China is still where the action is

22 November 2012

Over the past decade, and more so in the past five years or so, producers of raw material as well as finished leather and leather goods have come to rely on China as their principle market. This is not to rule out countries like South Korea and of course India and Vietnam, but generally, if there were not a market in China for all the industry produces, prices would be a mere fraction of what they currently are.

In speaking with the leather buyer for a major footwear brand this week, he noted that their emerging economy is so big that a “slowdown” really means that sectors are affected. We didn’t discuss this in depth but just looking at the economic news from China, the only reduction in sales is compared to previous boom years. My friend at the brand noted that there are brands in China, like Belle, who just completed opening 70 more retail shoe stores throughout the country.

He pointed out that the tanning and footwear manufacturing industries biggest problem is going to be rising wages and benefits – labour is a problem in the south but many factories have already moved to locals three hours from the Dongguan by high speed train. Many will follow to stay in China and benefit from the incentives and reduce costs.

Another footwear brand confided on November 21 that if raw material prices stay at or advance beyond current levels, they are resigned to the fact that they will have to pay for the leather they need. For Chinese footwear brands, there doesn’t seem to be any problem in passing on higher leather prices up the supply chain. For US and international brands however, they will find away, just like they did 20 or 50 cents/sq.ft/ ago.

Note: we’re only talking about footwear, approximately 55% or so of total leather consumption. Automotive leather has about a 35% penetration rate in China and where else are leather handbags produced in the quantity and quality that China exports and consumes domestically every year. Will synthetics replace leather in these products? At least not in the near future, even at higher prices.

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