1. business and industrial
2. manufacturing

MIDI-BRIEF: TRANSFORMING the NIGERIAN LEATHER INDUSTRY
CONTENTS:
HOW the INDUSTRY WORKS (Production and Trading of Hides and Skins – Tanning – Finished Leather Goods – Leather Value Chain Structure) : POPULAR INDUSTRY MYTHS and
REALITIES : INDUSTRY DYNAMICS (Growth Drivers – Global Industry Production, Power
and Responsiveness Trends – Employment – Competitiveness – Systemic Value Chain Constraints) : GEMS1 RESPONSIVE SUPPORT
The Growth and Employment in States (GEMS) programme is a five-year programme jointly funded by the World
Bank and DFID. Its aim is to increase growth and employment, especially for poor men and women, by improving competitiveness in strategically important Nigerian industry clusters in selected states and nationally, as well as through
business environment reform. Wholly funded by DFID, the target market for the GEMS1 component is the meat and
leather industry.
As in other target markets, GEMS1 uses the Making Markets Work Better for the Poor (M4P) approach targeting
sustainable improvements in market outcomes by altering the incentives that the market as a system provides to participants. It addresses major government and market failures in the system thus bringing about systemic change. Improving the incomes of the poor, especially women and the young, is an explicit goal of M4P programmes.
HOW the INDUSTRY WORKS...
Leather Value Addition Stages
Production and Trading of Hides and Skins: The sector starts as a by-product The Nigerian leather industry is mainly
of the meat sector when hides and skins are stripped off a slaughtered carcass to centred in Kano. The production of
get to the other parts of the animal. Hides are thicker and refer here to cattle finished leather goods from a raw skin
follows five major transformation
hides while skins are thinner and refer here to sheep and goat skins. Despite the
stages. At each of these stages signifislaughter of nearly 7 million cattle annually, the majority of Nigerian hides are cant value is added to the incoming
used to produce ‘pomo’ (the local term for edible hide), a delicacy consumed pre- raw material. The following diagram
dominantly in southern Nigeria, but also gaining in popularity in the north. Given provides a schematic of the value addithe high price that hides fetch in the food market (which can be as much as five tion stages.
times the price paid by tanneries) there is little incentive for producers to sell their
• IN - Skin recovered at
hide to the leather industry. Therefore most leather is produced from sheep and
Slaughter
goat skins.
• OUT - Skin supplied to
SKIN SUPPLY
Tanner
The slaughter of sheep and goats is undertaken by local slaughterers at village
level and at urban abattoirs. Slaughtering peaks during the small (Eid-Al-Fitir) and
• IN - Raw Skin
big (Eid-Al-Kabhir) Sallah Religious Festivals of August and October when about
• OUT - Chrome Tanned Skin
25% of annual skin raw material is sourced. Formal slaughterhouses and abattoirs
(Wet Blue) Produced
CHROME TAN
are dispersed across various cities and states of Nigeria with a reputation for being poorly managed. Most slaughtering still occurs informally: according to
• IN - Wet Blue Skin
UNIDO in 2002, 70% of sheep goat skins are procured from unregistered slaugh• OUT – Crust Leather
CRUST
produced
ters.
PRODUCTION
Both in the case of abattoirs and unregistered slaughter slabs, the processing
of dead animals is often conducted manually on animal skins or on the floor with
• IN – Crust Leather
minimal attention given to avoiding knife damage. Raw skins are easily damaged
FINISHED
• OUT – Finished Leather
LEATHER
at this stage while primary producers have limited incentives to deliver good qualPRODUCTION
ity skins that are free of defects since a good quality skin is worth less that 3% of
the overall slaughtered animal value. The common practice for purchasing and
• IN – Finished Leather
• OUT – Finished Leather
trading skins at the point of slaughter is to price skins based on size with minimal
FINISHED
Goods
GOODS
attention given to grading the skins. As a result, there is currently no mechanism
PRODUCTION
by which to grade skins at the slaughter place and ensure that skins produced
without defects earn a premium over lower grade skins.
Prices currently paid by major traders to butchers and market dealers are N600 for Grade 1 sheepskin and N400 for
Grade 1 goatskin (representing a drop of about 50% on prices paid in 2010: major traders presently make a profit of about
N100 per sheepskin and N50 per goat from the tanneries. The average value of a reject skin is N100. Skins are still the
main cost driver throughout the chain: according to Consilium International in 2010, account for 64% of costs in tanning
and 73% in finishing. Skins are the main cost driver throughout the leather value chain: according to Consilium International in 2010, they account for 64% of costs in tanning and 73% in finishing. There is a scarcity of good quality skins as a
result of pre-mortem defects from poor animal husbandry practices, peri-mortem defects from poor slaughtering techniques and post-mortem defects from improper curing and preservation of skins. The grading and selection of skins will
vary from tannery to tannery, and each tannery will have its own selection techniques depending on the requirements
of its end customers. Grades 1,2 and 3 are generally determined by a combination of quality issues: (i) parasite, fungal
GEMS1 | SUPPORT to MEAT and LEATHER INDUSTRY | SEPTEMBER 2012
MIDI-BRIEF: TRANSFORMING the NIGERIAN LEATHER INDUSTRY
and disease conditions; (ii) flay damage (holes and knife damage that occurs during skin removal); (iii) poor preservation; (iv) insufficient skin size; and, (v) poor skin shape. Rejects are sold to traditional/artisanal tanneries.
The trading stage involves a large elaborate network of
skin traders and sub-traders who serve as intermediaries linking tanneries to the primary producers of raw skins. There are
approximately 250 medium to smaller dealers and 30 major
skin dealers, with most of the main Kano-based dealers being
of Lebanese descent. Although the informal and highly dispersed nature of goat and sheep slaughtering in Nigeria makes
skin collection particularly complicated, this network manages
to gather skins from across the country as well as other parts
of Africa.
Skins are collected through a multi-level system, starting
with small collectors at the village level up to large traders
who deliver skins to industrial tanneries once they have accumulated sufficient supplies through their sub-trader network.
Skins from abattoirs and slaughterhouses typically enter the
supply chain at the market skin dealer level. A large trader may
work with over 20 or more sub-traders and be among a pool of
several main traders serving a particular tannery. At the same
time, the large traders typically supply more than one warehouse or branch in Kano, selling higher grade skins to tanneries that are willing to pay more and lower grade skins to other
buyers in the market. The majority of warehouses in Kano are
either owned or associated with individual tanneries. An important characteristic of the trading network is that it is common practice for industrial tanneries to advance funds to appointed dealers or branches, which in turn finance small collectors and traders with advances. This alleviates credit constraints experienced within the trading network, especially
since business is conducted on a cash basis.
Salting (costing N30-45 per skin depending on
whether the skin is sheep or goat) is the popular
method for curing and preserving skins, and salt is
typically provided by industrial tanneries to the large
dealers that bring skins to Kano, and these dealers are
responsible for distributing salt to their own suppliers
in order to ensure that raw skins are properly conserved as they move along the trading network. Primary producers usually salt skins prior to sale. The industrial tanneries complete grade checks at tannery
gate where they purchase
As there is inadequate primary production of
sheep and goats in Nigeria, salted skins/hides are also
imported from neighbouring countries as well as east
and north Africa. The domestic supply of raw skins is
seasonal with supply at its lowest during the rainy season in July and August. During these months, the quality of both sheep and goat skins are substantially
lower because the increased humidity results in deficiencies such as hair-slip and red heat. Traders and
tanneries estimate that during the rainy season, inadequate preservation and storage coupled with bacterial build-up caused by the damp weather can lead
to losses of up to 70% of sheepskins and up to 30-40%
of goatskins. In other months, the rate of rejected
skins falls to 15% for sheepskins and 5% for goatskins.
This suggests a total annual loss in the range of 1.4-1.6
million skins, much of which can be prevented through
better practices in curing and storing skin.
Tanning: Once the skin is accepted at the tannery gate, it passes through the warehouse system of the tanneries and
later through machine tanning processes after which it is called leather which may be exported as crust or finished
leather for which additional cosmetic processes are added. Finished leather is exported or sold locally for the production
of FLGs (footwear, fashion accessories, upholstery, dresses and other items). The Leather Industry has two subsectors –
formal tanning and traditional/artisanal tanning.
The formal tanning subsector has 3 large and 5 medium size active industrial tanneries based in Kano that account
for 90% of all exports (according to ComTrade in 2010, around 40 million tanned hides over $3 billion representing just
under 3% of the global market) to international re-tanners mostly in Europe but increasingly the Far East reflection the
geographical shift in production for end markets of the past decade or so. Around 18 formal tanning enterprises have
closed or become inactive over the past 12 years. Three smaller formal tanneries service the domestic market. The formal subsector essentially captures all the better quality skins that are available in the market. There is no uniform standard for tanned leather: each tannery has different chemical formulas using imported chemicals from major European
suppliers, techniques, and technologies to produce various types of leather articles. Following wet blue transformation,
the tanneries will regrade and select the wet blues for further processing into crust and finished leather for client requirements. Imports of wet blue will also be considered at this stage.
GEMS1 | SUPPORT to MEAT and LEATHER INDUSTRY | SEPTEMBER 2012
MIDI-BRIEF: TRANSFORMING the NIGERIAN LEATHER INDUSTRY
After the raw material has been transformed into wet blue, the
tanneries will regrade and select the wet blues for further processing into crust and finished leather. Imports of wet blue will also be
considered at this stage. The selection depends on the final product required by the tannery’s clients and can significantly impact
the profits of the company. The tannery’s goal is to minimize the
number of rejects while ensuring that those which are selected will
meet the required quality standards for the final product. In certain
instances, tanneries are able to use lower grade skins to obtain a
higher grade finishing if the leather required is in white or cream
colours. This is because defects are less visible on light collared
leather. Selected wet blues are further processed into crust,
whereas rejects are either discarded or sold to other tanneries,
particularly traditional tanneries.
Formulas for a particular leather article may contain up to 52
different chemicals, with up to 75% of the chemical being imported.
Larger tanneries which focus on exporting higher grade leather
products generally import a majority of their chemicals from world
renowned chemical suppliers (BASF, Bayer, TFL, Stoppani, Clariant,
etc). Medium tanneries geared towards lower grade exports also
use imported chemicals, albeit a lower percentage than local
chemicals. Smaller and medium sized tanneries providing low
grade leather to local markets tend to use the cheapest chemicals
with almost all of their chemicals being procured locally.Both wet
blue and crust are intermediate products, but the Nigerian government only allows products from the crust and finished leather
stages to be traded internationally.
The regrading and selection of crust can also
have a major impact on the profitability of the
company. For example, tanneries may be able to
retain lower grades of crust if they can hide defects through dyeing and finishing the product. In
this way, they would be able to command a higher
price than if they had naturally finished the
leather.
Most tanneries export the crust leather overseas, and a few continue to process the crust into
finished leather. It has, however, been difficult for
Nigerian tanneries to specialize in finished leather.
The physical distance from final users abroad (i.e.
brands and leather goods factories) prevents Nigerian tanneries from providing the service and
quality required by these clients. Orders are often
returned by these users for additional retouching,
modifications, or finishing. This becomes not only
difficult but also costly given the distance and
poor infrastructure linking Nigeria with its client
markets. Additionally, the fashion industry tends
to require a wide variety of colours in very small
quantities and at very high speeds. Nigerian tanneries are more geared towards high volume production rather than small, tailor-made orders. It is
unlikely that Nigeria will be able to offer these
services in the near future.
Traditional/Artisanal Tanneries have a long history in Nigeria of employing traditional methods to convert lower
grade raw skins into a reasonably good quality finished leather, primarily for the local market. Traditional tanners typically work with raw skin and wet blue rejects, which are obtained at favourable prices through various channels: (1) directly from the village slaughter place, (2) through the network of skin traders or (3) from tanneries. In some cases, rejects have even been discarded by the industrial tanneries and are obtained free of charge by the traditional tanneries.
However, in the past year, the number of skin rejects has fallen as larger tanneries are keeping even the lowest grades
of skin and wet blue. Small-scale tanners, dyers and leather product manufacturers have increasingly been forced to
search out foreign markets in neighbouring countries to source their skins and leather.
These tanneries are generally small family-owned units which are clustered mainly in and around towns with manufacturers of footwear and other leather products. Within the Kano Metropolitan area alone, there are five artisan tanning clusters tanning around 25-30,000 skins weekly. The handmade tanned and dyed leather produced by these tanneries supply local leather products manufacturers and the Nigerian handicraft sub-sector. Both the handmade leather and
resulting products are sold within Nigeria and also exported to other countries in West Africa.
\
Finished Leather Goods (FLGs): The Nigerian FLG value chain comprises the producer group of actors which accounts
for over 60% of all the actors in the sector. They are of two types of these – industrial and artisanal producers. Based on
the scale and type of operation and the level of machinery involved, the industrial producer group can be divided into
two main production groups – large and small industrial producers. The large industrial production group is characterized by complete and fully-integrated automated production systems with less labour involvement. The small industrial
producers typically import and locally assemble component parts of various FLGs.
The artisanal producers have two distinct operational groups based on the nature and scope of the operation: these
are ‘artisan complete’ and ‘artisan specialist’. The ‘artisan complete’ are those skilled individuals producers capable of
undertaking all stages of production (typically shoemakers). ‘Artisan complete’ producers have a sub-group, ‘artisan
cooperative’, which shares investment, sourcing of inputs, production and marketing of their products. The ‘artisan specialists’ are those individuals specializing in one or two stages of production to provide related services to other producers. There are also artisan niche producers that are fully vertically integrated and are producing high quality FLGs for
high net worth individuals.
The backward linkages in the chain include: input suppliers such as industrial tanneries and traditional tanneries; finished leather importers; suppliers and distributors of imported accessories and components; local producers, suppliers
and traders of accessories and components. The most popular FLG products are footwear (around 85% of all FLGs),
house-ware, and fashion accessories and ornaments. Slippers and sandals comprise around 80% of footwear production.
GEMS1 | SUPPORT to MEAT and LEATHER INDUSTRY | SEPTEMBER 2012
MIDI-BRIEF:
BRIEF: TRANSFORMING the NIGERIAN LEATHER INDUSTRY
The main FLG production areas are Kano, Onitsha, Aba and Lagos. Covered shoes dominate production in Aba, Lagos
and Onitsha and are significant in Kano and Kaduna, while slippers and sandals are dominant in
in Kano & Kaduna and sigsi
nificant in Aba, Lagos and Onitsha. House-wares
wares and ornaments are significant in Kano and Sokoto while fashion acce
accessories are significant in Aba, Lagos, Onitsha and Kaduna. The forward linkage actors of the producers are local and sstatelevel wholesalers and retailers for informal .distribution into domestic and regional markets.
The main three inputs for FLGs are leather (the pripr
mary input), components and accessories. The two main
types of leather used by producers are natural and synthetic leather. Imported synthetic leather accounts for
50% of leather inputs for FLG production followed by
hides 35% and skins 15%. The synthetic leather is used
mostly for footwear and some fashion accessories such
as upholstery, ladies’ bags and purses, shoes and sli
slippers, and forth.
Skins are generally used more in footwear producprodu
tion and hides for footwear and other leather goods.
The 3 main sources of leather inputs are local industrial
tanneries, traditional tanneries and imported leather
(the demand shortfall for hide is about 80% of total d
demand). Some of the demand-supply
supply gap is filled by iimportation of reject hide leather. Of the total supply of
skin, 5% is produced by traditional tanneries, 85% by
mechanized tanneries and 10% is imported.
ed. Of the total
supply of hides, less than 1% is produced by traditional
tanneries, 70% by mechanized tanneries and 29% is imi
ported. Accessories and components consist of leather,
sole, glue, thread, metal accessories and foam.
Leather Value Chain Structure:
The FLG cluster in Aba cityy is divided into six zones, each
producing a distinct product such as lady footwear, travel
bags, and belts, among others. Daily production of footwear
is estimated at 20,000 pairs of shoes, of which 20
20-30% are
made with leather. Most of the leather used in production
comes from Kano, although in some special instances leather
has been imported from Brazil. It is, however, becoming iincreasingly difficult for Abba buyers to obtain leather from
the commercial tanneries in Kano since even lower grades
are being
ng exported. Accessories are mainly imported from
China and India and of a cheaper quality than what is availaavail
ble from Europe. These leather products are catered to co
consumers from lower and middle income groups.
In the absence of official export paperwork
paperwork, it is difficult
to quantify the exact volume being sold abroad. However, a
substantial percentage is being exported informally to
neighbouring West African countries. It is worth noting that
existing customers and buyers have expressed increasing
dissatisfaction with the quality and styles of Nigerian leather
products. As a result, they have started to look for alternaaltern
tive sources of leather goods in order to have products that
are more in fashion and made of higher quality leather.
MIDI-BRIEF: TRANSFORMING the NIGERIAN LEATHER INDUSTRY
POPULAR LEATHER INDUSTRY MYTHS and REALITIES...
Myth: Red Sokoto goat
skins command a premium price!
Reality: Tanneries do not pay a premium for Red Sokoto skins and base their payments for all
skins on quality issues centred on the area (i.e. size) of the skin and the level of grain damage
(usually caused by one or a combination of skin parasites, poor flaying by less-skilled slaughterers and poor preservation). The small-stock source is also irrelevant as larger Nigerian tanneries use modern equipment and chemicals to transform skins into finished leather satisfying
a range of client finishing requirements.
Myth: Nigerian finished leather goods
are made from Nigerian leather!
Myth: Nigerian finished leather
goods are not exported!
Reality: Nigerian finished leather
goods are mainly produced from imported leather since Nigerian tanneries export most of their finished
leather to take advantage of the EEG
scheme
Reality: A significant volume of Nigerian finished leather goods is
exported to regional markets, especially ladies’ and gents’ shoes
made in Aba and Onitsha, and ladies’ slippers and sandals from
Kano
Myth: Nigeria would be better-off if
‘Pomo’ production and consumption was
discouraged in favour of leather production!
Reality: The raw skin value to the farmer
for ‘Pomo’ is 1.5-2 times that of leather
while employment generated in modern
tanneries is less than that in Pomo production and retailing
INDUSTRY DYNAMICS...
Growth Drivers: Comtrade estimates the global market for finished leather goods at around USD 1 trillion. Demand for
leather worldwide increase 3-4% annually during 2005-08 but fell in 2009 due to the global economic and financial crisis.
90% of the global trade in leather are goods, products and accessories. According to TradeMap data, China dominates
the export market with around one-third share: other leading producers include Italy, Brazil, India, Pakistan, France and
Hong Kong. Footwear has been a major driver of growth for both China and Italy accounting for about 50% of China’s
exports in 2008, and around 45% of Italy’s. The global leather market is fuelled by three main drivers: new products,
new fashion trends and the creation and introduction of new applications for leather. Ibid estimates the global market
for skins at around USD 29 billion with trade in hides and skins dominated by Italy, the US, Brazil and Hong Kong.
The major drivers of recent change and growth in
the Nigerian leather industry have been government
interventions. Up to 1979, most of the skins that were
exported out of Nigeria were exported in raw form.
Once this was prohibited by the government in 1979,
the existing tanneries were forced to upgrade by investing in new technologies and machinery to tan the
skins into Wet Blue, in which form they were exported. In 1999, the government again intervened to
ban the export of Wet Blue, and many tanneries were
forced to close down. Those that remained again had
to invest heavily in upgrading technologies and machinery to produce crust or finished leather, or were
forced to sell their Wet Blue to other tanneries able to
transform it into crust. Only the foreign-owned tanneries had the financial resources and technological
know-how to invest in new equipment, machinery,
and technology. Today, about 6-8 tanneries produce
90% of all products and all are still foreign-owned (by
the Chinese, Lebanese, and European). Dozens of foreign technicians and engineers are still being used to
operate the tanneries.
Nigeria is home to one of Africa’s largest livestock
sectors: leather is the second major earner of foreign
exchange after Oil. In 2008, Nigeria exported around
USD680 million of tanned skins but exports fell in
2009 due to the global economic and financial crisis.
According to ComTrade for 2010, Nigeria exported
around 40 million skins valued in excess of USD 3 billion, and representing about 2,9% of global trade.
The major drivers of this growth were investment by the
major tanneries in higher value products (i.e. from crust to
more finished leather) which also enabled them to increase the
usage of Grade 3 skins hitherto rejected for domestic craft
leather production as well as the government’s Export Expansion Grant (EEG) scheme where the industrial tanneries can
claim a 30% grant on exported crust and finished leather invoice values. Traditional/artisanal tanneries currently produce
around 2 million craft leather pieces annually for the domestic
FLG sector. While the Nigerian sheep and goat skin based
leather sector is a significant contributor to global trade in this
specific commodity, the industry is almost unknown at regional
and global level.
As demand for skins by tanneries exceeds domestic supply,
48% of the 52 million pieces procured in 2010 were salted
skins/hides imported from neighbouring countries as well as
eastern and northern Africa (58% of all skins processed are
goat). Many of these imported skins are of lower quality and
trade at a substantial discount compared to prices paid to skins
originating from Kano, Katsina and Sokoto. Although these
imports have helped narrow the supply gap, the low quality of
imported skin has negatively impacted the overall quality of
raw skins being used by the Nigerian leather industry.
The industry estimates that Nigeria imports around USD
300-500 million annually of leather products informally (the
import of leather is officially banned). Chinese imports account
for 90% of the Nigerian FLGs domestic market leaving Nigerian
producers with just a 10% share. The estimated value of the
Nigerian FLG sector for domestic and regional markets is USD
200 million.
GEMS1 | SUPPORT to MEAT and LEATHER INDUSTRY | SEPTEMBER 2012
MIDI-BRIEF: TRANSFORMING the NIGERIAN LEATHER INDUSTRY
Global Industry Production, Power and Responsiveness Trends: Unable to meet the demand of fashion for a
wider variety of colours, smaller orders, and faster service, many European tanneries closed down around the turn of
the millennium and production has shifted to low-cost Asian centres such as China, India and Vietnam as well as Brazil.
Today, Asia is the hub of leather shoe production accounting for 85% of global leather shoe production.
Power in the value chain has shifted considerably:
over time, this shifted first from skin suppliers and
warehouses (from 1960-1975), to the tanneries (19751990) to manufacturers (1990-2000), and then to retailers such as Zara, Tommy Hilfiger, and Timberland,
which control distribution of the product and subcontract production (2000-2010). Today, the power is
shifting into the hands of the consumer.
“We have too many suppliers. Our goal is to a long-term
relationship with fewer suppliers. It’s very important to
have good, reliable suppliers who want to make money,
and we want them to comply with corporate social responsibility regulations.”
Yves Carcelle, CEO of the Louis Vuitton Group of Companies
As power has shifted gradually further and further away from the tanneries and suppliers, the imperative to become
rapidly responsive to demand, lean and efficient to ensure survival has become increasingly intense. Consolidation is
occurring at the retail and brand level, tightening supply chain management. An increasingly challenging environment
has accelerated the need for supply chain efficiency and the ability for retailers to leverage global infrastructure and
marketing dollars. Increased demand for efficiency has caused retailers to limit the number of suppliers that they use.
Product trends that characterize the leather industry today include innovation, design-driven lines/products, technological development, just-in-time, short lead times, compliance and green technologies.
Employment Creation: Nigeria’s leather sector is job-rich. The meat and leather industry provides the market for millions of Nigerian primary producers and many more in neighbouring countries. The formal leather subsector in Kano
creates around 9,000 full time and 5,000 seasonal jobs, while the 5 traditional tanning clusters in Kano create over 8,000
full time jobs: a further 40,000 employed in artisanal tanning in the area. The FLGs sector provides direct employment
for around 100,000 in Lagos, 300,000 in Aba, 150,000 in Onitsha, 60,000 in Kano, 10,000 in Kaduna and a further
200,000 in other areas. Women comprise about 30% of the FLG workforce but much less in tanning. If various classes of
indirect employees of finished leather, transport and other sectors are considered, the number engaged by the sector
may tends towards a 2.5-3 million.
Competitiveness: Overall, skins only represent a small percentage (less than 3%) of the value of an animal, which means
that the availability of skins for leather depends on the attractiveness of keeping sheep and goat for meat. Thus, the fortune of the leather sector depends on the fortune of the
meat and livestock sector.
In order to remain competitive in future years the formal
tanning sector will need to adapt from being sellers of large
packages of commodity crust leather by improving their ability to produce smaller volumes of specific leather products
(re-tanned, finished leather and finished leather goods) to
meet changing customer specifications. In these circumstances there is a need to upgrade the full range of leather
products produced and to improve the interaction of the Nigerian skin leather sector with international and regional customers.
There is potential for establishing joint ventures or
agreements with foreign partners to finish and further process the crust leather being produced in Nigeria abroad.
Rather than engaging foreign tanneries as potential partners,
tanneries in Nigeria are currently exporting crust to independent buyers and tanneries, and have a customer-supplier
relationship with these entities.
Kano’s leather cluster participates almost exclusively
at the lower end of the value chain rather than the
higher value-added, export-oriented finished leather
goods segment. This translates into low value and low
margins for manufacturers. A basic crust or semifinished skin, for example, is exported for only about
USD6 to USD9 on average, depending upon quality,
finish, grade, size, etc. Products made for the domestic
market are no more sophisticated than the material for
export.
FLG producers specialize in low-end products of
poor quality with poor finish, made with technologies
and tools that have been largely abandoned in the rest
of the world. Nigeria manufactures and sells only lowend shoes and slippers of poor quality, while more than
120 million pairs of basic, medium-quality leather shoes
are imported from Asia.
Nigeria lags considerably behind best-practice countries such as Italy and Spain in several critical success
factors identified by the cluster working groups including research and development, quality standards, price,
innovation, logistics, branding and communication with
buyers.
Production Factors - Labour The cost of labour in Kano is generally competitive due to a plentiful supply of labourers, ranging from about $40-$60 per month for line workers up to about $100-$150 for line heads (comparable to wages
in low-cost China). However, labourers in Kano’s leather cluster are generally low-skilled (having been trained largely
informally) and are less productive than global competitors. The poor quality of Kano’s infrastructure presents challenges, particularly power, water, and telecommunications (Nigeria ranked 131st out of 133 countries globally on the 2010
Global Competitiveness Report on the quality of electricity supply and 126th on infrastructure). Kano depends heavily on
“inherited” factors such as low labour cost and the availability of skins, rather than “created” factors such as more soGEMS1 | SUPPORT to MEAT and LEATHER INDUSTRY | SEPTEMBER 2012
MIDI-BRIEF: TRANSFORMING the NIGERIAN LEATHER INDUSTRY
phisticated production technology or skilled labourers. That would contribute to building a key competitive advantage.
Although several tanneries have upgraded their machinery and can now achieve efficiencies of about 80% the level of
best practice countries like China, Vietnam, or India, they are the exception rather than the rule as most tanneries are
using inefficient equipment that offer both cost disadvantages and lower quality than competitors (such as China).
Interaction Amongst Industry Actors: The
Kano leather cluster lacks many of the conditions
necessary for assuring strong, dynamic industry
players. The industry is highly fragmented at the
level of skins and hides, not so much because of
strong competition as because of a lack of standards or certifications that differentiate suppliers.
Because of a deficit in the number of skins available, tanneries are forced to accept all the skins
provided by their suppliers, regardless of quality:
while they are squeezed on the other end by
brands and distributors, who hold relatively
greater market power than the tanneries do. High
levels of informality, particularly in the suppliers
of tanneries selling to the domestic market, discourage industry players from making significant
investments in their businesses.
Levels of innovation are generally low, a result of low investment in R&D. This stems from a
lack of understanding of the fashion industry due
to extremely weak links with export markets, and
only infrequent attendance at events like trade
shows that might otherwise introduce them to
the latest fashion trends. There is in theory a ban
on the import of leather goods, which should
open up opportunities in the domestic market:
however, this is not enforced, and cross-border
trade has resulted in an estimated 90% of the local
market being occupied by the Chinese.
The power imbalances between the major tanneries and other
market players in the market must be addressed before more efficient functioning of the market can be attained. The Nigerian Tanners Council members hold the key to finding a way to resolve these imbalances and create win-win solutions: they would need to be
guided to develop inclusive business models which can help them
improve revenues and profits simultaneously while providing a fair
deal to stakeholders upstream. It is critical that the task of improving meat quality is designed hand-in-hand with the task of improving the quality of skins provided to the tanneries in order to find
optimal solutions (as this is naturally the link between the meat and
leather industries).
Trade Agreements: Under the African Growth and Opportunity
Act (AGOA), Nigeria has preferential trading (duty free) with the
USA for certain products. Leather goods qualify as an eligible product exported under AGOA. In 2009, Nigeria was counted among the
top five beneficiary countries in trading with the USA under AGOA
mainly due to high volumes of petroleum and petroleum products.
Although the USA is an importer of finished leather products, less
than 10% of the total value of exports from Nigeria traded under
AGOA was in leather goods. Nigeria has been a member of the
World Trade Organization (WTO) since 1995. The WTO agreements
have not facilitated increased exports. Nigeria is a member of the
Economic Community of West African States (ECOWAS), sharing a
common external tariff for preferential trade agreements between
Nigeria and its fellow member states. Despite these preferential
trade agreements, most of Nigeria’s regional exports of leather
products occur informally between Niger, Cameroon, and Burkina
Faso.
Export Expansion Grant (EEG) Scheme: Since 1986, and like many countries, Nigeria has tried to subsidize its industry to enable it to compete with the international markets and to somehow “compensate” the additional costs that operating in Nigeria brings (lack of infrastructures, lack of electricity, lack of water, congestion of ports and so forth). Under the redesigned EEG features from 2005 based on the objectives of the National Empowerment and Development
Strategy (NEEDS) programme, the grant rates are company-specific rather than product-specific as in the old guidelines
(i.e. now 0-30% for manufacturing, 0-15% for non-manufacturing and 0-10% for merchant exporters or exporters of primary products). While It is clear that EEG has benefited the industry overall, but not all the money collected from EEG has
gone into additional capital investment or creation of employment. The EEG has distorted some of the sectors that it
has benefited, like the leather sector, where higher rates of EEG have meant higher competition for the raw skin in order
to produce more and export more to obtain higher EEG rates and amounts.
The EEG review in 2005 that made implementation of the EEG company-specific and not product-specific resulted in
a further distortion to the leather industry leaving companies competing for the same raw skin and in the same international markets with different levels of EEG. The current EEG structure is geared towards benefiting larger groups and
pays little or no attention to newcomers to any industry of smaller companies that are left with no chance of competing
in the market. In the leather sector in particular, part of the EEG collected by tanneries has gone into the price of the raw
skins, increasing the raw skins price. This has created an additional distortion since the companies are forced to pay for
the raw skins in cash when they receive them or even in advance, and the EEG will not come until 2 to 5 years later. If the
EEG was totally removed, it is clear that all the inefficient companies that are just living off EEG, would disappear and so
will disappear the companies that are just in the business for EEG sake, but it is also equally true that the company investments will greatly be reduced and the company expansions will be very limited which would have a high negative
impact on the employment and growth generation.
The suppliers of hides and skins are bitter about the EEG arrangement because to them it makes the rich tanneries
richer and gives them more power to control prices. Tension exists between the two sub-sectors as the EEG scheme has
driven the formal sub-sector to acquire and process a larger number of skins. This has resulted in the quality of skins falling in both sub-sectors; the formal tanners reluctantly accept lower skins quality in order to maintain production volGEMS1 | SUPPORT to MEAT and LEATHER INDUSTRY | SEPTEMBER 2012
MIDI-BRIEF: TRANSFORMING the NIGERIAN LEATHER INDUSTRY
umes while the traditional/artisanal subsector is left with a smaller quantity of even poorer quantity skins. Skin quality is
therefore a common concern across both sub-sectors.
Systemic Value Chain Constraints: Nigeria’s leather industry could further increase its leather exports but is constrained particularly by the supply of quality skins and access to more competitively priced capital. The systemic constraints are:
Business Enabling Environment: Problems with the
business enabling environment include policy, implementation, regulation and inspection related constraints. The key challenges facing the leather sector in
this area include: (1) environmental standards (the
heavy use of chemicals in the industrial tanning process
has a significant impact on the environment compounded by weak enforcement); and, (2) the EEG which is bias
towards larger tanneries and distorts the skins market
(prices may be as much as double the price of a similar
piece elsewhere in Africa.
Market Access Constraints: Market access constraints
relate to productivity, capacity utilization, infrastructure, and transaction costs. The main constraint is the
availability of quality skins. Problems also exist with limited availability of water, affordable electricity, and other key inputs (chemicals, productive labour force, etc).
Horizontal and Vertical Linkages Constraints: Horizontal
linkages refer to the capacity to cooperate and organize
within each level, whereas vertical linkages refer to the capacity to cooperate and link with agents along different levels of the value chain. Nigeria’s leather value chain is characterized by a lack of trust among value chain actors and an
absence of effective dialogue among traders, tanners, leather goods producers, or other groups within and across the
value chain. This is further compounded by the weak capacity of associations within the value chain to cooperate on
cross-cutting constraints. There are also no vertical linkages
between the larger commercial tanneries and other tanneries.
Supporting Markets Constraints: Challenges also exist for
the leather industry when it comes to supporting markets
such as finance, labour training, and advisory services.
GEMS1 RESPONSIVE SUPPORT...
The target impact of GEMS 1 is “to increase growth, income and employment, especially for poor men and women, in
meat and leather markets in selected states and nationally”. The expected outcome is to “improve the performance and
inclusiveness of meat and leather sector market systems that are important for poor people”.
Complimenting target outputs of the Nigerian Leather Industry Transformation Agenda while ensuring high local
ownership by the private sector, and responsive to resolving major industry competitiveness constraints while exploiting major growth and employment opportunities, the core leather industry strategy for GEMS1 is supporting markets
and linkages for the following:
•
Finished Leather Goods (FLGs) for Domestic and Export Markets: Working with partners both in the local
leather goods manufacturing sector and those that supply services to the sector to improve marketing, develop
access to improved materials and implement improved production techniques, especially to increase competitiveness vs. Chinese imports.
•
Skin Supply to Tanneries: Working with partners both in the skin trading value chain and those that supply
goods and services to create linkages and develop and implement improved techniques for reducing skin damage and improving skin preservation and sorting and increase skin value.
•
Production of Finished Leather for Export: Working with partners in the tanning sector (those that manufacture crust and finished leather) and those that supply services to the sector to develop improved manufacturing processes and market access for finished leather including manufacturing process and market access improvement.
Other important areas of potential intervention under consideration include: (1) supporting markets and linkages
for the export of quality finished leather goods; and, (2) strengthening support functions to improve sector coordination and information management.
Prepared by GEMS1, the DFID-funded programme supporting the Nigerian
Meat and Leather Industry implemented by GRM International Limited