The second edition of the Growth and Transformation Plan (GTPII) has laid out an ambitious plan for the leather sector to reach 800 million dollars in exports by 2020. As part of the country’s move towards more value addition to the country, it is expected that 60pc of this export value will come from footwear exports, and 27pc from finished leather. However, the sector’s overall export performance in 2016 went down by 12pc registering a total of 116 million dollars as compared to its 2015 performance of 132.8 million dollars.
This sector, considered a priority by the government with ambitious targets and promises, has been consistently performing below government targets. The causes for the recent pronounced underperformance of this sector needs to be looked at more closely.
In 2016, the leather industry worldwide experienced a 10 to 12pc reductions in production while there was a 20 to 25pc reduction in shoe, garment, and glove exports from China. While Ethiopia’s recent export underperformance could be partly due to the slowing down of the international market, the industry has a long way to go in order to sustainably increase its share of the international market.
The country, in line with its plan to create more value addition, levied a 150pc duty on export of semi-processed leather five years ago. This brought some major changes that the sector needed to adapt to in order to perform sustainably in the domestic and international markets. The change was introduced to encourage export of finished leather and leather products with the notion that the industry developed the capacity to do so and benefit from the additional value to be created inside the country.
The introduction of the export tax required tanneries to only export finished leather which effectively meant that they could no longer sell to international tanneries but to leather product manufacturers. With this shift in product, the customer type that tanneries target completely changed. Customers who used to buy Ethiopian semi-finished leather and finish it in their own requirements are no longer customers for finished leather.
This means tanneries now have to look for leather product manufacturers to be their new customers. Leather product manufacturers come with their very specific requirements that are based on the fashion market they cater to. This is a major shift in the business model for Ethiopian tanneries that used to process leather only up to semi-finished and supply in bulk for the export market.
Tanneries need to start doing a demand-led and contract-based production that is securing a specific order before getting into commercial scale production. Breaking into this new market cannot be underestimated. Ethiopia is not known for its finished leather in the international market, and proving technically that Ethiopian tanneries can supply finished leather with the required quality and quantity is a major challenge the industry is struggling with. The global market for finished leather is highly competitive in which Ethiopian finished leather is being judged on its quality and delivery time together with finished leather from China, India and Turkey.
Alongside this market change, former importers of Ethiopian finished leather from China and India moved to Ethiopia to process and export leather. This also has significantly changed the market scenario for the domestic tanneries with their former buyers becoming their competitors. While FDIs are important in a country like Ethiopia to increase local capacity, access international markets, and transfer knowledge, their overall contribution to the industry should be closely looked at. Focusing FDIs’ role on bringing value where the country needs it most will bring long term return to the industry.
With finished leather processing comes high-quality requirements. Most of the tanneries do not have the technology to fix natural defects of hides and skins at the finishing stage. During the days of semi-finished leather export, quality used to be a factor, but not at the same level it is now. Since international tanneries have the technology to fix quality issues at finishing stage, they accepted different quality levels of semi-finished leather for different prices. This is no more the case with finished leather export.
According to tanneries, raw hides and skin quality is deteriorating at an alarming rate. Supply of grade one to five quality has gone down from 50pc to 8pc in the past five to six years. This is caused by animal disease called Ectoparasite in which the Ministry of Livestock and Fisheries has the responsibility of addressing.
Post-mortem quality issues are also accounting for more than 60pc of the cases. There are not enough fully functional abattoirs in the country, and small ruminants are mostly slaughtered in household and business backyards. This has been a consistent challenge to the industry. Ethiopia needs to conduct closer policy implementation and enforcement of availing functional abattoirs in different parts of the country.
Ethiopian tanneries are also being challenged with a very tight working capital problem. In the effort to make high-quality finished leather, tanneries needed to invest in machineries and facilities. Accordingly, most tanneries’ assets are tied up with bank loans. The longer processing time for finished leather also means longer period before shipment and payments are processed. These changes are putting a strain on tanneries’ working capital. This same problem has led to the recent raw hides and skins market crisis due to tanneries’ reduced capacity to buy raw materials.
Although the problem around access to finance is a highly discussed point around businesses in Ethiopia, the leather sector is at a much desperate stage for it to work. Recently, Ethiopian Industrial Input Development Enterprise (EIIDE), an enterprise established to support the manufacturing sector by availing inputs, has started giving collateral free credit to tanneries for raw material purchase. The initiative is proving to help the industry with its tight working capital problem.
On the other hand, there is much hope and expectation from the leather products export market. If this segment of the sector is to perform as expected, it will be a big market for the finished leather market. However, this market, similar to the international finished leather market, won’t be easy to come by. Tanneries need to develop the trust and relationship with leather product manufacturers to process specific types of finished leather-based on product orders. This kind of interdependence is almost non-existent in the Ethiopian context. Rather, different industry actors prefer to integrate backward to ensure constant and quality supply of inputs. In the developed economies, specialization is the key to efficiency where business partnerships and interdependency improve efficiency and competitiveness. If domestic tanneries first could get to the required level of interaction with the local market to produce demand led finished leather, the learning curve could serve as their springboard to get into the international market.
Looking at the leather industry worldwide, chemical suppliers are closer to the fashion world and upcoming trends in the product market. Using them as a link between the products and tanning market should be an interesting business model in which they provide assistance on access to markets and proper finishing capacity. Chemical suppliers, as part of their sales and marketing activity, have been providing technical assistance to tanneries in the early stages of leather processing. Now is the time to increase, perhaps improve, their engagement with the tanneries to support them technically and provide access to markets.
With higher stages of leather processing and product manufacturing, comes increased number and type of chemicals and accessories used. Currently, long lead-time in the importation of chemicals and accessories is one of the major bottlenecks. Factories shy away from taking big export orders due to lack of confidence in meeting quality and time requirements of international buyers. This is mostly due to the unconscionable time it takes factories to get foreign currency, and to deal with logistics and customs.
More than ever, there is a need for more integrated work among factories, input suppliers, government bodies. Looking at the possibility of import aggregation of industrial inputs could be one to help address the bureaucracy around imports faced by individual factories on small volume of imports.
On the regulation front, market actors argue that policy enforcement around finished leather export is loose, resulting in semi-finished leather still being exported. The problem in this is twofold: one; the country is losing on the right value of its exports, and two; international buyers are still sourcing semi-finished leather from Ethiopia in which case, they no longer need to source finished leather at a higher price from Ethiopia. Focusing Ethiopia’s export towards leather products is the best alternative by all means. It is more value addition in a country, and creates employment, generates foreign currency, and pushes factories to adopt the latest technology. Until the country fully moves to products export, regulatory bodies need to tighten their screening and approving system around finished leather export.
The challenges are complex and interconnected with different actors involved at different stages. The overall performance of the sector in 2016 was alarming. Ethiopia’s emerging global competitiveness in light manufacturing, increasing foreign direct investments, increasing interest from international buyers, and big buyers’ mission to explore Ethiopia’s readiness to be the next footwear sourcing destination are exciting opportunities and can transform the sector as it happened in China 20 years ago and Vietnam five years ago.
With big opportunities come big responsibilities. Ethiopia must be ready to welcome these opportunities and ensure this sector is treated as a real priority.
Ministry of Industry, Ministry of Trade, Leather Industry Development Institute, Ministry of Livestock and Fisheries, Ethiopian Revenue and Customs Authority, financial institutions, policy makers, Ethiopian Industrial Input Development Enterprise, and development partners are on the front list of directly concerned institutions that should own the process of elevating this industry to the level it needs to be.
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