The Launch of the Priority Manufacturing Sector Value Chain Reports

Your log

Leather sector Findings and Recommendations

October 2015

Launch of the Priority Manufacturing Sector Value Chain Reports

Contents

I. Global Trends – Demand & Supply

II. Kenya Leather Sector Analysis

III. Competitiveness Analysis

IV. Key Strategic Directions, Actions & Scenarios

Market Demand for Leather Goods Far Exceeds Supply in Africa

3Source: UN Comtrade

• The global market growing at 5% annually

• Sub‐Saharan African market demand estimated to grow at 10%

• Only a few countries with vibrant leather industry in SSA

InsightsKey Trends in Sub‐Saharan Africa

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

2012 2013

USD

'000

s

Export Import

Leather Footwear Import

vs Export

Leather Footwear

Production vs Demand

Demand

Supply

Trade Deficit

Source: UNIDO

Source: UN Comtrade

Contents





Kenya Leather Products: Footwear dominate production, handbags show promise

Source: ETG Primary Research 4

Kenyan Leather Footwear Products are mostly basic shoes: School Shoes, Sandals, Men’s Shoes, Military/Security Boots

6Source: ETG Primary Research

Total market for footwear in Kenya is estimated at 42 million pairs per year.

Mitumba Dominates Footwear Market: 63%26.5 million pairs/year

Source: Primary research, modified Delphi Analysis7

63%

32%

5%

Kenyan leather footwear accounts for small share of total 42m footwear market ~ only 3.3m pairs (8%)

8

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

2nd Hand‐Mitumba New‐Low Cost New‐Mid Cost New‐High Cost

Pairs

(Millions)

Market Share of Total Footwear Purchased by Price

Non‐Leather Leather‐imported Leather‐Kenyan

Kenya share of leather shoesonly 22% (3.3m pairs)

“Wet Blue” Accounts for 89% of Total Leather Exports……industry must move to higher value added leather manufacturing

Raw Hides & Skins

Wet Blue & Crust

Finished Leather

4

$ 3.5 Million$ 6.7 Million $ 131 Million $ 5.6 Million

Animal Husbandry and

Leather Products

Tanning ManufacturingAbattoirs & Traders

Labor Intensive Capital Intensive Labor Intensive

Employment

Capital/Labor

Intensity

Export Value*

Greatest Value Addition & Employment Potential

31,600(11,600 Slaughter Houses/Slabs20,000 traders)

Source: UN Comtrade, 2014 Kenya Statistical Abstract, ETG Primary Research

12,9341,077

Employment in Leather Industry: Majority is Informal Sector and Growing, Formal Sector Stagnant

10

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2009 2010 2011 2012 2013

Employmen

t

Employment in Leather Industry

Tanning Footwear Handbags, luggage, etc. Sub‐Total Informal Sector (Jua Kali)**

10,000

1,075

1,859

1,077

Source: 2014 Kenya Statistical Abstract, ETG Primary Research

14,011

TanningFormal Sector Leather FootwearHandbag, luggage, etc.

Informal SectorLeather Products

Informal Sectoraccounts for 63% of total

leather industry employment

11

Informal Sector2/3 of Leather

Footwear

Formal Sectorproduces 1/3 of

LeatherFootwear

89% of Total Leather Export

in Wet blue

Minimal Linkages Between Formal and Informal

Sector

Kenya’s Leather Cluster: Complex, yet fragmented

Contents





13

012345678

Availability of raw materials

Quality of raw materials

Access to/cost raw materials

Access to finance

Sustained capital investment

Degree of vertical integration

Tech sophistication ofequipmentProcess skills

R&D

Product development

Tradition in the industry

Unique skills within sector

Product perception by market

Kenya

Benchmarking & Gap Analysis Kenya’s competitiveness lags significantly behind global competitors

14

012345678

Availability of raw materials



Access to finance




R&D

Product development




Kenya

Ethiopia


15

0123456789

10Availability of raw materials



Access to finance




R&D

Product development




Kenya

Ethiopia

China


16

0123456789

10Availability of raw materials



Access to finance




R&D

Product development




Kenya

Ethiopia

China

Italy


17

1

$4.40 $3.72

$2.75

$2.27

$1.10

$0.55

$0.17

$0.03

$0.39

$0.31

$0.09

$0.06

$0.55

$0.34

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

$9.00

$10.00

Kenya Ethiopia

USD

Leather(Sheep Skin)

Soles, Buckle, Other Inputs

LaborElectricityPackaging

MaintenanceOther Cost

$ 9.24 $ 7.28

Value Chain Cost Analysis: Kenyan low cost leather men’s shoes are even more expensive than Ethiopian loafers

Other Cost 62%

Maintenance 47%

Packaging 24%

Electricity 450%

Labor 100%

Other Inputs 21%

Leather 18% (sheep skin)

Cost Difference

Total Cost 30%

Cost Difference

Low cost men’s shoe Low cost men’s loafer

18

1

$4.40 $3.72

$2.75

$2.27

$1.10

$0.55

$0.17

$0.03

$0.39

$0.31

$0.09

$0.06

$0.55

$0.34

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

$9.00

$10.00

Kenya Ethiopia

USD

Leather(Sheep Skin)

Soles, Buckle, Other Inputs

LaborElectricityPackaging

MaintenanceOther Cost

$ 9.24 $ 7.28

Value Chain Cost Analysis: Kenyan low cost leather men’s shoes are even more expensive than Ethiopian loafers

Other Cost 62%

Maintenance 47%

Packaging 24%

Electricity 450%

Labor 100%

Other Inputs 21%

Leather 18% (sheep skin)

Cost Difference

Total Cost 30%

Cost Difference

Low cost men’s shoe Low cost men’s loafer

Kenya is significantly less competitive, and not yet ready for

FDI.

Key competitiveness constraints are: 1) lack of supply and quality in raw hides & skins, and 2) high costs and low quality in manufacturing, 3) lack of industry coordination


Cross Cutting

Constraints

• Low quality raw hides and skins

• Low supply/high cost of hides and skins

• Big volume of raw hides and skins smuggling

• Lack of quality effluent facility• High environmental cost• High health

• Few tanneries processing finished leather

• High cost of inputs (leather, soles, etc.)

• Relatively high labor cost

• Low availability of quality finished leather

• Lack of skilled artisans and technicians & access to training

• Lack of machinery

Lack of Industry coordination

Key Constraints

Are proposed policies addressing present constraints??

Competitive Positioning for KenyaLeather Footwear

Differentiation

Undifferentiated Unique Qualities

ProductScope

Low‐EndShoesBoots

High‐EndShoes

China• Continuing to grow but, declining market share

• slight movement upscale

Vietnam

India

Ethiopia

Italy

Kenya2014

2020

2005

• Continual movement upscale

•Continuing to grow increasing market share

• Movement upscale • Increasing

market share of low cost footwear

•Rapidly growing in low‐end footwear

•Continuing to grow with FDI

Competitive Positioning for KenyaLeather Footwear

DifferentiationUndifferentiated Unique Qualities

ProductScope

Low‐EndShoesBoots

High‐EndShoes

China• Continuing to grow but, declining market share

• slight movement upscale

Vietnam• Continuing to grow increasing market share

• Movement upscale

India• Increasing market share of low cost footwearEthiopia

•Rapidly growing in low‐end footwear

•Continuing to grow with FDI

Italy•Continual movement upscale

Kenya2014

2020

2005

Near‐term StrategyIncrease share in local market and Increase exports to regional market (EAC)

Mid‐term StrategyGrow exports and attract FDI

How?By reducing costs, increasing quality of leather inputs, local procurement. Increasing skills and productivity of informal sector

China

Vietnam

India

Ethiopia

Italy

Competitive Positioning for KenyaLeather Handbags, Travel Ware, & Cases

Differentiation

ProductScope

Low‐EndProducts

High‐EndProducts

Kenya2020

Kenya2013


China

Vietnam

India

Ethiopia

Italy

Competitive Positioning for KenyaLeather Handbags, Travel Ware, & Cases

Differentiation

ProductScope

Low‐EndProducts

High‐EndProducts

Kenya2020

Kenya2013


Overall Strategy1. Increase share in global

markets (EU, USA, EAC, COMESA)

How?Increase Kenyan brand recognition, “Buy Kenyan”, locaprocurement, joint marketing,increase worker skills, B‐2‐B connections, access to design,Increase FDI

Contents





Strategic Leather Product & Markets Targets

Finished Leather

PRODUCT MARKET

Low value added leather footwear

Low cost men’s shoes, school shoes, Security/Military Boots Kenya, EAC

High value added specialty products

Handbags, travel ware, cases US, EU

Specifications of cut size, color, texture, pattern

China, EU

Three Strategies for Enhancing Leather Industry Competitiveness & Growth

26

1. Increase Access to Markets & Induce Greater Demand for Kenya Leather Products‐ Grow domestic market share‐ Increase EAC share‐World play in niche markets

1. Increase Access to Markets & Induce Greater Demand for Kenya Leather Products‐ Grow domestic market share‐ Increase EAC share‐World play in niche markets

2. Build Quality/Standards, Reduce Costs‐ Improve Production Process Technology and Machinery‐ Improve Skills‐ Enhance Enforce Quality & Standards

2. Build Quality/Standards, Reduce Costs‐ Improve Production Process Technology and Machinery‐ Improve Skills‐ Enhance Enforce Quality & Standards

3. Improve Governance & Strengthen Collaboration in Leather Industry• Institutional strengthening• Cluster Building

3. Improve Governance & Strengthen Collaboration in Leather Industry• Institutional strengthening• Cluster Building

3 Competitiveness Strategies & 18 Key Actions

27

2. Build Quality/Standards, Reduce Costs

2.1 Improve Production Process, Technology and Machinery 2.1.1 Establish Leather Product Development Accelerators (or "Leather Wealth Creation Centers")i. Nairobi Leather Accelerator (for formal sector)ii. Kariokor Leather Business Acceleratoriii. 2.1.2 Develop Leather City / Industry Park2.1.3 Strengthen Incentives and Decrease Import Duties on Leather Tanning and Leather Product Production Inputs

2.2 Improve Skills 2.2.1 Restructure and Upgrade TPCSI—the Training and Production Center for the Shoe Industry 2.2.2 Strengthen University Leather Design, Technology, and Marketing Capacities2.2.3 Enhance Human Resource Placement Services for Leather Industry2.2.4 Improve and Extend Professional Certification Programs for Leather Industry2.2.5 Strengthen Professional Development Organizations

2.3 Enhance and Enforce Quality & Standards2.3.1 Promote Greater Adoption of Quality Leather Processing Certification 2.3.2 Develop Leather Award and Recognition Programs2.3.3 Increase Enforcement of Quality Standards for Imported Leather Products2.3.4 Initiate Regional Branding of Leather Industry to Promote Specialization

1. Increase Access to Markets & Induce Greater Demand for Kenya Leather Products

Action Initiatives:1.1 Develop a Leather Marketing Entity to Increase Domestic and International Awareness, and Coordinate Branding of Kenya Leather 1.2 Promote International Match-Making between Crust and Finished Leather Buyers and Kenyan Producers.1.3 Design Transparent Public Procurement Policy 1.4 Introduce Mass Customization of Made-to-Order Shoes

3. Improve Governance & Strengthen Collaboration in Leather Industry

Action Initiatives:3.1 Establish a Leather Industry Working Group & Strategy Implementation Process3.2 Strengthen KLDC--Kenyan Leather Development Council

28

Strategy 1. Increase Access to Markets & Induce Greater Demand for Kenya Leather Products

Develop a Leather Marketing Entity

INVESTMENTVALUE ADDED

LOW IMPLEMENTATION

COST

Promote International Match‐Making

Design Transparent Public Procurement Policy

HighLow

EMPLOYMENT

Mass Customization of Made‐to‐Order Shoes

EXPECTED IMPACTSEASE OF

IMPLEMENTATION

29

Strategy 2. Build Quality/Standards, Reduce Costs

LWCC—Common Mfg Facility

Improve Production, Tech, & Machinery INVESTMENT

VALUE ADDED

LOW IMPLEMENTATION

COST

Kariokor Business Accelerator

Leather City / Industry Park

HighLow

EMPLOYMENT

Duties Reduction on Leather inputs


IMPLEMENTATION

Improve Skills

Upgrade TPCSI

Strengthen University Capacities

Improve HR Placement Services

Increase Enforcement Import Standards

Enhance Quality/Standards

Develop Leather Award Programs

Promote Quality Leather Certification

Regional Branding, Promote Specialization

30

Strategy 3. Improve Governance & Strengthen Collaboration in Leather Industry

Establish a Leather Industry Strategy Implementation Process (Clustering)

INVESTMENTVALUE ADDED

LOW IMPLEMENTATION

COST

Strengthen KLDC

HighLow

EMPLOYMENT


IMPLEMENTATION

LEATHER WEALTH CREATION CENTER (LWCC)A Common Manufacturing Facility to Consolidate the Leather Potential in Kenya

Private Sector Facility to pool and upscaleleather articles production capability

Establishment of a private sector‐led common manufacturing and marketing platform to enable collective generation of competitive leather products

A pilot center will be established in Nairobi and then replicated in the 8 regions.

Joint production and marketing projects will be undertaken at the Center, for example, beginning with a project on production of competitive school shoes (“one child, one pair”)

STRATEGIC IMPORTANCE: Access to existing, state-run common manufacturing facilities--TPCSI and KIRDI--is limited because of location and a bureaucratic (top down) service orientation to producers

CORE OBJECTIVEA vibrant & functional

CMF producing Competitive products for the local, regional & International markets

Estimated budgetYear 1: US$ 545,000

Action Plan

Activity Responsible Date

Review of Success factors/ lessons learned for common manufacturing facilities in Africa, in world. UNIDO, JICA, KOICA

Beatrice & Maurice 5th December 2014

Develop initial draft project proposal Beatrice & Maurice, Dr. Onyuka, Hezakiah

27th February 2015

Meetings with Stakeholders for input and feedback to proposal

Beatrice & Maurice, Dr. Onyuka, Hezakiah

16th Dec (round 1); 15 February (round 2)

Endorsement of LAEA, other leather sector stakeholders and Assoc (tanners, cobblers, etc.. Min of Ind., KIE, KEBS, KIRDI, EPC, KIPI, universities (Kenyatta and Nairobi Universities, Kenya Technical Univ.)

Beatrice & Maurice, Dr. Onyuka, HezakiahJennifer

31st March 2015

Hire expert to conduct feasibility study for the proposed common mfg facility

Beatrice & Maurice 5th March 2015

Establish a Steering Team Beatrice & Maurice, Dr. Onyuka, Hezakiah

15th February 2015

Mobilize resources (HR, financing, equipment, space) Beatrice & Maurice, Dr. Onyuka, HezakiahJennifer, Steering Team

31st June 2015

Action Plan (Continued)

Activity Responsible Date

Establish pilot operation Steering Team 15th September 2015

Monitoring & Evaluation Ex- ante, Formative, Process, Outcome

Identify resources (HR, financing, equipment, space)

Beatrice & Maurice, Dr. Onyuka, HezakiahJennifer +Steering Team

15 June 2015

Mobilize resources for launching pilot common manufacturing facility

Beatrice & Maurice, Dr. Onyuka, HezakiahJennifer +Steering Team

15 August 2015

Develop operations guidelines to govern shared use of common facilities Steering Team 10 June 2015

Establish pilot operation Beatrice & Maurice, Dr. Onyuka, HezakiahJennifer +Steering Team

15 September 2015

PRODUCTS/ RESULTSMeasures of Success

• Proposal endorsed by stakeholders– December 20, 2014

• Identified sources of finance– March 15, 2015

• Mobilizing investments, Sourcing equipment, etc.– June 15, 2015

• Launch of LWCC Nairobi pilot facility– November 15, 2015

INFLUENCE LEADER(s)– Beatrice Mwasi, LAEA– Hezekiah Okayo, Min of Ind.

TECHNICAL LEADER(s)– Maurice Omondi, LAEA– Dr. Onyuka (KIRDI)

INTIATIVE ACTION TEAM– Rebecca Mpaayei (EPC)– Jennifer Mulli (LAEA)

Leadership of LWCC

Kariokor Leather: Common

Manufacturing Center

(KLCMC)

“technology improvement and innovation, work sites, and a bias in public procurement in favor of the small scale”

Seasonal Paper No. 2 of 1992 on Small Enterprise and the Jua Kali Development in Kenya

Kariokor Leather: Common Mfg CenterEstablish a workshop with basic

production machinery (Clicking, Skiving, Splitting, Embossing,

Lasting machines)

Provide production, technical and business training to Kariokor MSMEs to improve quality while keeping the production cost low

Estimated budgetPhase 1: US$ 70,300

CORE OBJECTIVEA vibrant & functional CMCproducing competitive products for the local &

regional markets

Job creation, poverty reduction, skill development.

Establish that Kariokor Market can produce quality shoes and leather articles at a good price.

Access to material (finished leather, good quality, good price)

Access to Machinery

Create awareness through the media that Kariokormarket is the best producer of authentic leather shoes and articles in Africa!!

Strategic Importance

PRODUCTS/ RESULTSMeasures of Success

• Specification of machinery needed– August 2015

• Secure space for workshop facility– December 15, 2015

• Mobilizing investments, acquiring machinery– January 15, 2016

• Launch of KariokorLeather CMC– February 1, 2016

LEADERSHIP• INFLUENCE LEADERS

– Aden Mohamed, CS, Ministry of Industrialization– Dr. Evans Kidero (Governor Nairobi County)– (Leather Industry of Kenya, Agha Khan Foundation)

• TECHNICAL LEADERS– Nicholas Mutisya, Chair, Nairobi Cty Cobblers Assoc.– Peter Kitheka Treasurer, Nairobi Cty Cobblers Assoc.

• INTIATIVE ACTION TEAM– Charles Ndung’u (CEO, KLDC)– Kabiru Ndonga, (Chairman, Kariokor Market)– Patricia Jesse, (Sec. Nairobi Cty Cobblers Assoc.)– Mrs. Ongoro (County Minister for Trade & Industry– Maina Kamanda (MP – Starehe Constituency)– County Mechanical Engineer

Leather City: High potential impact, but needs to be market tested

39

A successful leather industry park will solve three critical constraints:

• A common effluent treatment to bring down the highcosts of water effluent treatment

• Co‐location/clustering to offset industry fragmentation• Logistics and document facilitation to reduce trade

barriers

Key Questions:

1. Prepare detailed business plan: Is Athi River best site? What are initial costs of ensuring sufficient water supply? Benefits of locating near the EPZ?

2. Pre‐Market Testing Who is willing to locate in park and what is demand/willingness to pay for services?

4. Develop Master PlanWhat economies of scale and linkage benefits can be maximized?

3. Econ/Tech./Env. Anal‐ysis Are high costs of infrastr. (water & treatment) offset by benefits of jobs created and revenues?

5. Identify Private Developer‐PPP Which private sector developers have expressed interest? Need for “market test” of viability?

6. Find Anchor Tenants & Donor Financing What are the learnings from DongoKundu (e.g., Toyota & JICA)?

Leather Industry Park RecommendationsWork with the private sector

40SEZ: Lessons for Kenya from global experience

Private sector participation (as developers / PPP) critical for several reasons

− Financial risk‐sharing

− Speed of implementation

− Technical expertise

− Market signal

Examples: Dominican Republic, Colombia, Philippines, Kenya

Important to get the legal framework / incentives right…

History of successful private

zones

Recent developments –Mombasa FTZ

Key competitiveness constraints are: 1) lack of supply and quality in raw hides & skins, and 2) high costs and low quality in manufacturing, 3) lack of industry coordination


Cross Cutting

Constraints

• Low quality raw hides and skins

• Low supply/high cost of hides and skins

• Big volume of raw hides and skins smuggling

• Lack of quality effluent facility• High environmental cost• High health

• Few tanneries processing finished leather

• High cost of inputs (leather, soles, etc.)

• Relatively high labor cost

• Low availability of quality finished leather

• Lack of skilled artisans and technicians & access to training

• Lack of machinery

Lack of Industry coordination

Key Constraints

Are proposed policies addressing present constraints??

STRENGTHEN KLDC

• More responsibility and power for coordinating all leather institutions (TPSCI, KIRDI, AHITI), and other institutes

• Coordinate the leather sector stakeholders • Allocate more financial resources to enable KLDC to execute its mandate.– Coordinating leather sector activities– Carry out regulatory functions– Support accelerators and common manufacturing– Policy development and implementation– Capacity building– Market development

42

Employment Impact of Proposed ActionsScenarios of the Future

Modest improvement in competitiveness of informal sector, formal sector stagnant

“Do Nothing“ Scenario

“Partial Action” Scenario

“Action across the VC” Scenario

Improvement in competitiveness of both formal and informal sectors

Strong competitiveness of formal & informal sector, plus growth in FDI

10

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2009 2010 2011 2012 2013 2015 2020 2025

44

Employment Impact of Proposed ActionsScenarios of the Future

Based on estimate of 1,667 jobs per million pairs of shoes produced, if Kenya was able to increase its competitiveness, market share, and annual production of shoes, by 10 million pairs, from its current 3.3 million pairs of shoes, to 13.3 million pairs of shoes, then employment in the leather industry would roughly double from 15,000 to 32,000. This estimate is roughly consistent with Scenario C above.

Kenya currently produces 3.3 million pairs per annum, and employs an estimated 5,500 in leather footwear

Country

Leather footwear production*

(million pairs per annum)

Leather footwear employment** (1,000 workers)

Employment generated (jobs per 1 million pairs

produced)

Worker productivity

(pairs per worker per annum)

Projected new employment

from 10 million additional pairs

Vietnam 1,172 700 597 1,674 5,900

China 3,120 2,702 866 1,155 8,660

Turkey 79.7 100 1,255 797 12,500

India 909 1,500 1,650 286 16,502

Ethiopia 5.9 7.6 1,288 776 12,880

Kenya 3.3 5.5 1,667 600 16,667

Average 1,220 881 12,185Sources: * Production estimates taken from World Statistical Compendium for Raw Hides and Skins, Leather and Leather Footwear 1992‐2011 (FAO)** Employment estimates from national leather industry association reports (Vietnam Ministry of Industry and Trade; China Leather Industry Association; Turkish Statistical Institute; India Council for Leather Exports; Ethiopia—International Food Policy Institute.

Documents

The Launch of the Priority Manufacturing Sector Value Chain Reports