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Strategies and Road Map Development – A Report for NMCC August 2009
Foreword Background Objective and approach Setting the Context : Overview of global and Indian leather industry India’s share of global leather exports Market composition Segment composition Sub-segment composition Key conclusions for Indian leather and footwear sector Tracing the evolution of leather industry in India and China Analysis of the Indian Leather Industry and key conclusions Factor Conditions Demand Conditions Firms Structure and Rivalry Supporting Industries Government Support Scenario Analysis Key Conclusions and Recommendations Annexure: Results of the Primary Survey List of Abbreviations Contacts
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NMCC have undertaken a number of studies towards enhancing the competitiveness of manufacturing sector and identify the current strengths and constraints of keysectors, and recommend national level industry/ sector specific policy initiatives
This document is the subsequent sections details the Deloitte report on “Firm Level Competitiveness (Strategies and Road Map Development)” for the “Leather and Footwear” sector in India. Deloitte Touche Tohmatsu India Pvt. In this context. current strengths and constraints of identified sectors. the NMCC have undertaken a number of studies towards enhancing the competitiveness of manufacturing sector including identification of manufacturing sectors which have potential for global competitiveness.Background The National Manufacturing Competitiveness Council (NMCC) has been set up by the Government to provide a continuing forum for policy dialogue to energize and sustain the growth of manufacturing industries in India. Ltd. (Deloitte) have been engaged by NMCC to study and submit a report for enhancing the “Firm Level Competitiveness (Strategies and Road Map Development)” for the Indian “Leather and Footwear” sector. August 2009 5 . and recommend National level industry/sector specific policy initiatives as may be required for augmenting the growth of manufacturing sector.
provide the contours for strategic initiatives and detail a roadmap for implementation. • Recommendations based on the “Gaps” identified focusing on the key areas for consideration in each sector and a road map to achieve the sectoral objectives. • The results from the above were then be aggregated and analyzed to understand the “Gaps” in their performance with reference to the sector objectives defined by NMCC. • In addition to the primary/secondary research of organizations. The objective was be to validate the inputs from secondary research and obtain a perspective on the critical success factors and drivers for competitiveness of the sector. The results from the above were then be aggregated and analyzed to understand the “Gaps” in their performance with reference to the sector objectives defined by NMCC. Approach • Analyze the performance of organizations based on data obtained through primary and secondary research.Objectives and approach The objectives of the Deloitte engagement were • Understand the competitiveness of firms across their supply chain • From the results for organizations in each sector. identify the key areas for focus for the organizations based on the critical trends and factors driving success • From the above. Deloitte conducted primary research with key stakeholders and experts. 6 .
Global The global leather trade was valued at around US$100 bn in 2005. Gucci. Nike.Setting the context: Overview of global and Indian leather industry Leather Sector . marketing & production of premium shoes • Export widely to the world market 5 Portugal • Production • Focus on short-production runs in the medium price range 6 • • • United States Design and marketing Focus on specific market segments like sports and recreational shoe and boots Manufacturing only in selected lines such as handsewn casuals shoes and boots Source: ITC Leather Statistics. Western Europe Leading Footwear Clusters in addition to India China. Leather Companies Companies in fashion and accessories segment Suppliers to Brand Owners LVMH. Adidas etc Kasen Holdings. Yueyuen and numerous SMEs USA. 2005 August 2009 7 . Organizations in the developed economies source leather products from developing economies directly or through intermediaries while focusing on building brands. India and other developing countries 6 5 4 3 2 1 1 Vietnam / Indonesia • OEM production • Focus on low costs segments mainly for the European market 2 China • OEM production • Focus on low costs segments mainly for the US market 3 Romania • Production subsidiaries of Italian companies • Focus on lower to medium price range 4 Italy • Design.
gloves. The raw hides and skins are converted into finished leather in a tannery.Leather Sector – Global : Weaknesses and Threats for Leading Clusters Country Portugal Romania Italy China Vietnam Indonesia United States Weakness Predominantly catering to European markets Threat Competition from Chinese and other low cost countries High cost of labor Low value. goats. currency depreciation forcing out companies from Indonesia High cost of labor Rising exports from the low cost countries Tariff barriers on Chinese exports by the European Union Tariff barriers on Vietnamese exports by the European Union Rising costs due to raw material imports. http://www. which have an influence in the performance of the leather and footwear segment. flooding of the domestic market by Chinese manufacturers Virtually no manufacturing of shoes except for defence units. 8 .Geneva • Leather from bovine animals are called hides and leather from sheep. garments etc. Sports shoes) Unstable political system . high volume products Predominantly a footwear manufacturer (esp. lambs and kids are called skins • The raw material for the leather industry are hides and skins which originate from livestock. product machinery etc.aspx?news_id=64666 Classification of Leather & Footwear Industry Leather and Footwear Industry Finished Leather Leather Footwear Leather Garments / Apparel Leather Goods Source: Classification based on International Trade Center. bags. Source: The Global Footwear Industry .fibre2fashion. • Finished leather is the input material for leather products like footwear.com/news/general-textile-industry-news/vietnam/newsdetails. there are allied industries like footwear components. • In addition to the core value chain.
7% 1.2% occupying the 9th position.82 266.2% 2.6% 2.India’s Share of Global Leather Exports India’s share in the global exports is 2.8% 1.8% 3.4% 4% India Korea Thailand Portugal Indonesia Netherlands Romania UK Viet Nam Malaysia Austria Argentina Pakistan Others Composition of World Exports Average: 2001 .2% 15.4% 1.11 Finished leather Leather footwear Footwear components Leather garments Leather goods Saddlery and harness Non-leather footwear China Italy Germany Brazil Spain Belgium United States of America France The composition of world exports is a five year average (2001 to 2005). Macau and Taiwan have been taken into account while arriving at the market share.4% 1. Hong Kong.2005 12.7% 3. China is the largest exporter of leather with a share of over 31% of world’s exports India’s composition of exports in Leather and Footwear (mn USD) – 2007-08 105.4% 1. Source: CLE.9 1% 1% 1.9% 343.93 31.8% 1.99 2% 2.4% 766.9% 784.2% 2.7% 2.6% 1. Intra-country trade between China.81 45. Share of India and China are calculated on the basis of the average value of exports during the period 2001 to 2005.95 1163. ITC August 2009 9 .
Srinivasan – 2004 Data from 2005-2006 is collected from ITC.6% in 2006. Competition and Cooperation - An Update - T. • During this period production rose in developing countries by 160% and their share of global output grew from 35 to71% China India comparison . whereas China has increased its share from 0.41% in 1981 to around 31% in 2006 • World’s production of shoes with leather uppers grew by 30% between 1979 and 1996.World leather trade 10 31% 8 6 % of world trade 4 2 0 1978-81 China India Source: China and India: Economic Performance. N.India’s share in world leather trade had been in the declining trend from 8. Comtrade websites 1982-84 1985-87 1988-91 1992-94 1995-97 1998-00 2000-06 10 .8% in 1981 to 2.
6% 2% 2.2% 13.3% 1.1% 1. However.2% 1.2% 1.2005 14. China and the UK.9% 12% 51% of Indian exports are to Italy.2005 15. Composition of World Imports Average : 2001 .6% 3% 3.7% 0.1% 2. USA is the single largest importer consuming nearly 27% of total world imports.4% Canada Viet Nam Malaysia South Africa Others USA Japan Russian Federation Germany UK Canada 8% 9.3% 2.5% Italy Korea Netherlands France Australia Spain Viet Nam Kazakhstan Belgium Panama United Arab Emirates Others Composition of China exports Average : 2001 .7% 5.9% USA Italy Germany France China UK Japan Spain Belgium Netherlands Canada Mexico Austria Korea Romania Switzerland Australia Poland Denmark Portugal Others August 2009 11 .7% 42.9% 7.9% 1.9% 5.4% 2.2% 1. India’s exports to USA forms just 11% of its overall export value.2% 2.4% 5.7% 6. Even within India’s top export destinations.5% 1.1% 11% Italy Germany China UK USA Spain France Source : ITC Netherlands Portugal United Arab Emirates Korea Belgium Denmark Australia 11.5% 5.9% 7. India’s share in their import portfolio is around 4%.2% 1.5% 1.2% 1.8% 1% 1% 1.2% 2.2005 11.1% 1.4% 26.0% 0.9% 1.5% 1.0% 1.Market Composition Composition of India exports Average : 2001 . while China’s share is around 9% .2% 5.5% 1.4% 1% 0.7% 13.0% 1.2% 1.7% 2.9% 2.3% 1.15% in these regions. these countries account for only 27% of world imports of leather.4% 1. Germany.2% 1.
4% 8.Market Composition:To top export destinations.4% 4.3% 14.9% 13. 2.9% 30% 28.5% 15.4% 50.3% 4.6% 9.6% 20% 12.8% 15% 20.4% 4. India’s share in their import portfolio is around 4% India Share of Top Importing Countries Average: 2001 – 2005 India’s share of Country’s Imports 60% 56.7% 10% 9.6% 44.9% Share of World Exports India.2% 40% 20% 51.7% 17.8% 36.2% 10% 5% 0% USA Italy China. 30.9% 11.2% Source : ITC Germany France China Uk Japan Spain Belgium Canada Mexico Austria Korea Romania Australia Denmark Others 0% Netherlands Seitzerland Poland Portugal China’s share of the country’s Imports India’s share of the country’s Imports Country’s share of Total World Imports 12 .2% 25% Country’s Share of Total World Imports 30% 50% 48.
Market Composition – Exports from key countries segment-wise (excluding India and China) • The export value of the top 10 countries other than India and China in the leather and footwear categories Apparel Italy Malaysia Germany Pakistan Thailand USA France Turkey Belgium UK and Northern Ireland USD (‘000) 1353586 1255069 669130 618830 597758 595171 529953 380378 363580 341880 Leather Goods France USA Germany Italy Poland Mexico Brazil Austria Hungary Slovenia USD (‘000) 308419 303204 127378 120362 117047 115146 109678 104551 91010 78860 Footwear Italy Belgium Germany Spain Brazil Romania Netherlands France Portugal Indonesia Source: ITC. 2005 USD (‘000) 8859980 2522321 2421873 2189177 1979367 1589037 1525036 1517768 1486971 1428518 Finished Leather Italy Brazil USA South Korea Argentina Germany Spain Thailand Pakistan France USD (‘000) 3913849 1394313 1082539 855721 810372 665486 378690 335592 306662 298641 August 2009 13 .
8% 2.3% Composition of China Exports Average : 2001 .5% 28% 69.9% 23% 26. Comtrade Leather Apparel Leather Goods Footwear Leather Apparel Leather Leather Goods Footwear constitutes 62% of world imports.2006 6. finished leather which has significantly lower value addition compared to footwear constitutes 29% of India’s exports.8% Leather Leather Goods Leather Apparel Footwear 14 .1% 42. Also.9% 17.8% in the form of Finished Leather and over 68% as footwear Composition of World Imports Average : 2001 .4% 62.Segment Composition Composition of India Exports Average : 2001 .6% 1. China exports just 2. However.2% Footwear Leather Source : ITC .2006 16. India’s footwear exports form less than half (41%) of its total exports.2006 2.
5% 0.9% of India’s portfolio.611 India exports nearly 40% of its finished leather to China.4% 2.4% of global imports of finished leather but only 1. Finished Leather Average % of India’s Exports : 2001 .2005 1% 0.1% 1.Sub-Segment Composition Finished Leather – SITC Code .4% 13.3% 1.1% China Italy Germany Korea Viet Nam Spain Malaysia France USA Portugal South Africa Indonesia Thailand Russian Federation Netherlands Others China Italy USA Mexico Romania Germany Spain Poland 2.8% 1.8% 1.8% 4.1% 2.9% 5.6% Hungary Japan Turkey Canada Others 5.2% Source : ITC August 2009 15 .1% 2.1% 5.9% 1.9% 2.7% 1.2% 1.3% 6% 2.6% 3.2005 14.3% 2.5% 9.7% 2.1% 1. Italy and Spain are the other key destinations. USA forms 5.0% 4.4% 1.8% 26.8% 39.7% 3.1% Portugal Thailand India Slovenia UK Vietnam Korea France 4.2% 15.9% 1.9% 1.8% Finished Leather Average % of World Imports : 2001 .
5% 7.7% 12.2005 10.1% Leather Footwear Average % of World Imports : 2001 .7% 1.3% 1.3% 1.0% 1. However.5% 17. Germany and Italy are the major export markets for Indian footwear.1% 2.4% 2.1% 24.0% 1.3% 2.851 UK.5% 1.1% 6.1% 2.2% 1. one of the largest markets USA (which accounts for 28.7% 6.8% 21.1% of global imports of footwear) is not among the top three destinations for Indian footwear exports.0% Portugal Belgium Denmark Austria Canada Australia Others USA China Germany UK France Italy Japan Belgium Source : ITC 6. Leather Footwear Average % of India’s Exports : 2001 .4% 1.3% 1.9% 1.3% 6.8% 5.6% 1.6% 2.2005 28.5% Spain Netherlands Canada Austria Switzerland Australia Denmark Others UK Germany taly United States of America France Spain Netherlands United Arab Emirates Source : ITC 16 .9% 2.Footwear – SITC Code .4% 4.3% 13.
1% 4.7% 6.2% 18.2005 10.6% 1.612 USA.2% 1.9% 2.0% Poland Italy Singapore United Arab Emirates Netherlands Australia Sweden Switzerland Romania Russian Federation Austria Others August 2009 17 .3% 15.3% 1.3% 1.6% 2.3% 6.7% 7. Mexico.2005 11.2% 0.6% 3.6% 12.2% 4.7% 4.4% 11. the second largest importer of leather goods is not a key destination for India’s leather goods Leather Goods Average % of India’s Exports : 2001 .9% 1.5% 5.8% 3.4% 1.6% 1.8% 18.4% 3.6% 1.5% 0. Germany and the UK are the major export markets for India’s leather goods and are also leading importers of leather goods in the world.8% 2.0% 1.0% 2.9% 2.5% 1.5% 4.1% 3.4% 2.6% 9.3% Leather Goods Avg % of World Imports 2001 .6% 0.Leather Goods – SITC Code .0% 1.2% USA UK Germany France Italy Spain Netherlands China Source : ITC Sweden Australia Belgium Canada Denmark Malaysia United Arab Emirates Others USA Mexico UK Germany Canada France Czech Republic Japan Slovenia China Hungary Spain Belgium Source : ITC 3.
Leather Apparel Average % of India’s Exports : 2001 .8% 2.848 Germany.0% 1. Spain and Italy are the major destinations for India’s leather apparel.0% 15.8% 1.9% of global imports of leather apparel but only 16.0% 7. USA forms 33.4% 1.9% Germany Spain Italy USA France UK Netherlands Denmark Canada Australia Chile Belgium Sweden Portugal Others USA Japan Germany China France UK Italy Spain Canada 1.2% 1.2005 16.8% 33.3% 1.2% 7.3% 7.3% 1.0% 3.9% 3.2% 3.0% 1.1% 1.3% 16.4% 1.Leather Apparel – SITC Code .2005 11.9% 1.8% 18.1% 1.3% 2.2% Belgium Netherlands Switzerland Australia Austria Sweden Denmark Mexico Others 18 .0% Leather Apparel Avg % of World Imports 2001 .1% 7.9% 2.4% 1.6% 1.9% 5.1% 5.9% of India’s portfolio.
2% as value added products.1% of global imports) is not among the top three destinations for Indian footwear exports. finished leather constituted 29% of India’s exports while the share of finished leather in the global imports is only 18%. leather apparel and leather goods.2% as footwear and 2. Similarly. • In comparison.41% in 1981 to around 35% in 2005 Low share of value-added products • India’s footwear exports formed less than half (41%) of its total exports. China exported as high as 97.9% of global imports of leather apparel but only 16. India’s footwear exports as mentioned earlier formed less than half (41%) of its total exports. • Footwear constituted 62% of world imports.2% for the period 2001 – 2005 • India’s share declined from 8% in 1980s to current levels. declining over a period a time • India’s share of global exports was only about 2. China’s share increased from 0. Export portfolio not aligned to key segments • India exported about 71% as value added products namely leather footwear. • In comparison. • In comparison. USA forms 33. China has aligned itself significantly better to the global leather trade compared to India In summary. On the contrary. However. However. finished leather which has significantly lower value addition compared to footwear constituted 29% of India’s exports.Key conclusions for Indian leather and footwear sector Low market share. the USA which is the largest importer of leather products is the top destination for China.8% as finished leather. Geographic portfolio not aligned to key markets • One of the largest markets for footwear – USA (which accounted for 28. • In comparison. China exported 68. In summary. China has aligned itself significantly better to the global leather trade compared to India August 2009 19 . • One segment where India is aligned to key customer markets is finished leather which is in the upstream side of the value chain.9% of India’s portfolio.
France.41% in 1981 to around 35% in 2005. Brazil African Countries (Ethiopia. However.8% in 1981 to 2. 20 . whereas China has increased its share from 0. India Vietnam.3% in 2005. Indonesia.India and China evolved as leading footwear producing nations during the same time period (around 1980s). European countries (Germany. over the next two decades. Taiwan China. China became the world’s leading producer of leather and footwear products while India’s market share reduced during the same time period 1 1 2 3 5 4 4 Zone 1 2 3 4 5 Year 1960s 1970s-80s After 1980 After 1990 After 2000 Countries USA. Kenya etc) India’s share in world leather trade had been in the declining trend from 8. UK etc) Korea.
3% for India and 31% of China. In the region. studying the growth pattern of leather industry in China would enable us understand the key factors that led to growth and the initiatives at various levels that would enable competitiveness of the sector and firms in the sector. However China’s footwear exports had increased multifold and it is now the world’s largest supplier of leather footwear. Vietnam is an emerging center in the global leather and footwear trade that could have been considered for comparison. China Leather Industry Association’s website. 50% of the Vietnamese leather firms are foreign owned (similar to China) August 2009 21 . Hence identification of the critical success factors for growth would be more relevant for India when compared with China than with Vietnam • Incidentally.India and China had exported equal number of pairs of leather footwear during early 80s. • Even.4% as compared to 2. in the footwear category. Vietnam could not fit into the comparative analysis due to the following reasons while China was best placed. Nguyen Thi Tong 400 200 0 1986-88 1989-91 1992 China India 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2007 • Based on the above. However. Council for Leather Exports website China’s export data includes inter-country trade by Hong Kong Report on The status of Vietnam leather goods and footwear Industry in 2006 and six months of 2007 – Dr. Vietnam’s focus is on sports shoes ( 70% of the total footwear produced). • Vietnam. • Global market share is around 1. Exports of leather footwear from China and India • The CAGR of China’s footwear exports during the period was around 13% while India’s CAGR stood at 11% Pairs (mn) 1400 1200 1000 800 600 Source: FAO . unlike India and China is focused significantly on the footwear segment ( about 78% of their capacity is for manufacturing footwear).
50% income tax on the third year. nearly 24% of the leather firms were foreign owned accounting for 57% of total sales. In the early 1950s. Incentives provided by the Government: 2 year tax exemption. Sources: The Role of Clustering in Rural Industrialization: A Case Study of the Footwear Industry in Wenzhou : May 2007. New Competition: Foreign Direct Investment and Industrial Development in China: 2004 CLE Country Study – China Trade liberalization and environmental protection . China and India 22 . only 19 factories were operational producing around 0.1978 Pre-Economic Reforms: Private shoe manufacturing was largely depressed in this time. the Government had taken over almost all the shoe factories and the remaining factories were closed 1950 .A Study of Leather Industry in Brazil. single-window clearance for all approvals and delegation to local authorities for approving foreign investments. Second Wave – since 1991 : Rapid development of Foreign Invested Enterprises & Private Owned Enterprises. State Owned Enterprises (SOE) also did not perform well and in the year 1978. 1978 – till now Economic reforms and open door policy: First Wave .5 mn pairs a year. During the Ming Dynasty (1368-1644). 80% of the foreign invested firms were Taiwanese in the 1990s.1978-1991: Rapid development of Town and Village Owned Enterprises. footwear industry in Wenzhou flourished with shoe makers learning advanced techniques and setting up many factories. Wenzhou footwear was known for its exquisite quality and was produced exclusively for the Royal Family 1900 – 1950s Initial Industrialization: During 1910s.Tracing the evolution of leather industry in India and China Evolution of China’s Leather Sector (Wenzhou Cluster) The growth of the leather industry in China is attributed to the first wave of economic reforms in 1978 with rapid development of Town and Village Owned Enterprises (TVEs) and second wave with foreign firms investing in China. In 2000. Till 1900s Traditional Business: Shoe making has a history of more than 500years in Wenzhou.
Government’s policy to support FIEs: Incentives were provided for FIEs ranging from tax holidays for 2 years. 1992 – till now Phase 2: Major reforms included the unification of exchange rates. This strong market demand prompted the rapid development of TVEs. the reform of tax and fiscal systems. a ‘market’ track was introduced under which economic agents participated in the market with free market prices. provided that they fulfill their obligation under the plan. current account convertibility. the leather industry saw more conducive environment for growth with the rise in TVEs and FIEs Leather Industry Development of TVEs: As more and more SOEs were closed. footwear products were in short supply.1991 Economic Reform Phase 1: The basic institutional framework of central planning remained largely intact. FIE investment flowed in predominantly from Hong Kong and Taiwan. Yasheng Huang 2008 August 2009 23 . Meanwhile new competitive forces were injected into the economy through transitional institutions. Company Law. They were required to induct Directors to Under this. Competitive product markets were created by curtailing central planning and moving towards market-based prices. 50% on tax in the third year. Trade credits were also common. to hold shareholder meetings and to establish and obligations for fixed quantities of goods at fixed planned boards of supervisors. 1978 . prices as specified in the pre-existing plan. Taiwanese investment comprised 80% of the total foreign investment in the leather sector in China which was instrumental in accessing the US market. 2004 Ownership biases and FDI in China. ‘central’ economic agents were assigned rights to form boards. Sources: Foreign Direct Investment and Industrial Development in China. single window clearances and power for the local governments to promote FIEs Rise of FIEs: In the second wave of the economic reforms. Access to markets: FIEs brought in the access to markets. the reorganization of financial regulatory system. the adoption of Western accounting rules Moving towards ‘Market’ economy: The ‘Central’ economic agents were slowly reorganized to improve their Dual Track Reform: The dual-track price reform was based competitiveness. SOEs were organizationally restructured into upon the logic of continual enforcement of the central limited liability corporations according to the newly passed planning while simultaneously liberalizing the markets.After the economic reforms. Division of Labour: TVEs specialized in producing single / few processes / sub-components for the footwear industry which brought down the technical barriers to entry Access to Capital: Most of the credit was through own funds and funds from friends / relatives. Meanwhile.
tax holidays etc.1980s Mechanization gained momentum: During this time. finishing. • The favorable factor conditions present in China was utilized well by the FIEs who enabled China to become a leading exporter by providing easy access to its customers. • Overall improvement in the infrastructure which enhanced the competitiveness of the industry. mechanization rapidly increased. 1850s – 1930s Cottage Industry: British government aimed at procuring cheap semifinished leather and exporting it to Europe for processing 1930s – 1940s Mechanization of the factories: Mass production with professional labour – primarily vegetable tanning otherwise known as ‘East India tanning’ 1950s. Less developed component industry affects the growth of the leather sector Source: Trade Liberalization and the Restructuring of Tamil Nadu’s Leather Sector: Coping with Liberalization’s New Environmental Challenges and Lessons from Prior Episodes of Adjustment . Outsourcing: Increasingly large footwear companies outsourced their labour-intensive less-critical operations to SSI sector De-reservation of Leather & Leather Products in 2001: To enable economies of scale to compete in the global market However. While there is significant potential for growth.Rise of TVEs and FIEs. Tanners setup their own footwear upper manufacturing units Government Focus: Employment generation. reduction of import duties. footwear. power. • Cluster based approach brought down the entry barriers and improved the operational efficiency – High level of division of labor. Earning foreign exchange through Reservation and Restriction on semi-finished leather Small Scale reservation: Incentives and licensing policies aimed at promoting leather and footwear industry in Small and Medium sector Focus on Value addition in leather industry: Government restricted the export of semi-finished leather by imposing export tax 1980s – till now Ban on the export of semi-finished leather & Focus on Leather Products: Import duties on all tannery. and other leather goods machinery were lowered to a uniform rate of 25%. Chrome tanning was introduced and there was increasing demand for finished leather in the foreign markets. • Incentives provided by the Government for the Foreign Invested Enterprises (FIEs) – Incentives ranging from subsidized land. The Indian leather industry had evolved from being a semi-finished leather exporter in the 1960s to exporter of high quality leather footwear and products today. Indian leather exports achieved a moderate growth rate of around 7% in the last 10 years. Cluster based approach and the government’s incentives were the key reasons for the growth of leather industry in China • Rise of Town and Village Owned Enterprises (TVEs) in the first wave (1978-1991) and the penetration of Foreign Invested Enterprises (FIEs) in the second wave (from 1991) – Most of the investments from Hong Kong and Taiwan.Meenu Tewari Competitiveness through export clustering: Strategic considerations- UNIDO - 2005 24 .
• The footwear accessories industry is less developed ( most of the companies possess small capacities) leading to supply constraints and sub-optimal scales. low level of FDI and lack of supporting industries • Majority of the Indian firms are proprietorship / partnership / privately owned companies – Lack of scale economies due to investment constraints – Lack of awareness on latest management techniques and decision making abilities • Low levels of FDI in the leather sector. who were instrumental in boosting China’s exports to world markets were absent in India. the share of finished leather was around 22% and the remaining share is from value added products 100% 80% 60% 40% 20% Semi finished leather 0% 1975-76 1977-78 1979-80 1981-82 1983-84 1985-86 1987-88 1989-90 1991-92 1993-94 1995-96 1997-98 2007-08 Leather products Finished leather Semi finished leather While Indian leather exports grew at a rate of 8. India’s stagnant market share in world exports can be attributed to sub-optimal scales. – Indian leather sector was devoid of FDI which typically brings in state-of–the art machinery.8% (despite a low market share) during the period 2001-2005. China grew at more than 12% over the same time.Indian leather industry is moving up the value chain with leather products constituting more than 75% of the exports • Indian government banned the export of semi-finished leather in 1991 in order to stimulate the value addition in the leather sector • In 2007-08. high-variety products. • Indian firms were naturally aligned to European markets. India is dependant on China for most of the accessories. best practices in the industry and efficiencies in operations / management that would positively influence the competitiveness of the sector. Indian firms were not typically preferable for the high-volume US market which is world’s largest consumer August 2009 25 . given its requirement for low-volume. Only Rs 200 Crores from 1991 to 2005 – Foreign firms.
Analysis of the Indian leather industry and key conclusions Porter’s Diamond Framework has been employed to compare the competitiveness of Chinese and Indian leather industry • Structure of the industry • Foreign Direct Investment • Collaborative / cluster based approach among firms Firm Structure & Rivalry Government • Economic reforms • Incentives for firms • Attracting foreign investments Factor Conditions Demand Conditions • Labor cost • Infrastructure related costs • Access to Capital • Raw material availability Support Industries • Access to Foreign markets • Local demand • Upstream and downstream Industries • Associations and Institutions 26 .
Factor Conditions Labor cost Infrastructure Access to capital Raw material availability August 2009 27 .
93 5 0.1 1. • This is the primary reason for the shift in the geographies of leather production in the 80s.59 0 Thailand China Pilippines Mexico Brazil Korea Italy Japan Source : “The global leather value chain” – Presented to UNIDO. World Bank report - 2004 28 . While in Italy labour costs accounts for 38% of the production costs.48 Vietnam 0.08 1. India’s labour cost is about 3% of Italy’s labour cost and China’s labour costs are around 7% of Italy’s labour cost • The slow technical development in footwear operations.13 15 10 6.16 2.15 4. 2001 ‘Leathers’ July 08 edition – CLE.75 Indonesia 1.Labor cost Developing countries in Asia took advantage of the shift in the leather and footwear manufacturing. it is less than 10% in developing countries Worker Cost in 2008 (USD/Hr) USD 30 25. particularly in the production of uppers make footwear manufacturing a labour intensive operation as a result of which companies are forced to move to /access countries and regions with lower wages.43 India 0.24 25 20 15. predominantly due to the lower labour costs. Feb 28.
59 Shoes (Men) Shoes (Women) Garments (Jackets) Bags (Women) Wallets 4 12 2 8 12 Country India China Bangladesh Srilanka Pakistan Korea Singapore Malaysia Thailand Hiring and Firing Practices 2.76 0. China’s labor policies are perceived as more employer friendly than India’s labor policies.43 0.29 China 1.47 0.In the key segment of footwear.6 Factor Condition Importance China India Labor Cost 4.59 1.5 4 2.29 1. Product Daily Production (Pairs / Nos) India China 6 15 5 10 15 Monthly Production (pairs/Nos) India 120 360 60 240 360 China 180 450 150 300 450 Monthly Wages (USD) India 103 103 103 103 103 China 264 264 264 264 264 Labour cost per item (USD) India 0. the labour cost per item in India is cheaper by 41% over China although the productivity of Chinese employees is higher by 33% (in leather garments/apparel India and China have the same effective cost).9 4 4.72 0.86 0. Exim bank report – 2006.7 4. Global Competitiveness Report – World bank 2005-06 1 – Impeded by Regulations 7 – Flexibility determined by employers August 2009 29 .5 4.1 5. Global Competitiveness Report – 2005-06. The Indian Footwear & Leather Industry – CII.2 Source: ‘Leathers’ July 2008 – magazine from CLE. Also.88 0.
transportation facilities and good working conditions which attracts labor from leather industry Key issue for China: Increasing labour costs Key issue for India: Shortage of skilled labour 30 . companies which produces electronics parts and products in Sriperumpudur attract labor from the nearby leather cluster (Ranipet). The sector was under SSI reservation till 2001. • Due to these reasons.2 0. World Bank report - 2004 • Leather and Footwear industry was encouraged by the government as a means to increase employment generation.1 0. • Total employment in this sector would amount to 2. • Companies in the coastal regions would focus on high value products and the companies moving into the central and the western region on low value products Source: “The global leather value chain” – Presented to UNIDO.3 • Most of the Chinese leather companies are situated in the east coast of China and labour costs are increasing in the east coast due to high economic activity.3 0.39 0.7 0.1 While India has an advantage on unit costs today.51 0.5 million (30% of which are women) • Footwear industry provides employment to the uneducated population - 40% of employment is represented by unskilled workers doing table work operation in the assembly line • In the last few years there is a severe attrition in the companies (with the rate around 15%) – There is a lack of skilled & semi-skilled labor causing the increase in attrition – The setting up of SEZs of other industries near the leather production clusters has also led to increase in attrition.9 0. In Tamil Nadu.6 1.g.3 1. Chinese companies are forced to relocate their factories to interior provinces of China where labour costs are relatively low. ‘Leathers’ July 08 edition – CLE.39$/hr in 2003 to 1.7 0.1 0.44 0.1$/hr in 2008 • The higher labour costs are driven by the new Labour Contract Law ( LCL) which mandates transparent employment terms and empowers workers to bring legal action against employers who do not pay proper wages. For e.9 0.1 2003 2004 2005 2006 2007 2008 0. – Labour cost in leather industry increased from 0.Rising labor costs in China forces the migration of the leather companies towards the central and western region Risng Labour Costs in Chinese leather Industry USD 1. Feb 28.5 0.1 -0. 2001. insurance etc.5 1. These electronics companies provide attractive salaries. Indian leather companies are facing severe attrition and there is a shortage of skilled and semi-skilled labour Operation Primary Collection Tanning (Organized) Footwear (Cottage& Household) Footwear (Organized) Other leather Products (Organized) No of employees (mn) 1 0.
Infrastructure Challenges in East and South Asia – March 2006. Infrastructure Challenges in East and South Asia – March 2006. that rated India 39th among 150 nations. some of the reasons for high costs of logistics in India • Quality of Infrastructure • Competence of private and public logistics service providers • Higher clearance time in entry locations like ports and other border agencies • Reliability of the trading system and the supply chain Corroborating the above.Worst 7 . Vaidyanathan.6 Roads 4. Roads and Ports) which helps in its development of trade Country China India 1.7 2.6 2. CII Institute of Logistics.0 • The average clearance time in the ports is nearly 3.6 3.4% a year on the sales compared to less than 2% in China Share of firms owning Generators (by Size) Country China India Micro 0% 23% Small / Medium 14% 76% Large / Very Large 38% 91% Time for exports/imports refers to the time the business starts preparing the necessary documents to export/imports goods until the time the cargo is in the warehouse. Water. 2005.8 3 Factor Condition Importance China India Infrastructure Sources: Current status of logistics in India. Indian companies are losing about 8. The impact of business environment and economic geography on plant level productivity: An analysis of Indian industry.9 4. Emerging Markets Infrastructure: Just Getting Started-Morgan Stanley – April 2008 August 2009 31 .G.47 days in India compared to 16 hours in China Country India China USA Indonesia Taiwan Korea Documents for Export 10 6 6 7 8 5 Time for Export (Days) 22 7 5 3 9 3 Documents for import 36 20 9 25 14 12 Time for import (Days) 15 11 5 10 8 8 According to the World Bank Logistics Report 2007.Best Electricity 4.Infrastructure • India’s infrastructure acts as a significant deterrent to its competitiveness compared to competing countries like China Country France Japan Canada India China Logistics cost (cents per Km) 5.5 3. Emerging Markets Infrastructure: Just Getting Started-Morgan Stanley – April 2008. Indian logistics is characterized by higher levels of inventory and therefore warehousing costs driven by low speeds on highways (average 30 Km per hr as against 60 km per hr in Europe) • Power outages are very frequent in India. The World Bank-June 2005. Development Research Group-The World Bank-June 2005.0 5. • China’s infrastructure is ranked higher than India’s infrastructure in all the sub-sectors (Electricity.7 Water 4. Business Environment and Comparative Advantage in Africa: Evidence from the Investment Climate Data.3 Ports 3. while there is an outage only once in two weeks in China.0 7. Trade logistics in the Global Economy - The world bank Logistics report 2007 Sources: The impact of business environment and economic geography on plant level productivity: an analysis of Indian industry.
% Customs Clearance delays Inland Transport delays Power Outages / Cost of own power Water Others Multiple responses allowed Source: Primary Survey conducted by Deloitte 32 . inland transportation delays and power outages are the key disablers of their competitiveness % of companies who responded that infrastructure has significant impact 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% .Infrastructure: Primary Survey Nearly 70% of the respondents believe that customs clearance.
50% 66. Chinese private firms ought to have possessed strong competitive advantages. Most of the startup companies used their own funds. Members of the footwear clusters are located in close proximity to one another. • In industries such as garments and shoe-making.00% Own Funds Relatives & friends Banks Public Funds and Others • Another common practice was the use of trade credits from upstream and downstream enterprises to ease working capital constraints. Factor Condition Access to capital 0. leading to repeated business transactions and the formation of a certain level of trust among the upstream and downstream firms in the production chain. their access to bank funds is low.Yasheng Huang August 2009 33 .35% • The outcome of this allocative pattern is that private entrepreneurs accessed capital by selling their equity shares to companies based in Hong Kong and Taiwan.Access to Capital In China. • However.1980s 8. but poor allocative decisions of Chinese financial institutions imply that a severe mismatch between human and financial capital exists—i. efficient private firms were denied financing. • Poor maintenance of the books of accounts has made it difficult to access bank loans which require clear and transparent accounting practices.30% 24. whereas inefficient SOEs are favored. which remain the preferred sources of financing. Only 16% of the loans find the way to the SME sector and since more than 75% of Indian companies are in the SME sector. Importance China India Source: The Role of Clustering in Rural Industrialization: A Case Study of the Footwear Industry in Wenzhou : May 2007.. Indian SMEs in the leather sector have very low access to the bank funds though leather has been a priority sector for lending.e. post 1997 Chinese banks have been providing finance to private firms after the credit quotas have been removed by the government. Capital was denied to private firms during 1980s. • Most of the investment requirements of the leather sector is funded through internal sources or community funding. The role of Foreign-Invested Enterprises in The Chinese economy: an Institutional Foundation approach . During the emergence of FIEs most of them sold their stake to foreign investors • A large number of leather companies which were started during the 1980s used own funds or capital borrowed from friends / relatives Sources of Capital . • Many of the small and medium businesses in India do not access bank capital.
01% 0.14% 0.5 million).countrywise .thehindubusinessline.07% 0.02% 0.02% 0.01% 0.13% 0. the quality of Chinese leather is considered to be of inferior quality.07% 0.02% 0. Pigs constitute only 2. the consumption of pork is only 7% of the total meat consumption.02% 0.com/News/News-By-Industry/ET-Cetera/India-should-look-at-improving-pig-raising-practices/articleshow/4480325. For E.04% 0. The quality of the skin is inferior because of: – Damages in the hides because of injuries.22% 0.Raw Material Availability China’s high production of leather is not reflected in the quality of domestic hides and skins due to poor slaughtering practices and inferior quality of cattle Production of Bovine Hides and Skins . whip marks and gadflies.02% 0.27% Australia Mexico France Italy Others China New Zealand Australia UK India Spain Iran South Africa Algeria Turkey Others • Though China is the leading producer of hides and skins.40% 0.78% of our live stock (around 13.As majority of Indians don’t prefer pig meat (pork). * - CLE Country study of China http://economictimes.htm 34 . – Hides are not strong or thick because the cattle is mostly old and sick when slaughtered – Some slaughter houses damage the skins unintentionally due to their low technology. Therefore.02% 0.05% 0.17% 0.2004 0.04% China New Zealand Australia UK India Spain Iran South Africa Algeria Turkey Others 0.08% 0.03% 0. EXIM Bank report. CLRI is now developing leather from low grade cattle skins that can compete with the Chinese pig skin leather.countrywise .03% 0.04% 0.02% 0.01% 0. • The quality of domestic leather production is inconsistent and varies among different production centers.06% Production of Skins of Sheeps & Lambs .01% 0.3% Production of Skins of Goats and Kids .12% 0.indiatimes. Nearly 70% of pig skin produced by China are inferior in quality*.05% 0.2004 0.2004 0.com/2004/07/13/stories/2004071301630300.cms http://www.04% USA China Brazil India Argentina Russia 0. Source: FAO.1% 0.Countrywise . • India: Pig farming in India is in nascent stage.g.36% 0.
551 2005 4.806 224.607 306.841. • In China.909 214.649 NA 333.725. Thailand etc are importing leather in finished / semi-finished form to manufacture leather footwear / products.China 9000 8000 7000 6000 5000 4000 3000 2000 1000 0 1986-88 1989-91 1992 1993 1994 1995 1996 1997 1998 1999 2000 2201 2002 2003 mn Sq ft Trade with Hong Kong.088 NA 302.898 492. • China produces lesser sq ft of cow skins compared to India. China imports large quantity of leather and the trend is increasing over the years.Due to the poor quality of the domestic hides.587.837 361. Production and Import of light bovine leather .085. However.559 234. FAO 2005 2002 3. nearly 80% of the leather used for manufacturing is imported from various countries Import Value of leather by the countries (‘000 USD) 2001 China Vietnam Thailand Source: ITC.224 2003 4. there are no shortages as the shortfall is met through imports • Countries like China.493 August 2009 35 .219 3. Vietnam.364 2004 4. Macau and Taiwan considered in the above data Production • Availability of livestock (raw materials) has a moderate impact on the leather industry.634.
But the production of hides from bovine animals is low due to the ban on cow-slaughtering in a majority of Indian states Country. Cow slaughtering continues to be carried out in unlicensed abattoirs. – According to Dept of Animal Husbandry.India is rich in the availability of cattle and has the highest share of bovine animals in the world. • This also affects the quality of hides which is low on account of improper slaughtering practices. corporate / organized players would find it infeasible/difficult to deal / operate in this segment Source of raw hides Raw hide from slaughtered animals Raw hide from fallen animals Imports % in total consumption 60% 30% 10% Factor Condition Raw Material Availability Importance China India Source: Compiled from FAO. Dept of Animal Husbandry 36 .wise share of Bovine Animals -2005 Production of Bovine Hides and Skins -Country-wise -2004 India Brazil China USA Argentina Pakistan Ethiopia Sudan Mexico Australia Others USA China Brazil India Argentina Russia Australia Mexico France Italy Others • The slaughtering of cows is banned in most Indian states. 2003. Sep 12. there are approximately 25776 unlicensed abattoirs in operation in India today against 5521 legal abattoirs. PETA- The Hindu. • Given the above. EXIM Bank report. – The animal is considered sacred by India's majority community and beef is not consumed by most of the people in India • However.
Demand Conditions Access to market August 2009 37 .
6 pairs / yr • Average value of a footwear = ( $ 5 bn)/( 1.0% 13.0% % growth 6 5 4 3 2 1 0 2003 2004 2005 2006 2007 2008E Year 2009E 2010E 2011E 2012E 5. Indian Footwear Industry .1bn * 1.6) – $ 2. Datamonitor (Export of leather uppers not included ) 38 .8 bn pairs.0% 15.0% • India’s current market size is around $5bn • Population – 1.Value 10 9 8 7 (in bn USD) 11.1bn • Per capita consumption – 1. 128 per pair ( 1 USD = Rs 45) Source: Council of Leather exports. The domestic market is highly competitive with few national players and multinational players present in the organized segment and a large unorganized segment characterized by chappals / sandals served by small scale players • The growth rate of the Indian domestic footwear industry is around 8 % and is predicted to grow at around 7.0% 9.0% 7.Domestic demand – Indian footwear industry • India’s footwear industry is valued at around $ 5 bn and nearly 1.84 per pair of footwear – Rs.5~8% in the near future.
80% 6.80% 2005 43.71 1.50% 9. Premium leather shoes has a share of around 7% Country USA Japan European Union Brazil Thailand China India* Consumption (mn pairs) 1939.4 2768.40% • Men’s footwear accounts for almost 50% of the market.40% 14.70% 2006 45.90% 48.60% 8.7 584..60% 2007 48.00% 7.9 1100 Per-capita pairs per person/year 6. However. Footwear has different segments like sports footwear. Modern format Footwear retail is one of the most organised retail format in India and has 48% share in the total sales.80% 10.00% 11.30% 9. Around 40% of the market is women’s footwear and the remaining 10% by Children’s footwear.60% 25.38 2.60% 37.3 1286. Reliance etc. Majority of the Indian footwear sales is the casual footwear followed by economy shoes.25 1. the demand for footwear is rising with organized retail gaining more market share.00% 12. • Per capita consumption of footwear in India is very low compared to other economies.40% 8. % Sales of footwear segments Casual Economy Premium Non Leather Premium Leather Sports / Active Source: Deloitte Estimates August 2009 39 .2 380.6 4.60% 10. Music & Gifts % Organised formats 2004 39. Increasingly major players like Tata.7 1800 Population (mn) 290.4 1666.30% 7.68 4. semi-formal/casual footwear.80% 7.5 483 144. and formalwear and utility footwear. are entering the retail business.3 127.6 Segments Watches Footwear Health & Beauty Services Consumer Durables Mobile Handsets & Accessories Books.Domestic market for footwear is promising with large corporate entering the organized retail business.50% 30.2 182 64.00% 6.90% 13. Khadims.68 2.30% 12.
8% of their production in 1997.Access to market China: The Foreign Invested Enterprises (FIEs) of China were predominantly from Hong Kong and Taiwan. • Hong Kong imported and exported nearly 1.7 percent of sales in furniture manufacturing.1 percent in leather and related products. access to technology is relatively very low. The tanning units in India consume at an average 40 ltr/sq ft of finished leather as against 12-15 ltr/sq ft in the tanneries in developed countries • While institutes like CLRI and FDDI play an active role in developing and dissipating technology to the industry. played a major role in diversification into leather products – The main reason is their local production base in Europe had shut down or moved abroad. • A case to point is the chemical consumption in Indian tanneries which is about 25 to 30% higher than international norms primarily due to the use of inefficient equipment and processes and the absence of recycling . Domestic market is also growing due to the rising income levels and low penetration of leather footwear. – In a number of labor-intensive industries. FIEs accounted for 30. • The FIEs brought in the linkages with the western markets.9% of their production whereas domestic firms exported 34. the FIE shares of industry sales seem to be substantial as well. • The specific consumption of water in Indian tanneries is more than double of that in tanneries in the developed countries. the firm structure has an important bearing on the adoption of technology. in India as most firms are small and medium sized family owned businesses. Françoise Lemoine. 2000 Indian Footwear Industry. 2002 CII. Barriers and Opportunities for Promoting Trade in Environmentally Friendly Products. • European buyers of finished leather from Indian suppliers.A Study of India’s Leather Industry - 2002 40 . In 1995. However. FIEs control of access to the Western markets led to its dominance in exports from China.4 bn pairs of footwear from China in the year 1996 demonstrating that the FIEs from Hong Kong and Taiwan acted as a bridge between mainland China and the western world • Large scale investments by FIEs enabled Chinese manufacturers to cater to the high volume US market Factor Condition Access to Market India: Indian companies were traditionally aligned to European market whereas the largest market was left untapped by Indian companies. Importance China India Source: FDI and the Opening Up of China’s Economy. – Small order quantities and more focus on design enabled Indian leather industry to take advantage of the European footwear industry Access to Technology: • Chinese companies have access to technology owing to the foreign investments which also brought in the necessary technology.8 percent in garments. FIEs exported 99. and 54. 50.
Firm Structure and Rivalry Increasing number of FIEs/TVEs Cluster based approach August 2009 41 .
they were willing to invest in technology improvement and staff training. In addition. Foreign Direct Investment and Industrial Development in China. FDI and the Opening Up of China’s Economy. these enterprises helped improve quality standards during the tanning process.Increasing number of FIEs / TVEs Evolution of TVEs and FIEs in the leather industry increased the market share of China in the world leather trade from less than 3% in 1980 to more than 20% in 1997 • Phase 1: 1978 to 1991: – During this phase a large number of Collectively Owned Enterprises (COEs) / Town and Village Owned Enterprises (TVEs) were formed which operated in an optimal income sharing model – important feature of TVEs were the community (town or village) control of firms – TVEs could overcome the obstacles of access to capital through help from local (community) governments since there was a strong lending discrimination against POEs • Phase 2: 1992 to till now: – The number of foreign owned enterprises increased significantly and in 1997 more than 53% of the output of leather were from FIEs – The foreign ventures use imported machinery and chemicals with guaranteed standards. The results of their efforts were usually reflected in better quality of their products and in the export share of their products (more than 99%) – FIEs accounted for nearly 57% of the total exports from China in 2000 Shares of Ownership in Total Industrial Output 80 70 60 50 40 30 20 10 0 1980 SOEs 1985 1990 COEs 1991 1992 1993 1994 POEs FIEs 1995 1996 1997 1998 1999 Joint Stock Companies Ownership pattern in Chinese Leather companies 100 90 80 70 60 50 40 30 20 10 0 1995 State Owned Enterprises Others 42 1997 12 10 2007 Collectively Invested Foreign Investments 7 68 63 62 3 17 10 17 7 24 Share of Sales in Chinese Leather Industry 100 3 5 37 34 51 50 Source: CLE – Country Study – China. 2004. Françoise Lemoine 52 31 5 57 12 0 1995 1997 6 2007 7 . More important.
Most of the companies are in Rs. 1-10 crore segment • China has 200 factories producing 20000 pairs a day (5 mn pairs annually) in a locality. India has only 3 factories of that scale. CLE – Country Study-China. – As of 2002. ‘LEATHERS’ – July 2008. Lack of investments has led to sub-optimality in size rendering them uncompetitive when faced with cost competition.000 units. • At the firm level.Most of the organizations in this sector are proprietorships or partnerships traditionally owned by family members. CLE. the industry has not witnessed significant capacity additions over the last decade Lack of awareness on best practices** – Most of the CEOs of leather companies lack the knowledge of latest management techniques and the best practices of other industries Structure of India Leather Sector India 5% 2% 18% 1 - 10 (Rs. CLE. • Nearly 60% of the companies in India are either proprietorships or partnership firms. only 2% of the companies have revenues of more than Rs. 25-20 (Rs. ‘LEATHERS’ – July 2008. Crores). More than 50 Crores 75% Ownership pattern in Indian Leather sector 2% 28% 39% Proprietorship Partnership Private Limited Public Limited Factor Condition Management Structure Importance China India 31% Source: DnB – Indian Leather Sector. 50 Crores. Crores) 10-25 (Rs. CII **Interviews with Sectoral Experts August 2009 43 . CLE – Country Study-China. the Indian leather industry is highly fragmented. CII **Interviews with Sectoral Experts Source: DnB – Indian Leather Sector. on a total of nearly 56. Lack of scale economies – Unwillingness to expand through the debt route** and limited exposure to the capital market has resulted in the companies relying primarily on internal funds for expansion opportunities – Consequently. Crores). Limited exposure to best practices in operations / management also hampers their growth.
specializing in leathers for shoes and leather goods. ft per annum state of. most buyers (brand owners and intermediaries) have their own standards similar to SA8000 and they conduct periodic audits to confirm whether their suppliers are confirming to the same 44 . • Indian companies would help Ethiopia boost its leather exports and in turn Indian leather products made out of Ethiopian leather would find greater acceptability in global market because of its high quality Fair Labour practices : • Compliance to standards like SA8000 is a growing trend among the leather companies with around 20 companies already accredited with the certification • However.Recent trends Firm Structures: JVs and FDI • A Chennai based leading leather manufacturer and exporter. for the setting up of a six million sq. specializing in finished leather. The Ethiopian leather industry has been manufacturing mainly wet blue leather for the last 10 to 15 years.the-art leather manufacturing facility in Chennai to produce superior quality of bovine leather in India and cater to Indian market • One of the world’s largest Fashion accessories manufacturer LVMH ( Moet Hennessey Louis Vuitton) had acquired 20% stake in Hidesign ( Indian leather goods manufacturer) • Entrepreneurs from Taiwan are setting up plants in Andhra Pradesh and Tamil Nadu for producing sports shoes Global Sourcing • A MoU was signed between the Ethiopian Leather Industries Association (ELISA) and the Confederation of Indian Industries (CII) which makes it easier to source leather from Ethiopia. It is a typical feature of developing countries. as wet blue is the first stage of the leather value chain. has struck a first-of-its-kind joint venture with Conceria Virginia Italy(CVI). a 10-year-old Italian tannery. shoe uppers and full shoes.
there is a distribution of orders among the eligible manufacturers / suppliers thereby meeting the commitment for exports. Chinese Leather Industries Association’s website.g. Fujian. Guangdong. CLE – Country Study - China Chinese leather industry’s strength lies in these clusters where they process millions of pairs of footwear in a cost-effective manner Collaborative approach to Marketing • When a bulk order is received. – Shiling: Leather complex with 2. Operating in a cluster based approach and adopting a collaborative approach for marketing has allowed Chinese companies to deliver large volumes of footwear per order • The leather industry in China is clustered in five major provinces – Zhejiang. Leather city complex with 160000 sqm and online trade platform.5 mn sqm area with more than 900 traders of leather and material. Shared infrastructure and lower costs • The close geographical location of similar manufacturers within a cluster enables flexibility and capacity pooling to better handle uncertain demand – For example. sole of footwear is broken down to outsole. heel pad etc.Cluster Based Approach Most investments in the leather industry in China happened in a few provinces. 1200 traders for leather products and 300 offices of companies • The products are bought from and sold to the traders in the local market • Clustering has simplified the complex production processes into small steps and lowered technical and capital barriers to entry • The division of labor decomposes complicated footwear products into numerous intermediate products which enabled many entrepreneurs without shoe making background to participate – E. etc Footwear Production zone in China Chongqing Sichuan Guangdong Fujian Zhejiang Source: The Role of Clustering in Rural Industrialization: A Case Study of the Footwear Industry in Wenzhou : May 2007. sock lining. Some companies focus on single operation like component assembly. mid-sole. August 2009 45 . Sichuan and Chongqing • The production is concentrated in cities like: – Wenzhou: More than 4000 companies & more than 400000 employees – Haining : More than 2000 companies present in the city. insole. companies can outsource orders or parts of orders that they may not be able to handle themselves to other firms with similar production capabilities within the same geographical area – Such an arrangement creates a perception to a purchaser that its entire order is being fulfilled by the same producer. heel.
Companies in India. the collaboration and division of labor among the companies is absent in India. • Though the tanneries and leather footwear production are concentrated in three major locations. Xiaohang Yue. • With frequent small shipments occurring between facilities. information is still being transferred through face-toface interactions. Lifang Wu. Companies in India. the collaboration and division of labor among the companies is absent in India.g. making it more disadvantageous for Indian firms to compete in the marketplace. in-transit inventories—which tie up working capital—are minimized. 46 . are particular about their buyer’s information and rarely share them amongst themselves. Ambur. 3/1/2006 Footwear Production zones in India Agra Kanpur Kolkata Unlike China. • Though internet is used in few business transactions. • Within the supply cluster. there is no visible coordination among the players as compared to their Chinese counterparts • This has resulted in supply chain imbalances. high inventory and wastage across the supply chain. which results in creating personal relationships (Guanxi in Chinese) and strengthening community ties. • Leather industry is present in these geographies for many years – Chennai cluster exported leather for the past 100 years – Kanpur is well known for its saddlery products whose history traces back to the military cantonments of British era Factor Condition Cluster based approach Ranipet. are particular about their buyer’s information and rarely share them amongst themselves. and Thaddeus Sim - Supply Chain Management Review. Source: Supply Chain Clusters: A Key to China's Cost Advantage. shipping costs between suppliers and manufacturers are greatly reduced because of the close proximity of these firms. Anecdotal references Importance China India Unlike China.• The close proximity of similar facilities also allows these companies to share the investment costs of building facilities and other required infrastructure – E. Common Effluent Treatment Plants (CETPs). Vaniambadi Chennai Source: IBEF – 2006. – The geographic proximity of firms in supply clusters provides favorable conditions for this kind of information transfer.
Primary Survey Less than 50% of the organizations surveyed collaborate with the customers on tactical areas like demand planning, transportation planning and production planning initiatives. Organizations who collaborate with customers have reported benefits Customer collaboration and benefits achieved
% of companies with medium to high collaboration 100.% 90.% 80.% 70.% 60.% 50.% 40.% 30.% 20.% 10.% .% Strategic planning Demand planning Promotion planning Production planning Inventory replenishment Transportation planning Cost reduction Quality improvement
Benefits Gained 5 4.5 4 3.5 3 2.5 2 1.5 1 Strategic planning Demand planning Promotion planning Production planning Inventory replenishment Transportation planning Cost reduction Quality improvement
Indian Leather and Footwear sector
Scale 1 = no benefit 3 = moderate benefit 5 = very high benefit
Similarly, only about 50% of the companies surveyed have engaged in a collaboration with suppliers. However, they have not achieved significant benefits. These levels of collaboration have resulted in delayed deliveries from suppliers. Less than 20% of the companies reported on-time deliveries of over 70% from suppliers Supplier collaboration and benefits achieved
% of companies with medium to high collaboration 100.% 90.% 80.% 70.% 60.% 50.% 40.% 30.% 20.% 10.% .% Strategic planning Demand planning Promotion planning Production planning Inventory replenishment Transportation planning Cost reduction Quality improvement
Benefits Gained 5 4.5 4 3.5 3 2.5 2 1.5 1 Strategic planning Demand planning Promotion planning Production planning Inventory replenishment Transportation planning Cost reduction Quality improvement
Number of on-time deliveries/total number of deliveries (in %)
Industry Supplier Delivery % 60.% 50.% % of companies 40.% 30.% 20.% 10.% .% <50% 50-60% 60-70% 70-80% >80% Scale 1 = no benefit 3 = moderate benefit 5 = very high benefit Indian Leather and Footwear sector
% of On time deliveries 48
Lack of collaboration with the suppliers and customers has resulted in poor visibility along the supply chain Information availability to understand supply chain performance
5 4.5 4 3.5 3 2.5 2 1.5 1 Delivery dates Supplier inventory Supplier capacity FG Inventory Production schedule Capacity Product cost Product profit Customer forecast Customer inventory Customer profitability Customer Service Customer retention
Indian Leather and Footwear sector
Scale 1 = no information available
3 = some information available
5 = information is readily available
Due to poor visibility in the value chain (customer and supplier), Indian leather companies are fraught with inefficiencies in terms of higher inventory and delayed deliveries. Given the nature of the industry and export destinations, these typically result in high levels of obsolescence On- time delivery for most of Indian companies is less than 70%
Industry On Time Delivery 60.% 50.% 40.% 30.% 20.% 10.% .% <70% 70-80% 80-90% >90%
Over 50% of the Indian companies hold 3 – 6 months stock on an average
% of companies
% of companies
% of On time deliveries Percentage of shipments that meet customer request date (for the different peer groups Indian Leather and Footwear sector
Inventory turns (Annual cost of goods sold) / (average total on hand inventory)
Indian companies are not flexible to meet the dynamic nature of the business like changing product mix, volume etc owing to low levels of collaboration along the supply chain Flexibility: Current capability and importance in 3 years.
Current Capability 5 4.5 4 3.5 3 2.5 2 1.5 1 Product mix Production volume Custom orders Change in prod. spec. Delayed differentiation Make/buy decisions Shift manufacture load Scale 1 = significant disadvantage 3 = equivalent capability 5 = strong advantage
Importance in Next 3 Years 5 4.5 4 3.5 3 2.5 2 1.5 1
Change in prod. spec.
Shift manufac. load
Scale 1 = not important 5 = very important
Indian Leather and Footwear sector
Adoption of technologies that aid material and information flow is low in leather sector in India. Less than 50% of the firms have an enterprise application (“ERP”) for transaction processing and management information.One of the primary reasons could be the size of investments involved in implementation and maintenance which could be prohibitive for the firms in this industry given their size Technology: implementation and benefit
% of companies with some to extensive implementation 100.% 90.% 80.% 70.% 60.% 50.% 40.% 30.% 20.% 10.% .% PDM/PLM EDI Trading Exchanges e Procurement ERP Demand planning APS QMS WMS TMS CRM Also, most of the firms do not measure basic parameters for competitiveness like • Profitability of various SKUs • Manufacturing non-conformance rate • Outbound freight cost, etc.
Indian Leather and Footwear sector
Supporting Industries Proximity of the industries/information flow August 2009 51 .
Local manufacturers are perceived to produce poor quality machines. This is explained as one of main reasons for India focusing more on men’s footwear while China and other competing countries export more women’s footwear • Demand for women’s footwear consumption is driven by higher per capita usage in the developed countries as compared to men. • Most of the world’s leading producers of tannery chemicals are present in India and have facilities in major clusters (where specific processes to meet the requirement of client tanneries are developed). Barriers and Opportunities for Promoting Trade in Environmentally Friendly Products. buckles etc) is very small in India. • Large quantities of footwear components have to be imported from China. Source: Indian Leather Industry – Prospects and Problems – CLE.hktdc. to help the industry identify and groom the right management and technical personnel.com/imn/02100301/leather003. most of the companies still operate in the small scale levels and the capacity addition has been very limited.htm accessed on 18.A Study of India’s Leather Industry – May 2002 Source: http://info. academic & research institutions • China has a well developed components and machinery industry. Enterprises with a total investment of over Rmb 5 mn are usually equipped with in-house product and technology design. However. • A majority of the large firms in China have internal design centers. • These companies provided important technical support when Indian tanneries were faced with the task of substituting hazardous chemicals (PCP and Azo dyes).Numerous leather associations act as a bridge between industry and government. • Given the high cost of imported machinery only large sized firms access them leaving a majority of the leather industry using outdated / poor quality local machines Chemical Companies: • Chemical companies play an important role in process changes. • These associations are envisaged to be a major contact point with academic and research institutions. The per capita consumption is 4~5 pairs per woman compared to 2 pairs per man in the developed countries. Wenzhou cluster alone had: – 200 footwear machinery manufacturers – 380 footwear sole manufacturers – 180 footwear last manufacturers – 100 footwear accessories and ornaments manufacturers – 50 design studios and numerous training schools • China Leather Industry Association (CLIA) has developed and registered a trademark called ‘Genuine Leather Mark’ (GLM) which is internationally accepted • There are numerous associations for leather sector in various provinces in China which acts as a bridge between industry and government. Many of them even appoint foreign and domestic experts as well as academic and research institutions to provide technical advice and product development services. Supporting industries like equipment and footwear components industry are not well developed in India leading to dependence on import for the same Footwear Components Industry: • The size of footwear component industry (which produces components like ornaments. as well as quality control teams. In 2006. The components industry is completely de-reserved since 2008. communicating the industry's interests to officials so that they are taken into consideration when industrial policies and economic plans are formulated. Equipment Suppliers: • Almost all the machines used for leather processing are imported.09.08 52 . Anecdotal evidences from Indian Footwear Components Manufacturers Association .
gather and disseminate market information to the industry.Institutions like CLRI and CLE have been instrumental in the growth of Indian leather industry. to run trade shows abroad Train the professional manpower for the industry. However. Industrial Consultancy. and certification facilities to firms • Memorandum of understanding with the University of Northampton in the United Kingdom to explore new areas of research in leather • Played a key role in setting up CETPs during the shutting down of all tanneries and tackle the problem of AZO and PCP dyes ban by Germany during 90s Council for Leather Exports (CLE) Footwear Design and Development Institute (FDDI) All India Skin and Hide Tanning and Merchants Association and numerous other associations Polytechnics and ITIs providing training in leather and Footwear manufacturing Promote leather exports. Research and Development and Training of industry professionals Major association of leather and footwear manufacturers who act as a bridge between the Government. Organization Central Leather Research Institute (CLRI) Roles Leather-related research. However. Barriers and Opportunities for Promoting Trade in Environmentally Friendly Products- A Study of India’s Leather Industry – May 2002 August 2009 53 . CLE and the members Large number of polytechnics and ITIs provide training. Anecdotal evidences. testing. dissemination of new practices and training. there is a felt need for more training institutions to meet the export targets by 2011. given the demand for skilled labor there exists a shortage of the same necessitating more training institutions Factor Condition Supporting Industries Importance China India Source: Indian Leather Industry – Prospects and Problems – CLE.
Government Support Economic reforms & Incentives Other policies towards FIEs 54 .
Corporate tax was only 15% while tax rate at other places was 55% for domestic firms and 40% for FIEs.Reforms. The China Circle Economics and Technology in The PRC. • “Five connections and one leveling” – Connecting roads. Bargaining Power and Foreign Direct Investment in China: Can 1. reduced tax structure which helped in FIEs gaining more share in the export of leather products. 2000. Chinese and Taiwanese to travel and invest in China (More than 60% of the foreign investment in China between 1992 and 1998 is by Hong Kong and Taiwan investors) – 2 years tax exemption for FIE from the date they make profit and 50% tax for the next 3 years – In the Export Processing Zones. – For the promotion of exports. The Mixed Reforms –A generalization and comparative case study on the ETRE systems of China and the EU – 2005. 1997 August 2009 55 . • Special preference treatment to Hong Kong. In most of the local government controlled areas it was close to zero – Subsidies for electricity and other utilities – Building of roads and other infrastructure projects supporting the factory sites. China and Economic Institutions. Water. additional 10% tax exemption is provided for firms which export more than 70% of its products – Export tax refund of 15~17% for leather products till 2004 and 13% till 30-June-2007 – Direct financial subsidies for Research and Development (R&D) expenditure on specified Science and Technology (S&T) projects have increasingly become an instrument of industrial policy.3 Billion Consumers Tame the Multinationals? August 2002. Taiwan and Hong Kong Naughton. Telecommunications. Incentives and Policies Chinese government favored FIEs with their flexible policies. Electricity and Ports and leveling of sites – were the main methods used to attract foreign investment – Free or highly subsidized land – Normally the land is sold at a cost less than the development cost. if necessary Streamlining of government structures and procedures • Delegation to local authorities the power to approve foreign investment • One - stop shopping centre for getting all approvals within a few days for foreign investment into China Source: Developing Countries.
high income tax and taxes on imports – The government also provided an airfreight subsidy of 15-22% on leather exports.Reservation of the sector for SSI led to fragmentation of the industry preventing the achievement of economies of scale. Latin America)—with respect to high interest rates. and a duty drawback scheme that paid back firms excise and customs duties paid on the import of raw materials (such as components. upon the recommendation of the Pande Commission. wet blue and crust leather • Third Phase: after 2000 – De-reservation and De-licensing of several leather goods from the Small Scale sector in 2001 – Duty Drawback scheme.5% of the export FOB value to the fifty percent of export turn-over of notified products) Source: CLE website.5% of the FOB value of the products exported to the markets / cash back of 2. 3% Duty Free Import Scheme. finishing. and other leather goods machinery to an uniform rate of 25%. etc) used in the manufacture and export of finished products • Second phase of modernization: from 1979 – In 1979. Trade Liberalization and the Restructuring of Tamil Nadu’s Leather Sector: Coping with liberalization’s New Environmental Challenges and Lessons from Prior Episodes of Adjustment - 2001 56 . – In the mid-1980s. the government removed all duties on the import of hides and skins. India’s policies were aimed at employment generation and foreign exchange while reserving the sector for small and medium enterprises. Export Credit Passbook (ECPB) and various other schemes – 100% FDI allowed in leather and footwear sector from 2002 – Focus Markets and Focus Products scheme ( cash back of 2. excise duty exemption for exports of final products. • Government constituted a commission in 1972 to examine ways to improve the leather sector – The commission recommended the restrictions of exporting semi-finished leather and promote exports of value added leather products – The government imposed export tax on the export of semi-finished leather • First phase of modernization: took place from 1973 to 1980 with number of incentives and support programs – A cash compensatory scheme to compensate Indian exporters for the export disadvantages they faced vis-à-vis their competitors abroad (South Korean Taiwan. the Kaul commission recommended to reduce import duties on all tannery. packaging materials. footwear. The dereservation in 2001 and 100% FDI is expected to bring scale economies in the leather industry • During 1950s and 1960s.
Trade Liberalization and the Restructuring of Tamil Nadu’s Leather Sector: Coping with liberalization’s New Environmental Challenges and Lessons from Prior Episodes of Adjustment - 2001 August 2009 57 . footwear. Factor Condition Government Support Importance China India Source: CLE website. saddlery.The Government of India is supporting the leather industry in enhancing its competitiveness through upgradation and modernization by providing financial assistance • Department of Industrial Policy and Promotion (DIPP ) provides a comprehensive scheme for modernization and technology up gradation in all the segments of the Leather Industry. • Government had sanctioned Rs 290 Crores for this project and will be implemented through two Program Implementation Units (PIU) namely CLRI and FDDI. 50 lakh for both categories for technology up-gradation/modernization and/or expansion. • Here. footwear components. financial assistance will be provided to the extent of 30% of the cost of plant and machinery for SSI and 20% of cost of plant & machinery for other units (i. non-small scale units) subject to a ceiling of Rs. from tanneries. • This scheme is called “Integrated Development of Leather Sector” (IDLS). It was started in 2002 and will be continued till 2012. leather goods and garments.e. CLRI Website.
93 1209. cluster based approach and the presence of supporting industries India needs to bridge the gap.51 • The growth rate for the projection is assumed as the growth rates observed between the year 2007-08 vs. Elements of Diamond Framework Parameterss Labor Cost Infrastructure Importance China India Factor Conditions Access to Capital Raw Material Availability Demand Condition Access to Market Management Structure Firm Structure and Rivalry Cluster Based Approach & Collaboration Supporting Industries Government Support Presence of supporting Economic Reforms & Incentives Strong Weak Positive Neutral Negative The CLE had set an export target of USD 7 bn by 2011.61 2035.99 3963.82 872.03 2010-11 911.2 bn in the year 2011.28 82.99 784.73 58 .61 5191.55 174.77 4530.57 2009-10 860. 2006-07 Finished Leather Footwear Footwear Components Leather Garments Leather Goods Saddlery and Harness Total (mn $) Source: CLE data 724 1017.93% 18.81 969.94% 21.00% 11. a shortfall of about 25% in the next 3 years.81 3477. 2006-07 Growth % YoY 5.52% 2008-09 812.38 135. In other key factors like infrastructure.41 389.91 706.57 471.11 343.12 381.58 1711.14% 28.98 470.86 322.41 1438.43 2007-08 766.84 309.05% 11.India scores better than China on costs of labor.72 266.33 3059.41 1077. exports would be able to reach a target of USD 5.07 219.95 105.92 423.55 224. Based on current growth rates and segment contributions.
7% 21.85 2009-10 945.14% 28. to achieve the target for the year 2011.2 % of Indian exports.52 2327.61 2289.48 2009-10 1281. growth rates required are between 20 % and 30% for Current composition Finished Leather Footwear Footwear Components Leather Garments Leather Goods Saddlery and Harness Total (Mn $) Source: CLE data all sectors.0% 7. Hence.93 1209.93 1209.50 329.00 3150.10 5508.95 105.43 167. while the global trend is towards casual and comfort shoes Proposed composition Finished Leather Footwear Footwear Components Leather Garments Leather Goods Saddlery and Harness Total (Mn $) Source: CLE data – India produces more men shoes whereas women and children shoes is the bigger market • It is assumed that footwear exports increases to 45% in the next 3 years and finished leather exports reduced to 15% of the total exports inline with the global trends • In this case.11 343.93% 18. several interventions at the policy.2% 2008-09 991.2% 21.7% 33.00 7000.56 128.79 998.00 2007-08 766.3% 24.7% whereas in global trade it is only 16% • Similarly.96 2010-11 1050.0% 45.37 1504.91 951. Current Growth rate 5.0% August 2009 59 .49 1871. sectoral and firm levels are required.00% 11.29 155.99 784.30 2010-11 1656.14% 28.97 4362.1% 2.42 5542.02 437.94% 21.93% 18.17 435.11 343.52% Projected Growth rate 29.93 132.12 406.06 503.6% 27. the growth rates required for footwear and finished leather are 37% and 11% respectively which requires large capacity additions and interventions from the government 2007-08 766.72 266.51 Current Growth rate 5.00 210.65 399.3% 27.00 1400.72 266.05% 11.05% 11.6% 22.4% 23.81 3477. finished leather accounts for 23. other than saddlery and harness which accounts for only 2.3% 25.81 557. all other segments have a growth rate less than 20%.0% 3.00 700.97 188.94% 21.Scenario Analysis Scenario1: Meeting the export targets with the current composition of the portfolio If the export target for the year 2011 are to be achieved with the share of sub-segments being maintained.99 784.00 15.6% 26.00 709.1% 23.52% Projected Growth rate 11.78 552.7% Scenario2: Meeting the export target with 45% share of leather footwear and 15% of finished leather • In India’s current exports.08 1615.51 23.39 1154.7% 2008-09 851.81 3477.7% of the export share.0% 10.2% 10.95 105.60 1664.37 7000.16 1270.00 490.0% 20.28 326.24 4389. footwear exports constitutes about 33. whereas in global trade its around 66% – Formal and dress shoes dominate Indian exports. Currently.0% 37.2% 7.00% 11.
• The potential for employment is across all skills: – semi-skilled and unskilled laborers - 92%. Crores) 4000 3000 162 130 Source: CII.1%. It also needs to add nearly 5 lakh jobs to meet the target • There is a potential for adding over 5 lakh employees in this sector in the next few years.Leather industry requires an investment of over Rs. Sector Tannery Footwear Leather Garments Leather Goods Required Manpower Addition (Nos) 100000 300000 45000 52000 Required Investment (Rs. 7000 Crores to meet the export target of USD 7bn by 2011 set by CLE. Indian Leather Exports – Prospects and Problems - CLE Anecdotal references 60 . – technical supervisors- 7%. senior managers and technologists . – entrepreneurs.
efficiency in operations and latest management practices for the industry to benefit. Promoting footwear component clusters near leather clusters: • Promotion of footwear component industries near the leather and footwear clusters or incentives for building scale for the component industries would boost the leather sector. around 4 bn square feet of finished leather is required. Focus on Training: Increasing the capacity of training institutes • The existing capacities of the training institutes would not be sufficient to meet the employment generation projections for 2011. 200 Crores of FDI (Which is only 0. setting up cross-industry clusters and support them through governmental interventions on infrastructure like port clearances and power. Attracting Foreign Direct Investment: • The leather and footwear sector had seen only Rs.Key conclusions and recommendations Improving cost competitiveness through value chain efficiencies: • Implementing best practices at a firm level and at the sectoral level through cluster based approach. Increasing the tanning capacity : • India’s current capacity of tanneries is around 2 bn square feet whereas to achieve the export target of 7 bn $ in 2011. • FDI brings in scale.15% of India’s total FDI from 1991 to 2005). August 2009 61 .
CLE and Industry Associations Adoption of best practices from other industries helps in improving operational and financial efficiency State Level Industries Department.Improving cost competitiveness through value chain efficiencies: Initiative Promoting a cluster based approach among the companies. CLE Adherence to delivery schedules by the companies results in higher customer satisfaction Improving cost competitiveness through value chain efficiencies: Learning from the Auto Cluster of UNIDO • The objective of the program is to strengthen the capacity of Indian small and medium auto component suppliers to meet the requirements of vehicle manufacturers and.Italian) are disseminated to the companies in the leather sector ( CLE – Leathers – June 2008) UNIDO. These organizations can then be leaders who disseminate the learnings to other members through leather specific clusters Implementations of best practices in manufacturing technologies (value engineering) and manufacturing (lean manufacturing. one or two organizations can be aligned to a cluster in a mature industry like automotive/auto component and learn from the leaders in planned cost declines and efficiencies. 62 . UNIDO and companies in the clusters Expected Results Easy transfer of the best practices among the companies which improves their operational efficiencies. CLE. Organizations can be grouped into small teams within and across regions Ideally.) Promoting visits by leaders of cluster organizations to other industries to understand management and financial practices Simplify clearance procedures for leather products in the Seaports and Airports Likely Stakeholders CII. to enhance their productivity and performance levels so as to facilitate their inclusion in the domestic as well as the global automotive supply chains. costs and collaboration with customers and suppliers Organizations like UNIDO are conducting programs specifically targeted at the leather sector with initiatives like “cluster twinning programs” where best practices of the global leather industry ( in this case . About 40 companies took part in Phase 2 ( 2003-2005). Customs department. and the programme now in Phase 3 has 58 companies participating across the country. CII supported by CLRI. – Phase 1 of the programme was taken up in 1999 in the western region as a demonstration programme in which 20 companies participated. CLE Operational performance of the companies will improve which results in better quality and delivery UNIDO. costing systems etc.
waste elimination). g) reduced inventory levels. and trust and respect for each other. d) reduction in number of accidents. b) improvements in work place and work practices. the intangible benefits have been even higher – measured in terms of a clean working environment. SMED. improved relations between the management and employees. f) reduction in customer returns. e) decline in in-house rejections. red tag). August 2009 63 . f) reduction in customer returns. – One cluster comprises 8 to 10 companies. and j) improvement in productivity. i) fewer machine breakdowns. daily management discipline. delivery schedule achievement. h) reduction in set up time. According to Automotive Component Manufacturers Association. and for each cluster. b) improvements in work place and work practices. e) decline in in-house rejections. wastage. 5S (maintenance of model machine. c) total employee involvement. space utilization. – In-plant training and shopfloor interventions are provided in the following modules: employee involvement (Kaizens – Q circles. The national engineer visits the companies and helps translate the training inputs. etc. d) reduction in number of accidents. i) fewer machine breakdowns. a substantial difference is noticed within a year. g) reduced inventory levels. process capability. labor and overall productivity. absenteeism. inventory turnover. working under the guidance of senior counselors and industry experts. inventory management (containerization. or even within a few months. h) reduction in set up time. cost and delivery is presented by member firms at the periodic review meetings and compared against the baseline survey – These indicators are defects in parts per million (ppm). Innovation and Competence Building in SMEs: The Case of Indian Automotives – Neelam Singh UNIDO The benefits of the programme are seen in a) reduction in absenteeism. The benefits are also in terms of the reduction of energy. c) total employee involvement. productivity improvement ( multi-machine manufacturing. standards). and j) improvement in productivity. transformation in work culture. Grouping is dependent upon the geographical location of the companies selected. • The benefits of the programme are seen in a) reduction in absenteeism. openness and the desire to learn and share. lead-time for production. national engineers (counselors) having expertise in TPM/TQM etc are appointed. According to the counselors. • Data on key performance indicators pertaining to quality. safety). Source: Learning. quality management (Poka Yoke. and sustenance (alignment with cluster activities). flow manufacturing).
costs of certifications like SA 8000 which also enables access to key customers and markets and associated costs of training by the organizations can be subsidized – with a ceiling linked to the number of employees Training centers in the clusters. cutting etc Likely Stakeholders Government of India.g. norms of production. companies Expected Results Cluster based approach can be organized for components also. common salary levels in a cluster • E. CLE and companies in the cluster Training centers in the clusters can disseminate latest product requirements and can provide trained manpower to the necessary companies • Common standards in all areas of manufacturing can be implemented in a phased manner. cutting.g.Promoting footwear component clusters near leather clusters: Initiative Promoting footwear component clusters near leather clusters Likely Stakeholders Government of India. CLRI CLRI.g. One of the reasons for high attrition levels is the significant difference in salaries between various companies in the same area for the same job (e. Following a common salary band in a cluster would help in reducing the attrition. CLE. FDDI etc CLRI. Industry Associations Expected Results Trained personnel to fulfill the projected demand of 5 lakh jobs To reduce the shortage in skilled operations which provide the desired value addition and product premium Companies will provide more training to the employees which leads to improvement in quality. Incentives can be provided for the component industries to add capacities resulting in increase in economies of scale / consolidation of the industry Focus on women’s footwear: Availability of components will allow Indian companies to focus on women’s footwear which is the larger market compared to men’s footwear Focus on Training : Increasing the capacity of training institutes and enable training by organizations Initiative Increase the capacity / number of training institutions in the leather and footwear sector Specific training and certifications in the “hot skill” areas of toe lasting. E. productivity etc To enable fair labour practices. Skilled and Semi-skilled operations State level Industries Department. stitching etc) 64 . CLRI.
cost of treating the wastewater can be subsidized to the tanneries with conditions to upgrade the machinery August 2009 65 .Increasing the tanning capacity: Initiative Likely Stakeholders Expected Results Increases the availability of finished leather to meet the export target for 2011 Increased motivation for modernization thereby improving efficiencies and building scale Providing financial assistance/ CLRI. UNIDO and State Level subsidies (over current levels) to Industries Department modernize the existing tanneries and thereby building scale Incentivsing environment friendly State Governments initiatives to promote modernization and enabling cost competitiveness: For example.
or outsourcing Focus on IT and real Estate portfolios. and tax management to aggressively reduce external spend % savings* 10-20% Focus on streamlining business processes via simplification. demand management. projects. 5-10% elimination. and support rationalization Focuses on re-aligning staff based on method of adding value and realtionship to business Shift to a more cost-efficient business model 15-25% 10-30% Strategic. The dynamics of the industry would therefore undergo a change: Consolidation: There may be a consolidation of the companies which brings Collaboration: Collaborative approach between the players to improve cost competitiveness Tax benefits and incentives in line with global competitors (like China) to be provided to enable FDI Government of India / state governments Assist Indian companies in identifying partners Government of India of choice for strategic partnerships In the short term: Typical steps to be undertaken by the firms to survive the downturn • Some of the strategies followed by the companies to survive / mitigate the risks in the downturn are: – Optimize manufacturing and supply chain networks – Reduce material costs through sourcing strategies – “Variabilize” cost structure through tolling and outsourcing – Challenge value contribution of each business unit and plan accordingly – Rethink the operating model to reduce cost and business complexity • Some of the methods of reducing costs are listed below: Tactical Improvements Cost Imrovement levers Spend reduction and Demand management Business Process Redesign Infrastructure Rationalization Service Delivery Model and organization Alignment Business Model Redesign Description Focuses on strategic sourcing.Attracting Foreign Direct Investment: Initiative Leather parks with all amenities constituting only export organizations to be initiated Likely Stakeholders Government of India / state governments Expected Results Foreign companies bring in market access and efficiencies of scale and scope. platforms. Structural Improvements 20-30% * relative savings estimates based on Deloitte experience. They in turn force Indian companies to improve their operational efficiencies. Source: Deloitte Research 66 .
Annexure: "Results of the Primary Survey" Primary Survey • The responses from 12 companies (as detailed in the terms of reference) were collected in the primary survey • India’s leather clusters are present in South. North and East zones. North and East zones which together total 87% of the manufacturing facilities in India. Crores) <20 21 – 50 51 - 100 101 - 200 >200 No. Hence. the distribution for the study focused significantly on the South. Sector Tannery Footwear / Footwear components Leather goods Leather Garments Saddlery and Harness No. The Central and West zones together contribute only 13% of the total number of units. of Companies 1 4 5 2 August 2009 67 . of Companies 6 3 1 2 Approximate number of employees <100 101-500 501 – 1000 >1000 No. of Companies 2 4 4 1 1 Region South North West East No. of Companies 3 6 1 1 1 Annual Revenue (Rs.
Business performance Supply chain priorities Collaboration Visibility Flexibility Product innovation Operational excellence Human resources Infrastructure 68 .
5 4 3.Business Performance Industry growth rate. new geographic markets and new products are expected to drive revenue for Indian leather industry in the immediate future.5 2 1. JVs and M&A are seen as the next set of drivers Revenue growth drivers .next 3 years 5 4.5 1 Industry growth rate Economy New geographic markets New market channels New products / services Joint ventures / alliances Merger / acquisition Indian Leather and Footwear sector Scale 1 = not important 5 = highly important August 2009 69 .5 3 2.
5 4 3.% 40.% 20.% 10.% Negative (net loss) Break Even (no profit/no loss) Up to 5% profit 5-10% profit 10-15% profit 15-25% profit Over 25% profit Indian Leather and Footwear sector 70 .% Peer group distribution of profitability percentage: EBIT (earnings before interest and taxes) in last fiscal year. Profitability of 50% of the companies were 5% or less Profitability Regional Profitability 60. revenue growth.5 3 2.5 1 Return to shareholders Revenue growth Market share Profitability ROA Customer satisfaction Customer loyalty Scale 1 = Poor Performance 3 =met goals 5 = Exceptional Performance Indian Leather and Footwear sector The profitability of Indian companies were lower due to rising labour costs and input costs. Customer satisfaction and retention of customers.% 30.5 2 1.Most of the Indian companies performed well in shareholders return. .% 50. This is also reflected by the fact that Indian exports exceeded the target set for the year 2007-08 by 14% Business performance metrics Performance against goals 5 4.
5 1 Product innovation Time-tomarket Sourcing Quality ManufaManufaManufacturing cturing cturing flexibility productivity lead time / cost Logistics Customer Supply service chain cost Scale 1 = not important 5 = highly important Indian Leather and Footwear sector Adoption of technologies that aid material and information flow is low in leather sector in India.% . most of the firms do not measure basic parameters for competitiveness like Indian Leather and Footwear sector August 2009 71 . Supply Chain Priorities 5 4.% 90.% 70.% 50.5 4 3.% PDM/ PLM EDI Trading Procurement Exchanges ERP Demand planning APS QMS WMS TMS CRM • Profitability of various SKUs • Manufacturing non-conformance rate • Outbound freight cost. etc.% 10.5 3 2.% 40.% 80.% 20. Less than 50% of the firms have an enterprise application (“ERP”) for transaction processing and management information. Also. manufacturing lead time and productivity and time-to-market seems to be the key priorities of Indian companies.5 2 1.% 60.One of the primary reasons could be the size of investments involved in implementation and maintenance which could be prohibitive for the firms in this industry given their size Technology: implementation and benefit % of companies with some to extensive implementation 100.Supply Chain Priorities Improving Customer service.% 30.
Collaboration Less than 50% of the organizations surveyed collaborate with the customers on tactical areas like demand planning.% 70.% 90. transportation planning and production planning initiatives.% 10.% 30.% 80.% 20.% 60.5 1 Strategic planning Demand planning Promotion planning Production planning Inventory replenishment Transportation planning Cost reduction Quality improvement Scale 1 = no benefit 3 = moderate benefit 5 = very high benefit Indian Leather and Footwear sector 72 .% 50.% .% Strategic planning Demand planning Promotion planning Production planning Inventory replenishment Transportation planning Cost reduction Quality improvement Benefits Gained 5 4.5 2 1.5 4 3. Organizations who collaborate with customers have reported benefits Customer collaboration and benefits achieved % of companies with medium to high collaboration 100.5 3 2.% 40.
% 50. Less than 20% of the companies reported on-time deliveries of over 70% from suppliers Supplier collaboration and benefits achieved % of companies with medium to high collaboration 100.5 4 3.Similarly. they have not achieved significant benefits.% 80.% 30.% Strategic planning Demand planning Promotion planning Production planning Inventory replenishment Transportation planning Cost reduction Quality improvement Scale 1 = significant disadvantage 3 = equivalent capability 5 = strong advantage Benefits Gained 5 4. However.% .% 70.% 20.5 3 2.% 40. These levels of collaboration have resulted in delayed deliveries from suppliers.5 1 Strategic planning Demand planning Promotion planning Production planning Inventory replenishment Transportation planning Cost reduction Quality improvement Scale 1 = not important 5 = very important August 2009 73 .% 60.5 2 1. only about 50% of the companies surveyed have engaged in a collaboration with suppliers.% 10.% 90.
% 20.5 2 1.% 30.5 1 Delivery dates Supplier inventory Supplier Visibility Indian Leather and Footwear sector Supplier capacity FG Production Inventory schedule Capacity Product cost Product Profit Customer forecast Customer inventory Customer profitability Customer service Customer retention Internal Visibility Scale 1 = no information available 3 = some information available 5 = information is readily available Customer Visibility 74 .% .Number of on-time deliveries/total number of deliveries (in %) Industry Supplier Delivery % 60.5 4 3.% 50.% <50% 50-60% 60-70% % of On time deliveries 70-80% >80% Indian Leather and Footwear sector Visibility Lack of collaboration with the suppliers and customers has resulted in poor visibility along the supply chain Information availability to understand supply chain performance 5 4.5 3 2.% 10.% % of companies 40.
5 1 Product mix Production volume Custom orders Change in prod.5 4 3. spec. Delayed differentiation Make/buy decisions Shift manufac. Current Capabilities 5 4.5 4 3.5 2 1. Indian companies have not created capabilities in flexible supply chains. make/buy decisions and abilities to rapidly change product mix and volumes Flexibility: Current capability and importance in 3 years. load Scale 1 = significant disadvantage 3 = equivalent capability 5 = strong advantage Importance in Next 3 Years 5 4.Flexibility Due to the poor visibility of the supply chain and low levels of collaborations with in the supply chain.5 3 2. Organizations have not indicated capabilities in concepts like delayed differentiation.5 3 2.5 1 Product mix Production volume Custom orders Change in prod.5 2 1. spec. Delayed differentiation Make/buy decisions Shift manufac. load Scale 1 = significant disadvantage 3 = equivalent capability 5 = strong advantage Indian Leather and Footwear sector August 2009 75 .
5 2 1.Product Innovation Though only a few Indian companies have their own design studios. innovation in developing the product is high.5 1 Product innovation Indian Leather and Footwear sector Time-to-market 76 .5 4 3.5 4 3.5 1 Product innovation Time-to-market Innovation Priorities 5 4.5 3 2. Companies are also focusing on improving their time-to-market capabilities Product innovation: capability and priority Current Capabilities 5 4.5 2 1.5 3 2.
% 50. order management.5 1 Sales & Marketing Forecast Order management Procurement Manufacturing Distribution Supply chain network R&D Engineering Indian Leather and Footwear sector Scale 1 = no benefit 3 = moderate benefit 5 = very high benefit August 2009 77 . Those who have invested have achieved higher benefits Operational excellence: functional focus and benefits achieved % with Some to Major Implementation 100.5 2 1.5 4 3.% 70.5 3 2. manufacturing etc. But only a few companies are investing in operational excellence in R&D.% .% 30.% 90.% % of companies responded 80.Operational Excellence Indian companies show implementation of major functions like forecasting.% 60.% 20.% 10.% Forecast Sales & Marketing Order management Procurement Manufacturing Distribution Supply chain network R&D Engineering Benefit Achieved to Date 5 4.% 40.
% .% 40.5 3 2.% 60.% Customer segmentation Demand planning Supplier scorecards Design for mfg Lean mfg Continuous improvement Quick changeover Benefit Achieved to Date 5 4.5 1 Customer segmentation Demand planning Supplier scorecards Design for mfg Lean mfg Continuous improvement Quick changeover Indian Leather and Footwear sector Scale 1 = no benefit 3 = moderate benefit 5 = very high benefit 78 .5 4 3.% 70.% % of companies responded 80. This low level of implementation results in poor visibility and business performance Operational effectiveness techniques and benefits achieved % with Some to Major Implementation 100.% 10.% 20.5 2 1.% 90.% 50.Less than 50% of the companies have implemented customer segmentation.% 30. demand planning and lean manufacturing techniques.
5 3 2. TQM were not implemented in most of the companies.% 40.5 1 Design for quality Quality certification SPC TQM Six Sigma Indian Leather and Footwear sector Scale 1 = no benefit 3 = moderate benefit 5 = very high benefit August 2009 79 .5 4 3. process control techniques.% 60.% 10.% Design for quality Quality certification SPC TQM Six Sigma Benefit Achieved to Date 5 4.% .% 90.Though a few companies have obtained quality certifications in ISO.% 70.% 30.% % of companies responded 80. These factors affects the company’s performance in the areas of quality.% 50.% 20. inventory holding and therefore cost management Quality management and benefits % with Some to Major Implementation 100.5 2 1. SA8000 etc.
% 70.Very few companies have the plans of outsourcing their manufacturing and logistics.5 4 3.% % of companies responded 90.% 50.5 1 Reduce workforce Product rationalization Close Facility Move production Outsource mfg Outsource logistics Transportation optimization Supply chain network optimization Indian Leather and Footwear sector Scale 1 = no benefit 3 = moderate benefit 5 = very high benefit 80 .% 30.% 20.% 40.% 60.5 3 2. product rationalization etc. Cost reduction % with Some to Major Implementation 100.% . Most of the companies are not planning to implement cost reduction plans like workforce reduction.5 2 1.% 80.% Reduce workforce Product rationalization Close Facility Move production Outsource mfg Outsource logistics Transportation optimization Supply chain network optimization Benefit Achieved to Date 5 4.
% 20.% 20.% >15 % 10-15 % 5-10% < 5% Infrastructure Nearly 70% of the respondents believe that customs clearance. Indian leather companies are fraught with inefficiencies in terms of higher inventory and delayed deliveries. Most of the companies indicate attrition levels of over 15%.Due to poor visibility in the value chain (customer and supplier).% % of Companies 40. This results in higher costs for training.% 30. Given the nature of the industry and export destinations. these typically result in high levels of obsolescence On- time delivery for most of Indian companies is less than 70% Industry On Time Delivery 60.% <2 2-4 4-6 Inventory Turns (Annual cost of goods sold) / (average total on hand inventory) 6-8 >8 Human Resources There is a high level of attrition in this industry.0% 70.0% 50.% .% 40. poor quality and delay in delivery dates Attrition levels in Indian Leather industry Attrition levels 60. Indian Leather and Footwear sector % of Companies Over 50% of the Indian companies hold 3 – 6 months stock on an average Inventory Turns 60.% 10.% 50.% <70% 70-80% 80-90% >90% % of on time deliveries Percentage of shipments that meet customer request date (for the different peer groups).% 40.0% 20.% .% 30.% 50.% 30.% 10.% Customer Clearance delays Multiple responses allowed Source: Primary Survey conducted by Deloitte August 2009 81 Inland Transport delays Power Outages / Cost of own power Water Others % of Companies Indian Leather and Footwear sector .% 50.0% 60. inland transportation delays and power outages are the key disablers of their competitiveness % of companies who responded that infrastructure has significant impact 100.0% 40.0% 10.% 20.0% .% 10.0% 30.% .0% 80.% 90.
SA8000 SEZ SME SPC sqm SSI TMS TQM UAE UK UNIDO US USA USD WMS WTO Louis Vuitton Moet Hennessy Million Non-Governmental Organization National Institute of Fashion Technology National Manufacturing Competitiveness Council Product Data Management People for Ethical Treatment to Animals Program Implementation Units Product Lifecycle Management Quality Management System Research and Development Return on Assets Indian Rupees Social Accountability 8000 Special Economic Zone Small and Medium Enterprises Statistical Process Control Square Meter Small Scale Industries Transportation Management System Total Quality Management United Arab Emirates United Kingdom United Nations Industrial Development Organization United States of America United States of America United States Dollar Warehouse Management System World Trade Organization 82 .List of Abbreviations AISHTMA APS ASEAN bn CAGR CEO CETP CII CLE CLIA CLRI CRM CSIR DIPP DnB e. EDI ERP EU FAO FDDI FDI FDRA GBS IDLS ISO ITC JV LCL All India Skin and Hide Tanners and Merchants Association Advanced Planning and Scheduling Association of Southeast Asian Nations Billion Compounded Annual Growth Rate Chief Executive Officer Common Effluent Treatment Plant Confederation of Indian Industries Council for Leather Exports China Leather Industries Association Central Leather Research Institute Customer Relationship Management Council of Scientific and Industrial Research Department of Industrial Policy and Promotion Dun and Bradstreet Example Electronic Data Interchange Enterprise Resource Planning European Union Food and Agricultural Organization Footwear Design and Development Institute Foreign Direct Investment Footwear Distributors and Retailers of America Global Manufacturing Benchmarking Survey Integrated Development of Leather Sector International Organization for Standards International Trade Center Joint Venture Labour Contract Law LVMH mn NGO NIFT NMCC PDM PETA PIU PLM QMS R&D ROA Rs.g.
Contacts August 2009 83 .
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