Coupled with the problems of illegal imports and the increasing presence of cheap Asian produced footwear, the domestic leather and footwear sector has also not escaped the global economic slowdown. Tanners have also been hit by high raw material prices and a strong peso.

David Haro Carrillo, president of CICUR (Leather Council of Guanajuato State) explains: ‘The crisis in the industry is increasing due to the issue of BSE, foot and mouth and the fall out caused by these diseases leading to a shortage of raw materials. As a consequence this has raised the price of semi-processed and finished leather and led to a virtual standstill in domestic footwear consumption. All these factors have been reinforced by the economic crisis already being experienced in the leather industry.

‘We are also unable to export a great amount due to the appreciation of the peso. The actual exchange rate is unfavourable (US$1 = 9 pesos) to export into the global economy and is making our final product difficult to sell on the international market’, added Haro.

Negative factors affecting the Mexican tanner:

* Shortage of quality raw materials

* Higher prices of raw materials

* Imports of Chinese and Far East footwear

* Stricter environmental regulations to decrease the amount of pollutants

* Imports of foreign leather

* Illegal imports

According to David Haro: ‘The national leather industry faces an unfair competition with some Latin American countries, whose governments encourage the exports of leather products through unfair trade practices. It is the case that Chile and Uruguay have a reimbursement system for exports and Argentina and Brazil, which due to an over-production of raw materials and semi-processed leather, ban or veto these exports with no justification, leaving tanners with total freedom to export finished leather. This enables the tanners in these countries to offer their products in Mexico at very low prices which the local tanners cannot compete against.’

He reiterated that legal imports of leather, not only from Chile but also from Europe and Central America, have affected the sales of the local producers, adding to the damage caused by the economic recession.

‘We are working hard to integrate a system of combined sourcing of wet-blue and salted hides imported from the US, Eastern Europe and some African countries. For local tanners to compete, we have to look for synergies and take advantage of the latest technology to produce a higher quality product for domestic and foreign buyers’, says Haro.

Haro and other leading figures in the Mexican leather sector are actively lobbying the national government to support the leather and footwear industry in Mexico, particularly in the state of Guanajuato. The tanning industry is asking the government to take the following measures:

* Import barriers on finished leather and leather products

* Competitive international finance resources

* Financial help for industrial development

* Realistic exchange rate (peso:dollar)

* Tax credit on imports of raw hides and wet-blue

* Security for transportation

* Search for strategic alliances and increase level of competitiveness

* Implementation of standard company programmes for production, quality and international services

* Promotion of association schemes among tanners

The weakening of the global leather industry has had an impact. However, tanners – particularly around León – have invested heavily in new machinery and equipment in recent years, enabling them to compete on the domestic and global stage. In the past year the only thing which has held many back has been the strength of the peso. A number of Mexican tanners have been advocating a devaluation of the currency.

National production is estimated to be 20 million m2 of finished leather from 1,000 tanneries. Principal customers of the tanners are Mexico’s 2,600 footwear companies, 600 leathergoods producers and 300 leather garment manufacturers. Approximately half of the tanning and leather product manufacturers and 55% of the sectors’ jobs are located in the central Mexican state of Guanajuato. From this total, approximately 75% of the tanneries are concentrated in the state of Guanajuato, most in the city of León.

The value of the industry’s exports in 2000 was US$255 million with imports of US$751 million during the same period. As a result of the deficit and other factors, an estimated 9,000 jobs were lost in 2001 in the leather and footwear sectors and many companies were forced to work a three-day week.

The leather industry in León represents 75% of national leather production. The leather sector represents 55% of the gross local industrial wealth in León and 38% of the entire Guanajuato state’s gross industrial wealth.

‘The situation facing the leather industry is not unique and this is made worse locally due to the concentrated cluster of leather and footwear companies around León, says Jaime Alberto Dueñas, president of ANACU (Mexican National Leather Association). ‘The answer is to make the local cluster of tanners and footwear producers work more efficiently to match the orders.’

He said that the association had been involved in meetings with the local government to make them aware of the sector’s inability to compete with the Asian leather and footwear industry due to additional benefits given in those countries. He said that Mexico had opened its borders completely to the free market, which had caused unfair conditions for local industry, which was not able to compete on a level playing field in foreign markets.

Therefore, he said, Mexican producers would have to look for niche markets, producing leather with fashion colours and styles and greater uniformity and quality. In other words, he encourages local tanners to seek western markets where Mexico has lower costs, instead of going head-to-head with China and other mass producers.

‘In terms of leather technology, including retanning, dyeing, fatliquoring and drying, Mexico is ahead compared with international quality standards’, says Dueñas. ‘However we still have to invest more resources in filling our spare capacity and double our efforts in the finishing plant to be competitive in leather fashion.’ Dueñas suggested that the tanning industry in Mexico is currently operating at 60% of capacity.

Competition has not only hotted-up on the international market for Mexico but also domestically. A combination of the Nafta free trade agreement and the entry of China to the World Trade Organisation (WTO) will strengthen the hand of Asians including Indonesia, Vietnam and Thailand.

Despite strong competition on the local market, more Mexican tanners are doing more business with the Far East, Asian and Indian markets. They have studied the success of Asians and realised that they already have much of the infrastructure required to compete.

‘We cannot have a great leather industry, if we don’t have a strong footwear industry and as long as we work together we will strengthen our hand to fully use the close leather-footwear supply chain in Mexico’, says Dueñas.

According to a survey carried out by Centro de Capital y Competitividad Intelectual (CECIC) the strategy of the Chinese facing competition is not defence or surviving, but attacking the global market. Through the effective use of the leather-footwear supply chain, the Chinese were able to take full advantage of high volume, low cost production with short lead times and consistent quality.

With a strong localised supply chain Mexico already has a competitive advantage similar to China but also the advantage of direct access to the world’s largest footwear consumer market, the USA.

Hence, it is essential for the Mexican leather and footwear sector to become even more internationally competitive. There is a need to be focused on the strengths of the industrial leather-footwear-supply chain. By working more closely they can take advantage of economies of scale, which characterise other successful industrial clusters.

To face the current competition from China in the US market, action is required today. Not only do the Mexicans face competition from China but they also are up against Indonesia, Vietnam and Thailand. The leather industry in Mexico is ranked as the 20th largest in the world in terms of sales and the 5th largest in the US market with US$62 million sales from a total market value of $1.05 billion.

Financing a competitive strategy

The strategy devised by the industry in Mexico is not to copy the Chinese formula based on low costs and cheap labour, but provide a strategy based on quality and integrated customer service to enable a rapid response to customers, particularly in the US. The Mexican strategy has been called the 5R approach: the right product in the right quantity, at the right time, the right place and the right price.

As a result of the CECIC survey, the federal government have financially supported the cluster leather-footwear supply strategy with an initial funding of 3.0 million pesos ($333,000) and the state government of Guanajuato have also contributed 2.15 million pesos ($233,074) directed to the programme to improve Mexico’s international competitiveness.