Surviving against all the odds

Most observers of Zimbabwean leather and footwear industries from outside have an almost incredulous respect for companies which operate in seemingly impossible conditions, and the circumstances have never been more difficult than today. However, despite the difficulties and the dire forecasts, only a handful of companies have actually closed. The remaining companies have all shrunk and it's not so much survival of the fittest as survival by ingenuity and, where possible, export. Any company who can export, does. Every manufacturing company battles to get components because they can't get hold of the foreign exchange necessary to import them. Exports of manufactured goods have also suffered, because suppliers of primary materials - mainly wet-blue leather - are exporting them, despite agreements which are supposed to ensure that these primary materials go further up the value chain. There is also a sense of despair among many companies; a number of whom declined to be interviewed, for fear of some sort of official retribution. Another agreed to speak, but only under conditions of anonymity. Shortage of raw materials According to Marc Garnett, chairman of the Leather and Allied Industries Federation of Zimbabwe (LAIFEZ): 'The situation is very fluid. The cattle slaughter rate has dropped substantially because beef - the primary product - has become unaffordable to the majority of Zimbabweans and most commercial ranches, who supplied the best raw hides, are shut. In 2002, there were 700,000 cattle slaughtered. My guess is that last year the figure was 400,000 and this year it will be 250,000. Yet we have the capacity to soak 800,000-1 million hides and finish 350,000. And we used to.' Foreign exchange Foreign exchange is also a critical issue. In a comprehensive report prepared for the Reserve Bank of Zimbabwe in response to a proposed footwear export drive to Russia, LAIFEZ secretary Bev Jack concluded: 'Stocks of imported raw materials are exhausted and replenishment can take up to three months. With the present shortage of foreign exchange, it is unlikely that there can be any meaningful build up of stocks in the short-to-medium term. There is a period of up to six weeks for planning mass production. Therefore, it is quite likely that manufacturers will have to downsize even further before year-end. Escalating input costs are making our products more and more unattractive to export as they can certainly source products much cheaper from the Far East.' A vicious circle For Zimbabwe Bata Shoe Co Ltd, the country's biggest tannery and footwear manufacturer, shortages of raw materials caused by the foreign exchange situation have been crippling. 'It's a vicious circle', company manager Ed Duthie said. 'We need to export to earn FOREX, we need FOREX to buy raw materials to be able to export. There's no shortage of FOREX, or at least it is not as scarce as you might think, but much of it is in the wrong hands. You could probably go into any bar in Harare and secure US$100,000 FOREX at the parallel rate there and then, but at completely ruinous rates. 'The hide situation is critical. It has been made worse because a lot of hides are being exported as wet-blues. A lot of new punters have come into the hide market and they're taking hides from our traditional suppliers, like S M Lurie and Hides & Skins Collectors. Also, the EPZs [Export Processing Zones] don't fall under the industry agreement, so they can afford to pay more for hides which we never see. 'One week we got in 400 hides, which is less than our daily soak - previously, we would hold five weeks' stock, just to make sure we had enough. Another week we got in enough hides for two days' production. If we don't get more, we'll have to close the tannery until we get more. You can't work like this.' Even coal, mined locally, is in short supply. At the time of the interview, Bata had coal for four days for their boilers. 'South African suppliers have kept this company going', Duthie said, 'even though payments are sometimes delayed. 'We've been talking to government but to no avail, and part of the reason is that everyone's looking after themselves first - some of the [wet-blue] tanners are saying one thing and doing another, and some of the farmers are doing the same. What's supposed to happen is that, by agreement, traders and tanners must ask LAIFEZ for permission to export and only export what the local industry can't use. 'What is happening is that they demand exorbitant prices on a take-it-or-leave-it basis. It's more profitable for them to export the hides - not necessarily at high prices - and sell the FOREX. Even we have now asked for permission to do the same.' Bata's tannery was designed to supply their shoe factories which used to make 15 million pairs/year (not including thong sandals). This year they expect to make 6 million pairs. On good days, they still produce 22,000 pairs of canvas and 9,500 pairs of leather and synthetic upper shoes. The company export 600,000 pairs/year to South Africa - 10% of their output - 'and those get priority, of course, if we can get the leather.' Duthie said local sales subsidised exports to some extent, but local sales were diminishing due to a lack of raw materials and because disposable income has diminished. According to Duthie: 'Another factor is greedy landlords demanding US$-based rentals, but a saving factor is that we own most of our high volume stores.' The outcome of all of this is that Bata now have 83 shops, down from 108 'and further downsizing may be necessary. 'The biggest problem is the interest rate, coupled with inflation', said the managing director of a group which includes a farm, feedlot, abattoir and a medium-sized tannery. 'If you're borrowing - at 550% - to re-establish a cattle herd, it's a major hurdle, because cattle need time to grow.' The group have one farm left of their original five; cattle ranches were the ones taken, and they have converted the remaining farm to beef, with an 800-strong breeding herd. Echoing the point made by Duthie, the managing director said: 'We used to buy in a lot of hides for the tannery, now they mostly come from our own cattle because anyone who has access to hides is exporting them to get FOREX.' The group themselves are exporting most of their production as wet-blue, to South Africa, Greece and Italy, although they also supply to Bata and other local tanners. Positive signs 'At the moment there are some positive signs. The Cold Storage Commission is leasing out some farms to former commercial farmers. It's a bit tricky still, because although the Reserve Bank is lending the farmers money under the ASEPF scheme, at 50% interest, it's two-year money, which helps them with the breeding, but it's not enough time to help with the feedlot side, which is what we need to get back to an assured source of supply.' He said the commercial herd appeared to be stable and growing. Communal farmers were also 'coming on side', with a growing sense of commercial value of cattle. 'There are a lot of African speculators buying cattle from communal farms and feeding them into the system. Once the communal farmers are educated, it will be a lot more positive because it's estimated they have 4.5-5 million cattle.' He said a tracing system for cattle had also been put in place, and 'if we get our beef exports back [exports were stopped on account of an outbreak of FMD] we'll be in a position to benefit.' Ostrich hit by avian flu It's not just the bovine leather and footwear sector which has been affected. The ostrich industry welcomed the lifting of the ten-month ban on exports to the EU in July. According to PT Royal Ostrindo technical manager Rudolph Darck, while most farmers tried to hold onto their birds, PT Royal marketed the meat locally, with a reduced throughput.' The ban - which came into force in November last year when Avian Influenza antibodies were detected in Zimbabwe - hit the tannery, by far the biggest ostrich leather producer in the country, whose major market is the US. The tannery diversified into a variety of exotics, including elephant, hippo and crocodile. 'We were quite active in the skins collection market, and it kept us going.' The group are vertically integrated - farms, abattoir, meat processing, tannery, leathergoods factory - and diversified - they have also recently acquired a chicken producing business. Looking ahead, Darck's assessment is that 'it's a very challenging situation'. Crocodile expansion Crocodile skin producers Lakecroc Farm, Kariba, an Innscor Africa subsidiary, are seeking Z$300 billion from the parent company to expand operations by 50%, according to Lakecroc general manager Jimmyson Kazangarare. He said: 'The company is seeking the funds to establish a third 15-hecatre crocodile farm, to be fully operational by December 2006.' The company currently operate two farms at Lakecroc in Kariba and in Ume, about 70km from Lake Kariba, with a total of 120,000 crocodiles. 'We initially exported crocodile skins only, while the meat was used to feed other crocodiles, but we have now diversified into selling meat locally and for export to the EU. We have an annual target of 50,000 animals aged between 22 and 36 months and are also planning to establish a plant to produce quality crocodile leather by 2010.' Kazangarare added: 'The company was facing some problems in its operations, especially as the water level in Lake Kariba was now very low, and we had to extend the farm's pump by 700m into the lake.' Footwear For footwear manufacturer Italian Styles, who supply only the local market, the biggest problem is raw materials: 'Because we can't get foreign currency to import', said director Paul Grotto. 'For the last five years, we wouldn't have survived if we hadn't had a lot of components in stock.' In the same period, the factory has shrunk, from 136 staff to 19, and where it was purely a pu sandal factory, it now also 'makes a bit of leather, because we can get that locally'. He said the manufacturing industry generally had shrunk, but consumer demand remained, although Zimbabwean retailers are also buying from Chinese importers. 'We got whacked by China but I think the retailers are still selling approximately the same quantities because they're buying from Chinese importers as well.' According to Grotto, prices generally increase weekly, and Italian Styles offer discounts for fortnightly payment. 'Obviously, you cost in the inflation, but what you can't cost in is when the currency collapses, which it's done twice this year: from a 100:1 exchange rate between the Zim and US dollars in January to 250:1 at the end of July. 'In July, after the currency was devalued, it went from 300:1 to 650:1 on the parallel market. You can't plan for that - you just lose everything you've made for the past few months.' He said the Chinese appeared to flout currency regulations by trading in US dollars, but weren't penalised for it. He said he believed the government's decision to devalue 'indicates that they understand the problems. We can carry on operating with existing stock, for about a year', he said. 'We always seem to be able to come up with a plan, but it's getting tiring.' Part of the reason outsiders find it hard to grasp the extent of Zimbabwe's difficulties is that business just seems to continue. 'Our business in Zimbabwe is surprisingly good', said Colin Teifel, director of South African chemical and machinery suppliers N E Teifel & Co. 'The smaller tanneries up there have to buy whatever they can locally but the bigger plants are exporting substantial quantities of wet-blue hides to earn FOREX, and because they're so reliant on those exports, they don't take chances with the quality - they import the chemicals they need.' He said he had the impression that many Zimbabwean companies were preparing themselves for a turnaround in the not-too-distant future. 'I don't know how they do it. They must be tough.' Background At Independence in 1980, Zimbabwe - despite fifteen years of UN sanctions - inherited a vibrant leather sector from the then Rhodesia. Despite difficulties, hide production was around 700,000 per year, most of it taken to finished leather. On independence, aid organisations arrived; progress was made and much was achieved. The British equipped the laboratories of LIZ (the Leather Institute of Zimbabwe) and also sponsored the training of technicians in Britain. Unido provided invaluable assistance, for example organising a revolving fund project - financed initially by Italy - which enabled large scale modernisation of selected Zimbabwe tanneries and footwear plants. The results were dramatic with a marked improvement in the output and quality of leather and footwear. On completion of its 'All Africa Hides and Skins and Leather Improvement Project' in the early '90s, Unido authorised a further project aimed specifically at finished article manufacture. When it ended in 1994/95, the future for the Zimbabwe leather sector looked bright. Under the subsequent government, the commercial farming sector came under intense scrutiny and has since been in decline. By the mid '90s, annual hide production had risen to nearly one million, with the prospect of further increase. The bulk of hide production, 85%, was carried out either at strategically located and well equipped CSC (Cold Storage Commission) or municipal abattoirs. The balance, 15%, of hide production rested mainly with rural butcheries, where facilities were mediocre but improving. Only a small number of cattle were subject to home slaughter under rudimentary conditions. At this time, commercial farms and ranches, where animal husbandry was excellent, owned a mere 25% of the national herd, (the remainder was owned by subsistence level indigenous farmers) but the commercial farms produced 75% of cattle for slaughter, which invariably took place at CSC plants. Now, in 2006, hide merchants are unanimous in saying hide production has fallen by at least 50%, to around 500,000, annually. Merchants stress that most hides reaching the market now originate from cattle raised by subsistence farmers under rough conditions: poor feeding, especially in the dry season, no supplementary feeding even during drought; damage from barbed wire and thorns during grazing. Many cattle bear a multiplicity of brands, not a mere two or three. Very few hides reaching the market even meet national standards. Local sources told us that the infrastructure of the commercial farming sector has been almost wholly destroyed, making it impossible to ranch cattle. Export of raw hides from Zimbabwe is banned. Raw hides have to be processed to at least wet-blue prior to export. Even though hide output is generally of low quality, a ready market exists. Processing low value hides is, however, an expensive business. Outlay in chemicals and labour remains the same but cash returns are less and throughput now is only half what it used to be. Tanneries try to keep domestic manufacturers of footwear supplied but have to export at least part of their wet-blue production to meet their own foreign exchange needs. They try to work on a 50:50 basis vis-à-vis domestic calls for finished leather and their own crying need to earn foreign exchange by the export of wet-blue. Chinese operators were recently permitted to buy hides locally, have them taken to wet-blue either by buying an interest in a local plant or by contracting out, and then export to China. The inevitable result is price escalation: an ever smaller supply meeting ever increasing demand. This will ultimately force wet-blue operators, if they are to remain in business, to review their 50:50 allocations. Despite significantly lowered hide quality, Zimbabwe's tanneries make surprisingly good finished leathers. But the fact remains, cash returns are reduced by the preponderance of poor quality raw material: 75% country hides today as opposed to 75% commercial farm origin in 1995. During May 2006, three plants closed, RK Footwear, Sheeva Footwear and Goksel Leather. One international plant is rumoured to be in serious straits, behind in paying creditors, contemplating redundancies and, perhaps, closure. If there is any truth in the rumours and closure occurs, the event could signal the death knell of footwear manufacture in Zimbabwe.