With the coronavirus pandemic having been brought under control in China, APLF thought that it was an opportune time to find out exactly what is the current state of China’s leather industry. APLF approached the Chairman of the China Leather Industry Association (CLIA), Mr Li Yuzhong, to find out the facts of the situation in mid-March 2020.
Chairman of the China Leather Industry Association (CLIA), Mr Li Yuzhong
Q: As of 10 March, what percentage of tanneries are operating nationwide and specifically what is the state of tanning activity in Hubei province?
A: According to the industry survey, as of 10th March, over 90% of the tanneries in China have resumed operations. However, the actual capacity utilization rate remains low. Tanneries are facing problems such as restrictions on labour mobility, limited supply of protective equipment and the interplay between upstream and downstream industrial chains. In addition, under the influence of the rapid spread of the coronavirus around the world at present, it takes times for production to be completely resumed.
There are not many tanneries in Hubei province. The existing tanning companies in Hubei are still awaiting the approval of work resumption from the government. It is expected that they will soon restart their operations.
Q: Can you estimate the average level of production of leather and are the tanneries well-stocked with raw and semi-finished material to accelerate operations?
A: Tanning companies started to resume production successively after the Lantern Festival. However, the production is less than 40% of the capacity in general due to the epidemic. Starting from March, tanneries’ production has improved, and some companies have operated at over 70% of capacity.
Since tanneries had already established a procurement plan for hides before the outbreak of the COVID-19, the supplies of hides and wet blue leather can generally meet the demand of enterprises. The current supply of hides is sufficient in the market. As the coronavirus circulates across the world, various nations will implement corresponding measures. Their impacts on global hide production and shipping remain to be seen.
Q: Have Chinese buyers returned to the US hide market to secure supplies or are they looking at other countries (such as Brazil) from where to import raw materials necessary for production?
A: Over the years, China and the US have built a stable relationship upon the supply and demand of hides. The US is the largest supplier of imported hides and one of the main suppliers of imported semi-finished leather especially wet blue leather in China. With regards to imports: Under the influence of the US-China trade war, in 2019, the volume of US imported hides in terms of total volume of imported hides in China decreased by 1.7% but still ranked first; the volume of US imported semi-finished leather in terms of total imported semi-finished leather in China decreased by 1.6%, which still ranked second after Brazil. In 2019, China imported 387,800 tons of hides from the US, which accounted for 37.4% of the total volume of imported hides in China;
48,000 tons of semi-finished leather were imported from the US, which accounted for 7.4% of the total volume of imported semi-finished leather in China. Meanwhile, with the changes in leather market demand and the international trade situation, China is gradually changing the structure of hide imports. Changes in import states and ratios will continuously take place. However, it is no doubt that the US remains one of the most important hide supplier of China. China and the US have signed a Phase 1 trade deal and since 2nd March, Chinese tanneries can apply to the central government for exemptions of additional tariffs on 41015019 (a whole piece cow hide weighing more than 16kg) which is imported from the US. That product is the major type of hide imported from the US to China. Currently, some enterprises’ applications have been approved. This is very favourable news to the trade of hides between China and the US, which encourages the Chinese tanning companies to increase imports of US cow hides.
Q: Is the situation at major Chinese ports now unblocked for the import and export of supplies and finished goods after economic activity resumed and after the extended Lunar New Year vacation?
A: Ports in China are implementing normal customs procedures on imported goods and no special restrictive measures have been taken. After the Lunar New Year vacation, imports and exports have returned to normal since the staff returned to work.
Q: It was widely reported that the Purchasing Managers Index declined to just 35.7%. Does CLIA expect this indicator to recover so as to put China back on the road to economic growth If so, within what time frame?
A: Since the coronavirus outbreak began, the whole country has responded to the call of the Chinese government and adopted very effective control measures. As the virus has been under control, economic activities are gradually returning to normal. The CLIA believes that the production and operation of the Chinese leather industry will progressively improve and there will be a steady increase in various indicators including the Purchasing Managers' Index under the sound leadership of the Chinese government. However, we note that different control measures against the coronavirus have been adopted by nations across the world, bringing uncertainties to the global prevention and control of the epidemic. The export growth of Chinese leather products might therefore slow down under the influence of adverse factors such as logistics restrictions.
Q: Have factories in the main footwear manufacturing areas such as Wenzhou and Guangdong resumed activity?
A: The whole country, excluding Hubei province, has resumed footwear manufacturing in general. Before 10th March, both rates of employee attendance and actual capacity utilization were lower than that in the same period last year because of the coronavirus. The situation is getting better as the epidemic is brought under control. For example, the employee attendance rate is rising gradually with a few companies having reached the highest level. Belle, for example, resumed operation on 24th February with an employee attendance rate of around 70% in early March and 90% in mid-March; Jihua 3515 resumed operation in late February and the employee attendance rate has almost reached 100% at present.
Capacity utilization rate is under the influence of various problems like limited supply of protective equipment, low operational rates in upstream industrial chains, dramatic declines in sales in downstream enterprises as well as impacts on follow-up export orders caused by the rapid coronavirus outbreak around the world. Companies’ actual capacity utilization rate will be lower than that in the same period last year for the long run.
Larger companies will generally perform better than SMEs in the circumstances mentioned above.
Q: How intact are the supply chains to the factories that are currently working?
A: Companies in the supply chains and footwear manufacturing are recovering at the same time. Because of the epidemic and low operating rate in downstream companies, there are not many orders. Some large footwear materials companies have an employee attendance rate of over 70% and capacity utilization rate of over 60%, whereas small companies are confronted with a bigger challenge. All major footwear materials markets of the country have resumed operations in early March.
Q: Is there evidence that orders have been redirected to other countries such as Vietnam and Cambodia during the factory shutdown?
A: Since the outbreak of coronavirus is a sudden incident, there is no mass relocation at the moment. Although there might be very few cases of order adjustment in the early stages of the coronavirus outbreak for a short period of time, southeast Asian countries highly depend on Chinese supply chains which had also been impacted by this sudden outbreak that led to shortages of raw materials in these countries. China has developed a manufacturing system with the largest scale, the most extensive category coverage and the most comprehensive supporting facilities in the world, which play a significant role in the global industrial chain and supply chains. Thus, the resilience of the Chinese industrial chain and supply chains is relatively strong. China puts efforts in resuming work and production and returning the economy to normal operations and hopes to provide significant support and security for maintaining stable and safe global industrial chain and supply chains.
Q: Have most migrant workers returned to work or are they still hampered by travel restrictions?
A: Currently, most migrant workers have returned to work except those in Hubei. During the early period of work resumption in mid to late February, traffic restrictions indeed hampered the flow of migrant workers. Enterprises and local government organizations arranged chartered buses to areas where migrant workers concentrated to bring them back to work. Now, the country has opened to traffic, except in some special areas, so it is now easier for the industrial workers to return.
Q: Does the CLIA expect the overall situation to normalize in the next 3 to 4 months within China?
A: As the development of the Chinese footwear industry is entering a new cycle in recent years, the growth rates of various indicators have slowed down. The influence of the industrial cycle coupled with the sudden impacts brought about by the coronavirus will further lengthen the duration of the industrial cycle. The epidemic has been brought under control in China and it is expected that the impacts of this sudden incident will only affect the domestic market of the industry for the short term. As the epidemic is under control and people’s lives get back on track, it is predicted that the number of domestic orders will return to normal as well. However, since the coronavirus continues to spread across the world and there is no obvious turning point at the moment, the number of export orders is expected to keep falling in this situation as we cannot predict the trend of the coronavirus. On the whole, it is quite challenging for the situation to normalize in the next 3-4 months.
Q: How is the internal retail sector reacting in China – especially in major cities now that the spread of the virus appears to be under control?
A: The retail industry, especially offline retail, was hit hard during the coronavirus outbreak. However, it has started to recover now as the coronavirus is under control in China.
On the premise of implementing precautionary measures, some offline stores selling shoes and bags have resumed operations. Since the coronavirus outbreak started, many brands in China have stepped up online promotion, increased types of products selling online and kept intensifying online sales marketing in order to adapt to the current epidemic situation, the market and demands of consumers. The result is relatively effective and to a certain degree, it compensated for the great impacts suffered by offline retail during the outbreak.
Q: What policies have been implemented by the central government to help industries that have been under pressure during the health crisis – for example, relieving cash flow problems so that the workforce can be paid?
The leather industry is a labour intensive industry mainly comprised of SMEs which are the major job providers of the country. However, orders and revenue of companies decreased while essential expenses increased due to the coronavirus. This is the current challenge faced by SMEs. Since late January, central government and local governments have frequently rolled out relief measures to alleviate their burdens. At national level, over 140 policies have been introduced, which are ed about alleviating burdens of enterprises, strengthening financial support, increasing financial and tax subsidies, supporting the stabilization of employment and optimizing government services, and so on. Many local governments have also introduced rules in order to accelerate the implementation of policies. For example:
The Ministry of Human Resources and Social Security, the Ministry of Finance and the State Taxation Administration issued the “Notice on the Phased Reduction of Social Insurance Premiums for Enterprises”, which includes three measures on the “exemption, reduction and deferral” of employees’ social insurance premiums paid by the employers. It is expected that the policies of reducing and exempting social insurance premiums could reduce the burden of enterprises by 600 billion yuan. Phased reduction of social insurance premiums can ease the difficulties of SMEs and help them to resume operations and production in a more direct, targeted and effective way; the General Office of National Development and Reform Commission announced that supportive policies on a two-tiered electricity system will be adopted during the epidemic period to lower the electricity costs of enterprises; The China Banking and Insurance Regulatory Commission, the People’s Bank of China, the National Development and Reform Commission, the Ministry of Industry and Information Technology and the Ministry of Finance jointly issued the “Notice on Provisional Postponement in Principal and Interest Repayment for Loans to SMEs and Micro Enterprises”. The loan principal repayments of eligible enterprises who encounter temporary liquidity difficulties will be provisionally deferred; Regarding financial support, the China Banking and Insurance Regulatory Commission announced policies such as further reducing the financing costs for loans to micro and small-sized enterprises by 0.5% in 2020. The Customs Tariff Commission of the State Council issued the “Notice regarding the Initiatives on Tariff Exclusion for US Imports under Market-Oriented Principles”, which includes 41015019 (a whole piece cow hide weighing more than 16kg) imported from the US and thus relieve the tariff burden of importing cow hides from the US.
Q: What are the actions the CLIA took to help the China leather industry in this difficult period?
A: With regards to the prevention and control measures on the coronavirus, the CLIA has promptly established a leading group for COVID-19 prevention and controlled by the Chairman Li Yuzhong. We adopted the approach of united arrangements and agile action, to remind the whole industry to have a deep knowledge of the importance and urgency of implementing prevention and control measures, strengthen the unified leadership and command, and firmly implement the decisions and arrangements of the CPC Central Committee.
Meanwhile, the CLIA has received timely information about the engagement of the enterprises and local associations in fighting the epidemic within the industry and urged the enterprises to implement prevention and control measures in earnest and to make contributions within their capacities. According to incomplete statistics, as of 20th March 2020, leather companies in the country have donated money and resources with a total amount of two hundred million yuan.
For those specialized markets of leather with enough financial capacity, the CLIA has encouraged them to reduce the rent in different degrees according to the actual situation. For example, Haining China leather city the rent and property management fees for two months based on the rent of the last lease term (2019-2020) to ease the capital burdens of enterprises by direct economic means.
The CLIA reminded enterprises who have restarted operations to do their best in preventing and controlling the epidemic and resuming production at the same time.
In order to complement the ministries and commissions of the country, the CLIA has done a survey on different aspects such as the impacts of the coronavirus on the enterprises and the industry, work resumption of enterprises and impacts on foreign investment and cooperation. The survey generally covers enterprises in more than 40 areas of the leather industry including footwear manufacturing, tanning, bags and luggage, leather jackets, furs and leather chemicals. It has summarised and analysed the impacts and provided relevant policy recommendations. The final survey report has been sent to related ministries or commissions to provide a basis for relevant decisions made by the country.
Since 2nd March, the CLIA is actively assisting its members by applying for exemptions on additional tariffs on cow hide imported from the US in order to alleviate the burden on these enterprises.
To further ease their loads, the CLIA will also actively respond to the call of the government and provide support to members on different aspects such as memberships fees to reduce their burden and support their development.
Meanwhile, the CLIA has concentrated on conducting a survey of buyers’ demands with all exhibitors to understand their individual needs and offer precise services; strengthening communication with leather product companies and distributors to learn about the current market situation and invite more buyers to visit fairs at the same time. Such actions will help build a better business platform for the development of the industry.
In addition, the CLIA will take advantage of the industry media and online communities such as websites, publications and Weibo/ WeChat of the CLIA to promote the exhibitors of All China Leather Exhibition (ACLE) and their products.