Last week, BR Research met Imjaz Latif, the CEO of Sheikhs of Sialkot. Established in 1981 Sheikhs of Sialkot is one of the top three leather manufacturers currently operating out of Sialkot. He is the member of the Sialkot Chamber of Commerce and Industry. The business he is currently heading includes a tannery and a separate garment stitching unit. In this interview, Latif gives a brief overview of leather industry in Pakistan, its issues, and prospects, and also sheds light on the performance of his company.
BR Research: Please tell us a brief history of Sheikhs of Sialkot?
Imjaz Latif: We established as a partnership concern in 1985. It is a family business. At that time the primary business was leather gloves; both for motorbikes and fashion gloves. In 1990 it was converted into a private limited company and we diversified into leather garments such as leather jackets. We also established a tannery. We currently have two units; one is the tannery and the other is this facility where we do the finishing and stitch the garments under one roof.
Initially, till 2004, our prime focus was on men's wear because basically at that time there was not a market for women's wear. Plus, there are many issues and technicalities involved in it since women's wear includes pattern making and fittings etc, for which we didn't have the expertise.
BRR: How did you attain that expertise?
IL: Basically our association hired some Korean technicians in R&D category. And that's how we got our people trained in pattern making and fitting of women's leather garments. Then we started marketing from a new angle and we got a lot of growth.
BRR: What is your production mix now?
IL: At this time, 98 percent of our production is women's wear and two percent men's wear. In women's wear, we are working with renowned international brands like Zara, Bull and Bear and Boschka. There are some brands from Germany like Gypsy Nauritious and Street One.
BRR: Have you thought of going into ladies' bags?
IL: We have tried bags. But that involves a lot of accessories that you have to import. We have established a small division working on bags but we feel there is time before we get our R&D done and go into full fledge production, because we are behind China in that.
BRR: How do you see the export market?
IL: There has been a huge difference in the export market over the last decade. Ten years ago the export market had middlemen. We used to sell to wholesalers who in turn sold our products to outlets and retailers. Now the kind of brands we are working with have minimized this gap and they are buying directly from us.
BRR: This means your margins must have become better?
IL: No the margins are not better, but we get profitability in output because relationships with big brands allow us to produce higher volumes and so our capacity utilization is better. A wholesaler could not do that for us.
BRR: What kind of production volumes are we talking about here?
IL: We produce 50 to 60 thousand garments per month and all of it is exported, and we are closing this year at Rs2 billion ($20 mn). So Sialkot has a total export of $800 million we have a 2.5 percent share in the total exports.
BRR: Who are the biggest players in Sialkot?
IL: Right now, in business of soccer balls, there are two big players, namely Forward Sports who are working with Adidas and Silver Star who work with Nike. In surgical, there is Hilborough Penna QSA surgical.
In the leather business, there are three big names - Leatherfield, VIP Wears and Sheikh of Sialkot. LeatherField has the highest share but nobody has a dominating share.
BRR: Why does no one dominate and what are the issues in scalability?
IL: The major reason behind that is the availability and productivity of labour, and that problem persists in all trades. Fresh labour is not coming in, so much as so that shortage of labour is a major threat to surgical manufacturers. Today's generation doesn't want to get their hands dirty. They want a good mobile and money in their pocket for balance.
Usually parents send those children to learn craftsmanship at an early age, who are not good at studies, but we cannot afford to employ children under the age of eighteen because we are working with international brands and have to comply socially.
The second factor is raw material availability, especially in leather. Garments are being manufactured with sheep leather and the price of sheep meat has skyrocketed, so there are less animals being slaughtered which means low skin availability.
Thirdly, animals and raw hide and wet blue have started to be exported. The government has imposed a five percent duty on raw material exports but this percentage is trivial and exports are not affected by it. So we end up importing leather. There are many processes and hurdles in import, extending the transit time. And our buyers give us a very short lead time. They want delivery after thirty days of placing an order. So it is difficult to import and process orders quickly. Lastly, the biggest hurdle we are facing these days is of electricity supply.
BRR: How is your cash cycle?
IL: You raise an important point. You need liquidity to import as cash collaterals are required. But liquidity is a major problem in current circumstances. The cheque for our rebate has been lying with the tax authorities for the last four months and we still have not received anything. The government is integrating the drawbacks with imports due to which arrear payments get delayed.
BRR: What's your view on international leather market? How is the competition, and what are your competing points?
IL: We face stiff competition from India and China. The kind of power cuts we face means that the production is shifted onto the generators for up to eight hours and that affects the cost of production. We have to honour our international commitments no matter where the cost of production goes. So the government seriously needs to look into these issues. They should at least provide energy to the industry as it is the backbone of the economy.
The main competing point for us is price. If the buyers want high-end work, they will get it done from Turkey, India or China. We do casual garments and supply orders in bulk and in that category, the only competing point is price.
BRR: Why don't you move into high-end products?
IL: High end products place extra demands on R&D, which requires great investment. But in the current scenario, nobody in this country wants to take a risk. We are hoping that the environment becomes conducive to investments and then the businesses can pick up from there.
BRR: What has been your average annual growth in the last three years?
IL: Average annual growth in turnover in the last three years has been around fifteen percent.
BRR: In which areas do you see further expansion in the future?
IL: We have made a huge investment in the current business. Slowly, we are diversifying into finished leather.
BRR: What is the strategic reason behind it?
IL: Well, the average cost per square foot leather consumed in a garment is $1.35. The average price per square foot of cow or buffalo leather is $3, plus the work is mechanized and labour requirement is one tenth. In the garments line of work, there are new issues every day. But in finished leather, the profitability is higher with lesser management issues. So the margins and manageability are both better in this line of business.
BRR: What is your view of the current government's performance so far?
IL: So far there is nothing; only promises. We spend an extra Rs3 million on fuel for generators in a month and all these costs and overheads are added on to the price of the product. Our net margin has fallen to five percent from close to ten to 12 percent ten years ago. Electricity is a major cost component and the minimum wage rate now is Rs12000, all of it adds on to the product cost.
BRR: What are leather industry dynamics?
IL: There are about 200 tanneries in Pakistan. Some have fizzled out. But no new industry has come. People are going to other businesses. We can get a lot of growth in the current business provided we get the facilities. Our transformer broke down two days ago and the authorities still haven't replaced it. The generator has been running for the last fifteen hours continuously. In any another country, we could have filed a lawsuit claiming losses in production. Then there is the issue of excess billing.
BRR: Yours seems to be a family business. Could you share the structure and whether you empower management?
IL: I and my brother started this company, and it still is a family business. As for the management, we have noted that managers don't take tough decisions. They keep on delaying the decisions. No matter how high caliber person you bring in.
BRR: What is the industry doing about waste treatment for leather industry?
IL: Waste treatment is a big issue in our industry. An individual waste treatment plant costs Rs50 to Rs70 million. There should be a treatment plant which should treat the combined affluence of the leather industry. Recently the government has allocated a separate area for leather industry. But only the plots have been demarked there. When the infrastructure is put up there, including waste treatment, I will be happy to move to that area. The government of Norway has provided funding for that project.
BRR: How has the currency movements affected you?
IL: We booked seasonal orders at Rs105-106 so we got a loss at the currency revaluation. There is no way around it - you cannot argue with the customer because you risk losing them. There are seasonal deals.
BRR: What have you thought about launching in Pakistan?
IL: The margins are good and the urban centers have good business but we are not interested at the moment as our export business keeps us busy.
BRR: What is Pakistan's share in the world market?
IL: It is about one and a half to two percent but this can grow, provided we get facilities and infrastructure. Plus we are not present in the biggest segment, which is upholstery. American cows and bulls provide fifty to sixty feet of leather. Pakistani skin size is twenty to thirty feet. In China there are about a thousand units doing upholstery.
BRR: What policy measures would you like to propose to support leather industry?
IL: The most important thing is to curb smuggling of raw leather and livestock. Secondly, livestock segment should be expanded in the country, and lastly the finished products should be supported.