Economic Significance Of Pakistani Leather Industry
The value of production and value added by the leather industry is given in the table below (figures were only available uptil the year 1991).
|YEAR||VALUE OF PRODUCTION
The leather and leather products industry directly and indirectly provides 200,000 jobs according to an estimate. About 44,000 workers are directly employed by the industry. The ratio of skilled to un-skilled workers varies from sub-sector to sub-sector; however the overall share of skilled workers is 53.77% of the total labor force. Semi-skilled workers and un-skilled workers constitute 2.58% and 20.74% of the labor force respectively. The leather industry is labor-intensive as compared to other industries in Pakistan as can be seen in the table below:
COMPARATIVE LABOR INTENSITY OF INDUSTRY
|Type of Industry||1979-80||1986-87|
|Food & Beverages||0.30||0.32|
|Chemical & Rubber & Plastic||–||0.21|
|Basic Metal Industries||–||0.11|
|Leather & Leather Products||0.42||0.36|
Finding skilled (karigar) labor is very difficult partly due to the high degree of specialization especially in the garments manufacturing sub-sector. This problem can be highlighted by comparing Pakistan with South Korea; the production ratio is 1:5 which means that the average Pakistani worker produces 1/5th that of his Korean counterpart for a given capacity.
However there are some institutes in Pakistan which have been making a contribution to the industry through research and imparting training and education:
Leather Research Center, PCSIR
Leather Product Development Center
Institute of Leather Technology
LPDC- Glove Training Center
Located in SITE, Karachi. The center has played an important role in arranging demonstrations and seminars for different types of leather manufacturer at its Pilot Plant Tanneries, not only by its own technical staff but with foreign leather technologists and experts as well. This center has also helped the local industry run physical and chemical tests on various types of leather. Equipment and machinery at PCSIR is being used for training as well as serving as a common facility center to those tanneries which do not have such sophisticated equipment and machinery. Nominal charges are made for the use of these facilities. The center also conducts 3 to 6 months training courses of light leather manufacture for shoe uppers and leather garments.
Leather Development Center, Karachi
This has been setup with the assistance of UNIDO under the Ministry of Industries. It provides training for the manufacture of leather goods and garments. The courses offered range from making patterns, cutting and stiching to factory management and costing.
Footwear Center, Hyderabad
It has basically been responsible for conducting certificate training and diploma courses in pattern making, designing, cutting, stitching and finishing of footwear. It has been an useful center for imparting training in the feild of ladies’, mens’, children’s and safety boots manufacturing. It is reasonably well equipped and along with the local instructors some foreign footwear experts have also conducted training courses.
Institute of Leather Technology, Gujranwala
After the reorganization of this institute in 1985, it now offers a diploma course and six months to one year practical training courses for machinery operation in its training program. After further modernization, the institute conducts the following three courses:
- Diploma in Leather Technology (3-year full time course)
- Special Courses (2-3 weeks providing know-how and skills depending on requirements of the industry)
- Skill Development Courses (24-week course in the field of tanning machinery operation and maintainance)
The Leather Product Development Center setup for the development of leather gloves at Sialkot organizes courses in the following fields:
- Leather gloves cutting
- Leather goods training for women
- Sewing courses for women
- Machine maintainance courses
The leather products industry employs a relatively higher number of skilled workers than the tanning industry. Most workers in leather garment manufacturing units work on piece rate. A tannery worker on an average earns Rs. 1500/- to 2000/- per month. A sticher in a garment unit earns around Rs. 6000/- per month.
The labor force can be divided up into nine categories: mangerial, foremen, technical, skilled, semi-skilled, un-skilled, contract, casual and other miscellaneous jobs. The table on the following page gives the total labor force divided up according to job classification and sub-sector.
TOTAL MANPOWER EMPLOYED IN THE ORGANIZED SECTOR OF THE INDUSTRY BY TYPE AND INDUSTRY SUB-SECTOR
|SECTOR OF THE INDUSTRY|
|MANPOWER||TANNING||GARMENTS||GLOVES||GOODS||FOOT WEAR||SHOE UPPERS||TOTAL|
EXPORTS AND IMPORTS
The leather industry is very important to the country due to its export earnings potential. It contributed 7.7% to the total export earnings of Pakistan during July-May 1994-95. It is the second largest export earner after textiles, accounting for about $ 551 million during July-May, 1994-95. A break-up of the major exports of Pakistan can be seen below.
(million US $)
|ITEM||1994-95 (Jul-May)||%||1993-94 (Jul-May)||%||%’age Change|
|Carpets & Rugs||180||2.51||133||2.19||35.34|
|Fish + preperation||140||1.96||145||2.39||-3.45|
|Pet & pet products||69||0.96||52||0.86||32.69|
|Chemical & products||46||0.64||27||0.45||70.37|
|Fruits & Vegetables||44||0.61||50||0.82||-12.00|
During the period July-May 1994-95, the quantity of leather exported increased to 16,177,000 square meters from 14,652,000 square meters during the previous year’s corresponding period, showing an increase of 10.41%. The value also rose from $ 201,105,000 to $ 243,804,000 for the same periods, showing an increase of 21.23%. Therefore the average value per square meter also rose from $ 13.75 to $ 15.07; an increase of 9.6%.
A more detailed break-up of the leather exports is given below:
|%’age change from last year|
|Leather & Products(Excl. leather footwear)||–||558,995||0.58|
|Leather tanned (000 Sq. Meters)||16,177||243,804||21.23|
|Apparel & Clothing (000 dozens)||539||267,711||-13.40|
|Leather Gloves (000 dozens)||2,257||3,9079||13.80|
|Leather Manufactures NS||—||8401||-24.84|
The largest importing countries of Pakistani leather and leather products and their share of Pakistani exports are given below.
- Germany 1%
- New Zealand 3
- Netherlands 1
- France 5
- Saudi Arabia 7
- Switzerland 9
- Denmark 5
- USA 2
- Italy 2
- Dubai 8
- UK 4
- Belgium 3
- Sweden 2
- Australia 8
- Others 0
The export of skins and hides is banned. Semi-finished leather is banned for export in some cases and a high export duty is imposed in other cases. This effectively prevents leather from being exported in its early stages as the government would like to see the export of value-added manufactures. The different government policies regarding exports and imports are given in the Public Policy section.
The leather industry basically imports four items:
- Skins and Hides
- Machinery and spare parts
The import of leather goods is practically non-existant due to the surplus created in the local market. The gap between the local supply and demand for hides and skins has been increasing over the years. The supply and demand are given in the table on the following page. (million square meters)
The gap has been increasing due to the slow growth in the output of skins and hides. Untill recently most of the skins and hides were smuggled into the country. However, the government allowed the duty-free import of skins and hides some years back. Now most of the imports are through proper channels and smuggling has become insignificant.
Due to the shortage and lack of production of chemicals in Pakistan, a large quantity of chemicals have to be imported. The major chemicals imported along with their sources are given below.
- Sodium: China, Germany, Italy, Belgium, Bulgaria
- Sulphuric Acid: China, Germany, Italy
- Chromium Sulphate: China, Germany, Italy, Turkey, UK, Romania
- Basifying Agents: China, Germany, Italy, Turkey
- Retanning Materials: China, Germany, Italy, France, Holland, Switzerland
- Fat Liquors: China, Germany, Italy, Spain, Holland, Switzerland
- Dyes: China, Germany, Italy, France, Korea, Switzerland, UK, Romania
- Finishing Chemicals: China, Germany, Italy, Turkey
The leather industry has passed through five different stages through its evolution. In the first stage from 1947 to the 1950’s, the industry was stagnant. This era had the following features:
- export of only skins and raw hides
- production of vegetable sole leather for the local market
- use of primitive methods
- a small number of tanneries, concentrated in Multan and Lahore.
The second stage of evolution occurred in the Sixties with the advent of high industrialization and development. New tanneries started up and started utilising the raw hides and skins for the production of pickled, wet blue and vegetable tanned leather for exports. Till the early Seventies, semi-finished leather was the major component of overall leather production and exports.
During the third stage the industry moved into the production of partly crust/dyed and partly finished leather. Almost 78% of the leather product exports consisted of finished and semi-finished leather. There was a massive increase in the number of units partly due to the overall economic environment which was in favor of small scale industries.
The decade of the Eighties saw the advent of the fourth stage. This period was marked by high growth as well as significant changes in the composition of the output. The share of value added leather goods doubled during this stage. There were many reasons behind these developments; government policies, private sector initiatives and the efforts of various institutions devoted to the promotion of workers skills, better designing and more modern and sophisticated techniques.
The Nineties saw a reversal of the fortunes of the leather indusrty. A world wide recession in the leather market has brought about stiffer competition, narrower profit margins and lower overall demand. This has created many problems for the leather sector in Pakistan and a large number of units have been forced to shut down or operate much below capacity. Raw hides and skins account for over 80% of raw material costs and the local supply has not been sufficient to meet the demand, this is a major factor in limiting the growth of the industry.
Currently there are 436 tanneries in the country and their locations are given below:
|A.J. & Kasmir||2|
The reason why the industry is concentrated around Karachi, Lahore and Sialkot is that most of the skilled labor is situated in these areas.
The current tanning capacity is:
- Chrome tanned leather (million square meters) 08
- Vegetable tanned leather (mill. sq. meters) 18
The leather garments indusry has the following estimated capacity (quantity in number of pieces):
- Jackets 6,019,371
- Trousers 230,051
- Skirts 358,607
- Long Coats 424,217
- Vests & Others 373,859
- TOTAL 7,406,105
EVOLUTION OF TECHNOLOGY
At the time of independence, the leather industry was a very small one and the technology was very primitive. However, there existed many skilled laborers who had emigrated from India. The industry was predominantly at a small scale and spread all over the country. Skills were passed on within the families. As the industry grew, the emphasis shifted away from basic production to value added production as described in the previous section.
Leather technology has come a long way over a past few decades. Most of the leather units currently operating in Pakistan are mechanized as compared to the extremely heavy reliance on manual methods of production just 20 years ago. More than 50% of the tanning units are mechnaized and about 47% are atleast semi-mechanized.
The industry is one of the worst pollutors and this has been a major reason why the industry has shifted on a global basis to the underdeveloped countries. This has created enormous environmental problems. Due to this, new technology is being continously researched and implemented the world over. However, Pakistan has lagged behind in this respect.
Most of the technology has been imported as the local industry has lagged behind in technological innovations and improvements. Very few funds are allocaed to Research and Development by the individual companies. However, these companies do provide for skills formation and consider their own contributions as satisfactory. The only source of research and development has been PCSIR. The major contribuion of PCSIR has been its development of new techniques in leather processing. Some other institutions are also invovled in the development of the leather industry and their most important contribution has been the training of skilled manpower. (A complete list of these institutions along with their activities is provided in Economic Significance of the Leather Industry section).
The locally manufactured machinery is cheaper in terms of comparative prices than imported machinery. However, the quality of its output is significantly lower than that of the imported machinery. The machines are also not as durable and thus have higher maintenance costs. The most prominent pioneers in the production of locally manufactured machinery were M/s. Jullandar Mechanical Works, Lahore Tanning Machinery Works and Imdad Tanning Machinery Works.
The tanning industry converts raw hides and skins into finished leather. The current production processes are given below (as given in NDFC report 1993):
1. BEAM HOUSE PROCESS
- Flaying: The removal of the hides and skins from the animals bodies.
- Curing: To preserve the hides and skins for storage and transportation. The skins and hides are either dried out or preserved in salted or wet-salted conditions.
- Preservation by saling: The preservaion of skins by saling may be preceded by brining and may also involve the use of
- Soaking/Washing: In soaking, the cured, dry salted or brined salted hides and skins are put in pits, paddles or drums in water alone or with some soaking agents and thoroughly soaked so that they may be restored back to their original condition. Another purpose for soaking is to remove any dirt or blood which might be on the skins or hides.
- Unhairing/Dewooling: The soaked hides and skins are painted with an “unhairing-paint,” a solution of sulphide, lime and water. This loosens the hair/wool, which is then removed either by hand with a blunt unhairing knife, or with an unhairing machine.
- Limimg: This is done to loosen the hair/wool and ensure the removal of flesh, as well as to “plump up” the hides and skins to prepare them for the subsequent tanning operation.
- Deliming: If the lime is not removed, the finsihed leather becomes hard and grain brittle and discolored. The degreeof deliming depends on the type of leather required.
- Bating: All types of leather are treated with bating agents, a mixture of ammonium chloride or sulphate together with enzymes, in saw dust and water in paddles or drums, at an optimum temperature of 37 degrees centigrade. The grain of pelts after bating becomes smooth and silky.
- Pickling: The delimed and bated pelts then undergo a pickling process in wooden/stainless steel paddles/drums, containing water, salt, and suphuric acid. Pickling completely removes the lime during which time the alkaline character of the hides/skins changes to one of an acidic nature.
- Depickling: To remove any traces of acid, the pickled stock is treated with hypo (sodium thio-suphate) and salt. The hypo neutralizes the acid, while the salt helps in supressing the swelling of the pelt.
2.THE TANNING PROCESS
- Vegetable tanning: The vegetable tanning process extracts are obtained from the barks and leaves of certain trees and shrubs which contain tannins and are able to convert the pelts into leather, thus preventing any decay in the skins and hides.
- Chrome tanning: The pickled pelts are treated with basic chromium salts to convert them into leather with a silky grain, thus ensuring a fine texture and appearance. Today many categories of leather are produced through chrome tanning. The process is carried out in wooden or stainless steel paddles/drums, over a time of six to eight hours.
- Synthetic Tanning: Before vegetable or chrome tanning, the pelts may also be treated with naphthalene or phenol based synthetic tanning materials, called syntans. Syntans are used to give brighter colored chrome leathers.
- Combination Tanning: The following combinations of tannages are used most often:
Vegetable + synthetic
Chrome + synthetic
Synthetic + vegetable
Synthetic + chrome
Synthetic + chrome + vegetable
Synthetic + vegetable + chrome
Synthetic + resin
3. POST TANNING PROCESS
- Most of the light leatthers after tanning are subjected to the following processes.
- Splitting: The hides and skins can be split into two layers, with the help of a band knife splitting machine.
- Shaving: The hides and skins are then shaved to a uniform thickness by using hydraulic orcomputerized shaving machines.
- Washing: To remove surplus chrome tanning salts and loose shaving dusts. the hides and skins are then washed.
- Neutralization: The chrome tanned leather is treated with sodium bicarbonate to neutralize the excess acid on the leather surface and inside the fibres.
- Dyeing/coloring: The tanned leathers are then washed and treated with dyes to obtain the desired colr or shape. This is done in wooden, stainless steel or plastic drums at high temperatures.
- Fat Liquoring: After washing, the dyed leathers are treated with fat liquors so as to obtain furhter softening of the leather.
- Setting out: To remove excess water, pleats and creases, the hides and skins are set out by hand or by using setting out machines.
- Drying: The tanned, dyed and fat liquored leather is then dried either by way of hanging, tunnel drying, toggled drying, past drying or vacuum drying.
- Staking, Buffing, Brushing: The dried stock is then staked out to stretch so that it softens. After drying, the flesh side of the leather is buffed with emery paper and then brushed before finishing.
- Finishing: The dyed leathers for finishing are first treated with seasons after which organic and inorganic pigment finishes, binders, or plasticizers are manually applied on the surface of the leather by pad/brush, or sprayed on by a machine and then dried.
- Glazing: This involves polishing the surface of the leather with a high pressure glazing machine.
- Plating/Embossing: Plating is done to make the surface of the leather flat and smooth; this is done by processing the leather through a hydraulic press under high temperature and pressure. Simaltaneously, attractive designs can be printed/embossed on the grain surface of the leather, if so desired.
- Measuring: The hides or skins area is finally measured, in square feet or square deci-meters, with the help of a computerized measuring machine.
ROLE OF PUBLIC POLICY
A tannery can only be set up in special reserved locations and after the procurement of certain licenses. The most important license is the one which certifies that the tanning unit will treat its effluents before releasing them into the environment. Other licenses include import and export licenses which cost 2,000 and 1,500 rupees respectively, but to obtain them, one must be a member of the relevant chamber.
The government’s trade policy has been erratic over the years. However, the overall policy measures seek to promote exports through export rebates, duty free imports of machinery, concessionary refinancing, etc.
The government’s import policies are as follows :
- Duty free import of machinery not manufactured locally worth upto Rs. 10 million under BMR. Such machinery is also exempt from sales tax and Iqra surcharge.
- Duty free imports of spare parts not manufactured locally. Such imports are also exempt from sales tax and Iqra surcharge.
- Duty free import of raw/pickled hides and skins and wet blues. 4. Refund of 10% duty on the import of chemicals used by tanneries in the processing of leather to be exported.
- Import of secondhand and reconditoned machinery is also allowed.
- Import of crust and finished leather is charged an import duty equivalent to the draw-back rates applicable on export of finished leather. Such leather is exempt from sales tax.
- Duty free import of leather footwear.
- Import duty on basic Chromium Sulphate is at 40%.
- Import duty on spare parts used in locally manufactured machines is 80%.
A list of tanning machineries which can be imported duty free is given under :
- Sole leather rolling press
- Leather polishing machine
- Machines for combing, carding and shearing of wool of skins
- Steel or fibre glass or wooden drum: for skin dyeing only
- Leather staking/stretching machine (excluding slowcomb/jaw )
- Air blast dedusting machine (all types)
- Passing unit(no less than 25 plates, with auotmatic temperature and humidity conrtol)
- Vacuum dryer(all types)
- Hydraulic press for ironing, printing and pressing of leather
- Leather glazing machine(with pressure adjusment of all sorts)
- Leather buffing machine(all types no below 450 mm)
- Machine for spraying /padding curtain coating of leather (all types with automatic spraying and drying)
- Leather measuring machine(all types)
- Toggle dryer/tunnel dryer
- Leather shaving machine(not below 600mm and hydraulic models
- Leather splitting machine (all types suitable for limespliting or dry splitting wih safety device and electrical panel)
- Sammying or setting-out or sammying/settingcombined/drum Setting out (mechanical or hydraulic excluding offal setting machine)
- Fleshing machine/scudding machine (not below 1200mm, hydraulic or mechanical)
- Unhairing/dewooling machine (mechanical or hydraulic)
- Sulphide applicator
The government also provides various incentives for exports such as concessionary term-financing, export rebates, duty draw-backs, etc. Duty draw-backs on export of leather and leather products as announced on October 31, 1995:
|Leather made-ups and garments||4.75|
|Artificial leather footballs||5.00|
|Artificial leather gloves||11.91|
Other export policies include:
- Ban on the export of raw hides and skins.
- Ban on the export of wet-blue cow hides and cow calf.
- A 20% export duty on export of wet-blue from goat, sheep and buffalo.
- Duty draw-back on exports of footwear: 15% on leather shoe uppers; 7.5% on leather footwear.
- Refund of license fees at various rates ranging from 0.34% to 1.95% on exports of various export items.
In order to facilitate exporters, the government has recently made possible the payment of duty draw-backs through banks. Exporters had a long standing arguement that it took very long for duty draw-backs to be paid. It is hoped that this measure will solve this problem. Refinance credit has also been exempted from the payment of excise duties. In addition to this, the government has decided to accept the declared value of goods exported to high tariff nations; this gives some leeway to the exporters and also speeds up the export process.
MONETARY AND FISCAL POLICIES
The government provides many incentives to the leather industry through fiscal as well as monetary policies. Firstly, the industry is allowed concessionary refinancing for export purposes. This refinancing can be availed at 12% for a period of 120 and 210 days for Parts I and II respecively. Recently, those units located in Karachi have been allowed a special consideration period of 15 days due to the local disturbances. However, these rates are higher than those offered by neighboring countries such as India which provides concessionary refinancing at the rate of 8%. If an exporter over-steps these time limits, then heavy penalties are imposed upon him. As mentioned before, refinance credit is exempt from the payment of excise duty.
Concessional financing at 3% is also available for the purchase of locally manufactured machinery under BMR. Exporters can avail exemption certificates from the Income Tax authorities to avoid paying with-holding tax. Exemption from Income Tax to units set up between December 1, 1990 and June 30, 1995 in rural areas. Export income of upto 55% is exempt from Income Tax.
Determining the future location and structure of the world leather processing has to take into consideration the environmental impact of leather processing. This industry is currently creating a lot of environmental hazards especially from the tanning process in the following main areas:
Many different types of wastes are created by both tannaries and leather goods manufacturers, although most of the blame lies on tannaries. For example, salt dusts are produced during the handling and storage of raw salted hides and skins. Wet lime sludges are produced in large quantities after the liming operations. Hairs and green fleashings are produced in unhairing and fleshing operations. As the leather is processed further shavings and trimmings of chrome tanned leather are produced. As the waste water is passed through settlement tanks sludge is produced which has a content of chromium.
Companies of this industry are concentrated in areas such as Sector 7-A of Korangi, Karachi and this has led to the effect that this land cannot be used for agricultural purposes or for industrial usage due to the discharge of effluents, especially liquid wastes.
- IMPACT ON WATER RESOURCES
The largest consumer of water in all industries happens to be the tanneries. They affect not only the water supply to the area in which they are located but also the underground water is polluted. The waste from the tanneries is discharged from the nullahs which are usually broken which leads to two main things:
- Contamination of the underground water
- The bad quality of the water may lead to the spoilage of the leather being produced in the tannery.
- IMPACT ON AIR:
During the tanning process, unused chemicals and pigments may be discharged leading to air pollution. If the operating areas are not ventilated, hydrogen sulphide arising from the effluents can cause serious health hazards. The smell near tannaries is due to the burning of hair and leather trimmings.
- IMPACT ON FARMLAND AND AGRICULURAL PRODUCTS:
Liquid wastes can seep into the underground water and thus contaminate it. If this water is used for irrigation purposes then chemicals enter into the food chain.
- IMPACT ON FLORA AND FAUNA
Chromium is a heavy metal which builds up along river banks and thus affects both flora and fauna.
- IMPACT ON INFRASRUCTURE
Due to the high solids content of liquid waste, sewers and nullahs often get blocked. In the case of nullahs, the effluent at times spills over and forms stagnant pools. Solid wastes are sometimes sold off for the manufacture of by-products, but are sometimes just thrown out into the surrounding areas. This gives rise to rodents and mosquitoes.
Government regulations have been lax and have not been implemented. Regulations require all wastes to be treated before being discharged so that they do not harm the environment. There has not been any implemantation of such regulations and leather units have been one of the worst violators of pollution legislation. Countries in the developed world have already taken serious steps towards curbing pollution from tanneries. In many countries, tanning has been completley banned or very stringent rules and regulations have been placed upon them. This has been a major reason for the closure of tanneries across Europe.
Treating waste water consists of four steps:
Segregation or mixing of suitable sectional waste water streams from different processes.
- Primary treatment
- Secondary biological treatment
- Disposal of solid wastes from the treatment system.
A recent World Bank delegation had suggested the setting up of a treatment plant in Sialkot which would be able to deal with the waste of all current tannaries plus an estimated 250-300 more in the future. The costs of the plant is estimated as follows:
Land procurement cost US $ 160,000
Treatment system capital cost 3,700,000
Operating and maintenance costs(per year) 190,000
FACTORS AFFEECTING MARKET DEMAND
The demand for tanned leather is derived from the demand for leather products. The output of leather products thus determines the quantity and quality of tanned leather demanded. Approximately half of the tanned leather produced is expoorted while the rest is used locally. The quality supplied to foreign buyers is usually analine (high-quality) while that supplied to local buyers is usually inferior.
The demand for leather products, especially leather garments is very volatile. The rapid pace at which fashions change can adversely affect the demand for leather products at any point in time. Leather products are very price elastic and thus prices cannot be increased unchecked.
FACTORS AFFECTING SUPPLY
The supply of the basic raw material, ie. hides and skins used to be enough to fulfill the local requirements; however it has not been sufficient to fulfill the local demand recently and imports have had to be made. In 1994-95 there were a total of 110 miilion buffaloes, cattle, goats and sheep. The average growth rate is 3.1% per annum. Buffaloes and cows provide hides whereas goats and sheep provide skins. In 1994-95, the local supply of hides and skins was 6.3 million and 39.2 million respectively. The rate of growth of the supply of skins and hides has however been historically slower than 3.1%. The basic raw material is a by-product of the meat industry. Accurate figures for livestock and the production of skins and hides are very difficult to determine. The only figures available are those from recognized slaughter houses. The whole leather industry depends upon the supply of hides and skins and therefore the most crucial thing is their quality. The quality of hides and skins is unsatisfactory and needs improvement. The reasons behind this are many:
- Poor breeding. This has naturally led to a poor quality of hides and skins
- Diseases, especially those spread by the warble fly affect the quality of the hides and skins.
- Slaughtering methods (e.g. unnecessary cus). This is the major cause of concern as poor methods of slaughter affect the quality by up to 25%.
- Selection of Often old and frail animals are chosen for slaughter which naturally provide lower quality hides and skins.
- Storage and Preservation. Since skins and hides are sold by measurement, they are usually soaked and salt in order to expand them. This causes great damage.
- Hides and skins selection. The selection process requires extensive know-how so that only good quality materials are chosen.
LIVESTOCK POPULATION AND PRODUCION OF HIDES AND SKINS (millions)
The other essenial raw materials are chemicals. More than 26 chemicals are used in the tanning and finishing processes. The broad groups of chemicals are given below along with their percentage share of the total value of chemicals used:
- Lime 6%
- Sodium Sulphide 4
- Sulphuric Acid 1
- Chromosol 7
- Basifying Agents 3
- Retanning Materials 3
- Fat Liquors 7
- Dyes 8
- Finishing Chemicals 1
The prices of chemicals depends upon the supplier, counry as well as quality of the chemicals. Due to the lack of development of the chemical industry, a large portion of the chemicals have to be imported. However, with the growth of the chemical industry, many previously imported chemicals are being replaced with locally manufactured ones. The locally manufactured chemicals are also less expensive with some prices being lower by 30-40% than the world prices.
The finished leather products sector has adequate supply of tanned leather for its production needs. Infact, Pakistan exports its excess tanned leather because the local demand is not high enough to absorb all the supply. The local producers are able to purchase the finished leather at prices lower than the world market due to the lower prices in the local markets. The most expensive qualities of leather are usually full grain aniline – finished (dyed) calf skin leather.
Accessories used in leather goods include among other things, buckles, clips, hooks and rings, zipper chains and laces, buttons and press buttons, mettallic corner moulds, locks and eye-lets, synthetic threads and fusing material. Almost 90% of these accessories are imported due to non-availability in the local market.
FACRORS AFFECTING CONCENTRATION/ FEATURES OF COMPETITION
To set up a tannery, a license must be procured which certifies that any effluents will be treated before being released into the atmosphere. Tanneries are usually allocated a seperate area in which they can operate; in Karachi, tanneries can only be set up in sector 7A of Korangi.
There exists a very strong cartel amongst the suppliers of raw skins and hides. Until recently, Chiniotis had a virtual monopoly in both hides and skins, but now Pathans have gained control over cow/buffalo hides and Chiniotis only control sheep/goat skins. Hides and skins are auctioned off in the local markets and only members of the Pakistan’s Tanners Association can place bids. This effectively bars non-members from competing for the raw material. Furthermore, new entrants are heavily discouraged in the tanneries business and only family members are welcomed into the business circles. New entrants find themselves effectivley cut off from raw materials and skilled labor. A major barrier to entry in the tanning business is the need of contacts in the “katcha” market, ie. the skins and hides markets. A tanning unit must have a contact in the katcha market otherwise it will find it extremely difficult to procure raw materials.
Competition in the leather products sector is much more market-based. There are a large number of units and no group has dominance over the entire sector. There are no barriers to entry either explicit or implicit. One problem however does exist: many tanning units have their own leather product divisions as well and this leaves very little finished leather for units specializing in leather products.
Pricing in the industry differs in the two sub-sectors. This is basically due to the the different markets that each sub-sector relies upon. The tanneries supply around 60% of their ouput to the local leather product manufacturers. The pricing of tanned leather depends upon various characteristics such as cost of production (primarily input prices of hides and skins), international prices, supply and demand and government policies. Due to the high rate of inflation, the prices of leather and leather goods has been consistantly increasing over time. Pakistan’s cost of production have been higher than that of its regional competitors. According to a survey done by NDFC of about 100 units, 97% believed that costs of production, 93% believed that market conditions and 68% believed that government policies were critical in determining prices.
The average export prices for finished leather exports have been increasing at annual compound rates between 15% and 17% over the past few years. However, when one removes the devaluation effects of the rupee, the increase in prices in US dollar terms comes to around 5% to 7%. This is in line with the average inflation rate and shows that real prices are not really increasing. This however shows that the quality of the leather has not been improving significantly. When we look at the price trends in more detail, we see different trends emerging for different products. The table on the following page gives the annual compound growth rates of the export prices of some products:
GROWTH RATEOF EXPORT PRICES
|Other Animals NS||19.76|
|Leather Articles of Clothing|
|Belts & Bandoliers||11.64|
|Other clothing accessories||31.45|
|Boots & Shoes||0.68|
|Leather Aricles for Machine|
|Articles for Machines NS||19.77|
|Leather Sports Goods|
|Weight lifting belts||-0.51|
Due to the large number of tanneries and leather product manufacturers, the pricing of the outputs is competetive and no single company has significant control over them. However, the tanneries industry is dominated by Chiniotis who do collude to lower their raw material costs of hides and skins and jack-up prices of tanned leather.
Pakistan is a relatively competetive supplier of both tanned and value-added leather in the world market. However, some points should be made in this respect. Firstly, our regional competitors, namely India, have an edge over us as their producion costs are lower. For example, the labor cost for stitching a jacket in Pakistan is Rs. 125/- to 175/-, while in India it is Rs. 50/- to 70/-. The productivity of workers is also lower in Pakistan as compared to our competitors. For example, in the garments sectors, the average production per machine is 1.25 garments, whereas it is 5 in India, 7 in Korea, and 10 garments per machine in China. Pakistani manufacturers enjoy an advantage of lower raw material costs (10% lower) as compared to world averages. This allows the industry to be competitive in the world market. It should be noted that garment manufacturers like Korea import tanned leather from Pakistan (at prices higher than those prevailing in the local Pakistani market) and are still able to compete with Pakistan in the world market.
Non-price competition involves many aspects, for example, quality, product styling, advertising, branding, packaging, distribution and product development.
The quality of Pakistani leather is of a relatively cheap standard as classified by the major importing countries. However, there are a few large units located in Karachi which are producing world class leather garments which are meeting international standards and classifications. The reasons behind the lower quality of leather are mainly due to the poor quality of hides and skins supply, plus a somewhat outdated tanning technology.
Innovations in the tanning industry have led to production from fish, frogs, chicken legs and even from cow stomach in many colors and finishes. Fashion is an important consideration in the manufacturing of value added leather products. Unfortunately, Pakistani manufacturers have at times been slow to respond to the changing needs of the world market. However, at the same time some manufacturers have kept up to date and in some cases led the way in fashion designing. The fashion factor is most important in clothing and clothing accessory items (e.g. jackets, skirts and handbags, belts respectively). Articles such as wallets, suitcases, briefcases, schoolbags, rucksacks are less sensitive to fashion. Although they may vary in color and material, thier designs and sizes remain relatively stable.
Packaging is a very important tool for marketing leather products. In some cases it is as important as the product itself. The packaging should be in a form, material, color and size jointly agreed by the buyer and the seller. Transport packaging is of special importance for items such as suitcases and handbags to protect against humidity and mould. Maintenance of shape is essential for handbags. In some cases exporters try to save on transportation costs by cramming as many leather handbags as possible into a container. When the goods arrive at the destination they are flattened, creased and generally unpresentable. They then require reconditionig, an expensive and time consuming activity for the exporter.
These activities are essential for increasing customer awareness and sales. Unfortunately, most Pakistani manufacturers neglect this aspect.
The distribution channels vary from country to country, but follow a basic general pattern. Central buying groups for large retail stores tend to purchase most of their leather goods directly from suppliers. Importers buy in lower quantities and often purchase for small and medium-size retailers. Exporters have been pressing the government for a subsidy on air freight because they have to ship their products very quickly due to changing styles.
The market performance of the leather industry has been on the upside and has been fairly stable over the past five years with an increase in some areas of effeciency and a decline in other areas. The market effeciency of the industry has been discussed below:
The leather industry is currently at a bad stage in its growth and has average operating margins of 4.5% while its average net margins are only 0.46%. The leather industry has been showing profits over the years.
The industry is relatively effecient in allocaing its resources and has a return on equity of 8.9% and the return on its fixed assets stands at 12.8%.
The leather industry in Pakistan lacks in the field of technology and so there exists a low level of technical effeciency as compared to the competition. The ineffeciency is due to the lack of proper technical training of the workers already working in the factories, the use of relatively old forms of technology as well as the industry being more of a labor intensive one than its foreign competition.
The leather industry in Pakistan has a lower average wage per worker as well as lower worker productivity as compared to foreign competition. The other competitors in the world market are adhering o the ISO standards and use much better ways to market, promote and distribute their products.
The leather industry in Pakistan is somewhat stagnant and few resources are allocated to bringing about developments for the improvement of products or processes. However, the industry has shown some innovativeness as can be seen by the development of using frogs and fish in their production of leather.
Very little investment is made by local leather companies, and around 67% invest less than 5% of their profits in research and development.
The decrease in the demand of leather for export along with the decrease in export rebates has led to lower profitability of leather units. Operating margins were the highest around 1991 at around 6% but have since then been falling.
In the opinion of a director of a leather company in Karachi, about 90% of leather product manufacturers have shutdown or reduced their production; the tanning industry is producing 30% lesser quantity than it was in 1993-94. This in turn has increased the prices of tanned leather and thus have reduced the margins of leather product manufacturers.
PROSPECTS OF FUTURE GROWTH
The leather industry currently contributes 7.7% to the total export earnings of Pakistan and holds an important position in providing a good base for increasing trade ties between Pakistan and many foriegn countries. This industry has a good potential for growth if proper government steps are taken regarding import and export policies, political decisions as well as for more promotion via foriegn and local trade fairs.
The major factors that can be attributed to affecting the growth of the leather industry can be divided into industry-specific and external.
INDUSTRY SPECIFIC FACTORS
The government has imposed many restrictions on the leather industry via its import, export, fiscal and monetary policies which greatly hinder the growth of this industry.
- The import policy has some hitches that adversely affect the leather industry such as:
- There exists a 40% import duty on Chromium Sulphate, which happens to be the most common chemical used in the industry.
- Refunding of the 10% duty drawback for chemicals imported for the purpose of processing leaher to be re-exported takes a lot of time and blocks up capital that can be effectively utilised in that time period.
- Duty free import of leather footwear is allowed into the country which affects the footwear industry.
- Import duty is charged on crust and finished leather used in the manufacture of finished goods i.e, handbags, briefcases.
The export policy has some hinderences that need to be overcome before the leather industry can achieve its potential for growth, such as :
- Refunding of the duty drawback on exports of footwear i.e. leather shoe uppers and leather foowear takes a lot of time and blocks up capital that can be effectively utilised in that time period.
- Similarly the refunding of license fees on the export of various export items takes a lot of time and blocks up capital that can be effectively utilised in that time period.
The fiscal and moneary policy of the country also affects the industry in the following ways:
- Concessionary refinancing is done at a rate of 12%, which is higher than that offered in the neighbouring countries giving them an edge over the local industry.
- The leather exporers are subject to assessment of income tax at various levels of manufacturing and not only at the last stage.
The leather industry is not only affected by specific industry concerns, but the external environment also plays an important role in how the industry will progress. The external factors that play their part in stunting the growth of the leather industry are as under:
- The law and order situation in the city of Karachi, where a lot of the tanneries and leather product manufacturers are located, is in shambles. Strikes and uncalled for holidays disrupt the working of the factories a lot.
- Most of the labour working in the above mentioned factories reside in the worst affected ares of Karachi and due to this the production of these factories is well below capacity most of the time.
- Increase in the costs of the major inputs i.e, electricity, gas and labor charges, have gone up leading to higher producion costs and low margins.
- There is a shortage of water in the city of Karachi, but the water requirements of the leather industry are quite large as 30-40 litres are required for the processing of 1 Kg of raw hide or skin in finished leather.
- Internationally, there has been an increase in anti-leather feelings which has to be nullified.
- There has been a decrease in the demand of leather in the world markets due to a rise in the sentiments against the use of leather and increasing environmental concerns.
- There is a need for quality assurance by the manufacturers.
The leather industry does contain a potential for growth in the future but the government policies are not too condusive in this regard. There is a need to exploit all the foriegn potential in the world via trade fairs and proper promotion of Pakistani leather products abroad.
If proper government measures regarding leather made-ups,etc are taken and more support is provided by the government alongwith the reduction in unscrupulous practices by some manufacturers and proper measures to ensure quality are taken , then the leather industry can do great things for Pakistan.