The growth of Indian leather exports – a sector dominated by small and medium enterprises (SMEs) – is likely to stall this year due to volatile economic conditions in the European markets and the steep increase in raw material and input prices, which has eroded margins by 50 per cent, said industry representatives.
The good news is that the industry is expected to attain a size of $5.4 billion by 2014 from the current level of $3.8 billion. But the question of survival has become a priority for entrepreneurs, and the industry is now looking at consolidation and turning its eyes towards the domestic market, the representatives said.
“Export growth is likely to stall in the next six-month period due to volatile economic conditions in the US and European markets,” said M Rafeeque Ahmed, chairman of the Council of Leather Exports (CLE) and head of the Farida Group.
Until recently there was a free flow of orders, and customers typically placed repeat orders that were 15-20 per cent higher than their previous orders, but this year customers are reluctant to do so, said K Srinivasan, a Chennai-based exporter of leather shoes.
Ahmed added that though the industry is witnessing 13-15 per cent growth at present, this pace may slow down in the months ahead due to the crisis in western markets.
“Their (western) economies are weak and purchasing power is becoming weaker,” said Ahmed. About 80 per cent of India’s leather exports go to the US and Europe. The main markets are Germany (14 per cent), UK (13 per cent), USA (nine per cent), Italy (11.6 per cent), France (17 per cent) and Spain (16.25 per cent).
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Two other major issues for the industry are the rise in the costs of inputs (power and labour), said an exporter from Ambur, the site of one of the largest leather clusters.
Ahmed said raw material prices had gone up by 35-40 per cent in the last six to nine months, while power costs had gone up three times due to power cuts – both scheduled and unscheduled – in the state.
“We have been facing scheduled load shedding of about two to three hours every day. But industrialists point out that there is unscheduled power cut for at least another two hours, crippling production,” he said. “These two factors alone have eroded margins by 50 per cent, and the cost of labour by another 50 per cent.”
“To offset these price increases we have to increase product prices by at least by 16 per cent, but customers are not ready for an increase of more than five per cent. Either we increase prices marginally and retain customers or lose them to our Chinese competitors,” said a member of the association, which represents members from footwear industries in Ambur, Vaniyambadi and Pernambut.
Tamil Nadu has around 400 leather units, including tanneries, of which 65-70 per cent are micro and small units.
The other issue is the interest rate, which has gone up from seven per cent in March 2010 to 12.5 per cent at present. Transaction costs are 10-12 per cent in India, against the global norm of five to six per cent.
To address the high volatility in the export markets, units in these clusters have now started looking at consolidation, said Ahmed who is also president of the All India Skin and Hide Tanners and Merchants Association.
“They (manufacturers) are also looking at launching their own brands to cater to the domestic market, which is largely catered for by industry in the North. Though the value is less, domestic market volumes are stable. In the next five years the domestic market will gain momentum,” he said.