LEATHER INDUSTRY OF PAKISTAN

Overview

In 1947, there were a few tanneries

operating on a small scale producing sole

leather.

In 1950’s tanneries were set up at Karachi

and Lahore

1960’s and 70’s marked the establishment of

tanneries at Hyderabad, Kasur, Multan, Sialkot, Sahiwal and Gujranwala.

Leather Industry Today Today, the leather tanneries are divided into two

sectors – organized and unorganized sector

700 units in total – 450 units in the unorganized sector and 250 units are members of organized sector

The tannery units in the unorganized sector producing leather on cottage basis, with negligible use of machinery

These are concentrated in the form of clusters-Kasur has 275 tanneries-Sialkot houses 250 tanneries -Karachi has around 150 tanneries

The Pakistan Leather Industry started with the production of pickled and vegetable tanned hides and skins.

Today we produce not only wet blue and crust forms of leather but we also produce fully finished leather and leather based products

-Such as jackets, belts, gloves and footwear

The industry plays a pivotal role in stimulating export volumes

- In 2007-2008, the industry achieved exports of worth US$ 1.22 billion, registering an increase 21% when compared to the previous year

Export of finished leather increased 26% in terms of quantity and 16% in terms of value in the year 2007-08

The major export partners are: European

community(accounts for 65% of the total exports)

North and Latin American countries as well as Central Asian states(contributing 35% of total exports)

Pakistan has 1% share of the world leather market.

This is a reflection of the deteriorating situation our leather industry is in.

0%

2%

4%

6%

8%

10%

12%

14%

16%

1%

3%

15%

3%

Leather associations in Pakistan

Pakistan garments association(PLGMEA)-Karachi

Pakistan tanners association(PTA) -Karachi

Pakistan footwear association(PFMA)-Lahore

Pakistan gloves association(PGMEA)-Sialkot

ANALYZING INDUSTRY COMPETITIVENESS

Model used: Porter’s Diamond model

Research methodology used: o Published data

o Primary research conducted at Nova leathers Pvt. Ltd Omar Leathers Pvt. Ltd Noor Leathers Shafi tanners and co. Mehmood Brothers tanners and manufacturers Prime tanners Pvt Ltd. Blooming Leather Pvt. Ltd KHAS Pvt.Ltd Pakistan Tanners Association National Institute of Leather Technology

Factor conditionsRaw material The basic raw material used are the

hides and skins of ovine and bovine animals.

The word skin is used for small animals or “ovine”(sheep and goat)

The word hide is used for bigger animals “bovine”(buffalos and cows)

Category-wise usage of the hides and skins: Cow hide and sheep skin is mostly used for

smooth finishes of the upper sole of shoes, inner side of gloves and designer bags and clothing

Buffalo hides and goat skin are used in coarser items like leather soles and joints

Tanning methods used:

Vegetable-tanning – uses ‘tannin’ Chrome-tanning – uses salt compound of

chromium

Buffalo and cow skins mostly come from Punjab, while goat and sheep is of much better quality in Sindh.

Interestingly enough we import around 70-80% of hides and skins from Europe, Africa and Middle-east.

Locally, tanners usually procures the raw material from slaughter colonies(kamelas) situated in the outskirts of various cities

The leather tanneries purchase quite a lot of the hides and skins during Eid-ul-Azha (some of them stock raw materials for the 4-5 months of usage)

The local slaughtering is mainly done by unprofessional slaughterers during Eid-ul-Azha

This results in a lot of unnecessary cuts that decreases the net worth of the raw material or at times renders the skin useless.

Hides and skins are perishable items. They start rotting soon due to the flesh and blood residue.

Local slaughterers do not have state-of-the art preservation houses and they use the traditional method of “salting” to preserve the skin.

Million NumbersFiscal Year Cattle Buffalos Sheep Goats Camels

2001-2002 22.8 24.0 24.4 50.9 0.8

2002-2003 23.3 24.8 24.6 52.8 0.8

2003-2004 23.8 25.5 24.7 54.7 0.7

2004-2005 24.2 26.3 24.9 56.7 0.7

2005-2006 29.6 27.3 26.5 53.8 0.9

2006-2007 * 30.7 28.2 26.8 55.2 0.9

2007-2008 * 31.8 29.0 27.1 56.7 1.0

LIVESTOCK POPULATION IN PAKISTAN(2001-02 TO 2007-08)

Dyes and Chemicals 90% of the dyes and chemicals

used in the tanning of leather are imported mainly from Germany Spain Italy

10% dyes and chemicals are taken from MNCs which have got their set ups in Pakistan Sandoz Bayer BASF Clariant

The proportion of imported to local dyes is very high because of the poor quality of dyes and the restrictions

(regarding the usage of certain chemicals in the manufacture of dyes) by international buyers.

Labour The leather industry provides employment to

200,000 people of Pakistan

Almost 80% of the labour is skilled( they have the required expertise to operate the machinery)

Approximately 20% are the unskilled workers who are basically helpers( they help in unloading, loading and packaging)

Apart from this there are around 15 to 20% graduated , engineers and diploma holders In the big players of the industry.

The smaller tanneries have 2 to 5% of graduates in their workforce

Almost all the tanneries have the minimum age requirement of 18 years, below which they do not employ the candidate

Basic training methodology prevalent is the “Ustaad-shaagird “ method

The tanneries we visited have not conducted any sort of workshops or skill development programs for their workers over the past two years

They believe that the expertise that the workers have is sufficient enough to meet the buyer preferences

Our leather industry is facing the same problems as the other industries in Pakistan, which is the lack of interest of today’s literate class to opt for working in these industries

Training institutes:

There are various training institutes that have been established to provide leather based academic degrees.

Some of them are:

National institute of Leather Technology, Karachi(NILT)Leather products development institute, Sialkot(LPDI)

Institute of Leather Technology, Gujranwala(ILT)Pakistan Institute of Fashion Design, Lahore(PIFD)

Footwear training institute, Charsadda(FTI)Facility cum Training centre, KasurCleaner Production centre, Kasur

There are various programs that NILT is offering in order to impart Leather related knowledge. Some of them are:

Diploma of Associate Engineering(DAE) Diploma in Leather Technology Diploma in Leather garments Diploma in Leather goods

NILT has fully fledged mini tannery, Physical, Chemical and Analytical Laboratories, Information Technology Centre, a good Library, Research & Design Laboratories with other essential facilities which is catering to the needs of upgrading the leather sector

Capital and Machinery

Around 80 to 95% of machinery is imported from countries like Italy and France

The high percentage of import in terms of machinery is a reflection of the insignificant manufacturing base in Pakistan.

Around 5 to 10% machinery used by the small tanneries is locally produced. Such machinery is locally known as chukrum.

These are smaller in size and available at reasonable

prices.

Research & Development: There are numerous institutes related to leather, yet

the rate at which research and development is being carried out is very slow and is in it’s initial stages

Our primary research showed that only big players of the industry such as Nova leathers and Mhmood Brothers have come up with a new dyeing technology(steel dyeing drums) which ensure better quality of dyeing.

The university of veterinary and animal sciences(UVAS), Lahore and PTA have signed a research project for the identification of skin diseases in animals and geographical patterns of these diseases.

Infrastructure: There are severe infrastructure

problems faced by the Leather industry.

The industrial hub of Karachi, Korangi Industrial Area (sector 7-A) does not have a single metal road. These tanneries are also deprived of the basic utilities(such as water and electricity).

Being a water-based industry, tanneries have to purchase water and they have also arranged for company-owned generators to ensure uninterrupted power supply.

The drainage system is in a very poor condition as well.

Demand ConditionsClimatic conditions:

• The demand of Leather is highly dependant on natural factors such as climate

• Pakistan lies in the temperate zone, the climate is generally arid, characterized by hot summers and cool winters. There are also wide variations between extremes of temperature at various locations.

• The demand can still be created by focusing more on the products which are not affected by the climate.

EXPORT OF LEATHER & LEATHER PRODUCTS FROM PAKISTANDURING JULY-JUNE 2006-07 VIS-À-VIS JULY-JUNE 2007-2008Value = US Dollars in Thousand

Commodities UnitJuly-June2006-2007

July-June2007-2008

% Change

Qty Value Qty Value

Leather ‘000’ SQM

19,225

356,884

24,257

415,263

+16.36%

AUP/Sq.M

18.56 17.12 -7.75%

Leather Apparel & Clothing

‘000’ DOZ

848 388,115

1,121 528,154

+36.08%

AUP/Pcs 38.14 39.26 +2.94%

Leather Gloves ‘000’ DOZ

3,934 132,589

4,258 161,169

+21.56%

AUP/Pair 5.62 6.31 +12.31%

Leather Footwear ‘000’ Pairs

9,979 97,089 9,809 105,358

+8.52%

AUP/Pair 9.73 10.74 +10.40%

Other Leather Manufactures

‘000’ KGS

1,360 33,477 521 10,177 -69.60%

AUP/Kg 24.62 19.53 -20.64%

TOTAL : 1008,154

1,220,121

21.02%

Garments42%

Leather33%

Gloves16%

Footwear8%

Other Leather Products1%

Product Profile

Footwear56%

Upholstery13%

Clothing11%

Leather Goods

9%

Automo-tive7%

Gloves4%

Global Demand for Leather Products

Absence of commercial farming:

• In Pakistan, 65% of the population resides in rural areas.

• The inhabitants of these areas do not take care of animals in a professional manner

• Animals become victims of wobble fly disease and skin rash.

Country Image and Price: 70% of tanneries that we visited mentioned that

the major impediment in the growth of the Leather industry is the unfavorable image Pakistan has in the international arena.

We identified 4 factors that are significant for the development of any industry, that are: Country image Logistics Price Quality

In Pakistan, we gave minor attention to these four aspects which are otherwise essentials for success.

The law and order situation is making foreign investors reluctant to invest

Even the hoteling facilities and country ambience is not up to the standards

Animal activists:

A recent culture shift has been observed, due to which people are becoming more and more conscious about the environment and extinction of animal life

There have been recent activist movements such as the one by Pamela Anderson and the Chetus organization

Livestock Industry:

In Pakistan, we regard the meat industry to be of prime importance, Leather is just seen as a by-product.

This perspective needs to be changed for the sophistication of local demand

Effluent treatment plant & REACH agreement

This plant has been made in Korangi with the collaboration of Dutch government.

Certifications of social compliance and standardization for the use of chemicals.

Related & supporting IndustriesFashion Industry:

The fashion industry of Pakistan is not up to the standards.

There is lack of awareness among the masses regarding the latest trends in fashion

If the fashion industry flourishes and creates awareness about its products, the leather industry will get a boost as more and more people will be inclined to buy leather based products(such as belts and bags)

Film Industry:

Pakistan’s film industry is almost non-existent.

Over the years, India’s clothing industry has prospered due to the fact that its film industry has been progressing at an amazing rate, and that makes Indiaa one of our major competitors.

Feed Industry:

In the process of tanning, leather passes through the shaving process in which a lot of wastage(burada type) is gathered

This wastage is then sent to the feed industry where it is used in the manufacture of animal feed.

Soap Industry:

During the fleshing stage, the access fat is removed from the animal skin.

This fat is used in the manufacture of low-grade soaps

Machinery:

90% of the machinery used in the leather industry is imported from countries like Italy and France.

Our local manufacturing base is insignificant and no conscious effort is being made to locally produce low priced and good quality machines.

Banking and finance industry: The credit availibilty to the leather tanneries is

an on going issue.

The borrowing cost is high which deters further investment in the industry.

The initiative taken by the government to reduce the Bank’s spread from 3% to 2% ( in 06-07) can help the industry grow.

Livestock Industry Livestock provides the most important raw material to the

Leather industry, therefore the quality and quantity of livestock available matters a lot.

Severe need to commercialize livestock farming in order to breed healthy animals for provision of quality hides and skins.

Hides and skins are worth more money and can have more value-addition done to them therefore, this should be focused as a primary product rather than a secondary product of the meat industry.

Dyes and chemicals

Our local chemical and dye manufacturing is not supporting the Leather industry, as apart from a few MNCs mentioned earlier, none of the companies meet the international standards.

Our local chemical and dyes should address various health issues associated with the chemicals they produce in order to abide by all the set international regulations.

Training, research and educational institutes

The institutes(already mentioned in the factor conditions) are not working to their full capacity due to the lack of students, faculty, proper academic curriculum.

The NILT has taken initiatives to train individuals in Leather and Leather products but they are not capable of attracting people, which is reflected in the minute number of the present class at the institute(currently 110)

Firm structure, strategy and rivalryStructure:

Divided into two subsectors – organized and unorganized sector

700 units in total – 450 units in the unorganized sector and 250 units are members of organized sector

The unorganized sector has retailers in the area of in Joria Bazaar and Zainab market.

Leather Industry

Organizedsector

Unorganized sector

The associations of leather in Pakistan are:

Pakistan garments association(PLGMEA)

Pakistan tanners association(PTA)Pakistan footwear association(PFMA)Pakistan gloves association(PGMEA)

The Pakistan tanners association fully represents the tanneries all over Pakistan, and has represented the issues of its member exporters at the federal level for consideration

Pakistan Tanners Association central sub committees are also in touch with SMEDA to discuss some relevant issues of the leather industry towards to the formulation of the leather vision.

Clusters formation

The organized sector is mainly concentrated in the main hubs of the Country – Karachi, Lahore and Sialkot.

Other towns having leather industries are:

Hyderabad, Multan, Sahiwal, Kasur, Sheikhupura, Gujranwala, and Peshawar

In Karachi Korangi industrial area an informal cluster of tanners has emerged.

Informal Cluster: Korangi

Industrial Area (Sector 7A)

This cluster comprises of not only over 150 tanneries but also an effluent treatment plant, National Institute of Leather and southern zone office of Pakistan Tanners Association. The tanneries residing over here are all export oriented .

Apart from these 150 tanneries we have a few scattered units in Sher Shah and SITE

Informal Cluster: Kasur

Apart from this we also have a cluster in Kasur, in this cluster there are mostly unorganized and unregistered tanneries.

There are 275 tanneries in total Average daily input is 190 tons of wet salted weight The units tend to provide hides and skins up to the

wet blue form only. The structure of industries in Kasur is a traditional

family owned business. This informal cluster has always remained a high processing center mostly catering to the needs of local, low priced bracket footwear manufacturers

Rivalry

Research proved that there is minimal domestic rivalry among the tanneries in Pakistan each tannery is working in isolation and the actions of the rivals does not have any direct affect on it, as mostly the big industry players are export-oriented

So in order to brew competition and innovation we need to propel a competitive environment in the local arena.

Strategy Lately, the leather industry has

engaged in various fairs domestically and internationally in order to increase awareness of leather products among the masses

Pakistan Pavilions was organized by Pakistan Tanners Association in collaboration with the EPB.

The government of Pakistan gives 50% government subsidy in various international fairs and exhibitions held at different destinations in the world

Some of the fairs in which Pakistan tanners participated are mentioned below:

Lineapelle Fair held in October 2005, at Bologna, Italy. IDF Leather Fair, held in January 2006, at Istanbul,

Turkey. MMT Section of APLF, held in March 2006, at Hong

Kong. All China leather exhibition, held in September 2006,

at Shanghai. Le Cuir, held in September 2006, at Paris

The government of Pakistan assigned a task of Comprehensive development Strategy for the sector.

The entities that are involved in this venture are SMEDA Ministry of industries Production & special initiatives

The aim of this strategic step, is to reposition the leather industry on the domestic, regional and the internationla front.

The leather vision and strategy also includes the goal of setting up leather parks in Sialkot.

SMEDA has initiated the project of IIN( industry information Network)

The goal is to provide a common platform which will stimulate coordination among the members.

Government

The government of Pakistan is not providing the Leather industry with channelized and adequate support.

Repeated efforts have been made by the Pakistan Tanners Association to let the government know of their problems however they haven't yet achieved anything worth mentioning.

EPB has helped the leather industry by providing easy access in international fairs and is also offering subsidies from 50%-75%

The article published in business recorder on the 28th December 2008, mentions that government of India and China are taken various measures such as Indian government has injected Rs.9130 million to save its leather industry.

 

1

0 %0 %0 %

Finishing Foils25% Income Tax, 16%

Sales Tax

Tax on Import of Inputs and

accessories

0%0-13%3-25 %25 %Custom Duty on

Import of Inputs and Accessories

15 %Finished 7-11%

Footwear/Bags 11 % Apparel 5%

Finished 7.5 %Footwear 11.5 %Apparel 11.4 %

Finished 0.8-1.17%Apparel 3.22%Gloves 1.76%

Footwear < 2 %

Duty Drawback/ Tax Rebate

PAKISTAN INDIA CHINA BANGLADESH

Global Market Share 1 % 3 % 15 % 2-3 %

Export Duty on Finished Leather

0 %0 %

(A few items have up to 25 % duty)

0 %(Export Duty on Raw 20%)

0 %

Custom Duty on Import of Leather (wet blue, crust & finished)

0 % 0%

Wet Blue : Bovine, Equine 5%

Sheep, Goat, Swine 12%

10% ( Wet Blue & Crust)

Custom Duty on Import of Raw Hides

and skins0 %

0 %Certain Categories

25%

Bovine: 0-6%Sheep: 0-12%

10 %

POLICY COMPARISON MATRIX

The Pakistani government should also provide the much needed financial support (as proposed by Pakistan Tanners Association, the provision of 25% financial costs for setting up design centers and individual units).

Another outcry by the tanners was over the high cost and unwarranted supply of utilities (electricity, water and gas).

Even the logistic support is in a very poor situation.

There have been many unchannelized haphazard activities by the government to promote the leather industry of Pakistan

The government needs to take great strides in order to improve the image of Pakistani products.

Furthermore, as we read in the dairy sector, the smuggling and exporting of live animals is disadvantageous for the Leather Industry. The Government needs to look into this matter.

Export rebates of upto 23% were given uptil 10 years ago, which has now been reduced to a meager 0.8 to 1% for finished goods, 0.22% for apparels, 1.76% for gloves and 2% for footwear.

This reduces our ability to compete with countries giving high export rebates.

For example, Indian and Chinese Leather exporters receive around 7 to 11% export rebates for finished goods, where as the Bangladesh exporters get 15% rebates.

Impact of WTO on Leather Industry Some of leather products from Pakistan especially

leather jackets are much in demand but under the foreign renowned brand names, e.g Zara’s, Marks and Spencer, and NEXT.

Under WTO, no import tariffs are applied to raw hides and skins in Pakistan at present. However, there are varying levels of tariffs on processed goods.

A major debate is about whether or not unfinished leather should be exported or not, as a restriction in this case would give the leather garment industry a stronger edge over the leather tanners.1

A major dispute with WTO concerning Pakistan’s leather industry is the export restrictions on hides and skins which were initiated by the European communities.

Despite the fact that Pakistan removed the restrictions on the export of hides and skins, WTO is still seriously concerned about the matter and it is still a dispute.1

Lack of Infrastructure: The industry is a water based industry, yet

there is extreme water shortage that tanneries have to face.

There is an unwarranted supply of electricity, which disrupts the production process.

Road networks are in a very bad shape, where all that is available are the “Katcha” roads.

The drainage system is also in a very poor condition.The drains carrying the industrial waste are not covered.

• Availability of quality Raw material

• raw material is not good enough to meet the needs of the international buyers

• 80-85% tanneries import their raw material.• NewZeland• Sudan• Spain• Europe• Animals in Sindh become victims of the

wobble fly disease and skin rashes.

UnFavorable environmen

tal conditions

Poor Quality animal breed

Poor quality of skin

low quality of finished products

Demand conditions: The local production is not reflective of

international demand. Internationally there is a huge demand for

footwear. Pakistan is not at all competent in this arena

and accounts for 0.1% share of global footwear market.

4

Global Market Analysis

World Imports

US$ 47Billion

US$ 110

MillionMarket Share: 0.1 %

Growth: 8 % per year since last 4 years

Production: 150 Million

pairs (1 % of world)

Strategy Working Group – Leather Sector

US$ 1.5

BillionMarket Share: 3.2 %

Growth: 20%

Production: 2 Billion

pairs (14% of world)

US$ 9.2

BillionMarket Share: 20 %Production: 10 BillionPairs (66% of world)

Source: UNSD 2007Source: UNSD, 2007Ref: US$40B, 2005 ITC, Geneva, Council of Leather Exports, IndiaPR-inside.com

Source: DGCI&S, India April 07– March 08Directorate General of Commercial Intelligence and Statistics

World Production: 15 Billion pairs

Exports for 2007Source: Sina.com,PR-inside.com

Increasing global market competition: Pakistan’s Leather industry accounts for 1% of the total world share of Leather.While countries like Bangladesh which entered this industry after Pakistan, is grabbing around 2-3% of

the global market share.

Lack of R&D and workforce training. We do have numerous institutes for leather based technology, yet they have not been performing up

to the standards. Moreover the general perception, shared by tannery owners is that their workforce is good enough.

This needs to be changed and employees must be encouraged to take the courses offered by institutes like NILT

Gaps in the qualities of local supplies

This is reflected in the inefficiency of the local machinery and dyes manufacturers.

Our local machinery and dye manufacturers are not competent enough, forcing tannery owners to import all the machines ands the chemicals.

Empirical research shows that 80% dyes used are imported.

Poor coordination among the cluster-players

The clusters in Kasur, Sialkot and Karachi are the most important. Yet there isn’t a concerted effort taking place to turnaround things for the sector.

There isnt a shortage of institutes NILT Leather products development ( LPDI) Institute of leather technology(ILT)

But there is a need of unanimity of effort.

Cumbersome regulatory procedures

Export rebates of upto 23% were given uptil 10 years ago, which has now been reduced to a meager 0.8 to 1% for finished goods, 0.22% for apparels, 1.76% for gloves and 2% for footwear.

This reduces our ability to compete with countries giving high export rebates.

Over and above this, the Pakistan Leather Industry is subject to high L/C Margin approximating to 35%.

Lack of intercompany competition/rivalry

Lack of awareness in the local arena Red tape and bureaucracy

There are 32 departments in the government to look after the industries

Unfortunately all that they is to hinder the growth of the industry rather than support it.

Brand Pakistan The biggest impediment in the way of the

industry, has been Pakistan’s image in the international arena

Coordination between the relevant training institutes across Pakistan.

Management of the training institute facilities is not proactively focused to meet the needs of the industry.

Workforce development should be high on the list of strategic interventions to be made within the leather industry due to the challenge that they face in maintaining a workforce that has the skills and qualities required for the sector to remain competitive.

Product development in the Leather industry is majorly required. The tanneries in Pakistan should improve upon their product lines through R&D and innovation.

These days, people have become more aware of the hazards caused by these industries to human as well as animal life, therefore proper testing process of the chemicals produced locally should be done.

Increase awareness about the courses offered by NILT in conjunction with the Northampton University.

As the Leather industry has affiliation with the PIFD, there should be linkages with other universities and institutes as well.

The initiatives to make leather parks at Sialkot, Kasur and Charsadda should be taken seriously and proper work should be done upon them.

The strategy focuses on the need for the Pakistan leather industry to brand itself in the international market. “Leather Pakistan” should be presented as a brand through marketing initiatives.

Major trade shows, fairs and other promotional activities should be used to build our name, and thus improving the position of “Brand Pakistan”.

E-marketing- the use of the internet in order to make people more aware of leather industry in Pakistan

Provide investment incentives Higher duty drawback / tax rebate 6% R&D subsidy

Sustainable Pakistan leather sector competitiveness requires greater concentration on fashion and design

Government of Pakistan should support the establishment of a renowned and reputed international lab for leather and leather products to engage in R&D.

The industry has some excellent clients in the US and Europe and building on these with a marketing campaign, perhaps allied with warehousing assistance, there is potential for Pakistan to compete for clients with countries like Turkey who deal in a generally higher price bracket.

The focus on production of products specifically for the motorcycle industry by Sialkot producers is a good example of a specialty that can be promoted worldwide to draw positive buyer attention to Pakistan.

Commercialization of livestock farming to make the standard of breeding practices better.

The people at the slaughter houses who skin the animal, should be made more aware of the use of those hides and skins and how a little cut on the skin can make the whole skin useless.

Utilize the skin of aquatic animals, such as the sting ray fish and the white sharks, as well as crocodiles and alligators

More emphasis on the foot wear

Differentiate products in terms design

According to Porter's diamond model, domestic rivalry is healthy but if Pakistan is not very capable of that, the firms in the industry should atleast try to collaborate and thus contribute global competitiveness together.

The cost of production is also very high in Pakistan as compared to our competitors like China, India and Bangladesh. This is mainly due to the utilities, import costs and taxes, so Pakistan can work on that to capture its lost market