Research Report on Pakistani Leather Industry
Long before the first fire sent its sparks flying. ,long before the first wheel went rolling, man had made leather his friend. The friendship continues till day. At home and in the open , at work and at play, with the young , the old, with men and women. A comforting caring friendship. A friendship that protects and adorns. This were words used in an advertisement by a group of companies manufacturing leather and leather products. Perhaps these few words have described the centuries old relationship between leather and human beings.
At the time of independence in 1947, Pakistan was rich in livestock and produced raw hides and skins in abundance but had very limited tanning capacity, hardly capable of meeting its own requirements of leather and leather products. Prior to independence , raw hides and skins in dry as well as wet salted condition were exported through Bombay, a seaport now located in India. Shortly after independence, Pakistan itself became an exporter of these commodities.
The leather industry is probably one of the oldest in production, since leather has been made for past thousands of years. Of all the leather produced in the world about 85% is used for shoes and other useful goods. Hence if all the world’s population could afford shoes, the leather supply would have been grossly inadequate.
Leather and leather based industry represents one of the most important sectors of the economy. Today, after cotton and textile, leather happens to be the second major industry in Pakistan. It is a large foreign exchange earner and contributes about 5% to the GDP of the country.
Apart from catering to the entire domestic demand, the country produces a sizable surplus quantity for exports, making it a major source of foreign exchange warning.
Leather and leather products have a big share win the national economy, a fact which is amply reflected in the export figures of these goods. Starting largely from the export of raw hides and skins , the industry is progressively switching to over to the manufacture and export of the value added leather and leather products. Although more leather of right tannage, better finish and colors is being produced and exported, even then there is need for its further improvement.
In Pakistan leather industry is coming of age. Leather tanning industry started win 50s and over a period of more than 35 years wt has blossomed into a modern large sized industry of international standing. Similarly, Production and export of leather garments which started long time back (until 1982-83 most of the growth trend remained restricted to small scale sphere) eventually assumed importance and wt has now become a very dynamic sector amongst export oriented sub-sector of national economy.
Leather and leather based industries contributes around Rs. 10 billion to the national treasury. Our main competitors n the world market are India, Turkey, China, and Far Eastern countries like Japan, S. Korea, N. Korea, Hong Kong and Taiwan etc.
The leather industry can be divided into two man parts: Leather tanning industry and leather products industry which can be further classified n the following sub-sectors:
A: Leather Tanning industry:
1) Hides and Skins (Hides mainly of cattle and buffaloes and skins mainly of sheep and goats)
2) Leather manufacturing sub-divided into
- a) Tanning
- b) Finishing
B: Leather Products industry
4) Leather Sports Goods industry
5) Other leather products which include travel bags, brief cases, wallets, industrial belts and host of other time.
Leather and its products industry is among the fast expanding industries in Pakistan’s economy. Pakistan is one of the leading producers in the world and a well known and dependable source of its supply.
The situation is not much satisfactory with respect to the rate of leather industry in Pakistan in the sense that the production of leather and leather goods does not commensurate with the number of factors established here also because investment at a large scale is not taking place with the expected required rate.
- LEATHER TANNING INDUSTRY
Tanning is the process of converting hides and skins into a soft , flexible leather without destruction of the original structure. The tanner’s skill is win processing hides and skins of varying size , thickness and texture to produce leathers of reasonably uniform quality while perpetuating or enhancing its appearance and vapor permeability.
The tanning industry occurs an important place win Pakistan’s economy. At the time of independence there was no tanning worth the name win Pakistan except that of Bata. The entire production of hides and skins was being exported win a raw form . But now only finished leather and leather products of top quality comparable with products of many developed countries are exported. The tanning industry is providing raw material to five major leather based sub-sectors viz., footwear, garments, gloves, leather sports goods and leather goods including travel requisites, etc., employing about 25000 people.
The leather tanning industry can be divided into two categories. The first includes those units which process raw hides and skins only upto semi-finished or wet-blue stag. Such tanners are numerous and consist of a few wooden drums and pets. The second category consists of mechanized and semi- mechanized tanners having integrated facets for processing raw hides and skins into fully finished leather.
The present tanning industry consists of around 438 tanning units. Out of these, about 315 are in the organized scoter of Pakistan. At present the total installed capacity of the industry is approximately 53.3 million kgs of vegetable tanned leather at the growth rate of 12% of the previous year. 50% of the units are fully mechanized.
Tanning industry in Pakistan has grown at a modest pace. Karachi and Kasur eventually developed into centers of this industry. Gradually, the industry spread all over the country- in Lahore, Multan, Gujranwala, Hyderabad, Nowshera and Gujrat. Still, Karachi and Lahore are the main cities having the modern tanners. The reasons for this concentration are , availability of skilled and un-skilled manpower and markets of raw hides and skins.
With the passage of time the scenario has changed altogether. Pakistan has emerged as importer of raw hides and skins. In the late 60s the country had said good-by to export of semi-tanned and wet-blue leather. Now it exports fully tanned leather and leather products. The share of value-added products has shown constant increase , touching almost 65% of the total exports of leather and allied products.
According to an estimate there are around 500 tanning units spread all over the country. These can be classified as large, medium-sized, and cottage-sized units. Bulk of the leather is produced by large and medium-sized units. Specialized leather is produced by small units on job bass. This specialization in one or two parts of finished leather by tanning units has made possible the production of glazedkid,aniline, semi-anilined, sauce, gloving leather, burnished leather and splits. With the help of better quality hides and skins wt was possible to achieve 80 -100% efficiency in tanning units.
1.1 DISTRIBUTION OF TANNING INDUSTRY
The leather and leather goods industries have sprung up where sufficient supplies of raw materials and its collection and distribution channels exist. According to industry statistics, 60% of production comes from Karachi and Lahore alone. According to latest survey conducted by LIDO(Leather industry Development Organization) there are about 526 tanneries in Pakistan. These tanneries comprise large, medium and small sized units.
TANNERIES IN PAKISTAN
1.2 LIVE STOCK POSITION
Pakistan is rich in livestock. Animal breeding and farming is not only a means of earning for farmers, wt has entered the phase of commercial enterprise to meet dairy and meat requirements. Animal is an important factor controlling the availability of hides and skins. Only in big towns there are proper slaughter houses whereas in small towns wt is very unorganized. Another important factor is that hides and skins are mostly are damaged which reduces their price and meterage per skin. there is yet another factor is damage of skins by bacteria action due to improper storage.
Wt is estimated that Pakistan produces about 6 million hides and 36 million skins annually. Inspite of considerable domestic production wt has to import hides and skins to keep its tanneries running at optimum capacity.
In order to improve the quality of hides and skins locally, the LIDO has initiated a hides and skins improvement scheme with the technical assistance of FAO. Under this scheme, training is important to butchers coupled with an awareness program.
Being predominantly an agricultural country Pakistan has large livestock population producing about 5.25 million hides and 30 million skins. The output of sheep and goat skins s projected to rise from 34.6 million pieces in 1987 to about 46.3 million pieces by the year 2000. This figure can be substantially increased through planned farming of big and medium sized ranches at different places in the country. This will also ease the milk and meat supply position in the country.
Although production of hides and skins has increased over the years, with an average growth rate of 1.8% for hides and 3.2% for skins, the total supply has not kept pace with the increase in demand. To overcome this shortcoming the government allowed duty free import of wet blue raw hides and skins to supplement the local production.
The estimated population of livestock in 1993-94 is as follows:
Source: LIDO Survey
The availability of hides and skins in 1993-94 is as follows
Source: LIDO Survey
1.3 LOCAL TANNING MACHINERY
The local tanning machinery industry has played a useful role in the mechanization of the tanning industry by providing machinery at cheaper rates as compared to imported machinery. Tanning machinery production units have not only been successful in coping with the domestic requirements but have also been able to export tanning machinery to other counts including Bangladesh, Kenya, Saudi Arabia and Dubai. While they are cheaper than imported machines, local machines are inferior in quality, have a shorter working life and requires more maintenance work. By and large imported machinery , both new and second hand , is the preferred choice of most tanneries that are competing internationally on the bass of quality.
The local tanning machinery industry is faced with a number of problems such as an unfavorable tariff and duty structure, restricted opportunities for standardization, and access to long-term concessionary credit and capital. The industry , unlike India, where no import of tanning machinery w s allowed , has to compete with duty free imports of most types of leather tanning and finishing machinery. In order to enable the industry to benefit from the economies of scale, export rebates should be provided to the local machinery manufacturers. While there were also some suggestions that a 20% tax should be imposed on imported machinery, many local producers agreed that such a step, would prove to be ultimately counterproductive , since imposing restrictions on imports might eventually lead to a reduction in the transfer of technology from abroad, and hence might affect the quality and competitiveness of locally produced goods in the long-run.
The tanning industry’s installed capacity and production of chrome tanned leather rise estimated at 58.5 million sq. meters and 48.6 sq. meters respectively. The industry on an average, operates at about 85% of its installed capacity, which is regarded as the maximum average rate of utilization. Small-scale units operate at their full capacity, followed by medium and large-scale units which operate at 85 and 71 % respectively. Medium-sized units account for almost 64% of total installed capacity and 65% of total production which shows that the industry is dominated by medium-sized tanneries.
The bulk of leather produced in Pakistan is chrome tanned as the demand for vegetable tanned leather has declined sharply during the 80’s as a result of quality differences as well as increased demand for its substitutes.
1.4.1 PRODUCTION BOTTLENECKS
The leather industry at present, is confronted with a number of serious constraints, short run and long run, that inhibit its ability to respond quickly to fast-changing market conditions. For large-sized units, shortage of skilled labor, water and fuel appeared to be the most important constraints; for small units shortages of financial resources and technical personnel were the most frequently cited constraints. The pattern of responses of the medium sized units, given their weight in the population of tanneries and the survey sample. This shows that energy and financial resources are the most common bottlenecks faced by the industry. Shortages of energy, fuel and water and industrial disturbances are problems that affect the leather industry as well as the industrial sector in general. The problems of technical personnel, skilled labor and financial resources, however, can be addressed at the industry level.
1.4.2 PRODUCTION FLEXIBILITY
The ability to increase output in the short run in response to sudden surges in demand is critical for the success of many industries, particularly those like the leather industry, that are susceptible to sudden shifts in consumer fashion and tastes. The analysis of the survey responses on the methods employed to increase short run output rivals that all tanners except large semi-mechanized units relied on employing new equipment and more use of existing equipment.
1.5 RAW MATERIAL SUPPLY
An adequate and uninterrupted flow of good quality hides and skins is vital for the tanning industry. This in turn depends on the livestock population and the rate of slaughtering in the country as well as on there imports. The total population of buffaloes, cattle, goats and sheep growing at annual rate of 3.86%, 1.17%, 3.67% and 2.01% respectively in 1991. Production of hides and skins for the same year was 5.88 million and 36.73 million pieces respectively.
1.6 DEMAND SUPPLY GAP
Before 1980 there was a substantial surplus of locally available hides and skins. The situation began to change during 80’s as the consumption of hides and skins increased at a rate of 9.64% per year while supply grew at a rate of 1.97% only. By 1988, the local supply of hides and skins became insufficient to meet the tanneries’ total requirements, giving rise to imports. Unofficial imports of hides and skins from neighboring countries like Afghanistan and Iran, whose own requirements had fallen due to disturbed political conditions, made up for bulk of shortage. Skins accounted for a major part of the unofficial imports.
Greater stability in Iran and Afghanistan in the near future might deprive the Pakistan tanning industry of a major and convenient source of raw hides and skins. The gap between consumption and local supply of raw hides and skins, estimated at 25.44 million meters for 1991, is projected to increase to 48.31 million meters in 1995 which is about 58% of total consumption. This gap will have to be bridged by increasing official imports and expanding local supply at a faster rate.
Hides and skins are being financially imported from a number of countries such as Afghanistan, Iran, Saudi Arabia, New Zealand etc.
In addition to improving the capacity for handling of imported hides and skins, measures need to be taken to increase the availability of local hides and skins. Steps taken in the following areas can help achieve these objectives:
- The breeding system should be imported.
- Diseases spread by the warble fly are quite common and affect the quality of hides and skins. The occurrence of such diseases should be minimized so as to prevent any damage to the hides and skins. Lack of slaughtering houses organized on scientific lines and improper flaying practices result in the loss of about 25% of hides and skins. Abattoirs should be managed along professional lines to prevent this loss.
- Slaughtering of old and frail animals generates low quality hides and skins. The selection of the right kind of animals is essential to ensure hides and skins of better quality.
- Poor storage and preservation methods employed by the traders and sellers also damage hides and skins to a considerable extent. There is a need to increase the number of storage and preservation facilities and improve the existing ones.
- Personnel should be trained in the art of section of hides and skins which is a critical factor in the determination of the quality of leather produced and the profits generated.
The prices of raw hides and skins raw not entirely determined in a perfectly competitive market and large sized tanneries often take advantage of there ability to purchase them in bulk to manipulate there prices later on. The trade bodies such as the PTA should be entrusted with the task of monitoring the rise in prices while the government should regulate the prices of hides and skins from time to time. Moreover, the government should adopt a clear cut policy for imports of raw hides and skins.
1.8 PRODUCT QUALITY
The quality of Pakistani leather product, in general, is not as good as those produced by countries like Japan, Korea, Taiwan and Thailand, although wt compares favorably, in some cases, with Indian and Bangladeshi products. Pakistani meshed leather is of high quality and in-house improvements are also being mad in a few tanneries. However, the quality of finished products, specially in the area of designing, needs particular attention. Pakistan’s share in the export of shoe uppers is also relatively limited and offers great potential for expansion.
The leather industry relies heavily on imports for major chemicals and dyes used in the tanning and finishing processes. A large market for tanning chemicals exists in Pakistan, offering opportunities for local manufacture. However, while advocating a policy of encouraging the local manufacture of tanning chemicals, the policy makers should be careful in devising a protection policy, taking into account the quality repercussions on the leather produced for the export market.
1.10 TRAINING , RESEARCH AND DEVELOPMENT
The tanning industry is a highly labor intensive industry; labor is extensively employed in the initial stages of the tanning process while greater skills are required at the finishing stage . Although a number of foreign qualified /trained personnel are working in leather tanners , they have mostly acquired their skills through on the job training or are the sons and relatives of those few tannery owners who could afford to send them abroad for training. Their is little use of in-house vocational training, an important means of up-grading the skills of production personnel and recruitment in developed countries. The larger mechanized units with greater resources at their disposal, are in a better position to proved their personnel with a comprehensive rang of training facilities. Not only do mechanized units use a larger number of trained personnel pr unit, they also tend to rely more on non-family foreign and locally trained personnel. Semi-mechanized units, on the other hand prefer to send family members for foreign training, in order to ensure that the large amount of money spent is not wasted by the loss of personnel drawn away by the inducement of higher salaries from competitors. The preference for the use of family members places a manpower constraint on the ability on semi and non-mechanized units to expand. Wt is in the small to medium-sized sector that the training provided to production personnel is particularly unsatisfactory. institutional support is essential to meet the requirements of this sector.
The average quality of leather produced in Pakistan has improved and the competitiveness has mad wt a better value for the money spent. Infact, Pakistan has been producing and exporting leather which is comparable in quality with the leather produced by countries like Germany, USA, Spawn, Italy, Portugal and Japan. Pakistan has experienced double digit growth rate in the export of leather and leather products over the last many years. Now Pakistan competes directly with countries like India, Korea, Italy and Spain. With the increase in manpower cost in other countries the export of value-added products from Pakistan has increased manifold.
Important changes took place in the composition and direction of exports of leather and leather products in the 1980’s. The share of finished leather, which increased during the early 80’s, also started to decline during the second half of the decade as more of wt was diverted towards the production of leather products. Leather jackets is today the single largest item in the leather and leather goods exports. After having achieved a transition from exporting mostly semi-finished leather to a stage where products account for over 50% of total exports, the next logical step is to diversify these products.
1.11.1 EXPORT OF FINISHED LEATHER
The export of finished leather from Pakistan has maintained more or less the same level as in the past. Production of leather has increased but simultaneously consumption by value-added products manufacturing units has increased leaving a smaller quantity available for export. With the closure of tanneries in Europe wt is expected that the same equipment would move to other countries including Pakistan which is competing against countries like Thailand, Malaysia and Indonesia. The current foreign investment policy of Pakistan government has started attracting foreign investment and the quantum would grow in due course.
1.11.2 FUTURE STRATEGY:
The analysis of products composition markets and price trends lad us to suggest a future export strategy that should nuclide the following limits:
- The North American market, specially after the implementation of the North American Free Trade Agreement (NAFTA) , offers great potential for further exports.
- The Far Eastern countries, South Korea, Hong Kong and Taiwan, will grow in their absorption capacity for leather and offer great potential for Pakistani exports to these countries.
- Their is a need to enlarge the export bas as the industry has ignored a number of products that offer excellent potential for large scale value added production. The defined products are : Shoe uppers, watch straps, belts and clothing accessories, traveling bags wallets, hand bags and other utilities
Although the share of finished leather in the export of leather and leather products is expected to further decline with the increase in its us in leather products at home, total export earnings can be increased by improving the quality of finished leather .
1.11.3 EXPORT CONSTRAINTS
The industry is directly affected by the recessionary conditions n the international markets posing a short term constraint on exports. A long term constraint which s regarded as a more important indigenous constraining factor, is the fiscal policy regime, which includes direct and indirect taxes on outputs and inputs and rebates provided to the industry. Production bottlenecks and exchange rat policy are the other constraining factors faced by the industry. Inadequate capacity and declining competitiveness were seen as the least significant constraints by the survey respondents.
1.11.4 EXPORTS FINANCING
Lower cost, longer repayment and larger amounts, are cited as the three most significant advantages that access to bank borrowing has over informal market credit. Bank borrowing was also considered to be a more stable source of funding. While large size units had less need to external funding having ample cash resources of their own, the small and medium many positive steps and size units required greater access to bank financing and a number of suggestions were made in this regard. Wt was suggested that the export limit for refinancing should be revised with greater emphasis being placed on value-added products.
To encourage the export of finished leather and leather products the government has offered various incentives . Duty drawback rates of the imported raw material used in the production and manufacture of leather and leather products have been revised. Import of machinery for tanning is allowed. Moreover, there is no custom duty on such machinery. Concessionary credit at 8% is allowed for an extended monetary period.
The industrial incentives provided by the government are of two types, area specific and industry specific. Among the area specific incentives are the tax holidays, exemption from custom duty, deferment of duty, sales tax concessions, and sales tax rebates. Underdeveloped areas which include whole of Balochistan except Hub chowky, whole of NWFP, Northern areas, Azad Jammu& Kashmir and the divisions of D.G. Khan and Bahawalpur n Punjab and those of Larkana and Sukkur in Sind enjoy 8 years tax holiday and exemption from custom duty and sales tax on imported equipment.
The following steps have been taken by the government to discourage the export of raw hides and skins and encourage export of finished leather:
- The export of raw hides and skins has been banned.
- The export of wet-blue from cow hides and cow calves has been banned.
- The export of wet-blue from goat / sheep skin and buffalo hides is subject to a levy of 30% of export duty.
- Higher rates of custom rebate have been given on export finished leather and leather goods.
- Duty free import of tanning machinery under BMR has been allowed.
1.12.1 Fiscal and Monetary Incentives
- Under the export finance scheme, the commercial banks will provide export finance to exports at the pre-shipment, as well as the post-shipment stage at concessionary rate.
- Income and from export is exempt upto 55% from income tax. This facility is also admissible to commercial exports of manufactured goods.
- Import of machinery upto Rs. 5 million to export oriented industries is allowed subject to the submission of Bank guarantee by the
- In order to provide latest technology to leather industry for improving export prospects, LIDO was established. LIDO has played a pivotal role in raising the exports of leather sector.
- Duty free import of specified machinery and plant under BMR / new projects in the new industrial estates of NWFP and Balochistan.
1.12.2 Incentives For Foreign Investment
An adequate legal framework for foreign investment has been provided in the form of foreign investment (Promotion and Protection Act). The act also guarantees the following:
- Remittance of profit and capital.
- Remittance of appreciation of capital investment.
- Foreign investment shall not be subjected to higher rates of taxes than those of Pakistani citizens under similar circumstances.
- Relief from double taxation in case of those countries with which Pakistan has this sort of agreement.
On of the man causes of the rapid growth of the leather industry in Pakistan has been the general decline in the tanning industry in the developed countries as a result of stricter pollution control requirements. Rather than installed waste treatments facilities, tanners in Europe and America have often chosen to close down their operations. In Pakistan and other developing countries tanners have taken advantage of minimal or no effluent discharge standards, and have grown at the expense of the environment and the people living around them. While the economic benefits of an expanding leather industry are undoubtedly substantial, they are offset to a large extent by the unmeasured cost of environmental pollution. The waste water produced by the tanners, containing dangerous levels of organic and chemical (particularly chromium) pollutants, is used in some places for irrigation purposes, and in the coastal areas around Karachi s discharged into the sea. Thus, the health of consumers of farm produce and the coastal eco system are endangered. In addition , tanners also generate solid waste and air pollution.
1.13.1 REGIONAL POLLUTION PROBLEMS
The discharge of untreated effluent from hundreds of tanneries into the water bodies and open places in the country is posing a serious threat to human and aquatic life. The main clusters of the tanneries ,responsible for toxic effluent and putrifacting leather waste, are located in Karachi, Kasur, Sialkot, Multan, Gujranwala, Murdak and outskirts of Lahore.
While all the major tanning centers are faced with environmental problems, the situation in some is far worse than others. For example, in Karachi, wt was found that there is no proper disposal outlet for effluent, and the waste water was also not being treated. Very often the chemical effluents are dumped in a near by ‘nullah’ which clogged up the drainage system. The sludge is also often disposed off in the open. The UNDP has agreed to establish a water treatment plant n Korangi, smaller to the one wt has set up in Kasur. While most of the waste water in Karachi s discharged into the sea , thus adding to marine pollution, the problem is even more acute in Lahore and the Punjab, since the waste water is discharged mostly into the rivers. This same toxic river water is then used for irrigation purposes, affecting the fertility of the land in the long run. The chemicals in the water also enters the food chain via cows, buffaloes and other animals consuming river water.
1.13.2 VOLUNTARY STEPS BY SOME UNITS.
While the general standards of pollution control in the tanning industry are extremely poor, there are some units that have made voluntary efforts to control the adverse environmental effects of their operations. Sedimentation tanks are the least expensive methods for water treatment. The sludge is first separated from the rest of the effluents in these tanks. After being treated, the waste material is pumped directly into the nearby river or nullah. While this does not necessarily stop the affects of effluent pollution, atleast the waste at sludge is being treated to some extent before being disposed off.
1.13.3 GOVERNMENT POLICY
The government can play a vital role in creating a greater public awareness of the need for environmental care. From the condition of the environment in Pakistan today, wt is clear that neither the government nor, for that matter , the public, have fulfilled their responsibilities towards the environment. All governments to date have failed to develop a coherent strategy to dwell with industrial pollution. With the government is serious about reducing industrial pollution, then wt must act immediately to formulate an industrial pollution control policy and devise effective means for implementing wt. Such a policy must b broad enough to address itself to the industrial sector as a whole, while retaining the flexibility to dwell with the differing nature and levels of pollution generated by individual subsectors. The policy must be applied across the industrial sector without discrimination.
Some recommendations for the leather industry, which may be applied with some variations are as follows:
- Comprehensive and measurable pollution standards must be established for the leather tanning industry.
- All new tanners should be made to ensure that they achieve the standards by installing the necessary pollution control equipment. This responsibility should be assigned to financial institutions appraising new tanning projects.
- Existing tanneries should be given a reasonable time limit to meet the pollution standards, for example three years.
- To encourage early conversion in the interim period, incentives should be e. These could include tax credits, confessional loans and government grants.
- All new units and existing ones after the interim period failing to meet pollution standards should be penalized, initially through the imposition of heavy fines, and upon failure to make required improvements, by plant closure.
The leather sector has made great achievements during the past decade, due to both government and private initiative. However, if wt is to avoid stagnation and seize the opportunities available for further rapid growth in the future, the industry and the government will have to work closely together to overcome the constraints the sector faces today.