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FOOTWEAR AND LEATHER GOODS

SECTOR DEVELOPMENT STRATEGY

Version 1 Pretoria January 2007

DIVISION: TRADE AND INVESTMENT SOUTH AFRICA (TISA)CHIEF DIRECTORATE: CUSTOMISED SECTOR PROGRAMMES

ExBo File No. 1 Monday, 25 August 2008

This Sector Development Strategy is not for general dissemination.

PRIORITY SECTOR: FOOTWEAR AND LEATHER GOODS

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the Department of Trade and Industry (the dti), Version 1, January 2007

the dti, Version 2, August 2008

The text in this document (including the dti s logo) may not be reproduced in anyformat or medium. The material must be acknowledged as the dti copyright and thetitle of the document specified.

Any enquiries relating to the copyright of this document should be addressed to the

Leather and Footwear Sector Deskthe dti Private Bag X84PretoriaGauteng0001 (Postal)

12 Esselen StreetSunnysidePretoria0002 (Courier)

Tel: 0861 843 384(the dti Customer Contact Centre)


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Contents

Foreword by the Minister 4

Chapter 1: Introduction 7

Chapter 2: Sector Overview 11

Global opportunities and challenges trends 11 Highlights of leather and footwear value chain 11 Domestic opportunities and challenges trends 17 Wet Blue Tanneries and Raw Hide Agents 17 Footwear Leather Tanneries 18

Chapter 3: Sector Strategic Plan 35

Strategic Vision 35

Chapter 4: Sector Implementation Plan 36

A. Strategic Theme: Competitiveness 37 Key Strategic Challenge: Lack of International Competitiveness 37 Key Action Programme No. 1: Shared Resource Centre 38 Key Strategy Challenges: Ageing Plant and Equipment 45 Key Action Programme No. 2: Upgrading the Technological Base 45 B. Strategic Theme: Domestic Market Development 48 Key Strategic Challenge: Illegal Imports 48 Key Action Programme No. 3: Combat High Levels of Illegal Imports 48 C.Strategic theme: Empowerment 52 Key Strategic Challenge: Transforming the Industrys Profile 52 Key Action Programme No. 4: Promoting Broad-Based Black Economic Empowerment 52

Key Action Programme No. 5: Promote Skills Development, Training and Sustainable Employment 54

Chapter 5: Conclusion 59

Summary: Key Strategic Themes and Key Action Programmes for the Footwear and Leather Goods 59Benefits of the Sector Development Strategy 60

Abbreviations and Acronyms 61

Annexure 1 62

Government Websites 62All Spheres of Government 63

Annexure 2 63

Bibliography 63

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This Sector Development Strategy is neither hard, nor fast, nor a formula for instant

success. Instead, we offer it as the basis for continuing to forge constructive engagement

with stakeholders a partnership based on best practice, which must be effective at the

national, provincial and sectoral levels.

Long-standing challenges of competitiveness, exports and investments as well as

employment and equity, will not be solved overnight. However, concrete timeframes to

achieve our aims have been put firmly into place. Maximum co-operation from our

stakeholders is a key condition to achieve our goals within these deadlines. Firmer

benchmarks against which to measure and report progress, have also been developed.

There are mistakes the government should avoid. Any attempt to manipulate the

exchange rate would put our hard-earned macroeconomic stability at serious risk. Whilst

we understand the strength of Rand relative to the US Dollar makes life difficult for our

exporters, in practice we have to recognise that it is not possible for the Reserve Bank to

pursue an exchange rate target at the same time as an inflation target.

Likewise, we reject solutions based on attempts to defend the economy from fair

competitive pressures through restriction on trading with the world or subsidies to

domestic companies. Such actions would detract from the market framework, which

brings major competitiveness improvements. They would also run counter to the World

Trade Organization (WTO) and the benefits it brings to our exporters. As the opposite

side of the same coin, we take robust action against countries that seek to deny our firms

fair access to their markets. Thats why we, in conjunction with other developing

countries, fought strongly for a new world trade round in Doha.

Although Customised Sector Programme is nation-wide, there is an important role for the

provinces, we recognise that provincial leadership is essential in creating dynamic

provincial economies and closing the gap between and/or within provinces. Hence the

importance we attach to the provincial economic departments.

This document has been developed on the basis of discussions within the Customised

Sector Programme Project Team, established by the Department of Trade and Industry

(the dti ) at the beginning of the year, including the positive work of the partnership forged

through the inter-government and external stakeholder workshops. The Customised

Sector Programme must deliver real outcomes, underpinned by real commitment from allstakeholders. Above all we hope that this Sector Development Strategy, and its


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associated Programmes, will form the basis for an even stronger partnership and more

effective action in support of priority sectors in South Africa.

MANDISI MPAHLWA, MP

MINISTER: TRADE AND INDUSTRY

DATE: 12 July 2008


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Chapter 1: Introduction

1. The Minister of Trade and Industry, in his foreword to this document, states:

Priority sectors matter to South Africa. They account for over 22% of the Gross

Domestic Product, employ 23% of South Africas total employment, and contribute

over 55% to South Africas foreign exchange earnings. Therefore, the success of

the priority sectors is critical to our economy and a better life for all. Priority sectors

include footwear and leather goods.

2. In response, using the Customised Sector Programme (CSP) methodology, the dti ,

through Enterprise and Industry Development Division (EIDD), developed this

Strategy for the South African Footwear and Leather Goods sectors, with particular

reference to the following economic aspirations of the government:

Improvement of global competitiveness

Enhancement of exports

Attraction of local and foreign investments

Maintenance and creation of new employment

Encouragement of Broad-Based Black Economic Empowerment or B-BBEE

(equity)

3. the dti noted that skins and hides are raw materials in the leather value chain that

feed into different sub-sectors such as footwear, automotive, clothing, leather

accessories and furniture.

4. It should be noted that this Strategy only focuses on the leather value chain that

feeds into the footwear and leather goods sectors. It does not focus on developing

strategies for the automotive and furniture sectors. The leather goods sector, forlabour purposes, comprises the manufacture of luggage, handbags and general

goods, such as belts, purses, etc., forms part of the organised leather industry. The

General Leather Goods and Handbag Association is party to the National

Bargaining Council of the Leather Industry of South Africa. The Association

Secretariat does not deal with trade-related issues and lacks industry statistics. It is

a relatively small sector of approximately 90 SMME-type enterprises, employing

about 3,000 workers. It is affected by imports, mainly from China, and has shown a

big decline since the early 1990s. In the last three to four years, there appears tobe greater stability as regards employment, with an increase from 2,500 to 3,000


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countries, which have the lowest production costs.

o Provides highlights of the leather and footwear value chain, in the

context that leather usage is increasing roughly in line with the growth of

the worlds economy.

Chapter 3:

o Outlines the strategic vision, longer-term direction, key strategic

challenges, and the envisaged KAPs as part of three strategic themes

(key focus areas) that will maximise the impact in achieving the strategic

vision:

Improve long-term sustainable productivity and competitiveness;

Market development; and

Empowerment.

o The selected KAPs should be seen as an integrated plan to assist the

footwear and leather goods sectors to grow and provide employment,

thereby achieving the economic aspirations of government as

highlighted in paragraph 2 above.

Chapter 4:

o Details the sector implementation plan. The KAPs together with

related interventions, which contribute to the strategic vision of the

footwear and leather goods sectors are described in detail.

Chapter 5:

o Conclusion and next steps.


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Chapter 2: Sector Overview

Global opportunities and challenges trends

15. The global leather supply chain and footwear industry has restructured significantly

with a geographic shift of production towards those developing countries that have

the lowest production costs. Since leather is the common denominator of all the

three value chains (Automotive, Footwear and Leather Goods) this section presents

the findings of our global research into footwear and leather goods more specific.

16. As a limitation to the study, it has to be noted that global statistics on footwear are

hard to come by. The British footwear research body (SATRA) does maintainstatistics, which are periodically up-dated, but cannot be obtained without costly

contract membership. Thus, the findings for the global footwear industry in this

section are a consolidation of a specially commissioned research by SATRA for the

2001 study on exporting marketing opportunities for the industry, and other periodic

research by SATRA obtained indirectly by Southern African Footwear and Leather

Industries Association (SAFLIA).

17. While the following does not cover all aspects cited by the CSP Manual, the data on

the global footwear industry are perfectly adequate to demonstrate the relevant

trends in the global footwear scene.

Highlights of Leather and Footwear Value Chain

18. Leather usage is increasing roughly in line with the growth of the worlds economy.

Although the so-called developed countries have a higher conversion rate oflivestock to hides, over the past 20 years, production has shifted dramatically to

developing countries, at all levels of the leather value chain:

Livestock;

Raw Hides;

Wet Blue; and

Finished Leather.


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19. In 2000, leather usage for automotive seats and trim was relatively minor at 2% of

the total global production, although its share has risen somewhat since then.

However, in South Africa it is the mainstay at over 87% of total leather usage.

20. The footwear industry utilises all types of leather in its production. Heavy bovine ismainly used in footwear for such components as soles as opposed to light, which

is used for uppers.

21. The first stage of the leather chain is the recovery of hides and skins from animals.

Hides and skins are a by-product of farming stock bred primarily for meat

consumption. Thus, hides and skins are mainly recovered from slaughterhouses

and farms. Because the leather industry depends on the recovery of hides and

skins of the farming stock, availability of raw material directly depends on the size of

the animal population, the take off ratio and the weight/size of the hide/skin

recovered.

22. Developing countries outsize developed countries in terms of livestock by between

3 to 4 times. This means that at the beginning of the 2000s, developing countries

held 78.1% of the worlds 1.5 billion head of cattle livestock, and 76.6% of the

worlds 1.8 billion sheep and goats.

23. The conversion rate of animal population to raw hides and skins in developing

countries is far less than in the developed countries. Developing nations only

produced 53.8% of the 5.7 billion tonnes of raw hides, compared to the developed

nations 46.2%. A similar but slightly better picture arises for the conversion of the

sheep and goat population in developing countries. Despite having 76.6% of the

total sheep and goat population, their conversion rate to billion tonnes of world skins

falls to only 67.2%.

24. At the next stage of the leather chain, namely wet blue and finished leather, the

collected raw hides are converted into what consumers recognise as leather.

25. The 15-year production trend of finished leather indicates a general increase in the

global production of all types of finished leather. Global production of heavy bovine

leather increased by 1.2% on average per annum, from 414 billion to 495 billion

tonnes. The production of light bovine leather increased world-wide by 1.4% on


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average per annum, from 9 million feet 2 to 11 million feet 2. Finally, light sheep and

goat leather increased from 3.4 million feet 2 to 4.5 million feet 2.

26. A further indication of the forces of globalisation can be seen in the development of

trade in finished leather by volume. The export volume of the various types offinished leather has increased in both developing and developed countries over the

15-year period.

27. This reflects firstly, the increased specialisation of tanning in certain developing

countries, necessitating their exporting of leather to developed countries or other

developing countries, and secondly, the increased demand for leather in certain

developing countries, resulting in imports from certain developed countries, such as

Italy.

28. Trends in end-use shares:

Increasing Share : Auto (except possibly in Europe, owing to a preference for

textiles) and Furniture bovine.

Static Share : Garments, Other Leather Products mostly non-bovine.

Declining Share : Footwear shift from leather to synthetic leather and other

materials, such as textiles.

29. In 2000, nearly two-thirds of global leather production (66%) was used by the

footwear industry. In South Africa this is far less, as 87% of local leather production

is used in the automotive industry, compared to only 13% of local leather production

available for footwear and other leather.

30. South Africa has always dominated the world ostrich market but several new

players have entered the global industry. South Africa, relative to its size, is themain global ostrich producer next to the USA. It is said that China has increased its

ostrich population. At the same time, the Australian ostrich population is said to

have declined to only 12,000 in 2004. A more recent trend in the ostrich industry

has been the development of ostrich industries in South American countries like

Chile and Brazil, as well as in Eastern European countries.

31. The primary markets for ostrich skins are in Asia (principally Japan) and to a lesser

extent, the USA. South Africa is not the only exporting country to the USA andJapan. In 2000, South Africa controlled over 86% of the Japanese Ostrich market.


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37. The most impressive development has been made by China, which has increased

its share of world footwear exports, from only 3% in 1979, to a dominating 51% of

total world footwear exports in 1999, and the trend continues.

38. In 1979 the main significant exporting countries were Italy, USA and South Koreawith China being a minor player. By 1999 the picture had changed dramatically. The

USA and South Korea are effectively off the trade map and Italy has experienced

not only a decline in its share of global exports from 22% in 1979 to only 5.2% in

1999 but also a decline in volume from 374 million pairs in 1979 to 347 million pairs

in 1999. The winner of the relocation process has been China. From being a minor

player in 1979 it increased its export volume of 52 million pairs in 1979 to an

impressive 3.4 billion pairs in 1999 thereby increasing its share of total world

exports to 51%.

39. Only Portugal has increased its local production as a percentage of consumption.

This might be explained through re-exporting. Otherwise, especially in large market

countries like the USA, Canada, Germany, France, the UK and Japan, local

production, as a percentage of consumption, has declined significantly through

import penetration of cheaper footwear. Therefore, most footwear manufacturers in

the advanced countries have become either intermediaries between retailers and

production sources from developing countries, market suppliers of relatively price

insensitive niche markets, or developed strategic alliances like the supply of boots

to the US army. Some of these survival strategies are also disappearing as more

retailers start to source directly from the developing countries like China.

40. The main footwear producers are China, India, Italy, Brazil, Thailand, Turkey,

Indonesia, Mexico, Vietnam, Spain, South Korea, Pakistan and Philippines. From

1995 to 2001, footwear production has moved to China. Interestingly though is the

continued presence of Italy as a main producer which can be explained that Italy

has maintained its position as a high quality footwear producer specialising in the

production of high value footwear. Furthermore, countries like Brazil and India

should have seen a similar decline in production but have imposed trade policies,

which allow them access to cheap raw materials (especially leather).

41. It is not surprising that a similar picture develops when one looks at the main

footwear exporters. Given Chinas overwhelming footwear production volume it


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seems to follow logically that China also dominates the export market followed by

Italy, Vietnam, Indonesia and Brazil.

42. In terms of importers, following the decline in the percentage share of local

production of local consumption, the main importers are the countries, whichexperienced this decline because of increased import penetration.

43. The Top 7 importing countries show their increasing dependence on imports

primarily from China over the period 1995 to 2001. Even Italy, which is a major

exporter, relies increasingly on imports. This might indicate that some of the

exporting countries are actually only re-exporting which would make them net

importers.

44. The latest available data on the restructuring trend indicates the demise of local

production and exports in the more developed countries, and the rise of the

developing countries (especially China) to fulfil this role.

45. Chinas dominance as the main footwear exporter has increased even further by

32% from 3.4 billion pairs in 2001 to 4.5 billion pairs in 2003. Furthermore, China

(despite a huge population - local demand - and minimal imports) has increased its

exports share as a percentage of total production to 63%. It is also interesting to

note that Brazils footwear industry faces very little competition through imports as

imports are only 2.3% of local production while it manages to export almost 30% of

its local production.


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Domestic opportunities and challenges - trends

Wet Blue Tanneries and Raw Hide Agents

46. Because the Wet Blue 1 Segment is a trading segment as well as a productionprocess, it is relatively unaffected by the Motor Industry Development Programme

(MIDP) sales lost in the event of a collapse of the automotive leather chain would

easily be replaced by exports. Further, the drop in price resulting from such a

decline for auto leather would be passed back to source - the farmer - leaving

margins unaffected.

47. The quality of South African hides as been positively influenced by the rise in the

number of feedlots operating in the meat industry, with animals thus spending less

time in the open field. The quality of South African hides is rated to be superior to

other sub-Saharan African and most Asian hides, but inferior to most hides from

Australia, Argentina, the US and Europe. Their relatively small size compared with

the last two origins (3.5 to 4m 2) renders them just marginally suited for upholstery

and automotive leather. Only about 60% of South African hides are regarded as

suitable for automotive leather.

48. It is interesting to note that several Wet Blue processors are owned by local

feedlots/abattoirs, i.e. they have been created by forward integration to meet the

demand for local automotive leather brought about by the MIDP.

49. Prices of hides are higher and rising faster in South Africa than in other countries.

Since 1997 hide prices have increased: 56% in South Africa vs 26% in Germany

and 31% in the USA (Source: SAMIC). This is because of the increase in demand

of local hides caused by the MIDP. The industry is relatively capital intensive.

50. The impact of the MIDP on this segment is twofold:

The increased demand for auto leather made from local hides (to take

advantage of local content MIDP credits) has increased the price of such raw

hides and leather, compared to those, which can be imported.

Were the auto leather to be removed from the MIDP:

The Wet Blue Segment would survive as Raw Hides and Wet Blue are

essentially a world-traded commodity Wet Blue hides would be


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exported rather than supplied to local automotive tanneries, the Chinese

Market representing an obvious export opportunity.

The over capacity in the industry would force down-sizing, especially in

the Eastern Cape which is most dependent on imported Raw Hides.

Footwear Leather Tanneries

51. The Footwear Leather Tanneries are the first dedicated segment for the Footwear

Chain. However, they also provide minor amounts of (bovine) finished to the other

leather chain, (they generally prefer to import their leather requirements). The MIDP

has deprived the footwear sector of access to good quality South African leather at

an affordable price. The cost of a car seat in the overall price of a vehicle is

minimal, whereas in footwear the cost of leather upper is a major cost element inthe overall price of a shoe.

52. The number of tanneries has suffered a decline commensurate with the production

of local footwear. In the early 1990s there were at least seven tanneries, while now

only two remain, one of which is a relatively small concern.

53. Estimated annual turn-over of the footwear tannery segment is R150 million, and it

produces about 1.2 million metres 2 of leather (compared with the 8.3 million metres 2 of automotive leather produced by the five tanneries active in that sector).

54. The value added by this turn-over is approximately R60 million (which represents

41% of sales higher than both wet-blueing and auto leather tanning.

55. The footwear tanneries also supply the leather goods segment with some of their

bovine leather needs (10% of the tanneries output), the rest being imported.

56. The local tanning industry supplies more than half of the leather required by the

Footwear Segment. The balance is sourced by South African Footwear

Manufacturers mostly from India and Brazil, two countries with policies in place to

beneficiate their locally available leather-making raw material (hides and skins) by

applying export taxes.


1 Wet blue is a semi-tanned skin.

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57. South African Footwear Leather Tanners operate at 10% to 30% disadvantage in

price compared with the above mentioned competitor countries, India and Brazil,

because these countries restrict exports of their own wet blue leather. Local leather

tanners strategy to counteract this, is to concentrate on non-price elements of the

marketing mix, including quick response, zero-defect and customer service andability to produce short runs (niche marketing).

58. There is duty protection of 10% duty on certain Bovine leathers. All other leathers

enter the country duty free. In contrast, the local Footwear industry has a 30% duty

protection on imported leather shoes.

59. Locally available hides from South African sources are generally too expensive for

the requirements of the local Footwear Manufacturers resulting in approximately

75% of all locally produced grain leather and over 40% of all finished splits being

produced using imported raw material (mostly from elsewhere in Africa as well as

Brazil and Australia). The locally available wet blue splits are derived from the

Automotive Leather Segment.

60. The reason generally given for the high local hide price is the distortions caused by

the MIDP on local hide prices, particularly for better grade material. More cost-

effective sources can be found offshore to satisfy local footwear demand.

61. While the footwear tanneries are dependent on the footwear manufacturers the

latter have the leeway of imported leather as an alternative source. Despite there

being a 10% duty on imported leather, it can still be a cost-quality effective

alternative to the local tanneries to the extent that the research shows that up to

40% of leather used to manufacture footwear is imported, while 60% is sourced

locally.

62. At certain times in the past, up to 20% of South African finished footwear leather

production was exported, mostly to the UK, Asia and Europe. There is at present

very little export trade in South African finished footwear leather due to the strength

of the Rand.

63. Weekly-wage earners pay for 2004 varies greatly by location, from R12, 12 to R17,

14 per hour. The industry is relatively capital intensive, with raw materials being the

largest cost.


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64. One company is 100% German owned, while the other is 100% South African

owned.

Footwear Manufacturers

65. Globally, the manufacture of footwear for exports has quadrupled and relocated

from the developed countries to the developing countries. The growth of Chinese

exports is simply overwhelming and makes China the leader in the field as far as

footwear exports world-wide are concerned. The restructuring process of the

footwear industry globally by moving to developing countries generally follows the

economic rationale of the cheapest producer where the relocation cost and the start

up cost of manufacturers are low enough to shift production easily and quickly.

However, higher cost countries such as Italy, Spain, Portugal and others still remainamong the major footwear producers. There is every reason to believe that the

above also applies to the leather goods sector.


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WORLD FOOTWEAR PRODUCTION

2006 RANK MILLION PAIRS

China 1 7 980

India 2 790

Brazil 3 560Indonesia 4 475

Italy 5 348

Vietnam 6 340

Turkey 7 275

Pakistan 8 269

Thailand 9 241

Mexico 10 185

Spain 11 182

Philippines 12 145

South Korea 13 130

Japan 14 116

Iran 15 105

Portugal 16 95

Argentina 17 73

Poland 18 71

Tunisia 19 69

Colombia 20 63France 21 60

Romania 22 57

USA 23 50

Russia 24 47

Taiwan 25 41

Malaysia 26 40

RSA 27 37

Germany 28 29UK 29 27

Australia 30 6

TOTAL - 13 641

SATRA/SAFLIA: 2007


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LEADING COUNTRIES FOR

FOOT WEAR PRODUCTION - 2003

0

1000

2000

3000

4000

5000

6000

7000

8000

China India Brazil Indonesia Italy

M I L L I O N P A I R S

Source: SAFLIAs 2006 report



LEADING COUNTRIES FOR FOOTWEAR

CONSUMPTION - 2003

0

500

1000

15002000

2500

3000

3500

China USA India Japan Brazil


66. South Africa footwear production up to 1989 remained fairly constant and in excess

of 60m pairs per annum. Up to 1995 production ranged between 43m pairs and

54m pairs. From about 1996, with declines in local production by the formal sector a

shift to informal (or semi-formal) enterprises commenced that has continued up to

today. It is estimated that at present the informal sector in footwear comprising in

excess of 80 enterprises produces as much completed footwear as does the formal

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sector with over 100 enterprises. In 2006 total footwear produced in South Africa

i.e. including the informal sector, was 37m pairs, generating ex-factory sales in

excess of R3, 5 billion.



FOOTWEAR PRODUCTION BY

CATEGORY 2006

3.90%

56.01%26.87%

13.22%TENDER

MENS & BOYS

WOMEN & GIRLS

CHILDREN & INFANTS


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FOOT WEAR PRODUCT ION PER UPPER

2006

63.84%2.95%

23.51%

9.70% LEATHER

FABRICS

SRP

OTHER

CATEGORY OF FOOTWEAR

0

10

20

30

40

50

199 5 199 6 19 97 199 8 199 9 2 000 2 00 1 2 00 2 2 003 2 004 2 00 5 2 00 6


TENDER MEN & BOYS WOMEN & GIRLS CHILDREN & INFANTS


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DISTRIBUTION OF FOOTWEAR FACTORIES

BY VOLUME OF OUTPUT - 2006

Annual Output Number of Factories

('1000 Pairs)

Over 1000 2

750 - 999 3

500 - 749 8

300 - 499 6

200 - 299 21

100 - 199 25

50 - 99 26

Below 50 104

TOTAL 195


67. There has been a fundamental shift from synthetics footwear to leather footwear.

This has given the South African footwear manufacturers a competitive advantage.

68. To meet the onslaught from imported footwear the industry has restructured itself by

introducing a number of survival strategies. This process was a voluntary one

carried out independently by a number of factories and producing different

solutions. What they do have in common is the ability to produce footwear

acceptable in every respect to South African customers and in some cases tooverseas clients. Due to innovation which is employed by stakeholders the local

footwear sector has increased and is providing considerable less job opportunities.

69. China remains by far the biggest supplier of imported footwear to South Africa. In

2006, 127m pairs of footwear were imported into South Africa from China alone.

The balance of 14m pairs was from the rest of the world. The imports from China

were on average R22.17 per pair whilst total imports averaged R 26.73 per pair. Of

the total Chinese footwear imports into South Africa, more than 100m pairs, or 80%,

constitute those of shoes with synthetic uppers.PRIORITY SECTOR: FOOTWEAR AND LEATHER GOODS

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70. What is of concern to South African footwear manufacturers is the large volume of

leather uppered footwear imported from China at an average price of R40 per pair

compared with the average price of locally produced leather footwear of R100 per

pair. The volume of leather footwear from China of 21m pairs may seem low incomparison to the total volume of footwear from China but it does represent 70% of

the total footwear produced in South Africa. Moreover, what is of concern are the

rising imports from China of niche market products where South African

manufacturers are competitive. One example is leather safety footwear with steel

toecaps. Imports from 2003, when 24,000 pairs were imported, have escalated to

1,1m pairs in 2006. China accounts for 990,000 pairs of the total imports under that

tariff heading.

71. Below is reflected the 5 leading countries of origin of footwear imports into South

Africa:

FOOTWEAR IMPORTS

Top 5 Countries - 2006

Country Pairs (m) Value (Rm) Unit Price

CHINA 127 2,820 22.11

VIETNAM 4 300 74.16

HONG KONG 2,4 86 36.38

INDIA 1,5 79 53.38

INDONESIA 1,4 97 71.26

OTHER 10 399 39.90

Total 141 3,781 26.82



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in terms of South Africas obligations under the Uruguay Agreement of the GATT

55% for non-leather and 30% for leather footwear. On 19 September 1997 import

control on imported footwear from non-WTO countries was imposed and continued

until 20 September 2000. In 2000, duties on non-leather footwear reached 30%, to

bring it in line with leather footwear. At the date of initial publication (January 2007)this was the position with respect to tariff duties on most footwear imports. The 30%

duty is also the bound rate above which it is not possible for South Africa to

increase duties without applying to the WTO.

77. Illegal footwear imports, more particularly the practice of under-invoicing, seriously

undermine the process of customs control and have enormous undesirable effects

for the footwear sector where imports compete unfairly with local products. Illegal

imports of footwear and leather goods has serious negative consequences for the

industry and the broader economy as it leads to loss of market share, job losses,

factory closures, pressure on the sectors competitiveness, damage of brand equity

and undermines attempts by the sector to restructure. It is estimated that the extent

of such imports is anything between 10% and 30% of local footwear production

translating into possible employment losses of up to 10,000. This is a serious matter

for the industry and one that the South African Revenue Service (SARS) seems to

have difficulty in coping with adequately even though it has made a dedicated staff

member available to specifically focus on the problem of under-invoicing in the

footwear sector.

78. Business, labour and government should work jointly to stop the leakages in

customs, such as that caused by illegal imports. The current weaknesses in the

system could be addressed by SARS implementing all possible measures allowed

within the relevant legal framework to fight illegal imports, including the use of

minimum valuations.

79. Footwear exports, like most exports, are influenced by the exchange rate. The fairly

strong Rand during a large period of the last six years bears this out as does the

fact that a weakening in the Rand in 2002 saw South African footwear exports

increase by more than 40% over the previous year. South African footwear

exporters are reasonably competitive in the export market with medium to high

priced footwear and more particularly industrial footwear such as waterproof and

safety footwear and womens casual footwear.


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80. The footwear sector operates an export council (South African Footwear and

Leather Export Council) that has been successful in export promotion. 55% of

exports fall in the category industrial footwear and are dealt with outside the ambit

of the export council. The aims of the export council include to create awareness in

overseas markets of the high quality of footwear exports and to promote SouthAfrica as an ethical footwear destination.

81. However, thus far, efforts to promote South Africa as a fair trade destination seem

to have come to very little. Compared to many of its competitors, South Africa has

relatively fair labour standards. This provides an ideal opportunity for South Africa to

promote itself in the European and North American markets as an ethical producer

of footwear and these markets are growing with more customers insisting on

products not made in sweatshops or by children.

82. If South Africa establishes a reputation as an ethical supplier, the industry would

have to guard such a reputation to ensure that companies which do not comply with

bargaining council agreements and labour legislation do not undermine it.

83. Africa is the largest destination of South African footwear exports. In 2006 622 000

pairs of footwear were sold into the rest of Africa, representing 48% of total exports.

Other major countries of destination were Australia, Singapore, UK and the USA,

together accounting for 34% of exports from South Africa. Exports to the UK and

the USA enjoy the preferences in terms of the South Africa-EU TDCA and African

Growth and Opportunity Act (AGOA). Total footwear exports of 1,3m pairs for 2006

represent a decline of 15% compared to 2005.

84. The 5 leading countries of destination of South African exports are reflected below:

L



EADING COUNTRIES OF DESTINATION

FOR SA FOOTWEAR EXPORTS - 2006

0

100000

200000

300000

400000

500000

600000

700000

Africa UK USA Singapore Australia

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85. The footwear industry has embarked on several initiatives to address its problems

including the introduction of flexibility in terms of the operating status of

manufacturers to ensure stability within the sector. An example includes efforts to

restructure the footwear sector collective agreement that came into effect during

2005. Another is the skills audits conducted from time to time that identify skillsneeds. These audits have identified the need for, amongst others, supervisor and

design skills lost due to the decline in the industry.

86. The local industrys design capabilities should be strengthened. This can be done

by greater use of state of the art technology such as CAD-CAM technology and by

attracting and training new designers. Design innovation can assist local

manufacturers to shift to higher value-added footwear and leather goods

products and to develop unique niche products in which South Africa can be

globally competitive.

87. The skills of the South African footwear worker compares favourably with the best in

the developed world notwithstanding, the lack of advanced formal education

brought about as a result of apartheid education policies. At the date of first

publication in 2007, however, shortages were experienced in certain areas. The

CTFL Sector Education and Training Authority (SETA), although having made some

progress with regard to learnership training has not been able, mainly as a result of

lack of funds, to promote footwear skills training. A very high priority in the footwear

sector is the establishment of an institution that would strive to enhance the

productive capacity through training, skills and technology transfer, research, quality

control and innovative solutions that will together enhance the international

competitiveness of the sector.

88. A Shared Resource Centre, as envisaged in KAP 1, is indispensable in taking the

industry forward towards world-class manufacture and optimal global

competitiveness. An important advantage of such a centre would be the opportunity

for manufacturers, both large and small, to work together in sharing resources and

exchanging know-how. Generally, there has been a lack of collaboration at firm

level in the South African industry.

89. The industrys efforts to increase its quality, including that of its exported footwear,

are curtailed by the lack of a national quality standard. The introduction of such astandard can address the lack of consistent quality experienced in some parts of


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the industry. An institution tasked to assist local manufacturers in this area could go

some way to ensure South Africa establishes a global reputation as a high quality

producer.

90. A general increase in quality and a move to more innovative products and designrequire a skilled workforce. Training seems to remain a low priority in most firms,

more particularly Small, Medium and Micro Enterprises (SMMEs) who lack the

capacity to provide continuous training to its workers. In some parts of the industry,

skills deficiencies include work planning and process, people management and

training skills among lower and middle level management.

91. This situation is further exacerbated by the lack of a Sector Development Strategy,

particularly a training programme, to guide manufacturers and training bodies such

as the CTFL SETA.

92. Where training exists, this is often not integrated into other elements of human

resource policy to ensure career development and grading based on skills acquired.

EMPLOYMENT

0

5000

10000

15000

20000

25000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006


93. The footwear sector is the third most labour intensive sector in South Africa and it

needs attention to ensure that the industry has a sustainable long-term future

thereby contributing to employment growth.


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94. Wages in the footwear sector are probably in the middle range for factory workers in

South Africa. At the date of first publication in 2007, the highest prescribed rate in

terms of the footwear wage agreement in the leather industry bargaining council

was R1169.74 per week, whilst general workers earn R696.24 per week. Theformal footwear and leather goods sectors have a high level of compliance with

labour legislation. Unfortunately there exists a fairly substantial part of the industry

that ignore the provisions of the bargaining council and possibly even government

legislation including taxes.

95. There is serious doubt whether the local retail sector is too concerned about

compliance issues. They certainly do not insist on local manufacturers obeying

South Africas labour and tax laws, including customs provisions. As a result, in

marketing footwear, retailers do not promote these as fair trade products. In fact, a

fair amount of resistance from many parts of retail was initially experienced with the

introduction of country of origin labelling requirements.

96. Since the start of the nineteen- eighties SAFLIA has financed the biennial Date

Bank Survey and Realst Analysis conducted by the National Productivity Institute

with a view to improved competitiveness through improved performance. The study

provides a system that can measure ongoing productivity changes and the effects

of the interventions over time on bottom line performance. The last study was done

in 2004 and the NPI reported as follows: The footwear industry has consistently

improved since 2000 in order to become competitive with imports from countries

with lower cost structures and more favourable exchange rates than the South

African footwear industry. Cheaper imports also prohibited the local industry from

raising selling prices at the same rate as input prices it is subject to.


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PRODUCTIVITY

ANNUAL PER CAPITA PRODUCTIONYear Pairs per Capita

2006 2 7172005 2 2062004 2 4602003 2 3852002 2 4892001 2 2602000 2 1331999 2 0521998 1 9951997 2 1461996 1 9941995 1 948

97. In 2004 the NPI also undertook a Technology Audit on the footwear industry to

establish the state of technology in the industry and to determine how the

technology used in the industry compared to state of the art technology. The results

reflected an average rating of 3.52 for the industry as compared to 5.00

representing state of the art technology. Four departments were included viz.

clicking, pre-closing, closing, and finishing. Clicking fared best at 3.83 whilstFinishing recorded 3.27. The Report stated: It is patently clear that for the South

African footwear industry to become more competitive it will have to invest in these

types of systems (High Technology Electronic Systems) or at least have access to

them through it being made available through a Service Centre that could be part of

footwear and leather goods Shared Resource Centre.

98. Although there are manufacturers that have kept abreast of technological advances

by regular investment in state of the art equipment, many factories, mainly SMMEs,have allowed their machinery to become obsolete thereby jeopardising their

competitiveness.

99. The main reason for this underinvestment is the cost of new technology and

machinery. Often, in an industry, which has experienced the degree of adjustment

seen over the last few years in South Africa, margins remain very low, which makes

reinvestment difficult.

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100. The footwear sector has the potential to contribute to empowerment in the

manufacturing sector, as barriers to entry are lower than in many other

manufacturing sectors. It has already experienced a significant amount of Black

Economic Empowerment (BEE). However, this progress has not incorporated the

African population significantly. In addition, many suppliers to the industry remainwhite-owned, resulting in a lack of BEE in procurement. The industry is also still

experiencing a lack of higher-level technical and managerial skills among the

previously disadvantaged.

101. The perception of the footwear sector as declining has inhibited participation by

previously disadvantaged and, like many other areas of manufacturing, reduced its

attractiveness to potential BEE investors.

102. There is a general acceptance in the industry that the transformation of the industry

through B-BBEE, provides numerous advantages to the economy and the industry

itself.

103. Indeed, with the introduction of legislation dealing with the concept of B-BBEE,

SAFLIA formally embraced the principle of the application of B-BBEE in the

footwear and leather goods industry.


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Chapter 3: Sector Strategic Plan

Strategic Vision

104. Footwear and Leather Goods sector will be one of the most stable, predictable and

profitable sectors in the South African economy. With strong brands, unique

response capabilities and constant innovation it will provide service superior to that

of competitors, provide sustainable, quality employment, training and skills

development and become the cornerstone supplier to its customer.

Key Strategic Challenges

105. Key strategic challenges that retard the sector from achieving the strategic vision

and not resolve themselves optimally, and that there is clear role for business,

government and labour:

Ageing plant and equipment

Low export orientation

Surge of footwear imports

Lack of innovative designs Declining investment in research and development

General lack of continuous training and skills development

Inability of the Industry to attract investment

Impact of HIV/AIDS and down-sizing of industry has led to loss of skilled

labour

Adapting to the short-run character of industry due to limited market size

Inability of the sectors to empower all segments of the black population

Unfair competition due to importation of undervalue goods & false declaration

Loss of quality jobs through casualisation and informalisation.


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Longer-term Direction

106. High level indications of the type of activity that will fundamentally transform the

structure of the sectors by addressing the strategic challenges identified above are:

Access to finance and venture capital must be facilitated

Leadership must be provided; cluster culture and teamwork must be promoted

Skins and hides must be beneficiated

Reduction of input cost of leather, soles & raw materials

Focused design and branding initiatives must be developed. This will include

market development

Research and Development (R&D) and technology transfer must be encouraged

to enhance productivity

Focused and coherent approach to skills development and upgrading by aligning

tertiary institutions with industry needs must be supported

Equity must be spread across the South African black population

The current forum of engagement must be strengthened

Chapter 4: Sector Implementation PlanPRIORITY SECTOR: FOOTWEAR AND LEATHER GOODS

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107. It is clear that the interventions required to secure the vision mentioned in chapter 3

of this document encompass a broad set of factors, as well as a focus on the

domestic and international markets. Based on the terminology of the Customised

Sector Programme, the required interventions are discussed in detail within each

KAP.

108. The KAPs are broadly divided into three key strategic themes, namely:

Competitiveness;

Domestic market development; and

Empowerment.

A. Strategic Theme: Competitiveness

Key Strategic Challenge: Lack of international competitiveness

109. The South African footwear and leather goods sectors require a significant focus on

innovation in order to stay competitive. The current status quo within the sector is

low levels of expenditure on Research and Development (R&D), technology and

training compared to competitor countries, which results in poor capacity to

innovate. Innovation is essential to the future success of the footwear and leathergoods sectors.

110. The South African Wet Blue (hides and skins) is historically not competitive in terms

of the price and quality produced by competitors such as Australia, Brazil and Italy.

Prices of local hides are higher than those of competing countries. In addition, the

chemicals used by local tanneries and retainers are more expensive due to high

freight costs that are added to imports. The environment is less friendly for informal

hides suppliers and this is aggravated by a poor veterinary structures as comparedto Europe and USA.

111. Formal and rural farmers are not trained in better livestock husbandry, which

impacts on the quality of hides and skins. Cattle are also not well branded (tagging

IDs, freezing branding) to reduce waste from current 40% unusable material. There

is a need for R&D on better methods to process hides and skins in order to increase

the usage of available hides and skins.


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112. Footwear and Leather Goods producers in South Africa require high quality but

cheaper leather, in order to improve their comparative advantage in the global

economy. This has to be coupled with addressing other weaknesses within the

sectors.

113. A key weakness in the South African footwear and leather goods sectors is the

shortage of well-trained and competent new graduates entering the market.

Academic institutions have a low focus on courses related to footwear sector and

poor focus on new products and processes. The footwear industry has a negative

image amongst pupils and students, and the industry is therefore not regarded as

an attractive career. Research study programmes at academic institutions are not

aligned with the commercial realities of industry.

114. An additional area to be addressed is retail and customer requirement with respect

to design, quality and capacity. The purchase of new technology is a challenge for

the industry given the cost of acquiring new technology. This limits the capability of

the industry to effectively implement and maintain state of the art technology.

115. The intervention described in KAP 1 will contribute to improving the competitiveness

of the sectors but would need the implementation of other KAPs as well to be totally

effective.

116. It is recognised that several other issues, such as quality improvement and

innovation, are critical for increasing competitiveness. The Shared Resource

Centre will deals with these issue.

117. The globalisation and the liberalisation of trade accelerated the flow of goods and

ideas amongst nations. This required restructuring of the production and

consumption of manufactured goods. The South African footwear and leather goods

industry needs to find ways to adapt to the new trends that resulted from

globalisation. This will need the involvement of manufacturers, labour and

government to find acceptable ways to put the local industry on par with global

competitors.

Key Action Programme No. 1: Shared Resource Centre


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118. The Shared Resource Centre will be a productively driven, globally competitive, and

outcomes driven service provider that delivers business assistance, technical

support, quality control, research and development, world-class technical and

design skills and technology transfer on a cost effective basis. The Centre would

also assist new entrants to the sector with innovative solutions through anincubation process that would provide for the specific needs of the industry. It is an

ideal opportunity for South Africa to establish itself as a significant force

through this Centre and therefore it is necessary for stakeholders to agree on

scope of this Centre.

119. It is important that a Shared Resource Centre should contribute towards enhancing

these factors. This indicates firstly that the entire industry should support and use

the services of the Centre and secondly that the Centre would fulfil the specific

needs of the industry. The views of the potential users of the Centre are thus central

in the design of the Centre in terms scope, services, and operations.

120. Labour obviously plays an important role throughout the entire process of improving

competitiveness. Labour is one important resource that should be enabled to

produce world-class manufacturing for optimal global competitiveness. World-class

manufacturing also requires world-class technology, equipment, and world-class

human resources with matching skills through the whole process (from market

research and design through procurement, production, marketing and distribution)

in a quest to consistently satisfy customer and client expectations. Appropriate

management and control skills are required throughout the process to ensure cost

effective and globally competitive products and services according to the

requirements of the market.

121. A Shared Resource Centre would certainly not succeed without the wholehearted

support of all the role players in the industry i.e. manufacturers, retailers, labour and

government.

122. Design and product innovation are critical for shifting to higher value-added

footwear and leather goods products and for developing unique niche products in

which South Africa can be globally competitive

123. The proposed Shared Resource Centre can play an important role in ensuringinnovation becomes an integral part of local manufacturing. It can attract young


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people by instituting a youth development programme in which talented designers

and other skilled young people are mentored. It can also ensure better coordination

between designers and manufacturers to ensure that improvements in design

capacity translate into growth in volume output and employment.

124. A major programme of research into new product development and process

technology should be launched under the auspices of the Shared Resource Centre

and other relevant institutions such as the CSIR. Companies should be encouraged

to set aside budgets for research and development in product innovation. This could

be a conditionality set by the government for support given to companies in other

areas of this CSP.

125. Innovative design and products, coupled with a sector-wide increase in quality, will

allow the South African footwear and leather goods industry to distinguish itself from

other countries footwear and leather goods industries.

126. The Shared Resource Centre should therefore also assist firms to improve their

quality.

127. Footwear and leather goods firms can improve their competitiveness by developing

and enhancing strengths in key areas of soft competitiveness, namely in

innovation, quality, creativity and lead-time reductions through engaging in best

practices and continuous improvement. The Shared Resource Centre has a major

role to play in this regard.

The Goal

128. To increase competitiveness by establishing a Shared Resource Centre that

will assist the sector, including clusters.

Obstacles to Implementation

129. Inadequate support for the Shared Resource Centre from all stakeholders

130. Inadequate resources and infrastructure


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131. Lack of capacity of experienced staff to champion and drive the Shared Resource

Centre;

132. Lack of effective product, geographical or supply chain clusters in the sectors.

133. Lack of clear and objective understanding of cluster methodology and the

commitment required

134. Lack of financial resources to sustain clusters.

Interventions to Remove Each Obstacle

135. Providing the sector, including clusters, with both business support and technicalassistance, and incubating world-class manufacturing and design skills

136. Attracting financial support from provincial and local government, international

donors and the private sector for a Centre that delivers on its mandate and to build

clusters in areas where sufficient agglomeration warrants

137. Establishing technical co-operation agreements with the existing international

best pract ise centres especially directed towards capacity building.

138. Setting up common objectives to grow the sector.

139. Identifying new and existing clusters.

140. Provide a cluster secretariat inclusive of a facil itator to assist with the

development and implementation of cluster initiatives.

Levers Required

141. Finances

142. Business, labour and government partnership and buy-in.

143. Advocacy

Resources Required Starting from a Zero Base PRIORITY SECTOR: FOOTWEAR AND LEATHER GOODS

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144. Human resources.

145. Financial resources (R1 000 000 per annum per cluster and to fund the Shared

Resource Centre).

146. Adequate skills to manage and offer the courses and services of the centre

effectively;

147. State of the art equipment, tools and techniques;

148. Adequate infrastructure.

Risks and Mitigating Actions

149. Perception of declining trend of the footwear and leather goods industry could

result in the Shared Resource Centre not attracting experienced staff, thus

undermining the intent of this key action programme. However, it is widely believed

that a properly managed Sector Resource Centre will assist the sector to continue

its turn around and become more competitive, which would make employment in

the Sector Resource Centre more attractive;

150. Poor management of the Centre could result in substantial monetary resources

being wasted. Close industry monitoring and support for the Centre are

required.

151. Lack of interest in developing quality products and moving up the value chain by

firms. Successful marketing the Shared Resource Centres quality improvement

programme and creating awareness of the advantages of improved quality can

mitigate this.

152. Companies not adhering with labour laws and bargaining council agreements

receiving support from the Shared Resource Centre. Only companies who comply

with the relevant labour laws and bargaining council agreements should receive

support and funding.


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153. The risk in developing and implementing clusters is a lack of cluster culture in South

Africa. Constant training in cluster development will mitigate this.

154. Clusters may not be adequately funded. This will require long term partnerships to

be developed between business and provincial and national government in order foradequate resources to be deployed.

155. Companies not adhering with labour laws and bargaining council agreements

participating in cluster, Only companies who comply with the relevant labour laws

and bargaining council agreements should be allowed to participate in clusters

Implementing Group and Champion

156. Business (champion), labour, the dti , provincial governments, CTFL SETA,

similar existing centre, CSIR, retailers and designers.

Expected Outcomes (potential net economic benefit)

157. Improved education and technical skills in the sector supporting the potential for

higher value added activities within the value chain;

158. Product development and other technical services providing increased scope for

high value added production through the value chain;

159. Development of innovative products and designs and using this as a competitive

advantage.

160. A sector-wide increase in quality.

161. An increased number of South African manufacturers with global standard

accreditations.

162. Improved quality management system capabilities of manufacturers.

163. Job creation

164. Move to world-class competitive industry.


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165. Positive link between cluster development and:

Competitiveness;

Employment creation; Skills development;

Export development;

Import replacement;

Sector sustainability;

Investment attraction; and

SMME development.

Key Performance Indicators

166. Number of advanced technical and technological training courses offered by the

Centre, in conjunction with the appropriate further and higher level educational

institutions;

167. Number and quality of students qualifying through the Centre and entering the

industry;

168. Number of ideas commercialised

169. Number of firms including the SMMEs using the Centre and its services, including

linkages with designers, assistance with development of new products

170. Measurable improvements in quality-levels at participating firms, including to such a

level that companies can achieve global standards accreditations

171. Increased production volumes

172. Improved footwear and leather goods trade balance

173. Number of functioning clusters

174. Number of jobs created


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175. Budget line-item created

Key Strategy Challenges: Ageing plant and equipment

176. According to Cabinet Lekgotla of 2005: Access to capital has been a big

constraint in small business development. While several funds and structures

were in place, these needed to be made more accessible. It is a challenge of

implementation.

177. The continued low level of capital investment in the footwear and leather goods

sectors is a major impediment to their future success. The sectors recognise

that a failure to invest has significantly undermined competitiveness. Failure to

secure new capital investment and upgrading the technological base is likely toresult in continued crisis management rather than sustained and sustainable

improvement in competitiveness. Encouraging technology upgrading in the

footwear and leather goods sectors is therefore of great importance to the

success of this Strategy.

178. The purchase of new technology is a challenge for the sectors given the cost of

acquiring new technology. This limits the capability of the sectors to effectively

implement and maintain state of the art technology.

Key Action Programme No. 2: Upgrading the Technological Base

179. This KAP seeks to update outdated machinery and technology by encouraging

firms to invest and employ state of the art technology.

The Goal

180. To improve efficiency and quality through increased investment in technology

and equipment.

Obstacles to implementation

181. Lack of financial resources

182. High cost of new technology


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183. Obtaining the knowledge and skills to effectively implement and maintain state of

the art technology

Interventions to remove obstacles

184. Setting up a funding system to assist the sector to upgrade technology in line with

the goals of this CSP

185. Promoting availability of funding system to ensure participation by firms, including

by awareness campaigns

186. Firms to develop viable business plans to gain access to preferential loans or

investment support, including quid pro quos in relation to governments economicaspirations

Lever required

187. Finance

188. Technology and innovation

189. Training

Resources required (starting from a zero base)

190. Finance

191. Human resources will be required to facilitate the training that is needed.

Risks and mitigating actions

192. Limited use of the scheme by the sectors due to financial constraints and

bureaucracy. To mitigate this risk government should provide public funding to firms

based on viable business plans.

193. Public funding constraints. Government will need to make a commitment to the

technology upgrading.


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194. Non-participation in other KAPs by footwear and leather goods companies. This can

be mitigated by linking funding received for new technology and machinery with

participation in other applicable KAPs, especially the KAP on skills training.

195. Companies not adhering with labour laws and bargaining council agreementsreceiving money from government for upgrading machinery. Government should

ensure only those companies who comply with the relevant laws and agreements

receive funding.

Champion and implementing group

196. the dti (Champion)

197. Industry

198. National Treasury,

199. Department of Science and Technology,

200. CSIR

Expected Outcomes (potential net economic benefit)

201. Increase in the level of new technology and equipment within firms

202. Improvement of productivity

203. Improved skills base

Key Performance Indicators

204. Improved technology and equipment profile of the sector, leading to increased

productivity, sales volumes, job security and sustainable job creation, better

products and improved work processes.


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B. Strategic Theme: Domestic Market Development

Key Strategic Challenge: Illegal imports

205. The competitiveness measures set out in the Strategic Theme above cannot besuccessfully implemented without providing the industry with some respite from

footwear and leather goods imports, especially illegal and under-invoiced imports,

entering the local market.

206. This will assist the local industry in achieving some success in the domestic market,

which is essential for the survival of the industry and for kick-starting export growth.

Relief from illegal imports would also help lessen the destruction of jobs and

productive capacity.

Key Action Programme No. 3: Combat High Levels of Illegal Imports

207. Illegal imports include activities such as under-invoicing, under-valuation, false

declaration of goods, rerouting via third countries and corrupt payments to customs

officials that are aimed at evading tariffs or other customs rules, and any other

import practices that are not consistent with the law. These imports fall in two

categories: those that are understated in the official import figures and others thatare simply not reflected.

208. Illegally imported goods, inclusive of under-invoiced goods, cost the local economy

jobs. Successfully combating illegal imports can have a significant employment

impact.

209. The proposal of a system of technical guidelines to identify suspect pricing claims,

which would be used by customs agents to identify probable fraudulentdeclarations, is a vital element in combating under-invoicing and fraudulent claims.

This needs to be supplemented with regular internal audits of invoices to identify

suspicious transactions, based in part on price claims.

210. Local industry has for some time cooperated with authorities, including SARS to

address the issue of illegal imports. However, much more work is needed to rid our

economy of this problem. Industry recognises that government alone cannot fix this

and will assist it to battle illegal imports.


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211. The space created by curbing the amount of illegally imported footwear and leather

flowing into South Africa can be used to market locally made goods. This would fit

well with the increased quality, design and innovation envisaged for local products

in this Sector Development Strategy.

212. Government, labour and business should identify opportunities to market locally

manufactured goods through marketing campaigns using the label of origin

legislation and through partnerships with the likes of Proudly South African.

213. Government, labour and business should also investigate ways to deal with

counterfeiting and passing off of local brands.

The Goal:

214. To eliminate unfair competition, firm closures and job losses brought about by

under-invoiced and other illegal imports through better law enforcement.

Obstacles to Implementation:

215. Lack of supportive regulations providing SARS with a framework to respond to

illegal imports.

216. Lack of resources and capacity amongst South African and SACU customs officials

to effectively identify and respond to illegal imports.

Interventions to Remove Each Obstacle:

217. Government to

Increase budget to SARS to enable it to employ more customs officials to

increase inspections of containers and improve other areas of customs

controls.

218. SARS to

Implement the WTO compliant framework that enables it to effectivelyrespond to both under-invoiced and other illegal imports


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Institute forensic investigations of major importers and, in the event that

they are only agents, of their customers

Criminalise illegal importing, including asset forfeiture

Destroy seized goods

Increase the rate of container inspections

Cooperate with industry, for example taking up offers of training from

industry

Reduce the number of points of entry

219. Business to

Provide resources for SACU customs officials to allow them to effectively

identify illegal imports. This could potentially take a number of forms,

including the provision of pricing models based on South African materials

costs, import values into other major economies and product-specific training

Levers Required:

220. Finances

221. Training

222. Appropriate regulations.

Resources Required:

223. Limited monetary resources would be required to develop the pricing model and a

reference database as the information required should be readily accessible fromindustry and customs departments of other countries.

224. Monetary resources will be required for the relatively extensive training required of

Customs officials. Human resources for training SARS officials in product

knowledge would be provided by business.

Risks and Mitigating Actions:


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225. Too many ports of entry for effective control of illegal footwear and leather goods

imports. This can be mitigated by rationalising the number of ports of entry for

footwear and leather goods imports.

226. Current legal framework is inadequate to deter illegal activities. Convictingtransgressors in courts of law and introducing asset forfeiture in such cases can

mitigate this.

227. SARS unable to effectively monitor imports. To address this risk, resources should

be allocated to a larger sector-specific unit at SARS.

Implementing Group and Champion:

228. South African Revenue Service (champion), SAPS, the dti , labour, manufacturers,

importers, retailers, SDC and the Department of Justice.

Expected Outcomes:

229. Reduced levels of illegal and under-invoiced imports into SACU.

230. Increased revenue collection by SACUs customs agencies.

231. Improved trading conditions for domestic and regional manufacturers, resulting in

increased employment and investment.

Key Performance Indicators :

232. Number of identified under-invoiced and illegal shipments entering South Africa.

233. Number of containers detained due to under-invoicing and other illegal activities.

234. Number of successful criminal prosecutions for illegal importing.

235. Growth in employment, production and market share.

236. Increased customs revenue


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C. Strategic theme: Empowerment

237. The South African footwear and leather goods sectors need a focused BEE strategy

to achieve the B-BBEE of black industries. The BEE strategy will facilitate growth,

development and stability in the economy.

Key Strategic Challenge: Transforming the industrys profile

238. The leather goods industry does not have black people who have ownership and

control of existing enterprises while the footwear sector does not reflect a complete

B-BBEE.

Key Action Programme No. 4: Promoting B-BBEE

239. The transformation of the sectors through B-BBEE, provides certain advantages to

the economy. One of them is the long-term commercial benefit to the participants of

that process. It also provides for non-commercial or intangible benefits where the

participants are working towards a common vision and equal access to

opportunities in the sector. At a public policy level, the promotion of active

participation by black persons in the industry help to realise an important goal of

government and provides further rationale for public sector support for the industry.

240. The footwear sector has the potential to contribute to empowerment in the

manufacturing sector, as barriers to entry are lower than in many other

manufacturing sectors.

The Goal:

241. To adopt, implement and promote the governments Codes of Good Practice

for B-BBEE.

Obstacles to implementation:

242. Perception of the footwear sector as a sunset industry inhibits participation and

reduces attractiveness to potential BEE investors.

243. BEE is concentrating in a certain segment of the black population.

PRIORITY SECTOR: FOOTWEAR AND LEATHER GOODS244. Availability of capital for BEE transactions.

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245. Lack of higher-level technical and managerial skills among black people.


246. The governments Codes of Good Pract ice for B-BBEE-set compliance targets.

247. To monitor and ensure implementation of the governments Codes of Good

Practice, specifically at firm level.

248. Proactive marketing of opportunities amongst potential BEE investors and

potential future employees.

Levers Required:

249. Learner ships to attract future employees

250. Employment Equity Act, B-BBEE Act.

Resources Required:

251. Monetary and human resources to facilitate the activities of the governments

Codes of Good Practice for B-BBEE.

Risks and Mitigating Actions:

252. Failure to reach full agreement, or compromising on the central objectives of the

governments Codes of Good Practice for B-BBEE. This can be mitigated by

strong governmental leadership and monitoring of codes of good practice.

253. BEE only seen as dealing with ownership structures and not being broad-based. B-

BBEE.

Implementing Group and Champion:

254. Business associations and labour (champions), the dti , Department of Labour.

Expected Outcomes: PRIORITY SECTOR: FOOTWEAR AND LEATHER GOODS

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255. Adequately empowered and transformed footwear and leather goods sectors.

Key Performance Indicators:

256. Implementation of governments Codes of Good Practice for B-BBEE.

257. Reaching of targets in line with the B-BBEE code.

258. Use of the industry as an example of successful B-BBEE.

259. Number of successful black-owned companies.

KAP No. 5: Promote Skills Development, Training and Sustainable Employment

260. The achievement of this Sector Development Strategys strategic vision depends

largely on highly skilled workforce at operator, supervisor, management and all

other levels.

261. As the local footwear and leather goods industry lacks world-class skills at a

number of levels, it needs a coordinated skills development programme that coversthe full spectrum of skills requirements in support of future growth areas.

262. The main vehicle for the implementation of such a programme will be the SETA.

The CTFL SETA already implements a number of programmes, but is under-

resourced and space exists for an improvement in the allocation of resources and

its current programmes. The SETA must be appropriately resourced and its work

programme aligned with this Sector Development Strategy.

263. This programme should;

Increase the number of employees on accredited training and development

programmes and learnership programmes dramatically to ensure that at

least 15% of the workforce is trained and/or retrained every year, resulting

in a full skills upgrade in the sectors within five years

Address skills bottlenecks, especially in the training of middle management

in work planning, process and people management skills


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Integrate training with other elements of human resource policy. A skills-based

grading system for workers with appropriate rewards to encourage skills

formation, career-pathing and incentives to participate in training programmes

should be developed

264. Without skilled workers and management, this Sector Development Strategy and

many of its projects will not show the desired results.

265. The provisions of employment law and the Bill of Rights in the South African

Constitution govern the South African labour market. Modern industrial relations

machinery exists in the form of advanced conciliation and arbitration systems,

dedicated training institutions and collective bargaining forums in the form of

statutory bargaining councils.

266. The footwear and leather goods industry is characterised by relatively cooperative

industrial relations between organised labour and business. A national bargaining

council exists in the sectors. Nevertheless, some companies do not adhere to

minimum standards of employment.

267. A policy that seeks to base competitiveness on low wages would not be consistent

with South Africas human rights culture or with the goals of this Sector

Development Strategy. On the contrary, sustainable human resource policies will

allow the industry to compete in the market for fair trade products.

268. With an important segment of consumer consciousness favouring ethical sourcing

emerging in major trading partners of South Africa, the promotion of fair trade

practices would constitute a major competitive advantage over certain other

developing country exporters. It would allow the industry to market itself as an

ethical supplier in foreign markets.

269. Sustainable and appropriately remunerated employment also improves the

disposable incomes of families, which in turn feeds into consumption, motivates

employees and results in increased productivity

The Goal:


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270. To develop a labour force and management corps with world-class skills, able to

work productively in full compliance with labour legislation and under fair labour

standards, and to produce innovative products of world-class standards, through

continuous training.

Obstacles to Implementation:

271. Inadequate financial and human resources for the CTFL SETA.

272. Inadequate systems at the CTFL SETA.

273. Insufficient number of learners on traineeships.

274. Lack of management skills.

275. Coordination between current training and skills requirements.

276. Attempts to bypass and undermine the South African Constitution, laws and

bargaining council agreements in certain workplaces and areas of South Africa.


277. Government to provide adequate financial resources for the CTFL SETA for

example through the National Skills Fund.

278. Industry developing a strategic plan for the SETA and enhance its capacity to

manage the skills development programme through additional staff and improved

management systems.

279. The industry placing 15% of the workforce through structured learnerships and

accredited training and development programmes on an annual basis.

280.

CSPLeatherandFootwear

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