Leather Industry Essay Example

methods were basic and only a few small tanneries were established in Multan and Lahore. In the following period from 1960-70, as the overall economy grew, the leather industry also saw advancements. Two new tanneries were established during this phase, utilizing the raw hides and skins that were previously exported. These tanneries focused on producing pickled, wet blue, and vegetable tanned leather for international trade. Consequently, semi-finished leather became a popular export during this time.

During the third phase, the industry began to produce partly crust/dyed and partly finished leather. From 1970-80, approximately 78% of the total leather export was made up of finished and semi-finished leather. The fourth phase, which took place in the 1980s, saw significant growth and changes in output composition. The share of value-added goods doubled during this period. Various factors, including government policy, private sector initiatives, efforts from institutions focused on promoting workers and skills, improved design, and the use of more modern and sophisticated techniques, all contributed to these developments.

The industry's higher profit margins attracted capital, resulting in expansion and the emergence of additional tanneries.

PROCESS OF MAKING LEATHER

There are two stages involved in the process of making leather. The first stage is called wet-blue processing, which includes three steps: fleshing, soaking, and hair removal. During fleshing, excess flesh and fatty tissues are removed from the hide, and then the hides are washed to eliminate dirt and blood. Water, lime, and sulfide are added to the hides. These chemicals attack the hair, causing it to break off at the surface. More water, lime, and sulfide are added to the process. As a result, the hide structure

swells as the fibers in it absorb water.

The process of de-liming involves the removal of lime and alkaline chemicals from the limed hide. Tanning and basification, which takes about 10-15 hours, transforms the hide into a stable material that is resistant to decay and bacterial attacks. Chrome powder is utilized to dissolve and penetrate into the structure of the hide. The leather is considered fully tanned when it can withstand high temperatures and does not shrink when exposed to 100oC. Sammying is responsible for eliminating excess moisture from the hides. Wet blue, which is an intermediate stage in leather processing, refers to tanned hides that can be stored or transported globally. This marks Stage 2 of the process, known as finishing.

The wet blue is split to achieve the desired thickness for end use and dyestuff is applied to give it color. The leather is then subjected to the fat-liquoring process, which gives it a soft feel. Next, the hide is dried to reduce moisture, with a final moisture content of 15-20%. Finishing is carried out to protect the grain surface of the leather from moisture, dirt, and abrasion. Additionally, if needed, embossing is done to imprint an artificial grain pattern onto the leather's surface.

There are five sub sectors within the leather sector.

1. Finished Leather
2. Leather Garments
3. Leather Footwear
4. Leather Gloves
5. Leather Goods

The production of these products relies on the accessibility of hides and skins.

According to SMEDA (leather profile), EAC-Leather Sector report, and PTA- Annual Report, the major world suppliers of tanneries are China, India, Italy,

and Korea. In Pakistan, there are approximately 725 tanneries distributed across various regions. Kasur is recognized as the hub of tanneries, housing approximately 223 units. Sialkot follows closely with about 210 units, while Karachi ranks third with around 173 units. Other areas where tanneries are thriving include Lahore, Hyderabad, Peshawar, and Sahiwal. The concentration of tanneries in Lahore and Karachi can be attributed to the availability of skilled and semi-skilled labor, technicians, and a well-developed market for hides and skins.

Pakistan's leather industry is greatly boosted by major tanneries like Mohammad Shafi Tanneries and Mima Tanneries. In the year 2003-2004, Pakistan achieved a significant export of finished leather worth US$ 251,694,000, making it the second highest exporter in this sector. This reflected a growth of 7.2% compared to the previous year's value of $234,775,000. Pakistan's share in the global market for finished leather accounts for approximately 2.1%. The prominent countries dominating the supply of finished leather worldwide are China, Italy, India, Korea, and Brazil. Noteworthy importers of Pakistani finished leather include Italy, China, USA Germany Hong Kong Turkey Australia Japan Spain.

Hong Kong, Italy, South Korea, China, and Germany were among the highest capacity importers in fiscal year 2003-2004. Projections suggest that finished leather exports for the upcoming fiscal year will reach US$ 226 million.

LEATHER GARMENTS

Total number of unitsGeographical concentration| 461Karachi, Islamabad, Kasur, Multan| Capacity| 7 million Pcs| Capacity utilization| 71%| Exports for 2003-04| $ 323,656,000| Percentage increases from 2002-03| 39%| Total percentage of exports-current| 43. 5%| Percentage share of world leather garments exports (2003)| 9. 4%| Main buyers| UK,USA, France, Italy, Germany, Hong Kong|

The information below details

the statistics and figures concerning the leather garment industry:
- The total number of units is 461 with a geographical concentration in cities such as Karachi, Islamabad, Kasur, and Multan.
- The capacity is 7 million Pcs with a capacity utilization of 71%.
- The total exports for the year 2003-04 amounted to $323,656,000.
- There was a percentage increase of 39% from the previous year (2002-03).
- The current total percentage of exports is 43.5%.
- The industry held a percentage share of 9.4% in world leather garment exports in the year 2003.
- The main buyers are the UK, USA, France, Italy, Germany, and Hong Kong.

Pakistan, India, China, and Germany are major world suppliers of leather garments. Pakistan’s leather garments industry has become a prominent player in the global market. Our garments stand out due to their high quality leather, fine stitching, exquisite workmanship, sophisticated designs, and trendy styles. The export of leather garments comprises 88% of leather apparel and 12% of other leather clothing accessories. Although the Pakistani leather garments sector was established in the 1970s, it initially operated on a small scale. Additionally, the lack of access to good quality leather that met international standards hindered its progress.

At that time, a major limitation was exporting high-quality finished leather in large quantities from Pakistan. However, the installation of modern machinery during the 80’s allowed us to produce superior finished leather, which became acceptable in foreign markets. Since then, the leather industry in Pakistan has flourished significantly. The demand for leather garments within the country is minimal due to climatic conditions and high prices. Current statistics indicate that there are around 461 units for leather garments in Pakistan,

situated in Islamabad, Karachi, Lahore, Kasur, Multan, etc.

Pakistan's export of leather garments witnessed a significant increase of around 39% in 2003-2004. Leather garments accounted for the majority share in the export of leather products, amounting to approximately US$ 323,656,000 (43.5% of total leather exports). Pakistan's global market share in leather garments stood at around 9.4%. The target for the next fiscal year is expected to reach US$ 440 million. Despite the fluctuating nature of our leather garments industry, it is anticipated that conditions will improve in the coming years. The industry has the capacity to produce 7 million pieces of leather garments at a utilization rate of 71%.

China has been the leading exporter of leather garments for the past five years, but India and Pakistan have also become strong competitors in this industry. Notably, Pakistan exports its leather garments to several countries including Hong Kong, Germany, UK, USA, France, Italy, Greece, Spain, Japan, U.A.E., and Canada.

LEATHER GLOVES:

Karachi, Lahore, and Multan have a combined total of 348 units with a capacity of 10 million pairs. Currently, these units are operating at 50% capacity utilization. In the year 2003-2004, exports reached $70,722,000 which represented a 24% increase compared to the previous year. At present, exports account for 9% of total production while world finished leather exports in 2003 stood at 3.3%. The main buyers of Pakistani leather products are UK, USA, France, Germany, and Greece. On the other hand, China, Indonesia and Korea are major suppliers globally.

Pakistan's leather gloves industry is an important manufacturer that produces both sports and non-sports gloves. This industry operates on a small scale and relies heavily on

labor-intensive processes such as hand cutting and stitching. Thanks to its simple setup requirements, it has experienced growth in recent years with increased exports.

Pakistan primarily focuses on exporting leather gloves, with 95% of the gloves being sold overseas. Only a small portion, 5%, is consumed domestically. The manufacturing process occurs in 348 units located in Karachi, Lahore, Sialkot, and Multan. Together, these units have the capacity to produce 10 million pairs of leather gloves but are currently operating at only 50% utilization level. In the year 2003-2004, Pakistan's export of leather gloves accounted for 9.5% of its total exports and ranked as the country's fourth largest leather export category. The value of these exported goods reached approximately US$70,722,000, marking a significant increase of 24% from the previous year. As a result, Pakistan's share in the global leather gloves market reached 3.3%.

China dominates the global market for leather gloves, accounting for 50% of exports. Other countries such as Pakistan, Indonesia, Korea, and Thailand also contribute to this market. However, Pakistan's export of leather gloves has been inconsistent in the past five years. The main importers of Pakistan's gloves are the USA, UK, Germany, France, Saudi Arabia, UAE, Greece Spain and Canada.

When it comes to leather footwear production, Karachi Sukkhur and Hyderabad are geographically concentrated with a total of 524 units. These areas have the capacity to produce 200 million pairs of shoes but currently operate at only 50% capacity utilization. In the year 2003-2004 exports reached $78,044000 which was a 6.3% increase from the previous year. Currently accounting for only 10% of total exports and 0.22% of world finished leather exports. Major buyers

include UAE Germany Italy and France while China Italy and Spain serve as major suppliers globally.

Despite local demand representing about 41% of all shoes produced in the country,the performance of the leather footwear sector has been declining in recent years.The growth in worldwide population will likely increase demand for footwear leading to relocation from conventional shoe-producing nations to Asian countries where labor wages are lower.

To cut down on labor expenses in the shoe manufacturing sector, manufacturers opt to move their operations to countries with lower labor costs such as Korea, Taiwan, Pakistan, India, and Thailand. In Pakistan alone, there are around 524 units solely focused on producing leather footwear. These units are primarily located in Lahore, Karachi, Islamabad, Sukkur, and Hyderabad. Currently, the leather footwear industry has the capacity to manufacture 200 million pairs of shoes but is operating at only 50% of its potential. Notable exporters of leather footwear include Italy, China Germany and Spain.

Pakistan's revenue from leather footwear exports grew by 6.3% in the fiscal year 2003-2004, reaching US$ 78,044,000. However, this only accounted for 0.22% of the total market share as China dominates the industry and offers competitive pricing that has resulted in a significant reduction in Pakistan's market share. Despite this challenge, the Government of Pakistan remains optimistic and aims to achieve sales worth US$ 85 million in the upcoming fiscal year. Pakistani leather footwear continues to be imported by countries such as UAE, Germany, UK, France, Italy, Kuwait, Spain, and Canada.

LEATHER GOODS

In Karachi, Lahore, and Islamabad, there are a combined total of 137 units. The exports for the year 2003-2004 amounted

to $19,965,000, indicating an approximate decrease of 80% compared to the previous year. For the same period in 2004, the overall percentage of exports stood at 2.7%. The primary purchasers of leather goods are the USA, UAE, Germany, and France. Italy, France China Germany,and Korea serve as major global suppliers of leather goods. Leather goods can be categorized into industrial goods (22%) such as those used in machinery and saddlery/harness; consumer goods (78%) which include handbags,trunks,suitcases,vanity cases,briefcases,and belts.

There are around 137 units in cities such as Karachi, Lahore, Islamabad, and Sialkot that manufacture leather goods. Italy is the leading exporter of leather consumer goods, followed by France, China, Germany, and Korea. Thailand, USA, India, China, and France are major exporters of leather industrial goods. Unfortunately, Pakistan has witnessed a negative trend in this sector over the past five years with an annual decrease of 3% in our market. In 2003-2004, our export of leather goods declined by approximately 80% to US$19,965,000 from the previous year's $97,2620.

Pakistan exported various leather products in the last fiscal year and among them, leather goods had the lowest contribution at 2.7%. Leather consumer and industrial goods are imported by countries such as USA, UK, UAE, Germany, and France.

TRENDS EXPORTS

Despite recent advancements, the leather industry in Pakistan has experienced a decline in its share of total exports. In 1984-85, it accounted for 13.6% of all Pakistani exports. However, by 1989-90, this percentage had decreased to 9.6%, and it currently stands at 7%.

America and Europe receive 65% of our leathers, while other countries get the remaining 35%. Between 1997 and 2001, exports declined

due to foot and mouth disease outbreaks. However, there has been a significant improvement in the value added sector's exports. In 1989-90, the value added sector accounted for 42% of total exports, compared to finished leather. By 2003-04, the value added sector's contribution increased to 66% of total leather exports. From 2000 onwards, there was a huge surge in total leather exports with a rise from $538,142,000 to approximately $700 million by the end of 2001.

The increase in leather and leather product exports can be credited to trade policy liberalization and quality improvements. However, the adjustments made to the Pakistani Rupee relative to the Euro and US dollar had a negative effect on exports by late 2002. Luckily, this decline was overshadowed by an export rise at the start of the next year. The demand for Pakistan's tanned leather notably declined due to quality concerns and other factors. Nevertheless, there was a significant increase in tanned leather exports in 2000.

Last year, our exports of tanned leather experienced growth, providing encouragement for investors and manufacturers in the leather industry. Furthermore, we have observed a rise in demand for our leather garments. From 2001 to 2003, our product demand notably declined due to competition from Chinese and Indian leather. The confidence of buyers was also impacted by the 9/11 incident, resulting in order cancellations. Many buyers shifted their focus towards China and India as these countries were deemed politically stable at that time. Additionally, orders were canceled due to milder winters in Europe.

The rise in demand for leather garments has been counteracted by the decline in export of our leather goods due to a

lack of value adding firms and inadequate supporting industries. This leads to increased manufacturing costs. The demand for our leather footwear and gloves is low but gradually increasing, possibly due to the enhanced quality of our leather. However, there is growing competition in the market of leather gloves, particularly from Korea, which is known for producing excellent quality gloves.

Enhancing trade can be achieved through targeted marketing strategies and capitalizing on fashion trends. The Chinese market is noteworthy for its competitive advantage in the form of low labor costs, allowing them to offer products at more affordable prices compared to others. This poses a challenge for our markets. Pakistan stands out for its exceptional export of high-quality leather to various countries such as Italy, Korea, USA, Germany, Spain, Canada, South Africa, and different European markets. In 2003-2004, Pakistan's exports included Hong Kong, China Bangladesh, South Africa France Turkey Spain among other nations.

In the fiscal year 2003-2004, leather accounted for 7% of Pakistan's exports. The shortfall in Leather and Leather products exports during 2002-03 was due to a lack of funds caused by blocked stocks of leather garments production. Additionally, the duty drawback rates on finished and leather made-ups were reduced, further impacting exporters and hindering the sector's progress. Until 1998, Hong Kong was Pakistan's largest export partner for leather, holding a 20% share.

Domestic demand for leather garments is limited to the export sector. The local market for leather garments has very low consumption due to high prices and climatic conditions. The small demand that exists comes from the fashion-conscious upper classes and from foreign tourists through local sales in major cities like Karachi,

Lahore, Rawalpindi, Peshawar, and Quetta. Despite the lack of a domestic market, entrepreneurial individuals have still established leather garment manufacturing units, with most being owned by small and medium investors. Environmental controls are also in place.

The production of leather in developed countries has decreased due to stricter environmental regulations. This led to the increased demand for leather from developed countries, resulting in a rise in Pakistani exports. The duty free import of leather machinery allowed the industry to install advanced finishing machinery, leading to the production of finished leather that met international standards. In addition, the warm winter of 2001-2002 in Europe caused many European stores to have surplus stock, which affected their purchase decisions for the following season.

Despite not placing orders for leather garments, the situation in the leather industry in Pakistan has improved during the current season, bringing it close to the target. Leather garments are not suitable for very harsh climates as they cannot function below a certain temperature. This information is from the Pakistan Economist's September 11th Incident report, which highlights how economies of the most developed countries faced a slump after the September 11th incident. The loss of purchasing power by consumers primarily affected high-value items like leather garments. As a result, consumers naturally turned to cheaper products, leading to a sharp decline in the markets for leather garments in countries such as Germany, France, Sweden, Denmark, Japan, and Russian States.

The local industry faced another setback after the September 11 events, as there was a noticeable shift of buyers from Pakistan. Many buyers were alienated from Pakistan following the incident in the USA. These buyers moved their

production to India and China, and it has been difficult to attract them back to Pakistan. Unless Pakistan offers some benefits to entice these buyers, they will continue placing orders with competitors. SOURCE: Expert’s Advisory Cell (Industrial Digest-leather profile) Foot and Mouth Disease: In 2001, reports of Foot & Mouth Disease (FMD) in cattle in Britain caused global concern. By May 28, 2001, over 3.2 million animals were culled in the UK.

The UK had to cull a significant number of cattle during the Foot-and-Mouth Disease (FMD) outbreak, resulting in economic losses as the slaughtered animals were considered unfit for use. Other European countries also expressed concerns regarding FMD outbreaks. Consequently, it will take several years for the UK to replenish its cattle population, leading to a shortage of domestic leather. This scarcity is expected to result in three specific scenarios. Firstly, the UK will import leather from other countries. Pakistan and India have well-equipped tanning industries that can meet both the quality and quantity demands of the UK.

The United Kingdom (UK) may consider direct orders for leather products, as well as increased joint-ventures in the value-added leather industry. These potential scenarios can greatly benefit Pakistan by allowing deeper penetration into the UK market and creating sustainable opportunities. In terms of trade policy, a 20% export duty on semi-finished and finished leather is strongly recommended by the leather garment industry to ensure the availability of high-quality locally produced leather. Additionally, the import/export order should remove "Fox Furs" from the negative items list as they are in high demand abroad. The export of garments using fox fur trimmings for decoration should also be allowed to

boost the export of value-added leather garments. Moreover, value-added exports like leather garments, where further value-addition is not possible, should be exempt from Export Development Surcharge. The re-export of temporarily imported goods provided by buyers, without requiring a sight letter of credit or advance payment if supplied for free, should be permitted. The current policy lacks provisions for exporting these goods in their original and unprocessed form due to order cancellations or changes in design/style. Lastly, fashion plays a significant role in determining global demand for leather.

Pakistan primarily focuses on catering to the international market for leather goods due to the limited domestic demand. The country manufactures trendy leather garments, footwear, and accessories on a made-to-order basis for global clients, including renowned brands like Christian Dior, Armani, Gucci, Prada, Adidas, and Nike. However, leather cannot be exported to regions with lower purchasing power. East European and Soviet countries demand lower quality leather to make it affordable. Unfortunately, Pakistani products and exporters encounter significant challenges due to a negative image and reputation.

The image of leather garments made in Pakistan in the global market needs improvement. During Pakistan's participation in international trade fairs, fashion shows should be organized. To ensure the success of these exhibitions, it is advisable to hire professional organizations from respective countries to arrange single country exhibitions. Since the incident of September 11, the international media has been presenting a negative image of Pakistan. It is crucial for our government to make efforts to counter this propaganda. Additionally, Pakistan faces strong competition from India and China in the leather goods industry.

While China primarily serves the low-end mass market, Indian suppliers dominate

the mid-segment market offering a diverse range of footwear for men, women, and children. Unlike Pakistan, who has yet to explore this area, India's suppliers have a significant impact on supply conditions due to its large and steadily growing population of livestock including cattle, buffalo, sheep, and goats. The overall livestock population in Pakistan increased by eight percent between 1996-1997 and 1999-2000 reaching recorded numbers of 22 million cattle, 22.7 million buffalo, 24.1 million sheep, and 47.4 million goats by the end of 1999-2000.

Pakistan benefits from a thriving population of cattle, buffalo, sheep, and goats, which gives the country an advantage in the global leather and product markets. As a result, Pakistan has adopted advanced tanning technologies to ensure high-quality leather production for various value-added products. However, due to limited availability of domestically produced chemicals, there is heavy reliance on imported tannery chemicals. This dependence not only increases production costs but also creates a significant inventory burden. Pakistani leather manufacturers are struggling with increasing prices of imported chemicals, which make up the majority of their consumption. In fact, it is estimated that over the past 4-5 years, prices of imported chemicals have risen by approximately 40%. Consequently, the expenses incurred from importing chemicals greatly contribute to escalating production costs in Pakistan.

The leather sector is currently operating at a 20% lower capacity than its full potential, according to S. M. Nasim, Chairman of the Pakistan Tanners Association (PTA). Nasim believes that if the sector were to operate at maximum capacity, it could generate an annual revenue of one billion dollars. Currently, 75% of raw hides used by the industry are sourced locally, while the

remaining 25-30% is imported from countries such as Saudi Arabia, Iran, China, Dubai, Sudan, Kenya, Australia and Italy. However, instead of being utilized for manufacturing high-value leather garments and products domestically, high-quality leather is primarily exported.

Denim and textile do not compete with leather as they fall into different clothing categories and target different markets. Nonetheless, leather loses its functionality when the temperature drops below 5oC because it is not breathable in such cold conditions. Consequently, an alternative material is utilized to offer warmth. In countries where the temperature stays below 5oC for a significant portion of the year, alternatives to leather are used instead.

BARGAINING POWER OF BUYERS

The bargaining power of buyers in any industry is influenced by various factors, such as customer count, customer information, and availability of substitutes. In both the global market and the Pakistani leather and leather products market, there is a significant number of customers.

The USA, France, Italy, UK, and Germany collectively make up the largest purchasers of leather and leather products globally. Together, they represent 52% of global imports of leather. These influential buyers have the power to dictate conditions regarding design, specifications, prices, quality control standards, and environmental regulations. China, India, and Turkey serve as alternative suppliers for these buyers. International buyers have access to extensive information about various types of leather and their quality and cost. They carefully assess different options before choosing a specific country as their supplier.

Pakistan produces high-quality finished leather that is more expensive and of better quality compared to Chinese and Indian leather. Therefore, foreign buyers must pay a higher price for this superior product. Conversely, local purchasers

in the garment, glove, and footwear industries have no control over tanneries' pricing because importers are willing to pay high prices for the finished leather. This leads tanners to be unwilling to sell at preferential rates to local markets and instead offer the same price to both local and foreign buyers. As a result, local buyers are forced to compromise on lower quality leather due to cost constraints.

BARGAINING POWER OF SUPPLIERS

The level of supplier concentration and the availability of substitute inputs determine the suppliers' control over firms in the industry. First, the suppliers of machinery and chemicals have a significant impact on the industry. Most of the chemicals used (around 98%) and machinery used (around 75%) are imported. Germany, in particular, is a major supplier of chemicals and influences decisions regarding their usage and safety protocols. This is done to ensure the health and well-being of workers. Second, there are suppliers of raw hides and skins in the industry.

Currently, there is a scarcity of high-quality raw hides and skins in the market due to local supply shortages. The government does not impose any restrictions on the prices of these materials. Karachi, Lahore, Multan, and Kasur are the main markets for hides and skins as well as being the primary centers of leather production. As a result, the supply of raw materials is concentrated in these areas. Prices vary significantly because they are determined by market mechanisms rather than government regulation. Suppliers perceive hides and skins as animal by-products, which leads them to prioritize flaying, storage, and preservation methods less.

Furthermore, in Pakistan, hides and skins are unique because

they are measured by area. As a result, suppliers manipulate the skin by stretching it, which unfortunately damages its quality. On the other hand, suppliers who refrain from altering the hides and skins can charge a higher price for their service. This market is susceptible to manipulation by large tanneries that purchase raw materials in larg