Su Chaoying, Honorary Chairman of the China Leather Industry Association (CLIA) has just published an article on LinkedIn on 19 February regarding the impact of the coronavirus outbreak on the China leather industry.
CLIA conducted a survey among some of its members, according to the survey, up to 16th February., 40% of surveyed said they have restarted their work but only part of their production lines is operating, which is generally below 30-40% of normal production capacity. The rest of the companies expressed that they will not restart their operations until the 17th February or the end of the month. Most shoe plants in Wenzhou, the shoe cluster in China, have not yet resumed or fully restarted their operations up to now.
This situation has caused the loss of orders. Some factories said they have had lost about 10% of orders from overseas due to suspending operation and delayed delivery of finished products. Some in China are concerned that the outbreak of virus may stimulate the transformation of orders or production from China to South East Asia.
A big problem faced by the companies who are planning to restart operation is a shortage of disposable mask which may further delay the date for restarting operations, making the current business and supply even more difficult.
Another key issue for tanneries and shoemakers is constrained logistics and travel due to travel restrictions, resulting in difficulty in delivering products, materials and components needed by those companies and a shortage of labour. According to the updated information, millions of workers have had trouble returning to their jobs after the holiday due to travel restrictions. It is estimated by officials that about one-third of migrant workers will still not have returned to work at the beginning of March.
About 90% of the factory buildings of small and medium sized tanneries, shoes and handbag makers are rented from tenants, adding a big burden to those companies because they are suffering from cash flow problems at the moment.
Usually the basic salary and social insurance should be paid to the employees even if they are staying home, and sot this will add additional cost to the companies.
Hubei province, the centre of the outbreak, is one of China’s manufacturing bases where auto production accounts for 8% of the country’s total. The outbreak and disruption of logistics will hit the auto industry seriously, which may impact the local tanneries processing automotive leather.
People are more likely to stay home, preventing them from travelling and shopping. This situation has caused a very weak demand for shoes, leather garments and finished leather products. One of China’s big shoe brands has closed thousands of shoe shops across China. International luxury goods have also been hit. An international source reported that the British brand Burberry has closed over 20 stores in China.
China is not only the world factory for leather, shoes and handbags, but also the most important components and raw materials supplier. The outbreak of the virus has also caused supply chain disruptions. A big international shoe brand told local media, at least 60% of its products are made by its manufacturing contractors in China, while the figure for another famous international shoe brand is 48%. The delay and disruption of operations will definitely hit those brands’ business and affect its supply chain. The disruption of supply chains also impacts the normal operations of tanneries, shoe and finished leather products manufacturers based in the Eastern Asia region, which are invested in by China’s shoe and bag companies or have close relations with their materials suppliers in China. A handbag company based in Wenzhou said its factory in Thailand has stopped part of its operations due to lack of raw materials supplied by its China’s partner.
Some tanneries and shoe makers expected that their sales for the whole year might drop by 10-20% below what they planned early this year. Both exports or imports of raw hides, leather and finished leather products for the first quarter may be much lower than last year due to the negative impact of the virus on China’s leather industry, supply chains and consumer demand in the first quarter of this year. Some factories were also worried about the possible growth of inventory caused by weak demand from end consumers.
Last year, the volume of light leather produced by China’s medium and large sized tanneries were 573.6 million square meters, a 4% increase than the previous year. The total number of leather shoes reached 3.94 billion pairs – a slight increased of 1.8% from the previous year, while leather garments were 65.6 million pieces, down 9.2% year-on-year.
The Chinese government has rolled out a series of tax measures in response to concerns over the virus’ economic impact, including a reduction of interest rates and insurance fees. Officials have also announced the provision subsidies designed to help small and medium sized companies to survive.
To help the industries deal with the current difficulties, the China Leather Industry Association also called for a further reduction of import duties including cutting tax on raw hides from current 5% to 2%, while wet blue from 6% to 1%.
Some local media have suggested that rather than resorting to expansive fiscal and monetary policy, the government should instead focus on creating a better environment for companies to restart operations, especially by gradually removing restrictions on travel.
It is believed that China is more vulnerable to the crisis now than it was 17 years ago when SARS broke out. Since last year the trade tension with the US has brought a negative impact on China’s leather and shoe industries. The growth rate of the industries has been slowing down, which makes the leather industry not easy to deal with in such a crisis.
According to the statistics, in 2019，the exports of leather, shoes and finished leather products to the US were USD18.1 billion, down 5.6% from previous year. Of which exports of handbags were USD12.2 billion, down by 17.8% year-on-year; footwear USD11.4 billion, down 3.0% from last year.
The updated situation is that the numbers of new cases of virus infection across China are gradually going down, so it is likely that the level of disruption will be manageable.
It’s very hard to predict when the outbreak can be finally eased, but it is expected that if the number of new cases begins to consistently slow from now on outside the Hubei province and most of factories reopen in a few weeks, the hit on China’s leather industry may be limited in the first half of the year, and then normal business activities of the industry could be gradually resumed.
It is believed that the coronavirus crisis cannot change the fundamentals of the Chinese economy including the leather industry. This is mainly because of the well-established production chain in China. We saw good news that China’s Ministry of Finance has announced a series of measures and tax reductions on imports from the US including hides, leather and chemical products. This will help factories to reduce production costs further.