Competitive threat from S E Asia10 January 2005
Although still one of the two largest importers of hides in the world, the Korean tanning industry has become substantially smaller in recent years. It is no longer the world's largest producer of footwear, as it once was, nor is it the country that produces the largest quantities of leather as was the case at one time. Competition from China has also taken its toll on this country where tanning costs are significantly higher. As in many western countries, tanners centred in the Ansan suburb of Seoul are burdened with increasing environmental costs. The particular cost of labour, however, has been the key factor in the decline of Korean leather production. A typical tannery worker in Korea is paid about $1,500-$1,800 per month. This compares to about $100 per month in China and Vietnam where there are more than a few joint ventures with Korean tanners and shoe manufacturers. Another key contributing factor to the decline of the tanning industry in Korea is that their customers, including the world's largest shoe and garment manufacturers, have moved their facilities to China and other lower cost countries, and want their leather sources to accompany them to assure just-in-time deliveries and quality control. About 20 tanners are still operating to any reasonable degree in Korea. Nearly all of the larger ones have established factories in China. A sizeable percentage of the hides that are shipped to China and shown on USDA export figures each week, are actually purchased by Korean tanners for shipment to their Chinese facilities. This includes shoe upper and garment leather tanners. The Korean industry has never really tried to become established in furniture upholstery leathers but automotive upholstery is a growing segment of the Korean tanning trade. The majority of automotive leather tanned in Korea goes to the country's car makers. The three largest automobile manufacturers produce about 20 different models, many of which are offered with leather seats. There are currently three established tanners supplying the leather for these models. Prices quoted, depending on the specifications required for a particular model, is in the area of $2.30 to $2.50 per sq ft. The most favoured raw material for this leather is US heavy Texas and to a lesser extent, branded steers. Korean tanners continue to follow the tradition established long ago, relying on shoe upper leather as their main production. The majority of this, as in the case of automotive upholstery, is from American Heavy Texas steers, and to a lesser extent butt branded, branded and Colorado steers. Korea is also one of the largest destinations for European hides both in the raw and wet-blue. A growing quantity of South American wet-blue is also going to Korea. Australia and New Zealand also count Korean tanners as one of their main customers. Most of the tanners visited said that they have reduced soaks, ranging between 20% and 40% on their shoe upper and garment business. Automotive tanners, however, are still enjoying fairly steady business. One of the largest side leather tanners has cut their daily hide input from 7,000 per day down to 5,000. The lack of margin between raw material and finished leather prices is as much a major factor in this decline as reduced leather orders at this time of year. As has been the case in most parts of the world, leather prices in Korea have stayed the same, regardless of hide prices. For example, white athletic leather, a mainstay of Korean business, has been at $1.80/sq ft for typical tannery run for more than a year. Garment leather prices have also been relatively inelastic, generally selling between $1.20 and $1.40 per sq ft. One tanner noted that with lamb prices so low, cow garment leather is not competitive enough to attract consumers unless prices are commensurate with lamb. Not all of the shoe and garment manufacturers have left Korea. There is also a market for tanners to sell locally, but it is only a fraction of what it once was. The pu coated split market, centred in Busan, that was once dominant in the world, still exists. However, it is on a much smaller scale due to most of the trade moving to China. And local shops stock leathergoods made in China. Tanners in Korea may no longer enjoy the position once held in the world, but they are still a major and very important destination for raw material. The next stop on our visit was Taiwan. Contrary to the belief of some, there is still a thriving tanning industry on this island nation. Although the majority of their customers have moved to China and Vietnam, the remaining tanners, which are far less than existed even five years ago and are primarily located in the southern half of the country, have adapted to the changes necessary for their survival. There are about 15 tanners remaining, nearly all of whom are only making shoe upper leather which is almost all sold for export. Some of the larger tanners in Taiwan soak in the region of 5,000 hides per day while their smaller colleagues do as few as 500 to 1,000 per day. Like tanners in Korea, one way Taiwanese tanners are surviving is by moving to China along with their customers. Like shoe factories, they are benefiting from a Chinese labour force that is content with a pay scale beginning at $100/month that also includes housing and meals. This is common practice in China regardless of the item being manufactured. By comparison, the lowest echelons of tannery workers in Taiwan earn about $1,000 per month. In addition to China, a number of Taiwan's shoe factories have also moved to Vietnam where there is an active community of overseas Chinese involved in the tanning and shoe making industry. Labour in Vietnam is somewhat akin to China, so to the Taiwanese, the costs are similar and some infrastructure costs are lower than China. It could be said that the owners of tanneries in Taiwan soak more hides in their Chinese and Vietnamese tanneries then they do in their home drums. As noted, nearly all of the tanners in Taiwan produce shoe upper along with handbag and accessory leathers. However, there are several niche tanners as well. At least two tanners produce speciality leathers for the sports industry. There are also several split tanners, as well as pig skin tanners. The split tanners met said that the current malaise affecting the demand for splits has forced them to cut their production by between 25% and 50%. Once a major importer, most of the splits generated in Taiwan these days are exported to split tanners in China. As for tanners everywhere, price pressure on leathers is severe. To combat this, as well as environmental concerns that are not that different from western countries, tanners in Taiwan are managing change. In addition to moving production off-shore, some tanners are importing South American wet-blue with good result. Typical tannery run leather from American hides sells between $1.90 and $2.10 /sq ft in Taiwan. At US asking prices for Texas steers, and the chief diet of Taiwanese tanners, US branded steers, approaching $70 piece, profits are almost impossible to obtain. Australian hides have been popular in Taiwan for many years, as well as New Zealand, but only when priced competitively with American steers. Some European ox also find their way to Taiwan. Tanners in the country are not new to global sourcing of their raw material. A few tanners say that they can sell leather made from better grades of South American wet-blue for about $1.65/$1.75 per sq ft and make a small profit. The primary market is lower cost footwear such as sandals and various other finished goods, utilising corrected grains. Like everywhere else, chemical tanning and finishing costs have escalated along with the price of oil. One international chemical sales company representative met in Taiwan said they have had to raise their prices between 20% and 100% depending on the item, as have the few local chemical and finishing chemical manufacturers in Taiwan. In addition to being on solid financial footing, Taiwanese tanners are shrewd and experienced hide buyers, not only for price, but knowing which origins produce the types of grains in various seasons that they prefer. Those left are the survivors of a once larger industry. They have the capital, skills and acumen to continue well into the future. To many in the industry, frustrated by their low cost structure, how to compete with China remains an enigma. Although many tanners with whom we met during our visit were generally pleased with their level of business, others were not. Profit margins were not generous and few if any had more orders for leather than they could produce, as late fall is their traditional slow season. However, plans to expand capacity at many tanneries were continuing, especially in the furniture upholstery and, to a lesser degree, in the shoe upper segments of the trade. There are numerous very small tanners in Eastern China, but some are amongst the largest in the world. Kasen for example, in Haining, soaks at a rate of 200,000 hides per month in several facilities. The company make their own furniture utilising their own leather. They also produce shoe upper and have recently entered into the automotive field. Cosey is another fully integrated operation making furniture from the wood frame to the finished leather upholstered product and in very large volumes. There are many organisations like these two which have the capability and experience to source hides from many countries and buy when it suits them, depending on various markets and yield factors. Upholstery tanners with whom we met advised that they sell their furniture leather at between $1.35-$1.80/sq ft but there is more to this than meets the eye. Quality naturally dictates price, with most corrected grains bringing the bottom end of the range, and the small percentage of full grains they produce achieving the $1.80 level. However, one major difference in price for both upholstery and shoe upper leather is whether or not import taxes are paid on the hides bought in from overseas to make the leather. Chinese tanners must pay 25% of the invoiced value in taxes. Export credits are received to offset this tax (drawbacks). However, for the burgeoning domestic market, which a number of tanners rely on as their chief market, the tax has to be absorbed into the price they sell their leather for domestically. As a result, domestic leather prices are typically about 25% higher than leather sold into finished products for export. Speaking of the domestic market, more and more quantities of all types of leather products are being consumed in China. We failed to meet with a single tanner who did not sell a percentage of their production to Chinese manufacturers. Although tanners can get $1.95/sq ft for tannery run sold to export markets or to shoe manufacturers who then export the finished product, domestic footwear manufacturers are paying in the vicinity of $2.20/sq ft and tanners say that demand is quite good. The automotive leather business is still a very small part of the Chinese tanning industry. Those tanners producing automotive leather naturally have a stronghold on their local market where car production is growing rapidly. However, more than one Chinese automotive leather tanner is a certified bidder to some of the world's largest seat and car manufacturers. One tanner said that the average price received for their automotive leather is in the area of $2.20/sq ft. Several provinces in the northern portion of China produce mechanically flayed, well cured beef hides. A number of packers in these areas slaughter European breeds that several tanners told us produce about an 80% ABC grain selection. They say this sort is far better than any of the hides they import from overseas. They also save the import taxes on these hides, but the quantities are small and they are far from cheap. These packers only kill about 200 animals each per day and, at present, tanners in China who use them have to pay around $75 per piece. Many tanners are in the process of expanding their operations into very large modern facilities. A large number of machines that we saw when visiting these new plants were manufactured in China but, Italian equipment was well represented especially in the finishing departments. At the end of the week spent visiting Chinese tanners, although we know from previous experience and visits how large China's tanning industry has become, it is quite clear that they are poised for even further rapid expansion and dominance in the international leather market. They have already captured their domestic leather market which is still in its infancy, but this is likely to expand hugely within the next five years and beyond.