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LIVESTOCK AND POULTRY
World Markets and Trade
October 1997
The Mexican Hides and Skins Industry: An Overview
The Mexican leather industry is successfully meeting the international export challenge by expanding new markets abroad while improving environmental conditions at home.
Introduction
Mexico's tanning and leather manufacturing industry rebounded from a drastic peso devaluation at the end of 1994 to burgeoning exports in 1996. Mexican footwear exports jumped from about $70 million in 1994 to about $153 million in 1996, as manufacturers used exports as their vehicle to greater sales, better markets, and a broader income basis.
Industry Structure
The Mexican leather industry is geographically very compartmentalized and mostly located in the state of Guanajuato. About 80 percent of leather production is in León--Mexico's fourth largest city. Monterrey has a small number of tanneries, but they are limited to large exporters of footwear, while Mexico City only has 3 tanneries. In addition, there is a growing number of maquiladoras near the U.S. border, mostly for cowboy boots. The average tannery does not have very high technology, and the average age of the machinery varies from 12-18 years. Since Mexico does not produce tanning or footwear machinery, all must be imported at high cost. Also, most of the machinery imported is used equipment.
There are approximately 700 tanneries throughout the country, of which 600 would be considered micro tanneries; and from six to seven thousand leather manufacturers. Leather manufacturers mostly concentrate their production into four categories: a) footwear, b) designer products, c) furniture, and d) automobile upholstery.
The largest tanneries are mostly processing shoe leather as it is easiest to produce. A growing number are processing designer products and furniture for both domestic use and export. These products, especially furniture, require better and more refined leather.
Only two companies produce and export auto upholstery, CUINBA and Tenería Azteca. Auto upholstery is by far the most difficult of all leather products to produce since it requires high technology, skilled labor, strict quality control, and is very capital intensive.
Proportionally, there is very little foreign investment in the leather industry, but this is expected to change as the economy improves, firms grow larger, and the industry becomes more specialized and expands production of upholstery and automobile leather.
Mexico's domestic market is large but poor, and since per capita income is low experts do not foresee significant growth in consumption of footwear in the near future. Consequently, leather manufacturers are looking abroad, mostly to the United States, for new markets. Of the 1.2 billion pairs of shoes sold in the United States in 1996, less than 30 million came from Mexico. This, the Mexican leather industry perceives, is a great opportunity to expand their market since they have many comparative advantages that other countries lack.
Imports
About half the hides used by the Mexican leather industry are produced locally while the other half is imported, mostly from the United States. As the Mexican industry expands, so will its imports of U.S. hides. Local hides are typically branded and come from a warmer climate where the quality is not usually as high.
Although the national herd may be increasing slightly, the slaughter rate is below pre-devaluation days due to low incomes and reduced per capita meat consumption. Since experts do not think these will rise in the near future, the increased demand for hides must be met by additional imports.
There has been a notable rise in the U.S. exports of hides to Mexico in 1997. As of mid-September, there has been almost a twenty percent increase in Mexican imports of U.S. hides compared to the same period last year. Although well over ninety percent of the imports are still whole raw hides, the trend will be to import more wet blues.
To increase their exports, many Mexican tanners and progressive manufacturers are turning to their local trade associations and other similar groups to provide technical services and marketing information. There are four main associations dedicating their services to the tanning industry; two in Guanajuato, one in Jalisco, and one in Mexico City. These associations are helping the footwear manufacturers to increase their competitiveness by improving managerial and basic technical training, establishing trade standards concerning color, form, style, etc. and printing catalogues containing these standards. Since the cooperative movement has not occurred in the leather industry, the associations also provide some services that cooperatives provide in other areas. Among other things, they help association members form ad hoc partnerships established for specific purchases or sales arrangements, as well as subcontracting the production of large quantities of specific products, or models. Other services provided to the members include establishing industrial fairs that are quickly changing the perception of new export opportunities, and providing information concerning the latest footwear designs in various countries (especially Italy, since Italian designs tend to set international patterns and styles).
Image: Mexican Footwear Exports on Field Day
Environmental Issues
In 1992, the Mexican government passed strict environmental laws governing the treatment of all waste waters. These new regulations obviously affect the tanning industry--especially in León.
Consequently, the city of León is adopting measures to eliminate water pollution. Two industrial parks under construction will have the capability to process residuals from tanning industry of that city.
Beginning January 1, 2000, all tanneries must comply with the new regulations. To accomplish this they must either:
Treat the residual waters,
Move to a new location that has treatment facilities,
Purchase wet blues from tanneries in the new industrial zone, or
Import wet blues.
Some tanneries are planning to adopt new technologies developed to recycle waste waters in their present tanneries within León. Although there will probably be a large cost in improving the curing and chroming process, this improvement will enhance the quality of the products and increase specialization within the leather industry. Other tanners have already moved their brining and chroming facilities to the new parks. About 40 percent of the parks have been sold to tanneries already. Some tanners and manufacturers are planning to purchase the wet blues from enterprises located in these parks. Others are already importing more wet blues than before. Practically all tanners will be affected by the new regulations and those that do not change production methods will most likely vanish.
Although 97 percent of all hides imported from the United States are whole hides, the number of wet blues (unsplit and grain split) has more than doubled. As of mid-September, this number increased from 18,000 a year ago to almost 40,000. This trend is expected to increase dramatically in the near future.
Constraints to Expansion
To take advantage of the export market, the majority of the Mexican tanners must change their "managerial culture" more than anything else. The trade associations are trying to change this culture by helping tanners trade directly with hide suppliers in the United States. Direct purchasing helps to ensure improved quality control and consistency, however, the majority of tanners still import their hides through brokers. Two main reasons behind this practice are tradition and a preference for this practice by U.S. exporters. It is easier for the Mexican tanner to call his broker and order the type and quantity of hides he needs than to negotiate with specific U.S. suppliers. But, when some importers try to contact exporters directly they are frequently referred to the exporter's brokers. The bigger firms requiring large quantities of quality hides will deal directly with specific suppliers in the United States.
Other problems include very high interest rates charged by the lending institutions (sometimes this can amount to LIBOR+28), and international competition. Argentina is a strong competitor since that country imposes an export duty on their hides to cheapen their leather prices on the international market.
Future Prospects
The devaluation of 1994 sent shock waves throughout the leather industry by increasing the cost of imported raw materials and jacking up the interest rates. Many small and medium size firms just disappeared. Those that survived are now stronger and more attune to the market forces influencing the Mexican economy. Tanners and manufacturers are more export oriented than ever before and think there is a good future for the leather industry--but only in the export market since the domestic market shows little sign of boosting the demand needed to sustain the growth of the industry.
Some manufacturers are working with local cattle ranchers to improve the quality of Mexican hides, and trying to change the business culture of local suppliers that do not consider the hide as an important product of the animal. Other manufacturers are establishing joint ventures to buy raw materials, produce larger inventories and market their products in more lucrative niches.
New Challenge for U.S. Exporters
The dramatic changes in the Mexican vibrant leather industry have created opportunities, as well as challenges, for U.S. hide exporters. These opportunities will continue to expand as Mexico increasingly embraces NAFTA's globalization spirit, but U.S. exporters must be willing to face the new challenges created by the structural changes in the Mexican leather and tanning industry. Although different challenges will always emerge, the most prevalent ones can be divided into three categories: a) to provide consistently better quality hides, b) to establish more direct contact with Mexican tanners and manufacturers, and c) to increase exports of quality wet blues.
As Mexican manufacturers expand their production of international quality footwear, furniture and automobile upholstery, they are demanding better quality hides to permit them to be more competitive in world markets. Mexican importers view direct dealings with U.S. hide suppliers as one of the ways to ensure the steady supply of better quality hides.
Mexican tanners and manufacturers are also importing more wet blues than ever before to try to obtain better hides and address the environmental problems generated by the brining and chroming process. U.S. exporters must be able and willing to provide this ever growing number of predictable high quality wet blues at reasonable prices.
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