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

The role of Developing Countries in the value chain

Raw Materials

The availability of raw materials to the traditional leather manufacturing industries of the developed countries is influenced by the export restrictions imposed by developing countries. Until recently these restrictions meant that 50% of the world bovine hides and 22% of sheepskins were subject to restricted export (Vila 2000) i.e. had to undergo some form of processing before export.

Table 6 lists restrictions to exports of raw hides and skins valid in early 2000. Restrictions appear in large producers in both developing and developed countries.

An example of what is considered as non-tariff barriers among large producers of leather products is highlighted in recent news from India: The Economic times comments on the potential threat of new technical specifications on product quality that are emerging in the main buyer countries of the industrialized world, that could negatively affect the US $2 billion trade of Indian leather products. The Indian Council of Leather Exports is considering the new specifications as non-tariff barriers.

Table - Restrictions to Exports of Hides and Skins in Selected Countries

Source: Icex in: ( Vila 2000)

Competitiveness in the production of footwear

At the beginning of the 90s, the two most fundamental determinants of competitiveness in footwear production were considered to be, production costs and the differential impact of trade barriers. At that time other, less quantifiable factors that influence competitiveness were considered to be the following: technological developments; proximity to major markets and the role of quick response; requirements for high quality production; access to technology and management, design and marketing skills; the increasing importance of offshore, joint venture and contract production and some more country–specific factors such as political and infrastructure constraints and the availability of raw materials and components(Landell Mills 1990).

The significance of several of the above factors for the next five years has been subject to revisions. At a recent conference, it was predicted that factors (different from shoemaking technology) to make shoes better, quicker or more productively than before will be driving the footwear industry in the new millennium (SATRA Conference, Hong Kong, April 2000).

The importance of trade barriers and quotas may also diminish with China’s admission to the WTO. Trade barriers and existing quotas in the EU and the United states would fall and the possibility for China to negotiate worldwide reductions on import duties would be open (World Footwear September/October 2000).

The global supply chain of footwear which developed in the last decade and which is replacing the traditional pattern of integrated shoemaking (leather processing, tanning, finishing and shoe manufacturing in many developed countries) has been an agent for the transfer of designs, the introduction of modern management practices, quick response, and technology and quality improvement to producing developing countries participating in outsourcing, and has provided the producer countries with indirect access to major markets.

Competitiveness in the production stages of the chain has been addressed, in many instances, through the promotion of collective efficiency by enterprises operating within clusters and industrial districts as discussed in other sections of the paper The design and managing of different types of marketing and distribution global chains represent the challenge of the present decade to stay competitive in a fast changing world.

Labour Costs as a factor of Competitiveness

Labour costs continue to be a dominant factor of competitiveness. The slow technical  development in footwear operations, particularly in the production of uppers makes footwear  manufacturing such a labour intensive operation that entrepreneurs are induced to search for  countries and regions with lower wages. More efficient use of labour is required even in  regions/countries usually considered sources of unlimited cheap wages, as is the case of Southern  China.  The differences in labour costs in 1998 provide a partial explanation for  Korea, Taiwan and Hong Kong having been displaced from the group of the ten top footwear  producers in the course of the last decade.

Table 7. Labour Costs in Selected Footwear Producing Countries, 1998

Source: Labour Department and BASF internal, in:
“Status and Outlook of the Leather Industry in the New Millennium”
L.Vila, BASF, presented at the Round Table of the Leather Industry, Bologna, 6 May 2000.

3.2.2 Production Costs

The high proportion of material costs in total costs in footwear manufacturing in developing  countries and economies in transition is cited as one reason for their preference for job  subcontract in the production of shoes (UNIDO, Schmel, 2000).  While in Italy labour costs correspond to 38% of the total production costs, in Hungary 10%  and in Zimbabwe 6%. Materials costs have a much larger influence on total production cost,  they represent 54% the total cost in Hungary and 76% in Zimbabwe and 45% in Italy.)

Table 8.

Labour Costs and Production Costs in Selected Countries

Source: UNIDO, December 11, 2000 “Structure and Production Costs in Footwear Manufacture, Prepared by F. Schmel for the 14 Session of the Leather Products Industry Panel.

3.3 The Creation of Global Networks

Globalization has been defined as the erosion of barriers to the international flow of goods (Schmitz 1998).  In the case of the leather processing industry globalization started with the gradual relocation  of manufacturing activities, first from Western Europe to Asia, Pakistan, South Korea, India,  then to South Eastern Asia, China, Indonesia and Vietnam. In the last few years there has  been a move of multinationals towards East Europe and Central Asian bringing job-work for  the manufacturing of leather and leather products to Kazakhstan, Kyrgyzstan and Uzbekistan  (Schmel 1998). In this manner, the traditional pattern of integrated shoemaking and other  leather articles is being replaced by a global supply chain stretching across different  countries, zones and cultures. 

Prokopenko indicates that in the economy of globalization, the comparative advantages of nations  are exploited and integrated with the main objective of seeking cost efficiency and value  added productivity. A dominant characteristic of the economy of globalization is a continuous  drive for performance competitiveness among countries and companies and even among units inside the company (Prokopenko 2000). The factors of production in this economy are very  flexible and can be shifted easily from one place to another. 

Cooperation between firms is required for attaining higher competitiveness through  productivity growth and market expansion. One of effective way of improving  competitiveness is to adopt business network forms. Industrial clusters and industrial districts  are examples of inter firm networks with sectoral and geographic concentration.

The Sinos Valley Footwear Cluster in Brazil

The Sinos Valley footwear cluster in Brazil - studied and discussed by Schmitz and others,  has provided abundant information on the characteristics of an industrial district, its internal  linkages and its linkages to external markets as well as its evolution through time.

Analyzing this cluster in Brazil, Schmitz observed and recorded a series of events and  developments that by 1991 had taken place in Sinos valley that could explain the success of  the cluster’s footwear industry in the local and external markets (it accounted for a very high  portion of the Brazilian shoe exports and a large coverage of the local market). 

In the history of the cluster’s development, the following characteristics were observed by  Schmitz, all of which the specialized literature had identified as requirements for success in  the development and operation of industrial clusters:

• division of labour and specialization among firms;
• the provision of specialized products and services at short notice;
• the emergency of suppliers to provide raw materials and components;
• the growth of suppliers of second hand machinery and spare parts;
• the emergence of agents who sell to distant national and international markets;
• the growth of specialized producer services in technical, financial and accounting matters and,
• the formation of associations providing services and lobbying for its members” (Schmitz 95).

Table 9. illustrates the above characteristics of the cluster, the integrated character of the  industrial activities, their dimensions and the complementary characteristics of the members  of the cluster.

The 70 export agents that appear in the table undertake additional producer services besides  trade such as freelance designers, technical and financial consultants and specialized transport  services. Institutional infrastructure that has been created as a result of the cluster includes  three centers for specialized training and technical services for the shoe and leather industry;  six specialized industrial associations and two professional associations. In 1991 Sinos Valley  exported 100 million pairs, 70% of its output, for US$ 900 million.

The analysis of the Sinos Valley cluster showed the important role played by export agents in  promoting exports. However the cluster manufacturers relied heavily on the advise and  technical assistance given by the agents (bringing new designs and assisting firms in attaining  international quality and delivering standards) and invested little in product development and marketing concentrating on the US market where 70% of exports went at the time of the  analysis (Schmitz 1995).

Table - The Sinos Valley footwear cluster - Types of firms, numbers and workers in 1991

Source: ABAEX (1992). Projections on information from FEE, AICSUL, ACI-NH, SINDIMAQ, SINBORSUL, Municipal Government of Novo Hamburgo in: Schmitz H.

Characteristics of the cluster, such as the concentration of skills, the proximity of  suppliers and the existence of self-help institutions have been identified as the reasons for  the accelerated response of producers to government incentives to export and the stable  management of business during their gradual dismantling. It has been also highlighted  how well Sinos Valley was able to escape the continuous microeconomic crisis in Brazil  during the 80s and early 90s(Schmitz 1995).

Further analysis conducted by Schmitz after 1995, investigated whether enterprises in the  export-oriented Silos Valley had intensified cooperation to face increasing global  competition in leather footwear markets. Research results showed a substantial increase  in bilateral vertical cooperation for example, joint work during design and production  between producer of components and the user of components, contributing in this manner  to major advances in raising product quality, speed of response and flexibility. While  bilateral cooperation increased, multilateral cooperation oriented to the creation of  alliances along the total value chain collapsed. This happened in spite of the operational  success the cluster had shown up to the 80’s and the fact that its competitive advantage  was not based in cheap labour but on the collective efficiency of specialized  manufacturers and suppliers.  The research conducted by Schmitz registered improvements in production during the 90s  but indicated that improvements had only allowed the cluster to merely maintain its  position. Exports in 1997 were at the same level as those of 1990 and profits had  declined. These findings confirm the opinions of Kaplinsky and others who had predicted  that concentrating activities on the manufacture component of labour intensive value chains might not lead to sustainable income growth and that a better strategy for securing  income growth would be shifting towards stages of the chain with greater value added,  i.e. upgrading within the value chain into the design and marketing components. The  latter was the main objective of the “Shoes from Brazil Multilateral Programme” that had  started in the 90s but had failed mainly due to the impossibility of promoting stable  alliances along the value chain, among Sinos Valley enterprises

Table - Horizontal and Vertical Cooperation in Sinos Valley in the 90s

Source: Schmitz, 1998

According to Schmitz (1998), the program failed because globalization makes local  cooperation very difficult and in this case produced two effects: “some leading enterprises  put their alliance with a major global buyer above cooperation with local manufacturers;  and the state failed to mediate at critical moments between conflicting business  associations and entrepreneurial alliances”.

3.3.2 Outsourcing (Verite 2000)

Manufacturers from the United States and other developed countries began to outsource  production from independently owned factories in the 80s, when international financing  was made available to develop factory facilities in developing countries. 

There are many advantages in outsourcing for already established manufacturing  enterprises managing export markets: increasing capacity and flexibility without  investing, specialization, reduced production costs, reduced delivery times and provision  of opportunities to experiment with new production lines and suppliers without having to  take financial risks. Generally, costs involved in the production of new samples are  absorbed by the producing company in the hope of receiving an order. Outsourcing has  become very common in labour intensive industries such as apparel and footwear. 

Outsourcing fulfills the desire of multinational corporations to buy and market goods  from developing countries and complies with the wishes of manufacturers in developing  countries to do production-work and thus participate in the global business world. Several  constraints common in the manufacturing enterprises of developing countries make it  difficult to bring the parties together: 

• Lack of market information in developing countries new in the international markets
• Lack of English speaking staff in manufacturers from developing countries
• Poor communication infrastructure available to developing countries manufacturers
• Poor physical infrastructure to reach factories located in marginal areas
• Lack of experience in negotiating the contracts required by multinational corporations.

Multinationals often have overseas offices to make direct arrangements with  manufacturers and only the largest and most sophisticated overseas manufacturers make  direct arrangements with US companies. Middlemen facilitate negotiations outside these  traditional, well-established channels (Verite 2000).  There are three types of middlemen operating in the US market and the EU: contractors,  agents and trading companies.

Middlemen operating global chains (Verite 2000)

3.3.3 Multinationals as Buyers within Global Networks

The footwear chain is, as is the garments chain, managed by global buyers and supplied by  producers from developing countries. Schmitz and Knorringa (2000) examined the extent of  progressive upgrading in the footwear chain through interviews with large buyers in the  United States and Europe specialised in quality brands and in price-driven volume segments of  the market. 

Developing country producers must have access to "chains-lead firms", which are the marketing  agents that coordinate and integrate internationally dispersed activities.

Buyer companies, also called sourcing companies, are becoming bigger and stronger and have a  growing influence on the whole supply chain. As stated above, they frequently control the design and specification of the product, as well as the marketing and influence the processing and the  implementation of quality systems. Sourcing companies are creating partnerships with suppliers  with whom they increasingly share information on processes, quality and specifications. 

In the case of footwear, there is according to Schmitz a fundamental clash when it comes to  upgrading within the value chain. The reason being that although the buyers are interested in the  upgrading of production, they are rarely interested in helping producers in acquiring their own  design capability, developing their own brand names, or establishing their own marketing  channels. This conclusion was derived from a study of Sinos Valley export manufacturers. In  the early 90s manufacturers were found locked into production with very low possibilities of  inserting themselves into higher stages of the value chain for it would put them in conflict with  their existing buyers. 

There were however in the Sinos Valley isolated cases of producers inserting themselves into the  marketing stage. Producers that had created their own design and marketing expertise mainly for  the internal market had started exporting to the USA and Eastern Europe; an exporter to the USA  had also opened its own stores for serving the Brazilian market. In another case, a consortium of  four producing enterprises had set up their own company for marketing their products in other  South American countries (Schmitz and Knorringa 2000).

Regional share in World Leather Footwear exports

Trends in World Leather Footwear exports – 1985–96

3.3.4 Buyers View of Producing Countries

A survey among footwear buyers was conducted by Schmitz to investigate the performance in the footwear chain of three developing countries and Italy. The replies allowed the identification of competitive advantages for each country as illustrated in Figures 9, 10 and table 11.

Italy´s greatest strength lies on innovative design; Brazil had equaled or surpassed Italy in other parameters but appeared weak on price. Clearly price seems to be the main reason for buyers placing orders from China and India. China appears far superior to India in most parameters with the exception of coping with small orders where India appears better.

The results of the survey indicated that the suitable markets for China are those which give very large price-driven orders offering reliable product quality, for Brazil middle class retail chains supplying quality branded products while Italy’s markets will continue to supply small and high fashion orders from boutiques.

Figure 9

Performance Comparison, Italy - Brazil

Figure 10

Table 11

Competitive Advantages of four Footwear Producing Countries

Source: Interviews with US and European buyers, undertaken by H. Schmitz included in IDS Working Paper 100.