Optimism Tinged With Concern
By Hong Van
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| Recovery: Although global prices have yet to increase, enterprises have received ample orders. |
Despite signs of recovery, the woodwork industry is still facing enormous challenges and must exert tremendous effort if it wants to achieve export turnover of some US$3 billion in 2010
While many wood processing enterprises posted lackluster performance or even had to shut down last year due to evaporating orders, virtually every factory has clinched contracts in 2010. This, in turn, attests to the recovery of the woodwork industry. However, internal problems and hurdles facing the economy at present have sparked off concerns among wood processors.
Diversification fuels recovery
The woodwork industry was in tatters in the first seven months of 2009 due to domestic and global economic shocks. After expanding by 30-40%, or even 50%, per annum for almost a decade, woodwork export plunged by 17% in January-July 2009.
Wood processing enterprises struggled to get by. Orders dried up, foreign currencies were hard to borrow, and many workers in the sector were temporarily out of a job. Fortunately, woodwork export was on the rise again in the last few months of 2009. As the growth rate in the fourth quarter was 3%, the year-on-year fall in woodwork export was restricted at 9.9%, and export turnover was US$2.55 billion (including potteries and handicrafts).
According to the Ministry of Industry and Trade, export soared by 60% year-on-year in the first two months of 2010 to reach US$617 million. If this rate continues, woodwork exporters are entirely capable of meeting the target of US$3 billion for 2010.
Nguyen Chien Thang, chairman of the HCM City Handicraft and Wood Industry Association (HAWA), whose members account for a significant share in Vietnam’s woodwork export, says that although global prices have not increased, enterprises have received ample orders. He considers this favorable trend as the reason behind surging woodwork export over the past two months.
Tran Quoc Manh, general director of Sadaco, a big wood processor in HCM City, says that it is difficult to ask for higher prices at present because, as foreign buyers explain, the economic recovery remains shaky and consumers are unlikely to spend more on interior decoration items.
Meanwhile, wood export in Thailand, Indonesia and Malaysia has not recovered as rapidly as in Vietnam. The reason, Manh says, is that Vietnamese workers are capable and timber is mostly imported in line with the orders placed. Therefore, the Vietnamese woodwork industry offers diverse products that meet consumer needs.
While Thailand enjoys an advantage in combining wood with fabric or leather, Indonesia has vast forests, and Malaysia boasts large rubber plantations, they all trail behind Vietnam in terms of product diversity.
Challenges
“Orders abound, but prices stagnate or even fall in some cases. Consequently, profits are limited, and many companies only try to break even or retain traditional customers,” says Huynh Van Hanh, director of Minh Phuong Woodwork Co. in Binh Duong Province. Hanh and his counterparts worry about rising input costs.
According to HAWA, imported pine wood, a common input in Vietnam’s woodwork industry, has become over 20% costlier over the past three to four months. Transport costs have climbed, packaging is 20-30% more expensive, wages and social insurance premiums have jumped, and environmental protection fees will be imposed soon.
The greatest concern, shared by many members of HAWA, relates to higher power prices. While not as energy-guzzling as steelmakers and cement producers, wood processors must set aside 5-6% of their production costs for power bills. The hike in power tariffs will therefore influence woodwork prices. Furthermore, complements such as packaging and paint have also seen their prices jumping. In other words, the share of electricity in the cost of woodwork production may exceed 7%. As the power price hike has taken place since early March, when the woodwork industry was at full throttle, the challenges posed are daunting.
Thang, chairman of HAWA, compares wood processing enterprises to newly recovered patients, who are not fully fit but have to do strenuous work immediately. Notably, rising domestic production costs have eroded the competitiveness of Vietnamese woodwork, in view of intense competition from its counterpart in China and other neighboring countries, where woodwork exporters are entitled to varying degrees of government support or do not have to import as many materials as those in Vietnam.
The Vietnam Wood and Forestry Product Association says that woodwork export will pick up in 2010 as demand from the U.S. and the European Union (EU) is on the rise. Many important contracts have been signed for 2010, and export earnings are forecast at US$3 billion, up 17.6% year-on-year.
Vietnam’s woodwork export in 2008 reached US$2.829 billion, which provided the basis for the Ministry of Industry and Trade to flesh out the target for 2009. However, due to the global economic turmoil, the actual figure was merely US$2.55 billion.
Paradox
While Vietnam is becoming a woodwork exporter with export revenue of about US$3 billion per annum, the domestic woodwork market is flooded with imports. This paradox is ascribable to market principles. According to Dang Quoc Hung, vice chairman of HAWA, while Chinese woodwork in Vietnam, with low-quality timber as materials, targets the low- and middle-income groups, Vietnam’s woodwork export to China caters to demand from high-income customers as it is made of high-quality timber and boasts intricate design.
Another reason is that Vietnamese woodwork producers have not paid adequate attention to the local market. Their production often hinges on foreign orders, which involve middle-end and high-end items made of good timber. Local demand, meanwhile, is often neglected.
Furthermore, mass production and cost-saving measures have enabled Chinese producers to slash the prices of their woodwork. For instance, given the same factory rental, Vietnamese workers often work for one shift and make 1,000 products, while their Chinese counterparts work for two to three shifts and make 2,000-3,000 items. Production costs will certainly be lower in the second case.