kenya leather industry diagnosis strategy and action plan

8/16/2019 Kenya Leather Industry Diagnosis Strategy and Action Plan

1/126

Diagnosis, Strategy and Action Plan

KENYA LEATHER INDUSTRY

REPUBLIC OF KENYA

MINISTRY OF INDUSTRIALIZATION

AND ENTERPRISE DEVELOPMENT

99485


2/126


3/126

June 2015

Prepared for:Ministry of Industrialization and Enterprise Development

Prepared by:World Bank Group, Economic and Transformation Group

Sponsored by:DFID and the Netherlands

KENYA LEATHER INDUSTRY

DIAGNOSIS, STRATEGY AND ACTION PLAN


4/126

Disclaimer: This volume is a product of the sta of the Interna onal Bank for Reconstruc on and Development/ The World Bank. Thendings, interpreta ons, and conclusions expressed in this paper do not necessarily re ect the views of the Execu ve Directors of The

World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. Theboundaries, colors, denomina ons, and other informa on shown on any map in this work do not imply any judgment on the part of TheWorld Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries.

Copyright Statement: The material in this publica on is copyrighted. Copying and/or transmi ng por ons or all of this work withoutpermission may be a viola on of applicable law. The Interna onal Bank for Reconstruc on and Development/ The World Bank encourages

dissemina on of its work and will normally grant permission to reproduce por ons of the work promptly.

For permission to photocopy or reprint any part of this work, please send a request with complete informa on to theCopyright Clearance Center, Inc.,222 Rosewood Drive, Danvers,MA 01923, USA,Telephone 978-750-8400, fax 978-750-4470, h p://www.copyright.com/

All other queries on rights and licenses, including subsidiary rights, should be addressed to theO ce of the Publisher,

The World Bank, 1818 H Street NW,Washington, DC 20433, USA,fax 202-522-2422, e-mail [email protected].


5/126

ACKNOWLEDGEMENTS

T his report, funded through the generous sponsorship of DFID and the Netherlands, has been preparedby a team from the Economic Transformations Group, Inc. (ETG), led by Dr. Eric Rolf Hansen (Presidentof ETG) and including Ronald Kopicki, Young Moon, Marcela Miceli, Samuel Gerstin, as well as Fred Oganaand Anne Waweru from East Africa Market Development Associates Ltd. The team worked under theoverall guidance of Maria Paulina (Ina) Mogollon (Finance and Private Sector Development Specialist, Eastand Southern Africa Region of the World Bank) and beneted from the comments and support of WorldBank team colleagues, Ganesh Rasagam, Karuna Ramakrishnan, Douglas Zhihua Zeng, Aref Adamali, andKennedy Mukuna Opala. The team would like to thank those who provided support with data gathering andreview of report drafts, especially Adan Mohamed (Cabinet Secretary), Wilson Songa (Principal Secretary),Julius K. Korir and Hezekiah Bunde Okeyo of the Ministry of Industrialization, Sam Kiruthu (Chair, Leather Task Force), P.V. Sambasiva Rao (Alpharama), Charles Mwangi Ndung’u (Kenya Leather DevelopmentCouncil-KLDC), Beatrice Mwasi and Maurice Omondi (Leather Articles Entrepreneurs Association—LAEA),

and Nicholas Mutisya and Peter Kitheka (Nairobi County Cobblers Association). Finally, the team would liketo thank the many leather industry stakeholders interviewed for this study.


6/126


7/126

ABBREVIATIONS ......................................................................................................................................................................................... EXECUTIVE SUMMARY .......................... ............................. ............................. ............................. ............................. ...........INTRODUCTION AND BACKGROUND TO THE STUDY ................................................................................................................ x

1. GLOBAL TRENDS IN THE LEATHER INDUSTRY ........................... ............................. ............................. ......................1.1 Demand for leather and leather products is growing faster than supply ............................ ............................ ......... 11.2 Chinese tanneries facing increasingly stringent environmental regulations ......................................... ................. 21.3 Growing push towards clean production technologies ............................ ............................. ......................................... 1.4 Implications for Kenya ............................. ............................. ............................ ............................. ............................. .....

1.4.1 Capitalize on global trends ............................................................................................................................................... 31.4 Key nding of chapter 1 ......................... ............................. ............................. ............................. ..............................................

2. KENYAN LEATHER PRODUCTS AND MARKETS ............................................................................................................................. 2.1 Kenya’s leather products ............................ ............................ ............................. ............................. ........................................... 7

2.2 Kenya’s export and import of leather footwear ........................................ ............................ .............................................. 12.3 Kenya’s export and import of leather bags, travel ware, corporate items .......................... ............................ ........... 132.4 Domestic footwear market ............................. ............................. ............................. ............................. ..................................... 12.5 The second-hand mitumba market .......................................................................................................................................... 12.6 Key ndings of chapter 2 ......................... ............................. ............................. ............................ .............................................. 1

3. KENYA’S LEATHER SECTOR ........................... ............................. ............................. ............................. ...........................3.1 Overall structure of Kenya’s leather sector ......................................... ............................ ............................. .......................... 23.2 Leather product manufacturers in the formal sector ........................................ ............................ .................................... 23.3 Leather product manufacturers in the informal (Jua Kali) Sector - Kariokor Market (KM) ............. ...................... 3

3.4 Tanneries ........................................................................................................................................................................................... 33.5 Institutions supporting the leather sector .......................... ............................. ............................. ............................. .........3.6 Key ndings from chapter 3 ............................. ............................. ............................. ............................. ..........................

4. COMPETITIVENESS ANALYSIS ......................... ............................. ............................. ............................. ........................4.1 SWOT analysis of Kenya’s leather industry .......................... ............................. ............................. ............................. ....4.2 Benchmarking and gap analysis .......................... ............................. ............................. ............................. .............................. 494.3 Value chain analysis ............................. ............................. ............................. ............................ .................................................... 54.4 Competitive positioning analysis of Kenya’s leather products ............................. ............................. ............................ 4.5 Key ndings from chapter 4 ............................................... ............................. ............................. ............................ .......

5. IMPLEMENTATION RECOMMENDATIONS & ACTION PLAN ........................... ............................. ............................. .5.1 Strategic targeting of leather products and markets .......................... ............................ ................................................. 65.2 Promote th e dynamic restructuring of the leather industry by improving governance and strengthening

collaboration (Strategy 1) ........................................................................................................................................................... 65.3 Increase access to markets and induce greater demand for Kenyan leather and leather products

(Strategy 2) .................................................................................................................................................................................... 665.4 Build quality and standards (Strategy 3) ............................................ ............................. ............................. .......................... 68

TABLE OF CONTENTS


8/126

LIST OF FIGURES

Figure 1: Leather industry employment projections, 2015-2030 ............................ ............................ .................................. ixFigure 2: Global export earnings from raw hides and skins .......................... ............................. ............................................. 1Figure 3: Demand for leather shoes in Africa far exceeds local supply .................................................... ............................ 3Figure 4: Value of Chinese imports of raw leather (2007-2013) ............................................. ............................ ..................... 4Figure 5: Chinese imports of raw leather from Kenya (2007-2013) .............................................. ......................................... 4

Figure 6: Kenya’s leather industry exports (2007-2013) ......................... ............................. ............................. .......................... 7Figure 7: Kenya’s wet blue export markets, 2013 ..................................................... ............................. ....................................... 8Figure 8: Total export value of Kenyan leather products (2013) .......................... ............................. ..................................... 9Figure 9: Kenya’s nal leather products, dominated by footwear ................................................... ...................................... 10Figure 10: Types of leather footwear produced in Kenya ....................................... ............................. ....................................... 10Figure 11: Value of leather footwear exports by leading countries (2013) ............................... ......................... ................... 11Figure 12: Kenyan leather footwear exports (2007-2013) ........................................................................................................... 11Figure 13: Leather footwear export to EAC countries ................................................................................................................... 12Figure 14: Growth of leather footwear imports in Kenya (1996-2012) ................................................................................... 12Figure 15: Sources of Kenyan leather footwear imports (2013) ................................................................................................ 13

Figure 16: Exports of Kenyan leather bags, travelware, and corporate items ........................................................ .............. 13Figure 17: Kenyan market share of footwear by point of distribution/price ....................................................... .................. 14Figure 18: The Mitumba market product ow chart ...................................................................................................................... 16Figure 19: Origin of second-hand footwear in Kenya .................................................................................................................... 16Figure 20: Origin of second-hand leather footwear in Kenya (8.5 million pairs) ........................... ............................. ......... 17Figure 21: Simplied leather industry value chain .......................... ............................. ............................. ............................ ......... Figure 22: The value chain of Kenya’s leather industry ............................. ............................. ............................. .......................... Figure 23: Kenyan leather cluster map (Nairobi and its surrounding region) .................................... .................................. 24Figure 24: Strengthened Kenyan leather cluster map (Nairobi and its surrounding region) ..... .................................... 27Figure 25: Structure of the Kariokor market leather cluster ........................................................................................................ 33Figure 26: Spider diagram benchmarking Kenya’s leather industry competitiveness ......................... ............................. 49Figure 27: Competitive position of Kenyan leather footwear (2014) ....................................................................................... 56Figure 28: Projections of future global competition of leather footwear .......................... ............................. ....................... 59Figure 39: Projections of future global competition in other leather products ................................................ ................... 59Figure 30: Leather industry employment projections, 2015-2030 .......................... ............................. ............................. ....... 81

LIST OF TABLES

Table 1: Leather industry strategy and actions ....................... ............................. ............................. .......................................... vi Table 2: Exports of Kenyan leather and leather products, 2007-2013 ............................................ .................................... 7 Table 3: Top 10 destinations for Kenyan leather footwear exports, 2009-2013 (US$’000s) ...................... .. ................ 12 Table 4: Sales of all footwear in Kenya, 2014 (millions of pairs) ..................................................... ....................................... 14 Table 5: Employment in Kenya’s leather industry (2009-2013) ........................... ............................. ..................................... 35 Table 6: Details of tanneries operating in Kenya ..................................... ............................. ............................. ......................... 38 Table 7: Training courses offered by AHITI, TPCSI, and KITI ........................................... ............................. ............................ Table 8: SWOT analysis of the leather industry in Kenya ................................................... ............................. ......................... 47 Table 9: SWOT analysis of the informal (Jua Kali) leather sector in Kenya .................................. ............................ .......... 48 Table 10: Competitive benchmarking of Kenya’s leather industry vs. Ethiopia, China, and Italy (scale of 0-10) ... 50 Table 11: Comparative costs of tanning leather in Kenya and Ethiopia ........................................... ............................. ....... 52 Table 12: Comparative costs of producing a pair of low-cost shoes (Kenya) v.s loafers (Ethiopia) ... ...... ................... 52 Table 13: Comparisons of raw material inputs for producing a pair of loafers in Ethiopia, Tanzania, and China .. 54 Table 14: Breakdown of costs involved in producing boots in Kenya (Formal sector) ................................ .................... 54

Table 15: Breakdown of costs involved in producing men’s dress shoes in Kenya (Informal sector) ..... .................... 55


9/126

Table 16: Breakdown of costs involved in producing men’s safari boot in Kenya (Informal sector) ............. ............. 5 Table 17: Prot margins for producing school shoes, sandals, and belts (Informal sector) .................... ...................... 5 Table 18: Strategic targeting of Kenyan leather products and markets ................................... ............................. ............... 6 Table 19: Leather industry strategy & actions .............................................. ............................ ............................. .................... Table 20: Comparison of formal employment generation and productivity in the leather footwear sectors

among leading countries (2010-2013)*** .................................................................................................................... 8

ANNEXES

Annex 1: Leather strategy implementation: Expected activities and results for clustering process (Strategy 1) 86Annex 2: Ethiopian trade and investment policy to promote value addition ............................ .............. .......................... 8Annex 3: Kariokor market satellite leather accelerator (for informal sector) ............................ ............................. ............. Annex 4: Leather city (Leather industry park) .......................... ............................. ............................. ............................. .........Annex 5: Action plan for implementation of the leather sector strategy ......................... ............................. ...................... 9Annex 6: List of interviewees ........................... ............................. ............................ ............................. .............................................. 10

REFERENCES ........................... ............................. ............................. ............................. ............................. ............................

LIST OF BOXES

Box 1: Branding Ethiopian sheep leather in Japan ........................... ............................. ............................ ............................. .....Box 2: Case study−Slovakia ......................... ............................. ............................. ............................. ............................. ..........Box 4: Lessons learned in developing industry parks in Kenya and other countries ......................... ............................. ... 73Box 5: Case study: Ethiopia Leather Industries Development Institutes (LIDI) ........................... ............................. ............ Box 6: Promoting environmental practices in the leather industry ............................. ............................. ............................. ..


10/126

AGOA African Growth and Opportunity ActAHITI Animal Health and Training Institute

AI Articial InseminationB2B Business to Business CFC Common Facility Center COMESA Common Market for Eastern and Southern AfricaEAC East African Community EU European UnionFDI Foreign Direct InvestmentFTA Free Trade AgreementGI Geographic IndicatorGoK Government of Kenya

ICT Information Communications TechnologyILDP Indian Leather Development ProgrammeJICA Japan International Cooperation AgencyKAM Kenya Association of ManufacturersKIRDI Kenya Industrial Research and Development InstituteKITI Kenya Industrial Training InstituteKLDC Kenya Leather Development CouncilKM Kariokor MarketLAEA Leather Articles Entrepreneurs AssociationLIDI Leather Industry Development InstituteLWG Leather Working GroupMOU Memorandum of Understanding MSME Ministry of Small and Medium EnterprisesNGO Non-Governmental OrganizationPPP Public Private PartnershipR&D Research and DevelopmentSME Small and Medium EnterpriseSPV Special Purpose VehicleTPCSI Training and Production Center for the Shoe Industry

UK United KingdomUNIDO UN Industrial Development OrganizationUS United StatesVAT Value Added TaxWTO World Trade Organization

ABBREVIATIONS

KENYA LEATHER INDUSTRYi


11/126

THE GLOBAL AND AFRICAN CONTEXT

World trade in leather—one of themost widely traded commodities—iscurrently growing and is estimated at overUS$100 billion a year. 1 In 2013, leather footwearaccounted for half of that gure, amounting toUS$53.5 billion. Globally, demand for leather andleather products is growing faster than supply.Although the leather sector in Africa, includingin Kenya, has many natural strengths, it risksmissing out on opportunities in an expanding

global market. Despite the growing globalmarket for leather products such as footwear,ne leather, handbags, and auto upholstery,African countries, including Kenya, remainmarginal players. The key questions concernwhether and how Kenya can grow its leatherindustry, increase its competitiveness in leatherand leather products, grow exports and jobs,and create a viable and sustainable industry topropel the country toward inclusive prosperity.

Despite owning a fth of the global livestockpopulation, African countries account foronly 4 percent of world leather productionand 3.3 percent of value addition in leather. Most African nations, including Kenya, areessentially exporters of raw hides and skinsand wet blue leather and maintain a lowproduction capacity for nished leather. Just

to Kenya’s North, Ethiopia is emerging as anexception to this trend.

THE KENYAN CONTEXT

Although Kenya served as a leather footwearhub for East Africa two decades ago, it iscurrently a very minor exporter of leatherand leather products (only US$140 million,

0.14 percent of world export in 2013). Kenyais also signicantly less competitive than global

leaders including China, Italy, and Vietnamin all competitiveness indicators, exceptavailability of and access to raw materials.Its competitive position has been erodedby global imports of new low-cost footwearpenetrating Kenyan and East African marketsand second-hand imported footwear invadingdomestic markets. Today, Kenya is a low-costproducer of undifferentiated, low-end shoesand boots, producing an estimated 3.3 millionpairs of leather footwear per year, mostlyfor the domestic market. For instance, Bata,Kenya’s largest and dominant footwear maker,has signicantly reduced its production oflow-end, men’s leather shoes for the domesticmarket, and its export of leather shoes to theEast African market has also declined.

Currently, most Kenyan leather is produced

and sold as a commodity with little qualityor design differentiation. Kenya’s leatherexports consist of semi-processed tanned “wetblue” leather (89 percent), raw hides and skins(5 percent), nished leather (2 percent), andleather footwear and handbags, travel ware,and other leather products (4 percent). Up untilthe imposition of an 80 percent export tariff on raw hides and skins in 2009, raw hides andskins accounted for more than 25 percent of

Kenya’s total leather exports. Interviews withindustry experts conrm that despite the tariff,there continues to be a high level of smuggledexports of raw hides and skins. Unfortunately,trade in raw and semi-processed leather onlygenerates a marginal trickle-down effect on therest of the Kenyan population.

EXECUTIVE SUMMARY

1 All dollar amounts are U.S. dollars unless otherwise indicated.

Diagnosis, Strategy and Action Plan ii


12/126

Footwear is the biggest leather goodssubsector in Kenya, while the handbagsubsector is the most competitive vis-à-visglobal markets. In the case of leather handbags,travel ware, and cases, Kenya’s exports in 2013(US$2.2 million) were almost quadruple theexport size of Ethiopia’s (US$0.57 million) in thesame year. Kenya can build on its reputationfor quality hand bags, travel ware, and cases byimproving the quality of its products, buildingthe “made in Kenya” brand distinction, andcreating a mass customization delivery capacity. There is also a range of other leather productcategories where opportunities exist such asbelts, industrial boots, and gloves. However,

they would be starting with a scale and levelof competitiveness that is extremely low andwould be at a competitive disadvantage whenfaced with the labor intensive, global market.

Employment in Kenya’s leather industry isrelatively low (estimated at 14,000 duringpeak times) and the informal sector is thebigger employer, accounting for 10,000 ofthe 14,000 workers. According to the KenyaNational Bureau of Statistics, Kenya’s leathersector accounted for only 2 percent of formalmanufacturing employment and 1.3 percent ofmanufacturing value added in 2013.

Under the prevailing structure of theleather industry, wealth is very narrowlydistributed among a small number of traders/manufacturers. The industry has failed to

generate any signicant level of employmentbecause most of the value is captured by thetanneries, which represent the most capitalintensive and employment light segment ofthe value chain. The mode of competitionthat exists within the leather industry and the

prevailing business models both fail to capturegrowth potential or broadly distribute thewealth created.

INDUSTRY COMPETITIVENESS

Kenya’s leather sector competitiveness iscurrently based on the nation’s comparativecost advantages, derived from its abundantnatural resources of cattle, goats, and sheep(Kenya is the third largest livestock holder inAfrica), its relatively low labor costs, and itscomparative disregard for environmentaland related social costs. 2 The leather sector’scosts of production are subsidized to theextent that government policies (and their

poor enforcement) fail to force producers tointernalize environmental and social costsassociated with sustaining the sector, includingmost importantly, water resource clean up,long term health care, and natural resourcereplenishment costs.

Several factors hinder the growth of Kenya’sleather industry. In the footwear subsector,Kenya’s lack of cost competitiveness resultsfrom the following three major constraintsthat disadvantage Kenyan producers: (i) thehigh cost of domestically sold leather andleather inputs (including 25 percent duty onimported inputs); (ii) the high cost of labor; and(iii) the high cost of electricity. In addition, on thedemand side, it is very difficult for local leatherfootwear producers to compete in the domesticmarket against the inow of cheap and new

leather and non-leather footwear imports(mainly from China and India) and against thegrowth of the second-hand Mitumba market,which offers an enormous range of high andlow quality leather and non-leather footwear atbargain prices.

KENYA LEATHER INDUSTRYiii

Execu ve Summary

2 As will be evident further on in the report, some tanners have already invested heavily to safeguard the environment. However, they are the exceptionand not the norm.


13/126

Meanwhile, Ethiopia is emerging as a newworld-class player in leather footwear due toits low cost skilled labor, improvements in thequality of its raw material supply, the stablebusiness climate, and the establishment ofnew economic zones. Ethiopia is attracting anincreasing number of foreign investors whoare using the country as a production site,predominantly to enter the EU and US markets—the latter through the AGOA program.

Ethiopia has made tremendous productivitygains in recent years and now surpasses Kenyain terms of a cost competitiveness advantage. Indeed, it is approximately 30 percent more

costly to produce a pair of low-cost men’sleather shoes in Kenya than in Ethiopia. In Kenya,the cost of producing a pair of low-cost men’sshoes is approximately US$9.44, compared toEthiopia’s US$7.28 for a pair of men’s loafers.

INDUSTRY STRUCTURE

There is a vibrant and competitive informalsector, concentrated in the Kariokor Marketcluster in Nairobi, that produces low costleather footwear and goods for Kenya and theregion. Most of the leather good producers aremicro and small enterprises and many prefer tostay in the informal sector in order to remaincompetitive. There is an intricate link betweenthe formal and informal sector but it is weak andunbalanced. Many institutes and associationsexist to support the industry—most of whichare government owned or controlled—, but few

play a signicant role due to lack coordination,funding, and authority.

Additionally, only a few tanneries processnished leather for sale in the domestic Kenyanmarket. The nished leather market is tightlycontrolled and often resembles a seller’s market.Kenya’s largest and most modern tannery,Alpharama, dominates the production andcommands a great inuence over the market.For the tanning subsector of the leather valuechain, the relatively high cost of raw materialsand chemicals in Kenya (largely due to the 25percent import duty on inputs) represents itsmost signicant competitiveness challenge. 3

The current comparative cost advantageof Kenya’s tanneries in the production and

export of semi-nished wet blue leatherderives from the fact that North American,South American, the EU, and most recently,Chinese governments are unwilling tocontinue to absorb externalities in the sector,including most importantly, those associatedwith environmental clean up. As a result, theyare attempting to “export” those costs to nationssuch as Kenya that are willing to absorb them inexchange for production cost structures, whichare articially depressed. Over the long term,these deferred costs may reemerge in variousforms including, for instance, reduced lifespans, increased medical costs, and signicantlyincreased costs associated with waterpurication. Sustainable production shouldthus be a high priority for government policy.

STRATEGY FOR THE INDUSTRY

According to our competitive analyses, themost promising targets for Kenya’s leatherindustry include three key products withcorresponding market thrusts.

Diagnosis, Strategy and Action Plan iv

Execu ve Summary

2 Tanners who export have access to surface treating agents under EAC duty remission. Tanneries selling into the EAC market must pay the duty.


14/126

RECOMMENDATIONS

To increase the competitiveness of the leatherindustry and accomplish the above product-market objectives, strategies and actionsare recommended in Table 1 and groupedaccording to a framework, which consists ofthree key strategies. The table also matchesaction initiatives to the three product/market

competitiveness strategies for low-value-addedleather footwear, high-value added specialtyproducts, and/or nished leather. A detailedevaluation of these recommended initiativesand a priority action plan, including how they

should be staggered over time, is provided inthe full report.

Table 1: Leather industry strategy & actions

Recommendations to improve the competitiveness of:

Low value-addedleather footwear

High value-added specialty

productsFinishedleather

Strategy 1: Promote the dynamic restructuring of the leather industry X X X

1.1 Establish a collaborative, stakeholder-driven leather industry strategyimplementation process X X X

1.2 Strengthen the Kenya Leather Development Council (KLDC) X X X

1.3 Improve the regulatory framework to reduce production costs and safeguardthe environment

X X X

Strategy 2: Increase access to markets and induce greater demand forKenyan leather & leather products

2.1 Develop a leather marketing entity to increase awareness, coordinatebranding and promote exports

X X X

2.2 Design a transparent public procurement policy X X X

Strategy 3: Build quality and standards

3.1 Improve the Production Process, Technology and Machinery

3.1.1 Establish leather product development accelerators (or “leather wealthcreation centers”)

i. Nairobi Leather Accelerator (for formal sector) X X X

ii. Kariokor Market Satellite Leather Accelerator X

3.1.2 Develop a leather industry park X X X

KENYA LEATHER INDUSTRYv

Execu ve Summary

Strategic Products Strategic Markets

Low value added leather footwear• Domestic Market—increase share of domestic leather footwear market, particularly with low-cost

men’s shoes, low-cost school shoes, and boots.• Regional Market—increase exports to EACs of low cost-men’s shoes and boots.

High value added specialty products

• EU and US Markets—increase exports of specialty leather products, leather handbags, travel ware,and cases, with a focus on EU and US markets.

• Domestic and EAC Markets—increase domestic and regional sales, especially safari-type productssold to tourists in Kenya and EAC.

Finished leather • China and EU Markets—Increase exports of higher value added nished leather (and crust leather)especially to China and EU.


15/126

Due to the highly fragmented structure of theKenyan leather industry, the limited linkagesamong stakeholders, and lack of a coherent andshared competitiveness strategy by privatesector, government, and other institutions, theoverall plan is to improve access to markets,while enhancing productivity and movementto value addition and strengthening

collaboration in the industry. Three importantstrategies are recommended: (i) promote thedynamic restructuring of the industry; (ii)increase access to markets and induce greaterdemand for leather and leather products; and(iii) build quality and standards throughout thevalue chain.

According to the rst strategy, a criticalcornerstone for improving the competitivenessof the leather industry is a well-functioningset of institutions to support the industry,coupled with a strong legal framework andbusiness climate. This involves (i) establishinga leather cluster working group and strategyimplementation process, (ii) strengthening andpositioning KLDC as a driving institutional vehicle

to enhance leather industry competitiveness,and (iii) improving the regulatory frameworkto reduce the sector’s production costs—by reducing import duties on intermediarygoods—and safeguard the environment—byadopting and enforcing international leather-related environmental standards, particularly atthe tannery level.

Increasing access to markets for Kenyanleather is the key ingredient for the successof the leather industry. To this end, the secondstrategy suggests (i) developing a leathermarketing entity to increase domestic andinternational awareness of Kenyan leather,coordinate the branding of Kenyan leather,and promote exports. Such an entity couldpromote exports by organizing match-makingbetween international buyers of crust andnished leather and Kenyan producers, andleveraging global business-to-business (B2B)e-commerce platforms. Importantly, thestrategy to increase access to markets wouldalso include (ii) facilitating access of localproducers to the domestic market by improving

Diagnosis, Strategy and Action Plan vi

Execu ve Summary

3.2 Improve skills

3.2.1 Restructure and upgrade the Training and Production Center for the

Shoe Industry (TPCSI)

X X

3.2.2 Strengthen university leather design, technology, and marketingcapacities

X X

3.2.3 Enhance human resource placement services for the leather industry X X

3.3 Encourage quality & enforce standards

3.3.1 Align incentives for quality and promote quality certication systems X X

3.3.2 Develop leather award and recognition programs X X X

3.3.3 Initiate regional branding of the leather industry to promotespecialization

X X

3.3.4 Increase enforcement of quality standards for imported leather products X X

Recommendations to improve the competitiveness of:

Low value-addedleather footwear

High value-added specialty

productsFinishedleather


16/126

their opportunities to succeed with publicprocurement contracts, in line with the BuyKenya, Build Kenya policy. 4

Kenya’s leather industry trails behindglobal and regional competitors in terms ofproductivity, quality, and cost of products. Strategies and actions to enhance qualityand standards throughout the leather valuechain are vital to Kenya’s ability to competeboth within its own domestic market andglobally. The third strategy rests on threepillars: (i) improving the production process,technology and machinery; (ii) enhancingtraining and skill development centers; and (iii)

encouraging quality and enforcing standards. The rst of these pillars can be achieved byestablishing an industry accelerator for theformal sector and a common manufacturingfacility for the informal sector—both to supportrm development and linkage—, and bydeveloping critical infrastructure, including awater effluent treatment facility in, potentially,a leather industrial park. Critically, if the latter isto succeed, then it must have a strong marketorientation. The World Bank believes that apublicly-driven industrial park will not achievethe goals the Government of Kenya envisionsfor the industry.

Regarding skills and training in the industry,the government could restructure andupgrade the Training and Production Centerfor the Shoe Industry (TPCSI) and place it

under the direction of KLDC. In parallel, leatherdesign, technology, and marketing skills couldbe strengthened at the tertiary level throughthe endowment of professorships in theseareas, such that current and future studentsenrolled in leather-related degrees receive

high-level training. Relatedly, a human resourceplacement service for the leather industry couldbe organized in order to develop an efficientmarket for technically competent managers,technicians, and workers. Lastly, professionalcertication programs within the industry couldbe improved and extended to assure that criticalskills and competencies remain current andcompetitive through post graduate, continuoustraining. These measures would greatly enhancethe level of skills and training in the industry.

The third pillar of the strategy aimed at buildingquality and standards rests on a combinationof encouragement and enforcement.

Throughout the value chain, and particularlyat the very beginning with animal husbandry,incentives for quality should be aligned andquality certication systems promoted. Regionalbranding of the leather industry can furtherhelp by promoting geographic specializationand distinction (i.e. “Turkana Leather, A Traditionas Old as Man”). At the manufacturing end ofthe value chain, leather quality awards andrecognition programs can be developed toinduce innovation and foster competitionbased on distinct quality and design. Finally,the enforcement of quality standards can beincreased, particularly for imported products.

Regarding the second-hands goods trade, theWorld Bank believes that its benets in termsof employment generation and a lower costof living for all Kenyans outweigh its costs in

terms of a smaller domestic market for leathergoods producers. To this end, the target marketsegments for the Kenyan leather industry arethose where second-hand leather products areless prevalent, while a do-nothing course ofaction is suggested for ‘Mitumba.’

KENYA LEATHER INDUSTRYvii

Execu ve Summary

4 The Ministry of Industrialization and Enterprise Development is in the process of nalizing The Buy Kenya, Build Kenya policy, which is seen as a way ofcreating markets for local products and services. The policy aims to reduce government and private expenditure on imported products and services andreduce the unemployment rate by supporting the local economy to grow.


17/126

It is envisaged that the recommendationsand action plan proposed in this report willprovide the basis for Kenya’s leather industryto increase its competitiveness and grow jobs and income. Projections of future leatherindustry employment have been generated toshow the likely impact of minimal vs. substantialimplementation of recommended policyinitiatives (see Figure 1).

Three scenarios have been generated to depictthe future of the Kenyan leather industry.

a. Do Nothing Scenario: If no signicant effortis observed on the policy level, and privatesector-led initiatives are not implemented,we project a stagnant industry where thereis no notable growth.

b. Partial Action Scenario: According to thisscenario, there will be a minor improvementin the competitiveness of both the formaland informal sectors, resulting from the

successful implementation of only a fewrecommended actions.

c. Action across vc. Scenario: This positivescenario implies successful implementationof many of the recommended initiatives,

improvement in the competitiveness ofboth the formal and informal sectors, whichresults in a quadrupling of leather industryemployment within 15 years. If Kenyasuccessfully brings transformation acrossthe value chain, scenario C is feasible.

Based on a cross-country (China, Vietnam,Turkey, Ethiopia) average estimate of 1,500formal jobs per million pairs of shoes produced,

if Kenya was able to increase its competitiveness,market share, and annual production ofshoes by 15 million pairs—from its current 3.3million pairs of shoes to 18.3 million—, thenemployment in the leather footwear industrywould grow by 22,500 jobs (from 14,000 to36,500 jobs). This estimate is roughly consistentwith Scenario B above. In terms of value, the netexports of the leather industry could grow from

US$140 million a year to close to US$500 million.

To achieve this target and more, Kenya’spublic and private sector leaders will needto collaborate and work intelligently to createthis vision and strategy, implement actions,and develop the conditions for a renewal ofcompetitive strength and dynamism in theleather industry.

Figure 1: Leather industry employment projections 2015-2030

Source: ETG Projections

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

High Ac onPar al Ac onDo Nothing

2 00 9 2 01 0 2 011 20 12 2 01 3 2 01 5 2 02 0 20 25 2 03 0

N u m

b e r o

f i n

d u s t r y e m p

l o y e e s

Diagnosis, Strategy and Action Plan viii

Execu ve Summary


18/126

KENYA LEATHER INDUSTRYix

INTRODUCTION AND BACKGROUND TO THE STUDY

In 2014, Kenya’s Ministry of Industrializationrequested technical assistance from the WorldBank to conduct competitiveness assessments

and develop competitiveness strategies forfour key industries: textiles and apparel, foodprocessing, furniture, and leather and leatherproducts. The Ministry selected these fourindustry sectors for serious consideration aspriority sectors for industrial development and job creation in Kenya.

The Economic Transformations Group, Inc.(ETG), a sustainable economic developmentconsultancy from New York and Silicon Valley,was contracted to complete the analysis andstrategy for the leather industry. ETG built onprior analytical work by Kyram Consultants Ltd.

In the context of Kenya’s long-term visionto become an industrialized middle-incomecountry by 2030, its leather and leather productssector offers an important opportunity for

industrialization and diversication of exports.However, value addition in the leather sectorhas been minimal, and most of Kenya’s exportshave been in the form of unprocessed, raw hidesand skins. The leather sector can contribute toeconomic growth through expanding exportsof both semi-processed and nished leathergoods. The development of the sector involvesimproving the raw material base (especiallythe quality of hides and skins), boosting thetanning subsector, producing leather goods,and marketing.

Key strategic questions about the leatherindustry include: what is the status ofdevelopment of the industry, what are the

most critical competitiveness challengesand opportunities, what are the most arepromising leather products that Kenya should

focus on moving forward, and how can supportbe increased to value addition and exports byupgrading production processes, technology,marketing and branding of leather products.

The basic research methodology followeda standard approach of gathering existingreports and data, and interviewing a widerange of local and international experts (see Annex 2). The study team also visitedEthiopia’s Leather Industry DevelopmentInstitute, and footwear rms in Vietnam. Dueto the challenge of very minimal and poorquality data, particularly about the domesticmarket for leather products, and unrecordedexports of hides and skins, the team reliedheavily on interviews with key experts, industrystakeholders, and adapted a modied Delphimethodology to establish expert consensus

estimations for leather production levels, sizeof markets, and cross-country comparativeanalyses of competitiveness indicators andproduction costs. 5 We asked selected industryexperts to rank and scale competitive advantageof Kenyan leather producers in comparisonto other counterparts in the market. Similarly,a modied Delphi methodology was used toconduct a competitiveness benchmarkingexercise, which entailed surveying a numberof leather experts, policy makers, and businessleaders in Kenyan leather industry to rate countrycompetitiveness. Selected experts were asked tocompare Kenya’s leather industry performanceand ten competitiveness indicators against thatof the three representative countries. Further

Execu ve Summary

5 The modied Delphi method is a structured communication technique or method developed as a systematic, interactive forecasting method whichrelies on a panel of experts. The experts answer questions in two or more rounds, and after each round, a summary of the experts’ forecasts from theprevious round as well as the reasons they provided for their judgments is presented. Experts are encouraged to revise their earlier answers in light of thereplies of others. It is believed that during this process the range of the answers will decrease and the group will converge towards the "correct" answer.


19/126

Diagnosis, Strategy and Action Plan x

analysis was conducted to compare cost ofproduction of shoes in Kenya vs. Ethiopia,drawing on a combination of costs indicatedin reports, conrmed by expert opinions ofproducers and industry experts.

The analysis and recommendations hereinemphasize the tanning and manufacturingsegments of the leather and leather goodsvalue chain—and the markets to which these

sell—over the animal husbandry and abattoirsegments of the chain. Very little informationand analysis existed about the former, whilea signicant number of reports had beenwritten already about the latter. In addition,while the recommendations for tanning andmanufacturing fall under the purview of MOIED,the interventions necessary for the earlier stagesof the value chain are largely the responsibilityof the Ministry of Agriculture.

Execu ve Summary


20/126


21/126

Diagnosis, Strategy and Action Plan 1

GLOBAL TRENDS IN THE LEATHER INDUSTRY

1.1 DEMAND FOR LEATHER ANDLEATHER PRODUCTS IS GROWINGFASTER THAN SUPPLY

A major global shift has taken place inleather and leather products production,with a resetting of competitive advantagefrom Europe to Asia (and within Asia fromEast Asia to South Asia). In 2013, total leather

production in Europe was 6.3 billion sq. ft., whileAsian countries (e.g., China, India, Vietnam,Korea, Japan etc.) produced almost doublethat amount (12.1 billion sq. ft.). Of total annualglobal leather production (approximately 23billion sq. ft.), the leather footwear industry uses65 percent of leather (or 14.9 billion sq. ft.). Theremaining 8.1 billion sq. ft. (35 percent of totalleather production) goes into the manufacturingof a diversity of other types of leather products —

for example, furniture (14 percent), automobileseats and interiors (10.2 percent), garments

(10 percent), and miscellaneous other leatherproducts (8.0 percent). 6 The US is currentlythe largest importer of footwear in the world,accounting for 2.3 billion pairs, 24.8 percent ofthe world footwear trade, at a value of US$24.2billion in 2013. 7

The big message coming from comparisonsof demand and supply across regions is that

demand for leather products is growingmuch faster than supply. 8 Moreover, long termgrowth rates for leather products in developingcountries are twice as high as in developedcountries. This phenomenon has two causes:more rapid population growth, particularlywithin younger population cohorts, and rapidlyincreasing disposable income. Yet, insofar as themarket is concerned, this is expected to resultin chronic supply decits and increased upwardpressure on prices.

Recent years show a growth in earnings for rawhides and skins (Figure 2) as well as exportedleather. In 2010, global export earnings fromraw hides and skins increased by nearly 60percent (and a further 18 percent in 2011). Atthe same time, export earnings from leatherproducts increased by 28 percent in 2010 and

14 percent in 2011, while the value of footwearexports grew by a more modest 11 and 13percent, respectively, over the two years. Allleather-producing regions of the world showeda broadly similar pattern. Prices for all categories

SECTION ONE

6 M. Mwinyihija, (2014). “Emerging World Leather Trends and Continental Shifts on Leather and Leather Goods Production,” Advances in BusinessManagement and Administration, Vol. 1 (1): 1-13.

7 United States International Trade Commission (USITC) Trade Dataweb ‐ http://dataweb.usitc.gov/ ‐ compiled from tariff and trade data from the U.S.Department of Commerce, the U.S. Treasury, and the U.S. International Trade Commission. https://www.wewear.org/assets/1/7/usimportsfootwear1312.pdf

8 Demand for leather within certain product segments uctuates. For instance, sports footwear is now almost 99% synthetic. Car upholstery is alsoshifting, and now only visible parts of the seat are made of leather.

Figure 2: Global export earnings from raw hides and skins

So urc e: UN Comt rade

6,000

5,000

4,000

3,000

2,000

1,000

0

M i l l i o n

U S $

Global Export Earnings: Raw Hides and Skins

2004

Bovine

Sheep

2005 2006 2007 2008 2009 2010 2011


22/126

KENYA LEATHER INDUSTRY2

of leather, including raw, wet blue, crusted, andnished leather have increased since 2009, andthey reached new highs in 2013 and 2014. 9

1.2 CHINESE TANNERIES FACINGINCREASINGLY STRINGENTENVIRONMENTAL REGULATIONS

China remains one of the major producers ofleather products in the world, yet the nation’srecent change in direction to become moreenvironmentally sustainable has caused asignicant drop in leather production. InMarch 2014, local governments in the northernprovinces of Hebei and Xinji stopped a numberof tanneries from operating due to excessiveeffluence. 10 In April of the same year, over 100community members raided a tannery complexin Quanzhou, in the eastern Fujian Province,over pollution concerns. 11 Although Chinacontinues to import a great amount of raw hidesand skins, its environmental regulations areexpected to become all the more stringent. Thisinternalization of environmental costs, risingproduction costs associated with an increasing

private sector share in tanning, as well as labordemand issues have sapped the competitivenessof Chinese leather manufacturers with the resultthat the world’s third largest leather exporter hasbecome one of the largest emerging importersof nished leather.

1.3 GROWING PUSH TOWARDS CLEANPRODUCTION TECHNOLOGIES

The leather industry is a heavily pollutingindustry as effluents produced by tannerieshave a signicant negative impact on local

water and air resources. In particular, chromiumcontamination and high chemical oxygendemand are typical problems associated withtannery effluents, both of which can pose seriousrisks to the environment and human health. 12 Inmany low-income countries these pollutantsare responsible for the contamination of nearbysurface and groundwater systems with severelyhigh levels of chromium. 13 Human Rights Watchhas noted that workers might be handlingtanning chemicals without any sort of handprotection). Thus, while global leather demandis on the rise, consumers in developed countriesespecially are pushing for an acceleration of the‘green 14’ leather industry. Today in the US, greenapparel and accessories make up 2 percent ofthe fashion industry —a marketable increasefrom 0.25 percent a decade ago. 15 Major brandnames — Timberland (Earthkeepers), H&M(Conscious Collection), and Gucci (RainforestAlliance)—have introduced new materialsthat are stylish and fully recyclable (attractiveto consumers), and at the same time cost-cutting. Their product lines are buttressed bythe technological advances of leather researchcenters around the world: in 2009, Centre

9 M Mwinyihija, (2014).10 Litehide, (2014), “Northern Chinese Government enforces new policy, tanneries closed until they become compliant,” April 3. http://litehide.com/

archives/340311 World Watch Institute, (2015), “Villagers Attack Factories over Pollution in Eastern China“ May 22. http://www.worldwatch.org/villagers-attack-factories-

over-pollution-eastern-china12 Z Song, C.J. Williams, and R.G.J. Edyvean, (2000), “Sedimentation of Tannery Wastewater.” Water Research, Vol. 34, No. 7: 2171-2176.13 Mohammad Amir Hossain. Bhuiyan, et al. (2010) “Investigation of the Possible Sources of Heavy Metal Contamination in Lagoon and Canal Water in the

Tannery Industrial Area in Dhaka, Bangladesh.” Environmental Monitoring and Assessment, Vol. 175, No. 1-4: 633-649; and http://www.hrw.org/sites/default/les/reports/bangladesh1012webwcover.pdf

14 Just what constitutes ‘eco-friendly’ or ‘green’ leather is ambiguous. Generally, a leather product is considered ‘eco-friendly’ if it has been producedthrough means other than chromium sulphate tanning (which, along with about 250 other chemicals typically used in the tanning process, releasesunfriendly toxins into the atmosphere). It is not clear, however, whether this assumes that the husbandry involved in delivering the hide was done so inan organic and/or humane manner.

15 Business Insider, (2013), “The Rise of Green Fashion,” April 28. http://www.usatoday.com/story/money/business/2013/04/28/the-rise-of-green-fashion/1996773/

I. Global Trends in the Leather Industry


23/126


Technique Cuir (France) opened a state-of-the-art laboratory in Dongguan, China followingthe request of domestic producers; in 2012,Stahl Holdings (Denmark) developed ‘Stahlite’in order to reduce the weight of nished leatherby 40 percent, thus requiring less extensivechemical nishing; and in 2013, TILEATHERresearchers (Spain) pioneered titanium tanningas an alternative to chromium.

In the developing world, where there is lessdisposable income (although rising) andtherefore less demand for ‘green’ leatherproducts, governments have begun to stepin. In China, the Ministry of Industry and

Information’s (MOI) 2009 directive GuidingOptions of Tanning Industry StructuralAdjustment proclaimed that tanneries whoseproduction scale fell below 30,000 pieces ofstandard cattle hide per year would be shutdown, while those producing below 100,000pieces would be subject to limits. The MOIexpressly encouraged Chinese tanneries toobtain “Eco-Leather” certication 16 as denedby the China Leather Industry Association(CLIA). Since 2003, the CLIA has encouragedtanneries to meet or exceed internationalstandards in the production process and asregards the nished goods themselves —interms of leather quality, the use of specialized‘green’ chemicals, pollution control, wastetreatment, and corporate social responsibility.

Regarding the leather industry in Africa,

although environmental measures havebeen introduced (usually along thelines of EU regulations), there tends tobe a lack of cohesiveness. According toUNIDO, “Governments have establishedenvironmental protection offices in differentdepartments and bureaus with insufficient

coordination between them. This leads tofrequent discrepancies within the activities ofregulation and control, and results in inefficientimplementation.” 17 Therefore, it may becapacity-building (in industrial strengthening,standardization, and technology), motivatedby national development planning, whichcan instill an environmentally friendly leatherprocessing culture.

1.4 IMPLICATIONS FOR KENYA

Capitalize on global trends

Even though the global market for leatherproducts (footwear, ne leather, etc.) istrending upwards (Figure 3), African countriesremain marginal players. Despite owning a fthof global livestock population, African countriesaccount for only 4 percent of world leather andleather products production. 18 Most Africannations, including Kenya, are essentially exportersof raw hides and skins and wet blue leather, andmaintain a low production capacity for nishedleather. Consequently, there is an emergingimbalance of supply and demand for leather

products. Figure 3 demonstrates this trend forthe leather footwear industry; unsurprisingly,Africa is a signicant net importer.

16 Leather International, (2010). Government backs CLIA’s Eco-Leather mark, February 2010.17 UNIDO, (2010), “Future Trends in the World Leather and Leather Products Industry and Trade.”18 Mwinyihija Mwinyihija, and W. Quiesenberry, (2013), “Review of the challenges towards value addition of the leather sector in Africa,” Global Advanced

Research Journal of Management and Business Studies (ISSN: 2315-5086) Vol. 2(11): 518-528, November, 2013.

Figure 3: Demand for leather shoes in Africa far exceedslocal supply

So urce: UN Comt rade

African leather shoes production(Million pairs)

Expected potenial shoes demand(Million pairs)

1,950

1,800

1,650

1,500

1,350

1,200

1,050

900

750600

450

300

150

0

S h o e s

i n m

i l l i o n p a

i r s

1950 1960 1970 1980 1990 2000 2005 2010 2015 2020 2025 2030



24/126


On the other hand, developing countrymarkets —particularly in Africa includingKenya —offer attractive niches for aspiringshoe manufacturers. A major factor is at workhere: increasing per capita demand for shoes(taking into account rising disposable incomeand population growth, particularly amongschool-aged children).

Beyond the regional market, there is anemerging opportunity for Kenyan tanneriesto export more forms of processed leatherto China, where imports are growing. Figure4 shows that Chinese raw leather imports, aswell as tanned and further prepared leather

increased between 2007 to 2013.

Yet when considering direct imports fromKenya over this same period, China appearsto be importing an increasing percentage oftanned leather (wet blue and crust) (Figure 5).

The implications of reduced Chineseproduction and competitiveness for Kenyanleather producers are profound. Stricter

enforcement of environmental regulationsin China make importing Kenyan-produced

intermediate goods more attractive (this isconrmed by increased activity of Chinesebuyers in Kenyan markets of wet blue and crustleathers). With its Vision 2030, 19 the Kenyangovernment is aiming towards a prosperousnation anchored by competitive high valueindustries, abundant human and social capital,political maturity, and sound infrastructure.Kenya is thus looking to capture a signicantshare of the world employment opportunity thatwill be generated by China’s expecting sheddingof millions of jobs in the light manufacturingindustry, including the leather industry. 20

1.4 KEY FINDING OF CHAPTER 1

Globally, demand for leather products isgrowing much faster than supply. MostAfrican nations, including Kenya, are essentiallyexporters of raw hides and skins and wetblue leather, and maintain a low productioncapacity for nished leather. Chinese tanneriesface increasingly stringent environmentalregulations, which affords new opportunitiesfor exporting Kenyan-produced semi-processed

leather to China.

19 The number of Kenyans working for wage jobs grew gradually over the last few decades, and since the year 2009, has exceeded self-employment. Thenature of employment is in transition as well, as more people are moving away from traditional family-owned farming to higher value-added jobs.

20 At the same time, there exists an ever present challenge for Kenyan manufactures to reclaim market share in their own home market (particularlyfor footwear), where Chinese producers remain extremely aggressive price-wise and are apparently committed to preserving their dominant marketposition.

Figure 4: Value of Chinese imports of raw leather (2007-2013)

So urc e: UN Comt rad e

-

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

8,000,000

9,000,000

2007 2008 2009 2010 2011 2012 2013

U S

$ 0 0 0

' s

Total Raw Total Tanned Total Further Prepared

Figure 5: Chinese imports of raw leather from Kenya (2007-2013)


-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2007 2008 2009 2010 2011 2012 2013

U S D

0 0 0

' s

Year

Total Raw Total Tanned Total Furthe r P repa red



25/126


The near and medium-term outlook describedin the previous section necessitates asuccessful revitalization of the entire Kenyanleather sector. Already, Kenya is beneting fromrecent price increases for wet salted hides andgoatskins (such that buying skins, processingthem into blue leather, and exporting semi-nished leathers has become a lucrativebusiness for established tanneries).

Competitiveness analyses for Kenya in termsof its value-added leather products suggestthat additional investment in downstreamprocesses, as well as improved quality control,policies designed to encourage Foreign Direct

Investment (FDI), and up-scaling of productdesigns and manufacturing processes areneeded (and make good economic sense). These analyses are detailed in Chapter 4 ofthis report.

Furthermore, the leather sector itself meritsrestructuring, notably in the manner of bothformal and informal network clusters to reduceinput costs and accelerate capacity. A private

sector developer might be targeted in leadingthe development of a leather industry park. Thegovernment can broaden local procurementopportunities to Kenya leather producers. Theentire local leather value chain can collaborateto enhance its competitiveness vis-à-vis Kenya’ssecond-hand markets and imported newfootwear. These strategies (and others) arediscussed at length in Chapter 5.

An important mechanism for achieving thebasic goal of value addition and product qualityenhancement is the adoption of sustainable,clean technologies. Discriminating buyers,particularly in the developed world, value

green leather and are willing to pay a premiumfor it. It follows that adhering to internationalbest practices 21 for limiting pollutants andremediating their impact on the environmentis not only a socially responsible strategy forindustry development but one which canhelp position the Kenyan industry for theproduction and sale of higher-value products.Developing a ‘clean’, uniquely Kenyan brandwill help in this regard.

21 Kenya lacks systematic conformity to international standards at present, so these need to be adopted not only at the discretionary level of individualrms but also at the compulsory level of the entire leather industry.



26/126



27/126


In developing a strategy for Kenya’s leatherindustry, the starting place for analysisbegins with an understanding of Kenya’sexisting leather products and markets. Thischapter identifies Kenya’s most importantleather products and highlights the mostsignificant segments and trends of domesticand export markets.

2.1 KENYA’S LEATHER PRODUCTSKenya’s leather production consists mainly(89 percent) of semi-processed tanned “wetblue” and some crust leather. The remainingproduction consists of nished leather (2percent), leather footwear and handbags, travelware, and other leather products (4 percent),and raw hides and skins (5 percent). This sectionproles the size and relative advantages of

Kenya’s main leather products.23

“Wet Blue” Production and Exports DominateKenya’s Leather Industry

Over the last few years and including 2013, thesize of the leather export market as a whole hasbeen showing an upward trend. Currently, semi-

processed tanned “wet blue” leather is Kenya’sleading leather industry export, accountingfor 89 percent (US$131 million) of the value oftotal leather exports in 2012-13. As shown inFigure 6, raw hides and skins accounted for 27percent of total leather exports in 2007, until thegovernment began imposing duties. Since theimposition of an 80 percent export tariff on rawhides and skins in 2009, official statistics showthat exports of raw hides and skins droppedto 3 percent of leather exports, with the shareof tanned leather product exports increasingsubstantially. 24

22 UN Comtrad.23 UN Comtrad.

Table 2: Exports of Kenyan leather and leather products (2007-2013) (thousands of US$)Kenyan leather/leather products 2007 2008 2009 2010 2011 2012 2013 CAGR

Raw hides and skins 14,337 19,830 9,374 9,603 15,538 9,154 6,652 -12%

Wet blue/crust 38,477 52,505 32,467 58,355 84,309 102,888 130,905 23%

Finished leather 456 524 843 2,987 4,206 4,439 3,542 41%

Finished leather products 717 1,647 2,521 5,545 3,030 5,078 5,632 41%

Total 53,987 74,507 45,206 76,491 107,082 121,560 146,731 18%


KENYAN LEATHER PRODUCTS AND MARKETS

SECTION TWO

Figure 6: Kenya’s leather industry exports (2007-2013)


-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

2007 2008 2009 2010 2011 2012 2013

U S D

' 0 0 0 s

Raw Wet-blue and Crust Finished leather Leather Product

80% export tariff onraw hides, 2009


28/126


The following trade data shows that India,Italy, and China/Hong Kong were the biggestimporters of Kenya’s wet blue leather in 2013. China tops the list with US$63 million, followedby Italy and India with US$45 million and US$10million, respectively (Figure 7).

It is important to examine the state of theleather industry in the countries importingKenya’s wet blue. All three of Kenya’s biggestwet blue importers are major leather goodproducers in the global market. China is by farthe most dominant leather good producer in theworld in terms of production and export volume.Italy is considered as the leading and mostadvanced country in high-end leather products.India has also risen to be a major force, backedby its cheap and abundant labor, and concertedgovernment policies. The major differencebetween Kenya and these three countries isthat Kenya’s leather industry is not only small

in size, but it is only capturing a marginal sharein the global value chain. Greater wealth and jobs are created in countries that are focused

on downstream manufacturing. In order forKenya to move into greater value addition and job creation, Kenya must produce more nishedleather and nished leather products.

Furthermore, leather good producers andindustry experts in Kenya claim that highquality hides and skins are more likely to fall inthe hands of foreign leather good producers,which are able to pay higher prices for leatherproducts, while the domestic market is leftwith low-quality nished leather. A naturalexplanation is that a lot of small leather goodproducers cannot afford to purchase highquality leather due to their lack of capital. As the

majority of leather good producers in Kenya arecompeting in the low-end market, purchasinghigh quality leather for more will render theirproducts uncompetitive in the market. A numberof leather good producers also claim that sometanneries cut corners to minimize their tanningcosts. The relationship between tanneries andmanufacturers was more balanced when moresizable manufacturers existed in Kenya.

Kenya’s vision to move up the value chainAccording to UN Comtrade, in 2013, wet blueand crust accounted for 89 percent of totalleather exports in Kenya while nished leatherand nished leather products together onlyaccounted for around 6 percent. 24 Expertsemphasize that crust only makes up a fractionwithin the 89 percent share and they estimatethat wet blue leather must be responsible for at

least 80 percent of total Kenyan leather exports.Figure 8 summarizes the value chain and exportsof leather products in 2013.

24 There is concern among industry leaders that official sources of data underrepresent actual leather exports. A signicant quantity of raw hides and skinsare being smuggled out from Kenya without being taxed. At the leather processing level, a key tannery owner reports that Alpharama tannery aloneexports over US$6 million worth of nished leather and the industry total is estimated to be around US$10 million. Finished leather product exportsalso appear to be undervalued. Bata is estimated to export around US$4 million worth of leather shoes. Also, a large share of leather sandals and othergoods are leaving the country without declaration. Based upon interviews and analysis of the official data, in our judgment, the share of each stage ofthe value chain in gure 8 portrays a relatively accurate picture of reality.

Figure 7: Kenya’s wet blue export markets, 2013


-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

China/HongKong Italy India

U S D

' 0 0 0 s

II. Kenyan Leather Products and Markets


29/126


Value is added when an industry moves right

in the above value-chain diagram, indicatingthat Kenya is not currently capturing signicantearnings in the global value chain. Also, movingto the right will mean that more jobs will becreated as the downstream (manufacturing) ofthe leather industry is the more labor-intensivesector. Kenya exports mostly semi-processedwet blue, and a big share of value addition is thuscaptured in other countries that have vibrantleather product manufacturing industries

such as China, India, and Vietnam. As theaforementioned data indicates, Kenya has madenotable strides in moving away from exportingraw hides and skins to processed wet blue. Thegoal is to leverage the current momentum andmove into more value added products, furtherdown the leather value-chain.

The Government of Kenya (GoK) envisionsthe leather and leather industrial sectorplaying a crucial role in the development ofits economy. On the leather processing side,the goal is to move away from wet blue andinto crust, nished leather, and leather productexports. On the leather product production

side, the goal is to capture an increased supplyof nished leather available in local markets andproduce more nal leather goods such as shoes,belts, and bags for the local and export markets.

However, it is important to note that onceleather reaches the nished stage in itsparticular color, texture and pattern, thelocal market has a limited number of buyersfor nished leather. Most international buyersprefer leather in crust form as they still haveroom to manipulate hides and skins accordingto their preference. Tanneries must have agood idea about which buyer or market theirnished leather is heading before undergoing

the nishing process. Because of internationalbuyers’ preferences of buying leather in crustform, nished leathers are generally consumedby local producers. In this light, our reportinvestigates whether the Kenyan market hasthe capacity to absorb the potential surplus ofnished leather as well as whether Kenya canincrease its nal leather products export market,particularly to the East African Community (EAC)regional market.

Kenya’s nal leather products

In the absence of statistical information aboutthe volume of production of different leatherproducts in Kenya, we approached local leatherexperts and key players in the industry toestimate the relative size and competitivenessof Kenya’s various leather products, using amodied Delphi approach. 25 According to thedata gathered, Kenyan producers are currentlyproducing various leather products that rangefrom low-end leather footwear to high-endleather bags.

25 Chia-Chien Hsu, and Brian A. Sandford, (2007), “The Delphi Technique: Making Sense Of Consensus,” Practical Assessment, Research and Evaluation, vol12, No. 10. http://pareonline.net/pdf/v12n10.pdf

Figure 8: Total export value of Kenyan leather products (2013)

So urc e: UN Comt rade, 2014 Ke nya St at is ti ca l Ab st rac t, ETG Pr imar y Rese arc h

Manufacturing

LeatherProducts

US$5.6 Million

Labour IntensiveCapital IntensiveLabor Intensive

5%% of

Exports

Export

Value’

Capital/Labour

Intensity

89%

Bovine US$59mSheep & Lamb US$23.4mOther 49m

Footwear US$2.8mHandbags etc. US$2.25mOther US$0.6m

2% 4%

US$3.5 MillionUS$131 MillionUS$6.7 Million

FinishedLeather

Wet Blue& Crust

Raw Hides& Skins

Abaitoirs &Traders Tanning



30/126


The consensus estimate by leather expertsindicates that footwear is Kenya’s largestnished product subsector, followed byhandbags, handicrafts, and belts. Bags earnthe highest selling price, with leather garmentsin close second, followed by corporate items. The “other” leather goods subsector along withindustrial gloves collectively have the lowestselling points and production volumes, and alsooffer the lowest competitive advantage. “Other”leather goods include items such as sports balls,knife cases, etc.

While the footwear subsector has the biggestproduction volume, leather bags have thehighest competitive advantage in Kenya. Thereason for leather footwear’s low competitiveadvantage, despite its dominance in productionvolume, derives from the varying level ofcompetitiveness among different types offootwear. This variance is illustrated in Figure

10. Contrary to the varied differences amongleather footwear’s competitive advantages,many leather bags produced in Kenya areconsidered high quality and high-end, and theynaturally receive higher prices in the market.

Types of leather footwear

As Figure 10 indicates, there is a wide rangeof leather goods currently being producedin Kenya. Kenya produces a range of leatherfootwear, most prominently men’s dress shoes,

school shoes, safari boots, military/securityboots, and sandals.

Many formal and informal producers areengaged in the production of school shoes,

sandals, military/security boots, and men’sshoes for two reasons: First, there is a highdemand. A signicant share of the Kenyanpopulation is in school and in the working agebracket. Also, rising security concerns due toterrorism and other factors has led to an increaseddemand of military/security boots over the lastfew years; Second, these items are consideredmore as “uniform” products that do not requireadvanced design capacity or sophistication.

These Kenyan-made products seldom have highvariety and the ones from the informal sectorshare a similar rudimentary design. This explainsthe reason behind the meager production ofwomen’s shoes, which tend to be highly trendy

Figure 9: Kenya’s nal leather products, dominated by footwear26

So urc e: ETG ba se d on mo di fi ed De lp hi me thod ; bubb le si ze indi ca te s re la ti ve pro duct ion vo lume .

Footwear Handbags

Belts

Handicrafts

Industrial Gloves

Leather Garments

Corporate Items

Saddlery & HarnessAccessories

0

1

2

3

4

5

6

0 1 2 3 4 5 6 7 8

C o m p e t i t

i v e

A d v a n t a g e

Price

Figure 10: Types of leather footwear produced in Kenya

So urce: ETG ba se d on mo di fi ed De lphi me thod ; bu bb le si ze indi ca te s rel at iv prod uc ti on vo lume

Men's Dress Shoes

Military/SecurityBoots

Safari BootsSchool Shoes

Industrial Boots

Women's Shoes

Sandals

0

1

2

3

4

5

6

7

8

0 1 2 3 4 5 6 7

C o m p t i t i v e

A d v a n t a g e

Price


26 We asked the industry experts to scale (from 1 to 10: 1 being the lowest and 10 being the highest) each subsector by production volume (indicated bythe size of bubbles), competitive advantage (how competitive each domestic subsector is perceived to be in comparison to other counterparts in themarket), and price (how much value each product from each subsector commands in the market).


31/126


32/126


The upward trend of the leather footwearexport to EAC countries from 2007 through2013 is consistent with the global export trend. This suggests that the main export destinationsfor increased Kenyan leather products will bethe regional market, through the EAC countries.

Kenya leather footwear imports

Although the majority of new footwearimported into Kenya consists of plastic/non-leather shoes, imported leather footwear hasgrown rapidly in recent years, from US$2.4million in 1995 to US$5.5 million in 2007, and

reached US$12.3 million in 2011 and US$11million in 2012, as indicated in Figure 14.

27 Beatrice E. Imo, and Rael C. Maiyo, (2012), “Lessons from Thriving Second-Hand Clothing Businesses for Kenya’s Fashion Industry,” Journal ofEmerging Trends in Economics and Management Sciences. 3 (1): 32-37.

Table 3: Top 10 destinations for Kenyan leather footwear exports, 2009-2013 (US$ ’000s)

2009 2010 2011 2012 2013

1. Uganda 460 Zambia 1,575 Uganda 360 Zambia 743 Uganda 827.87

2. Tanzania 241 Uganda 1,292 Tanzania 313 Uganda 558 Zambia 735.86

3. U.K 182 Tanzania 294 Zambia 189 U.S 207 Tanzania 322.9

4. Malawi 122 U.K 251 SouthAfrica 134 Japan 196 Zimbabwe 156.22

5. Israel 64 Malawi 108 Japan 131 Tanzania 196 Malawi 143.21

6. SouthAfrica

41 U.S 93 U.S 112 SouthAfrica

155 U.S 113.78

7. U.S 37 SouthAfrica

45 U.K 109 Turkey 148 Japan 99.364

8. Rwanda 34 Australia 31 Rwanda 37 U.K 112 Italy 71.045

9. Germany 29 Austria 21 Spain 26 Zimbabwe 95 U.K 54.849

10. Italy 25 Germany 19 Austria 25 Rwanda 41 SouthAfrica

36.742

Total 1,233 3,729 1,436 2,452 2,562 So urc e: UN Comt rad e

Figure 14: Growth of leather footwear imports in Kenya (1996-2012)

So urce: The At la s of Eco no mic Comple xi ty

Figure 13: Leather footwear export to EAC countries


-

200

400

600

800

1,000

1,200

1,400

2008 2009 2010 2011 2012 2013

U S D ' 0 0 0 s

Uganda Tanzania Rwanda Buruni



33/126


The above diagram shows that China is thebiggest exporter of leather footwear toKenyan market, followed by India. The totalamount sums up to US$11 million. 28 However,similar to other official trade data in Kenya,pundits claim that this number is greatlyundervalued. The market suspects that asignificant amount of imported products,especially from China, are brought into Kenyavia Uganda without formal declaration.

In addition, although the Kenya Bureau ofStandards (KEBS) has implemented guidelinescalled the Pre-Export Verification of Conformity(PVoC) to Standards Programme for exportsto Kenya to assure Kenyan consumers of thesafety and quality of the imported goods theybuy, and to protect Kenyan manufacturersfrom unfair competition, many believe theseare not rigorously implemented.

Comparison of exports and imports of leatherfootwear

Despite the fact that footwear takes upthe biggest share of nal leather productsproduced in Kenya, the country still imports

more than it exports. In 2012, the value ofKenya’s total export of leather footwear wasUS$2.7 million, while import value was US$11million. The data available demonstrates thatKenya is a net importer (US$8.3 million) 29 ofleather footwear and many experts estimatethe true value of leather footwear imports to begreater than US$8.3 million.

2.3 KENYA’S EXPORT AND IMPORTOF LEATHER BAGS, TRAVEL WARE,CORPORATE ITEMS

After footwear, leather bags make up thesecond biggest leather subsector in Kenya. There are many small and medium size players

involved.30

The trend of Kenya’s export ofleather bags, travelware, and corporate itemsmirrors that of the Kenyan footwear sector.Although small in absolute value, there hasbeen an overall upward trend of exports since2007. Kenyan leather handbag, travelware,and corporate item exports have increasedsignicantly from a negligible US$383,000in 2007 to around US$2.3 million in 2013, 31 showing potential for future growth.

Figure 15: Sources of Kenyan leather footwear imports (2013)

So urc e: The At la s of Eco nomi c Comple xi ty

Figure 16: Exports of Kenyan leather bags, travelwareand corporate items


-

500

1,000

1,500

2,000

2,500

2007 2008 2009 2010 2011 2012 2013

U S

$ ' 0 0 0 s


28 The Atlas of Economic Complexity, Center for International Development, Harvard Universiry. www.atlas.cid.harvard.edu29 Ibid.30 This will be discussed more in detail in Chapter 3.31 UN Comtrade


34/126


2.4 DOMESTIC FOOTWEAR MARKET

In the absence of data about the size of Kenya’sdomestic market for footwear, the teamconducted interviews with experts to obtainconsensus estimations based on a modied

Delphi Approach. The ndings indicate thatthe second hand market ( Mitumba ) accountsfor around 63 percent of footwear sold in Kenya.Around 26.5 million pairs of Kenyan footwear aresold per year in second-hand Mitumba marketsas illustrated in Figure 17.

Among new shoes, the majority of purchasedshoes are in the low-cost category, with aninsignicant amount of shoes in the high-costcategory. This trend hints at the purchasingpower of the Kenyan population as well as thedistribution of economic class in Kenya.

Non-leather shoes dominate in both theMitumba and lower price range footwear,which dominate the Kenyan footwear market. Out of an estimated 42 million pairs of shoesthat are being purchased in Kenya annually,

15 million pairs (36 percent) are leather shoes.According to experts’ estimations, domesticproducers only supply low-price and mid-priceleather shoes into the market. Around 2.6 million

low-price leather shoes are being producedand this is the only category that Kenya is morecompetitive vis-à-vis international footwearimporters. Experts emphasize that in the low-price leather shoe market, there are still vibrantlocal producers, mainly the informal ( Jua Kali )sector, competing against cheap imports fromChina and Ethiopia. In the mid-price category,only about 0.8 million leather shoes are made inKenya, with the other 1 million pairs imported.Shoes in this category are mainly attributable toBata Shoe production. Again, there are currentlyno local producers of high-end leather footwear.

This estimation indicates that 11.7 million

leather shoes ar

kenya leather industry diagnosis strategy and action plan

Documents