Leather and leather products - Industry Overview

James E. Byron

Industry shipments of leather and leather products incresed slightly more than 1 percent in 1992 to an estimated $8.55 billion. In constant (1987) dollars, the value of shipments rose about 0.9 percent and is expected to increase L 6 percent in 1993, as higher exports by the leather tanning and footwear segments mom than offset the negative effect of severe import competition in the other segments.

The leather products group includes seven industries: nonrubber footwear (SIC 314); leather tanning and finishing (SIC 3172); gloves and mittens (SIC 315); luggage (SIC 3161); handbags (SIC 3171); small personal leather goods (SIC 3172); and leather wearing apparel (SIC 2386). The distribution of 1992 current-dollar industry shipments is shown in Table 1.

[TABULAR DATA 1 OMITTED]

Before reading this chapter, please see "How to Get the Most Out of This Book" on page 1. It will answer questions you may have concerning data, sources and references, and the Standard Industrial Classification (SIC) system. For other topics related to the subject of this chapter, see chapters 9 (Textiles), 12 (Plastics and Rubber), and 32 (Apparel and Fabricated Textile Products). Table 2 compares constant-dollar rates of change for shipments of leather and leather products in 1992 and 1993. The entire industry is expected to experience an increase of 1.6 percent in 1992, with increases of 5 percent for leather tanning, 3 percent for men's footwear, and 2 percent for house slippers. Constant-dollar shipments for each of the other four-digit industries are expected to remain either unchanged or decline. In 1992, total employment in these 7 industries was 97,100, down 1.7 percent from 1991.

[TABULAR DATA 2 OMITTED]

INTERNATIONAL COMPETITIVENESS

U.S. imports of leather products rose 8 percent in 1992 to an estimated $13.4 billion. The developing countries, including China, and the newly industrialized countries, including South Korea and Taiwan, accounted for 84.5 percent of the total. China was the largest supplier by far, accounting for 31.5 percent of the total. With the exception of leather tanning and finishing, all of these industries are extremely labor-intensive. In comparison with U.S. producers, manufacturers in most developing countries maintain a substantial cost advantage due to their much lower labor rates.

In 1992, U.S. exports of leather, nonrubber footwear, and other leather products were about $1.3 billion, up 10 percent from 1991. Thus, leather and leather products imports exceeded exports by about $12 billion, with $8.2 billion of this deficit in nonrubber footwear. By value, the ratio of imports to apparent consumption for this group of industries was about 67 percent in 1992. (Apparent consumption is product shipments plus imports minus exports.) The leather apparel industry had the highest ratio, 94 percent, followed by 73 percent each for footwear and handbags, 60 percent for gloves, 59 percent for luggage, and 47 percent for personal leather goods. Leather tanning ranked lowest at 28 percent. --James E. Byron, Office of Consumer Goods, (202) 482-4034, September 1992.

LEATHER TANNING AND FINISHING

The current-dollar value of leather tanning and finishing industry shipments increased about 1 percent in 1992 to $2.29 billion, from $2.27 billion in 199). This increase resulted primarily from increased export demand for U.S. leather. The current-dollar value of product shipments also increased slightly, from $2.31 billion to $2.33 billion. Measured in constant dollars, both industry and product shipments rose about 5.8 percent. The quantity of leather shipped by U.S. tanners increased about 5.5 percent to 15.9 million equivalent cattlehide units. Included in these totals are leathers produced from hides or skins of cattle, calves, goats, sheep, lambs, cabretta, horses, and other animals and reptiles. Shipments of cattlehide leather accounted for 14 million units, 88 percent of the total.

The leather tanning and finishing industry consists of establishments primarily engaged in tanning, currying, and finishing raw or cured hides and skins into leather. The industry also includes converters and dealers who buy hides, skins, or leather for processing under contract with tanners or finishers.

The tanning industry experienced considerable contraction and consolidation between 1982 and 1987. The number of companies declined from 342 to 308, and the number of establishments (plants) dropped from 384 to 338. By 1992, only about 110 establishments of significant size were directly tanning raw hides and skins into leather, mostly in New York, Massachusetts, California, Wisconsin, Pennsylvania, New Jersey, and Texas. Industry employment in 1992 was estimated at 12,700, up almost 6 percent from 1991. Production employment was 10,800, also up about 6 percent.

The shoe industry consumed about 50 percent of domestic leather shipments in 1992. The high leather prices of recent years finally had an effect on the proportion of domestic nonrubber footwear made with leather uppers, as the ratio declined to about 50 percent in 1992 from 55 percent in 1991. Oiled or waxy water-resistant leathers in heavier weights for moccasins, boat shoes, and hoots were much in demand. In 1992, shipments of sole leather were up about 7 percent over 1991 but, even so, sole leather captured only 5 percent of domestic leather shipments. Shoe manufacturers continue to substitute cheaper synthetic materials for sole leather. These substitutes have been made even more competitive than sole leather because of new equipment and technology that reduce labor costs in shoe bottoming operations. Sole leather is now used primarily in higher-priced men's and women's footwear of welt or cement construction made with more expensive upper leathers such as calf. Production of cattlehide garment leather and leather for the handbag, luggage, and personal leather goods industries also increased.

The fastest-growing and potentially largest markets for leather in the United States are those for the automotive and furniture markets. In 1987, upholstery leather shipments represented 21 percent, by value, of all product shipments, up from 7 percent in 1982. Industry estimates indicate that this share has since grown to about 30 percent. About 20 percent of all furniture manufactured in the United States is upholstered with leather. Leather is available as an option in most medium-priced automobiles and is a standard interior in high-priced foreign and domestic models. U.S. automotive upholstery leather exports, particularly to Japan, continued to grow substantially in 1992. U.S. leather is also used almost exclusively in Japanese models made in the United States. Production of wet-blue (partially-processed, chrome-tanned) cattlehide leather also increased sharply in 1992, when the largest U.S. meat packer opened another wet-blue tanning plant.

Hide Supply Up

Following five consecutive annual declines, the quantity of cattlehides derived from total commercial slaughter increased slightly in 1992, to an estimated 32.8 million hides from an alltime low of 32.7 million in 1991. Cattle slaughter reached a high of 43 million head in 1976 and has been in a long-term decline ever since.

Cattlehides are a by-product of the meat-packing industry, and their supply depends solely on demand for meat. A long-term downward shift in demand for red meat has discouraged rebuilding of cattle herds despite favorable prices for feed grains since 1986.

More recent increases in cattle population, however, appear to signal a more prolonged, though moderate, upturn in cattle slaughter. Cattle inventory rose from 98.9 million head on January 1, 1991 to 100. 1 million on January 1, 1992. Further increases are expected during 1992 and 1993. Higher cattle prices and continued low feed-grain prices in 1991 gave growers an incentive to build up breeding stock and, thereby, increase the calf crop, which was expected to rise about 1 percent in 1992 and 2 percent in 1993. Cattle slaughter is expected to increase to 33.1 million head in 1993, and again in 1994. Consequently, cattlehide supply will expand in both years.

In 1992, cattlehide prices declined an estimated 5 percent from 1991. During January-July 1992, the Department of Commerce composite average monthly price of three types of hides was 67 cents per pound, down about 5.4 percent from the same period in 1991. The Bureau of Labor Statistics' Producer Price Index for all leather, which had declined 5.5 percent in 1991, declined an additional 4.7 percent for January-July 1992 from the same period in 1991. Hide and leather prices were expected to weaken further during the remainder of 1992 and again in 1993.

ENVIRONMENTAL PROFILE

Environmental regulations affecting the leather tanning and finishing industry are administered by the Environmental Protection Agency (EPA). In 1985, the EPA established new standards to control pre-treatment of the liquid wastes that tanners discharge indirectly to publicly owned waste treatment facilities. These standards do not require biological treatment, but they do require control of sulfides, chromium, and acidity. Most tanners are coping successfully with these Federal standards, although local restrictions and tighter standards in some states have forced other tanners to close altogether or to confine production to the processing of wet-blue or crust leathers.

All tanners discharging directly to waterways, including those constructing new plants, must operate with EPA-approved National Discharge Elimination System (NDES) permits. EPA standards for this group require control of conventional pollutants, such as solids and biological oxygen demand, in addition to sulfides, chromium, and acidity. Control of these wastes requires both primary and secondary (biological) treatment facilities. They may even require expensive tertiary treatment in the future if the EPA tightens the standards or broadens them to include other pollutants, such as ammonia, biocides, chlorides, and surfactants. However, control of these waste products can most likely be achieved through less costly process modification.

The EPA also may end the exclusion from hazardous waste regulation waste scrap leather, wet-blue trimmings and shavings, and tannery sludges that contain chromium. The reason is that in land disposal, the non-toxic trivalent chromium may be oxidized to the toxic hexavalent form. The majority of chromium-containing solid waste would then be classified as hazardous and require treatment prior to land disposal. The industry is developing and adopting new tanning systems that will use other, non-toxic metal salts to replace some or all of the chromium currently used. Vegetable, synthetic resin, and other organic tanning materials can also be substituted for some of the chromium. Tanning systems that recycle chromium are extensively used throughout the industry to reduce concentrations in the final effluent.

Strict Federal standards curbing emissions of volatile organic compounds have encouraged the industry to adopt low-solvent or solvent-free finishing (coating) technologies. The 1990 Clean Air Act requires a 90-percent reduction by 1994 in all volatile organic compounds from the industry baseline recorded in the 1987 Toxic Release Inventory.

Under the terms of a consent decree with citizen environmental groups, the EPA proposed an 11-year plan in May 1992 to develop new industrial effluent limitation guidelines and pre-treatment standards and to revise existing guidelines and standards. For the tanning industry, the EPA will initiate a study in 1994 and publish a report on its findings and recommendations by the end of 1995. The industry does not concede that revisions to existing leather tanning guidelines are necessary. It contends that any attempt to push manufacturing processes and wastewater technology beyond consistently achieved present levels could be a high financial burden to the industry and may not significantly reduce the risk to human health or the environment. Under the Clean Water Act, the EPA is allowed discretion whether to proceed with guideline revisions, based on such a cost/benefit risk assessment.

INTERNATIONAL COMPETITIVENESS

Combined exports of raw and wet-blue cattlehides totaled an estimated 22.2 million hides in 1992, down about 7.5 percent from 1991 (Figure 33-1). Expressed as a percentage of total commercial slaughter, the quantity exported declined from 74 percent to 68 percent. Raw cattlehide exports declined about 7 percent, to an estimated 18.8 million pieces; wet-blue cattlehide exports increased about 12 percent, to an 3.4 million pieces. During the first half of 1992 the largest importers of U.S. cattlehides were South Korea (46 percent), Japan (21 percent), Maxico (14 percent), and Taiwan (11 percent). Together, the four countries accounted for 92 percent of the total.

Unlike many other countries with abundant hide supplies, the United States does not restrict raw material exports, making it the world's largest hide exporter. The high proportions of cattlehides exported by the United States in recent years have been the major cause of high domestic hide and leather prices. Developing countries, particularly those with abundant raw material supplies such as Argentina, Brazil, and India, impose export controls or taxes to restrict raw material exports in order to encourage the growth of their own tanning and leather products industries. Export restrictions depress the price of hides and skins within these countries, thereby indirectly subsidizing production and exports of leather and leather products. Large quantities of these products come to the United States and other developed countries that have comparatively free and open markets.

The United States produces only small quantities of calfskins and exports almost all of them. Because of limited supplies of imported raw material, goat and kid leathers are no longer tanned in significant quantities in the United States. Domestic sheepskin production totaled about 5.8 million skins in 1992. Along with small quantities of imported pickled sheepskins, these skins are tanned into grain and suede garment leathers and shearlings.

Leather Exports Up

Leather exports increased in 1992 by about 7 percent, to $725 million. The weaker U.S. dollar stimulated export demand despite weak economies m most developed countries.

The United States exported leather to about 80 countries during January-June 1992. Japan was the largest importer, accounting for 30 percent of the total. About 85 percent of Japanese leather imports from the United States were of automotive upholstery leather, which is exempt from tariff-rate quotas that Japan imposes on other leather imports. For the first half of 1992, U.S. exports of upholstery leather to Japan were up 19 percent over the same period in 1991.

The Dominican Republic, the largest export market, was second with a 9-percent share. South Korea (a leading exporter of leather footwear and garments to the United States), Hong Kong, Canada, and Italy tied for third, each with an 8 percent share, followed by Mexico (5 percent), Taiwan (5 percent), and Germany (4 percent). In 1992, cattlehide leather accounted for an estimated 74 percent of all U.S. leather exports. For January-June 1992, upholstery leather accounted for 29 percent of all U.S. leather exports. The largest markets for U.S. upholstery leather were Japan (88 percent of the total) and Germany (5 percent). By value, 18 percent of all leather exports was wet-blue exports, including splits. South Korea, Italy, and Taiwan were the largest importers. International trade in wet-blue continues to increase because of lower shipping costs, quality advantages, and environmental benefits for these products compared with raw cattlehides. The largest meat packer has expanded production to more than 4 million hides annually to meet greater domestic and foreign demand for wet-blue leathers.

During the first six months of 1992, U.S. leather exports to beneficiary developing countries--those that receive tariff concessions from the United States under the Generalized System of Preferences (GSP) section of the Trade Act of 1974--were 23 percent, up from 20 percent for the same period in 1992. Large increases were recorded for Hong Kong, the Dominican Republic, Mexico, and China.

Leather Imports Also Up

In 1992, U.S. leather imports increased about 9 percent, to $624 million, from $571 million in 1991. About 74 percent of this total was cattlehide leather, 4 percent sheepskin leather, 3 percent goatskin leather, and the balance calfskin, buffalo, pigskin, reptile, and other types of leather. By value, about 27 percent of U.S. leather imports in 1992 was upholstery leather.

The United States imported leather from more than 60 countries in 1992. Argentina was the largest supplier with 15 percent of the total, followed by Italy (12 percent), the United Kingdom (10 percent), Brazil (9 percent), Thailand (6 percent), and Uruguay (5 percent). Argentina and Italy were the largest suppliers to the United States of cattlehide leather, Italy of sheep leather, and Pakistan of goat leather.

During January-March 1992, leather imports from beneficiary developing countries were 49 percent of total U$. leather imports, down from 55 percent in the same period of 1991. In recent years, this ratio has continued to decline as most developing countries convert more of their domestic raw material supplies to leather and, finally, leather products for export markets. Because tanning capacity in these countries exceeds domestic supply, many of them also import hides and skins from the United States and other developed countries to fill their domestic requirements for leather.

Trade Agreements

In January 1986, the United States reached an agreement to settled a long-standing dispute with Japan over that country's import quotas on leather and leather footwear, which were found to be illegal under the General Agreement on Tariffs and Trade (GATT). Japan replaced these import quotas with legal tariff-rate quotas. The existing tariffs of 15 percent on leather and 27 percent on leather footwear now apply to quantities within the quota, and a 60-percent rate applies to imports in excess of quota amounts. The agreement expired in March 1991, but Japan continues to enforce the quota system, which offers trade protection to the underprivileged Barukumin, a minority group that historically has worked in the tanning and meat packing industries in Japan.

Although U.S. exports of leather to Japan were up 21 percent during January-June 1992 compared with the same period in 1991, about 85 percent of these exports, or $95 million, were automotive upholstery leather. This leather is not subject to tariff-rate quotas because it is returned to the United States in Japanese automobiles. U.S. exports of wet-blue leather to Japan also increased over the period; most of the other types declined.

Japan's bovine leather global quotas were an estimated 570,000 square meters in 1992, only 1 percent of Japan's total bovine leather market. Almost all is produced from imported raw cattlehides, most of which come from the United States. Both the U.S. Government and the European Community have addressed the issue of Japan's tariff-rate quota system on leather and leather footwear in the Uruguay Round of multilateral trade negotiations. Japan has offered a moderate increase in the quota on leather footwear but no further liberalization of the quota on leather.

In U.S.-Mexico negotiations on a North American Free Trade Agreement (NAFTA), Mexico refused to meet a U.S. raquest for immediate reciprocal reductions to zero for both U.S. and Mexico tariffs on leather. Consequently, U.S. duties on most Maxican leather, which range up to 10 percent, will be accorded 10-year staged reductions. Mexican duties on U S. leather, which range from 10 to 20 percent, also will be phased out over 10 years.

Countervailing Duties

In September 1990, the Department of Commerce determined that Argentina's cattlehides were selling in Argentina at artificially low prices because of that country's export embargo on hides. A group of U.S. tanners had alleged that the embargo indirectly subsidized exports of low-priced Argentine leather to the United States. The Commerce Department directed the Customs Service to levy countervailing duties averaging 15 percent on almost all types of leather imported from Argentina until further notice. During 1991 and 1992, these additional duties narrowed the price gap between U.S. and Argentina leathers in the U.S. market. In May 1992, the Government of Argentina revoked its embargo on the export of raw hides and replaced it with an export tax with an effective rate of 30 percent. The tax was expected to have the same effect as the embargo in preventing the export of raw or cured hides.

Outlook for 1993

Leather shipments should increase about 5 percent, to 16.7 million cattlehide units, with a like increase in real value of shipments. Increased domestic slaughter will make more hides available for U.S. tanners, and leather prices will become more competitive with other materials. U.S. leather exports will continue to grow at about 7 percent. Countervailing duties on leather from Argentina will offset some of their price advantage and allow for higher levels of production in the United States.

Long-Term Prospects

The longer-term outlook for the leather tanning and finishing industry appears to be good. The U.S. hide supply will continue to increase, and hide prices should remain at the lowest levels of the past five years. These conditions should encourage tanners to increase working capital and reduce debt. Wet-blue leather's share of total U.S. production will continue to increase. New waste treatment technology and equipment, often embodied in new wet-blue plants, will help tanners control waste discharges. U.S. Government trade actions and negotiations could help give the U.S. tanning industry greater access to international raw material and leather markets, thereby improving its opportunities to expand exports and achieve solid long-term growth.--James E. Byron, Office of Consumer Goods, (202) 482-4034, September 1992.

Additional References

Membership Bulletin, Leather Industry Statistics, 1992 Edition, Leather Industries of America, Inc., 1000 Thomas Jefferson St., NW, Suite 515, Washington, DC 20007. Telephone: (202) 342-8086. Leather, International Journal of the Industry (monthly), and International Leather Guide, 1992, Benn Publications Ltd., Sovereign Way, Tonbridge Kent TN91RW, England. Telephone: [44] (73) 236-4422. Journal of the American Leather Chemists Association, Leather Industries of America Research Laboratory, Campus Station, Cincinnati, OH 45221. Telephone: (513) 556-1200.

SHOES AND SLIPPERS

The nonrubber footwear industry (SIC 314) produces all types of footwear except rubber protective footwear and rubber-soled, fabric-upper footwear, both of which are classified in SIC 3021. Even though domestic consumption recovered somewhat in 1992 from the recession levels of 1991, the industry was again affected by a renewed surge of imported footwear and was unable to capitalize on the increase in consumption. The current-dollar value of industry shipments increased less than 1 percent, to an estimated $4 billion. This slight increase resulted from a rise in unit prices of 2.5 percent that was almost offset by a decline in unit shipments of about 2 percent. By industry sector, unit shipments of house slippers (SIC 3142) and men's footwear, except athletic (SIC 3143), grew about 0.7 percent and 2.8 percent, respectively. Unit shipments of women's footwear, except athletic (SIC 3144). declined 1 percent, and unit shipments of footwear, except rubber, NEC (SIC 3149) declined 7.6 percent in 1992.

Production Down

Production of nonrubber footwear declined about 2 percent, to an estimated 164 million pairs in 1992, the fourth consecutive year of decline. Production losses were largest for women's, children's, and athletic footwear, particularly in cement types of construction. Production of Goodyear welt types of men's footwear was unchanged from 1991 levels. Production declined in two of the major types of footwear, women's, which dropped 4.4 percent to 53.1 million pairs, and footwear NEC, which dropped 7.6 percent to 27 million pairs. Production of men's footwear remained unchanged at 39.8 million pairs, and slippers increased 2.6 percent to 44.1 million pairs.

The most recent four-year decline in nonrubber footwear production renewed a downward trend that began in 1968, when output peaked at 642 million pairs. Production has declined at a compound annual rate of about 5.5 percent over this 24-year period, although it stabilized somewhat from 1977 to 1981, when orderly marketing agreements (OMAs) with South Korea and Taiwan limited imports, and again from 1986 to 1988.

House Slippers

Shipments of slippers increased about 2.6 percent in 1992, to an estimated 45 million pairs. Product value dropped to an estimated $255 million. Slippers accounted for about 27 percent of the quantity, but only 7 percent of the value, of total product shipments of nonrubber footwear in 1992. Most slippers are produced from lower-cost materials, such as vinyl and textiles, rather than from leather. In 1992, import penetration, by quantity, for slippers was about 22 percent, the lowest of the four sectors.

Men's Footwear, Except Athletic

Shipments of men's footwear, which includes dress, casual, and work shoes and boots, were an estimated 42 million pairs in 1992, unchanged from 1991. Value increased about 2.9 percent, to an estimated $1.8 billion. Men's footwear accounted for 25 percent by quantity and 51 percent by value of total product shipments of nonrubber footwear. Leather is by far the most widely used upper material for men's footwear. By quantity, the ratio of imports to domestic consumption for men's footwear was an estimated 80 percent in 1992.

Women's Footwear, Except Athletic

Shipments of women's footwear declined about 4.4 percent in 1992, to an estimated 55 million pairs. Value declined about 1 percent, to an estimated $1.2 billion. Women's footwear accounted for about 32 percent by quantity and 33 percent by value of all nonrubber footwear product shipments in 1992. By quantity, import penetration for this sector reached 91 percent in 1992, the highest of the four sectors.

Footwear, Except Rubber NEC

Shipments of footwear for youths and boys, misses, children, infants and babies, athletes, and others declined about 7.5 percent to 27.3 million pairs, from 29.5 million pairs in 1991. Value also dropped about 7.5 percent, to $306 million in 1992 from $331 million in 1991. Shipments of footwear in this group accounted for 16 percent by quantity and 9 percent by value of all product shipments of nonrubber footwear in 1992.

In the first half of 1992, production of children's, infants, and athletic footwear declined compared with the same period in 1991. Production of misses' footwear increased substantially over the same period. Youths' and boys' footwear production remained unchanged.

About 99 percent of all nonrubber athletic footwear is imported. Imports rose about 2 percent in 1992. However, this category faced stiff competition from imported and domestically manufactured rubber-fabric footwear with rubber soles, customarily referred to as sneakers. For the first half of 1992, production of fabric-upper footwear was up 12 percent over the first half of 1991, and reached an estimated 109 million pairs for all of 1992. Both imports and apparent consumption of rubber-fabric footwear increased a substantial 34 percent and 27 percent, respectively, during the first half. Apparent consumption of rubber-fabric footwear for all of 1992 increased to an estimated 22 percent, to 380 million pairs.

As a result of this increased competition from fabric-upper shoes, the share of nonrubber athletic footwear in the total U.S. athletic footwear market declined from 40 to 33 percent, even though consumption of fabric-upper footwear increased substantially, to 725 million pairs. In 1992, U.S. consumption of athletic footwear accounted for 48 percent of total footwear consumption of 1.5 billion pairs, up from 40 percent in 1991.

For January-June 1992, imports of all juvenile nonrubber footwear were up a substantial 15 percent over the same period in 1991. The ratio of imports to apparent consumption for juvenile footwear was 92 percent.

Footwear Consumption Increases

Apparent consumption of nonrubber footwear increased about 4.6 percent in 1992, to an estimated 1.1 billion pairs. Per capita consumption also increased, from about 4.3 to more than 4.4 pairs, reversing a five-year decline, Per capita consumption had peaked at 4.9 pairs in 1986, following an increase from a low of 3.3 pairs in 1980. The 1992 consumption increase did not, however, lead to higher domestic production. All of the increase, and more, was met by increased imports.

Personal consumption expenditures (PCE) for footwear (including both rubber and nonrubber footwear) increased less than 2 percent in 1992, to an estimated $31.7 billion. Constant-dollar PCE, however, declined about 1. 5 percent. Footwear PCE was about 0.8 percent of total PCE, down slightly from 1991.

Consumers continued to demand comfortable footwear with proper fit. Casual and walking shoes increasingly incorporated new technology such as padded collars, linings and insoles, softer, lighter-weight outsoles, and other features. Machine-washable boat shoes and moccasins with water-resistant leather uppers in a wide variety of colors were selling well. Boots, especially Western boots, were very popular. For women, platform styles provided an appropriate finish for long skirts and pants. Sandals, moccasins, pumps, and lace-ups all had a more prominent fashion appeal as a result of height-enhancing shoe bottoms. Sales of rubber-canvas shoes in a variety of colors, styles, and designs increased substantially.

Prices and Profits

The average factory price for nonrubber footwear declined about 1 percent in 1992, to an estimated $20. This was the result primarily of the decline in leather prices that began in mid-1991, paralleling a decline in hide prices. The Consumer Price Index for all footwear, including imports, increased less than 1 percent over the same period.

An analysis by Footwear News (July 1992) indicated that as a group, 18 publicly held U.S. footwear resource companies (companies that may produce domestically or abroad) reported a 13 percent increase in sales in 1991 over 1990 and a 20 percent increase in profits. However, 89 percent of the group's total profits came from the two largest athletic footwear producers, both of which manufacture almost all their footwear overseas. Five of these resource companies, including the third largest athletic producer, showed losses for 1991. The net profit-to-sales ratio for the group was 5.4 percent in 1991, up from 5.1 percent in 1990. The profit-to-equity ratio was 18.7 percent. For a group of five footwear retailers, the same survey showed a sales increase of 4 percent in 1991, but profits declined 31 percent. The profit-to-sales ratio for the retailer group was 1.6 percent, down from 2.3 percent in 1990, and the profit-to-equity ratio was 6.8 percent, far lower than that for the resource group.

Another financial performance profile of 22 public footwear companies by a management consulting firm showed sales increasing 12.5 percent in 1991 and profits increasing 2.6 percent. Three of these companies accounted for 56 percent of the group's total sales. Two of these were the largest athletic footwear companies. Five companies in the group showed losses for 1991. Return-on-sales and return-on-equity for the group were 5.3 percent and 16.7 percent, respectively. The two median ratios were far less impressive: 2.6 percent and 7.6 percent, respectively. A subgroup of 12 companies that manufacture domestically or source overseas reported a solid 17-percent gain in profits on a 9 percent sales rise. Another subgroup of five athletic shoe companies showed ratios of 7.3 percent for return-on-sales, 21.5 percent for return-on-equity, and 19.5 percent for return-on-invested capital. The solid results for this subgroup were achieved despite a large loss incurred by the third largest athletic shoe company, and the results reflected athletic footwear's dominant share of the total footwear market.

Factories and Employment Down

The Census of Manufacturers for 1987 lists 379 companies operating 471 establishments in the nonrubber footwear industry, down from 558 companies and 751 establishments in 1982. In 1966, some 990 plants were in operation. Based on published reports of plant closing, these declines have continued since 1987. Many of the plants closed in 1991 and 1992 were owned by the largest manufacturing and retailing companies.

Total employment declined about 3.5 percent in 1992, to 54,900 workers. Production employment dropped about 4.3 percent, to 46,600 workers. The Bureau of Labor Statistics index on footwear industry productivity (1982 = 100) increased from 97.7 in 1983 to 101.7 in 1989, but dropped back to 98.7 in 1990. The index will probably be down again for 1991 and 1992, because declines in employment for those years were much smaller than those for production.

Trends in Technology

Widespread use of computers is shortening production time, reducing costs, improving quality, and allowing manufacturers to respond quickly to customer needs. In order to maintain competitiveness, manufacturers must respond to trends in fashion in hours and days rather than weeks. Computer-aided shoemaking systems (CAD/CAM/CIM), help manufacturers improve competitiveness through better quality, greatly expanded design flexibility, and lower production costs.

Three-dimensional CAD is now available for style development and visualization for the design and production of 3D tooling. CIM is now available as separate units that can be linked to a common CAD data source. Programmable machines are now available for virtually every aspect of the manufacturing process, including cutting, sewing, folding, lasting, and making. Continuous cutting machines can be used for leather and synthetic materials, where materials savings can exceed 5 percent. The latest developments in automatic stitching use some of the most advanced techniques in vision and computer technologies, thereby improving quality and vastly reducing labor costs. Vision techniques are also being used in the lasting systems, in which a camera can sense the position of the shoe's top-line in the last and compare it with a pre-programmed optimum position. The pull is automatically adjusted to position the top line to the proper position.

Such technologies narrow the cost advantage foreign manufacturers, particularly those in the Far East, have over U.S. manufacturers because of low wage rates. These technologies provide better quality and quicker response times, often giving U.S. producers a competitive edge.

INTERNATIONAL COMPETITIVENESS

Nonrubber footwear imports increased about 6 percent, to an all-time high estimated at 993 million pairs in 1992, the third consecutive annual increase. The customs value--excluding insurance, freight and duty--reached an estimated $8.5 billion, up about 2.6 percent from 1991. The average unit price for all nonrubber footwear imports in 1992 was an estimated $8.59 per pair, down about 3 percent.

Imports grew from 175 million pairs in 1968 to 941 million in 1986, a compound annual growth rate of 9.8 percent. Imports stabilized at about 375 million pairs and 50 percent of apparent consumption during the four-year period, beginning in June 1977, because of the quotas imposed by the orderly marketing agreements (OMAs) with South Korea and Taiwan. However, after these agreements expired in 1981, imports increased by more than 100 million pairs annually, reaching a high of 941 million pairs in 1986. Import penetration peaked the following year at 82 percent of apparent consumption. Following three annual declines to a low of 860 million pairs in 1989, imports again began to rise to the current record level. Import penetration also reached a new high of 87.8 percent in 1992.

For January-June 1992, China became the dominant supplier to the U.S. market (Table. 3). U.S. imports from China rose 31 percent, or 125 million pairs, as more production was shifted from Taiwan and South Korea to China because of lower labor costs. A large measure of technological and financial support for China's expanding footwear operations comes from Taiwanese manfacturers and financial interests. The import market share of the rive largest suppliers--China, Brazil, Taiwan, South Korea, and Indonesia--totals 85 percent. Although the United States imported nonrubber footwear from more than 80 countries in 1992, only four other countries--Italy, Thailand, Spain, and Hong Kong--captured more than 1 percent of the U.S. market for imported footwear.

[TABULAR DATA 3 OMITTED]

China, Brazil, and South Korea were the largest suppliers of men's leather footwear; Brazil, China, and Italy were the largest suppliers of women's leather footwear; China, Brazil, and South Korea, were the largest suppliers of juvenile leather footwear; and South Korea, China, and Indonesia supplied the most leather athletic footwear.

U.S. leather footwear imports accounted for about 53 percent of total nonrubber footwear imports in 1992, a ratio unchanged from 1991, and several points higher than that for domestic production. For the first six months of 1992, the average unit value for leather footwear imports was $12.03, down about 5 percent from the same period in 1991, and substantially below that for domestic production.

U.S. manufacturers export large quantities of cut footwear parts to many developing countries, where they are assembled and re-exported to the United States as finished or partly finished products. Under the U.S. Thriff Scheduli (Heading No. 9802), duties are assessed only on the value-added content. Moreover, U.S. duties on partially finished but unlasted nonrubber footwear are less than 5 percent, compared with 8.5 percent or more for completed footwear. Frequently, final manufacturing operations that require less labor, such as bottoming, finishing, and packing, are performed in the United States. For 1992, imports of such footwear parts of leather totaled about 11 million pairs, most of which came from the Dominican Republic, but they amounted to only 2 percent of leather footwear consumption. Imported parts of vinyl or plastic also totaled about 11 million pairs and came mostly from China.

Exports Also Up

In 1992, U.S. nonrubber footwear exports increased about 20 percent, to an estimated 21.7 million pairs, 13 percent of domestic production. Value increased about 12 percent, to $342 million. The average unit price was about $15.76 per pair, down about 7 percent from 1991. The weaker U.S. dollar encouraged export growth as U.S. producers found it easier to compete in high-cost, developed-country markets.

In the first half of 1992, Mexico was the largest export market, receiving 1.49 million pairs, 13.7 percent of the total, valued at $8.4 million. Most of these exports were athletic shoes with textile uppers. Argentina and Canada ranked second and third, with 9.6 and 8.9 percent of the U.S. export market, respectively. Exports to Argentina were up more than 360 percent.

Japan ranked fourth with 7.1 percent of the total. Exports to Japan were down 7 percent from 1991. Certain types of U.S.-produced leather footwear are price-competitive in the Japanese market. In 1992, about 60 percent of all U.S. footwear exports to Japan were athletic types, which are exempt from Japan's restrictive global tariff-rate quotas on leather non-athletic footwear. However, these quotas and licensing procedures required to administer them discourage U.S. manufacturers' from exporting these latter types to Japan. The Japanese market for leather footwear is estimated at more than 170 million pairs. Japan's global tariff-rate quotas, which are legal under GATT, restricted leather footwear imports to about 4.4 million pairs for Japan's 1991 fiscal year. As of mid-1992, the United States and the European Community had failed to get Japan to raise the annual quota to 25 million pairs and significantly reduce the above-quota duty rate of 60 percent during the Uruguay Round negotiations. It appeared that Japan might offer to increase the annual quota to 14 million pairs over a five-year period, a quantity less than 10 percent the size of the Japanese market.

During the first six months of 1992, Russia was the fifth largest market for U.S. nonrubber footwear exports, with 735,000 pairs valued at $6.5 million. The United Kingdom, Germany, Italy, France, and Spain were the next largest markets.

Trade Legislation

Several attempts by Congress to pass footwear import quota legislation since 1985 failed to survive vetoes by the President, and in late 1992 it appeared very unlikely that further attempts would be made. However, legislation extending the Caribbean Basin Initiative (CBI) passed in late 1990 and provided duty-free status for most products, except footwear, leather products, and several others. In 1991, a U.S. Customs Service ruling accorded duty-free treatment to U.S. footwear imports from CBI countries, providing the footwear is manufactured with 100 percent U.S. components. The industry attempted to gain congressional support for legislation restoring the duty under such conditions, but enabling legislation had not passed by mid-1992.

The industry was also concerned about increased imports from Mexico that could result from the removal of duties on footwear in the North American Free Trade Agreement (NAFTA). Negotiations on such an agreement among Canada, Mexico, and the United States were completed in August 1992 and may be implemented in beginning in 1993 or 1994. Rubber footwear, including rubber-fabric types, will have a 15-year phaseout of U.S. duties, which range from 37 to 48 percent. Most nonrubber footwear, including leather types which are dutiable at 8.5 to 12 percent, received shorter phaseout periods of 10 years. The trade agreement with Mexico incorporates strict rules of origin which the industry strongly supported to discourage other foreign producers from using Mexico to gain duty-free access to the U.S. market. U.S. footwear imports from other Central and South American countries could also increase substantially if accorded duty-free status under the Administration-proposed Andean Initiative and the Enterprise for the Americas Initiative.

Outlook for 1993

Shipments of nonrubber footwear are expected to increase slightly, to 170.7 million pairs. Production will increase about 1 percent, to an estimated 165.3 million pairs. Shipments will increase in two sectors: slippers by 2 percent, to 45.9 million pairs, and men's footwear by 3 percent, to 43.3 million pairs. Women's footwear will remain unchanged at 55 million pairs, and footwear, except rubber NEC will decline 3 percent, to 26.5 million pairs. Lower-cost imports of nonrubber footwear, particularly from the Far East, are expected to increase about 5 percent by quantity. As a result, both apparent consumption and per capita consumption are expected to increase by about 4 percent each. Import penetration is expected to rise above 88 percent.

Long-Term Prospects

The long-term outlook for the nonrubber footwear manufacturing industry continues to be one of declining production and increasing imports despite large increases in assembly operations from cut and sewn uppers produced offshore. Weaker firms will continue to close. Stronger ones will consolidate plants and invest in new technology designed to narrow the gap between foreign and U.S. labor costs. The industry's capacity to respond quickly and effectively to changes in the market has improved significantly. However, success in this area may also help low-cost Asian producers such as China and Indonesia as these countries adopt new technologies. Intense competition is expected from Mexico and other Central and South American suppliers if and when these areas receive duty-free treatment for footwear in proposed trade agreements.--James E. Byron, Office of Consumer Goods (202) 482-4034, September 1992.

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Additional References

(Call the Bureau of the Census at (301) 763-4100 for information about how to order Census Documents). Footwear, Current Industrial Report, MQ31A (quarterly, with annual summary). Bureau of the Census, Industry Division, U.S. Department of Commerce, Washington, DC 20230. Telephone: (301) 763-7807. Nonrubber Footwear Quarterly Statistical Reports, U.S. International Trade Commission, Washington, DC 20436. Telephone: (202) 252-1000. Footwear Manual, 1992, Footwear Industries of America, Inc., 1420 K St. NW, Washington, DC, 20005. Telephone: (202) 789-1420. Footwear News (weekly), Fairchild Publication, 7 West 34th St., New York, NY 10001. Telephone: (212) 630-3800. American Shoemaking (monthly), World Footwear (monthly), and American Shoemaking Directory, 1992, Shoe Trades Publishing Co. Inc., 61 Massachusetts Ave., Arlington, MA 02174. Telephone: (617) 648-8160.

LUGGAGE AND PERSONAL LEATHER GOODS

The luggage and personal leather goods industries produce a wide variety of consumer goods, including leather gloves and mittens (SIC 3151); luggage (SIC 3161); women's handbags and purses (SIC 3171); personal leather goods (SIC 3172); and leather and sheeplined clothing (SIC 2386).

The total value of industry shipments for all five of these industries increased about 3.4 percent in current dollars in 1992, to an estimated $2.3 billion. The value of product shipments also increased 3.3 percent, to about $2.1 billion. But when measured in constant dollars, industry and product shipments each rose 1.4 percent and 1.3 percent over 1991, respectively. In 1992, industry employment declined 1.3 percent, to 29,500, but production employment rose less than 1 percent, to 22,600.

INTERNATIONAL COMPETITIVENESS

Because labor costs represent such a high proportion of total production costs, these industries all encounter significant import competition, especially from developing countries where wage rates are far below U.S. levels. In 1992, the value of imports of luggage and personal leather goods rose a substantial 20 percent to an estimated $4.2 billion. By value, the ratio of imports to apparent consumption rose to 70 percent in 1992, from 66 percent in 1991.

Leather Gloves and Mittens

The U.S. leather glove and mitten industry is composed of two product segments: work gloves and mittens, which account for more than 85 percent of domestic production, and dress gloves and mittens, which account for approximately 15 percent. Finished goods are made either entirely of leather or of leather and such other materials as cotton or wool. In 1992, the value of shipments of these products declined about 5 percent from 1991, to $103 million. Measured in constant dollars, product shipments fell by 6 percent. Total production employment declined about 9 percent and 4 percent, respectively.

Because of the continued decline in manufacturing and construction, the demand for leather work gloves dropped in 1992. Apparent consumption of leather gloves and mittens in 1992 was $232 million by value, down 8 percent from 1991. Imports declined to an estimated $140 million, 60 percent of apparent consumption. Principal sources of imports, by quantity, were China with 81 percent of total imports, the Philippines (5 percent), and Hong Kong (4 percent).

Exports of leather gloves and mittens declined 16 percent in 1992, to an estimated $11 million. By quantity, however, 70 percent were exports of cut parts to three countries-Mexico, China, and Colombia--for assembly and re-entry into the United States. Under section 9802 (formerly 807) of the Harmonized Tariff Schedule of the United States, these items are subject to U.S. duties only on the value-added content.

Luggage

The luggage industry produces a wide variety of products, including suitcases, briefcases, attache cases, hand luggage, tote bags, trunks, and occupational cases. Materials used include leather, plastics, nylon, cotton, linen, and metals. Many products use combinations of these materials. Construction methods include sewing, molding, and laminating. About 25 percent of U.S.-produced finished goods is made of leather, and leather use is highest in attache cases and briefcases.

Luggage shipments increased about 6.7 percent in 1992, to almost $1.1 billion. In constant dollars, product shipments rose 3.5 percent. Total industry employment declined 3.7 percent, to 13,000 employees, but production employment increased about 4 percent, to 10,200, indicating that the industry was lowering overhead labor while increasing production.

In 1992, the moderate recovery from the recession resulted in slightly more travel and hence more demand for luggage. Apparent consumption of luggage, by value,, was $2.2 billion in 1992, up almost 12 percent from 1991. Imports rose about 20 percent, to an estimated $1.3 billion and represented 59 percent of apparent consumption. By quantity, only 2 percent of U.S. luggage imports are made of leather. Almost 31 percent of all attache cases and briefcases were made of leather, the highest proportion in this category. Principal sources of luggage imports, by quantity, were China, with 59 percent of the total, followed by Taiwan (I 9 percent) and South Korea (7 percent). U.S. imports of luggage from China grew about 20 percent by quantity over 1991, while those from Taiwan dropped 27 percent. In 1992, U.S. luggage exports rose about 44 percent over 1991, to an estimated $157 million. Canada, Japan and Mexico were the largest export markets.

Handbags

The handbag industry produces women's handbags and purses of leather and other materials, except precious metals, which are classified in SIC 391 1. By quantity, leather's share of domestic handbag shipments in 1987 was 61 percent. In 1992, the value of handbag product shipments declined about 3.4 percent, to an estimated $397 million. Product shipments in constant dollars also declined, about 3.8 percent. Industry employment rose about 3.3 percent, to 6, 1 00 employees, but production employment declined 7 percent, to 4,000 workers.

Apparent consumption of handbags increased about 2.2 percent in 1992, to $1.3 billion. Imports of handbags increased about 5.8 percent, to an estimated $950 million, and accounted for 73 percent of apparent consumption, up from 70 percent in 1991. Import penetration by quantity was far higher, reaching an estimated 90 percent in 1992. By quantity, about 26 percent of U.S. handbag imports were made of leather. Countries with the largest shares of U.S. handbag imports by quantity were China (76 percent), South Korea (8 percent), and Taiwan (5 percent). U.S. handbag imports from China rose 19 percent in 1992, while those from South Korea and Taiwan dropped 33 percent and 40 percent, respectively.

Exports of handbags in 1992 increased about 36 percent, to $38.3 million. Almost 40 percent, by quantity, were made of leather. Mexico, Japan, and Canada were the leading export markets, although exports to Mexico were primarily cut handbag parts that were assembled there and re-exported to the United States as finished goods.

Personal Leather Goods (Flatgoods)

This industry subsector produces such items as wallets and billfolds, French purses, and cases for eyeglasses, cigarettes, keys, and non-musical instruments. These products are often referred to as flatgoods because they are small enough to fit into pockets or handbags. Flatgoods are made in whole or in part of leather, plastics, or textiles.

In 1992, product shipments increased only slightly, to $367 million. Product shipments in constant dollars declined about 1 percent from 1991. Total employment dropped about 3.3 percent, to 5,900, and production employment also declined 2.8 percent, to 4,700.

Apparent consumption of flatgoods increased about 6 percent in 1992, to $647 million. Imports increased 14 percent, to an estimated $303 million, and represented 47 percent of apparent consumption by value, the lowest for the entire luggage and leather goods group. Principal foreign suppliers by value were China with 43 percent of total imports, South Korea (10 percent), and Italy and Taiwan (8 percent each). Imports of flatgoods from China were up 50 percent in 1992.

U.S. exports of personal leather goods totaled an estimated $22.8 million in 1992, an increase of 7 percent over 1991. Canada, Japan, and Hong Kong were the leading export markets.

Leather and Sheeplined Clothing

Leather wearing apparel manufacturers produce leather coats and jackets for men, women, and children. Shipments also include pants, vests, dresses, skirts, and other clothing. Demand for leather and sheeplined clothing is more directly related to trends in fashion than is the case for luggage and personal leather goods, so consumption patterns vary widely from year to year. As leather prices rise relative to other materials, consumers elect to purchase apparel of other materials or postpone such discretionary spending altogether. In late 1991, leather prices reversed an upward trend that had restricted leather apparel purchases. The resulting decline in prices stimulated consumer demand for leather apparel.

Product shipments of leather wearing apparel increased about 14 percent in 1992, to an estimated $143 million. Product shipments in constant dollars also rose, about 15 percent. Total employment and production employment were up more than 15 percent each. In 1992, apparent consumption of leather wearing apparel increased a substantial 39 percent, to an estimated $1.6 billion. Imports of leather apparel were also up 39 percent, to about $1.5 billion. Import penetration, by value, was 94.4 percent. By quantity, South Korea was the largest supplier with 53 percent. China ranked second with 27 percent of the total. However, imports from China were up more than 200 percent over 1991. It appears that China could soon overtake South Korea as the number one supplier. The customs value unit price of leather wearing apparel imports from China was 41 percent lower than that from South Korea in 1992. U.S. exports of leather wearing apparel in 1992 dropped about 8 percent from 1991, to $52.7 million.

Outlook for 1993

Demand for luggage and leather products is expected to increase only slightly as the economy recovers. Imports will capture an even larger market share in most of these industries. As a result, product shipments in constant dollars are expected to decline 1.8 percent. Rates of growth or decline are expected to vary among the industries: gloves and mittens, -- 3.5 percent; luggage, unchanged; handbags, -- 3.4 percent; personal leather goods, -- 3.6 percent; and leather wearing apparel, -- 3.9 percent.

Long-Term Products

Consumer demand for luggage and leather products will continue to strengthen after 1993 because of demographic factors. Higher white-collar employment should result in increased purchases of leather office products. Larger numbers of professional women in the workforce will lead to higher sales of business cases. Larger numbers of retirees with increased disposable income may stimulate more travel and corresponding increases in luggage sales.

However, U.S. leather products will continue to meet stiff competition from abroad, particularly from Far Eastern countries. It is unlikely that any of the U.S. market lost to imports during the past 20 years will be recaptured in the next 20 years. Nevertheless, with the benefit of a low-valued dollar, innovative and aggressive producers can expect to expand exports and at least share in future expansion of the U.S. market.--James E. Byron, Office of Consumer Goods, (202) 482-4034, September 1992.

[TABULAR DATA OMITTED]

Additional References

Call the Bureau of the Census at (301) 763-4100 for information about how to order Census Documents). Leather Gloves, Luggage, and Miscellaneous Leather Goods, SIC 315 1, 3161, 3171, 3172; 1997 Census of Manufactures, series MC 97(I)-31B, Bureau of the Census, U.S. Department of Commerce, Washington, DC 20233. Telephone: (301) 763-2510. Miscellaneous Apparel and Accessories, SIC 2371, 2394, 2385, 2386, 2387. 2389; 1987 Census of Manufactures, series 87(1)-23 D, Bureau of the Census, U.S. Department of Commerce, Washington, DC 20233. Telephone: (301) 763-2510. Showcase, Luggage and Leather Goods Manufacturers of America Inc., 350 Fifth Ave., New York, NY 101 18. Telephone: (212) 6952340. Travelware, Business Journals, Inc., 50 Day St., Norwalk, CT 06854. Telephone: (203) 853-6015.

COPYRIGHT 1993 U.S. Department of Commerce
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