The Indian Leather industry is vital for the Indian economy with its substantial export earnings and strong growth potential. Revenues have grown from $2,495 million in 2004-5 to $ 3,598 million in 2008-9 and, the industry employed 2.5 m people rising to an estimated 3.5 million this year – most of whom are in the highly fragmented primary processing and flaying phase. An estimated 75% of this production capacity is from small scale cottage and artisans – the informal sector; and this needs to be addressed in terms of skills and the financing of much needed technological and environmental improvements.

In terms of ouput, the footwear segment is the driver of the industry and India is second only to China with a market share of 13 per cent of the global total of16 billion pairs. Overall, India produces 2 billion pairs and exports an estimated 115 million pairs. There are aggressive plans to increase footwear production and exports from $1.53 billion to well over $3 billion by 2013-14. This will take a significant effort to build on recent upgrades of machinery to world class equipment manned by highly skilled technicians.

India produces over 2.5 billion square feet of leather per year – which is 10 per cent of the global market – and is the 5th largest exporter of leather goods and accessories.  Currently, the industry is being transformed with fresh thinking on business development split into two areas – strategic and operational.

In strategic terms, there is a significant need for a more professional grasp of design requirements overseas. Having said that there is clear evidence that various players are building capability to match the very best. Years back, I used to buy my business bags from Coach in the USA and recently, I replaced it with a terrific design from Fabindia – a brilliant exponent of things Indian and, inclusive growth strategies. Hidesign is another illustration of innovative design as is output from Auroville – both from Pondicherry. All of these brands pay increased attention to detail in production techniques and add quality of accessories to the superb finish of the leather itself. Couple with innovative packaging the look and feel is of a more sophisticated offering set to match any brand on the world stage.

Hidesign is a recognised leader in the research of the ecological use of vegetable tanned leathers for its leather goods. Their website illustrates how they have learned from the centuries old skills of tanning with natural seeds and barks. This has a significant ecological impact. Almost all leathers today are chrome tanned and coated by heavy finishes which is one of the worst polluters. Vegetable tanning greatly reduces the hazards of environmental pollution. This process uses natural extracts from barks of Wattle trees and Myrobalam seeds found in local forests of South India. It takes almost 30 days to cure these leathers while chemically treated chrome leathers are made in 4-5 days. Then, to finish the look off accessories have been upgraded and these are made of solid brass instead of zinc alloys. This minimises electro plating.

The Hidesign factory at Pondicherry is another element in this quality and ecologically sound platform. Designed and built by Ray Meeker, the well known low cost ecological building expert who has built ponds, waterfalls and streams into the layout of the factory. No asbestos is used anywhere in the factory and all waste water at the factory goes through filtration and is reused. All waste material is also separated and reused or sold for reuse.

In operational terms priorities start with optimising the sourcing of raw materials and closer collaboration with the meat processing industry has been developed to ensure quality raw materials and, increase levels of import substitution. In parallel, the industry is addressing a range of environmental issues in terms of effluent and, energy utilisation – though the key issue is to standardise across the States and clear up current fragmentation. This project is coordinated by the BDS (Business Development Service) and Entrepreneurship Development of India (EDI) and supported by SIDBI.

The leather cluster in Tamil Nadu accounts for 60 per cent of India’s output with Chennai generating 25 per cent of the total and the rest coming from areas such as Ambur, Vaniyambadi, Pernampet, Vellore and Ranipet near the City and over 50 per cent of production concentrated in the Palar Valley in the northern part of the state. In revenues, this represents over £500 million and is considered by UNIDO one of the most dynamic clusters worldwide. The region employs over 50,000 people directly working in or for 150 small tanneries and nearly 300 SMEs. The tanning process employs about 15,000 and footwear over 25,000 people and women accounting for 70 per cent of the workforce.

The industry has seen a significant shift in recent years from exporting raw materials to added value design based products and, as the work of various pioneering brands featured above illustrates Indian leather goods have been transformed and this will provide a significant platform to develop the industry and, hopefully, for this to become a beacon of global standards for other industries with a significant formal and informal mix in their operational roots. In particular, there is no better example of how going green can be part of the added value that will raise India’s profile on the world stage.

This is an important argument against those who think of environmental concerns adding cost to the process when, in fact, improved infrastructure, logistics techniques and skills can transform economic, social and environmental outcomes in a significant way. In terms of world trade, these developments in the Indian leather industry are demonstrating how to add value in an emerging economy and not rest content to be the raw material supplier for more developed economies. And this trickle could become a flood.

Article by: Rob Bell, Transformational Logistics Blog

Vietnam’s textile industry has increased significantly since normalizing relationships with the United States in the 1990’s. Vietnam was granted most favoured nation status (MFN) in December 2001, which led to a dramatic reduction in import tariffs in the US market. Vietnam’s induction to the World Trade Organization (WTO) in 2007 and the Vietnamese government’s strong support of the textile and garment sector, have provided strong incentives to attract foreign investors.  The textile industry is now the second biggest exporter in Vietnam and is expected to become the biggest in 2009. However the financial crisis has had a severe affect on Vietnam’s textile industry, which has suffered from a slump in demand from key export markets in the US, Europe and Japan.

Labour cost advantage

In the textile industry, companies are increasingly looking for lower cost countries that can provide outsourcing opportunities. The rising cost of land and labour are diminishing China’s labour cost advantage and Vietnam is increasingly seen as a low cost sourcing alternative to China. Estimates are that wage levels in Vietnam are about one third of those in China’s coastal region.  Companies that are chasing lower labour costs are increasingly moving production to Vietnam. In a 2008 Booz Allen Hamilton survey 88 percent of companies originally chose China for its lower labour costs. Of the companies surveyed, 55 percent believe China is losing its competitive edge to countries such as Vietnam. The survey also indicated that 63 percent named Vietnam as their top low cost sourcing alternative to China. However, costs may be rising.  The Navigos Group, a leading recruitment solutions provider in Vietnam, announced early in the year that there had been a 16.47 percent increase in Vietnamese workers’ average gross salaries between April 2008 and March 2009.

Low cost location

However, low cost labour is hardly a competitive advantage in the long term. Labour cost keeps changing and today’s low cost location is not necessarily tomorrow’s viable outsourcing location. If it is not China or Vietnam, it could be Bangladesh or Cambodia. Ig Hortsmann, a professor of business economics at the University of Toronto’s Rotman School of Management notes that Nike originally off shored manufacturing to Japan.  As labour costs increased, manufacturing was later moved to South Korea and Taiwan. When labour cost increased in South Korea and Taiwan, it was moved to China and later also to Vietnam.  Justin Wood, a Director of the Economist Intelligence Unit Corporate Network in Singapore makes the point that in the last 15 years Vietnam has moved from a low to a middle income country. The move towards a middle income will likely put additional pressure on Vietnam’s low cost labour status.

The Vietnam advantage

Elisabeth Rolskov, founder of ER-Couture in Vietnam, notes that manufacturing advantages in Vietnam go beyond labour cost and the country has some competitive advantages compared to China. “Vietnam has very good embroidery skills and needle work”, says Rolskov. “A lot of designers and manufacturers need embroidery skills and Vietnam has kept in touch with its traditional roots,” she adds.

However, for local designers, Vietnam has limitations as a sourcing location. “Sourcing material, buttons and zippers from Guangzhou is much better,” says Rolskov.  In Guangzhou you can find everything in air-conditioned shopping areas and the shopping experience is less hectic.” This can have a negative impact on a designer’s creativity as the designer is restricted by what is on offer in the local market.

Rolskov thinks Vietnam is currently a great location for smaller manufacturers as the market is more flexible. “China is more volume focused”, adds Rolskov, a view supported by Rebecca Lebold, director of apparel product and technical development at Lilly Pulitzer. “Vietnam has higher production minimums than many other countries. Lower minimums would allow smaller companies to source their product in Vietnam”, Lebold notes.

Intellectual property threat

For many companies outsourcing to Vietnam, intellectual property (IP) remains a concern. Within the fashion industry, IP is not as enforced as it is within the film and music industries. Designers can “take inspiration” and it is seen as a major driver for setting trends in the industry.   The World Intellectual Property Organization (WIPO) has called for stricter intellectual property enforcement within the fashion industry to better protect companies and promote competitiveness within the textile and clothing industries. “It is a hard thing to take care of and you just have to be faster than everybody else”, says Rolskov.  For smaller designers and labels it is much easier to switch manufacturing.  However to prevent the copying of designs is a challenging undertaking.

Infrastructure development

For Vietnam to advance as an outsourcing location, the textile industry supply chain needs to be considered.  Local logistics are influenced by direct and indirect cost.  In Vietnam’s textile industry raw materials are often imported, which increases cost compared with those countries able to source locally. Managing reverse logistics can also be a challenging undertaking in Vietnam.  Procedures, processes and infrastructure are sometimes not in place to manage repairs, returns and warranties.

According to a new market research report from Transport Intelligence (Ti) entitled Vietnam Logistics 2009, the high cost of logistics remains one of the biggest stumbling blocks in Vietnam. According to TI analyst John Manners Bell, logistics costs are estimated at 25 percent of Vietnam’s GDP. Even with cheap labour cost, poor infrastructure remains a major barrier for entry.   This is largely due to Vietnam being in the early stages of infrastructure development.

Many experts believe that China’s advanced infrastructure gives it a major competitive advantage. Electricity and transportation costs will likely come down even further and and  this will have a significant impact on the total cost, even if their labour is more costly. The Vietnamese government is aware of this dynamic and has invested billions of dollars in the country’s infrastructure.  The government is actively encouraging foreign direct investment in the country’s infrastructure. This is visible with projects such as the Cai Mep Container Port in the Mekong River Delta and the new Long Thanh airport that’s projected to be completed by 2015.

Through assessing the overall supply chain, rather than a singular focus on labour costs, it is easier to identify where Vietnam’s opportunities and challenges lie in the textile industry.  While small scale designers and manufacturers take advantage of a flexible environment, infrastructure and logistics processes will need further investment to make Vietnam an outsourcing destination and source for tomorrow’s fashionista wardrobes.

JvN: Holcim (Vietnam) Ltd. is a leading producer of cement and ready-mix concrete. The company was registered in February 1994 as a join-venture company between Holcim Ltd. and Vietnam Cement Industry Corporation (VICEM), a state owned enterprise of Vietnam. Holcim Vietnam employs around 1,500 people at its five main sites.  Our current focus is in South Vietnam and in particular Ho Chi Minh City and the Mekong Delta.

TN: With the current economic climate and with new capacity coming online, experts have warned of an oversupply in the Vietnam market. How do you think oversupply will affect you?

There is a concern about oversupply. However, globally there is an oversupply and the situation is not unique to Vietnam. Countries like the US used to be net importers of cement but are now net exporters. In Vietnam there is more capacity being built and this will put more pressure on prices.  However, we are very positive about Vietnam’s economic prospects and continued foreign direct investment. The future of infrastructure projects is bright and this will have a positive impact on our business.

TN: Can you tell us more about your distribution strategy?

We currently have direct control over our bulk delivery. We operate a fleet of bulk vehicles that we schedule and control to ensure improved efficiency and improved value for customers. Currently, bulk sales volumes  represent about 35% of our total sales with bagged cement being the balance. The level of bulk sales is often used as an indicator of relative sophistication of a market. In Vietnam this ratio is steadily growing as the market develops. Compared with some other markets we have a lot of scope for growth. In the USA or Europe for example bulk sales represent 95% of volumes in many sub markets. We expect to see a growth in bulk sales and bulk delivery will form a key part of our distribution strategy in the future. For our bag business, customers are collecting directly from our facilities and it is definitely a part of our supply chain that we want to improve on. With better control and scheduling, we can reduce the bottlenecks at our facilities to improve cycle times and so improve customer service.

TN: How important are distributors to your business?

JvN: Distributors form an important part of our supply chain strategy. At the same time we have a need to get closer to our end consumer to better understand how we could add further value and our distributor network is one area we would like to focus on to help deliver improvement. We have several distributor programs and the key is to find distributors that know the market and add value to our business. This can sometimes be challenging. The market in Vietnam is highly fragmented and competitive and exclusive distributors are rare. It is not uncommon in Vietnam for a distributor to sell three different brands of cement.

TN: Can you give us an overview of the technology you are using in your supply chain?

JvN: Holcim uses SAP in all of the more than seventy countries where we operate. We are currently not integrated up to distributor level and it is definitely something we will address in the not too distant future.

TN: Transportation overloading is a big problem in Vietnam. How are you addressing this as a company?

JvN: Overloading is a huge problem in Vietnam and it is something that Holcim take very seriously. We also want to move away from old technology tankers and we see a big potential for aluminum tankers with a bigger capacity.