Enhancing the Competitiveness of Pakistan’s Footwear Industry

The contribution of large-scale manufacturing in Pakistan’s GDP has decreased from a high of 14.8 percent in 2008 to 13.2 percent in 2019. This reduction in the contribution of the manufacturing sector partly explains the reduction in Pakistan’s share in global exports from 0.16 percent in 2005 to 0.13 percent in 2019.

Since 2018, the Pakistan Business Council (PBC) has initiated its Make-in-Pakistan (MiP) initiative. The MiP initiative aims to develop a policy framework that will help revive the manufacturing sector in Pakistan leading to the creation of jobs, an increase in value-added exports, the promotion of import substitution, and ultimately help raise government revenues.

As part of the Make-in-Pakistan initiative, the PBC has initiated a series of sector studies to identify impediments to improve global competitiveness of those sectors in which Pakistan has international presence. This report titled “Enhancing the Competitiveness of Pakistan’s Footwear Industry” is part of the PBC’s Make-in-Pakistan series and follows sector reports done by the PBC on the “Knitted Apparel Sector, the “Denim Apparel Sector,” the “Towel Sector,” and “Pakistan’s Refrigerator Industry.”

Global Trends in Footwear

Globally, China is the world’s biggest footwear manufacturer and also the largest exporter followed by India, Vietnam and Indonesia. The value of global footwear exports increased in 2019 to reach $153.3 billion – a growth of 5.6 percent over 2018. This growth was mainly driven by Asian countries. China was the source for 2 out of every 3 pairs of shoes exported in 2019. However, China has been seeing a steady decline in its exports of footwear since 2010 due to higher labor costs, more stringent government policies and attractive policies introduced by other competitors such as Cambodia, Vietnam and Bangladesh. As for footwear imports, the US is the largest importer, importing 1 in every 5 pairs of shoes.

Over the last ten years, the increasing popularity of textile footwear has been the most important trend in the global footwear trade. This category now represents a quarter of the footwear trade, up from 14.6 percent (value) in 2010. In terms of volume, Rubber and plastic (HS-6402) represent 47.5 percent of all footwear exported globally while the leather footwear category represents over 38.0 percent in value terms of total footwear exports.

Major Competitors in the Global Footwear Industry

Between 2010 and 2019, the footwear sector’s share in Cambodia’s total exports has more than doubled from 3.1 percent to 8.5 percent. The rapid growth in Cambodia’s footwear sector is partly a reflection of favorable government policies especially related to macroeconomic management and openness.

Bangladesh is attracting increasing interest from international investors as an emerging preferred low-cost manufacturing hub in Asia. Bangladesh produced 407.0 million pairs of shoes (all types of footwear including those of leather are included) in 2019. The country stands at the 8th position in the global footwear market in terms of production volume. The footwear industry contributes just over 2.4 percent to Bangladesh’s exports. Moreover, the country’s ability to utilize tariff-free access to the European Union (through EU’s Generalized System of Preferences, GSP), Canada, Australia and Japan have made Bangladesh a sourcing hub for leather and footwear products.

Vietnam is the 3rd largest producer of footwear with a share of 5.8 percent, behind India (10.7 percent) and China (55.5 percent). The footwear industry in Vietnam is responsible for more than 1.5 million jobs. Foreign direct investment (FDI) is the main factor contributing to the growth of the industry in recent years. Vietnamese

footwear exports have more than doubled in the last 10 years and the local industry is benefiting from various FTAs and the shift from China of basic manufacturing.

The Chinese footwear industry has long been the world’s number one supplier. Although fierce competition from regional competitors has reduced the output of footwear products in China in recent years, the country is still expected to be the world’s top footwear supplier over the next few years. Total revenue from China’s footwear industry for 2019 was $64.7 billion. Overall, the global market is expected to continue to grow at an average annual rate of 5.8 percent through to 2025.

Footwear Industry in Pakistan

Footwear contributes less than one percent to Pakistan’s global exports. Despite the low contribution to the international footwear market, Pakistan is the seventh largest producer of footwear, manufacturing more than 2.0 percent of all footwear produced worldwide. It is also the seventh largest consumer of footwear, accounting for 2.2 percent of global consumption. In 2010, Pakistan exported $92.6 million worth of footwear, whereas it exported $135.3 million in 2019 – a growth of 45.9 percent. However, this figure is still very small when compared to Pakistan’s total exports of $23.8 billion. Pakistan’s footwear exports mainly comprise of leather footwear which represent 84.2 percent of Pakistan’s footwear exports. Footwear made of rubber and plastic was the second largest export category.

Pakistan’s footwear exports are highly concentrated and limited to a few countries. In 2019, Pakistan exported more than 69.0 percent of its footwear to Europe. The US has a 9.3 percent share even though it has the greatest export potential.

Shoe manufacturing in Pakistan is predominantly located in and around the city of Lahore, where almost 80 percent of the documented footwear industry is located. The sector is majorly comprised of the unorganized sector (80 percent), where craft manufacturers / cobblers represent the majority of footwear manufacturers.

Foreign investment in the leather industry represents less than 1.0 percent of total FDI inflows. FDI has played an insignificant role in the development of Pakistan’s footwear sector. Low FDI in the leather and footwear sector has led to limited access to new markets and inputs that could help facilitate product diversification. A lack of FDI has also resulted in poor vertical integration of footwear units in the organized sector.

Major Reasons Identified for the Lack of Global Competitiveness:

  • Labor Productivity and Skill Development: Shortage of trained manpower and a lack of vocational and technical training institutes.
  • Inadequate Support from the Ancillary or Supporting Industries: Lack of quality inputs / components / accessories leads to high dependence on imports of accessories, components, chemicals and adhesives.
  • Low Levels of Technology & R&D: Limited access to technology and lack of R&D.
  • Non-Availability of Quality Leather: Tanning industry prefers to export quality leather especially for shoe uppers.
  • High Tariffs on Critical Inputs: High custom duties on imports of accessories, components, chemicals and adhesives.
  • Scale Limitations: Small size of production units and fragmented nature of manufacturing and lack of inter-firm coordination hampers scale and innovation.
  • High Cost of Doing business: Cost of power, gas, labor, transportation, etc., all higher and inconsistent as compared to regional competitors impacts competitiveness.
  • Unfavorable Market Access: Other than in the EU where Pakistan benefits from GSP+, tariffs are high in the other major markets such as Japan & the USA.
  • Limited Access to Working Capital & Long-Term Finance: Since most firms are SMEs, they lack the collateral to access both working capital and long-term finance.
  • Country Image: Poor image of the country is reflected in the reluctance of buyers to visit Pakistan.
  • No Joint Ventures in the Footwear Industry: Footwear industry as a whole has been lacking in potential foreign collaborations and joint ventures especially for exporting footwear from Pakistan.

Although, the Government of Pakistan has in the past announced a number of policies and sector specific incentives to tackle issues in the footwear industry, they have not been successful mainly due to poor implementation of good policies.

Major Recommendations for Enhancing Competitiveness:

  • Sector Specific Training Programs: Design in consultation with industry, training programs to develop skills in shoe designing, pattern making, cutting, stitching as well as a focus on developing managerial skills.
  • Promote Setting Up of Ancillary / Supporting Industries: Government needs to promote the setting-up of ancillary / supporting industries to reduce dependence on imports and to reduce turnaround time.
  • Improving the Leather Value Chain: Since Pakistan’s strength at the moment is in leather footwear, the Government should collaborate with the Pakistan Tanners Association (PTA) to provide training and education to various stakeholders who are involved in the hides and skins value chain.
  • Cascading Tariffs: Currently the tariff on finished footwear and components are the same. The Government needs to implement a cascading tariff structure.
  • A Long-Term Sector Plan: To remove uncertainty, the Government needs to develop and adhere to a long-term plan for the sector.
  • Improving Cashflows of Sector: Timely payment of rebates and refunds to reduce exporters’ liquidity crunch.
  • Development of Footwear Clusters: Consolidation of industry which is currently fragmented through the establishment of a footwear hub and research centers through the establishment of footwear clusters.
  • A National Program for Building Brands & Improving Pakistan’s Image: A National brand-building program along the lines of TURK QUALITY is needed to promote the development of Pakistani brands. Similarly, the Government needs to roll out a program for improving the country’s image.
  • Sector Association’s Role Needs to be Enhanced: The role of the Footwear Association needs to be enhanced, currently the Government treats footwear as part of the leather industry and the sector suffers from a lack of attention.
  • Pakistan’s Footwear Sector Needs to be Showcased: Greater participation in international trade fairs both in existing as well as potential new markets.
  • Promoting Collaborations, FDI, Joint Ventures & Skills Transfer: A comprehensive program needs to be put in place to promote collaborations with foreign companies and to promote export oriented FDI & Joint Ventures. Scale and innovation in footwear exports depends on covering value chains into global value chains.

The PBC is a private sector not-for-profit advocacy platform set-up in 2005 by 14 (now 84) of Pakistan’s largest businesses. PBC’s research-based advocacy supports measures which improve Pakistani industry’s regional and global competitiveness. More information about the PBC, its members, objectives and activities can be found on its website: www.pbc.org.pk