Launch of the Priority Manufacturing Sector Value Chain Reports
Leather sector Findings and Recommendations October 2015
Your log
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 Key Trends in Sub‐Saharan Africa
Insights Demand
• The global market growing at 5% annually
Leather Footwear Production vs Demand
• Sub‐Saharan African market demand estimated to grow at 10%
Supply Source: UNIDO
350,000 300,000
USD '000s
Leather Footwear Import vs Export
Trade Deficit
250,000 200,000 150,000 100,000 50,000 0 2012
Source: UN Comtrade
Source: UN Comtrade
• Only a few countries with vibrant leather industry in SSA
2013 Export
Import
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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
Total market for footwear in Kenya is estimated at 42 million pairs per year. Source: ETG Primary Research
6
Mitumba Dominates Footwear Market: 63% 26.5 million pairs/year
63%
32%
5%
Source: Primary research, modified Delphi Analysis
7
Kenyan leather footwear accounts for small share of total 42m footwear market ~ only 3.3m pairs (8%) Market Share of Total Footwear Purchased by Price 20.0 18.0
Kenya share of leather shoes only 22% (3.3m pairs)
16.0 Pairs (Millions)
14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 2nd Hand‐Mitumba
New‐Low Cost
Non‐Leather
Leather‐imported
New‐Mid Cost
New‐High Cost
Leather‐Kenyan 8
“Wet Blue” Accounts for 89% of Total Leather Exports……industry must move to higher value added leather manufacturing Animal Husbandry and
Raw Hides & Skins
Export Value*
$ 6.7 Million
Wet Blue & Crust
$ 131 Million
Abattoirs & Traders
Employ ment
Capital/ Labor Intensity
Finished Leather
31,600 (11,600 Slaughter Houses/Slabs 20,000 traders)
Labor Intensive
Source: UN Comtrade, 2014 Kenya Statistical Abstract, ETG Primary Research
$ 3.5 Million
Leather Products
$ 5.6 Million
Tanning
Manufacturing
1,077
12,934
Capital Intensive
Labor Intensive
Greatest Value Addition & Employment Potential 4
Employment in Leather Industry: Majority is Informal Sector and Growing, Formal Sector Stagnant Informal Sector 16,000
Employment in Leather Industry
14,011
14,000
Employment
12,000
accounts for 63% of total leather industry employment
10,000
10,000
8,000
Informal Sector Leather Products
6,000 4,000
1,075 Handbag, luggage, etc.
2,000
1,859 Formal Sector Leather Footwear 1,077 Tanning
0 2009 Tanning
Footwear
2010
2011
Handbags, luggage, etc.
Source: 2014 Kenya Statistical Abstract, ETG Primary Research
2012
2013
Sub‐Total Informal Sector (Jua Kali)** 10
Kenya’s Leather Cluster: Complex, yet fragmented 89% of Total Leather Export in Wet blue
Formal Sector produces 1/3 of Leather Footwear
Informal Sector 2/3 of Leather Footwear
Minimal Linkages Between Formal and Informal Sector 11
Contents I.
Global Trends – Demand & Supply
II. Kenya Leather Sector Analysis III. Competitiveness Analysis IV. Key Strategic Directions, Actions & Scenarios
Benchmarking & Gap Analysis
Kenya’s competitiveness lags significantly behind global competitors Availability of raw materials Product perception by market
8 7
Quality of raw materials
6 5
Unique skills within sector
Access to/cost raw materials
4 3 2
Tradition in the industry
1
Access to finance
Kenya
0
Product development
Sustained capital investment
R&D Process skills
Degree of vertical integration Tech sophistication of equipment
13
Benchmarking & Gap Analysis
Kenya’s competitiveness lags significantly behind global competitors Availability of raw materials Product perception by market
8 7
Quality of raw materials
6 5
Unique skills within sector
Access to/cost raw materials
4 3 2
Tradition in the industry
1
Access to finance
Kenya
0
Product development
Ethiopia Sustained capital investment
R&D Process skills
Degree of vertical integration Tech sophistication of equipment
14
Benchmarking & Gap Analysis
Kenya’s competitiveness lags significantly behind global competitors Availability of raw materials Product perception by market
Unique skills within sector
Tradition in the industry
10 9 8 7 6 5 4 3 2 1 0
Quality of raw materials
Access to/cost raw materials
Kenya
Access to finance
Ethiopia China
Product development
Sustained capital investment
R&D Process skills
Degree of vertical integration Tech sophistication of equipment
15
Benchmarking & Gap Analysis
Kenya’s competitiveness lags significantly behind global competitors Availability of raw materials Product perception by market
Unique skills within sector
Tradition in the industry
10 9 8 7 6 5 4 3 2 1 0
Quality of raw materials
Access to/cost raw materials
Kenya Access to finance
Ethiopia China Italy
Sustained capital investment
Product development
R&D Process skills
Degree of vertical integration Tech sophistication of equipment
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Value Chain Cost Analysis: Kenyan low cost leather men’s
shoes are even more expensive than Ethiopian loafers $ 9.24 $ 7.28 Cost Difference $10.00 Total Cost Other Cost $9.00 Maintenance Packaging Electricity $8.00
Labor
$0.55
$0.39 $0.17
USD
$5.00
Other Cost 62%
$0.06
Soles, Buckle, Other Inputs
Cost Difference
$0.34
$1.10
$7.00 $6.00
30%
$0.09
$0.03
$0.31 $0.55
$2.75 $2.27
Maintenance 47% Packaging 24%
$4.00
Electricity 450%
$3.00
Labor 100%
$2.00 $1.00
Leather (Sheep Skin)
$4.40
$3.72
Other Inputs 21% Leather 18% (sheep skin)
$0.00
Kenya
Low cost men’s shoe
Ethiopia
Low cost men’s loafer
1
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Value Chain Cost Analysis: Kenyan low cost leather men’s
shoes are even more expensive than Ethiopian loafers Cost Difference $ 9.24 $ 7.28 $10.00 Total Cost Other Cost $9.00 Maintenance Packaging Electricity $8.00
Labor
$0.55
$0.39 $0.17
USD
$5.00
Other Cost 62%
$0.06
Soles, Buckle, Other Inputs
$0.31 $0.55
$0.03 $2.75
$2.27
$3.00
$1.00
Maintenance 47% Packaging 24% Electricity 450%
$4.00
$2.00
Cost Difference
$0.34
$1.10
$7.00 $6.00
30%
$0.09
Leather (Sheep Skin)
$4.40
$0.00
Kenya
Low cost men’s shoe
Kenya is significantly less competitive, and not yet ready for FDI.
Labor 100%
$3.72
Other Inputs 21% Leather 18% (sheep skin)
Ethiopia
1
Low cost men’s loafer 18
Are proposed policies addressing present constraints?? 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 Abattoirs & Traders
Key Constraints
• • •
Low quality raw hides and skins Low supply/high cost of hides and skins Big volume of raw hides and skins smuggling
Tanning
Manufacturing
• • •
Lack of quality effluent facility • High environmental cost • High health Few tanneries processing finished leather
• • • •
Cross Cutting Constraints
Lack of Industry coordination
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
Competitive Positioning for Kenya Leather Footwear Italy High‐End Shoes
China
• Continual movement upscale
• Continuing to grow but, declining market share • slight movement upscale
Vietnam
Product Scope
•Continuing to grow increasing market share • Movement India upscale • Increasing
Ethiopia 2020
Low‐End Shoes Boots
Kenya 2014
market share of low cost footwear •Rapidly growing in low‐end footwear •Continuing to grow with FDI
2005
Undifferentiated
Unique Qualities Differentiation
Competitive Positioning for Kenya Leather Footwear
Italy
High‐End Shoes
• Continual movement upscale
China • Continuing to grow but, declining market share • slight movement upscale
Vietnam
Product Scope
• Continuing to grow increasing market share • Movement upscale
India • Increasing market share
Ethiopia of low cost footwear 2020
Low‐End Shoes Boots
Kenya 2014
• Rapidly growing in low‐end footwear • Continuing to grow with FDI
2005
Undifferentiated
Near‐term Strategy Increase share in local market and Increase exports to regional market (EAC) Mid‐term Strategy Grow exports and attract FDI How? By reducing costs, increasing quality of leather inputs, local procurement. Increasing skills and productivity of informal sector Unique Qualities
Differentiation
Competitive Positioning for Kenya Leather Handbags, Travel Ware, & Cases
High‐End Products
Italy China
Product Scope
Kenya 2020
Vietnam Kenya Ethiopia
India
2013
Low‐End Products
Undifferentiated
Unique Qualities Differentiation
Competitive Positioning for Kenya Leather Handbags, Travel Ware, & Cases
High‐End Products
Italy China
Product Scope
Kenya 2020
Vietnam Kenya Ethiopia
India
2013
Low‐End Products
Undifferentiated
Overall Strategy 1. Increase share in global markets (EU, USA, EAC, COMESA) How? Increase Kenyan brand recognition, “Buy Kenyan”, loca procurement, joint marketing, increase worker skills, B‐2‐B connections, access to design, Increase FDI Unique Qualities
Differentiation
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 PRODUCT
Low value added leather footwear
High value added specialty products
Finished Leather
MARKET Low cost men’s shoes, school shoes, Security/Military Boots
Handbags, travel ware, cases
Specifications of cut size, color, texture, pattern
Kenya, EAC
US, EU
China, EU
Three Strategies for Enhancing Leather Industry Competitiveness & Growth 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
3. Improve Governance & Strengthen Collaboration in Leather Industry • Institutional strengthening • Cluster Building 26
3 Competitiveness Strategies & 18 Key Actions 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 Process 3.2 Strengthen KLDC--Kenyan Leather Development Council
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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 Accelerator iii. 2.1.2 Develop Leather City / Industry Park 2.1.3 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 Capacities 2.2.3 Enhance Human Resource Placement Services for Leather Industry 2.2.4 Improve and Extend Professional Certification Programs for Leather Industry 2.2.5 Strengthen Professional Development Organizations 2.3 Enhance and Enforce Quality & Standards 2.3.1 Promote Greater Adoption of Quality Leather Processing Certification 2.3.2 Develop Leather Award and Recognition Programs 2.3.3 Increase Enforcement of Quality Standards for Imported Leather Products 2.3.4 Initiate Regional Branding of Leather Industry to Promote Specialization
Strategy 1. Increase Access to Markets & Induce Greater Demand for Kenya Leather Products
High Low
EXPECTED IMPACTS EMPLOYMENT
VALUE ADDED
LOW EASE OF IMPLEMENTATION IMPLEMENTATION COST INVESTMENT
Develop a Leather Marketing Entity Promote International Match‐Making Design Transparent Public Procurement Policy Mass Customization of Made‐to‐Order Shoes
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Strategy 2. Build Quality/Standards, Reduce Costs Improve Production, Tech, & Machinery
EXPECTED IMPACTS EMPLOYMENT
VALUE ADDED
LOW EASE OF IMPLEMENTATION IMPLEMENTATION COST INVESTMENT
High Low
LWCC—Common Mfg Facility Kariokor Business Accelerator Leather City / Industry Park Duties Reduction on Leather inputs
Improve Skills Upgrade TPCSI Strengthen University Capacities Improve HR Placement Services
Enhance Quality/Standards Promote Quality Leather Certification Develop Leather Award Programs Increase Enforcement Import Standards Regional Branding, Promote Specialization
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Strategy 3. Improve Governance & Strengthen Collaboration in Leather Industry
High Low
EXPECTED IMPACTS EMPLOYMENT
VALUE ADDED
LOW EASE OF IMPLEMENTATION IMPLEMENTATION COST INVESTMENT
Establish a Leather Industry Strategy Implementation Process (Clustering)
Strengthen KLDC
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Private Sector Facility to pool and upscale leather articles production capability CORE OBJECTIVE
LEATHER WEALTH CREATION CENTER (LWCC) A Common Manufacturing Facility to Consolidate the Leather Potential in Kenya
A vibrant & functional CMF producing Competitive products for the local, regional & International markets
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.
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
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”)
Estimated budget Year 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, Hezakiah Jennifer
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, Hezakiah Jennifer, 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, Hezakiah Jennifer + Steering Team
15 June 2015
Mobilize resources for launching pilot common manufacturing facility
Beatrice & Maurice, Dr. Onyuka, Hezakiah Jennifer + Steering Team
15 August 2015
Steering Team
10 June 2015
Beatrice & Maurice, Dr. Onyuka, Hezakiah Jennifer + Steering Team
15 September 2015
Develop operations guidelines to govern shared use of common facilities Establish pilot operation
PRODUCTS/ RESULTS
Measures of Success •
Proposal endorsed by stakeholders –
•
Identified sources of finance –
•
March 15, 2015
Mobilizing investments, Sourcing equipment, etc. –
•
December 20, 2014
June 15, 2015
Launch of LWCC Nairobi pilot facility –
November 15, 2015
Leadership of LWCC 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)
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
CORE OBJECTIVE A vibrant & functional CMC producing competitive products for the local & regional markets
Strategic Importance Job creation, poverty reduction, skill development. Establish that Kariokor Market can produce quality shoes and leather articles at a good price.
Kariokor Leather: Common Mfg Center Establish 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
Access to material (finished leather, good quality, good price) Access to Machinery Create awareness through the media that Kariokor market is the best producer of authentic leather shoes and articles in Africa!!
Estimated budget Phase 1: US$ 70,300
PRODUCTS/ RESULTS
Measures of Success •
Specification of machinery needed –
•
Secure space for workshop facility –
•
December 15, 2015
Mobilizing investments, acquiring machinery –
•
August 2015
January 15, 2016
Launch of Kariokor Leather CMC –
February 1, 2016
LEADERSHIP •
INFLUENCE LEADERS – – –
•
TECHNICAL LEADERS – –
•
Aden Mohamed, CS, Ministry of Industrialization Dr. Evans Kidero (Governor Nairobi County) (Leather Industry of Kenya, Agha Khan Foundation) 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 A successful leather industry park will solve three critical constraints: • • •
A common effluent treatment to bring down the high costs 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
2. Pre‐Market Testing
best site? What are initial costs of ensuring sufficient water supply? Benefits of locating near the EPZ?
Who is willing to locate in park and what is demand/willingness to pay for services?
4. Develop Master Plan
5. Identify Private Developer‐PPP Which
What economies of scale and linkage benefits can be maximized?
private sector developers have expressed interest? Need for “market test” of viability?
3. Econ/Tech./Env. Anal‐ ysis Are high costs of infrastr. (water & treatment) offset by benefits of jobs created and revenues?
6. Find Anchor Tenants & Donor Financing What are the learnings from Dongo Kundu (e.g., Toyota & JICA)? 39
Leather Industry Park Recommendations Work with the private sector Private sector participation (as developers / PPP) critical for several reasons − Financial risk‐sharing − Speed of implementation − Technical expertise
History of successful private zones
Recent developments – Mombasa FTZ
− Market signal Examples: Dominican Republic, Colombia, Philippines, Kenya Important to get the legal framework / incentives right…
SEZ: Lessons for Kenya from global experience
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Are proposed policies addressing present constraints?? 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 Abattoirs & Traders
Key Constraints
• • •
Low quality raw hides and skins Low supply/high cost of hides and skins Big volume of raw hides and skins smuggling
Tanning
Manufacturing
• • •
Lack of quality effluent facility • High environmental cost • High health Few tanneries processing finished leather
• • • •
Cross Cutting Constraints
Lack of Industry coordination
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
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
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Employment Impact of Proposed Actions Scenarios of the Future 40,000
“Action across the VC” Scenario Strong competitiveness of formal & informal sector, plus growth in FDI
35,000
30,000
“Partial Action” Scenario
25,000
Improvement in competitiveness of both formal and informal sectors 20,000
“Do Nothing“ Scenario 15,000
Modest improvement in competitiveness of informal sector, formal sector stagnant
10,000
10 5,000
0 2009
2010
2011
2012
2013
2015
2020
2025
Employment Impact of Proposed Actions Scenarios of the Future Kenya currently produces 3.3 million pairs per annum, and employs an estimated 5,500 in leather footwear
Leather footwear Employment Worker Projected new production* Leather footwear generated (jobs productivity employment (million pairs per employment** per 1 million pairs (pairs per worker from 10 million Country annum) (1,000 workers) produced) per annum) 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
1,220
881
12,185
Average
Sources: * 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.
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.
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