India gains from EU anti dumping policies22 March 2007
The recent anti-dumping duty by the European Union of 16% on China and 10% on Vietnam has been heralded as good news for other Asian countries who have been overshadowed by the huge volume of footwear exports which have been accomplished by these two countries. India is just one of a number of countries who see this as their big opportunity to provide more footwear for the important European market. But it is not just the footwear market which is coming under the spotlight and China, in particular, is facing a major leather industry upheaval while the government struggles to come to terms with environmental problems. Shri Kamal Nath, commerce and industry minister, has said that exports from India's leather sector are likely to reach US$7 billion by 2010-11. The current export earnings from the leather sector are about US$2.7 billion with a growth of around 8%. Delivering the keynote address at the one-day India Leather Summit 2006: Towards Global Dominance which was organised by the Council for Leather Exports (CLE), he said that in order to raise leather exports to the projected level, an annual 20% export growth rate must be sustained along with additional production technology and greater manufacturing capacity. Indian leather products are expected to benefit from the World Trade Organisation (WTO) regime. According to Kamal Nath: 'Indian leather products will not only get greater market access in developed countries in view of tariff elimination and reduction mechanism through free, regional and preferential trade agreements, the cost competitiveness of the domestic manufacturers will improve further in view of gradual phasing out of import duties on inputs and machinery.' Kamal Nath also voiced concern over poor investor interest in the industry. 'So far, overseas investment in the industry is at an abysmal level of less than 0.15% of total foreign investment inflows into the country. This trend needs to be reversed through aggressive campaigns, investment promotion programmes and by creating awareness about the investment opportunities available.' In order to help leather companies the minister has asked international luxury goods companies such as Hermes International to make use of the provision permitting FDI in single-brand retailing and to source leather products from India. Later, during an interactive session with exporters, minister of state for commerce Jairam Ramesh was presented with grievances and problems which are said to be plaguing the sector. Assuring the industry of the government's overall support, he said that in the current fiscal year exports are poised to post a turnaround by clocking a growth rate of 11% to $3 billion. Nath said that in the light of the recent anti-dumping duty by the EU, Indian leather exporters must make a determined foray into the lucrative European market. He also urged the industry to seek investment from Taiwan, South Korea and Europe to build supply capacity domestically to cater to the overseas market. According to him, SEZs for leather by Sipcot at Sriperumbudur (Tamil Nadu) and another at Tada (Andhra Pradesh) would become functional soon. Kamal Nath told his audience that: 'The Prime Minister and Sonia Gandhi have been speaking to me on the need to give the leather industry a high priority. The leather sector has not so far got the attention it needs, considering the 2.8 million plus people working in the sector', Nath added. He said an integrated leather development programme was being implemented with a central allocation of Rs400 crore, focusing on modernisation of manufacturing facilities in all segments of the leather sector. On the leather industry's demand to have flexible labour laws, Nath said: 'even in China there is a labour crisis in this sector. India, with its skilled labour, can take advantage of the situation. But our focus is on employment security rather than employment generation. But, at least in some areas, I hope we can make some headway. But first there will have to be a political consensus.' Despite the reprieve that the domestic leather export industry may get by way of new opportunities opening up in the European Union in the wake of the latest anti-dumping duty on China and Vietnam, a reality check shows the chinks in Indian leather industry's armour. Even as China has increased its share both in the high-volume and low volume segments, India's progress on both the counts has been poor. Global exports are dominated by footwear to an extent of 65% while Indian footwear only manages 36%. Indian leather caters to medium and high quality markets, though in lesser volume, and there is a case for looking at pricing Indian footwear competitively to gain good access to the US market. Other important differences between India and its competitors are that the footwear segment in India is dominated by men's shoes in the formal category even as the world's largest footwear market (the US) commands a product mix in favour of casual styles, athletic shoes and ladies' footwear. India is 'woefully weak' in all these three segments. A Unido report in 2005 pointed out that against 200 industrial houses such as Shoe Factory in China, India has only four large shoe manufacturing industrial houses. Around 63% of its exports are to the European market with only a fraction of the exports going to the US, which is the highest growing market in the world. The Indian footwear sector suffers from an inadequate supply of components with the sector remaining in the infant stage. The larger manufacturers are forced to import what they need from overseas. Council for Leather Exports According to a vision document by the Council for Leather Exports, the export target of $7 billion by 2010-11 by the leather industry demands immediate investment in capacity augmentation, human resource development and training. The marketing strategy needs a paradigm shift by focusing on the larger markets such as the US and new markets in the Far East and Scandinavian countries. CLE say that global trade in leather products rose from $77.33 billion (2000) to $97.60 billion (2004) while India's trade in such products increased from $1.99 billion to $2.38 billion during the same period. But India's share, which was 2.54% in 2002 declined to 2.44% in 2004. China and Italy remain on top with a share of 22% and 16% worldwide. Jairam Ramesh said that Taiwanese companies have shown keen interest in investing in the industry in Andhra Pradesh and Tamil Nadu (Sriperumpudur) and the focus would be on diversifying from high-end product in the price band of $15-$20 per pair to low-priced leather products in the range of $5 to $9 per pair to give a run to the low-cost suppliers like China and Vietnam in these markets.'We must switch over to volumes rather than persisting in the high price segments', he added. Ramesh further contended that while the global market has sizeable non-leather footwear, Indian production is mainly leather and hence there is a need for pushing production of non-leather footwear to earn a modest share in the global market. His views are unlikely to be popular with the leather industry who would prefer all shoes to be made of leather and do not welcome downgrading of products. He said investment, both domestic and foreign, was particularly important now because the CLE has conceded that the Chinese are able to produce leather garments at competitive rates and had entered the US market in a big way pushing down Indian sales. High raw material cost appears to have hit the garment industry, besides the deficiencies in design capabilities and low productivity. It has been suggested that the footwear sector would lead the growth for about five to six years and hit a plateau unless the product-mix is altered to suit the needs of the US market. It is in this context that experts have cautioned that investments in the sector would not increase unless SEZ parks are offered to the investors. The proposed capacity augmentation is possible through five SEZ parks for leather products at Chennai, Kanpur, Kolkata, Agra and Tada (Andhra Pradesh). Similarly, for the tanning sector, two exclusive tanning clusters are proposed: one near Nellore in Andhra Pradesh and one near Ennore in north Chennai. Agra SEZ Agra is expected to begin work this year on a special economic zone (SEZ) for its leather shoe industry. The SEZ is to be developed by a private firm on 100 hectares of land that will be acquired through a state government notification soon, according to official sources. Some 40% of the area will be used for commercial purposes and 60% for residential and other infrastructural facilities. Parsvanath Builders has been asked to submit a detailed plan within a year and secure clearance from the ministry of environment. Agra's National Chamber of Industries and Commerce has promised all help to the promoters. The Federation of Indian Export Organisations (FIEO) has welcomed the commerce ministry's decision to set up a SEZ for the leather industry, saying it will boost leather product exports from Agra. 'The SEZ will help leather and leather product exporters, especially given the dismal infrastructure they have in the area compared to exporters in competing countries', said FIEO (northern region) chairman R K Dhawan. Agra is one of the chief shoe manufacturing centres and the SEZ will not only help upgrade skills but promote exports from the city of the Taj Mahal. It is estimated that at $2,289 million India contributes 3% to the global leather and leather product exports. West Bengal footwear park? It has been said that the footwear industry in West Bengal is fast becoming uncompetitive (particularly with regard to low-priced men's shoes) because of large tax exemptions in states such as Delhi and Madhya Pradesh. Industry associations in the state now fear that some 300,000 skilled and unskilled labourers engaged in this SSI sector may lose their jobs if local sourcing starts shrinking in a big way. Admitting that trade was slowly shifting to other parts of the country to avail itself of attractive tax benefits being provided elsewhere, leading city-based footwear manufacturers have confirmed that purchases from vendors in Delhi and Agra have sharply increased in the first six months of the current fiscal year. According to one established manufacturer, who was sourcing exclusively from within the state, his own purchases from outstation vendors between March and August this year have increased substantially, admittedly at the expense of the local vendors. Another manufacturer has already set up a regional footwear distribution centre in Delhi on the basis of large outsourcing from low tax states. In August, the Union Government agreed in principle to extend financial assistance to help implement a proposal for setting up a 'footwear park and rural footwear service centre' in West Bengal. The proposed park will have common infrastructure fitted with modern production facilities. Out of Rs110-crore (US$25 million) earmarked by the planning commission for proper infrastructure development for the country's leather sector during the tenth plan, assistance of Rs12.25 crore is expected to come for the proposed park and service centre. The investment is to be made through the Leather Forum Calcutta for Research & Development, a promotional private body dedicated to creating an adequate infrastructure for footwear and leathergoods manufacturers in the state. In addition to monitoring the project, they have approached the State Government for necessary land at Budge Budge in South 24 Parganas and Barasat in North 24 Parganas for the proposed park and service centre. Wastewater recycling Work on the Ambur-Vaniyambadi leather cluster (in the North Arcot district of Tamil Nadu) under a Rs67.33 crore (US$15 million) Industrial Infrastructure Upgradation Scheme is said to be on course and, hopefully, will be completed by August 2007. The bulk of the costs are being met through a government grant, with the balance coming from the various stake-holders in the area. The project involves setting up of a network of advanced wastewater recycling plants and other effluent treatment infrastructure to help the leather units in the area achieve zero discharge and sludge disposal facilities. The modern MBR-RO (membrane bio reactor-reverse osmosis) technology is being used for the project. According to Rafeeque Ahmed, president, All India Skin & Hide Tanners and Merchants Association, three CETPs in Ambur and Vaniyambadi will be connected to the new facility. The membrane bioreactor system, a technology proven to be effective in removing organic pollutants and suspended solids from tannery effluent, will first involve a pilot project which will then be extended to a commercial scale of about 7,500 million litres a day. According to Ahmed, this is a system that has not been tried on such a large scale for tannery effluents in India and will be the first of its kind. The Tamil Nadu Water Investment Company (TWIC) are implementing the project. Ahmed said the work order for modification of the central effluent treatment plant (CETP) and pipeline and pump station, estimated to cost Rs13.25 crore, has already been issued. The sludge disposal facility, namely the secure land fill system, being implemented by the CLRI, Chennai, is expected to cost Rs6 crore (US$1.34 million). The three functioning CETPs, one each at Maligaithope and Thuthipet in Ambur for the leather cluster in and around the area, and one at Valayampet in Vaniyambadi, need upgrading. Due to the poor monsoon conditions, the leather industries in the area are forced to buy water for treatment processes at a heavy cost. The expansion route Footwear exporters are on an expansion spree as the demand from existing and new markets is growing strongly. Capacities could have grown by 50% in 2006. Most large exporters such as Forward Shoes, Farida Shoes, Presidency Kid Leathers and AVT are undergoing expansion to meet the increased demand. Exporters have their hands full with orders and expanding production capacities is the only option, say industry sources. According to Rafeeque Ahmed, chairman, Farida Shoes, the company's capacity is expected to nearly double with their new facility at Ambur, North Arcot in Tamil Nadu. Farida Shoes' fourth factory was due for completion at the end of last year. The third generation is getting into the saddle in the family-held leather businesses and they are setting their sights high. Rafeeque Ahmed has strict instructions from his son — the new factory must be ready in 2-3 months; commitments have been made to Wal-Mart and deliveries were due to start by the year-end. According to Zackria Sait, managing director, Presidency Kid Leather Ltd, the company have increased their production capacity to 4,000 pairs a day, a four-fold growth. In two years' time, the company hope to manufacture 10,000 pairs/day. Europe and the US are looking to India and 'huge orders are coming in'. In Tamil Nadu alone, rough estimates indicate that production capacities could increase to about a 100,000 pairs/day or more in the near future, a 50% increase. In two or three years this could triple or even quadruple. Forward Shoes are setting up a 10,000 pair a day unit with a 20,000 sq ft built up area at Pallavaram, a southern suburb of Chennai. This factory is expected to commence production in April 2007. Muhammad Yavar Dhala, managing director, Forward Group, says: 'Customers do not like to hear 'no' more than once.' When buyers come in to place an order manufacturers simply cannot afford to turn them away. Finished leather, leather footwear, garments and accessories manufacturers are pushing hard to increase their factories' capacity or setting up new ones. The leather industry has benefited from the need for international players to keep costs down and to identify a production base other than China with a skilled workforce, ability to deliver and quality consciousness. The small, dusty towns in North Arcot: Ranipet, Ambur and Vaniyambadi meet these conditions. Ahmed says: 'From trading in plant extracts to catering to tanners, getting into tanning and moving on to leather products, the industry has evolved over the last century. From there to meeting the needs of premium brands in European fashion has happened in the last decade or two.' This is not without problems, however. Leather manufacturers report that full order books are counterbalanced by labour shortage and problems of communication; even though these towns are just a two-hour drive from Chennai, a hub for the telecommunication industry. International businesses mean expatriates, middle-level managers with good pay packets looking for some quality of life. But basic facilities such as good schools, entertainment and shopping facilities are almost absent. Most companies build their own guesthouses to attract the executives to stay on. At Ranipet, P V Gopalakrishna, who heads Bachi Shoes, says the company expanded from making a 1,000 pairs of shoes a day in 1998 to 6,000 pairs now and a new facility to produce another 3,000 pairs is due for completion soon. Bachi started making shoe components with a 12,000-pairs-a-day factory in 2003 and are doubling this capacity now. He needs 750 more workers at the shoe factory but buses are already transporting workers from 40km away to and from their residences. They say they will have to look further afield. Being within a 100 km of the major centres of automobile and telecommunication production centres in Sriperumbudur is another problem because those industries can out-pay the leather industry. P Anees Ahmed, director, Naser Bali (gloves) Pvt Ltd at Vaniyambadi, says that his company has the only factory that makes golf gloves for the international premium brands. They are expanding their tannery to produce 15 million sq ft of leather a year. T Rafeeq Ahmed of T Abdul Wahid & Co says labour shortage is the limiting factor to expansion. If it was just equipment, a shoe-upper production line can be in place in two days, 'but where do I go for workers', he asks. Factories need to move into the interiors, but roads and communication would become a bigger problem. Factories also need to expand to cater to the US market which is much larger than the European market. Entire factories making several thousand pairs of shoes a day need to be dedicated to one US retailer. Companies cannot always make that kind of a commitment, he says. Liberty Shoes Limited have decided to set up three new production facilities to double capacity to 100,000 pairs of footwear/day over the next three years. The company have planned an investment of Rs1,600 million, of which Rs800 million will be used in the new units and another Rs800 million for further expansion. Three more new plants are planned for this year and capacity is expected to increase from 50,000 pairs/day to 75,000 pairs within the year and to 100,000 pairs in three years', stated chief executive officer Adesh Gupta. One of the three units will be set up at Roorke in Uttaranchal with a Rs500 million investment for leather footwear, while the other two will be set up at Ponta Sahib in Himachal Pradesh involving an investment of Rs300 million for non-leather footwear, he said. The company also plan to invest another Rs800 million by 2008 in further expansion. Liberty have teamed up with the global retail chain Wal-Mart to sell their products through the latter's outlets across the globe. 'Initially they test marketed our products in 30-35 stores and now will be sourcing in bulk from us. Though there is no firm commitment on volumes, our expansion plans are also based on expectations of huge orders from Wal-Mart', Gupta said. In order to capitalise on the booming retail sector, Liberty have also formed a joint venture company with Pantaloon, named Footmark Retail India Ltd, to open retail stores under the Footmark brand name. At a time when many manufacturing companies are going into retail, Kanpur-based leather company Mirza International have decided to follow suit by opening their 25th lifestyle store in Kanpur, the first in the city, as part of their drive to open 50 such stores and take the number to 300 eventually. Taking lessons from companies such as Reebok, they decided two years ago to go into retail. This has now become one of their major activities. The stores, named Red Tape, the international footwear brand of the company, have a large number of accessories such as T-shirts, denim jeans, wallets, and belts and footwear for both men and women, said Shuja Mirza, vice- president (marketing). By following the franchise model, the firm have managed to keep their investment in fixed assets low. Investment will be in the form of inventories and in the range Rs60-100 crore. Joint ventures The Chennai-based Farida Group, a leading exporter of footwear, have teamed up with Jaffra of Vienna, Austria, to set up a joint venture for manufacturing shoe components. According to Rafeeque Ahmed, chairman of the group, the joint venture will produce insoles in women's shoes for the high-end brands. Jaffra are a leading supplier for international brands. The product is high-tech and not available locally, particularly for high-heeled shoes. Ladies' shoes are the next area of growth for shoe exporters who have until now concentrated on men's shoes, he said. Jaffra are a century-old company specialising in insoles and sheets for insoles. Apart from Vienna, they also have production facilities in the Czech Republic. The factory at Ambur, in North Arcot district, will have a capacity to produce more than 30,000 pairs of insoles a day. Ambur is a leading centre for the manufacture of leather footwear. The project involves investments of Rs4 crore with an equity of Rs1.75 crore. Farida will have a 60% stake and Jaffra 40%. Sreeleathers of Kolkata are planning to enter into a joint venture with a European footwear company. Sreeleathers are one of the leading eastern Indian brands in the footwear and leather accessories segment. 'Since we are exporting to European countries, we felt it was a good idea to tie-up with a European footwear major for ease in local operations. At present, we are talking to one such company for a JV and finalisation would take another few months', said S B Dey, director of Sreeleathers. After formation of the joint venture, Sreeleathers would use the partner company's manufacturing base to produce Sreeleathers products. Sreeleathers would also use the partner's distribution network in Europe. At present Sreeleathers export leathergoods to Europe, the Middle East and Japan, among others. The company also plan to set up a manufacturing base in Bantala in West Bengal, in addition to the one in Kolkata. 'We have just bought land at Bantala. We have not decided yet as to how we are going to use it but may set up a plant there to manufacture both footwear and accessories', said Dey. The $1.52-billion Boston-based New Balance Athletic Shoe Inc (NBAS), a major player in the walking and running shoes segment, recently launched their range of footwear and apparel in eastern India through Royal Sporting House Distribution (India). The company's contract manufacturing arrangement is with Moja Footwear of Haryana. New Balance was the fourth international sports footwear brand entering the Rs600-crore (US$ 134.2 million) Indian market, after Nike, Adidas and Reebok. Reebok accounts for Rs300 crore, followed by Adidas (Rs120 crore) and Nike (Rs100 crore). NBAS are said to be aiming at a 10% market share within the first three years (Rs60 crore by 2009) and turnover of Rs100 crore within five years. The plan is to introduce the complete range of footwear and apparel in the Eastern region States of West Bengal, Orissa, Bihar and Jharkhand through the multi-brand outlets. Overseas investments Six months ago Gruppo Investor, a Portuguese holding company with interests in shoe and shoe components manufacturing, set up a 100% subsidiary for making shoes for the export market. Their subsidiary, Calsea Footwear, have set up a factory near Kaveripakkam, Vellore district, about 80km west of Chennai. Calsea Footwear Pvt Ltd have the capacity to manufacture 4,500 pairs plus of shoes/day. The district is a manufacturing hub for leather, footwear and leather products. The company are looking at Tamil Nadu State as a base for shoe manufacturing to cater to the US, Europe, South Africa and the Gulf markets. Added benefit to the industries in the region is that Calsea will source all the components, shoe uppers and leather from the units in the area. Gruppo also have five factories in Portugal and one in Romania and manufacture more than 20,000 pairs of shoes/day. The Portuguese company's presence in India is in line with the interest shown by other European and US companies which are looking for alternatives to China as a production facility. A year ago it was reported that one of the largest manufacturers of footwear, PouChen of Vietnam, were seeking for a location in Tamil Nadu to set up a manufacturing facility. PouChen are described as the largest manufacturer of footwear under one roof and they cater to some of the leading international brands such as Nike, Adidas and Reebok. If this comes to fruition it could become one of the biggest facilities in India. Just one PouChen unit in China manufactures over a 100,000 pairs of shoes/day. The way forward for India will be largely dependent on how much foreign investment they can attract, either through joint ventures or through direct investment by companies who wish to set up offshore manufacturing to replace their reliance on China. In order to do this they still have to tackle problems relating to worker availability, reliability of energy supplies and sound infrastructure arrangements such as good transport routes.