Forging links between east and west11 September 2002
In the spirit of understanding and flexibility which is necessary for future dealings between the two sides of the divide, the creator of the Link, Ron Sauer, opened the conference and announced that the first session would be delayed to allow delegates to watch the World Cup match on the television. The opening session, when it got underway, was taken by Arpad Varszegi, director of BCE (Hungary). He spoke about the leather and footwear industries in central and eastern Europe and the beginnings of co-operation with the European Union. Varszegi compared the current situation with ten years ago, saying that there had been a huge drop in production of leather and shoes in the region due to the loss of traditional markets, lack of financial resources and stricter environmental regulations. Production has stabilised during the past four years, albeit at a lower level. The industries have been affected by the very high level of imports from Asia, specifically China. They have also been hit by high inflation and do not have enough capital for any development. He said that eight to ten years ago, the industry was characterised by state control which was both severe and strong; centralised production units and distorted economic politics/regulation through state subsidies. Mass production was the order of the day with a shoe factory, say, producing two million pairs of shoes. He described such huge capacities, allied to having no real owner, as equating to having no order. There was no such thing as demand or marketing and a complete lack of information. Because of this, they were ill-equipped when it came to making approaches to international markets. In the years 1990-94, production and trade collapsed. The first steps were taken towards privatisation and there was the appearance of foreign capital for the first time. Some owners segmented big factories and up to a dozen affiliated units at a time became independent. Overseas joint-ventures were sought as some countries did not allow 100% foreign ownership. Many companies went bankrupt. Inflation soared, up to 100% in some instances, but averaged out at 30-35%. This used up all the working capital in central and eastern Europe. Many companies were only able to survive by securing long-term contracts under which they were provided with the raw materials and designs and were only required to supply the labour. There was no marketing involved and no sales force needed. By 1995-97, full privatisation had occurred but the industries were only working at 20-30% capacity. Turning his attention to the future, Varszegi said that many countries in central Europe and the Baltic area will join the EU but he acknowledged that they still have a lot to learn when it comes to IT and marketing. The big challenge will be to create the full system and conditions of a market economy. The rules of the free market already exist but there is still a great deal of state involvement through import/export and other regulations. They need more information on trading east to west and north to south and to learn how to co-operate with the big players. By joining the EU, they hope to gain financial support through subsidies to aid development of their industries. However, more companies are expected to cease trading. He said that Asian goods will continue to enter the market at an increasing rate. Quality will improve and there will be more competition for raw materials in Europe. He concluded that quality is the key to survival and success. In his answer to a question from the floor, he said that the economy is growing in central and eastern Europe and agricultural production will increase. This is inevitable due to the past dramatic decreases. The only way now is up, particularly against a backdrop of increasing stability in the region. The Italian perspective Dr Bruno Cortese, president of the Associazione Italiana dei Chimici del Cuoio, looked at the opportunities and exchange of products between eastern Europe and western Europe. He said that the fall in meat consumption in western Europe due to changes in dietary habits had been aggravated by BSE. This had led to considerable reductions in the number of animals slaughtered and, consequently, in the availability of hides. For this reason, several countries had been forced to import massively to cope with the demand from local tannery facilities. Against this background, several countries had gradually abandoned the tanning industry. Others, such as Italy which has traditionally been active in this sector, have succeeded in maintaining their positions and, to some extent, improving their position. There are three highly important sectors in Italy, each specialising in a different type of production. Chiampo Valley Area (Arzignano) This area is situated in the north-east of Italy and is one of the most important areas in Europe, specialising in the production of hides for decoration/furnishing. The breakdown is currently as follows: * Hides for furnishing - 70% * Hides for footwear - 20% * Hides for clothing/leatherwear - 10% The key figures for the area are: * Tanneries - 350 * Sub-contracted work - 450 * Turnover - €3.185 billion * Export - 45% (Private source) Around 50% of the hides worked are fresh hides; the remaining 50% are wet-blue. For the fresh hides, the countries of origin are: Germany, France, the UK and the Netherlands, whilst the tanned hides come from Russia, South Africa, Australia, New Zealand and south America. In the north-east, a number of specialist companies manufacture tanning machines which are exported around the world. Santa Croce Sull'Arno Situated in central Italy, this sector has as its main focus the conversion of hides for footwear. The main products of the Santa Croce tannery sector breakdown as follows: * Uppers and leather for soles - 70% of production * Leathergoods - 20% of production * Clothing - 10% of production The raw material is mainly bovine hides - for footwear, leathergoods and clothing - which are supplied as fresh salted hides, wet-white or wet-blue. For soles the material used is almost exclusively fresh salted. 35% of the national production of hides and 98% of soles is concentrated in this area. The key figures for the area for 2001 are as follows: * Tanneries - 400 * Sub-contracted work and other companies in the sector - 500 * Global turnover for the zone - €2.1 billion * Percentage of exports over turnover - 40% With reference to the sources of these products, 75% of raw or semi-finished hides come from European and eastern European abattoirs, 15% from national abattoirs and 10% from north and south America. (Source: Association of Tanners and Consortium of Tanners Ponte a Egola) Solofra area Situated in southern Italy, this is the specialist area for small hides and skins for clothing and footwear, with the breakdown as follows: * Hides for clothing - 65% of production * Hides for linings - 15% * Hides for shoe uppers - 10% The key figures for the Solofra area for 2001 are: * Tanneries - 150 * Sub-contracting work - 200 * Annual production - 45,000,000m² * Turnover - €1.4 billion * Percentage of exports - 70% Supply of raw or semi-finished leather comes from: the Middle East, the UK, New Zealand, Nigeria and South Africa. The material used in the area is mainly goat and sheepskin, however, the type of raw material is constantly evolving. Until quite recently, the skins were mostly pickled but currently wet-blue is the most frequently used. * Wet-blue - 65% * Crust - 18% * Pickled - 15% * Others - 2% (Source: Union of Industrial Manufacturers in the Avellino province) There are other less important centres, such as in the Turbigo area plus many other tanneries spread right across Italy. In total, in Italy in 2000, hides have been bought for the following sums: * Raw hides - €2.5 billion * Raw hides for fur - €75 million * Tanned hides with and without hair - €2.15 billion Taking a collective look at the other western countries with strong tannery production, which might be interested in importing raw or semi-finished hides from eastern Europe, the following warrant a mention: Spain Estimates of production for 2002: * Chrome tanned bovine - 23,000,000m² * Box calf hides for soles, vegetable tanned - 3,500 tons * Sheepskins for nappa garment - 13,000,000m² * Doubleface sheepskins - 3,000,000 m² * Goatskins for footwear - 1,500,000m² Spain has approximately 250 tanneries and around 50% of bovine hides have to be imported. (Private source) Portugal In Portugal, the situation with regard to tanning can be summarised as follows: * Tanneries (bovine) - 90 approximately * Tanneries (sheepskins) - 10 approximately * Bovine hides from national abattoirs - 20% * Fresh imported hides - 30% * Wet-blue hides - 50% Imported raw hides come from Brazil, Russia, Spain etc. (Private source) Greece There are currently around 60 active tanneries, of which half are located in the Athens area. Annual production breaks down as follows: * Production of bovine hides - 600,000m² * Production of sheepskins - 1,000,000m² Of this, 60% is finished and 40% wet-blue; 70% of the raw material used is supplied by local abattoirs, and the remainder is imported as wet-blue. In Greece, the current situation is not promising. There are many constraints owing to the pollution perceived to be caused by this industry and to the regional distribution of tanneries. Athens tanneries are situated inside the city. (Private source) Türkiye A country which straddles east and west and which has developed its tanning sector considerably, today numbers over a thousand tanneries. Even in Türkiye, the tanning sector has been developed to envisage the concentration of tanneries and services in a limited area. Examples of this are Corlu, Tuzla (Istanbul) Menemen (Izmir), and other factories that are at the project stage, such as at Bursa. For 2002, forecasts of demand for raw materials are as follows: * Sheepskins - 74,000,000 pieces * Goatskins - 6,000,000 pieces * Bovine hides - 5,500,000 pieces Local abattoirs provide: * Sheepskins - 15-17,000,000 pieces * Bovine hides - 3,000,000 pieces (Source: specialised magazines) In order to satisfy internal demand for the current year, Turkish tanneries will have to import 75% of sheepskins and 45% of bovine. The bovine hides are imported from Azerbaijan, Georgia, the Ukraine, Russia, Kazakhstan etc, while the sheepskins come from Australia, New Zealand, the UK, Ireland and Spain. Importers and exporters Many European countries are importers of raw and semi-finished hides but, in turn, they are exporters of finished hides, chemical products and machines for tanning and technical processes. Currently imported hides do not always meet the demands required by the tanner. Often, natural defects in the raw material are added to those caused by imprecise fleshing with a number of cuts. Pickled pelts often reveal defects caused by poor processing prior to pickling. With wet-blues, those which have not been tanned according to the latest technology may exhibit chrome stains, abrasions and often have a grain side which is not very firm, making it difficult to work with them. Today, with the trade in white or dyed crust hides, the risks are even greater. Many professionals know that the raw materials used in the west should meet the precise standards laid down by several countries. The list of products subjected to constraints lengthens on a daily basis. It already includes hexavalent chrome, pesticides, free formaldehyde and banned dyes and to this are being added other substances adjudged to be toxic to health, and rightly so. It is, therefore, absolutely vital that these precise rules should be respected in the relationship between the supplier of the raw materials and the buyer. Speaking from experience Ralph Arbeid, Arcapelli, Italy, was introduced into the world of hides and skins in the Soviet Union and several of the other ex-Warsaw pact countries in 1987, so he has experience of the last years of the socialist economy and the start of the market economy with all its advantages and disadvantages. He said it was not his intention to offend or make judgements, only to open a discussion on the subject and through dialogue find ways which are acceptable to all, to improve trading and eliminate the lack of confidence that has characterised business between the east and the west during the past ten years. He emphasised that all over the world there are honest and dishonest businessmen and that no country or region has the exclusivity for either honest or dishonest traders. 'However', he said, 'I take the liberty to state, as a matter of fact, that free trade in one form or another has been exercised for hundreds of years in the west, whereas the citizens of the ex-Soviet Union unfortunately have not known free trade for as long as living memory goes.' He went on to point out that the so-called Warsaw pact countries such as Hungary, Poland, the Czech and Slovak Republics as well as the Balkan countries, had known a flourishing international and free trade before WWII, as experienced for centuries in France, Germany and England. He believes that this historical difference is the basis of the various problems that have been experienced by businessmen both in the east and in the west. These problems are not over, although they are diminishing step by step, even if basic differences remain, at least for the moment. Arbeid acknowledged that dishonest western traders had taken undue advantage of the lack of experience of eastern traders but said that mistakes made by the eastern traders had put them in sharp contrast with honest western traders. It was a mistake for westerners to treat their eastern counterparts as little children that have no idea what the hide and skins business was all about. At the same time it has been a mistake by the eastern traders to refuse, as a matter of principle, to listen to people from the west who genuinely have a huge experience in this field. 'In socialist times, it was rather difficult and at the same time very easy to do business with the various state trade corporations in the USSR and its allies. It was difficult to get started, as so-called newcomers were not easily accepted as partners, but once the initial diffidence was put aside, from the point of reliability, doing business was extremely easy. 'Once a contract was concluded, its terms were generally respected to the very letter by a totally inflexible system. Only a natural disaster could change those terms once the machinery was set into motion, regardless of whether the international market went up or down. 'The buyer in the west would not dream of defaulting on a payment or invent stories because he knew that such misbehaviour would promptly and terminally endanger his position with the export organisation and compromise his position forever. 'When the socialist economies closed down, state slaughterhouses and state warehouses were suddenly without the support and experience of their centralised export office in Moscow, Warsaw, Bucharest, Budapest etc, and had to confront their buyers directly. 'Unfortunately some unscrupulous buyers never paid for shipments, others promised to pay excessive prices in order to convince the shippers to conclude a contract but when the goods arrived, they found excuses to pay less, far less than contracted. All of a sudden honest and dependable buyers were overshadowed by unscrupulous buyers who promised the moon and the freshly independent inexperienced shippers fell for it. 'They imagined that they had found the right partner when in a one dollar per kilo market, their goods were bought at $1.25; not imagining that in the end they would be paid maybe only 90 cents. Reliable, dependable partners were left abandoned and anarchy and chaos took over. 'Some slaughterhouses sold and correctly shipped their goods but were never paid. Others were invited to the west and were virtually given, as final settlement, a briefcase filled with dollars which seemed a lot but which was only a small part of the debt the buyer actually owed them. 'Buyers started outbidding their competitors so that the same truckload initially sold at one dollar was resold and resold and resold again, each time at a higher price, meaning that the first buyers had a contract at a reasonable price but no goods and the last buyer had the goods but at a price that was far higher than the actual market value. On arrival he adjusted the price without inhibition by lodging various claims. 'Everybody who had access or thought they had access to hides and skins became an exporter. Offices and companies were opened and closed shortly afterwards, as soon as some quick money was made. Contracts were stipulated but were not worth the paper they were written on as there were no goods to cover them, or simply because other buyers promised more. 'Anxious buyers sent money to finance the collection of hides, which were promised to them at low prices. Many never received their hides and, of course, the money was never sent back. 'Let me give you an example I have experienced myself. For several years, my company bought the full years' production of wetsalted cattle hides from a rather large abattoir in western Siberia from Soyuzpushnina in Moscow. When the abattoir obtained the right to export their hides directly they found a German importer prepared to pay 35% above the market price of $1 per kilo for their hides, something we obviously were unable to match. 'The same German trader contacted us and offered to sell the hides in question at the actual market price, hence some 25% below his own purchase price. Needless to say the abattoir was never paid. The German bankrupted and played the same trick more than once with other companies he created on purpose. That was ten years ago. 'In my view, the trade between the east and west after 1991 developed in a totally unorthodox way and completely different from the way this trade has traditionally been handled. Part of this different approach is the ease with which people can contact each other these days, by phone, fax or e-mail. 'I think that the east European export market was the very first to experiment and experience direct sales from the producer to the end-user in western Europe. This direct contact led to absolutely crazy situations. Personally I judge that this has damaged the reputation of many, and has caused great damage to all. Unorthodox methods 'Except for the hides and skins coming from the east European countries there is no country in the world where an importer has to pay for his goods before they are shipped. Nor is there a country in the world where the buyer is invited to see the goods in the warehouse of the shipper, losing any possibility of checking for incorrect shipment once the goods arrive at their destination. There isn't an export country in the world that offers its goods but asks the buyers to propose their price. 'I realise that these unorthodox methods are the consequence of bad experiences, mainly caused by buyers and sellers who in their thirst for ever more profit changed the rules but it is very difficult, or even impossible, to establish if the chicken was born before the egg or vice-versa. 'Over the years, we, like most west European tanneries and traders, have been contacted by virtually hundreds of exporters from the CIS countries. Some proposals were interesting and could have led to business. However, they just wanted us to send money, upon which they promised to prepare and ultimately ship goods. 'Being afraid of sending money to people we don't know anything about, we tried to negotiate terms that were more acceptable. But the very moment we suggested a more balanced way of payment, the supplier simply did not answer our messages anymore and disappeared, trying elsewhere and sometimes we understand that importers who were prepared to meet such unorthodox terms were found. 'At the beginning I said I wanted to be constructive and I will keep my word and make some suggestions, according to the title of this speech: Time to Change. Despite what some people may say or feel after negative experiences, the leather trade is a serious business, run by serious people. 'This trade has been established a long time and has, therefore, a rather deeply rooted tradition, part of which is unfortunately disappearing with modernisation. Traditional traders, mostly from Holland and the UK, introduced certain rules to make trading more honest, more objective and more comfortable. The International Contract 'The International Council of Hides, Skins and Leather Traders Associations (ICHSLTA) and the International Council of Tanners have given this trade a whole set of rules, based on tens of years of experience. The International Hide and Skin Contract is a careful and in my view honest compromise that takes care of the rights and obligations of all parties involved in trading - the buyers and the sellers - without preference or bias. 'This international contract is not perfect but it takes care of a lot of matters that can cause friction and uncertainties and, since times change, the international contract is updated from time to time to fit the new requirements of the market. 'There doesn't exist a 100% fail-safe system that will avoid problems for all parties but one can come close to an acceptable platform. I am not saying that eastern exporters should use the international contract at any cost, but adopting its main parameters would make trading far less complicated and would establish far more clearly the rights and obligations of each party, an improvement over the chaos that is reigning now. 'A major friction point between buyers and sellers all over the world has always been the weighing of raw hides and skins. The fresher the hides are the more complicated matters become but the International Contract has specific parameters that deal with this question, both for the method and the substance. 'It has only been for ten years that we have experienced free trade between east and west, and until now I believe that the experience in general has been rather disappointing for both parties. 'It is Time for a Change and I sincerely hope that this gathering will be able to actively contribute to this change. 'Today, very few importers are willing to make advance payments for their purchases in the east and for me this indicates that the first steps are being made towards a normalisation of the east-west trade. 'This is probably due to the fact that most who export their hides and leather today from the east are stable exporters and not the one-day butterflies we have experienced in the past.