Innovating to survive11 February 2005
The reasons behind the decline of the Spanish leather industry are something on which representatives of tanners, chemical companies and industry associations are agreed. Several factors have combined to cause major difficulties for the sector in 2004. The dollar has declined steadily from a value of e1.13 in December 2001 to e0.82 in December 2004. This decrease in the value of the dollar against the euro has made exports increasingly difficult for Spanish companies. The boom in production from Asia has meant fierce competition for Spanish producers and the domestic market becoming flooded with cheaper imports. The crisis in consumption in European Union countries, the key export market for Spanish production, has worsened the situation. The impact of these factors has been the closure of numerous enterprises across the industry in 2004. However, some businesses have adapted well to the difficult circumstances and through a combination of marketing, innovation and design are riding out the storm effectively. Tanners' associations are also playing their part in supporting the industry, and the diverse sectors are working together towards a brighter future. The decline in figures The reduced market has lead to the sector being scaled down. Rationalisation has meant that 42.7% of companies in the sector now have fewer than ten employees. The scale of closures in the last decade is dramatic. According to the Annual Leather Report 2004, compiled by the Spanish Leather Council, there are now just 187 tanneries active across the whole of Spain, compared with 206 in 2002 and 255 in 1998. In 2004, notable tannery closures around Spain included Mapiel, a doubleface tannery in Madrid, goat leather makers Tenerias Argent, in Canals (although the rest of the Lederval group continues as normal), and Tenerias Santurce in Santurce. In terms of employment, in 2003 the Spanish leather industry employed approximately 118,000 people. Josep Ballbè, director general of tanners' association CEC-FECUR told Leather International: 'Over the last 15-20 years the number of workers in the tanning industry has halved but production levels have remained the same. However, in the last three years, the workforce has shrunk dramatically by a further 30%, and production is gradually decreasing.' Put into context, this is a far more serious situation than that faced in the rest of the EU where in the period 2002-3 textile and garment production across the zone was down just 4.4% and jobs were down 7.1%. Jorge Gadea, general manager of the Josefa Perez Jimeno tannery in Betera, told Leather International that production levels in his company had been reduced dramatically since 2000. He attributes this fall in production to the state of the domestic market with many traditional clients going out of business, and to the consumption of cheap imports. He also cites the fact that many Spanish designers are not supporting the national industry but having their designs made up abroad. The value of finished leather exported by Spanish manufacturers has also decreased dramatically. Figures from CEC-FECUR indicate that exports have fallen from €403 million in the period January-September 2001, to e243 million in the same period of 2004. The major markets for finished Spanish leathers are still in Europe with 70% of exports. Main clients are Italy, France, Portugal and Türkiye, while outside Europe, Hong Kong and China are the most important customers. The latter appear as expanding markets for Spanish made leather. Geographical regions In general, the four main tanning clusters specialise in different types of leather. The Catalan town of Vic produces small skins for footwear and garments, Igualada produces larger skins for footwear. The area around Valencia specialises in bovine, goat and sheepskins for all leather types, whereas Lorca specialises in bovine hides, principally for the footwear industry. The current situation differs greatly from one cluster to another. According to Josep Ballbè, the most serious problems are in the southern town of Lorca, Murcia. This is because production is concentrated on side leather for footwear made for domestic consumption and has, therefore, been worst affected by cheap imports from China and the Far East, North Africa and Latin America. The industrial clusters situated in Catalunya are in general more export focused and do not depend on any one market, particularly Spain itself. This has enabled them to improve and compete on international markets. However, as a significant proportion of exports are to EU countries, they are still suffering. Pilar Llorca Lopez represents Spanish Tanners' Association CEC-FECUR in the tanning clusters around Valencia. According to Llorca, the leather industry in the region has suffered a marked decline in recent years. She states that in 2002, there were 72 companies in operation in Valencia; by 2004 the number had fallen to just 60. Two thirds of Spanish footwear output is based in Valencia. The region's exports are largely dependent on the European Union countries, thus the impact of decreased consumption has hit particularly hard in Valencia. By sector The industry is structured along the following lines: approximately 60% of Spanish output is for footwear, 30% for garment, 8% for leathergoods, and the remaining 2% for upholstery. The footwear sector is traditionally the most stable. Spain is one of the world leaders in footwear leathers in terms of both quality and design, producing 25% of Europe's output. In 2004, (up to September) footwear exports were down 10% while imports were up 22% as cheaper products from Asia find their way into the domestic market. France is the most important export destination for shoes, buying €403 million per year, followed by the UK and Germany. The decline of the dollar has meant that sales of footwear to the US have fallen sharply after having maintained its position as a key destination for the previous four years. According to Pilar Llorca of CEC-FECUR, 2004 has been the worst year in several decades for the footwear sector due to the influx of imports from countries such as Taiwan, China and Vietnam. Llorca says that the sector is realistic about the competition faced from abroad and tanners know they must concentrate on quality, fashion and innovation in order to maintain their reputation and advantage. The most marked decline in terms of both production and exports has been in the doubleface sector. Doubleface exports decreased by 26% (see figure 5). In 2002, €170 million worth of doubleface skins were produced, and by 2004 this had fallen to by 20% to e136 million due in part to the decline of the Turkish market, coupled with a number of mild winters and an increase in the price of raw materials. Carlos Hitschmann of vegetable tanning extract and wet-end chemical producers LFT Chemicals, based in Igualada, told Leather International: 'Sheepskin and doubleface have been going through a particularly difficult period, continuing to decline over the last two years. Markets in cold climates such as Russia that require doubleface have dollar based currencies so, when the dollar is devalued against the euro by 30% as in recent years, it makes sales to these markets extremely difficult.' According to Hitschmann, 'side leather has had a revival in the last month or so and is, really the only current going concern.' Vegetable tanned leather and sole leather production have fallen by 17% from 2002 to 2003. 58% of total production is made from bovine hides and sides for upper and sole leather. While upper has remained stable, sole leather production has dropped. According to Ballbè, in the past 15 years, over half the companies involved in garment manufacture in Spain have disappeared. In order to address this, the foreign trade promotion arm of CEC-FECUR, Acexpiel have established their own sub-group 'Acexpiel garments', created to support the companies involved in leather garment manufacturing and promote their work overseas. Javier Jardi of leather chemical makers Cromogenia Units confirms that the garment industry has declined sharply in recent years but believes that the same is true all over the world. He believes that for the industry as a whole, 2004 was worse than 2003, and states he has seen no indication that anything will change in 2005. Leathergoods is the healthiest segment with both production and exports up in 2004. Despite the good results, a study commissioned by the Fira de Barcelona identifies a lack of a trained workforce as a major problem for the sector, which is largely based in Andalucia, Catalunya and Valencia. Leathergoods are mostly exported to France 35%, Portugal 15% and Japan 8%. As in other sectors, sales to the US are down by 11% due to the weak dollar. The only other sector to have experienced an increase in exports was exotic leathers such as reptile skins. However, this only represents a small percentage of the total (Source CEC-FECUR Estacom). Causes of the decline Josep Ballbè, director general of CEC-FECUR, acknowledges that the last 2-3 years have been difficult. He attributes the continued decline to three factors: The weakness of the dollar against the euro This has made exports to the USA and other dollar-based economies such as Russia and Türkiye very difficult. It is unanimously agreed across the industry that the weakness of the dollar against the euro has been the biggest contributor to the crisis. (Figure 6 shows the decline of the dollar from 2001-2004.) José Estévez of chemical company Colorantes Industriales concurs: 'The problem is that one year ago the euro was at $0.89 and today stands at $1.36, a depreciation of 40%.' The boom in China and the Asian countries which has brought with it greater competition. Ballbè states that Chinese companies are gradually improving in terms of technology as well as quality, making competition even fiercer. The 2005 report on the leather industry, commissioned by the Fira de Barcelona, cites wide liberalisation of international trade as an obstacle. The crisis in consumption in European Union countries, particularly severe in Germany, which has always been a very important market for the Spanish industry. Ballbè emphasises that the German market for leather products has decreased significantly in the last two years. The industry's dependence on a small number of markets, for example the doubleface sector's heavy reliance on Türkiye and Russia, has left it vulnerable in times of crisis. The increasing trend of sub-contracting labour intensive production abroad is yet another obstacle for the Spanish industry. Ballbè states 'a further contributory factor is the fact that production is being moved away from Spain by companies who have facilities in other countries such as Brazil and Nigeria. This is particularly prevalent where beamhouse operations are concerned due to strict EU regulations on the environment. The lack of water in Spain makes restrictions even more stringent, so Spanish tanners now either do not carry out beamhouse operations and buy in the wet-blue or crust, or produce in the third world.' Compliance with stringent European Union environmental legislation has required a large outlay for many Spanish tanneries, while their competitors in China/Asia are not so strictly regulated and, therefore, have lower costs. This is a major disadvantage to producing leather in developed countries. Solutions However, the leather sector is fighting back in a variety of ways, including using new technology, rationalisation and striving to make their products stand out in terms of design and quality. Industry associations such as CEC-FECUR have taken initiatives for the future, including the drawing-up of a white paper, currently under way, which will investigate how the sector can regain its competitivity. The white paper will create an individual action plan and future strategy for each tanning zone, aiming to get businesses to cooperate towards a common goal. Businesses, organisations and local and national governments are already working together to provide common effluent treatment plants (see Igualada), joint purchase of raw materials and joint marketing ventures. In collaboration with Inescop (Instituto Tecnologico del Calzado), a research association based in Alicante, CEC-FECUR have carried out a study on tanneries' impact on the environment and future developments in technology for effluent treatment entitled 'Estudio comparativo Medioambiental en las Industrias de Curtidos de la Comunidad Valenciana' (full details will be published in the April edition of Leather International) According to the Consejo Español de la Piel (Spanish Council of Tanners) the Spanish industry also suffers from low levels of cow hide as a raw material and thus relies on imports. Quality sheep and goatskins are becoming ever more scarce, pushing up the prices and decreasing margins. One of Spain's natural advantages is the high quality of its raw materials, particularly ovine and caprine. In terms of small skins, Spanish merino and entrefino breeds are renowned throughout the world. They are highly suited for use in the production of doubleface. To take full advantage of this, the tanners' association CEC-FECUR do not want to export these excellent quality skins outside the European Union, but retain them to further the reputation of Spanish finished leather. According to Ballbè, finished leather is the area in which the Spanish industry can really stand out from the competition. To this end, the sector has embarked on an ambitious marketing campaign, aiming to give 'Spanish Leather' a collective identity as a high quality brand and promote the fact that famous names such as Gucci source their leather from Spain. CEC-FECUR's campaign focuses on the cutting edge design and innovative finishes exemplified by footwear designer Pura Lopez and offered by its members and is aimed at the main existing markets such as Italy, Germany, UK, France, US, Canada, Türkiye, China and Japan. The campaign has resulted in a significant increase in exports to Hong Kong and China. Marketing strategies are a central part of the attempt to turn the industry's fortunes around. A number of Spanish industrialists seem to be finding strength in unity and safety in numbers and are forming alliances to target certain export markets and share the costs implied. One such example is Valencia Quality Leather (VQL). They are grouping together to develop the Asian market, choosing to see the boom in the region not as a threat to their own sales, but as a potential market in itself. Valencia Quality leathers VQL - Cooperation and evolution VQL is comprised of five tanneries who have come together with the sole aim of targeting the Asian market, particularly China. Their united approach to this expanding market enables them to operate more competitively by sharing the costs involved in marketing and shipping. The tanneries involved, who each produce different types of leather are: Teneria Industrial Valenciana (TIVSA) who work with natural shrunken shoulders and bellies for shoe uppers and leathergoods; Curtidos Nules produce footwear and leathergoods leathers mainly from full grain, as well as corrected or patent leather for shoes; Curtidos Requena work with fancy leathers, prints, transfers and lasers; Curtidos Viguer specialise in splits and, finally, Hijos de Bautista Bas who work only with full grain. All five tanneries produce at the high-end of the market and are located in and around the province of Valencia. Only one of the companies in the group had been previously selling in Asia. The five tanneries employ a total of 275 workers. According to Pancho Mensua, general manager of VQL, in recent years Spanish tanneries, like their counterparts across Europe, have been losing their traditional clients as production is moved away to cheaper regions. He explains that VQL's objective is to develop the VQL brand and its reputation. 'We target high level brands as everyone knows there is no way to be competitive at the lower end.' VQL aim to develop a well established and loyal market in Asia focusing on China and its satellites, eg Hong Kong and Taiwan, concentrating on clients who buy the type of high quality items already produced by the tanneries. This approach allows VQL's members to retain autonomy with their products. Cost effectiveness and efficiency are maintained as no changes to the existing production process are necessary. Having streamlined practices and identified the kind of product that can sell profitably, VQL offer quality, fashion, a wide range of colours, added value and customer service. Their strong image and the variety of articles that they are able to produce are a key to their success. First year results saw approximately 500,000 sq ft of leather exported to China by the company. Pancho Mensua is confident that VQL can build on these results and secure a bright future. How have companies from across the industry adapted to the crisis? One of the region's longest established tanneries, dating back to 1870, is Josefa Perez Jimeno, Betera, Valencia, specialising in sheepskin for chamois, garment, leathergoods and shoe linings. Jorge Gadea Perez represents the third generation of the family to run the business which employs 42 people. This company has ridden the crisis by focusing on quality, innovation and investing in environmental controls. Josefa Perez Jimeno have also diversified production and found ways to add value to their products to meet the demands of today's buyer. Specialities include putting backing or lining onto sheepskin leather for luggage on site in the tannery. This makes it more resistant, allowing them to make use of both sides of the split. Superior quality is the key for Josefa Perez's chamois leather, made using a unique in house method. The split is tanned with fish oils and then air-dried for one month. Although more labour intensive than a through feed buffing machine, the chamois leathers are processed on a buffing wheel by hand to ensure the highest quality. Keeping up with the latest finishes is a priority for the tannery. They have pioneered a wrinkling technique for high fashion. The leather is twisted by hand before dyeing, so the dye is not taken up uniformly. Once the leather has been ironed, a stamped effect is apparent. This has proved popular on leather goods. Recent investments at the tannery have centred on effluent treatment facilities as a demonstration of their commitment to the environment. Staff members have spent the last two years working with INESCOP on methods of eliminating salt from the tannery effluent. The majority of Josefa Perez Jimeno's output is sold to China, followed by Mexico, Argentina, Korea and the UK. Current production levels are 3 million sq ft of skivers (grain splits) and 2million sq ft of chamois. LFT Chemicals LFT are a leather chemical producer based in Igualada. They produce a wide range of chemicals from beamhouse auxiliaries to dyes and finishing products and have an output of 3,000 tonnes per year. The company have been operating for 60 years and were originally set up for producing mimosa extracts. LFT have identified the changes in the industry over the past six years and adapted to meet them. Until 1999, LFT's production was based on vegetable extracts, 80-90% of which was sold to the Spanish market. Now, however, the company have diversified production, offering a full range of chemicals for the leather industry and specialising in fatliquors and retanning agents, accounting for 90% of sales. Hitschmann explains: 'LFT are facing the downturn in the market by making products 'by tanners for tanners' and a process of continuous evolution of products according to the needs of tanners.' LFT have also adapted in terms of their client base, selling to a diverse range of countries to reduce dependence on the Spanish market. They currently export to Türkey, Iran, Taiwan, Ecuador, and Colombia among others. Miret - innovating to survive At Miret, emphasis is on quality and design. They are vegetable tanners of sole leather and leathergoods such as belts, saddlery and other equestrian equipment. Miret employ 25 people and have ISO 9001-2000 accreditation. In a further example of tanners cooperating to ensure their future, tanneries around Igualada have come together to form Mundi-Cuir, an organisation which aims to integrate their overseas sales operations and develop new markets. With agents all over the world, Mundi-Cuir act as the export department for all member companies including Miret, and collectively have the resources to attend international exhibitions worldwide, such as Lineapelle and APLF which individual members do not have the time or budget to do alone. Mundi-Cuir are an independent company which deals with leather for garments, leathergoods, sofas and footwear. Mundi-cuir claim to be able to source any kind of leather and assist tanners in purchasing of raw materials, with collective purchasing power enabling them to secure greater cost efficiency. Josep Salat, manager, believes that this is a challenging time for the industry in Igualada. Tanners have contributed to a new effluent treatment plant, underlining their commitment to remain in the area. Tanners in the area have the backing of research and development organisations such as AIICA and INESCOP, dedicated to the applied research into environmental issues and processes. Salat would like to see this kind of collective working taken further suggesting, for example, that sharing specialised machinery between tanneries in the area would lower production costs. The leather industry plays a key role in a region which currently suffers from high unemployment and a low growth rate. Cromogenia Units Chemicals company Cromogenia Units have also diversified their markets to ride out the storm. Javier Jardi, general manager, leather chemicals division, told Leather International that given the crisis in the leather sectors in Italy and Spain, these markets hold limited possibility for growth. However, according to Jardi, the southern cone countries are experiencing a particularly buoyant phase. They have good raw materials, the necessary technology and lower production costs than European counterparts. Cromogenia have gained market share in the Southern cone, Brazil and China. The company's strategy has been to place themselves in the markets which are doing well. They have been active in China for several years and by the end of 2005 will have a new production facility up and running. The cornerstone of their strategy has been to develop a new range of lower price products with the emphasis firmly on cost efficiency. Colorantes Industriales Colorantes Industriales were founded in 1983, initially producing dyes for leather and textiles for sale to the domestic market. The company have evolved with the market so now exports account for 55-60% of total sales, achieving sales of e16million per year. 90% of production is for the leather industry and the remaining 10% for textiles and paper. Their main markets include Spain, Italy and China. Colorantes' strategy for survival has been to create bases in the major markets, for example establishing a commercial entity, Colorantes Italia in Santa Croce sull' Arno. So what does the future hold? José Estévez of chemical manufacturers Colorantes Industriales believes that the market is rallying to a small extent. He cites the example that Portuguese tanners now have work for January, February and March, which they didn't have in the same period of 2004. Estévez predicts that 'while the dollar remains so weak, China will maintain its stronghold on the market, but once it recovers, anyone who has survived this period of crisis will thrive. China will suffer a boomerang effect in the near future, as the margins available there are shrinking. Salaries will rise as the Chinese people start to demand a higher standard of living and status symbols such as Mercedes cars, and this increase in costs will lead to international companies who have relocated beginning to close down their operations.' Pilar Llorca acknowledges the fact that the sector is in decline but is taking positive action to adapt and improve. Prospects for 2005 are uncertain as the industry's fortunes are linked to economic activity in the European Union. Josep Ballbè hopes that once the sector's ongoing rationalisation process is completed and companies have adapted to the crisis they will be able to operate competitively.