Overview

• The mainland and Hong Kong agreed in October 2005 to further liberalise the mainland market for Hong Kong companies under the third phase of the Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA III). Under CEPA III, the mainland agreed to give all products of Hong Kong origin, including leather consumer goods, tariff-free treatment starting from 1 January 2006.
• Hong Kong's leather consumer goods manufacturers and suppliers export a wide range of products to the global markets, including footwear, travel goods, handbags, wallets, briefcases, clothing, gloves, mittens, belts and other miscellaneous fashion accessories. Overseas buyers regard Hong Kong as an important sourcing centre for leather consumer goods. They are attracted by the industry's high quality products, flexibility, production with short lead-time, quick response to fashion trends and ability to meet customer specifications.
• Following the financial crisis in 2008, there has been an unprecedented impact on leather and hide trade. It is clear that the leather industry was hit hard as trade figures suggest that the total exports of leather goods coming out of Hong Kong dropped significantly by 17% in the first four months of 2009 compared with a 5% increase in the year before.

Industry Features* 

*Industry statistics refer to production in Hong Kong only.

The latest official statistics show that there were 30 manufacturing establishments in 2008, with a related workforce amounting to 140. In face of rising operation costs in Hong Kong, the majority of local manufacturers have shifted a significant part of production to the Chinese mainland, leaving only limited capacity in Hong Kong to meet small orders. Some manufacturers have invested heavily in advanced automated machinery and operation systems to streamline the whole production process.

Many Hong Kong companies are engaged in the trading of leather consumer goods. At the end of 2008, the number of establishments involved in the import-export trade of leather consumer goods amounted to 3,730. Direct workforce employed by these establishments totalled 18,890.

In addition to competitive labour costs, a broad spectrum of raw materials, parts and fittings (like hides and buckles) are supplied by nearby sources on the Chinese mainland. Indeed, some Hong Kong, Taiwan, and mainland manufacturers are vertically integrated, which further enhances quality control and flexibility in production and creates synergy. For instance, Yue Yuen Industrial (Holdings) Limited, a Hong Kong listed company, teams up with upstream suppliers ranging from raw materials to shoes components.

Many Hong Kong companies are engaged in the trading of leather consumer goods. Some of them are appointed by foreign brands as their agents in the region, including the Chinese mainland. A number of Hong Kong's leather consumer goods companies, such as Mirabell, Staccato and Belle, take strong initiatives in developing the mainland market.

Performance of Hong Kong's Exports of Leather Consumer Goods^

Following the 5% increase in 2008, Hong Kong's exports of leather consumer goods dropped by 17% in the first four months of 2009. Re-exports, accounting for almost all exports of leather consumer goods from Hong Kong, decreased by 17%, while domestic exports declined significantly by 45%.

The US is Hong Kong's leading export destination for leather consumer goods, contributing 37% of the total exports during the first four months of 2009. Following the US are the EU and Japan, accounting for respective shares of around 24% and 9%. During January-April 2009, Hong Kong's exports of leather consumer goods to the US dropped by 30%, while exports to the EU also dropped by 10%. In the meantime, while exports to the Chinese mainland dropped by 1% compared to an increase of 45% the year before, sales to South Korea and Macau increased by 32% and 71% respectively.

Product‑wise, exports of leather footwear, taking up almost 70% of all exports of leather goods, dropped by 20% in the first four months of 2009, while sales of handbags, trunks and suitcases were down 3%. In addition, exports of leather apparel were up 1% during January-April 2009, while gloves, mittens and mitts, as well as other clothing accessories, recorded respective declines of 40% and 16%. 

Note: ^ Since offshore trade has not been captured by ordinary trade figures, these numbers do not necessarily reflect the full picture of the export business managed by Hong Kong companies.
*Insignificant

Sales Channels

The majority of leather goods manufacturers in Hong Kong are small and medium enterprises (SMEs) which predominantly produce on an OEM basis for leading brands in North America, Western Europe and Japan. An increasing number of manufacturers are involved in product design and development, engineering, modelling, tooling and quality control. However, many of them still prefer selling to overseas importers and distributors, who in turn market to wholesalers and retailers.

Rather than relying heavily on OEM/ODM contracts, a number of larger leather consumer goods companies have their own wholesale and retail network. Certain suppliers, such as Goldlion, Crocodile Garments and Le Saunda, have already been selling their brandname products in Hong Kong as well as other markets, like the Chinese mainland.

With an aim to foster local footwear design talent and encourage more Hong Kong leather footwear suppliers to enhance the design components of their products, the Federation of Hong Kong Footwear, sponsored by Hong Kong Trade Development Council (HKTDC), organises the Hong Kong Footwear Design Competition every year.

To establish business contacts with overseas buyers, Hong Kong manufacturers and traders have involved themselves actively in international trade shows led or sponsored by TDC, including GDS Shoe Fair (Dusseldorf), China (Dalian) International Garment & Textile Fair (CIGF) and MOTEXHA (Dubai). Some of them, particularly those selling handbags, wallets and other accessory items, also participate in trade fairs for gift items such as Birmingham Spring Fair International, Ambiente Frankfurt and the Tokyo International Gift Show.

Industry Trends

In pursuit of lower production costs, higher profit margins, expanding capacity and product range extension, leather consumer goods manufacturers in Hong Kong have shifted a significant part of their production facilities to the Chinese mainland. Leather industry is highly specialised and vertically integrated. Relocation may also provide the advantage of being more accessible to the raw materials and facilitating the retailing and distribution. In view of soaring production costs, manufacturers have further invested heavily in advanced automated machinery and operation systems to streamline the whole production process.

Environmental concerns also pervade the industry. Since leather processing usually involves production technology and chemicals that cause environmental pollution, the industry is considered as one of the most polluting industries, and the Cleaner Production Promotion Law requiring manufacturers on the mainland to improve their production processes and product designs for better environmental protection is imposed. Following the imposition of the 'Discharge Standards of Pollutants for Leather and Fur Making Industry' to reduce the total discharge volume of pollutants by 11% within five years, more stringent environmental policies are expected. In the Guangdong Province, the authority intends to cluster the heavily polluted leather factories together in industrial parks for more efficient waste management. Against the backdrop, upgrading the environmental technologies, like introducing unharmful chemicals, recycling, effluent treatment and sludge handling, will be necessary.

In another development, some US retailers and manufacturers are under attack by lobbying groups for selling products from countries using leather skinned off from dead animals that have been subject to excessive pains and distress when in transit or/and being killed. For example, following protests by PETA (People for the Ethical Treatment of Animals), some big companies have reportedly decided to boycott the leather obtained from the animals that suffer from intolerable conditions when in transit to slaughterhouses.

CEPA Provisions

The mainland and Hong Kong agreed in October 2005 to further liberalise the mainland market for Hong Kong companies under the third phase of the Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA III). Under CEPA III, the mainland agreed to give all products of Hong Kong origin, including leather consumer goods, tariff-free treatment starting from 1 January 2006.

Detailed information, including the origin rules for leather consumer goods items, is available from the following hyperlink: http://www.tid.gov.hk/english/cepa/tradegoods/files/mainland_2009.pdf.

Trade Measures Affecting Exports of Leather Consumer Goods

Overall speaking, trade measures for leather consumer goods are quite prohibitive. In many overseas markets, leather consumer goods are subject to high import tariffs. Although the common EU quota system on footwear established in 1994 was progressively phased out by January 2005, an anti-dumping duty of 16.5% has been levied on certain leather footwear from the mainland since October 2006. In Japan, footwear made wholly or partially from leather falls under the Tariff Quota (TQ) System as established by the Customs Tariff Law. In general, the import duties for leather are 12-16% (in-quota) and 30% (out-quota). For leather footwear, the applicable import duties are 17.3%, 21.6% or 24% (in-quota) depending on the type of shoes, and 30% or 4,300 yen/pair whichever is higher (out-quota).

Tariff Rates of Selected Leather Consumer Goods in Major Markets

Leather consumer goods manufacturers are obliged to observe international restrictions on the preservation of endangered species. The Washington Convention (Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES)) restricts or prohibits the trade of species listed in the Appendices to the Convention. Appendix I includes species threatened with extinction. Trade in specimens of these species is permitted only in exceptional circumstances. Appendix II includes species not necessarily threatened with extinction, but in which trade must be controlled in order to avoid utilization incompatible with their survival. Appendix III contains species that are protected in at least one country, which has asked other CITES parties for assistance in controlling the trade.

Hong Kong manufacturers also face challenges from the regulatory environment overseas. For health reasons, the EU has adopted a Directive aimed at prohibiting the trading of clothing, footwear and other textile and leather articles which contain azo-dyes, from which aromatic amines may be released.

Product Trends

With the economic downturn, consumers have become far more budget conscious. There has been a wave of trading down where basic items are expected to outperform those targeting impulse shoppers. Meanwhile, despite some recent slackening in the pace amidst the economic hard times, leather consumer goods are increasingly viewed as fashion accessories. The trend, from smart over clean chic, neo sports up to romanticism, is expected to sweep the market. Plain, clear and versatile are also new attributes to fashion. There is also a trend for formal dressing combining the elegance and grace of leather. This will give rise to greater demand for leather shoes and bags alongside with the rise of feminism.

"Biodegradable" and "eco-friendly" products are grabbing the attention of the leather consumer goods industry. For instance, chromium salts, the chemical used in the tanning process, have the potential hazard of causing cellular damage. Many Western countries have therefore made stringent requirements on chrome-tanned leather and its products. Some infant shoes importers are demanding chrome-free leather shoes, while leather products manufactured with more environmentally-sensitive approaches using wax, vegetable dyes, etc, are becoming increasingly popular.