This report is an overview of the challenges Fujian Province and other large tannery production bases in China are facing.
THIS REPORT CONTAINS ASSESSMENTS OF COMMODITY AND TRADE ISSUES MADE BY
USDA STAFF AND NOT NECESSARILY STATEMENTS OF OFFICIAL U.S. GOVERNMENT
GAIN Report Number: CH11848
China - Peoples Republic of
China’s footwear industry facing a number of challenges
Livestock and Products
This report is an overview of the challenges Fujian Province and other large tannery production bases
in China are facing. There are about 1,000 tanneries with annual production value at $2.38 billion in
Fujian. In 2011, Fujian Province alone imported $176 million-worth in U.S. hides. It is estimated that
70 to 80 percent of Fujian’s imported hides were supplied by the United States. Tighter inspection
procedures and higher prices have been a burden for local importers. Finished leather is mainly
supplied to footwear manufacturers within Fujian and Guangdong Province. Xinye, Fengan and Jinxin
are the three leading tanners of Fujian. This report was developed from marketing intelligence
collected after many meetings and interviews with industry players, officials, and trade leaders
throughout the manufacturing chain.
Overview of China’s footwear industry
According to the Year Book published by
APICCAPS, Portuguese Footwear, Components
and Leather Goods Manufacturers’ Association, in
2011 China remained as the largest producer of
shoes (12.8 billion pairs) with 60.5 percent of the
world’s production, followed by India (2.2 billion
pair) and Brazil (819 million pairs). At the same
time, China consumed the largest portion of
these shoes at 15.9 percent and the United States
followed at 12.9 percent. 73.1 percent of shoes
ATO/GZ Director and USHSLA Delegation visited a Fujian produced in China were exported.
The average export price of China’s shoes was $3.87, much lower than $12.6 from India, $15.65
from Indonesia, and $16.2 from Vietnam. In 2011, China’s leather shoes exports totaled 891
There are about 1,000 tanneries with annual production value at $2.38 billion in Fujian. Xinye, Fengan
and Jinxin are the three largest Fujian tanners. According to the China customs data, in 2012, Fujian
Province imported $176 million of U.S. hides. Finished leather hides were mainly supplied to footwear
manufacturers within Fujian and Guangdong Province. About 70 to 80 percent of Fujian’s imported
hides were of U.S. origin. The first publically listed tanner in Mainland China was Xinye Leather.
Environmental Policies: In China, official government environmental impact statistics are only made
available to tanners with production values over $20 million. There are 799 tanners who are in this
select group, among which, only 46 passed the government’s environmental evaluation requirements.
Since 2010, China has banned the building of new tanneries and banned state-owned banks from
financing new tannery operations. The industry expects stricter environmental policies in the future.
In Fujian, there are only three tanneries who have obtained official approval for managing waste water
treatment: Xinye, Fengan and Jinxing. With no new tanners in Jinjiang (Fujian tannery base) as a result
of a ban on approvals, many smaller scale tanners that have survived several periods of consolidation
were setting up new plants in Zhangpu (170 km from Jinjiang) before the November shut-down
deadline was implement. Effective November 2012, no waste water containing ammonia and nitrogen
will be allowed to be released in Jinjiang and the COD (chemical oxygen demand) level in waste water
is now being strictly monitored by the local government who is coming under pressure from national
authorities. Other production bases have also been forced to implement similar policies. For example,
Jiangsu Province will only hand out permits to factories with production volumes exceeding 800,000
pieces of hides. In Wenzhou, restrictions on waste water treatment have tightened up as well. Any
newly built plants have to be equipped with a capacity for processing over 500,000 tons of waste
water. The Chengdu municipal government banned the establishment of tanneries within its confines.
Additionally, some of the smaller tanners used to sell gelatin shavings to processors and this was an
additional source of revenue. However due to rampant food safety scandals in China, tanners are not
allowed to do so anymore. These tanners are grumbling about losing this income stream.
In Fujian Province’s Kemu Village there are about 63 tanners scattered among residential buildings.
The local government is encouraging them to consolidate into three to five large enterprises. What’s
more, China is going to increase the cost of industrial use water to $2.86 (18 RMB) per ton. It is
common that Fujian tanneries partnered up with their Guangdong counterparts, because of the
stringent environmental policy, and sent raw hides to be processed in Guangdong before they enter
the finishing process in Fujian. It remains unclear whether this specialization in trade trend will
National industry analysts are wondering whether China’s tanners are going to migrate to other parts
of the country or even outside of China. However, industry players say it is nearly impossible to do so,
as most of the fixed investment costs are on tied to the land. This move would be prohibitively costly
and from a logistical point of view also challenging as there is heavy equipment that would need to be
dismantled and re-assembled. A handful of tanners did manage to move, although the damaged
drums and equipment replacement costs cut right into their profitability at a time when high hides
costs have been forcing the sector to operate on razor sharp margins. In the past five years, the trend
has been to set up new production bases in Vietnam, Indonesia, the Philippines, and Thailand.
Diversification efforts have proven successful for the large tanners, although industry leaders
mentioned that China still remains their main production focus because the value and quality of
production is much higher for good produced in China that in Southeast Asia.
China’s largest finished leather markets are located in Wenzhou, Guangzhou, Quanzhou, and Chengdu.
According to trade contacts in each of these markets, in 2012, sales dropped dramatically overnight
and by the end of the year averaged out to about 20-30 percent. In 2011, many of the same tanners
used to produce around 1,500 to 2,000 pieces of hides per month. Currently, they reduced the number
to 1,000 pieces, but still expressed having a difficult time to selling their merchandise.
During interviews with Fujian tanners, the most frequently raised question was when U.S. hides prices
would decline. According to Fujian tanners and high hide prices worldwide alone is the single largest
contributor to this consolidation period in the industry. Large production plants grew in size and
capacity, while the smaller ones where forced to shut down.
Although some companies reported growing sales, China’s shoe manufacturing industry reduced
production volumes by 7 percent in the first half of 2012. Tanners indicated that prices of finished
hides were sold at $3.3 (21 to 22yuan) per feet and in the second half of 2012 (September-November),
there were 25 to 35 percent decreases in prices due to weaker demand for finished leather. Tanners
are not optimistic about the remaining 2012, as stocks for shoes and bags are higher than ever and
depreciating according to retail analysts. Analysts also indicate that discounted merchandise will hurt
the profitability of shoe wholesalers and the retail sector. And, although new e-commerce and online
retail channels for leather apparel and footwear have emerged in Mainland China in recent years,
expectations on demand range from fickle to weak. Consequently, cash flows are drying up for
tanners and forcing this sector to adopt more conservative production practices. Many of them
expanded production lines only a few years ago, but are now losing factories because of their heavy
reliance in the export market.
Fujian tanners claim the leather market is saturated. Demand from shoe manufacturers is diminishing,
but supplies from leather factories are abundant with price speculation disadvantaging tanners. Many
tanners claim to be under an exorbitant amount of pressure losing money whether they produce or
not and ultimately blame high U.S. hides prices for these shortcomings. The truth is that (1) strict
environmental protection requirements; (2) higher labor costs; (3) higher production materials such
as chemicals are growing and have outpaced the growth of the business. What some tanners failed to
see five years ago during the boom years was that if they had invested heavier in the development of
the domestic market instead of focusing on exporting all of their production to the West, they simply
would not find themselves in this mess.
Demand in Guangdong Province declined as its production relies heavily on exports. Guangdong
factories supply to Nike, Addidas and OEM for many large U.S. and European brands, therefore,
business was adversely impacted by the global economic downturn. On the other hand, Fujian
Province businesses did not have strong ties with foreign brands five to ten years ago. So many local
shoes manufacturers for example invested significantly in the domestic market in the past ten years.
Now, these Fujian shoe brands are well known among Chinese consumers, such as Tebu, Anta, and
Local tanners reported that hides with medium price tags did not sell well. On the other hand, the high
priced hides (such as dairy hides) enjoyed a good market, while the lowest priced hides also moved
rapidly. This purchasing trend is indicative of China’s production moving up the value chain.
Cargill bagging complaints: Throughout meetings with Fujian tanners, the greatest concern centered
on Cargill’s new bagging system. Fujian tanners thought it was a new system that Cargill designed to
transfer costs to buyers. Raw hides on pallets were much easier to handle, and now the new bagging
system has created difficulties for buyers. For example:
1. Temperature within the bag is higher than the pallets affecting quality
2. Difficult to handle. Bags take up larger space because they cannot be piled up
3. Loading is time consuming as it used to take 10 minutes and now it takes around 30 minutes
4. Difficult to count the number of hides. Inventory management has become a concern for
buyers who cannot readily distinguish the number of hides inside a bag. Additionally, traders
added that Cargill does not accept counts if the bag’s seal is broken
5. Difficult to transport to alternate sites
Concerns over U.S. hides trading
DISCLAIMER: ATO Guangzhou interviewed over 20
traders and compiled a list of issues they cited in
these interviews. This portion of the report does
reflect the views of ATO Guangzhou, but is a list of
complaints the trade expressed and should be
used by U.S. exporters and the industry as point of
reference from their buyers in the world’s largest
overseas market for U.S. hides.
Hide prices - Traders wondered whether there
was a larger broker who controlled U.S. hides
USHSLA Delegation examining U.S. hides in Fujian inside prices.
a large tannery
Importers are still purchasing U.S. hides, because they said the United States is the only large and
consistent supplier, have acceptable quality and with reliable delivery time. In terms of overall quality,
tanners indicated they preferred German hides. Since the sales of finished hides have been weak for
most of 2012, tanners are hesitating to schedule a large production in 2013. As a result, many of them
tried not to source large quantities of U.S. hides unless they are certain they will have a sizable order.
Lower quality U.S. hides – The senior management of Xinye Leather said their production managers
complained about the declining quality of U.S. hides in the past three years. (Xinye Leather imports
about 300 to 350 containers per month). They asked whether the drop in quality was due to the U.S.
banning the use of chemical sprays on animal skins, as it increases chances of defects on skin. They
also asked whether the U.S. Department of Agriculture would allow using some chemical sprays to
protect animal skin quality. Other tanners said the quality of hides decreased globally, and not just in
the United States. They added the situation was the same in Holland and Germany and asked if climate
change had anything to do with this. As a result of a strong Australian dollar, in 2011 and 2012 tanners
sourced more hides from the United States than in previous years.
The following are a series of observations gathered by Fujian industry leaders ATO Guangzhou
interviewed for this report:
Mixing Mexican hides - When the United States could not meet orders is it possible for some U.S.
exporters purchase from Mexico and label as U.S. hides?
Mixing different grades and types of hides – Tanners were unhappy with mixing light weight hides
with heavy weight hides or mixing heifers with steers. They want to look for reliable exporters who
would not mix hides of different grades or quality. Chinese buyers said they wanted to do business
according to contracts. Grade 3 hides were mixed in normal products and this was a deal breaker for
one tanner who now purchases hides exclusively from Brazil.
Short of pieces - Normally it should be 630 pieces per container, but it is common for buyers to receive
three to five pieces less. In one rare occasion, 40 pieces were missing from a shipment. According to
Fujian importers, the U.S. exporters said it was the local buyer’s problem.
Lower weights - In contracts, the weight ranges between 60 to 62 pounds, but buyers only received
products at 60 pounds. Shipments always contain excessive amount of water, with about 2 to 3
percent of total contents being water.
Contract conditions – a 10 percent difference in hide counts are tolerable for a 630-piece container.
When the overall market is weak, sellers would ship up to 700 pieces in a container. When the price of
hides is high, buyers would receive only 575 pieces. A container’s weight is allowed to have 5 percent
difference, but buyers seldom received more hides.
Credibility - Some exporters do not honor sales contracts that were made while hides were at a lower
price. They never ship the rest of the contract agreed upon numbers to their buyers. One importer said
they had an agreement with one U.S. company with a low price in 2009, but the remaining 60
containers never arrived.
No mechanism to for resolving dispute: According to sales contracts, sellers should visit buyers within
10 days after receiving complaints. It was common that the exporters did not show up. After Chinese
buyers called U.S. exporters to complain about product quality, they were asked not to touch the
container until an U.S. representative arrived onsite, which held up the entire production process.
When there is a disagreement on weight, Fujian buyers were asked to use certification agents in Hong
Kong to weigh all containers.
Conclusions: The Fujian tannery industry is a major buyer of U.S. hides, the largest in fact. Tanners
have been importing from the United States for years and will continue to do so. However, it is
apparent that communication and mutual understanding could be strengthened through more regular
meetings, dialogues, and visits from both sides. Fujian tanneries and U.S. exporters are undoubtedly
inextricable partners. Post suggests U.S. industry prepare presentations (electronic or in person) to
address many of the concerns regarding defects or scratches on U.S. hides. U.S. Hides, Skins and
Leather Association (USHSLA) representatives explained to post that the defects were not due to
insect bites or as a result of global climate change, but due to uncontrollable circumstances during the
cattle raising process. During USHSLA’s recent visit to Fujian, local tanners understood that U.S. anti-
trust law, bans U.S. companies from discussing prices publically.
With funding support, ATO Guangzhou can sustain efforts to bring the two sides to closer together
since USHSLA has no in-country representative. It is important the U.S. hides industry partners with
local tanners to plan marketing to China’s massive domestic consumer market that is beginning to