The Launch of the Priority Manufacturing Sector Value Chain Reports

Launch of the Priority Manufacturing Sector Value Chain Reports

Leather sector Findings and Recommendations October 2015

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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 Key Trends in Sub‐Saharan Africa

Insights Demand

• The global market growing at 5% annually

Leather Footwear Production vs Demand

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

Supply Source: UNIDO

350,000 300,000

USD '000s

Leather Footwear Import vs Export

Trade Deficit

250,000 200,000 150,000 100,000 50,000 0 2012

Source: UN Comtrade

Source: UN Comtrade

• Only a few countries with vibrant leather industry in SSA

2013 Export

Import

3

Contents I.

Global Trends – Demand & Supply

II. Kenya Leather Sector Analysis III. Competitiveness Analysis IV. Key Strategic Directions, Actions & Scenarios

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

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

Source: ETG Primary Research

6

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

63%

32%

5%

Source: Primary research, modified Delphi Analysis

7

Kenyan leather footwear accounts for small share of total 42m footwear market ~ only 3.3m pairs (8%) Market Share of Total Footwear Purchased by Price 20.0 18.0

Kenya share of leather shoes only 22% (3.3m pairs)

16.0 Pairs (Millions)

14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 2nd Hand‐Mitumba

New‐Low Cost

Non‐Leather

Leather‐imported

New‐Mid Cost

New‐High Cost

Leather‐Kenyan 8

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

Raw Hides & Skins

Export Value*

$ 6.7 Million

Wet Blue & Crust

$ 131 Million

Abattoirs & Traders

Employ ment

Capital/ Labor Intensity

Finished Leather

31,600 (11,600 Slaughter Houses/Slabs 20,000 traders)

Labor Intensive

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

$ 3.5 Million

Leather Products

$ 5.6 Million

Tanning

Manufacturing

1,077

12,934

Capital Intensive

Labor Intensive

Greatest Value Addition & Employment Potential 4

Employment in Leather Industry: Majority is Informal Sector and Growing, Formal Sector Stagnant Informal Sector 16,000

Employment in Leather Industry

14,011

14,000

Employment

12,000

accounts for 63% of total leather industry employment

10,000

10,000

8,000

Informal Sector Leather Products

6,000 4,000

1,075 Handbag, luggage, etc.

2,000

1,859 Formal Sector Leather Footwear 1,077 Tanning

0 2009 Tanning

Footwear

2010

2011

Handbags, luggage, etc.

Source: 2014 Kenya Statistical Abstract, ETG Primary Research

2012

2013

Sub‐Total Informal Sector (Jua Kali)** 10

Kenya’s Leather Cluster: Complex, yet fragmented 89% of Total Leather Export in Wet blue

Formal Sector produces 1/3 of Leather Footwear

Informal Sector 2/3 of Leather Footwear

Minimal Linkages Between Formal and Informal Sector 11

Contents I.

Global Trends – Demand & Supply

II. Kenya Leather Sector Analysis III. Competitiveness Analysis IV. Key Strategic Directions, Actions & Scenarios

Benchmarking & Gap Analysis

Kenya’s competitiveness lags significantly behind global competitors Availability of raw materials Product perception by market

8 7

Quality of raw materials

6 5

Unique skills within sector

Access to/cost raw materials

4 3 2

Tradition in the industry

1

Access to finance

Kenya

0

Product development

Sustained capital investment

R&D Process skills

Degree of vertical integration Tech sophistication of equipment

13

Benchmarking & Gap Analysis

Kenya’s competitiveness lags significantly behind global competitors Availability of raw materials Product perception by market

8 7

Quality of raw materials

6 5

Unique skills within sector

Access to/cost raw materials

4 3 2

Tradition in the industry

1

Access to finance

Kenya

0

Product development

Ethiopia Sustained capital investment

R&D Process skills

Degree of vertical integration Tech sophistication of equipment

14

Benchmarking & Gap Analysis

Kenya’s competitiveness lags significantly behind global competitors Availability of raw materials Product perception by market

Unique skills within sector

Tradition in the industry

10 9 8 7 6 5 4 3 2 1 0

Quality of raw materials

Access to/cost raw materials

Kenya

Access to finance

Ethiopia China

Product development

Sustained capital investment

R&D Process skills

Degree of vertical integration Tech sophistication of equipment

15

Benchmarking & Gap Analysis

Kenya’s competitiveness lags significantly behind global competitors Availability of raw materials Product perception by market

Unique skills within sector

Tradition in the industry

10 9 8 7 6 5 4 3 2 1 0

Quality of raw materials

Access to/cost raw materials

Kenya Access to finance

Ethiopia China Italy

Sustained capital investment

Product development

R&D Process skills

Degree of vertical integration Tech sophistication of equipment

16

Value Chain Cost Analysis: Kenyan low cost leather men’s

shoes are even more expensive than Ethiopian loafers $ 9.24 $ 7.28 Cost Difference $10.00 Total Cost Other Cost $9.00 Maintenance Packaging Electricity $8.00

Labor

$0.55

$0.39 $0.17

USD

$5.00

Other Cost 62%

$0.06

Soles, Buckle, Other Inputs

Cost Difference

$0.34

$1.10

$7.00 $6.00

30%

$0.09

$0.03

$0.31 $0.55

$2.75 $2.27

Maintenance 47% Packaging 24%

$4.00

Electricity 450%

$3.00

Labor 100%

$2.00 $1.00

Leather (Sheep Skin)

$4.40

$3.72

Other Inputs 21% Leather 18% (sheep skin)

$0.00

Kenya

Low cost men’s shoe

Ethiopia

Low cost men’s loafer

1

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Value Chain Cost Analysis: Kenyan low cost leather men’s

shoes are even more expensive than Ethiopian loafers Cost Difference $ 9.24 $ 7.28 $10.00 Total Cost Other Cost $9.00 Maintenance Packaging Electricity $8.00

Labor

$0.55

$0.39 $0.17

USD

$5.00

Other Cost 62%

$0.06

Soles, Buckle, Other Inputs

$0.31 $0.55

$0.03 $2.75

$2.27

$3.00

$1.00

Maintenance 47% Packaging 24% Electricity 450%

$4.00

$2.00

Cost Difference

$0.34

$1.10

$7.00 $6.00

30%

$0.09

Leather (Sheep Skin)

$4.40

$0.00

Kenya

Low cost men’s shoe

Kenya is significantly less competitive, and not yet ready for FDI.

Labor 100%

$3.72

Other Inputs 21% Leather 18% (sheep skin)

Ethiopia

1

Low cost men’s loafer 18

Are proposed policies addressing present constraints??

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 Abattoirs & Traders

Key Constraints

• • •

Low quality raw hides and skins Low supply/high cost of hides and skins Big volume of raw hides and skins smuggling

Tanning

Manufacturing

• • •

Lack of quality effluent facility • High environmental cost • High health Few tanneries processing finished leather

• • • •

Cross Cutting Constraints

Lack of Industry coordination

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

Competitive Positioning for Kenya Leather Footwear Italy High‐End Shoes

China

• Continual movement upscale

• Continuing to grow but, declining market share • slight movement upscale

Vietnam

Product Scope

•Continuing to grow increasing market share • Movement India upscale • Increasing

Ethiopia 2020

Low‐End Shoes Boots

Kenya 2014

market share of low cost footwear •Rapidly growing in low‐end footwear •Continuing to grow with FDI

2005

Undifferentiated

Unique Qualities Differentiation

Competitive Positioning for Kenya Leather Footwear

Italy

High‐End Shoes

• Continual movement upscale

China • Continuing to grow but, declining market share • slight movement upscale

Vietnam

Product Scope

• Continuing to grow increasing market share • Movement upscale

India • Increasing market share

Ethiopia of low cost footwear 2020

Low‐End Shoes Boots

Kenya 2014

• Rapidly growing in low‐end footwear • Continuing to grow with FDI

2005

Undifferentiated

Near‐term Strategy Increase share in local market and Increase exports to regional market (EAC) Mid‐term Strategy Grow exports and attract FDI How? By reducing costs, increasing quality of leather inputs, local procurement. Increasing skills and productivity of informal sector Unique Qualities

Differentiation

Competitive Positioning for Kenya Leather Handbags, Travel Ware, & Cases

High‐End Products

Italy China

Product Scope

Kenya 2020

Vietnam Kenya Ethiopia

India

2013

Low‐End Products

Undifferentiated

Unique Qualities Differentiation

Competitive Positioning for Kenya Leather Handbags, Travel Ware, & Cases

High‐End Products

Italy China

Product Scope

Kenya 2020

Vietnam Kenya Ethiopia

India

2013

Low‐End Products

Undifferentiated

Overall Strategy 1. Increase share in global markets (EU, USA, EAC, COMESA) How? Increase Kenyan brand recognition, “Buy Kenyan”, loca procurement, joint marketing, increase worker skills, B‐2‐B connections, access to design, Increase FDI Unique Qualities

Differentiation

Contents I.

Global Trends – Demand & Supply

II. Kenya Leather Sector Analysis III. Competitiveness Analysis IV. Key Strategic Directions, Actions & Scenarios

Strategic Leather Product & Markets Targets PRODUCT

Low value added leather footwear

High value added specialty products

Finished Leather

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

Handbags, travel ware, cases

Specifications of cut size, color, texture, pattern

Kenya, EAC

US, EU

China, EU

Three Strategies for Enhancing Leather Industry Competitiveness & Growth 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

3. Improve Governance & Strengthen Collaboration in Leather Industry • Institutional strengthening • Cluster Building 26

3 Competitiveness Strategies & 18 Key Actions 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 Process 3.2 Strengthen KLDC--Kenyan Leather Development Council

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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 Accelerator iii. 2.1.2 Develop Leather City / Industry Park 2.1.3 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 Capacities 2.2.3 Enhance Human Resource Placement Services for Leather Industry 2.2.4 Improve and Extend Professional Certification Programs for Leather Industry 2.2.5 Strengthen Professional Development Organizations 2.3 Enhance and Enforce Quality & Standards 2.3.1 Promote Greater Adoption of Quality Leather Processing Certification 2.3.2 Develop Leather Award and Recognition Programs 2.3.3 Increase Enforcement of Quality Standards for Imported Leather Products 2.3.4 Initiate Regional Branding of Leather Industry to Promote Specialization

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

High Low

EXPECTED IMPACTS EMPLOYMENT

VALUE ADDED

LOW EASE OF IMPLEMENTATION IMPLEMENTATION COST INVESTMENT

Develop a Leather Marketing Entity Promote International Match‐Making Design Transparent Public Procurement Policy Mass Customization of Made‐to‐Order Shoes

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Strategy 2. Build Quality/Standards, Reduce Costs Improve Production, Tech, & Machinery

EXPECTED IMPACTS EMPLOYMENT

VALUE ADDED

LOW EASE OF IMPLEMENTATION IMPLEMENTATION COST INVESTMENT

High Low

LWCC—Common Mfg Facility Kariokor Business Accelerator Leather City / Industry Park Duties Reduction on Leather inputs

Improve Skills Upgrade TPCSI Strengthen University Capacities Improve HR Placement Services

Enhance Quality/Standards Promote Quality Leather Certification Develop Leather Award Programs Increase Enforcement Import Standards Regional Branding, Promote Specialization

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Strategy 3. Improve Governance & Strengthen Collaboration in Leather Industry

High Low

EXPECTED IMPACTS EMPLOYMENT

VALUE ADDED

LOW EASE OF IMPLEMENTATION IMPLEMENTATION COST INVESTMENT

Establish a Leather Industry Strategy Implementation Process (Clustering)

Strengthen KLDC

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Private Sector Facility to pool and upscale leather articles production capability CORE OBJECTIVE

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

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

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.

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

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”)

Estimated budget Year 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, Hezakiah Jennifer

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, Hezakiah Jennifer, 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, Hezakiah Jennifer + Steering Team

15 June 2015

Mobilize resources for launching pilot common manufacturing facility

Beatrice & Maurice, Dr. Onyuka, Hezakiah Jennifer + Steering Team

15 August 2015

Steering Team

10 June 2015

Beatrice & Maurice, Dr. Onyuka, Hezakiah Jennifer + Steering Team

15 September 2015

Develop operations guidelines to govern shared use of common facilities Establish pilot operation

PRODUCTS/ RESULTS

Measures of Success •

Proposal endorsed by stakeholders –

•

Identified sources of finance –

•

March 15, 2015

Mobilizing investments, Sourcing equipment, etc.

–

•

December 20, 2014

June 15, 2015

Launch of LWCC Nairobi pilot facility –

November 15, 2015

Leadership of LWCC 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)

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

CORE OBJECTIVE A vibrant & functional CMC producing competitive products for the local & regional markets

Strategic Importance Job creation, poverty reduction, skill development.

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

Kariokor Leather: Common Mfg Center Establish 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

Access to material (finished leather, good quality, good price) Access to Machinery Create awareness through the media that Kariokor market is the best producer of authentic leather shoes and articles in Africa!!

Estimated budget Phase 1: US$ 70,300

PRODUCTS/ RESULTS

Measures of Success •

Specification of machinery needed –

•

Secure space for workshop facility –

•

December 15, 2015

Mobilizing investments, acquiring machinery –

•

August 2015

January 15, 2016

Launch of Kariokor Leather CMC –

February 1, 2016

LEADERSHIP •

INFLUENCE LEADERS – – –

•

TECHNICAL LEADERS – –

•

Aden Mohamed, CS, Ministry of Industrialization Dr. Evans Kidero (Governor Nairobi County) (Leather Industry of Kenya, Agha Khan Foundation) 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 A successful leather industry park will solve three critical constraints: • • •

A common effluent treatment to bring down the high costs 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

2. Pre‐Market Testing

best site? What are initial costs of ensuring sufficient water supply? Benefits of locating near the EPZ?

Who is willing to locate in park and what is demand/willingness to pay for services?

4. Develop Master Plan

5. Identify Private Developer‐PPP Which

What economies of scale and linkage benefits can be maximized?

private sector developers have expressed interest? Need for “market test” of viability?

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

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

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Leather Industry Park Recommendations Work with the private sector  Private sector participation (as developers / PPP) critical for several reasons − Financial risk‐sharing − Speed of implementation − Technical expertise

History of successful private zones

Recent developments – Mombasa FTZ

− Market signal Examples: Dominican Republic, Colombia, Philippines, Kenya  Important to get the legal framework / incentives right…

SEZ: Lessons for Kenya from global experience

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Are proposed policies addressing present constraints??

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 Abattoirs & Traders

Key Constraints

• • •

Low quality raw hides and skins Low supply/high cost of hides and skins Big volume of raw hides and skins smuggling

Tanning

Manufacturing

• • •

Lack of quality effluent facility • High environmental cost • High health Few tanneries processing finished leather

• • • •

Cross Cutting Constraints

Lack of Industry coordination

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

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

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Employment Impact of Proposed Actions Scenarios of the Future 40,000

“Action across the VC” Scenario Strong competitiveness of formal & informal sector, plus growth in FDI

35,000

30,000

“Partial Action” Scenario

25,000

Improvement in competitiveness of both formal and informal sectors 20,000

“Do Nothing“ Scenario 15,000

Modest improvement in competitiveness of informal sector, formal sector stagnant

10,000

10 5,000

0 2009

2010

2011

2012

2013

2015

2020

2025

Employment Impact of Proposed Actions Scenarios of the Future Kenya currently produces 3.3 million pairs per annum, and employs an estimated 5,500 in leather footwear

Leather footwear Employment Worker Projected new production* Leather footwear generated (jobs productivity employment (million pairs per employment** per 1 million pairs (pairs per worker from 10 million Country annum) (1,000 workers) produced) per annum) 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

1,220

881

12,185

Average

Sources: * 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.

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.

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