Margins however continue to be under pressure.
The Tamil Nadu leather industry, which accounts for 45 per cent of India’s leather exports, is seeing an increase in its order books. Leather units, a majority of them small and medium enterprises (SMEs), said that current capacity utilisation is around 80-85 per cent. However, margins continue to be under pressure, they said.
A cross-section of industry representatives from the three major leather clusters of Chennai, Ranipet and Ambur said that order books had earlier come down by 25 per cent after recession hit the European and American markets.
“Things are getting back to normal and our order books have increased by 10 per cent,” M Rafeeque Ahmed, chairman and managing director of the Farida Group and chairman of the Footwear Design and Development Institute, said.
The severe winter in Europe has helped the units, said H E Farooq Ahmed, executive director of the South India Shoe Manufacturers Association. He added that orders for the summer of 2010 are showing positive signs and capacity utilisation across units has risen to 80-85 per cent from 50-60 per cent earlier.
“Though there is a recovery in the order book, our margins continue to be under pressure,” said S Srinivasan, who exports leather shoe uppers to Germany. “Our current margin is only one-third of what we use to get two years back.”
Customers are asking for price reductions of 15-20 per cent, explained Ahmed. “If we don’t agree, they will go to China or Bangladesh,” he added.
To control costs, leather units are looking at reducing overheads, adopting new technologies and asking raw material suppliers to reduce prices.
“Some companies tried looking at newer markets, but did not succeed,” said an industry source. He attributed this mainly to quality issues and high costs. The leather units were traditionally catering to Europe and in a bid to diversify, looked at the US and Asian markets. “But Chinese products still dominate these markets. They are able to manufacture in large quantities and can offer better prices, whereas in India this is still a challenge.”
The other challenges are power, raw material cost, human resource availability and most importantly, credit, added Ahmed. “We still have a power cut for two hours and the coming summer is going to be worse,” he said.
Power costs have trebled — from Rs 4 per unit earlier to Rs 12. This erodes profitability and, even more, quality, which is vital for retaining customers, exporters said. Moreover, customers want discounts of 10-15 per cent, and exporters say that, in order to retain them, they are forced to agree.
The other major problem, according to Ahmed, is that banks are reluctant to lend and have placed SMEs in the ‘high-risk’ category. Banks which were lending money to these units are now asking for substantial collateral. “The flow of credit has almost stopped,” said Ahmed, who has submitted a representation to the Union Commerce Ministry and urged the Reserve Bank of India to monitor credit flows.
According to Council for Leather Exports data, leather exports from Tamil Nadu increased to Rs 5,385.30 crore in 2007-08, from Rs 5,277.24 crore in 2006-07. The industry employs around 3 lakh people in the state.
According to the council, around 90 medium units, 451 small units and 48 micro units are registered with it in Tamil Nadu. The main business of these units is to take up outsourced jobs, including tanning and manufacturing leather shoe uppers. SMEs control 50-60 per cent of the state’s Rs 5,400 crore tanning industry. The finished leather segment, estimated at around Rs 1,000 crore, is controlled by SMEs to the extent of 70 per cent.
