The leather industry in Poland

THE LEATHER INDUSTRY IN POLAND

Ten years of restructuring – what next?

After 1997 the industry’s results have deteriorated again, despite a period of restructuring and almost 100% of the industry being in private hands.

10 years of restructuring and the present production and organisation state of the industry – does it hold any outlooks for stability and development, competitiveness in the world markets? Or will the industry shrink after Poland’s accession to the EU, being only a place of cheaper labour.

The information in this report focuses on two branches – footwear and tanneries.

1. The organization of the leather industry

Poland’s economic reforms found the leather industry in growing crisis. The organisational structure of the industry was built in the 60’s and 70’s, based mainly on large multi-plant companies, which couldn’t cope with the changing market. One of the main causes of the collapse was the faulty organization of companies – 90% being state-owned. The basic organisation unit was the large multi-plant firm encompassing tanneries, footwear production, frequently also sole unit manufacturing, leatherboard production and spare parts manufacturing. These giants had an enormous social infrastructure i. e.: holiday resorts, schools, medical health centres, housing construction, hotels for workers and even sports clubs. This non-productive field devoured huge financial means. The firms had to be self-sufficient in raw materials (leather, sole units) and equipment (pre-production, cutting, sewing). There were virtually no links between the companies. There was no specialisation or cooperation usually present in footwear manufacturing i. e. Spain and Italy’s footwear industry had this situation, which caused their labour effectiveness to be relatively low despite modern machinery. The large multi-plant firms quickly fell apart; employment, leather and footwear production dropped sharply.

Over the years 1990 – 1993 footwear production dropped two-fold.

As always when the market economy starts to function, the situation begins to stabilise. Many small and medium private firms were set up, based on a craftsmanship structure or on the remains of the large state-owned companies’ property. Many firms were privatised through participation in the National Investment Funds, some even made it to the stock market.

The changes that have taken place over the last decade in the structure of turnover and employment are as follows:

Ownership structure	1990	1993	1995	1996	1997	1998	1999	2000
Turnover Total in mln PLN* Sector % share - private - state - total	1 750 11 89 100	1 050 41 59 100	1 962 52 48 100	2 599 58 42 100	2 627 76 24 100	2 978 79 21 100	3 041 88 12 100	3 070 93 7 100
Employment in thous. Sector % share - private - state - total	85 8 92 100	74 39 61 100	66 56 44 100	64 61 39 100	67 72 28 100	61 75 25 100	51 82 18 100	43 89 11 100

* PLN – Polish Zloty

The leather industry has been almost completely privatised in the last decade and this is its biggest asset in the preparatory period before Poland’s accession to the EU. Also the size and structure of Polish firms is looking more like the typical structure of a company from the EU. The present organization of employment in these firms (employing over 5 people) is as follows:

Branch / number of employees	6 - 20	21 - 100	101 - 250	>250	Total
Tanneries	73	26	7	6	112
Fancy goods makers	279	59	12	2	352
Footwear manufacturers	469	192	6	30	697
Total	821	277	25	38	1 161

2. Production

Here are the figures for footwear and leather production over the last 10 years:

	units	1990	1993	1995	1996	1997	1998	1999	2000
Vegetable-tanned leather	th. tons	4,0	1,7	0,4	0,5	0,6	0,2	0,2	0,2
Chrome-tanned leather	mln m2	20,2	10,8	12,2	12,4	13,4	11,6	8,9	8,7
Total shoe production Including: -with leather uppers	mln pairs mln pairs	105,0 43,3	50,7 20,9	62,8 24,6	69,9 26,9	71,9 27,7	57,1 24,4	50,4 21,5	46,7 18,1

Over the first 3 years of new economic regulations the quantity of production dropped two-fold. This was the result of major structural changes, the liquidation and bankruptcy of many large companies. The private enterprises were only starting to emerge and export to Eastern Europe collapsed.

Since 1994 the situation was beginning to settle down. The ‘Restructuring program for the leather industry’ and the ‘Exprom’ export support program were being implemented. This helped many entrepreneurs attend trade shows abroad, receive help from foreign consultants and also get training.

Vegetable-tanned leather and footwear production had risen.

In the second half of 1996 the Ministry of the Industry and Commerce had qualified the leather industry as an ‘industry with chances’ in the economic structure of the country. Private enterprises were spending more funds in modernising machines, investment outlays rose almost two-fold. The footwear and leather industry was becoming more profitable, export was rising substantially.

The crisis came in 1997, caused chiefly by rising import of cheap footwear from the Far East.

3. Foreign trade and the domestic market

3.1 Footwear

3.1.1 Import

The first half of the 90’s saw rising import, but a large part of it from the Far East was re-exported to Russia and the CIS. An enormous increase of import erupted in 1995, which obviously left a mark on the manufacturing and economic situation of Polish firms.

These are the Poland’s footwear import figures for the years 1994-2000 (in millions of pairs):

Country	1994	1995	1996	1997	1998	1999	2000
Total:	44,3	78,4	113,8	99,0	103,8	63,5	54,1
China	26,0	52,1	88,1	78,6	81,7	18,1	2,5
Taiwan	0,3	0,4	0,5	0,4	0,3	12,9	19,1
Vietnam	0,1	0,3	0,7	2,5	6,4	14,8	16,8
Italy	2,6	4,2	4,2	3,9	3,8	3,4	4,0
South Korea	2,0	2,8	4,1	1,3	0,5	1,8	3,6
Turkey	1,5	4,0	4,7	4,5	5,2	5,2	1,0
Hong Kong	3,5	2,6	3,5	1,9	0,3	1,9	1,1
Thailand	1,1	1,5	1,8	0,8	0,7	0,6	0,5
Indonesia	0,6	0,8	1,6	0,9	0,9	0,6	1,4
Spain	0,1	0,3	0,7	1,3	1,5	0,9	0,7

The enormous import brought about a collapse in footwear production since the second half of 1997. Over the years 1997 – 2000 it dropped by 25,2 mln pairs (by 35%), and as a result leather production also dropped by 35% (by 4,7 mln m2). Also whole industry started to show losses. The Polish Chamber of Shoe and Leather Industry (PCSLI) had been putting forward proposals of limiting import since 1995, but this only came into effect in 1999.

Since 2001 is the last year of additional customs duty, the PCSLI has asked for the tariffs to be sustained by the Ministry of the Economy.

Otherwise, in 2002, import from China would rise again, particularly that Chinese exporters have found other ways of evading the import duties through false certificates of staining import duties on Chinese footwear and introducing import restrictions on footwear from Taiwan and Vietnam is the essential requirement for decreasing import.

Preventing excessive (and often illegitimate) import is the greatest chance for stability on the Polish footwear market.

3.1.2 Export

Apart from import, the influence of export on manufacturer’s profitability cannot be underestimated. A revival came in 1995, and since then export has been quite high.

These are the export quantity, value and average price figures:

EXPORT	1994	1995	1996	1997	1998	1999	2000
Quantity (mln pairs)	13,8	17,2	22,4	27,5	28,3	30,0	29,5
Value (mln USD)	122,2	175,0	220,0	208,7	187,2	190,6	194,9
Average price (USD)	8,86	10,17	9,82	7,59	6,61	6,35	6,61

The export destination was as follows (thousands of pairs):

	1996	1997	1998	1999	2000
Total export:	22 376	27 464	28 271	30 028	29 477
Germany	5 311	6 596	7 344	8 722	8 438
Ukraine	3 160	6 639	5 080	4 372	5 259
Russia	3 797	3 104	1 768	1 279	2 868
Italy	750	751	1 363	1 765	2 033
Czech Republic	1 100	1 347	1 834	1 767	1 452
Denmark	816	604	888	1 017	1 136
France	590	740	920	1 384	1 090
Holland	609	646	730	1 114	948
USA	977	907	583	987	725
Great Britain	1 640	1 727	940	682	654

The years 1998 and 99 saw a significant drop in export to the East, caused by inappropriate government policy obstructing cross-border trade and by the financial crisis in Russia. Fortunately the situation in Russia is becoming stable represented in larger export figures for 2000.

The biggest problem lies in the currency exchange rate. Its variability makes price negotiation and export planning very difficult and the unnaturally strong zloty makes export less profitable.

Since 1990 the government has never introduced any measures assisting or promoting export production.

3.1.3 Domestic supply and footwear distribution

The supply balance in Poland in the years 1999 – 2000 was as follows (million pairs):

	1990	1993	1995	1996	1997	1998	1999	2000
Production	105,0	50,7	62,8	69,9	71,9	57,1	50,4	46,7
Export	22,0	20,6	17,2	22,4	27,5	28,3	30,0	29,5
Import	4,2	32,0	78,4	113,8	99,0	103,8	63,5	54,1
Supply	122,8	62,1	124,0	161,3	143,4	132,6	83,9	71,3

The biggest supply for the market was in 1996 and 97; with unregistered import and illegal markets it amounted to about 180 mln pairs annually.

Since then as a result of falling production and import, footwear supply in Poland has continually decreased. A difficult market did not allow for substantial price rises.

The footwear price index is gradually falling and has always been lower than inflation:

1995 – 117,1 1996 – 109,8 1997 – 108,2 1998 – 107,4 1999 – 106,8 2000 – 105,3

3.1.3 Footwear distribution

The weakest aspect of the Polish Leather industry is the lack of professional footwear distribution. The biggest problem lies in the fact that the small domestic producers don’t have enough capital and concentrate more on competing than cooperating.

In this situation the manufacturers’ only role is quality production. Setting up larger production and distribution structures is difficult because you need to change the producers’ attitude towards giving up some of their rights first. There are some positive features however. Some leading Polish footwear producers are attempting to set up distribution networks, starting up a network of professional retail shops with their own products, i. e. Gino Rossi, But-S, Rylko. The rapidly growing CCC price-point footwear chain is a singularity, but it has met the needs of Polish customers, who are not generally very wealthy. Distribution is the key problem for the footwear industry and these were only exceptions to the rule. It is necessary to solve this challenge but preferable with domestic capital, which unfortunately is rather scarce – alas the need for cooperation. Foreign investors prefer to develop their own networks, e. g. Bata, Garant, Deichman and others.

TANNING INDUSTRY

The problem of this branch that has large unused production capacity is the demand for finished leather and export and on the other hand rawhide supply i. e. domestic purchase, import and export.

The raw hide supply (including wet-blue) over the last decade looked like this:

	1994	1995	1996	1997	1998	1999	2000
Leather production:
- chrome tanned (th m2)	10 900	12 200	12 400	13 400	11 600	8 900	8 700
- veget. tanned (tons)	1 800	400	500	600	200	200	200
Raw hides used	60 460	61 600	60 000	67 800	57 200	46 500	45 800
Export	7 500	5 940	3 890	4 860	7 500	9 650	9 520
Import	21 700	26 930	23 770	23 180	14 400	13 400	23 930
Domestic purchase	46 260	40 610	10 120	49 480	50 300	42 750	31 390

There has been a steep fall in raw hide purchase over the last 2 years (by 38%).

This is the result of lower cattle numbers (smaller beef consumption and a shift towards poultry) and smaller beef export farther east. The second most important raw materials are pig skins. Until the early 90’s flaying of pigs was compulsory and it involved 95% of all slaughter.

After 1992 most slaughterhouses discontinued flaying and domestic supply dropped 4-fold. Also the sheep count has dropped by 90% in the last decade resulting in lower supply.

The difficult raw materials problem in tanning has appeared over the last few months, with the BSE and foot-and-mouth disease panic. Raw hide import, which constituted 53% of all hides used in Poland, had been blocked, with a rise in demand for Polish raw hides in the EU. The next few months will show how the crisis affected Polish and European tanning.

Summary

The difficult situation for the leather industries has affected its financial results, since then the industry as a hole has become unprofitable. However the results for 2000 are a little better than 1998-99.

	1996	1997	1998	1999	2000
Cost ratio (%)	97,4	99,5	102,1	101,6	100,2
Gross profit ratio	+4,4	+2,0	-2,1	-1,6	+0,1
Net profit ratio	+2,0	+0,4	-3,3	-2,9	-1,1
Number of profitable firms (%)	64,5	59,3	46,6	50,5	52,0

The first 7 months of 2001 do not look very promising and depict the bad situation of the industry:

nr	Type	units	7 months of 2001	7 months of 2000	% change
1	Total footwear production	mln pairs	23,4	24,7	-5,3
	including:
	-shoes with leather uppers	mln pairs	9,1	9,9	-8,1
2	Chrome tanned leather	mln m2	3,4	3,8	-10,5
3	Value of production sold	mln PLN	1 594,7	1 629,9	-2,2
4	Average employment	thous.	40	43	-7,0
	including:
	-July	thous.	39	41	-4,9
5	Average wage
	Industry generally	PLN	2 141	1996	+7,3
	Leather industry	PLN	1 312	1252	+4,8
6	Price index (prev. year=100%)
	-leather industry	%	101,1	102,1	-1,0
	-footwear	%	102,0	105,8	-3,6
7	Producers’ stocks
	-leather + artificial leather shoes	mln pairs	2,7	2,6	+3,8
	-shoes with textile uppers	mln pairs	0,9	1,0	-10,0
8	Footwear import	mln pairs	39,2	30,6	+28,8
	including:
	China	mln pairs	1,0	1,2	-16,7
9	Footwear export	mln pairs	13,6	14,1	-3,5
10	Cost ratio	%	100,9	98,8
11	Net profitability of turnover		-0,9	+1,2
12	Gross profitability of turnover		-2,0	-0,1
13	Number of firms with net profit	%	46,7	54,9

First of all, the situation of the Polish leather industry is analogous to the situation of the economy in general. Even the most efficient lobby cannot change the situation in the industry as a whole.

Quick and decisive actions are needed; the elimination of threats and taking advantage of the industry’s assets should assure the existence and successful stability for the Polish leather industry. It should also insure competitiveness on world markets and a suitable place in the ranks of producers from the EU leather industries.