Furniture Industry in Vietnam

Industry Overview The furniture industry of Vietnam has a long history and glorious tradition renowned for its diversity and highly-skilled craftsmanship. Vietnam furniture has gained significant grounds not only in the Asian market but has grown beyond the region quickly. The past ten years have witnessed wooden products becoming one of five key export products of Vietnam. The domestic and export consumption of furniture and wooden products would be roughly 7 billion dollars in 2012. Exports have been the major driver of the country furniture industry accounting for more than 80% of the total output. As per CSIL - an Italian industry research center, revenue in recent years has shown remarkable development and the country has become the largest furniture producer in Southeast Asia and one of the five biggest worldwide. Vietnamese wooden products have been exported to 120 countries and territories. The competitive ability for wood products has improved to a high degree in recent years, competitive to regions such as Thailand, Indonesia, Malaysia and the Philippines. The furniture can now compete with products made in China, which is the top furniture exporter in the world. The availability of skilled workers and relatively low production costs along with government incentives to attract foreign direct investment (FDI) made Vietnam an attractive furniture manufacturing centre. The Vietnam furniture industry is also characterized by an accelerated influx of foreign investment and the rapid expansion of existing companies. Industry Structure Vietnam has wood reserves of 600 million cubic meters, but it can harvest only three million cubic meters of wood every year. Vietnam has nearly 6,500 timber and forestry processing businesses with a total of more than 400,000 employees. These firms are located mainly in Ho Chi Minh City and Binh Duong, Dong Nai, and Binh Dinh Provinces. Wooden furniture occupies the major part of furniture products, followed by metal furniture, while rattan furniture and plastic furniture takes up only a few. Wood furniture production in Vietnam is carried out in both craft villages and by industrial processing (factory-based). There are 4 main centers for wood furniture production: In the Red Delta river, in Binh Dinh province, the Central Highlands (Gia Lai and Dak Lak) and southern Vietnam (Binh Duong, Hochiminh City, Dong Nai and Long An). The industry has a number of competitive advantages, chief of which is robust Original equipment Manufacturer capability. This is demonstrated by Global Sources findings that 90 percent of turnout is produced according to customers specifications.

Wood processing Industry The domestic furniture sector is highly fragmented. Furniture manufacturers in Vietnam can be ranked into three categories: Small scale plants established and operating by private families, medium scale companies-local owned and large manufacturing companies, joint venture and foreign owned. Structure of Furniture industry Based on Ownership Non State Owned Enterprises 33.7% Foreign invested Enterprises 62% Based on Investment (Capital) Micro & Small 93% Medium 5.5% Based on Labour Micro ( 0 9 Small ( 10 50 workers) Workers) 46% 49% 4.2% Medium & large (>50 - 200) Large 1.2% State Owned Enterprises 4.3%

Source: Ministry of Agriculture and Rural Development, UNIDO Viet Nam Industrial Investment report 2011 Vietnam is a popular manufacturing location for Taiwanese, Malaysian, Indonesian and Chinese companies. There are also big Scandinavian and US companies active on the Vietnamese market. Among these are Scancom, IKEA, and Scanasia. The Medium and large plant enterprises have invested in improved technology equipments in line with developed countries such as Japan, Germany, Italy and the US. They have not reached advanced level as yet but have high degree of mechanization and the products meet the international standards of quality. However, Employees of most processing facilities are from micro firms, usually from tiny and small villages. These employees have virtually no basic training, low quality equipments which leads to low productivity. The industry produces four main types of products. i.e. Exterior furniture, interior furniture, fine arts products made from natural wood and rattan and bamboo products Wood and Wooden products export structure in 2012

Source: VIFA fair, http://www.vifafair.com/site/vifa-information/welcome-to-vifa-2013 Furniture and wood products Exports According to the General Statistics Office of Vietnam (GSO), wood and timber products exports reached US$3.4 billion in the first 9 months of 2012. The average monthly export value was US$377 million, even up to US$400 million in latter two months of 2012. The total export volume for 2012 reached US$4.6 billion. Export revenue and YoY growth rate for 2005-2012

Source: General Department of Vietnam Customs Export volume of furniture industry has been increasing since 2000 with an exception in the year 2009 due to global economic recession. Vietnams furniture exports have surged from US$ 1.6 Billion in 2005 to US$ 4.6 billion in 2012. As per HAWA (Handicraft & Wood Industry Association), the average annual growth rate of wood exports has reached 16.5%. The Vietnam wood export has about 2% share of worlds wood exports. Wooden products export structure by market in first 9 months of 2012

Source: General Department of Vietnam Customs Furniture products from Vietnam are exported to over 120 countries. In the first nine months of 2012, the US topped the export figure of volume of wood and timber products worth US$1.3 billion, followed by China (US$547 million), Japan (US$498 million), South Korea (US$159 million) and the UK (US$135 million). Vietnamese furniture market has penetrated the South Korean market and the export to Korea has been increasing over the years. Many Korean consumers have chosen made-in-Vietnam furniture and home utensils as Vietnam and the Korea share similarities in culture and consumer taste. Raw material Imports Along with the increase in export of furniture, the import demand for wood raw materials too has increased. The average growth rate of imports for wood raw materials over 2007-2012 has been 12.1%. Wood imports from 2006 2012 and YoY growth rate

Source: General Department of Vietnam Customs Wood import market of Vietnam in 2012

Source: MOIT Analysis by HAWA Vietnam also imports wood from Africa, particularly from South Africa. However, imports decreased sharply till 2010 & 2011, but again increased sharply in 2012. Also orange wood is imported from Cambodia. Domestic Market Only 20% of total income for manufacturers comes from the domestic market. Vietnamese wooden furniture exporters have committed that they still have not found the way to conquer the home market, because they do not understand the Vietnamese taste well. Analysts have commented that Vietnamese wooden furniture manufacturers have regrettably missed the home market which has a high demand, diversified taste (both low cost Chinese to high quality Italian products are available) and the peoples readiness to pay for furniture products. This coul d be due to the lack of cooperation between manufacturers and designers. As a result, Vietnam has to import 2.4 billion dollars worth of wooden products every year. The domestic market has been flooded with Chinese, Malaysian and Taiwanese products. The housing development holds up to 90 percent of the total demand of the total wooden furniture market. In order to penetrate the domestic market, enterprises would have to spend money and time on the market surveys, designing and distribution. Vietnamese manufacturers would also have to manage both the production and distribution works, while they still do not have well developed wholesale and retail networks yet, to conquer the domestic market. Vietnamese furniture enterprises prefer making products for export, because they can arrange production in a large scale and fulfill big orders. Meanwhile, if targeting the domestic market, they would have to diversify the designs continually to satisfy small orders. Regulations The players in the furniture sector have to meet the requirements of Wood certified legal origin FSC Certified Wood Full documentation, lawful traceability

Circular No 1 of the Ministry of Agriculture and Rural development stipulates that wooden products must be approved by local park rangers prior to their shipment. This new requirement was issued and took effect in July 2012. Below are the laws and regulations that are currently being imposed on the timber and furniture industry to prevent the use of illegal timber in furniture products. Law of Forest protection and development Circular no. 01/2012/TT-BNNPTNT - Regulation of documentation concerns the legality and the inspection of the source of forest products" Ministry of Agriculture and Rural Development is reviewing the legal system management, have defined legal timber. The timber legality definition and TLAS (Timber Legality Assurance System) which will be pending after VPA is agreed expectedly in January 2013. TLAS is an effective system for ensuring legality includes checks of forest operations as well as controlling the transport and processing of timber through different owners, from harvesting to point of export. Vietnam is the process of negotiating a VPA with EU.

FLEGT The negotiations were expected to be concluded by mid-2012 and official enforcement of the agreements will begin in 2013 when FLEGT comes into force throughout the EU.

HAWA (Handicraft & Wood Industry Association) Established in 1990, HAWA (Handicraft & Wood Industry Association of Ho Chi Minh City) is regarded as a support organization to Vietnam Furniture Industry. In June 2007 HAWA was established as a Jointstock company. HAWA has around 314 members, which mainly present enterprises operating in the field of handicrafts and wood industry. HAWAs activities range from promoting wood processing to furniture and interior design. Activities of HAWA

Source: HAWA (Handicraft & Wood Industry Association)

The geographical distribution of HAWA: 1. Ho Chi Minh City and adjoining provinces (such as Binh Duong, Dong Nai) 51% 2. Other provinces 49% The main objective of HAWA is to protect the interests of its members, organize fairs, training, conference and seminars. It also provides members useful information on about the source of wood, market, technologies and business opportunities. Binh Duong Furniture Association (BIFA) Binh Duong Furniture Association (BIFA) was established in March 2009, as a voluntary organization of Binh Duong's enterprises. The Association includes the following business such as Interior and Exterior Furniture Production, Consulting, Design and Decoration, Wood Handicraft, Equipment, Machinery and Accessories for wood industry. The main purpose of the association is to represent and protecting the legitimate interests of members, share experience of production management, business and labor, facilitate joint training of human resources in various forms for the wood processing industry in Binh Duong province, promoting intraregional trade and provide information on legal, market, customers, technology, suppliers etc to support the members in the business planning issues. Binh Duong Furniture Association has the advantage of a provincial association of timber and leads the country to in export furniture sales which accounts for 50% of the country's furniture exports. Foreign Investment Presently, Vietnam is both a significant exporter of furniture and is also hosting several foreign production facilities. Among the investments made in furniture sector, 16% is coming from FDI. Around 50% of export turnover is made FDI invested units. Investments have come in from 26 countries and territories of which major part is by Taiwan with 43 5% followed by Korean, UK, Japan and China. Industry Strengths Vietnam has one of the lowest industrial wage structures in the world. The cheap and abundant labor force is a clear strength for the wood processing industry Vietnams stable political system and macro-economic stability, relatively relaxed trading laws and added government incentives have served to bring many foreign investors to the country. Vietnam also has a developing infrastructure system and easy access to global shipping that allows smooth flow of exports Vietnam is rich in culture. This is translated into the furniture design and can be seen in the exquisite showmanship of furniture products.

The increasing global demand for lower cost furniture and the global sourcing policy of retailers operating in this market segment (e.g. IKEA). WTO membership - Vietnam joining the WTO provided opportunity to develop and access the world market. Its trade relationship with US and Europe has assisted to a large extent to the industry growth.

Opportunities and Trends Vietnamese manufacturers are progressing quickly from mass production to catering to middle and highend markets. They are better aware of the need to understand consumer tastes in different markets, and have developed their marketing and promotion capabilities to expand their reach to them. If negotiations on the Trans-Pacific Partnership (TPP) agreement succeed, more Latin American countries such as Chile and Peru will come to Vietnam to inspect the local wood processing industry. Trends in the timber export industry are moving from outdoor furniture to indoor furniture. Expansion into new markets such as the Middle East, Russia, and Eastern Europe is expected. Domestic market Consumption capacity of the domestic market is as large as that of the export market; wood processing businesses have neglected the domestic market. The demand for luxury wooden furniture, especially for use in restaurants, hotels, resorts, apartments and offices, has been rising due to increased foreign investment. In addition, the domestic real estate market's recovery and improved living standards have also boosted furniture demand. Furniture companies are expanding their chains by opening new stores in the country, even though the domestic furniture market's sales growth is expected to fall. Although companies might face losses in the beginning, the trend of opening big stores will continue as most of the companies plan to tap the domestic market. New pact with EU Vietnamese and European officials are in for the first round of talks on voluntary partnership agreements that focus on production and trade of processed wood products. The agreements are the means of putting the EU Forest Law Enforcement, Governance and Trade (FLEGT) licensing scheme into effect. The pact would open the door wider for timber products from Vietnam into the EU market. The goal is to assure legality for timber products and compliance with the FLEGT agreement. Support from Italy The Italian government is supporting a three-year scheme to help improve the capacity and competitiveness of Vietnamese small- and medium-sized enterprises (SMEs) in the wood processing industry.

Key Players

Company name Dai Chau JS Corp Duc Thanh Wood processing Co Thuan An Wood Processing JSC Truong Thanh Furniture Corporation Duc Long Gia Lai Group Savimex Corporation Vinafor Saigon JCO Sang Shun Enterprise Company Dai Thanh Furniture JSC Latitude Tree International Limited Prosper Joint Stock Company Minh Huu Lien JSC Source: Onesource, Hoovers

Location Hanoi Ho Chi Minh City Binh Duong Binh Duong Pleiku

Status Listed Listed Listed Listed Listed

Annual Revenue $ 20.6 M $ 10.6 M $ 21.9 M $145.2 M $ 45.6 M

Ho Chi Minh City Ho Chi Minh City Binh Duong Binh Dinh Binh Duong Binh Duong Ho Chi Minh City

Listed Private Private Private MNC Private Listed

$ 22.4 M $ 8.59 M $ 20.1 M $ 22 M $121.1 M $ 20.9 M $ 13.5 M

Industry Outlook Nearly two-thirds of Vietnams exports to the U.S. in 2011 were consumer products such as apparel, footwear, furniture. Coordination among sectors and industrial groups is a key measure to help garment, footwear and wood furniture businesses improve their chain value and competitiveness in both domestic and foreign markets. Furniture sector along with apparel, footwear and other low value-added manufacturing are no longer as attractive for new FDI as in the past. Hence, the State is encouraging to create favorable conditions for business and organizations to enter the wood materials business and serve domestic production. Companies in wood business must have a strategy to promote and distribute products in domestic market, to avoid dependence on a few markets to limit the risks. Revitalized demand from traditional markets and growing popularity in new overseas destinations are pushing the wooden and wicker furniture industry to become one of Vietnam's most important export sectors.

The government's aim is to shift from commodity type products towards the manufacture of high added value products. From the traditional operations as Original Equipment Manufacturer (OEM) and mass-level production, many local and foreign companies are working their way up in the furniture industry and moving to become Original Design Manufacturer (ODM) and developing their design capabilities and enhancing long-term competitiveness further. In order to improve product quality and enhance value add to their products, wood processors and exporters would have to focus on human resource development, management and equipment investment to turn out higher-quality products, instead of quantitative development as seen in the past. Hawas member companies have suggested opening a company specializing in doing marketing, distributing and building up distribution networks to improve the sales in domestic market. In 2007, the government approved a new plan, the Vietnam forestry Development Strategy 2006-2020, in which the need for importing raw materials will fall drastically. Sector Events Vietnam International Furniture and Home Accessories Fair VIFA is being held every annually at the Saigon Exhibition and Convention Center. It is one of the most well-known export furniture fairs in Vietnam and the South East Asia. The first fair was started in 2008. The event showcases a wide selection of indoor and outdoor furniture as well as a vast range of home accessories. This event is organized by HAWA (Handicraft & Wood Industry Association of Ho Chi Minh City). Ho Chi Minh City International Furniture and Handicrafts Fair is the biggest international specialized trade fair, focusing on the high growth rates and export industry. The Fair also takes the images of furniture and handicrafts of Vietnam to exhibitors through the latest and unique models, with diversified and skillful design from many famous domestic manufacturers. Besides that, all kinds of modern machinery equipment and materials for the wood processing will be exhibited at this fair. It is the largest international furniture and handicrafts trade exhibition in Vietnam. The Fair acts a one-stop Sourcing and business matching service center for international furniture importers sourcing potential partners. It was held in Oct 2012 at Tan Binh Exhibition & Convention Center (TBECC). References Factiva Ministry of Industry and Trade - Vietnam http://www.hawa.com.vn http://www.vietnamwoodexpo.com/ http://vccinews.com/ http://www.vifafair.com http://www.trade.hochiminhcity.gov.vn

http://www.furniture-vietnam.com http://www.vietrade.gov.vn/ Analyst report Mekong Securities 7th FLEGT annual coordination meeting - Presentation