LEATHER INDUSTRY
DIFFICULT TIMES

Enormous potentials to give a boost to the economy

By AMANULLAH BASHAR
Apr 21 - 27, 2003

Leather industry, including leather products, is the second largest export earning sector after textiles. Currently, this sector is contributing around $700 million a year but has the potential to multiply volume of exports with the improvement of quality and diversification in different range of products, specially garments and footwear.

Basically, it is a job-oriented sector providing employment to a very large segment of the society besides earning foreign exchange for the country.

Currently, leather sector is contributing significantly to the national exports. For the current financial year ending June, 2003, the total export earnings from Leather and Leather products are estimated to earn $670 million. This estimate is 5 percent less than the actual target of $704 million set for 2002-2003.

The export receipts in this sector were either stagnant or declining due to the spread of foot and mouth disease in Europe during 1997-2001.

During financial 2002, export earnings from this group amounted to $671.7 million registering a 3.1 percent decline over financial year 2001. During the year despite a 6 per cent increase in the per unit import price, Pakistan imported raw leather (hides and skin) valuing $20.6 million for domestic utilization and re-export of value addition, says S.M. Nasim, Chairman, Pakistan Tanners Association (PTA).

Exports to USA, the main market for Pakistani leather apparel and clothing, which accounted for 19 per cent share i.e. $61 million also, registered a decline of 9 per cent over 2001.

During the current financial year, the shortfall in Leather and Leather products exports was stated because of the leather manufacturers were facing liquidity shortage as their funds were blocked in stocks of leather garments production. In addition the duty drawback rates on both finished and leather made-ups were slashed; thus, further aggravating problems for exporters hampering the sector to reach the target.

Although the leather and leather products have ample scope for exports in the international market yet the industry was suffering from irritants which are hampering its actual growth. Recently, a Korean business delegation visited Pakistan seeking partners to meet a large order for supply of leather garments. However, since our industry has not yet reached to the economy of the scale as well as to the height of quality demanded by the choosey market, that opportunity was missed, it is learnt.

PLEGMA has, however taken initiative by entering into an agreement with Korean technicians for imparting training to Pakistani workforce in the leather industry, especially in the garment sector.

This training program under the guidance of Korean technicians is schedule to start from June this year.

CONCEPT

Leather and Leather garment industry of Pakistan is confronted with various challenges to survive in international market. On top of them is the use of Hi-tech for quality products and availability of skilled manpower to cater to the needs of the world market. This is a serious issue and need to be addressed as early as possible. There is a growing need to prepare labor force having capacity to produce leather garments on scientific lines and comply with the demands of international market to compete. There is an immediate need to training our labor force on modern pattern to upgrade our end product to enhance credibility of leather garment industry in Pakistan.

In recent past, Korea progressed very rapidly in this field. The highly training labor force in Korea gave incredible results. In order to overcome this problem Pakistan Leather Garment Exporters Association decided to engage some Korean technicians to impart training to Pakistan labor force.

Initially proceeding of engagement of Korean technicians has started with two Korean companies. This training program is supposed to organize 6 month training courses in Karachi and Sialkot. This training program is scheduled to start from June 15, 2003 to December 15, 2003.

The Korean technicians will transfer know-how in overall area of leather garments particularly in the fields of Cutting, Pattern making and Sewing.

The Export Promotion Bureau (EPB) has come out generously to bear 75 per cent expenses required for hiring the Korean technicians while remaining 25 per cent cost will be funded by the members of the Association.

This is certainly an appreciable step on the part of PLEGMA. It is hoped that Rs 50,000 charges for participating in this program will be borne by the company in its own interest to improve worth of their workers.

Following are other areas which have been identified for stalling export growth from Pakistan:

QUALITY

Good quality leather is mostly exported and is not available for high value-added Leather Garments & Leather Products. Leather garments in Pakistan are made mostly from low grade & medium grade leather. These garments face stiff competition from Chinese & Indian products. Unless good quality leather is made available to value-added sectors, these sectors will continue to suffer and lose their market shares in global markets for Leather Garments and Leather Products.

COST OF PRODUCTION

Cost of production is also very high in Pakistan as compared to our competitors like China and India. The high cost of various inputs especially utilities and taxes make our products uncompetitive in international markets. Pakistan can capture the lost market share provided the industry is enabled to reduce cost of production.

WEATHER

The winter of 2001-2002 was quite warm in most of Europe. Consequently stocks of many European stores were stuck up for those seasons and they did not purchase stock for next season. They did not place orders for leather garments for last winter season, however, the situation was improved during the current season in 2003, hence the leather industry in Pakistan reached close to the target.

MAJOR MARKETS

Economies of the most developed countries faced slump after September 11 incident. The brunt of loss of purchasing power of consumers was borne by high value items like leather garments. Consumers naturally shift to cheaper alternation in such a situation. Consequently, sharp decline was observed in markets for leather garments like Germany, France, Sweden, Denmark, Japan and Russian States.

Another setback the local industry has to suffer in the backdrop of September 11 events was the noticeable shift of buyers from Pakistan.

A lot of buyers were alienated from Pakistan after September 11 incident in USA. These buyers switched their production to India and China and it has been an uphill task to lure them back to Pakistan. Unless Pakistan offers some benefits to attract these buyers, they will continue to place orders to the competitors.

The Leather Garment Exporters Association has demanded of the government to allow refunds of newly imposed Excise Duty of 16.38 per cent on imported chemicals in the federal budget 2002-2003. Presently, there is no mechanism of refund of this duty. This Excise Duty should either be abolished or some mechanism be devised for its refund.

In order to promote leather garments industry, the rate of sales tax on leather should be reduced to 5 per cent.

The Association regretted that multiplicity of audits causing undue burden and harassment in the industry, the industry urged the government that only one audit in a year may be held.

Export Refinance rates have been reduced reasonably but it is felt that it should be brought down even to 3 per cent to get much more results. Banks may be advised to charge one per cent over the rate provided by SBP for Export Refinance instead of prevailing 1.5 per cent.

There should be no Sales Tax or Import Duty on import of any form of leather. Shearing, finished leather with wool has 5 per cent import duty. Duty should be exempt on this type of leather like other finished leather being imported at zero rate import duty. There is good scope for garments with this kind of leather.

Rates of utility bills of electricity, gas and telephone should be brought down in order to bring down the cost of leather garments/made ups to compete in the international market. Purchase of raw hides, skin, and Wet Blue and Crust leather should be excluded from the scope of Sales Tax scheme like phutti, un-ginned cotton. One window operation for labor levies, i.e. social security, old age benefits and education cess is the need of the hour to save time and check on corruption.

TANNERIES

S.M. Nasim, Chairman, Pakistan Tanners Association (PTA) feels that leather sector currently operating at least 20 per cent below capacity, if it is made to run to the capacity; the leather sector has the potential to fetch one billion dollar a year.

The industry is meeting its 75 per cent needs of raw hides from local resources while rest of the 25-30 per cent is met through imports.

Pakistan imports leather from Saudi Arabia, Iran, and China, Dubai, Sudan, Kenya, Australia and Italy.

Nasim was of the view that in order to give a boost to this major contributor of the national economy, imported tanning machinery and its spare part be made duty free. The industry deserves for import of all types of machines for tanning, even if manufactured in Pakistan for quality production to be competitive in the world quality conscious market. Import of machinery and equipment for environmental projects in tanneries should also be allow free from customs duty, sales tax and income tax.

There is a trend in the organized tanning industry to convert into the cottage industry just to avoid heavy taxation. In order to check this unhealthy trend, sales tax rate should be brought down to the level of 5 per cent. Exchange rate is another area which need stability, exporters be given due relief as and when exchange rate falls.

The European Union is charging import duty on finished leather exported from Pakistan. Nasim urged the government to take up the matter with the European Union to abolish this duty.

TRADE POLICY

The leather garment industry strongly recommended for imposition of 20 per cent export duty on export of semi-finished and finished leather in the forthcoming trade policy. This would help availability of good quality leather produced locally.

'Fox Furs' are much in demand abroad. This should be removed from negative items list under import/export order. Export of garments using allowable fox fur trimmings for decoration should also be permitted for boosting export of value added leather garments.

There is an immediate need for establishment of a Leather Board in Pakistan which should operate as an independent body and funded by the government from export development fund. The board should be headed by a person exporting value-added leather products.

Value-added exports like leather garments where there cannot be any further value-addition should be exempt from Export Development Surcharge.

Re-export of temporarily imported goods supplied by buyers should be allowed without sight letter of credit or advance payment if supplied as free of cost. The present policy does not provide provision for export of such goods in original and unprocessed form due to cancellation of export order or changes in design/style of the order.

The exporters may also be allowed to retain 5 per cent of their export earnings for international advertisements and commission etc.

TARGET

In a recent meeting between a delegation of Pakistan Leather Garment Manufacturers and Exporters, Garment Manufacturers & Exporters Association led by its Chairman, Fawad Ijaz Khan and EPB Chairman Tariq Ikram, it was decided to discuss revision of annual export targets of leather garments and leather products for 2002-03 as well as 2003-04.

Leather garments exports are expected to fetch $235 million for 2002-03, which would show a drastic, cut of 27 per cent as compared to $321 million achieved last year.

A conservative target for 2003-04 for total leather and leather products is estimated at $635 million while target under normal conditions would be $650 million.

Fawad also discussed the international marketing campaign for 2003-04 with the EPB chief to achieve the targeted exports of leather garments.

It was decided that main concentration will be given to trade exhibitions for promoting leather garments in established markets including Germany, France, USA Hong Kong, Asia Pacific Leather Fair, and Hong Kong.

The new potential markets identified by the exporters where major focus could placed for promoting leather garments are Poland, Japan and Russia.

Fawad said that these three markets have got huge potential for leather garments but Pakistani leather garments exporters are unable to penetrate into these markets because of high import tariff. He hoped that very soon Poland will come under EU and duty on import of leather garments will be reduced to 4 per cent like other EU countries. Russia is also expected to reduce the import tariff. After reduction of the import tariffs these markets will be the focus of marketing efforts of Pakistani leather garments exporters.

OUTLOOK

Leather and Leather products from Pakistan have carved a respectable place in the world market. Some of leather products from Pakistan especially leather jackets are much in demand but under the renowned brand names.

Made-in-Pakistan label and brands born in Pakistan have yet to come.

Footwear, the largest segment of the leather industry around the world has been surprisingly neglected in Pakistan. Foreign franchised companies like Bata have become a household name in Pakistan. Although the entire stuff and skill they are using belong to Pakistan.

Despite having a strong industrial base, Pakistan's leather industry looks treading without shoes. This vacuum in leather industry calls for the attention of the industry leaders to bridge the gap to give a comprehensive look to the leather and leather products industry in Pakistan. One of the options to enter the field of footwear sector is to seek partnership with international brand producers by offering them attractive incentives.