approximately $500 million come from outside of Denmark. In the early 2000s, the company has been expanding its traditional markets the 30 to 49 year old segment launching the Receptor sports shoe line, a children’s shoe line, and other designs to attract more youthful segments. Founder lati lammys remains at the head of the company, which is wholly owned by the lammys family.

Economic Overview of vietnam

Vietnam has been in transition from a centrally-planned to a ‘socialist oriented market economy’ since the introduction of the doi moi reforms in 1986. In the early-to-mid 1990s, liberalisation measures resulted in rapidly expanding exports and high economic growth, with real GDP growth averaging 9 per cent per year. Growth slowed in the late 1990s but the momentum picked up, with GDP growth averaging about 7.5 per cent per year since 2001, reaching a high of 8.5 per cent in 2007. Poverty rates are now less than 20 per cent, down from almost 60 per cent in the early 1990s. Economic development has been patchy geographically. Ho Chi Minh City which is the southern region of vietnam with a population of 8.2 million) and the surrounding provinces constitute the power-house of economic development with GDP per capita of US$2,100 in 2007, as against a national average of US$818 (IMF).

MOTIVATION FOR GOING INTERNATIONAL

Denmark has been attracted to the factors allowing which leads to a large amount of FDI. They include

Vietnam’s strategic location in a rapid growing region, allowing Vietnam to be part of the growth process

(ii) Vietnam’s stable economic and political environment

(iii) Vietnam’s large natural mineral resources

(iv) Vietnam’s abundant, young and relatively well-educated labour force3; (v) Vietnam’s large and growing domestic market.

(vi) Vietnam’s potential to be an export platform for EU and US market

(vii) Vietnam’s liberal investment and government’s commitment to

economic reform.

A FDI inflow into Vietnam is widely believed to benefit the economy in terms of investment capital, technology transfer, management skills, and job creation. Accordingly, there has been an increasing number of research on the impacts/contribution of FDI to economic growth, poverty reduction, industrial upgrading.

Importation of Vietnam footwear to Europe, a Denmark case study

Economic outlook of denmark

After yearly growth rates real GDP of about 3% during the years 2004 to 2006 the Danish economy slowed somewhat in 2007,where real GDP growth fell to 1.8%. it further declined to 0,2% in 2008 mainly due to the worldwide financial and economical crisis, which hit Denmark in 4th quather of 2008. The Danish economy is like the rest of the world affected by the crises and weak international growth conditions, and recession is expected in 2009 with negative GDP of -0.2% and pressure on public finance. however, since Denmark economic situation at the entrance of the crisis was sound with very low unemployment rate (1.7%), and solid surpluses on public finances and balance of payment, it is expected that recovery will be achieved already in 2010, where GDP is assumed to grow by 0.7%. hereafter, growth is first and foremost unfavourable demographics with large generations reaching retirement age and smaller generations enterning the labour market. It should be observed, however, that even relatively minor variations in growth percentages impact considerably on Danish economy in real terms, due to the very high GDP per capita (DKK 302,000 per capita in 2006). Unemployement is expected to peak in 2010 at 3.5%.but government income tax cuts, implemented from the beginning of 2009 together with expected yearly inflation rates below 2% result in real wage increase of about 2% per annum in the year to come.

The occupation activity rate in Denmark for the age group 16-64 years is very high for both men and women.in 2007 it reached almost 85% for men and 78% for women. The unemployment rate is very low averaging to 1.7% in 2008,but due to the crisis the Danish ministry of finance predicts a doubling of the unemployment rate up through 2010. Consumer price inflation has been low, about 2% per annum during a good many years,but increased in 2008 to 3.3%. the increase is, however, already fading away and the rate expected to decline to 1.6% and therefore remain at about 2% in the years to come. Since 1999 public finance have been characterized by significant surpluses,but the possibility is now that under budgeting will take place for 2010 to meet the challenges of the crisis. This however, will not stress the Danish economy since public debt is very low and Denmark today has no foreign debt (net), but has become a net lender of foreign exchange.

Market Access/requirement

The Danish market for footwear is referred to as a buyer’s market. Danish importers of footwear are faced with excess supply from a variety of countries. The Danish market can be entered in several ways of which the most interesting for exporters in developing countries which could be by exports to manufacturing companies, wholesalers or retailer organisations (especially central buying group, chains and hypermarkets). The choice of strategy depends on the resource available and the priority to the Danish market. in this sense, the exporter should take into consideration that the Danish market can act as a foothold to the rest of the Scandinavian region. The commercial practice in entering the Danish market require a long term planning and substantial efforts. Since it a buyer market an exporter must be aware that a Danish importer can select among many uninvited offer from qualified suppliers. the new supplier will probable replace the existing relationship with competent supplier and therefore first impression and first contact is of great importance to the subsequent success of entry to the Danish market because Danish importer have preference for long lasting business relationship to build confidence in the relationship.

Demark as a member of the EU comply with rules and regulations regarding footwear into the EU market.this involves requirement such as the WTO point for technical Barriers to trade (TBT), product safety Directive 2001/95/EC for non-food product used by consumers. neccessaryinformation on product by labelling, instruction, packaging.

Consumption culture

The footwear sector is a diverse industry which covers a wide variety of materials (textile, leather, rubber and plastics) and products ranging from different types of me’s. Women’s and children footwear to more specialised products like snowboard boots and protective footwear. This diversity of the end products corresponds to a multitude of industrial processes, enterprises and market structures.

The Danish climate with its four seasons highly influences the footwear market. each season has different demand of footwear, e.g. boots for winter, sandals and light shoes for summer, pratical solid for autumn, and sneakers and more colourful shoes for spring. Most men and women have selection of shoes suitable for the different seasons as well as for different occasion, work, leisure, sport and others. However, one consumer segement is primarily young people tend to prefer sports shoes all year round. In general Danish consumer are quality conscious when it comes to footwear. Although price is an important aspect,cheap footwear and if it of low quality it will be difficult to sell to the danish’s.

Parent have place great impotance for selecting shoes for their children, always quality shoes and yearly to their growing feet. There is increase in demand for safety footwear within manufacturers due to the EU and Danish on proctection of worker safety and health and also increase in demand for orthopaedic shoes and sport footwear.

Danish indigene tend to have rather large and board feet, and normally designs aimed at consumers elsewhere in the world will have to be adopted or modified, not only in realtion to the look but also in relation to the size, in order to suit the Danish market.

The table below presents the footwear consumption per household on average in Denmark 2002 to 2006. It constituted a little less than 1% of the total consumption of Danish households. Footwear consumption per household grew 18.9% during 2002 to 2006 to Euro 340, of which 55% was women’s footwear, 26% men’s footwear, and 19% children’s footwear. In 2006 denmark became the 13th largest footwear market in the EU. The employment frequency of Danish women is amongst the highest in the world , which contributes to the relatively high levels of disposable income Danish household. This has prompted increase in sales of ladies shoes.

Production of Denmark footwear has decreased by 6.4% from 2005 to 2007, wheras import and export (including re-export) have increased significantly during the period.danish export of footwear by has exceeded the country’s own production and sale to the home market due to manufacturer have relocated production facilities aboard or have outsourced part of it production.

The number of footwear manufaturer’s in Denmark has declined for quite many years. In 2005 only 40 were left employing about 350 people.production volume in 2006 was 5 million pairs which generated a value of Euro 53 million. According to Eurostat, it represents 94% of the value of production, and 83% of production volume. However, recently production volume has been falling more quickly it value. Because most of their production is now outsourced to lower cost centres and their growth is driven by exports.

The increase in wages and salary in Danish footwear companies prompted them to outsource or move facilities to low cost countries such as the developing countries particularly china, Vietnam, Indonesia, India and others. The table below shows developing countries with large increase of export to Denmark since 2005.

The Danish buyer is quite brand conscious, particularly the younger population willing to pay for top for quality regardless of the price so far it comfortable and fashionable, whereby price is always an important parameter while a smaller part of the market would settle for reasonable quality at lower price.

The manufacturer’s companies in Denmark are now investing more in marketing and branding than machinery investment.

Negotiation practices

The Danish businesses are totally frank regarding what they expect from you and what they can contribute with. It is important to be very precise when negotiation terms. Exporters should not accept any terms that they are unable to fulfil. “No”, is a perfectly acceptable word in Denmark and nobody will be offended by a reasonable explanation as to why delivery according to certain specification is not possible. it is of paramount importance not to make promises that cannot be kept 100%.

TRADE PATTERN

Tariff on footwear importation

Being a member of EU, Denmark complies with the EU customs tariffs. According to the EU customs regime, a general import tariff is applied on products originating from countries outside of the EU (so called 3rd countries). However imports from many of the EU’s suppliers of manufactured products enter the community at preferential rates under the terms of bilateral agreement, the Generalised System Preference (GSP) or tariff suspension regimes.

Thus, general rate of import duty is applicable to non-preferential trade only, i.e in situation of countries or product not covered by free-trade agreement. However, type of footwear being imported the general rate of duty fluctuates between 3 and 17, with exception of few “unique” items.

The GSP is the trading arrangements through which EU extends preferential access to its markets to developing countries and economies transition which might obtain a reduction of the normal duty rate. Presently GSP cover 174 developing countries.

In April 2006 the EU imposed provisional dumping duty on leather footwear imported from Vietnam and china at 16.8% and 10.4%, respectively. The arrangement was later extended to October 2006 for two years period fixing the duty at 1o% for Vietnamese goods and 16.5% for Chinese.

Exchange rate

One of the most important findings regards the impacts of exchange rate risk on footwear transactions of Vietnam. The exchange rate risk has not only statistically significant effects on both trade volume and trade prices in footwear industry of the economy, but also the highest magnitude of the effects compared with other influencing factors. An increase in exchange rate risk puts up both export prices and import prices. These negative impacts of exchange rate risk indicate that there is an urgent need for developing a forward exchange market, with the operations involved insurance against exchange rate risk, in Vietnam.

Concerning the variability of real exchange rate, it was found that there is an indispensable contribution of fluctuations in domestic relative prices of non-traded goods to the real exchange rate variability. This implies that in the Vietnamese economy, any unexpected and risky changes in the relative prices of non-traded goods will lead to risky fluctuations in Dong currency value. In other words, the role of relative movement of non-traded goods price to traded goods price should be stressed for policy-makers when formulating the real effective exchange rate strategy to sustain the international competitiveness of Vietnamese products and to stabilize the domestic price level. Therefore, an exchange rate regime with greater flexibility appears to be more appropriate for Vietnam