The Leather Global Value Chain
&
The World Leather footwear market

Introduction

Evolution of the Leather Value Chain

Footwear Industry in Central and Eastern Europe

Components of the Value chain

Global distribution of Footwear production

The role of Developing Countries in the value chain

Policies & References

Association of Romanian Leather and Footwear Manufacturers

Evolution of the Leather Value Chain

Global Value Chains

A commodity chain encompasses the whole range of activities involved in the design, production, and marketing of a product. The value chain, also called the commodity chain and production-consumption chain, is described as a comprehensive set of activities that are required to bring a product from a concept stage to marketing and consumption of end products (Gereffi1999). It involves a series of components that begin with product design and the selection and purchase of raw materials and intermediate inputs and go through processing, marketing and distribution. The chain continues with the operation of sales of intermediate and end products. The last component of the chain is the consumption of final goods that is regulated by internal and external demands.

The process of globalization has promoted two types of chains through which global production networks manage and operate: the producer-driven and the buyer-driven commodity chains. The first type is characteristic of capital-intensive industries such as automobiles, aircraft, computers, and other advanced technology industrial activities. The buyer-driven commodity chains are organized around labour -intensive industries such as footwear and garments in which the marketing and manufacturing agents (retailers, branded marketing agencies and branded manufacturers) set up global production networks, principally in developing countries. Enterprises in exporting, developing countries produce the finished goods under contract following the specifications, guidelines and technical advice provided by the purchasing agents. Successful examples of buyer driven commodity chains were Japanese in the 50s and 60s, Asian in the 70s and 80s and Chinese in the 90s (Gereffi 1999).

The Leather Global Value Chain

The leather industry utilizes a byproduct of slaughterhouses and transforms the raw materials into various types of leather and manufactured end products. The leather production-consumption chain has three processing stages, each requiring different combinations of material inputs, labour and capital. The first stage is the recovery of raw materials, that has direct links with animal production activities; hides and skins are recovered from dairy, draught animals or animals from slaughter houses. Leather tanning and finishing is the second stage that involves relatively capital-intensive operations while the third stage, which is the production of leather products, is a more labour intensive activity. These three processing stages are linked to key commercial components of the chain, the marketing of intermediate inputs, components and end products, and trade and consumption. Inputs to the chain without which the chain cannot operate under competitive basis are: qualified labour, design and art centers, component production, access to chemicals, technical and administrative support institutions, research and development, training as well as a set of adequate policies.

Marketing is the core of the modern leather product business and the principal main marketing agents have the necessary trade information and have established a wide network of sales channels that allow them to contract production, provide finance and serve the customer on time (within three to five weeks after placing the order) managing the complex mechanism of supply chain within the strategy of buyer-driven commodity chains (Schmel1998, Magretta 2000). There are two markets, the local and the export market; the latter is usually managed within the rules of a buyer-driven commodity chain, supply chain and triangle manufacturing as will be discussed later in this paper.

The support system for investment and innovation is shown in the Diagram as an independent component of the chain but in reality should be present and active in the policy components, services and in all linkages between components of the chain.

Livestock Slaughter Collection Primary Processing

Secondary Processing

Footwear and Leather Value Chain

Components of the chain: raw materials, industrial processing, trade, consumption and data

Raw Materials

This section of the paper refers principally to FAO and UNIDO publications and technical papers.

The leather industry depends on the availability of raw materials, which in turn is regulated by the animal population, the off-take ratio and the weight per hide and skin recovered. Between 1994 and 1996, 75% of the bovine herd was located in developing countries, which produce 56% of hides on a numerical basis and 43% of the world hide output by weight.

The largest disparity between population and output of hides occurs in Africa, which holds more than 10% of the worlds cattle but contributed during the period only 4.5% of the total hide output due to low levels of off-take ratio, poor handling in the field and price policies.

In the case of sheep and goatskins, the output coming from developing countries accounted in both cases for similar proportions to their global stock in numerical terms, 59% in sheepskins and 95% in goatskins (FAO 1998).

Sheep and goatskins represent 6% of the total leather supply in the world. Thirty percent of sheepskins come from three countries, New Zealand, Australia and the former Soviet Union. Most of the goatskins (3% of the total leather raw material) come from developing countries, mainly China, India Pakistan and tropical Africa.

In the period 1994-96 the global bovine population of some 1,477 million head yielded approximately 5.5 million tons of raw hides on a wet salted basis. Total production of heavy leather was 460,000 tones and that of light leather 10,138 million square feet. Approximately 65% of the light leather was used for the manufacture of 4,539 million pairs of shoes with leather uppers. The remaining 35% was used for the manufacture of garments, furniture and travel goods including handbags.

621,000 tones of raw skins from sheep and goats yielded 4,140 million square feet of sheep and goat leather. Part of the sheep leather was used for shoe linings and some goat leather in shoe uppers, but the majority was used for manufacturing a large range of leather products from clothing to wristwatch bands (FAO 1998).

Geographical Shifts in the production of raw materials

Between the early 80s and the mid 90s, world output of bovine hides and skins grew 14%. Growth concentrated in developing countries and contracted in developed regions. However, developed regions still account for more than 50% of the total world production. Latin America is the region with the largest production in the world, 20.6%. Sheepskin production in the world grew by almost 20% during the same period. As in the case of cattle hides, growth was higher in developing countries. Growth in goatskins during the period was 70%, two thirds of which took place in developing countries.

Shifts in Industrial Processing

Schmel resumes the history of the leather industry and its technical development during the last century in the following manner: “Leather and its derived products manufacturing turned into industry by mechanizing the processes. (The history of the leather goods and glove making illustrates clearly the validity of this statement. While shoe factories eagerly adapted machines for a wide range of operations, leather goods makers were reluctant to use other equipment than the cylinder bed sewing machines and therefore stayed behind in productivity.) Application of leather substitutes, modern chemicals and automation -including CAD/CAM/CIM - added more momentum to the development of tanneries and especially shoe producers. Competitiveness depended mainly on the know-how that was equivalent to technology. This process lasted from the beginning of the century to about the last decade” “Tanners were confronted with environmental problems, shoemakers were in search for suitable (flexible) production control mechanisms (e.g. conveyors, rinks, quality assurance, introduction of computers) in the 1970s and 1980s. This is the era of development of production systems capable of meeting the challenges of pollution, quality, efficiency, logistics, and cooperation. Innovations came still from technical knowledge but managerial aspects started to gain importance in practical applications. The last decade of the millennium is about marketing and trading whereby established trade contacts, brands, promotion and financial power are far more valuable assets than technology and related knowledge”(Schmel 1998).

Output of the Tanning and Finishing of hides and skins

Most of the output from the tanning component of the chain is light bovine leather, used to make shoe uppers and other finished goods. The remainder products from the tanning processing stage consist of heavy leather and leather from sheep and goats.

A decline in the production of heavy leather, which had been apparent for several years, was reversed by a 30% increase in the mid 90s, in line with an increase in leather shoe production. The growth in production was highest in the Far East, from 22% of the total world production in 1990 to 36% in 1996. This growth is assigned principally to China who has become the largest heavy leather producer in the world. The output of heavy leather in Europe and the former Soviet Union area decreased while the Near East, Africa and Latin America maintained their level of contribution and some increased (see figure 1).

Figure - Regional Share in the World Production of Heavy Leather from Bovine Animals

Production of Light Leather from bovine animals rose by 25% during the period 1979-1996. Developing countries increased their output by 80%, raising their share of tanning of this type of leather to over 55% worldwide. Again the fastest growth took place in the Far East, its output is equivalent to 36% of the world total, having risen from 16% in 1990 and 21% in 1985 (See figure 2). Sensible decreases in shares of total world production are registered in Europe (from 36% to 27%).

Figure - Regional Share of Light Leather from Bovine Animals

Figure - Regional Share in the World Production of Leather from Sheep and Goats

The global output of sheep and goat leather in the world expanded less than that of bovine leather, but in the developing countries production grew from 44 to 66% in the period 1979-96. Again, the largest percentage gains in production took place in the Far East. The tanning of sheep and goatskin declined in the developed countries during the same period (figure 3) (FAO 1998).

The Manufacture of End Products

Footwear

In 1996 65% of all leather was converted into 4539 million pairs of shoes with leather uppers. The remaining light bovine leather was used for the production of garments, furniture and travel goods FAO (1998).   The production of shoes with leather uppers grew by 30% between 1979 and 1996. During this period production rose in developing countries by 160% and their share of global output grew from 35% to 71%. The expansion in leather shoe production was greatest in the Far East and to a lesser degree in Latin America. Production declined in all developed regions.

Asia is the dominant producing region in the world. Its contribution to world production has steadily increased from 51% in 1985 to 63% in 1993 and 77% in 1999 with China by far the first in the world (Price 1999).

Figure - Regional Share in the World Production of Leather Shoes (all Types)

A regional breakdown of footwear production around the world in 1998 is illustrated below. China dominates the production scene and is also the largest exporter and consumer of footwear in the world SATRA (1997-98).

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Regional breakdown of footwear  production around the world 1998

Source:SATRA

Table - Leading Footwear Producers and Traders in the World (1997)

*These countries mainly re-export
Source: SATRA (1999)

Of the ten countries that were identified as the leading producers of footwear in 1998, China accounts for almost 50% of the world production. In Central and South America Brazil and Mexico are large producers for the region and it is expected for them to remain among the top ten world producers in the present decade. Italy was the fifth largest world producer in 1997 (fourth in 1998) and the main European producer.

It is expected that because of the very specific characteristics of its production system and those of its national chain Italy will maintain its position in the world’s footwear global chain.

In 1998 there was a slowdown in the worldwide global production of footwear, this being only 0.3 per cent higher than in 1997, markedly down from the average yearly increase of 4.2 per cent recorded in the previous three years. Asia increased production by 1.3% while the rest of the world saw relatively static or decreased production. China, the largest producer in the world (5520 million pairs) was followed by India with (685 million pairs) and Brazil (516 million pairs). Italy, Europe's star performer, produced 425 million pairs. Vietnam left the group, Indonesia lost ground and Pakistan was the newcomer.

World leading Footwear producers 2000

Trade

Leather and leather products are the most widely traded and universally used commodities in the world. Formal trade in these products was close to US$43 billion in 1994-96 and it is estimated that informal trade and business amount to equivalent values. The total value of trade (including leather shoes with leather uppers) is close to three times the value of the meat trade and more than three times that of the sugar trade as shown in Table 2.