the launch of the priority manufacturing sector value chain reports
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Leather sector Findings and Recommendations
October 2015
Launch of the Priority Manufacturing Sector Value Chain Reports
Contents
I. Global Trends – Demand & Supply
II. Kenya Leather Sector Analysis
III. Competitiveness Analysis
IV. Key Strategic Directions, Actions & Scenarios
Market Demand for Leather Goods Far Exceeds Supply in Africa
3Source: UN Comtrade
• The global market growing at 5% annually
• Sub‐Saharan African market demand estimated to grow at 10%
• Only a few countries with vibrant leather industry in SSA
InsightsKey Trends in Sub‐Saharan Africa
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
2012 2013
USD
'000
s
Export Import
Leather Footwear Import
vs Export
Leather Footwear
Production vs Demand
Demand
Supply
Trade Deficit
Source: UNIDO
Source: UN Comtrade
Contents
I. Global Trends – Demand & Supply
II. Kenya Leather Sector Analysis
III. Competitiveness Analysis
IV. Key Strategic Directions, Actions & Scenarios
Kenya Leather Products: Footwear dominate production, handbags show promise
Source: ETG Primary Research 4
Kenyan Leather Footwear Products are mostly basic shoes: School Shoes, Sandals, Men’s Shoes, Military/Security Boots
6Source: ETG Primary Research
Total market for footwear in Kenya is estimated at 42 million pairs per year.
Mitumba Dominates Footwear Market: 63%26.5 million pairs/year
Source: Primary research, modified Delphi Analysis7
63%
32%
5%
Kenyan leather footwear accounts for small share of total 42m footwear market ~ only 3.3m pairs (8%)
8
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
2nd Hand‐Mitumba New‐Low Cost New‐Mid Cost New‐High Cost
Pairs
(Millions)
Market Share of Total Footwear Purchased by Price
Non‐Leather Leather‐imported Leather‐Kenyan
Kenya share of leather shoesonly 22% (3.3m pairs)
“Wet Blue” Accounts for 89% of Total Leather Exports……industry must move to higher value added leather manufacturing
Raw Hides & Skins
Wet Blue & Crust
Finished Leather
4
$ 3.5 Million$ 6.7 Million $ 131 Million $ 5.6 Million
Animal Husbandry and
Leather Products
Tanning ManufacturingAbattoirs & Traders
Labor Intensive Capital Intensive Labor Intensive
Employment
Capital/Labor
Intensity
Export Value*
Greatest Value Addition & Employment Potential
31,600(11,600 Slaughter Houses/Slabs20,000 traders)
Source: UN Comtrade, 2014 Kenya Statistical Abstract, ETG Primary Research
12,9341,077
Employment in Leather Industry: Majority is Informal Sector and Growing, Formal Sector Stagnant
10
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
2009 2010 2011 2012 2013
Employmen
t
Employment in Leather Industry
Tanning Footwear Handbags, luggage, etc. Sub‐Total Informal Sector (Jua Kali)**
10,000
1,075
1,859
1,077
Source: 2014 Kenya Statistical Abstract, ETG Primary Research
14,011
TanningFormal Sector Leather FootwearHandbag, luggage, etc.
Informal SectorLeather Products
Informal Sectoraccounts for 63% of total
leather industry employment
11
Informal Sector2/3 of Leather
Footwear
Formal Sectorproduces 1/3 of
LeatherFootwear
89% of Total Leather Export
in Wet blue
Minimal Linkages Between Formal and Informal
Sector
Kenya’s Leather Cluster: Complex, yet fragmented
Contents
I. Global Trends – Demand & Supply
II. Kenya Leather Sector Analysis
III. Competitiveness Analysis
IV. Key Strategic Directions, Actions & Scenarios
13
012345678
Availability of raw materials
Quality of raw materials
Access to/cost raw materials
Access to finance
Sustained capital investment
Degree of vertical integration
Tech sophistication ofequipmentProcess skills
R&D
Product development
Tradition in the industry
Unique skills within sector
Product perception by market
Kenya
Benchmarking & Gap Analysis Kenya’s competitiveness lags significantly behind global competitors
14
012345678
Availability of raw materials
Quality of raw materials
Access to/cost raw materials
Access to finance
Sustained capital investment
Degree of vertical integration
Tech sophistication ofequipmentProcess skills
R&D
Product development
Tradition in the industry
Unique skills within sector
Product perception by market
Kenya
Ethiopia
Benchmarking & Gap Analysis Kenya’s competitiveness lags significantly behind global competitors
15
0123456789
10Availability of raw materials
Quality of raw materials
Access to/cost raw materials
Access to finance
Sustained capital investment
Degree of vertical integration
Tech sophistication ofequipmentProcess skills
R&D
Product development
Tradition in the industry
Unique skills within sector
Product perception by market
Kenya
Ethiopia
China
Benchmarking & Gap Analysis Kenya’s competitiveness lags significantly behind global competitors
16
0123456789
10Availability of raw materials
Quality of raw materials
Access to/cost raw materials
Access to finance
Sustained capital investment
Degree of vertical integration
Tech sophistication ofequipmentProcess skills
R&D
Product development
Tradition in the industry
Unique skills within sector
Product perception by market
Kenya
Ethiopia
China
Italy
Benchmarking & Gap Analysis Kenya’s competitiveness lags significantly behind global competitors
17
1
$4.40 $3.72
$2.75
$2.27
$1.10
$0.55
$0.17
$0.03
$0.39
$0.31
$0.09
$0.06
$0.55
$0.34
$0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
$8.00
$9.00
$10.00
Kenya Ethiopia
USD
Leather(Sheep Skin)
Soles, Buckle, Other Inputs
LaborElectricityPackaging
MaintenanceOther Cost
$ 9.24 $ 7.28
Value Chain Cost Analysis: Kenyan low cost leather men’s shoes are even more expensive than Ethiopian loafers
Other Cost 62%
Maintenance 47%
Packaging 24%
Electricity 450%
Labor 100%
Other Inputs 21%
Leather 18% (sheep skin)
Cost Difference
Total Cost 30%
Cost Difference
Low cost men’s shoe Low cost men’s loafer
18
1
$4.40 $3.72
$2.75
$2.27
$1.10
$0.55
$0.17
$0.03
$0.39
$0.31
$0.09
$0.06
$0.55
$0.34
$0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
$8.00
$9.00
$10.00
Kenya Ethiopia
USD
Leather(Sheep Skin)
Soles, Buckle, Other Inputs
LaborElectricityPackaging
MaintenanceOther Cost
$ 9.24 $ 7.28
Value Chain Cost Analysis: Kenyan low cost leather men’s shoes are even more expensive than Ethiopian loafers
Other Cost 62%
Maintenance 47%
Packaging 24%
Electricity 450%
Labor 100%
Other Inputs 21%
Leather 18% (sheep skin)
Cost Difference
Total Cost 30%
Cost Difference
Low cost men’s shoe Low cost men’s loafer
Kenya is significantly less competitive, and not yet ready for
FDI.
Key competitiveness constraints are: 1) lack of supply and quality in raw hides & skins, and 2) high costs and low quality in manufacturing, 3) lack of industry coordination
Tanning ManufacturingAbattoirs & Traders
Cross Cutting
Constraints
• Low quality raw hides and skins
• Low supply/high cost of hides and skins
• Big volume of raw hides and skins smuggling
• Lack of quality effluent facility• High environmental cost• High health
• Few tanneries processing finished leather
• High cost of inputs (leather, soles, etc.)
• Relatively high labor cost
• Low availability of quality finished leather
• Lack of skilled artisans and technicians & access to training
• Lack of machinery
Lack of Industry coordination
Key Constraints
Are proposed policies addressing present constraints??
Competitive Positioning for KenyaLeather Footwear
Differentiation
Undifferentiated Unique Qualities
ProductScope
Low‐EndShoesBoots
High‐EndShoes
China• Continuing to grow but, declining market share
• slight movement upscale
Vietnam
India
Ethiopia
Italy
Kenya2014
2020
2005
• Continual movement upscale
•Continuing to grow increasing market share
• Movement upscale • Increasing
market share of low cost footwear
•Rapidly growing in low‐end footwear
•Continuing to grow with FDI
Competitive Positioning for KenyaLeather Footwear
DifferentiationUndifferentiated Unique Qualities
ProductScope
Low‐EndShoesBoots
High‐EndShoes
China• Continuing to grow but, declining market share
• slight movement upscale
Vietnam• Continuing to grow increasing market share
• Movement upscale
India• Increasing market share of low cost footwearEthiopia
•Rapidly growing in low‐end footwear
•Continuing to grow with FDI
Italy•Continual movement upscale
Kenya2014
2020
2005
Near‐term StrategyIncrease share in local market and Increase exports to regional market (EAC)
Mid‐term StrategyGrow exports and attract FDI
How?By reducing costs, increasing quality of leather inputs, local procurement. Increasing skills and productivity of informal sector
China
Vietnam
India
Ethiopia
Italy
Competitive Positioning for KenyaLeather Handbags, Travel Ware, & Cases
Differentiation
ProductScope
Low‐EndProducts
High‐EndProducts
Kenya2020
Kenya2013
Undifferentiated Unique Qualities
China
Vietnam
India
Ethiopia
Italy
Competitive Positioning for KenyaLeather Handbags, Travel Ware, & Cases
Differentiation
ProductScope
Low‐EndProducts
High‐EndProducts
Kenya2020
Kenya2013
Undifferentiated Unique Qualities
Overall Strategy1. Increase share in global
markets (EU, USA, EAC, COMESA)
How?Increase Kenyan brand recognition, “Buy Kenyan”, locaprocurement, joint marketing,increase worker skills, B‐2‐B connections, access to design,Increase FDI
Contents
I. Global Trends – Demand & Supply
II. Kenya Leather Sector Analysis
III. Competitiveness Analysis
IV. Key Strategic Directions, Actions & Scenarios
Strategic Leather Product & Markets Targets
Finished Leather
PRODUCT MARKET
Low value added leather footwear
Low cost men’s shoes, school shoes, Security/Military Boots Kenya, EAC
High value added specialty products
Handbags, travel ware, cases US, EU
Specifications of cut size, color, texture, pattern
China, EU
Three Strategies for Enhancing Leather Industry Competitiveness & Growth
26
1. Increase Access to Markets & Induce Greater Demand for Kenya Leather Products‐ Grow domestic market share‐ Increase EAC share‐World play in niche markets
1. Increase Access to Markets & Induce Greater Demand for Kenya Leather Products‐ Grow domestic market share‐ Increase EAC share‐World play in niche markets
2. Build Quality/Standards, Reduce Costs‐ Improve Production Process Technology and Machinery‐ Improve Skills‐ Enhance Enforce Quality & Standards
2. Build Quality/Standards, Reduce Costs‐ Improve Production Process Technology and Machinery‐ Improve Skills‐ Enhance Enforce Quality & Standards
3. Improve Governance & Strengthen Collaboration in Leather Industry• Institutional strengthening• Cluster Building
3. Improve Governance & Strengthen Collaboration in Leather Industry• Institutional strengthening• Cluster Building
3 Competitiveness Strategies & 18 Key Actions
27
2. Build Quality/Standards, Reduce Costs
2.1 Improve Production Process, Technology and Machinery 2.1.1 Establish Leather Product Development Accelerators (or "Leather Wealth Creation Centers")i. Nairobi Leather Accelerator (for formal sector)ii. Kariokor Leather Business Acceleratoriii. 2.1.2 Develop Leather City / Industry Park2.1.3 Strengthen Incentives and Decrease Import Duties on Leather Tanning and Leather Product Production Inputs
2.2 Improve Skills 2.2.1 Restructure and Upgrade TPCSI—the Training and Production Center for the Shoe Industry 2.2.2 Strengthen University Leather Design, Technology, and Marketing Capacities2.2.3 Enhance Human Resource Placement Services for Leather Industry2.2.4 Improve and Extend Professional Certification Programs for Leather Industry2.2.5 Strengthen Professional Development Organizations
2.3 Enhance and Enforce Quality & Standards2.3.1 Promote Greater Adoption of Quality Leather Processing Certification 2.3.2 Develop Leather Award and Recognition Programs2.3.3 Increase Enforcement of Quality Standards for Imported Leather Products2.3.4 Initiate Regional Branding of Leather Industry to Promote Specialization
1. Increase Access to Markets & Induce Greater Demand for Kenya Leather Products
Action Initiatives:1.1 Develop a Leather Marketing Entity to Increase Domestic and International Awareness, and Coordinate Branding of Kenya Leather 1.2 Promote International Match-Making between Crust and Finished Leather Buyers and Kenyan Producers.1.3 Design Transparent Public Procurement Policy 1.4 Introduce Mass Customization of Made-to-Order Shoes
3. Improve Governance & Strengthen Collaboration in Leather Industry
Action Initiatives:3.1 Establish a Leather Industry Working Group & Strategy Implementation Process3.2 Strengthen KLDC--Kenyan Leather Development Council
28
Strategy 1. Increase Access to Markets & Induce Greater Demand for Kenya Leather Products
Develop a Leather Marketing Entity
INVESTMENTVALUE ADDED
LOW IMPLEMENTATION
COST
Promote International Match‐Making
Design Transparent Public Procurement Policy
HighLow
EMPLOYMENT
Mass Customization of Made‐to‐Order Shoes
EXPECTED IMPACTSEASE OF
IMPLEMENTATION
29
Strategy 2. Build Quality/Standards, Reduce Costs
LWCC—Common Mfg Facility
Improve Production, Tech, & Machinery INVESTMENT
VALUE ADDED
LOW IMPLEMENTATION
COST
Kariokor Business Accelerator
Leather City / Industry Park
HighLow
EMPLOYMENT
Duties Reduction on Leather inputs
EXPECTED IMPACTSEASE OF
IMPLEMENTATION
Improve Skills
Upgrade TPCSI
Strengthen University Capacities
Improve HR Placement Services
Increase Enforcement Import Standards
Enhance Quality/Standards
Develop Leather Award Programs
Promote Quality Leather Certification
Regional Branding, Promote Specialization
30
Strategy 3. Improve Governance & Strengthen Collaboration in Leather Industry
Establish a Leather Industry Strategy Implementation Process (Clustering)
INVESTMENTVALUE ADDED
LOW IMPLEMENTATION
COST
Strengthen KLDC
HighLow
EMPLOYMENT
EXPECTED IMPACTSEASE OF
IMPLEMENTATION
LEATHER WEALTH CREATION CENTER (LWCC)A Common Manufacturing Facility to Consolidate the Leather Potential in Kenya
Private Sector Facility to pool and upscaleleather articles production capability
Establishment of a private sector‐led common manufacturing and marketing platform to enable collective generation of competitive leather products
A pilot center will be established in Nairobi and then replicated in the 8 regions.
Joint production and marketing projects will be undertaken at the Center, for example, beginning with a project on production of competitive school shoes (“one child, one pair”)
STRATEGIC IMPORTANCE: Access to existing, state-run common manufacturing facilities--TPCSI and KIRDI--is limited because of location and a bureaucratic (top down) service orientation to producers
CORE OBJECTIVEA vibrant & functional
CMF producing Competitive products for the local, regional & International markets
Estimated budgetYear 1: US$ 545,000
Action Plan
Activity Responsible Date
Review of Success factors/ lessons learned for common manufacturing facilities in Africa, in world. UNIDO, JICA, KOICA
Beatrice & Maurice 5th December 2014
Develop initial draft project proposal Beatrice & Maurice, Dr. Onyuka, Hezakiah
27th February 2015
Meetings with Stakeholders for input and feedback to proposal
Beatrice & Maurice, Dr. Onyuka, Hezakiah
16th Dec (round 1); 15 February (round 2)
Endorsement of LAEA, other leather sector stakeholders and Assoc (tanners, cobblers, etc.. Min of Ind., KIE, KEBS, KIRDI, EPC, KIPI, universities (Kenyatta and Nairobi Universities, Kenya Technical Univ.)
Beatrice & Maurice, Dr. Onyuka, HezakiahJennifer
31st March 2015
Hire expert to conduct feasibility study for the proposed common mfg facility
Beatrice & Maurice 5th March 2015
Establish a Steering Team Beatrice & Maurice, Dr. Onyuka, Hezakiah
15th February 2015
Mobilize resources (HR, financing, equipment, space) Beatrice & Maurice, Dr. Onyuka, HezakiahJennifer, Steering Team
31st June 2015
Action Plan (Continued)
Activity Responsible Date
Establish pilot operation Steering Team 15th September 2015
Monitoring & Evaluation Ex- ante, Formative, Process, Outcome
Identify resources (HR, financing, equipment, space)
Beatrice & Maurice, Dr. Onyuka, HezakiahJennifer +Steering Team
15 June 2015
Mobilize resources for launching pilot common manufacturing facility
Beatrice & Maurice, Dr. Onyuka, HezakiahJennifer +Steering Team
15 August 2015
Develop operations guidelines to govern shared use of common facilities Steering Team 10 June 2015
Establish pilot operation Beatrice & Maurice, Dr. Onyuka, HezakiahJennifer +Steering Team
15 September 2015
PRODUCTS/ RESULTSMeasures of Success
• Proposal endorsed by stakeholders– December 20, 2014
• Identified sources of finance– March 15, 2015
• Mobilizing investments, Sourcing equipment, etc.– June 15, 2015
• Launch of LWCC Nairobi pilot facility– November 15, 2015
INFLUENCE LEADER(s)– Beatrice Mwasi, LAEA– Hezekiah Okayo, Min of Ind.
TECHNICAL LEADER(s)– Maurice Omondi, LAEA– Dr. Onyuka (KIRDI)
INTIATIVE ACTION TEAM– Rebecca Mpaayei (EPC)– Jennifer Mulli (LAEA)
Leadership of LWCC
Kariokor Leather: Common
Manufacturing Center
(KLCMC)
“technology improvement and innovation, work sites, and a bias in public procurement in favor of the small scale”
Seasonal Paper No. 2 of 1992 on Small Enterprise and the Jua Kali Development in Kenya
Kariokor Leather: Common Mfg CenterEstablish a workshop with basic
production machinery (Clicking, Skiving, Splitting, Embossing,
Lasting machines)
Provide production, technical and business training to Kariokor MSMEs to improve quality while keeping the production cost low
Estimated budgetPhase 1: US$ 70,300
CORE OBJECTIVEA vibrant & functional CMCproducing competitive products for the local &
regional markets
Job creation, poverty reduction, skill development.
Establish that Kariokor Market can produce quality shoes and leather articles at a good price.
Access to material (finished leather, good quality, good price)
Access to Machinery
Create awareness through the media that Kariokormarket is the best producer of authentic leather shoes and articles in Africa!!
Strategic Importance
PRODUCTS/ RESULTSMeasures of Success
• Specification of machinery needed– August 2015
• Secure space for workshop facility– December 15, 2015
• Mobilizing investments, acquiring machinery– January 15, 2016
• Launch of KariokorLeather CMC– February 1, 2016
LEADERSHIP• INFLUENCE LEADERS
– Aden Mohamed, CS, Ministry of Industrialization– Dr. Evans Kidero (Governor Nairobi County)– (Leather Industry of Kenya, Agha Khan Foundation)
• TECHNICAL LEADERS– Nicholas Mutisya, Chair, Nairobi Cty Cobblers Assoc.– Peter Kitheka Treasurer, Nairobi Cty Cobblers Assoc.
• INTIATIVE ACTION TEAM– Charles Ndung’u (CEO, KLDC)– Kabiru Ndonga, (Chairman, Kariokor Market)– Patricia Jesse, (Sec. Nairobi Cty Cobblers Assoc.)– Mrs. Ongoro (County Minister for Trade & Industry– Maina Kamanda (MP – Starehe Constituency)– County Mechanical Engineer
Leather City: High potential impact, but needs to be market tested
39
A successful leather industry park will solve three critical constraints:
• A common effluent treatment to bring down the highcosts of water effluent treatment
• Co‐location/clustering to offset industry fragmentation• Logistics and document facilitation to reduce trade
barriers
Key Questions:
1. Prepare detailed business plan: Is Athi River best site? What are initial costs of ensuring sufficient water supply? Benefits of locating near the EPZ?
2. Pre‐Market Testing Who is willing to locate in park and what is demand/willingness to pay for services?
4. Develop Master PlanWhat economies of scale and linkage benefits can be maximized?
3. Econ/Tech./Env. Anal‐ysis Are high costs of infrastr. (water & treatment) offset by benefits of jobs created and revenues?
5. Identify Private Developer‐PPP Which private sector developers have expressed interest? Need for “market test” of viability?
6. Find Anchor Tenants & Donor Financing What are the learnings from DongoKundu (e.g., Toyota & JICA)?
Leather Industry Park RecommendationsWork with the private sector
40SEZ: Lessons for Kenya from global experience
Private sector participation (as developers / PPP) critical for several reasons
− Financial risk‐sharing
− Speed of implementation
− Technical expertise
− Market signal
Examples: Dominican Republic, Colombia, Philippines, Kenya
Important to get the legal framework / incentives right…
History of successful private
zones
Recent developments –Mombasa FTZ
Key competitiveness constraints are: 1) lack of supply and quality in raw hides & skins, and 2) high costs and low quality in manufacturing, 3) lack of industry coordination
Tanning ManufacturingAbattoirs & Traders
Cross Cutting
Constraints
• Low quality raw hides and skins
• Low supply/high cost of hides and skins
• Big volume of raw hides and skins smuggling
• Lack of quality effluent facility• High environmental cost• High health
• Few tanneries processing finished leather
• High cost of inputs (leather, soles, etc.)
• Relatively high labor cost
• Low availability of quality finished leather
• Lack of skilled artisans and technicians & access to training
• Lack of machinery
Lack of Industry coordination
Key Constraints
Are proposed policies addressing present constraints??
STRENGTHEN KLDC
• More responsibility and power for coordinating all leather institutions (TPSCI, KIRDI, AHITI), and other institutes
• Coordinate the leather sector stakeholders • Allocate more financial resources to enable KLDC to execute its mandate.– Coordinating leather sector activities– Carry out regulatory functions– Support accelerators and common manufacturing– Policy development and implementation– Capacity building– Market development
42
Employment Impact of Proposed ActionsScenarios of the Future
Modest improvement in competitiveness of informal sector, formal sector stagnant
“Do Nothing“ Scenario
“Partial Action” Scenario
“Action across the VC” Scenario
Improvement in competitiveness of both formal and informal sectors
Strong competitiveness of formal & informal sector, plus growth in FDI
10
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
2009 2010 2011 2012 2013 2015 2020 2025
44
Employment Impact of Proposed ActionsScenarios of the Future
Based on estimate of 1,667 jobs per million pairs of shoes produced, if Kenya was able to increase its competitiveness, market share, and annual production of shoes, by 10 million pairs, from its current 3.3 million pairs of shoes, to 13.3 million pairs of shoes, then employment in the leather industry would roughly double from 15,000 to 32,000. This estimate is roughly consistent with Scenario C above.
Kenya currently produces 3.3 million pairs per annum, and employs an estimated 5,500 in leather footwear
Country
Leather footwear production*
(million pairs per annum)
Leather footwear employment** (1,000 workers)
Employment generated (jobs per 1 million pairs
produced)
Worker productivity
(pairs per worker per annum)
Projected new employment
from 10 million additional pairs
Vietnam 1,172 700 597 1,674 5,900
China 3,120 2,702 866 1,155 8,660
Turkey 79.7 100 1,255 797 12,500
India 909 1,500 1,650 286 16,502
Ethiopia 5.9 7.6 1,288 776 12,880
Kenya 3.3 5.5 1,667 600 16,667
Average 1,220 881 12,185Sources: * Production estimates taken from World Statistical Compendium for Raw Hides and Skins, Leather and Leather Footwear 1992‐2011 (FAO)** Employment estimates from national leather industry association reports (Vietnam Ministry of Industry and Trade; China Leather Industry Association; Turkish Statistical Institute; India Council for Leather Exports; Ethiopia—International Food Policy Institute.
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