Shredding Paper

Kneeling on the floor in the pantry using the sharp end of a lacquered chop-stick to un-jam the paper shredder is clearly a good moment to reflect on what is going on in the leather world. This is, after all, the new “age of interruption” where blackberries, SMS, email, and mobile phones are controlling us by the minute. With thick stone walls in the pantry I am a long way from the ringing of phones or bleeping of arriving messages.

So what is happening in China? We heard a year ago about duty on raw hides perhaps being imposed perhaps not, and about the government wishing to close some tanneries for environmental reasons. At the same time the southern provinces were saying they wanted to make car parts with high added value rather than shoes. It seems now that things are really coming to fruition.

It began to come clear in January when the New Scientist published an article about environmental issues in China . It started with the leather industry:

“I have just come back from the ancient city of Bozhou in Anhui province, where discharges from the factories are so toxic they have killed crops, animals and even people. We met fishermen along the Guo He river, which has become polluted with waste from a nearby leather tanning factory. A few years ago, villagers could swim in the river. Now they get blisters on their hands and feet from touching the water. The river has no fish at all, so the fishermen have lost their livelihood.

When you stand close to the river you can smell rotting flesh because the leather factory dumps its sewage, made up of animal skin and meat, untreated into the river. The farmers have stopped using river water to irrigate their fields because they found that when they do, the crops die. The tanning facility has the equipment to treat sewage, but the villagers say the company doesn’t use it because it is too expensive. They say the factory has a big discharge outlet at its warehouse, and when no one is looking they pour waste in the river.”

The tanning industry could do without this bad PR and we all know that properly managed there is no need for tanneries to be an environmental hazard. Given that we make a high performance and beautiful material out of a renewable resource we should actually be environmental champions.

Yet most of us have seen these big expensive waste treatment plants in the developing world that look as though they are rarely if ever used. It was some 15 years ago that on a Cotance tour of China that I was on we saw a number of plants in just this state and we saw another in Tibet just last year. The effluent plants were shown to us with great pride, and in some cases were quite enormous and complex, but few showed signs of much activity. This is why for those with space the Reed Bed option makes so much sense as part of the treatment mix. It is low cost not only to install but also to maintain.

Yet back to China today. Without question small tanneries in particular are suffering from tighter environmental controls and new tanneries are finding building permission harder to get. Furthermore the change in draw down duties from July of this year is impacting badly on the leather sector and for many the uncertainty is worse than the outcome of more expensive products. Add to this rising labour costs and a rising currency and the China leather industry has a lot of issues right now.

Lead in your pencil and the China Price

You also have to consider the scares and product recalls in the US and New Zealand arising from faulty or dangerous Chinese products. Lead covered toys, faulty car tires and killer pet food has not helped endear Chinese products to the US consumer. Without doubt the Chinese brand has been damaged just at the moment when the “China Price” is under threat from all these other issues. “The Chinese Price” was described by BusinessWeek in 2004 as the three scariest words in US industry. Wal-Mart could threaten you with the Chinese price and if you did not meet it you lost the business. But what does the Chinese price entail? Here are some clues from Professor Peter Navarro of the Merage School of Business in California :

“Lower labour costs account for 39% of the China Price advantage. A highly efficient form of production known as “industrial network clustering” together with catalytic Foreign Direct Investment add another 16% and 3%, respectively. The remainder of the China Price advantage is driven by more mercantilist elements. Export subsidies account for 17% of the advantage, an undervalued currency adds 11%, counterfeiting and piracy contribute 9%, and together, lax environmental and worker health and safety regulatory regimes add another 5%.”

Right now to keep Chinese leather industry labour costs lower than India or Indonesia you have to go west to places like Chengdu . At the same time we are seeing the export subsidies – mostly hidden – and currency advantages erode. No wonder growth accelerates in India and there is a rush back to Indonesia . Vietnam continues to do well but will have to watch if it is dependent on finished leather from China .

The large efficient plants set within a cluster of suppliers still offer a big advantage over many competing nations; and we should not ignore the counterfeits. This is a big business for the Chinese leathergoods. When you go to Shanghai remind your party that buying counterfeits is not just bad for the legitimate leather industry: it is also funding terrorism.

Make sure you let us know if you are attending and come by the booth. And by the way mending the shredder with a chop stick does not work. The end breaks off and gets jammed itself; but at least there were no interruptions.

Michael Redwood

Wednesday, 22 August 2007