Double Demand Promotes The Rapid Development Of Vietnam's Home Industry. How Can Chinese Enterprises Dig Gold?

Domestic demand: economic development, household consumption CAGR up to 9.6%

According to the data released by EVBN (EU Vietnam Business Federation), the total household spending of Vietnamese residents in 2015 was 10 billion euros, an increase of 9% or even higher than that of GDP in 2014. From 2015 to 2020, with the increase of residents' income, the acceleration of urbanization process and the massive start of new houses, the total expenditure on home consumption CAGR is expected to reach 9.6%. According to this growth rate, the total household spending of Vietnamese residents in 2018 exceeded 14 billion 400 million euros.

The household consumption of Vietnamese residents can be divided into two parts: public products and high-end products.

In the field of furniture, popular products come from carpenter shops and local small furniture factories, and high-end products usually have the ancestry of overseas enterprises or well-known domestic enterprises. Vietnam's home decoration includes handicrafts, home textiles, glassware, pottery, rattan and bamboo products. Among them, the public products come from the handicraft industry villages and towns in Vietnam, and the high-end products come from overseas and domestic well-known enterprises.

1, popular products

In Vietnam furniture, the price of popular products is low. By querying the official website of HOA PHAT and XUAN HOA, the average price of a set of tables and chairs is around 200 euros, the average price of the bed is around 250 euros, and the price of the chair is as low as 16 euros.

The furniture factories in Vietnam are mainly located in three areas: the northern Red River Delta (Hung Yen, Vinh Phuc, Bac Ninh, Hai Duong), the central coastal areas (Quang Nam, Binh Dinh), the central mountainous area, and the southern coastal areas (Hu Zhiming, Wei, and so on). A large number of small, medium and large timber processing enterprises, including foreign direct investment and joint ventures, are distributed in these areas. Foreign direct investment and joint ventures are usually located in industrial parks.

Most of the home furnishing products in Vietnam are produced by handicraft villages. Handicraft villages and towns have formed industrial clusters, each town focusing on specific products. These villages are mainly located in northern Vietnam, where Hanoi enjoys an important position and is regarded as the cradle of Vietnam's handicraft industry. 90% of home decoration output comes from the handicraft industry, and about 13 million workers nationwide are engaged in hand made home decorations. 90% of Vietnam's home decoration industry is local small and medium-sized enterprises, and foreign-funded enterprises account for a relatively low proportion, about 10%, usually from mainland China, Taiwan, Germany and Russia.

2, high-end products

Vietnam's high-end furniture prices are high, well-known brands have BoConcept, AA Corporation, Nha Xinh and so on. The average price of chairs sold by these brands is around 500 euros, and the price of a set of tables and chairs can reach as high as 4000 euros, and the average price of beds is more than 1000 euros.

Imports of home furnishings and furniture are mainly from China, Malaysia and Thailand. According to EVBN, Vietnam's home furnishings and furniture imports increased rapidly between 2014 and 2015. Home furniture imports CAGR up to 40.9%, home decoration products imports CAGR 14.4%. Home decoration imports mainly home textiles, accounting for more than 90%.

Free trade agreement is a major factor in promoting the import of furniture and home decoration in Vietnam. The Vietnamese Customs Law stipulates that unless the exporting countries reach a free trade agreement with Vietnam, they must impose a 25% tariff on imported furniture and home accessories. China and Vietnam have reached a free trade agreement, enjoying duty-free qualification when exporting home furnishings and furniture to Vietnam. The EU - Vietnam free trade agreement (EVFTA), which takes effect in 2019, will reduce the tariffs on high-end furniture and household products exported by EU member countries to 0. It is expected to further reduce product prices and make imported products more intimate.

At present, IKEA has entered Vietnam to spend more than 500 million US dollars to establish a retail network and warehouse in Hanoi.

With the development of economy and the increase of per capita disposable income, consumption has gradually escalated. Industry analysts estimate that more than 1 million 500 thousand of Vietnamese have the ability to consume high-end home furnishings and furniture products, and the overall household consumption level is also rising.

Vietnam's real estate industry is expected to reach an annual compound annual growth rate of 6% from 2015 to 2020. The acceleration of urbanization has led to the rigid demand of urban housing. Similar to the situation in China, Vietnamese consumers also believe that property is a long-term investment, tending to buy a house and rent out to young people and foreigners to get long-term returns. 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. The construction of high-end office buildings has brought a lot of demand for office furniture.

External demand: industrial transfer and Chinese enterprises' "down South Asia"

Vietnam's wooden furniture exports ranked first in Southeast Asia, ranking second in Asia and fourth in the world. In 2017, Vietnam's timber processing industry achieved a turnover of 8 billion US dollars, an increase of 10% over 2016. As of July 2018, the turnover of Vietnam's timber processing industry was 5 billion 300 million US dollars, an increase of 13.6% compared with the same period last year. The growth in the next few months is expected to remain unchanged, thereby reaching US $9 billion in exports in 2018.

This year, Vietnam's furniture export scale expanded further. According to the General Administration of customs, exports of timber and wood products reached nearly $3 billion 120 million during the period from January 2019 to April, an increase of 18.3% over the same period last year, much higher than the growth rate of around 10% in previous years. According to export volume, the ten largest export markets are the United States, Japan, China, South Korea, the United Kingdom, Germany, Canada, Australia, France and Holland. The United States is Vietnam's most important export market. In 2015 alone, the United States accounted for 38% of Vietnam's total domestic exports. The sum of Japan, China and the European Union was only 40%.

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

Vietnam has been able to become a rapidly rising star in the ranks of home exporting countries.

(1) strong attraction to foreign investment.

According to the data released by the Foreign Investment Bureau of the Ministry of investment and planning of Vietnam, in 2018, Vietnam approved foreign investment, capital raising and financing capital of 35 billion 500 million US dollars, equivalent to 99% of the same period in 2017. In 2018, foreign direct investment reached a record high of third US dollars in the past 19 billion 100 million years, an increase of nearly US $2 billion compared with 2017. Foreign investors are investing in 18 areas of Vietnam. The manufacturing industry is the largest area attracting foreign investment, with a total investment of US $16 billion 500 million, accounting for 47% of Vietnam's foreign direct investment. Followed by the real estate sector, the total amount of attracting foreign investment amounted to 6 billion 600 million US dollars; wholesale and retail trade ranked third, and the total investment amount was 3 billion 600 million US dollars.

(2) the free trade agreement has come into effect one after another.

The EU - Vietnam free trade agreement (EVFTA) and the trans Pacific Partnership comprehensive progress agreement (CPTPP), which take effect in 2019, will bring broader opportunities for Vietnam. These two agreements are expected to reduce export barriers and enhance the global competitiveness of local enterprises. After the implementation of the EU - Vietnam free trade agreement, the European Union will immediately exempt textiles and most furniture from Vietnam under the premise that exporters must be able to ensure that raw materials are derived 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 to local enterprises, but also makes Vietnam the attraction of many Chinese enterprises and American enterprises.

(3) state support for furniture and home decoration manufacturing industry.

In recent years, the Vietnamese government has introduced various policies and measures to help manufacturers promote, capture and occupy the market and promote the development of home decoration industry. The establishment of Hanoi design center and national brand Vietcraft Excellence is a good example. The Hanoi design center is the first design center in Vietnam, which is jointly established by the Vietnam handicrafts export chamber of Commerce (Vietcraft) and the Swedish Academy of industrial design of Lund University. It aims to enhance the international competitiveness of Vietnam's handicraft products through product design, merchandising and international standard knowledge training for artisans and craftsmen. The national brand Vietcraft Excellence is co founded by the Ministry of Commerce and the Vietnam handicraft Exporters Association. It can be described as "state owned enterprises in state-owned enterprises" from its official cultural significance and external publicity significance. Its brand includes many handicrafts with Vietnamese characteristics.

(4) labor is abundant and cheap.

China's labor costs are rising, and the labor force in Southeast Asia is much cheaper. Vietnam has a population of about 90000000. It also imports labour from Kampuchea, Burma and Laos. The population of these three countries is about more than 100 million, and the industrial population structure is relatively young, which is suitable for the development of manufacturing industry.

However, one obvious shortcoming is that the quality of labor in Vietnam is not high. In terms of skills, most of the workers belong to "washing their feet on the fields", and lack of vocational skills, and universities and training institutions are seriously inadequate. In terms of professionalism, workers are rather lazy and have little acceptance of overtime work. Zhao Lingmin, an analyst with overseas investment consultancy services in Southeast Asia, told the triweekly Life Weekly: "Southeast Asian workers are generally unwilling to work overtime. Overtime is two hours a day, which is the upper limit, and more money is given to them. It is unthinkable to work for 24 hours in a rush hour like China."

(5) for China's furniture manufacturing industry, the most important reason for promoting some of the players' "down South Asia" is the United States levying tariffs on Chinese furniture.

As early as the tariff rate was 10%, Chinese manufacturers and American retailers began to negotiate tariffs, both sides assume 5%, but up to 25% of tariffs have touched the bottom line of profits. According to an insider who once worked in the fourth largest furniture retailer, Williams Sonoma, who has rich experience in furniture foundry industry, "tariffs generally bear 12.5% of each side, but the net profit margin of furniture manufacturers is generally more than ten percent. Williams Sonoma in China's foundries is still relatively high profit margins, some companies even "big bully", depending on the strength of the order volume in successive years, the factory is suffering. Under such an environment, the "inferior South Ocean" has become the best solution for a factory and an American furniture retailer to win a win-win situation.

Driven by the above five factors, Vietnam's household manufacturing industry has developed rapidly.

Under the double demand, opportunities and challenges are symbiotic.

In the face of Vietnam's thriving emerging market, China has two opportunities: first, products go to sea, factories are set up in Vietnam, and products are sold to the United States; the two is that the brand goes to sea and sells products to Vietnam as a Chinese brand.

The first opportunity is mentioned above. The author thinks this is an opportunity, but it is also a part of the "helpless" choice of furniture enterprises that are mainly exporting to the United States under the pressure of tariffs.

First of all, when Chinese furniture enterprises set up factories in Vietnam, they will inevitably face the problem of low quality of Vietnamese labor. The labor force in Vietnam is indeed cheap, but if the workers' technical level and professional spirit are included in the evaluation system, we can consider the cost performance ratio and the input output ratio synthetically. Maybe those enterprises under the "Southeast Asia" will still miss the Chinese workers.

In addition, since May 2019, the US media and Vietnamese media have been reporting on the capacity of Chinese furniture enterprises to Vietnam. Once a large number of factories are set up in Vietnam, Chinese enterprises will inevitably become strong competitors of local enterprises. This is not the situation expected by the Vietnamese government.

Finally, from the aggregate perspective, although China is the world's largest furniture exporter, the value of furniture export accounts for less than 20% of the total output value. In addition, the low quality of labor force and the vigilance of the local government in the formation of competition between foreign-funded enterprises and local enterprises have led to the conclusion that "setting up factories in Vietnam for domestic enterprises" is only a partial phenomenon.

Among the second opportunities, Chinese enterprises should grasp the opportunities brought by Vietnam's upgrading of consumption and the embarrassing situation of Vietnam's local design power.

At present, the design ability of Vietnam's home enterprises is basically zero. The vast majority of the exported products are designed by the brand side, reflecting the lack of design talents in Vietnam's home enterprises. At the same time, Vietnam lacks high level art schools, and in the short run, there is no ability to train enough talents to meet the needs of the industry.

However, with the increase of residents' income, the increase of consumption power and the upgrading of consumption main force, people are more willing to pay for high quality and high added value commodities. In the past, consumers focused on the function of products, but now consumers began to expect products to be in line with their personal style and lifestyle, and at the same time, the quality was better. In addition, the younger generation of Vietnam is accelerating westernization, and is interested in western design styles and even life styles, which brings opportunities for foreign furniture enterprises to succeed in Vietnam. At present, some foreign investment brands (such as UMA, JYSK, etc.) have already entered Vietnam first. JYSK and BoConcept provide Scandinavian style furniture and home decoration, while UMA is the combination of three high quality, Nordic design and low price. IKEA from Nordic countries also has high hopes in Vietnam.

China's home industry is better than Vietnam in terms of design capability. After thirty years of development, the industry has also made certain deposits in various styles such as American, idyllic, Scandinavian, modern and so on. In addition to the familiar traditional large enterprises and listed companies, in recent years, a number of new home brands (such as creation, squeak, etc.) with higher design ability have also emerged in recent years, and a group of SPA brands with main performance to price ratio (such as famous products, noble products, etc.).