Leather sector: Transition needed to face LDC-graduation

With proper support, Bangladesh’s leather sector can move up the value chain by producing more high-end leather products, such as finished goods and branded products. Photo:TBS

The leather and leather goods sector aims to achieve $12 billion in exports by 2030, compared to only $1.22 billion in FY 2023. This is definitely a highly optimistic target, where we need about 40% yearly growth to reach the target. 

There is, of course, no denying that the sector can reach that level. However, even after a lot more research, dialogue, and presentations, improvement is slow. 

In the exports, leather footwear (HS 6403) contributed the most, about $704 million in FY23, while it was $396 for leather goods (HS 42), and rawhide (HS 41) was $123 million. In the case of footwear, the USA is the highest consumer (37%), Japan imports about 10%, and Germany and Canada are about 8% and 7%, respectively. Other EU countries, such as Poland, Great Britain, Italy, and France, import about 16%, while China imports only 2%. 

On the other hand, China imports raw hide significantly, about 43%. The next buyers are India (10%), Italy (8%), Hong Kong, and Vietnam (5%), and some other countries such as Spain, Japan, Taiwan, the Korea Republic, and the UAE also import from Bangladesh. It is seen that buyers are different for different types of products within the same sector.

In the case of leather goods, meaning relatively processed or finished leather and some products, India (26%) is the highest importer; the second is the USA (23%), followed by Japan (17%), and Belgium (7%). Countries like the Netherlands, Germany, Australia, Canada, China, and Hong Kong also import from Bangladesh. 

Leather goods such as footwear and similar products are high-value-added products; for example, leather jackets have high global demand. The global market is about $420.13 billion in 2022; the UK alone imports leather goods worth $3.56 billion, while Bangladesh exports only $14 million. 

The average price of a leather jacket could be $200–500, which can go up to $1500. Instead of exporting raw hides and finished leather, Bangladesh could look into high-value-added finished products to increase exports and achieve the target of 2030.

In a recent dialogue organised by ERD, a Leather Development Authority under the prime minister's office has been proposed to give a big boost to expedite reform measures. From the source of the Asia Foundation, we came to know that they have supported a number of industries—at least 15 to 20 leather factories in the country—to be prepared for Leather Working Group certification, which is one of the criteria to enter the global market. 

In India, LWG-certified suppliers are 253; in China, it is about 200; in Pakistan, it is 44; and in Vietnam, the number is 18. The LWG-certified companies in Bangladesh are only three, of which only one is gold and two others are silver-certified organisations from the Sustainable Leather Foundation.

Leather is considered one of the most important and promising sectors for Bangladesh's trade and economy. It was the highest export-earning sector of the country after ready-made garments during the last fiscal year. Considering the huge potential of this industry, the government has identified it as one of the top priority sectors. 

Currently, leather and leather products exported from Bangladesh enjoy duty-free, quota-free market access in various countries. The sector is also benefiting from various government support, including cash incentives. However, the sector could not progress deservedly, exploiting its full potential.

The recent ERD dialogue on the potential and challenges of the leather sector in Bangladesh discussed the impact of LDC graduation and when a tariff hike will be a concern. In the EU, the MFN tariff on leather (HS 41) and leather products (HS 42) is low, about 3 and 5%; however, the MFN tariff on leather footwear (HS 64) will be around 10%. It is noteworthy that under the GSP+ situation, footwear will enjoy zero duty, as in the EBA (ERD Study). 

There is immense potential to increase our leather footwear products in the EU if supported by local raw materials, standards, and other required compliances. It could give an excellent boost to the leather export sector.

On the other hand, the leather footwear market in other countries may face high tariffs after graduation in many countries. In Australia, the MFN tariff for footwear will be 3.75% post-graduation. In the case of Canada, it will be 10.37%, India (10%), Japan (25.25%), and Republic of Korea (RoK) (13%). Bangladesh has some competitiveness in the leather footwear sector; it could continue to increase its exports to the EU under the GSP+ system. 

Exports of leather and leather products (HS 41 and HS 42) will face different types of duties in importing countries such as Australia, Canada, India, Japan, and the RoK. The range of MFN tariffs will range from around 3.5% to about 11%. Bangladesh needs to select products and country-specific benefits after LDC graduation strategically.

It came out of the discussion that Bangladeshi exporters get 30–40% lower prices because of a lack of certification. These have been discussed on several occasions; however, they remained unresolved for long. Properly operationalising the CETP of the tannery estate is a long-standing problem.

There is a two-way challenge in the case of attaining the required number for LWG certification. The private sector has to be responsible, while the government has a role to play. However, initiatives should come first from the tannery industry owner to make the government responsible, which is not happening or taking so much time. 

Most of the enterprises in the tannery estate are small; they are not fully aware of the critical situation by themselves. The workers on the estate are never trained. A recent study by the Asia Foundation suggests a strong training centre on the tannery estate.

There are other issues, such as strengthening the backward linkage industries and proper preservation of raw materials at the grassroots level, establishing an effective linkage between the local RMG industry and the leather goods and footwear sector, and Speed to market, which is especially important due to the fast-paced nature of the fashion industry. Leather goods brands need to be able to respond to new trends quickly, and customer demands to remain competitive. 

A countrywide network should be established for collecting and preserving raw hides for the improvement of the local leather industry; the necessary enhancement of the skill base for the improvement of the leather industry; the preservation of rawhide; and the governance of the industries in Savar Tannery Estate are some other requirements. The private sector needs to invest in this sector, make a skilled workforce, and also take care of the local market's demand; this was a call from the government.

With the right investments and support, Bangladesh's leather sector can move up the value chain by producing more high-end leather products, such as finished goods and branded products. This would allow Bangladeshi leather exporters to capture a greater share of the profits in the global leather industry. After graduating from LDC status, Bangladesh could also attract more foreign investment in the leather sector. 

A raw material (rawhide) collection centre needs to be established in every upazila so that the quality of the raw material can be ensured during Eid Ul Azha. Mechanised desalting machines and establishing modern slaughterhouses at the upazila level are other proposals the private sector raised.

The Bangladeshi leather sector is also facing increasing pressure to improve its environmental performance. This requires investment in new technologies and processes to reduce pollution and waste. This requires a significant investment. 

When CETP is a much-discussed issue, solid waste management is another area. In a recent study by the Asia Foundation on supply chain analysis of tannery solid waste by-products in Bangladesh, they identified eleven types of solid waste from their field survey, and if these can be used properly, have extensive market value, and can be used for producing a number of products, they can even add value to the exports. 

In this supply chain, they identified thirty-one actors, mostly informal. Bangladesh has a solid waste management policy by DOE; however, solid waste management in the leather sector would need to be taken care of separately.

The concerns raise all these issues, and policymakers are aware of them. Now, there is a need for action and fixing the priorities for addressing the post-LDC situation and meeting the targets announced by national policies. The leather sector needs a transition to attain and retain its second largest export sector position.

Ferdaus Ara Begum is the CEO of Business Initiative Leading Development (BUILD), a public private dialogue platform that works for private sector development.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.