More than a decade of trials and tribulations

Increased demand for footwear based on a real rise in disposable consumer income has enabled many tanneries to lift their sales of finished leathers to the local shoe manufacturing industry. Table 1 illustrates the decline in productivity and the use of installed capacity of the tanning and footwear industries, taking 1997 as the base year. The deep recession evident in the sector can be clearly seen from 1999 to 2003, followed by a sharp rebound in 2004, a year which experienced phenomenal GDP growth of 17.5% after the resolution of the national lockout and oil industry sabotage. This took place from early December 2002-February 2003 and cost the country an estimated US$25-US$30 billion in lost oil and industrial production (approximately one year's national budget). The aftermath of the lockout enabled the central government to take control of the oil industry for the first time and direct capital flows in order to reactivate commerce and industrial production. Wages were increased by an average of 30% in 2003; new jobs were created resulting in a slow decline in overall unemployment (which had peaked at almost 21% in the first quarter of 2003). These measures resulted in the generation of more disposable income for consumer purchases. Background to the decline To trace the roots of the decline of the Venezuelan tanning and footwear industries it is necessary to go back as far as 1989. In that year the newly elected government imposed an IMF austerity programme in order to restructure the external debt and obtain new loans. The IMF imposed several conditions, the most devastating of which for local industry was the opening up of the Venezuelan economy to all imports. Prior to 1989 Venezuelan tanners had an almost captive market, supplying finished leather to the 650 shoe factories operating at that time. However, with the country now open to massive imports of cheap footwear, many shoe factories closed over the next eight years and converted themselves into importers. It was much easier and more profitable to import than to run an industrial operation, deal with the mind-numbing bureaucracy endemic in Venezuela and manage trade unions and collective bargaining agreements. These policies resulted in the closing of tanneries, shoe factories and a massive rise in imported footwear to satisfy the needs of a rapidly growing population. Only the most resilient and determined businesses in the sector survived and by the turn of the century there were only 350 footwear manufacturers and 24 tanneries operating throughout the country. Once the sector had apparently 'adjusted' to a new non-protectionist economic reality during the 1990s it would have seemed logical that the stronger companies would have forged ahead. However, other problems were looming on the horizon. Attempts to combat contraband The Venezuelan Footwear Association (then CAVENIC in 1998) was aware of the disastrous consequences for the local footwear industry of the imports of Chinese shoes and lobbied the government to impose an import duty of 300% on shoes from that country. This draconian measure did little to stem the flow of smuggled footwear into the country which employed methods such as under billing, bribes for customs officials to release containers from the ports and simply declaring leather shoes as plastic sandals, for example. Thus, the tanning industry was selling even less finished leather to its natural client, the local footwear manufacturing industry. Table 2 clearly illustrates the problems facing local tanners internally from 1999-2002: the sharp rise in exports of wet-blue and the decline in producing finished leather for local footwear manufacturers. The percentage of raw and salted hides actually reaching Venezuelan tanners leaves an average difference of some 50.8% in relation to the actual number of animals slaughtered in the four years covered. Where did these hides go to and why did they apparently 'vanish' from official statistics? The answer lies in a change in the policy of the Brazilian Agriculture Ministry which effectively restricted the flow of wet-blue and salted hides from Brazil, the largest Latin American exporter, to the international market by imposing a 9% duty in 1999 on such exports. From 1998 to 2004, Brazilian exports of salted hides declined from US$12.4 million to just US$2.4 million per year. For leading tanning nations such as Italy, the shortfall in raw materials had to be compensated from other sources and Venezuela was the prime candidate. With the local tanning industry unable to sell its production to local footwear manufacturers, Venezuelan tanners, many of whom originally came from Italy emigrating in the 1930s, were only too pleased to increase exports of wet-blue, despite its meagre profit margin, to Italian buyers. The tanners received payments in cash and, based on the figures in Table 2, were prepared to export this raw material through what can be termed as 'irregular channels', since many of these purchases do not show up either in export or production figures. This opportunity to take advantage of changes in the international market gave a respite to the embattled Venezuelan tanners, since cash flow could be maintained, and tanneries continued to tick over, even though at very low levels as can be seen in Table 1. At the same time Italian and Colombian buyers went directly to the Venezuelan slaughterhouses and purchased salted hides for export in US dollars. This eventually caused a dangerous shortfall in raw materials for the Venezuelan tanning industry, pushing up hide prices in the internal market and encouraging the slaughterhouses to sell to the highest bidder, accepting US dollars instead of the local currency which was continually being devalued as the economic and political conditions in the country degenerated. This scenario resulted in the April 2002 coup d'état, followed by the industrial strife mentioned earlier. Confidence levels plummeted and forced both the footwear and tanning industries to retrench into almost a 'survival mode'. The challenge of exchange control The Venezuelan government was obliged to impose exchange controls on January 17, 2003, in order to halt the draining of the Central Bank's international dollar reserves. An official rate was fixed at US$/Bs 1,600, with dollars having to be applied for through the Currency Exchange Commission (CADIVI) by importers of essential goods and supplies. Almost immediately, a parallel market emerged with the rate oscillating between 2,500-3,000 during 2003. After surviving the massive influx of 'contraband' footwear, the tanning industry now had to deal with the negative effects of exchange controls. Suppliers of chemicals and the slaughterhouses started pricing their products in 'parallel bolivares' which meant that the tanneries were paying around 80% more for supplies and raw materials, virtually overnight. In addition, local tanneries could not compete with Colombian and Italian buyers approaching the slaughterhouses with dollars, which were then exchanged mainly on the parallel market in the Colombian border town of Cúcuta for 80% more than the official exchange rate. The consequences were that the number of salted hides exported illegally rose from 720,000 in 2002, to 800,000 in 2003. In 2003, as Table 2 implies, 50% of salted hide exports were illegal. As the economy began to stabilize the parallel exchange rate declined to less than 2,500, but slaughterhouses refused to lower their prices accordingly in bolivares, still using the 3,000 exchange rate as a benchmark, which was still a massive headache for the tanning industry. In 2004, with exchange and price controls on basic foodstuffs, including meat, in place, cattle ranchers began to reduce the kill and send cattle over the border to Colombia in a bid to avoid the exchange control system, which dented their profits. The annual slaughter in 2004, declined by 20% compared to 2003, creating meat and hide shortages in the internal market. Reaction by the tanners Almost at the same time, in 2004 CADIVI relaxed the regulations to obtain US dollars for essential exports, as more dollars were available due to the high oil income being received by the government. As a result, the difference between the newly adjusted, official exchange rate fell to around 30%, instead of the 80% difference in 2003. This enabled the tanners to purchase dollars on the parallel market and import wet-blue from Colombia to supply their operations, and not be 100% dependent on the local slaughterhouses. The supply of wet-blue from Colombia helped to eliminate the distortions in the supply/demand equation caused by the artificially high prices being demanded by the slaughterhouses in local currency. Paradoxically, the latest crisis triggered by exchange controls worked in the tanneries' favour enabling them to start supplying local footwear manufacturers with finished leather, which was far more profitable than exporting wet-blue at very low margins, even with a relatively unfavorable parallel exchange rate. Table 1 clearly illustrates the recovery in activity of the footwear and tanning sectors in 2005 on the coat-tails of an economic boom fuelled by oil prices reaching more than US$60/barrel. Increasing real wages led a consumer boom which led the private sector to outperform the main state sectors of oil, aluminium, steel and iron ore production up to the present day. Obstacles facing the footwear and tanning sectors After the near terminal crises of 2002 and 2003 the Venezuelan footwear and tanning industries still face significant challenges. The footwear sector does not boast any reliable statistics in terms of production and imports. Exports are virtually non-existent. The Venezuelan population of 27 million requires around 55-60 million pairs per year to satisfy demand. With contraband footwear leading the way, imports are estimated to be as high as 40 million pairs per year, of which at best 20 million pairs are manufactured locally and even this could be a generous estimate since no overall statistics exist to take an accurate snapshot of the situation. Improved systems at ports to x-ray containers for contraband, examining false manifest declarations and detecting outright smuggling have at best had a marginal effect. It is curious to note that the main 'exporter' of footwear to Venezuela is Panama. As a free port shoes are 'triangulated' from China, India, Vietnam, Indonesia and other Asian manufacturers not only to Venezuela, but also to other Andean countries such as Colombia, Ecuador and Peru. With the reduced Venezuelan footwear manufacturing industry unable to satisfy local demand, imports are inevitable and there appears to be little prospect of this changing even in the medium to long term. There is money to be made by importing illegally and little risk, since punishments are limited to derisory fines and many importers are reputed to pay the corresponding fine on the spot to corrupt customs officials. In addition, with the massive exports of raw materials from Venezuela when compared to the size of its bovine herd, there appears very little prospect of the tanning sector expanding either as slaughterhouses opt for a 'fast buck' and do nothing to support local companies or job creation in this traditional sector of Venezuelan industry. This situation was exacerbated at the end of 2006, when Brazil re-imposed a 9% duty on wet-blue and salted hide exports, up from 4% in 2005, which will once again restrict raw material exports to Italy and China. Table 3 illustrates the widespread flight of unprocessed raw materials from Venezuela when compared to other Latin American nations. Despite having one of the smallest cattle herds on the continent, around 13 million head, Venezuela is currently exporting almost 24% of all salted hides from the region. Brazil has around 165 million head and Argentina 50 million head, but strict export duties and customs controls in these countries prevent the export of salted hides which could be processed into finished leather and even footwear. In the case of Venezuela, this would yield far more added value for all companies in the production chain, without even mentioning generating more jobs. These figures should be of great concern for the Venezuelan Land and Agricultural Ministry (MAT) since no apparent effort is being made to use these valuable raw materials internally. To make the situation even more critical, the above figures only refer to 'formal' or 'official' exports and the hides of animals unaccounted for and slaughtered have just vanished in ghost ships to European leather processing countries. This is without mentioning Venezuela's second biggest trading partner, Colombia. The country shares a 1,400 mile border with Venezuela which is difficult if not impossible to guard and ideal for cattle smuggling and contraband operations. One possible initiative being considered The least the Venezuelan tanning industry could do would be to produce more wet-blue and attempt to export it to China, where there is more latent demand after the Chinese government imposed punitive import taxes on raw and salted hides in late 2005. The current Venezuelan government has excellent commercial relations with China and, according to undisclosed government sources, a feasibility project was presented to consider the option of promoting the production of wet-blue with the aim of reactivating the tanning industry by opening up a new major market in Asia. This would entail injecting government petrodollars in the form of soft loans into the tanning industry. This would control the illicit activities of the slaughterhouses illegally exporting salted hides to all and sundry and thus secure a regular and fairly priced flow of raw material to the local tanneries. It could also involve the nationalisation of tanneries in poor financial shape, or placing them under the workers' control financed by the government in order to prevent them from closing down or being taken over by the banks, as was the case with 'Tenería 1ro de Octubre' in Cagua in 2004. The forecast rise in leather prices worldwide cannot be dismissed as a short term phenomenon when taking into account the reduced supply of raw hides in Argentina and Mexico, restricted Brazilian exports and rising raw hide prices in the USA. A major change in government interest and policy towards the leather industry could see Venezuela taking advantage of this situation and making the most of constant demand from Asia and climbing prices. Venezuela, despite its relatively small role in the global leather market, does have an important percentage of raw material exports within the context of Latin America (Table 3). The local industry can only be reactivated by processing these hides internally into wet-blue, crust or even finished leather to satisfy both internal demand from the shoe manufacturing industry and, at the same time, promoting exports to the workshop of the world now based in Asia and the new economic powerhouse of the People's Republic of China. The times they are a 'changing'? The poor health of the Venezuelan tannery sector, the loss of jobs, illegal raw hide exports and using the US dollar for transactions has all caught the attention of the Venezuelan government. Government policy is to make the most of raw materials longer term and export them as 'finished products' to give them more added value and hence contribute to the positive trade balance of the country. This is the case with crude oil, aluminum, iron ore and soon raw hides may fall into this category. A little known management project for the tannery sector was prepared at the end of 2006 by Ubaldo Rosales Pañiles as part of a university module addressing the ways in which the Venezuelan tannery industry could be reactivated. This study includes injecting funds into the sector, buying out unprofitable tanneries, joint worker/management control and policing the exports of raw hides by imposing heavy taxes as explained in the main article. The study concludes: 'The tanneries should receive financial incentives from central government with the aim of converting them into different organizational models, which will complement the industrial and socio productive industrial policies of the country, resulting in the generation of more permanent jobs in the formal economic sector.' To contact Rosales about this study, write to: Ubaldo Rosales Pañiles rosubaldo@yahoo.com&rtreturn;