Progress, Prospect and problems of Leather Industry in Bangladesh

1.1. Origin of the report

This study and the resulting report was conducted and submitted as a partial requirement for the International Business (ITB 301) course .The report was authorized by Mr.Md.Gazi Salah Uddin, course instructor of ITB 301, and Senior lecturer, Department of Business Administration, East West University.

1.2 Objective
The objective of this report is to address the performance of Bangladesh in international trading through a sector name Leather industry. The specific objectives of this study include the following: To study and analyze the current international market scenario To investigate various opportunities about Leather industry in Bangladesh To explore the contribution of leather production in the national economy To analyze the chances to boost the leather production and export revenue To detect the barriers of leather production and export in international market

1.3. Scopes and methodology

The scope of the term paper is that we had best possible available data on the year book for export and a journal for export. We actually went through many phases for research method. We have followed the guideline supplied by our instructor. Secondary research was conducted to identify present situation or position of Bangladesh in international trade. Consequently, this study is grounded in observation data obtained from recipients of articles, statements and some research paper from different countries and different authors.

1.4 LIMITATION
The following were the major limitations that hampered the report from being more accurate. Time constraint or limitation

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 Related websites are not standard because they give demo or little information or data. Assembling all the information in an adequate manner was also a difficult task. But among these we believe lacks of information are the main limitation of our report.

2.0 INTRODUCTION
Leather and leather products have always been a part of that heritage and after the emergence of an independent Bangladesh in 1971; the industry received a fresh momentum. Bangladesh started exporting crust and finished leather in early 80's and footwear and other manufactured leather goods during 90's. The leather industry in Bangladesh is well established and is the third highest foreign exchange earner right after RMG and frozen food sector. About 95% of leather and leather products of Bangladesh are marketed abroad, mostly in the form of crushed leather, finished leather, leather garments, and footwear. Most leather and leather goods go to Germany, Italy, France, Netherlands, Spain, Russia, Brazil, Japan, China, Singapore and Taiwan. The Leather sector plays a significant role in the economy of Bangladesh in terms of its contribution to export and domestic market. West Pakistan was the sole importer of Wet Blue, an intermediary in the Tanning Process, and the Western world had already source of good raw material for their, Industrial era, Shoe and boot factories, leather Jackets, handbags and other accessories. Yet Bangladesh then East Pakistan shared little of the profits from trade, since their technological contribution to the tanning process is marginal. Bangladesh being a Muslim country has the annual Qurbani festival, which is a fulcrum for the procurement of excellent and large sized , cow and goat hides, to the tune of nearly 1 million slaughters per year, the grain pattern on these items are very much in demand in the western world. The government of Bangladesh provides a support to the leather industry through various steps, including monitoring the export market, evaluating the performance of the sector by a permanent parliamentary committee, and liberal bank credit.

3. 0 Factor Endowments
3.1 Land
At present, there are about 170 tannery units in Bangladesh and they use locally available raw hides and skins. Of them 114 are large and medium units (by local standards) and are registered with the Directorate of Industries. Others are mostly of small and cottage type and

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are not on the register of the government. About 150 tannery units are located at Hazaribag of Dhaka in only 50 acres of land popularly known as tannery estate.

3.2 Labor
Another major advantage of this sector as it does not required highly skilled or expert labor but semi skilled labor can easily work in this sector. Bangladesh will definitely get advantage in this sector because we are labor intrinsic country. According to the records of the Bangladesh Tanners Association, about 3,000 workers are employed in the tanning industry. Besides, there are about 100 qualified technologists including foreign nationals who are working in different tanneries.

3.3 Capital
Total capital invested in the tannery industry is estimated at Tk 2.5 billion, of which government/bank finance is about Tk 1.2 billion. About 1,500 persons are involved in the process of collecting raw hides and skins and making them available at tannery units. About 100 organizations import chemicals for use in tannery industry.

3.4 Raw materials

Bangladesh produces approximately 100-150 million sq feet of raw hides and skins, about 85% of which is exported in crust and finished form. The principal raw materials dusty are cowhides and goatskins. Though there has been some appreciable improvement in animal husbandry and butcher's techniques in Bangladesh in recent times it may take quite some time to reach the international standard. On the other hand, Bangladesh goatskins enjoy an excellent reputation for quality. The goatskins are usually pulled from the animal rather than flayed, thereby avoiding damage to the flesh side and the grain side is usually free from defects.

3.5 Technology
A major factor for leather sector is that it is not technology oriented rather than skilled and creative manpower required. In this point of view Bangladesh has the advantage for this cheap labor.

3.6 Infrastructure
The government considers leather industry as one of the most booming export sectors. Thus, government is providing various infrastructural supports for flourishing the industry. The government in 2003 took the initiative to build Leather Industry Estate (LIE) in Savar which holds all the facilities necessary for international standard leather processing unit and

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expected to complete by 2012. Moreover, eight EPZs (Export processing Zone) of the country also facilitates thrive in footwear and other leather goods industry. Bangladeshs domestic and overseas transportation facility is also admirable.

4.0 Local Demand Condition:

Bangladeshs leather industry is mainly export oriented. About 90% of the total leather production is exported. However, in the recent years, the withdrawal of non-tariff barriers among the countries such as EU countries for China, Taiwan and Vietnam, several footwear factories have been relocated in Bangladesh which caused a flow in domestic demand for leather. Local demand is in the main for raw hides and wet blues. Experts predict that domestic demand can climb to 20% of total leather production. In general, countrys 52 shoe manufacturers consume around 60 million meters of leather a year.

5.0 Related and Supporting Industries

In Bangladesh, internationally competitive related and supporting industries for leather sector are the tannery industry, footwear industry and leather garments industry. As these industries are located near each other, they can take advantage of short line of communication, quick and constant flow of information and ongoing exchange of ideas and innovation. For instance, the shoe producers can interact regularly with leather manufacturers on new styles and manufacturing techniques and learn about new texture and color of leather when they are still on the drawing board.

5.1 Bank
As a exporting Item, bank is very facilitates by the extensive export of leather. They make the whole exporting process much easier for both importer and importer by opening LC, protecting importer from exchange rate. They generate revenue by giving the trade protection to the importing country. As a result there are lots of banks who are developing their activities relating to their international business.

5.2 Insurance company

Insurance company offering a wide range of non-life exporting products to retail an international customer of Bangladesh. Without insurance international cannot be conducted, thats why its also helps us to develop our insurance industry.

5.3 Salt industry

We know that, in order to process the raw leather a huge amount of salt is necessary. So If we can increase our export of leather and expand our business in foreign market, the demand of salt industry in domestic market will also develop.

5.4 Chemical industry

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In order to process the raw leather a huge chemical is necessary. So if we can increase our export of leather and expand our business in foreign market, the demand of chemical industry in domestic market will also develop.

6. Firm Strategy, Structure and Rivalry:

The conditions in a country that determine how companies are established are organized and are managed, and that determine the characteristics of domestic competition. According to Porters Diamond of National Advantage, the fourth determinant of countries competitiveness is the conditions in the nation governing how companies are created, organized, and managed, as well as the nature of domestic rivalry. In Bangladesh most of the leather processing units are small and medium in size; they are owned and managed by visionary entrepreneurs. Most of these are created due to the potential compositeness of this sector. The strategy for competitiveness, here, is the low-cost but high quality product. The rivalry among the companies is increasing intensively in the recent years. Local leather processing units are adopting international standard of management and procedure of production. Local footwear industries are also facing profound domestic competition to grasp domestic footwear market which has commenced the need for innovation, improving quality and cutting cost.

7.0 Foreign Demand Condition

As mentioned earlier, the leather industry of Bangladesh is solely based on export. The industry is account for nearly 4% of the global leather market. Bangladesh is currently exporting finished and crust leather items. The primary leather importing countries from Bangladesh are Germany, Italy, Hong Kong, Turkey, India, France, Netherlands, Spain, Russia, Brazil, Japan, China, Singapore and Taiwan. Chart-1 shows a comparative ranking among importing countries in 2009.
Table 1: Exports of Bangladesh from 2000-2001 to 2010-2011 Year 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 Export of Leather (taka in crore) 1364 1309 1239 1441 1608 1981 2290

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2007-2008 2008-2009 2009-2010 2010-2011

2425 1963 2431 2720 Source: Bangladesh-bank

In the year 2009-10 Bangladesh exported leather nearly 2431 crore taka. Because of the antidumping rules of WTO, China, India and Vietnam are facing difficulty in producing low cost leather goods. In 2010-11 by minimizing smuggling and increased international price (from 2.73 to 3.7 per miter of raw) also caused boost in leather exportation (nearly 2720 crore taka). Consequently, an enormous demand for Bangladeshi made footwear is formed in Germany, Italy, France, Japan and Canada. The following tables summarize the total value of leather exports from 2001-2011.
Fig 1: Export of Leather from 2001 to 2011 Source:

From the above Graph, we can explain that in year 2001-02 and 2002-03 the export of leather decreased and the reason behind this was the incident occurred in September 11 in USA. Again the export dropped in the year 2008-09 as a result of increase in salt price and devaluation of local currency. Faulty decision taken by care taker government of Bangladesh and the increase of smuggling in neighbor countries also caused the decrease of exportation.

8.0 Location of the Market

Mostly to Europe, Japan and China, Spain, USA, EU, Japan and Canada Industry people say EU and Japan have been the traditional market for Bangladeshi footwear industry, but huge demands are coming recently from USA, which is quite a new market destination for Bangladeshi footwear exporters. Apexs Nasim said demand from earthquakeravaged Japan might slow down in the coming months, but industry sees that fresh demand from USA, EU and other markets are very much convenient for further expansion of the industry here.

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Fig 2: Top 8 Leather Importing Countries from Bangladesh

Source: leather manufacturers The current scenario of export in major markets is discussed below: USA: Trade Policy: Market and Product Growth: EU: Trade Policy: Market and Product Growth:

9.0 Market access issues:

The term Market Access in trade negotiations refers to the set of tariff and Non-tariff barriers (NTBs) that can be used to restrict the flow of goods and services from one country to another. Industry for hides and skins in Bangladesh is mostly export-oriented and the country is capable of producing 180 million square feet of leather annually. The vital issue of Market Access could be analyzed from the following perspectives:

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Source: Annual Export Receipts, Statistics Department, Bangladesh Bank, 2009-10

Fig3 : Export Earnings to EU in the Leather Industry

In the year 2009-2010, Bangladesh exported leather and leather goods amounting of 46.8 crore taka to Germany (compared to 264 million taka and 107 million taka in the year 2008-09 and 2007-2008 respectively), 280 million taka to the United Kingdom (compared to 192 million taka and 152 million taka in the year 2008-2009 and 2007-2008 respectively), 412 million taka to France (compared to 423 million taka and 278 million taka in the year 2008-2009 and 2007-2008 respectively), 2,558 million taka to Italy (compared to 2,173 million taka and 2,958 million taka in the year 2008-2009 and 2007-2008 respectively) and 531 million taka worth of to Spain (compared to 411 million taka and 725 million taka in the year 2008-2009 and 2007-2008 respectively).
country Germay UK France Italy Year 2007-08 (taka million) 107 152 278 2958 725 Year 2008-09 (taka million) 264 192 423 2173 411 Year 2009-10 (taka million) 468 280 412 2558 531

9.1 Barriers towards Market Access

There are four types of barrier in the market access issue of leather
Type 1 barrier. Custom valuation, formalities and the rules of origin are found to be

most significant barriers towards market access for the leather and leather goods industries. Type 2 barrier. Technical regulation, standards and certification arrangement problems are the major problem for the industry.

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 Type 3 barrier. Labeling rules, packaging and marketing requirements are the major

problems towards market access. Type 4 barrier.

10.0 Major exporters in the world market:

These days world footwear production is absolutely being dominated by China, India, Thailand, Indonesia, Pakistan and other developing countries. Most of the leather goods, however, is being consumed by the USA, EU, Japan and Canada. The USA, EU, Japan and Canada are, however, consuming most of the leather goods.

10.1 Apex Tannery Limited.

A leading manufacturer and exporter of finished and crust leather from Bangladesh to major products manufacturers in China, Japan and Italy the company has annual export revenues of USD 37 million in 2008-2009, comprising almost 15% of the total export earning from leather of Bangladesh. ATL pioneered the export of value added crust and finished leather from Bangladesh and accessed capital markets for growth. ATL introduced the first convertible debenture in Bangladesh and has been publicly traded since 1986. ATL currently employs 895 persons, is professionally managed and is in full compliance Report under Section 2CC of the Securities & Exchange Commission Notification Order. ATL is also the first tannery in Bangladesh to be ISO 90012000 certified.

10.2 Adelchi Footwear Bangladesh Limited.

A leading manufacturer and exporter of leather footwear from Bangladesh to major shoe retailers in Western Europe, North America and Japan. The company has revenues of USD 42 million in 2009. AAFL pioneered the export of value added finished products export in the leather sector of Bangladesh and is also involved in the local footwear retail business with the second largest shoe retail network in the country. AAFL has equity , technical and marketing participation from La Nuova Adelchi one of the largest footwear manufacturers of Italy. Public listed and traded since 1993, AAFL is professionally managed, currently employs 3944 persons and is in full compliance with Corporate Governance Compliance Report under Section 2CC of the Securities Exchange Commission Notification Order

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11.0 Strengths of the present exporter:

This research has identified some strengths of the leather sector such as:
Plentiful supply of raw hides and skins: Bangladesh has a domestic supply of good

quality raw material, as hides and skins are a by-product of large livestock industry.
Worldwide reputation for quality grain leather: Bangladesh has a domestic supply of good

quality raw material, as hides and skins are a by-product of large livestock industry. Presently Bangladesh produces between 2 and 3 percent of the world's leather market. The hides and skins (average annual output is 150 million sq.ft.) have a good international reputation.
Availability of a large, low-wage work force: The labor-intensive leather industry is well

suited to Bangladesh having cheap and abundant labor.

Favorable business environment with the existence of EPZ (Export Processing Zone) in

the country: Currently there are 8 of Bangladesh Export Processing Zone, the world renowned brand of the 50 production of various products and sports goods, etc. , as well as production of general merchandise exports to the EU , the United States and other zero tariff for Bangladesh Preference-giving countries.

Duty free and GSP facilities: Adequate government support in the form of tax holidays, duty free imports of raw materials and machinery for export-oriented leather market. Having the basic raw materials for leather goods as well as for the production of leather shoe, a large pool of low cost but trainable labor force together with tariff concession facility to major importing countries under GSP coverage, Bangladesh can be a potential off shore location for leather and leather products manufacturing with low cost but high quality.

12.0 Bangladesh's Competitive Position

In comparison with the countries identified as direct competitors Bangladesh has the following strengths, which if properly utilized then, Bangladesh could become one of the major exporters for leather goods. 1) Plentiful supply of raw hides and skins; 2) Low Labor cost; and 3) Duty free and GSP facilities. Bangladesh has been exporting mainly crust and finished leather, which accounts for nearly 82% of the total exports of Leather and Leather goods industry. Out of the balance export more than 90% is footwear, which means only 1.8% of the total exports of Bangladesh is leather goods.

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12.0 Possibility of Matching Standard and Price in International Market:

Bangladesh has been exporting raw lather to USA, EU, Japan, Canada and Italy since the last two decades, so, we have already proved that our product is world class and matches with the standard in terms of quality of international market. The reason why our leather quality is standard is that we have the absolute and comparative advantage in producing leather. Besides that, 90% of our leather production has been exported because we have lack of expertise in processing leather. The development of Bangladesh's leather industries has reached a zenith and it has been showing great potential in value added exports, particularly in the leather footwear and leather goods sectors. Many leather footwear and accessories manufacturers in Taiwan, Japan, Hong Kong, among others, are establishing companies in Bangladesh as joint venture or even as 100% foreign investment. That refers that Bangladesh produces standard quality of leather and our pricing strategy is very much similar with international market.

12.1 Mode of Transportation

As we have earlier mentioned that Bangladesh is the leading exporter of leather. That is why we need to be concerned about that mode of transportation in exporting leather. Usually we transport our exporting leather through sea. The transportation mode that Bangladesh uses in exporting leather is ship. But in case of emergency export sometimes they use air transportation. When Bangladesh exports in neighboring countries they also use road.

12. 2 PROBLEMS
In Europe, the rate of interest for industrial loans is only 2.5 per cent. In India and Pakistan it is only five per cent. But in Bangladesh the rate of interest for bank loans is 13 to 17 per cent. Unless Bangladesh reduces interest rate for bank loans to international level, it will be very difficult for the export-oriented industries of Bangladesh to survive in world competition.

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Fig 4: Industrial Interest rate

13.0 Problems of Bangladesh Leather and Footwear Export Sector

Lack of an integrated comprehensive policy with proper inputs by all the stakeholders such as exporters, government, suppliers and buyers;

A small number of factories that have been set-up by mainly inexperienced entrepreneurs and ever eager machinery suppliers, who have used the myth of the buyback agreements to push their machine sales. These factories by and large have been unable to get off the ground despite considerable investment in machinery and infrastructure;

Other than three or four exporters most of the factories are not engaged in regular production and exports;

A total lack of adequately trained and skilled human resources for production as well as for managerial personnel in the leather footwear industry;

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 No training institute or facilities for skill development;

No support industry in terms of linkage factories such as lasts, cutting dies etc, so there is a high import dependence thereby reducing price competitiveness as well as increasing lead times;

Low awareness amongst international buyers as not enough factories are working in the industry

Poor representation in major international product fairs and shows;

Inadequate working capital finance as most banks insist on Master L/C and back to back L/C procedures for import. Unfortunately in today's highly competitive market most buyers no longer operate on L/C. Our competitors offer much easier payment terms such as open account, D/A basis delivery, etc;

Discrepancy in the import policy where the import duty on finished shoes and on shoe

components and accessories is almost the same, therefore there is no advantage for manufacturers. Today the local shoe industry is being severely threatened by cheap imports that are being smuggled and dumped from neighboring countries such as Myanmar and India.

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14.0 The International Challenge towards Export-Oriented Leather and Footwear Sector
Besides the above mentioned problems Bangladesh Export-Oriented Leather and Leather Goods has been facing the following international challenges: Overwhelming dominance of the Far East i.e. China Bangladesh should, however, look upon this not only just as a threat but also as an opportunity as a lot of buyers feel over-dependent on China and are looking for reliable alternative suppliers. These fears often manifest themselves in the form of quota restrictions, anti-dumping duties or tariff barriers on products from the Far East, which can be an opportunity for us. So it is imperative to become aware of the global situation and use it to our advantage. Furthermore Bangladesh can learn from the Chinese mode l where appropriate, for example by studying how they have developed their components industry, or by identifying segments or market niches where they are not predominant, e.g., leather moccasins. Chinese government policy in terms of duty exemptions, tax breaks, foreign exchange benefits and even infrastructural support, such as low cost housing for migrant labor and training facilities, should serve as a blue print for a country like Bangladesh.

14.1 Preferential Treatment in Foreign Market and Local Subsidy:

Recommendations Foreign direct investment in this sector along with the production of tanning chemicals appears to be highly rewarding. The government may seriously consider allowing all necessary imports on a duty-free or on a flat rate basis. To stop smuggling government should more focus on border side.

Government should also provide some supports through institutional credit support for the development of the industry. Especially disbursement of funds from banking sources to leather traders needs to be ample and smooth before the Eid-ul-Azha when the maximum number of hides and skins are produced in the country at a time.

Institutes need to be set up to impart education and training on leather technology. Such a move on the part of the government will increase the supply of trained people for employment in leather industries and inspire considerably the establishment of new leather industries.

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 The rate of interest of bank loans is too high in Bangladesh. The export-oriented leather industries of Bangladesh have to compete with world market. The rate of interest must be at par international standards. Leather is our 3rd largest export earning sector and we need to infuse new technology to modernize the industry so that it can withstand the intense global competition. Government should ensure proper preservation method through establishing modern warehouse in every district, towns and municipal areas to handle the carcass in a proper way. The government would move bilaterally and multilaterally, especially with Japan, to get duty-free access of leather and leather products. Tannery owners demand soft loan for shifting factories to Savar

14.2 Value Addition

Value addition of leather goods (various) in comparison with finished leather
SL. Material / Products Export Price 1 2 3 4 5 6 7 8 9 CRUST LEATHER FINISHED LEATHER KEY RING COIN PURSE BELT MENS WALL LADIES PURSE HAND BAG PROFESSIONAL BRIEF CASE US$(FOB) 1.20 1.65 1.50 1.75 3.50 4.50 6.25 16.00 35.00 Leather Consumpllon Qty Sft/ PCs 1,000 sft 1,000 sft 1,695 PCs 1,538 PCs 800 PCs 667 PCs 444 PCs 161 PCs 83 PCs Value US$ 1,200.00 1,650.00 2,542.50 2,692.31 2,800.00 3,000.00 2,777.78 2,580.65 2,916.67 Value Taka 75,000.00 103,125.00 158,906.25 168,269.23 175,000.00 187,500.00 173,611.11 161,290.32 182,291.67 0.38 0.54 0.63 0.70 0.82 0.68 0.56 0.77 % (+/-)

0.59 0.65 1.25 1.50 2.25 6.20 12.00

If we look a the above chart we can clearly see that by exporting leather goods (Various Items) on1000 sit of leather the value addition for products are much higher compared to the finished leather export. Therefore based on the information provided by EPB for the export of leather and leather goods from Bangladesh for the year 2003-2004 if we compare the ligers of export of leather and only wallet (only) then total export value would have been 383.64 Million and not 211.41

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(US$ 211.41 Mill export / US$ 1.65 finished leather value per sft = 128.13 mill sft/ 1.50 sft consumption of Wallet= 85.42 Mill PCs of wallet x US$ 4.50=US$ 383.04) Therefore by exporting wallets instead of finished leather Bangladesh could have earned US$ 172.23 Million extra. Therefore we can clearly see that from the above chart that if we export finished Leather goods weather shoes or bags or other finished items then exports of Bangladesh in this sector would surge. For the Leather goods industry to flourish, Bangladesh needs to improve in the following suggestions mentioned below:

14.3 RAW MATERIAL

This totally depends on what type of production is being done. In Bangladesh 95% of the companies work according to buyers recommendation using raw materials locally available with some imports. As the local market fo9r leather goods is small and there is no big brand name therefore the overall market for is dependent on foreign buyers. Therefore the development of backward linkage industries for Inner Materials, Lining Materials, Synthetic PVC Materials, Metal Accessories Etc. is essential for the overall development of this industry.

14.4 FINANCE
It is the biggest obstacle for the industries in this sector because to setup leather goods and footwear industries huge capital is required. Interest rates are very high and for this most of the companies cannot pay back on time and thus become sick. So assistance can be provided with or by giving long term loans directly through financial institutions and also provide loans with lower interest rates of 4% to 5%.

14.5 GOVERNEMENT POLIES

Government has decided this industry as a thrust sector & has approved 15% cash incentives but in most cases this thrust sector phenomenon is real in the books and speeches and has already become a document in the pages of history. The cash incentive concept has become a joke in some cases as most of the companies do not receive their funds due to lack of proper guide line provided by the central Bank. Only some nationalized banks give their customers the fund without any problem but most other banks, commercial, national, private and foreign banks only pay when they receive the payment from Bangladesh Bank. This even takes 6 to 8 months before the payment is received in some cases.

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Therefore the government should really decide and formulate a policy with clear concepts if they really decide and formulate a policy with clear concepts if they really are sincere about making this industry as a thrust sector.

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