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Cablegate: Vietnam's Expanding Furniture Industry

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 03 HANOI 001708

SIPDIS

STATE FOR EAP/BCLTV
STATE ALSO PASS USTR BRYAN
USDOC 4430/MAC/ASIA/OPB/VLC/HPPHO
USDA FOR FAS

E.O. 12958: N/A
TAGS: ETRD EIND ECON VM
SUBJECT: Vietnam's Expanding Furniture Industry

1. Summary: Vietnam's furniture export industry has
expanded rapidly in recent years due in part to benefits
from lower tariffs under the U.S.-Vietnam Bilateral Trade
Agreement and the imposition of anti-dumping duties on
Chinese furniture exports. Further expansion of the
industry faces some constrains as raw materials and skilled
managers are in short supply and input costs are rising.
End Summary.

Characteristics of the Industry
-------------------------------

2. Vietnam's wood products industry has about 1,500
enterprises, of which about 450 are active in furniture
exports. There are 51 foreign invested enterprises in this
sector with a total registered capital of over USD 180
million. The remaining enterprises are primarily domestic
private companies. Foreign invested enterprises (mainly
from Asia and Europe) and private enterprises produce about
75 percent of the sector's total value and earn about 78
percent of all furniture product export revenues.

3. The furniture industry consists primarily small and
medium-sized enterprises and, historically, the sector has
been relatively labor intensive. It employs about 170,000
people, with an average wage of approximately USD 45 per
month. Recently there has been a trend toward establishing
new, larger-scale private domestic and foreign invested
enterprises. These new factories, including Khai Vi in Ho
Chi Minh City, Phu Cuong and Duyen Hai in Binh Dinh province
and Viet Giai in Dong Nai province, employ over one thousand
workers each and are equipped with more modern machinery.

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4. According to GVN official statistics, during 2001-2004,
the production capacity of the furniture industry grew by 40
percent annually. Ho Chi Minh City and the surrounding
provinces, as well as some central highland provinces like
Dac Lac and Gia Lai, have quickly become production and
export centers. Production growth in Binh Duong, a province
north of HCMC, was the industry's fastest in 2004.

Soaring Exports, Rising Investment
----------------------------------

5. Vietnam's furniture exports have increased dramatically
in recent years - growing from USD 320 million in 2000 to
USD 563 million in 2003. In 2004, furniture exports jumped
to USD 1,054 million, making the furniture industry
Vietnam's sixth largest export earner. Vietnam now exports
furniture to 120 countries, although the United States, the
EU and Japan are its primary markets. (Note: According to
GVN official statistics, these three economies represented
29.6 percent, 28.5 percent and 16.2 percent of Vietnam's
total furniture exports in 2004. End Note.) Nevertheless,
Vietnam's market share remains small: 0.86 percent in the
United States, 0.2 percent in the EU and 7.3 percent in
Japan.

6. Vietnamese furniture exports to the United States have
grown significantly in the last few years, due in large part
to the impact of the U.S. - Vietnam Bilateral Trade
Agreement and anti-dumping duties levied against Chinese
furniture exports to the United States. With the entry-into-
force of the BTA in December 2001, Vietnam began benefiting
from Normal Trade Relations (Most Favored Nation (MFN))
Status. As a result, tariffs on Vietnamese furniture
exports were reduced from 40-45 percent to zero percent.
Since 2001, Vietnamese furniture exports to the United
States have increased from USD 10.6 million to USD 311.9
million in 2004. Vietnam now ranks as one of the ten
largest furniture exporters to the United States. In
addition, anti-dumping duties imposed on Chinese furniture
exports in 2004 by the United States have enhanced
opportunities for Vietnamese furniture makers to get a
foothold in the U.S. market.

7. Opportunities in the furniture sector are starting to
attract foreign investment. Although recent GVN investment
statistics for this sector are not yet available, anecdotal
evidence suggests Chinese and Taiwanese investment in the
furniture sector is growing. For example, Taiwan Kaiser
relocated to Vietnam in 2004 with a formidable USD 40
million in capital. According to press reports, Kaiser's
wood processing plant is expected to generate around 4,000
new jobs.

Scarce Materials and Rising Import Costs
----------------------------------------

8. Vietnam has the capacity to process approximately two
million cubic meters of logwood each year. However, since
2001, the GVN has allowed for the annual exploitation of
only 300,000 cubic meters of natural timber annually. As a
result, the industry imports up to eighty percent of the
materials used in to produce wooden furniture. During 2002-
2003, the costs of imported materials represented 40 percent
of the production costs for furniture. Rapid export growth
and the steady increase in the global price for timber
(about 10-30 percent higher in recent years) are driving
production costs up. Vietnamese producers estimate that
imported raw materials will constitute sixty percent of
production costs this year.

9. A number of neighboring countries have banned timber and
log exports, leaving Russia, the United States and Africa as
the most stable and cheap sources of raw materials for
Vietnam's burgeoning furniture industry. Tran Quoc Manh,
Vice-Chairman of the Handicraft and Wood Industry
Association (HAWA) of HCMC and Director of the furniture
enterprise, Saigon-DakLak Company, anticipates that finding
continuous, reliable sources of wood will be a challenge for
the next ten to twenty years. Manh noted that many
producers are increasingly turning to U.S. wood, which he
said is cheaper and of better quality than wood from Europe.
Vietnam's import of wood from the United States has
increased steadily, growing from USD 0.9 million in 2000 to
USD 39 million in 2004 (representing about 7.2 percent).
HAWA is hoping to address the price issue of raw material
imports by purchasing wood for its members directly from
suppliers. Manh estimated that seventy to eighty percent of
the wood imported into Vietnam for the furniture industry is
purchased through wood trading companies rather than from
the wood suppliers directly.

Furniture Production Booming in the South
------------------------------------------

10. In the south, the furniture industry is booming. As
with the textile industry, foreign investors and buyers in
the wood-processing sector have realized what advantages
Vietnam provides - low cost, highly skilled labor and
consistent, top quality production. Local producers in the
HCMC area and the Central Highlands are taking expertise
gained from exploiting Vietnam's forests and applying it to
furniture manufacturing and export.

11. Having focused on the Japanese and European markets in
the past, furniture makers are now looking to boost their
sales in the United States, especially to mid- and high-end
retailers. American furniture manufacturer Stickley opened
a factory in Binh Duong province in March. Taiwanese,
Malaysian and local Vietnamese producers are selling to the
likes of Bombay Furniture, Pottery Barn, Crate & Barrel and
Martha Stewart.

12. ConGen HCMC contacts list their two main challenges as
finding qualified managers and the limited supply of raw
materials. As in other sectors, furniture makers lament the
shortage of Vietnamese adequately trained to manage people
and production lines. As one foreign investor characterized
it, Vietnamese universities spend too much time on ideology
and not enough time on practical management skills.

Solutions For Sustainable Development
-------------------------------------

13. In an interview with the Vietnam Economic Times early
this year, the secretary of the Vietnam Timber and Forestry
Product Association identified the following four points as
priorities for the long-term development of Vietnam's wood
products industry:

- The establishment of new furniture factories should be
geographically linked to raw material sources, such as
forests and seaports.

- The current National Forestation Plan, which focuses on
short-term production capabilities for the paper industry
should be amended to include wood processing.

- The furniture industry needs to pay greater attention to
developing Vietnamese trademarks.

- The furniture industry needs to add about 100 thousand
additional workers each year in order to maintain its
development pace. The GVN should assist enterprises in
training workers and purchasing modern equipment.

14. The Association advised individual wood processing firms
to cooperate with foreign importers in order to ameliorate
their lack of modern equipment, expertise and market
information. HAWA is planning to build a wood-processing
center (this is a 250-hectare complex of wood processing
factories, handicraft villages and residences in HCMC's Binh
Chanh district set to be completed by the end of this year)
and establish a cooperative of material importers in order
to reduce the use of middlemen suppliers. The Prime Minister
issued a directive in June 2004 assigning various agencies
to draft policies for developing the wood products industry.

15. Comment: Furniture is clearly another sector in which
Vietnam could become one of the world's major exporters,
similar to its success in coffee, pepper and seafood. The
industry should be wary, however, of becoming a victim of
its own success as happened with catfish and shrimp (anti-
dumping cases) and coffee (plunging world prices). Though
Vietnam currently accounts for less than one percent of the
U.S. market, it could soon exceed the two percent level at
which anti-dumping cases may be filed. End Comment.

16. This cable was drafted jointly with Consulate General Ho
Chi Minh City.

BOARDMAN

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