Markets. Shoe industry in Russia. Tendencies.

Markets
Shoe industry in Russia. Tendencies

In present time Russia's light industry consists of over 22,000 businesses and companies, including 3,000 large and medium sized organizations averaging around 900 employees. Practically all these businesses are privatized and are mixed or private properties. In the period 1990-2000 industry's share in total Russian industrial output decreased from 12 to 1.6%, output of most important types of goods in natural term decreased by 71-90%. Today, light industry goods that are made in Russia provide for less than quarter of domestic demand, where the remaining 75-80% is satisfied with goods from foreign countries (mainly Turkey and China). At the same time, domestic light industry has production capacity for output of product with enough volume to provide for all demand of national market.
According to information from State Statistics Committee of Russian Federation (Goskomstat), shoes are made on 260 large and medium sized factories, where about 90% of overall volume is practically produced on 50 of these businesses. In year 2000, only 23% of shoe industry's production capacity was used (in 1998-14%).
By official statistics, towards the end of 1998 volume of shoes made in Russia dropped to 24.5 million of pairs a year (in USSR this index reached to 600 million). In 1999 volume of production was increased almost by 20%, in 2000 by additional 13% and reached about 33 million pairs per year.
Per Association of Italian shoe makers (ANCI) in 1998-1999 volume of Italian export to Russia decreased by nine times compared to 1997. In the year 2000 volume of Italian shoes brought to Russia consisted of 3.6-3.7 million pairs. According to State Customs Committee of Russian Federation (GTK), volume of legally imported to Russia shoes in 1999 consisted of 9 million pairs, and in 2000, of 11.9 million pairs. That is by 3-3.5 times less, than in 1997.
Volumes of shoe export from Russia due to its non-competitiveness, are low. Their share in volume of domestic production at present is not higher than 8%. Russian shoe market fills by 70-80% with imported goods. Biggest volume of delivered goods comes from the countries of South-Eastern Asia. Considerable portion of goods from those countries is low quality and is imported on discounted prices. China remains the biggest supplier of shoes.
Should be noted, that unregistered product takes considerable place on Russian local shoe market. According to Goskomstat and GTK of Russian Federation, 179 million pairs of unregistered shoes was sold in 1999, over 100 million pairs in 2000, that's over 60% of total volume of country's shoe market. Damage is being made to domestic production, since shoes brought as contraband are by 50-60% cheaper than shoes made by Russian shoe factories. That creates unequal conditions for competitiveness.
According to the president of "Siberian union of shoe-makers", General Manager of Siberian shoe company "Vestfalika" Mr. Titov, within last few years commodity markets of Russia are exposed to strong and continually increasing pressure of organized structure of contrabandists. One of legal contraband tendencies is "cargo shipping". On Russian side there are some travel agencies and shipping companies that are working together. "Cargo" is almost a legal way of contraband. Governments Decree of Russian Federation #783 from July 10 of 1999, on customs regulations for transfer of goods by physical persons over Russian border, gives a right for citizens of Russia for discounted routine of bringing goods from foreign countries. This right states that citizens may bring goods free of custom fees and taxes as long as they are non-commercial in nature, don't exceed 50 kilograms in weight, and are valued under $1,000. There are even wider margins for those citizens that have been away for over six consecutive months and for those that have been forced to relocate. General set of rules and regulations of taxation and regulation is used for physical persons bringing over goods with total costs exceeding $10,000 and/or total weight of which exceeds 200 kilograms. In other words it is profitable to break down the load in few separate shipments in order to partially or completely avoid custom fees and taxes. This trick is widely used by companies that ship goods over, by putting together (consolidating) small shipments of goods brought by "chelnok" (literally-canoe; used for physical persons - importers of shoes and other commodities). The shipping company, as per "chelnok's" request, makes declaration of goods at Customs. Such transfers got an unofficial name "Cargo". Commercial cargoes are declared at Customs as consolidated consignments. In practice one or several types of goods are transported in vans, containers, by air and trucks across the customs border in quantities considerably exceeding the quantity allowed for carrying across the customs border per one physical person, which is , in fact, a commercial consignment. This is contrary to article 109 of Customs Code "Transportation of goods by physical persons for non-commercial purposes" and causes damage to the State estimated at billions dollars, which had not been received to the budget, creates real opportunities for merging dishonest customs officers with smugglers and chelnoks. The role of customs officials in such cases is to enable the importers legally evade paying customs taxes. Bribed customs officers withdraw from customs examination and control, and owing to this drugs and other goods prohibited for import are smuggled together with consumer goods, commodities are declared under the wrong name, the weight and customs value are lowered. However large turnover of such markets practically is not subject to taxes. According to Mr. Titov the average daily turnover of one container art the wholesale footwear market "Raduga" in Novosibirsk over nine month a year is about 300 thousand rubles, during three months seasonal slump - about 70-100 thousand rubles. That is 570 market containers provide annual turnover exceeding 40 billion rubles. Almost all the footwear (up to 99%) sold at this market is produced in China. And this is the data covering only one wholesale market. Trade rules at wholesale and retail markets are, in fact, under criminal control. Losses suffered by the state are enormous, but government officials prefer not to notice it. Numerous government organs are perfectly aware about the ways to legalize contraband.
At the end of the last year the Order on lowering customs duties on some types of commodities, including footwear (Order of State Customs Committee of RF №1182 dtd 20th December, 2000) was adopted. The order is effective since 1st of January until 30th of September, 2001 and stipulates lowering duties for footwear up to 15% plus 0,7-1,4 EURO (depending on the class) per each pair. Duty rate for accessories has been lowered up to 10%.
After 30th of September duty rate may be revised. It is mostly those manufacturers who produce footwear in Russia from foreign accessories or completely place their orders on foreign factories who are mostly interested in reduction of duties for foreign footwear and accessories. Unfortunately, today most Russian footwear factories are not ready to manufacture production comparable to Italian goods in price and quality. This is especially true of middle and high class footwear. Russia's factories have neither machinery nor technologies nor accessories for its manufacture. Therefore growth of footwear industry is impossible without foreign participation. And in case customs duties for footwear import and accessories continue to decrease, manufacturers will get an opportunity not only to offer consumers good quality import production, but to develop their own production, taking the foreign production as an example. However, not all footwear market operators have the same opinion. Manufacturers of low class footwear, on the contrary, are willing to persuade the government that it is necessary to raise duties for imported commodities. For them growth of production can be achieved only provided imports are limited.
In post-perestroika period not only footwear production, but consumption volume has greatly decreased. According to Goskomstat in 2000 the population of Russia purchased only 197 million pairs. To compare: Soviet citizens annually bought 800 million pairs of footwear. Home manufacturers accounted for up to 75%. The rest was covered by import through Vneshtorg channels. However, during perestroika soviet manufacturer, who was not ready for competition, was ousted from the market. Major part of imported footwear was cheap Chinese goods. Russian manufacturers and sellers found it really hard to survive on the market.
In pre-crises 1997 240 million pairs were sold through retail trade. Simple arithmetic shows that official figures of consumer volumes do not correspond to the official data on home production and import. Thus minimum 152 million pairs, sold in Russia, seem to be "grey" import and production of cottage industry within the country. Thus 130 million pairs of footwear, imported to Russia from China by "chelnoks" in 2000 (according to the Association of footwear manufacturers of China) were not included in the official statistics. Moreover, 130 million is the minimum, as the information on other countries, Turkey, for instance, is simply not available. According to the experts, chelnoks, having the right to import up to 200 kg of footwear (about 600 pairs) duty free, provide more than 50% of Russia's retail market.
Duty free footwear import brings substantial damage to home footwear industry. This fact is recognized both by the importers, and by manufacturers of medium-class footwear, and by those, who produce cheap footwear for the old people. On the other hand, lack of duty charges makes this footwear, which is already cheap, affordable even for the poor layers of population. And introduction of equal conditions for all the importers will automatically lead to some raise in prices.
In the Soviet Union high class model footwear was practically not manufactured. That is why Russia practically does not have its own advanced technologies in footwear industry. There is a great backwardness in computer footwear design. Many components and materials are lacking, heels and lasts are practically not produced.
In 1999 most market operators switched to producing footwear in Russia. Factories were reorganized as joint-stock companies and bought out. Orders, earlier placed in Italy and other countries, were received by home enterprises, capable to manufacture goods of more or less good quality.
Many countries protect their market by introducing quotas for footwear imports (in Germany, for instance, imports are limited by 900000 pairs a year). It has to be noted, that before introducing quotas in Russia it is necessary to organize own manufacture in necessary quantities.
The main economic problems of footwear industry development, like for the whole light industry of Russia are lack of own current assets and impossibility to use bank loans under present high interest rates for assets replenishing; social sphere objects kept as part of capital assets of many enterprises which are to be handed over to municipal authorities. They distract considerable funds, that could be used for modernization and development of manufacturing.
The main aim of the nearest years is to increase manufacture of domestically made goods to satisfy the demand of the population, the country's economy and defense irrespective of the current situation; liquidation of critical dependence of the country on imports of light industry commodities. To achieve this aim it is necessary to solve the following tasks:
· Provide resources for industry development. To create conditions for providing raw materials, accessories of acceptable quality and in necessary volume on the market. To provide conditions for increasing their production in Russia.
· Technical reconstruction of industry enterprises. At present a large part of the machinery and equipment of the enterprises of the industry is characterized by physical and moral wear. On the average about 50% of equipment is under exploitation for more than 20 years. The degree of wear of main assets reaches 70% and continues to grow.
· Development of scientific, technical and innovation potential Acting economic mechanism has so far failed to secure necessary reaction of industry enterprises and organizations to scientific and technical achievements. The rate of renovation of technique and technologies, quality and compatibility of production are at low level, innovation activity of the enterprises is insufficient.
· Reforming management system at the enterprises, taking into consideration modern requirements to management, marketing, accounting, control of production costs.
· The problem of personnel for the industry also needs to be solved

Sources: "Vecherny Novosibirsk" dtd 27.06.01 Kommersant, № 110 Speech of Deputy Head of Department of light industry and consumer market of the Ministry of Science of Russia A.S. Borisov at the seminar "State and prospectives of Russia's footwear market in modern economic conditions" in the framework of VIII International Specialized Footwear, Leather and Accessories Exhibition "MosShoes"
02.07.2001

RUSSIAN LEATHERNET