Leather industry: rake up the potential

Be it a leather-bound notebook, a wallet, a handbag, footwear, belts, or even key chains; many Pakistanis would be sporting a leather-based accessory. While the fond ones might be spending a fortune on a branded accessory imported from abroad, the accessories of many would be carrying the made-in-Pakistan label.
The penchant for leather products is truly global, with people, sometimes, paying fortunes to obtain a prized, branded item from a designer of universal renown. It, therefore, comes as a little surprise that the global leather industry is growing substantially, with its trade hovering over $80 billion worldwide.
Yet, while the global market is burgeoning, Pakistan doesn seem to be exploiting the potential that lies with the growth in global leather demand. Pakistans leather exports stood at $700 million in FY10, less than 1 percent of the global leather market.
Despite having tremendous potential for growth, the leather industry of the country hasn witnessed the stupefying growth one would expect of it. Rather, leather exports had seen a slight decline over the previous fiscal years, only to improve slightly in FY11.
But whats barring this hide and skin sector from fully exploiting the potential? The problems are many, apparently.
DOMESTIC CONCERNS
A major cause of concern identified in the leather industry is linked to an inherent problem in Pakistans livestock industry - that of smuggling of animals. Industry sources claim that as many as 5,000 cattle may be smuggled to Iran and Afghanistan daily.
In fact, even legal export of live animals is detrimental to the leather industry as the hide of the animal is also lost because of that. "It is better to export meat than to export an entire animal because raw material for the leather industry is wasted," said Chaudhry Zulfiqar, former Chairman Pakistan Leather Garments Manufacturers Association (PLGMEA).
Pakissan, a local website on agricultural research and agriculture-based activities in Pakistan, cited the Minister for Livestock and Dairy Development as saying that more than 300,000 animals have been exported to various countries under the commercial export of live animals through an open policy since May 2009.
Adding to the ado were the devastating floods of last year. Over 200,000 livestock was reported dead or missing, while the number of those affected is believed to be in the millions. Consequently, a scarcity of animals was at play in hindering growth of leather exports from Pakistan.
Export of raw and semi-processed leather poses yet another predicament, particularly wet-blue leather, which affects the finished leather exports and the value-added sector. Currently, there is a 20 percent duty on the export of raw and semi-processed leather, but some players in the industry believe this should be higher.
In fact, the problem of a lack of clarity with respect to HS-codes - a standardised international coding system for classifying traded products - has also led to the export of semi-finished leather under the header of finished goods, Zulfiqar told BR Research.
For an industry mired in a multitude of problems of its own, the fiscal issues of the country have also taken a toll. This is evident from the near zero implementation of the trade policy 2009-12. Under the policy, leather exporters were said to be provided facilities from the Export Investment Support Fund.
These facilities included expert advisory services for manufacturers and exporters, grants for establishing design studios in factories, research and development support to leather garments and leather goods exporters, grants for setting up labs and effluent treatment plants in tanneries, etc.
However, the governments fiscal woes have kept the implementation of these much-appreciated plans at bay, much to the disappointment of many leather exporters.
CREATIVITY DEFICIT In these circumstances, much depends on the exporters creativity and product differentiation, and a key for achieving that necessitates better designing and branding. Currently, the product range offered by Pakistans leather industry is limited, and is concentrated more upon jackets and gloves. A few companies have come up with new products such as leather furniture and more products in footwear, but there are only a few and the potential for growth is immense.
This calls for the need of a design studio for the leather industry, possibly in collaboration with various designing schools in the country such as the Pakistan Institute of Fashion Design and the National College of Arts.
Several producers of leather products, even in the downstream sector, are content with producing unbranded, low-priced products, and some actually manufacture their products for well-known, international brands, without any credit given to their efforts or skills, or to the country, for that matter.
"Because many producers merely replicate the designs sent by foreign companies, they are not able to benefit from premiums which the foreign companies accrue, and which come from the power of good designing and branding," said Zulfiqar.
CONCERNS FROM THE INTERNATIONAL ARENA While the domestic issues and challenges might be quite a few, the leather industry also has to prove its grit amidst competition from regional players such as China and India.
Numerous incentives given to regional competitors by their respective governments, such as duty-drawback rates, have been oft-cited by players in the industry as a source of great grievance.
Duty-drawback refers to a system whereby manufacturers of exported goods are refunded the duty paid for importing raw materials used in the manufacturing process by the government. Industry sources claim that the duty drawback rate is around 9.5 percent in India and 12 percent in China, versus just 2 percent in Pakistan.
Further, the recent increase in the export refinance rates has also rendered the leather exporters fraternity woebegone. Coupled with bank spreads, the rate sums to over 10 percent, induced primarily on grounds of reducing export subsidies under the IMF conditions.
For exporters already mired by high utility costs thanks to rising gas and electricity prices, dearer borrowing rates are just another whiplash and the resultant high costs of production weaken their competitive position in the international market considerably.
One can sympathise with exporters along these lines; but looking at the fiscal whirlwind that the country is trying to flap itself out of, incentives of these sorts seem complicated, at least in the near future.
But blaming financial constrains for under-utilised potential is a semi-cooked explanation - there are other areas where this sector can buckle up to beat competition.
Take the product portfolio of Pakistan for example; the exports are largely dominated by leather garments and tanned leather, with the former making up over 40 percent of the total leather exports.
On the other hand, India has a more diversified portfolio including a high percentage of footwear, made-ups such as wallets, saddlery, etc. besides leather garments which make up around 13 percent of Indias total exports. Such product differentiation can be constructive for establishing a reputable image of the domestic industry amongst international buyers, needless to say, will also help capture a bigger market.
Interestingly, Chinas hefty inflation levels are offering some respite to the domestic leather industry though. Fawad Ijaz Khan, Chairman PLGMEA, claims this to have helped rev up exports satisfactorily in the months gone by. In the first half of FY11, exports from this sector moved up by around 45 percent in volume terms relative to the first half of FY10.
In fact, international media has also recognised the recent Achilles heel of China, as a New York Times article quoted in the CNBC said, "Inflation is starting to slow Chinas mighty export machine...Markups of 20 to 50 percent on products like leather shoes and polo shirts have sent Western buyers scrambling for alternate suppliers."
And Pakistani exporters have cashed in on the opportunity well, as obvious from the surge in value and volume-based exports of the sector. But they continue to suffer at the environmental compliance end.
With leather tanning creating various types of waste, from pollutant water, solid waste and harmful air emissions, one can imagine how well the countrys leather industry would have fared with the WTOs stringent environmental standards. Some major export markets, such as Germany, impose restrictions on the use of certain chemicals, as well as other environmental regulations.
Besides benefiting the environment, the compliance regulations are also believed to create better working conditions for tannery workers, many of whom suffer from respiratory disorders and skin infections.
But the implementation of environmentally-compliant technologies is rather pricey for the cash-strapped sector. Not much can be expected from the government either, as the still-pending implementation of the trade policy and fiscal constraints speak for themselves.
For the leather industry, the tremendous growth potential is the key for success. Even players in the industry, including the PLGMEA Chairman, recognise that a lot more can be done. Pray, don let a sparkling opportunity fall in the face of indolent policy implementation and a lack of vision.
The writer is a Research Analyst at Business Recorder. She can be reached at [email protected]