STATE OF THE SECTOR REPORT

PHILIPPINE FOOTWEAR

October 1, 2003 Pearl2 Project

The State of the Sector Report Philippine Footwear is one of a series of State of the Sector Reports published by the Pearl2 Project. Pearl2 is a Canadian International Development Agency funded Project jointly managed by the Innovation Science Council of British Columbia and the British Columbia Institute of Technology. Pearl2 is a five year initiative (2002 2007) with the stated purpose of supporting the development of small and medium enterprises (through out the Philippines) that create meaningful jobs for both men and women through the strengthening of Business Support Organizations (BSO) and Investment Promotion Groups (IPG). The Field Office of the Pearl 2 Project is located at: Suite 2103, Antel 2000 Corporate Center 121 Valero St., Salcedo Village Makati City, Metro Manila Philippines Phone Fax E-mail Website + 63 2 715 5912 + 63 2 884 1544 info@pearl2.net www.pearl2.net

Pearl2 Project Technical Paper #2 State of the Sector Report Philippine Footwear October 2003 All rights reserved. No part of this document may be reproduced, stored in a retrieval system, transmitted in any form or by any means, or otherwise circulated in any form, binding or cover, other than the form, binding and cover in which it was published, without prior written permission of the Innovation and Science Council of British Columbia, on behalf of its Pearl2 partners the British Columbia Institute of Technology and the Canadian International Development Agency. Innovation and Science Council of BC 4720 Kingsway Suite 1048 Metro Tower II Burnaby, B.C. Canada V5H 4N2 Telephone + 1 604 438 2752 www.iscbc.org

Disclaimer This report has been prepared by contracted advisors to the Pearl2 Project. The judgments expressed do not necessarily reflect the views of the Pearl2 Canadian Executing Agency (Innovation and Science Council of British Columbia and the British Columbia Institute of Technology), the funding agency, the Canadian International Development Agency or the Projects Philippine partner the Department of Trade and Industry. While every effort has been made to ensure accuracy of the information contained in this technical paper, this is not guaranteed. Accordingly, neither the Canadian Executing Agency, the Canadian International Development Agency nor the Department of Trade and Industry accepts any liability for actions taken based on this material Project Team Mr. Arun Abraham, Project Director Mr. John Manzanas, Senior Programme Officer and Editor Dr. Rizalito Gregorio, Advisor, Value Chain Analysis Ms. Ana Jover, Advisor, Costume Jewlery Ms. Ma. Teresita Agoncillo, Advisor, Costume Jewelry Ms. Cherie Carlos, Technical Editor Front Cover Design pITstop, Legaspi Village, Makati City, Philippines The Pearl2 Project gratefully acknowledges the assistance from the Philippine Footwear Federation, Inc. (PFFI) and Sikap Mo, Inc. and its members in the preparation of this report.

TABLE OF CONTENTS
1. Introduction Methodology Limitations Acknowledgements 2. Executive Summary 3. Overview of the Industry Product Scope Industry Coverage Firms in the Industry Market Segments World Market Exports of Footwear Local Footwear Market 4. Profile of the Sector Key Findings, By Section 5. Value Chain Analysis Structure of the Philippine Footwear Sector Process Flow in the Industry The Footwear Value Chain Diagram Key Findings from the Value Chain Analysis Footwear Value Chain Table 6. Needs Assessment of the Sector Key Findings, By Section 7. Proposed Areas for Intervention Annexes 1

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53 59 67

INTRODUCTION

1
INTRODUCTION
The Pearl2 Project, working with the Department of Trade and Industry, has identified the footwear industry as one of the areas for program assistance under the Projects Sectoral Enhancement component. Footwear manufacture has good export potential and has been established in the country for quite some time. To help determine how the Pearl2 Project can effectively assist the industry, this study was undertaken to determine the needs of the sector and the possible areas for assistance. In addition, the study also generated information on the firms in the industry that can serve later as baseline data for use in assessing the impact of assistance.

Methodology
Two consultants were engaged by the Pearl2 Project to undertake this report. Data was gathered from existing studies and reports provided by both government and private entities, including the Department of Trade and Industry (DTI), the National Statistics Office (NSO) and the Cottage Industry Technology Center (CITC). In addition, the

STATE OF THE SECTOR REPORT - PHILIPPINE FOOTWEAR

consultants also designed and conducted a short survey of footwear firms who were members of the Philippine Footwear Federation, Inc. (PFFI) and the Sikap Mo, Inc. Both groups are based in Marikina, Metro Manila, which is the center of the footwear industry in the country. Interviews were also conducted with key industry personalities, who provided valuable insights into the workings of the sector Data obtained from the survey, field research and literature review were tabulated and encoded. The Pearl2 Project also adopted the value chain model devised by Dr. Michael Porter of the Harvard Business School to analyze industry activities. The value chain analysis yielded information on specific issues, problem areas and other concerns of the industry a fairly wide ranging list from the sourcing of raw materials through processing and after sales service. These findings were then organized according to the industrys value chain components. Finally, the needs of the sector were assessed and specific areas of intervention to assist producers were identified. (Please see Annex 1 for a short background on the use of the value chain analysis.)

Limitations
The study is limited to the members of PFFI and Sikap Mo, Inc., who are concentrated in Marikina, Metro Manila. A total of forty six companies responded to the questionnaire,

INTRODUCTION

which represents about 44% of the combined members of the two groups, which number 105. Not included in the sampling are the small shoe enterprises that are not members of PFFI or Sikap Mo and operate informally. The study also has limited information on support industries such as suppliers of leather and other shoe parts or materials. The value chain analysis used in this study consolidates findings from different firms. It does not cover any financial or cost information from the firms, since these are quite difficult to obtain and would prove hard to reconcile when doing an evaluation on an industry level. There was also not enough time or resources for this effort. The value chain analysis used here is limited to the primary and support activities of the producers and does not consider the value chain of external entities such as suppliers or buyers.

Acknowledgements
The Pearl2 Project acknowledges with thanks the assistance and support for this report of the following persons: Ms. Ma. Teresita Jocson-Agoncillo and Ms. Ana Jover for undertaking the research and drafting the State of the Sector Report on Footwear; Dr. Rizalito Gregorio for helping develop the value chain for the sector; Mr.Joel Rodriguez, Philippine International Trading Corporation brand manager for wearables; Ms. Merlin Diaz of the Bureau of Export Trade

STATE OF THE SECTOR REPORT - PHILIPPINE FOOTWEAR

Promotions, product manager for footwear, for their support in the research of this study; Mr. Roger Py, Director General of PFFI, Mr. Mahar Jardiolin, President of Sikap Mo, Inc., and Mr. Frank Bonoan, Executive Director of CITC for their assistance in gathering data for this study. The project also acknowledges the cooperation provided by the other officers and members of PFFI and Sikap Mo, Inc. in providing data useful to the report.

EXECUTIVE SUMMARY

2
EXECUTIVE SUMMARY
The local footwear sector covers a range of products that includes dress and casual shoes, sports shoes, sandals and slippers. This report focuses on footwear made of leather and non-leather materials manufactured by small- to medium-sized producers and sold in both the local and export markets. There about 2,148 footwear firms nationwide directly employing 26,396 workers. Production of footwear in the country is concentrated in the National Capital Region (NCR), where about 43% of all shoe manufacturers are situated, employing some 46% of the industrys total work force. Within this area, the city of Marikina is the center of the footwear business. As of 2001, the city accounted for almost three fourths of all shoe producers in the NCR. Most of manufacturers in the industry are micro to small in size. Firms usually have their own shop facilities, although a small number rely on subcontractors for production work. For marketing and distribution, some companies have their

STATE OF THE SECTOR REPORT - PHILIPPINE FOOTWEAR

own boutique stores while others rent space in large department stores and malls. The specific market segments for the sector are defined according to the price and quality of the product. These range from cheap, low-end footwear made from synthetic materials to high-end and well-crafted leather shoes based on European or American designs or brands. The majority of shoe producers utilize manual and semiautomated processes in their manufacturing operations. Most workers are in production, and there is almost an equal proportion of men and women employed in the industry. The world market for footwear totaled almost US$ 49 billion in 2001. Most of the products represented by this figure were non-leather footwear. The United States is the largest market for footwear products, while China is the worlds largest supplier. Exports of Philippine footwear amounted to about US$ 48 million in 2002. Sports shoes comprised almost half of the exports. The Netherlands is the biggest market for the industry, followed by Japan and Great Britain. Local footwear exports have generally not performed well during the last few years, and a declining trend has been noted.

EXECUTIVE SUMMARY

Local shoe producers face stiff competition in the market mainly from low-priced products coming from China and other Asian countries. The industry also has difficulties regarding raw material supply. Local leather, as well as other shoe components, are not of the desired quality and price. Producers generally have to rely on imports for their materials and supplies. Problems on the production side include lack of skilled workers, use of outdated technology, and low worker productivity and efficiency. Also, the sector has no standards for shoe sizes, resulting in variations in product sizes. A favorable development for the industry is the recent establishment of a Philippine Footwear Academy in Marikina. This school aims to train workers in the various skills needed in shoe production. The Sikap Mo, Inc., supported by the PFFI, has also launched a branding concept for the footwear sector. This should help promote an appropriate image for the industry.

STATE OF THE SECTOR REPORT - PHILIPPINE FOOTWEAR

OVERVIEW

3
OVERVIEW
Product Scope
Footwear manufacturing in the country covers a range of products that includes sports shoes, dress or casual shoes, slippers and sandals. Materials range from leather, rubber and plastic to textile and other components. The sector targets buyers of all ages and offers products for men, women and children. Leather footwear is normally used as dress shoes. Nonleather footwear with outer soles of rubber or other materials such as plastic, wood, textile is commonly used as casual footwear. Sandals and slippers are mostly made of textile or plastic material and are used both indoors and outdoors. Sports footwear entails high standards of production and most sport shoes facilities in the country involve some direct foreign investments. Annex 2 provides a brief description of the general classification of footwear products. For the purposes of this study, the focus will be on leather and

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non-leather footwear.

Industry Coverage
As of 2001, there were about 2,148 registered footwear manufacturers nationwide. Total direct employment for the same year was estimated at around 26,396. Another 30,000 workers are estimated to be indirectly employed in the sector. The industry has a large presence in the National Capital Region (NCR), where 924 firms or 43% of the total manufacturers are located. Other regions with significant footwear producers include Central Luzon, Southern Tagalog and Central Visayas. Table 1 on the next page shows the distribution of footwear firms and employment in the country.

OVERVIEW

11

Within the National Capital Region, Marikina has the largest number of producers, with some 682 footwear firms employing about 7,480 workers. Employment of footwear workers in the city represents about 61% of the total for the region. Table 2 on the next page presents the industry presence within the National Capital Region.

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Firms in the Industry

Most firms in the industry have their own production facilities. A smaller number, however, rely on a network of subcontractors who manufacture all or part of their

OVERVIEW

13

products. These companies have very minimal in-house production facilities, and in certain cases, have none at all. In this setup, the company maintains a number of subcontractors with qualified production operations and manufacturing standards. These firms focus their resources on the marketing and distribution of finished goods. They are referred to either as brand distributors or traders. The former refers to a company that develops its own market under a specific brand and has its products manufactured by a network of local sub-contractors or, in the case of some companies, supplements production with importation. Traders are companies with established distribution networks, with manufacturing done mainly by subcontractors. There are two major groups identified under the Sectoral Enhancement component of Pearl2 as the lead associations for footwear. Both are located in Marikina. These are the Philippine Footwear Federation, Inc. and Sikap Mo, Inc. Please see Annexes 3 and 4 for a brief background on these two groups. Another group of footwear producers, the Carcar United Footwear Manufacturers Association, Inc. (CUFMAI), is based in Carcar, Cebu province. The group has about 15 members to date, comprised mainly of micro entrepreneurs. The CUFMAI is not covered in this study but a brief background on their association is provided in Annex 5.

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Market Segments
While footwear product lines vary according to fashion and cater to a specific market segment, the market segmentation for this sub-sector follows the same pattern as that of garments in that it is based on the income levels and the lifestyle of the end consumer. There are basically three distinct market segments for footwear based on quality and price. The high end market represents the upper echelon of the market segment. Buyers in this category can afford luxury items and indulge in extravagant lifestyles. This group normally buys imported shoes ranging from US$ 75.00 a pair to US$ 350.00 a pair in the local retail market. Preference leans towards Italian, French and American branded shoes. While customers from this sector purchase mostly imported branded shoes, they occasionally also purchase the locally made, branded footwear of select local boutiques. Normally, local boutique brands are made from imported materials. The average price point of the locally manufactured high-end footwear ranges from US$50 to US$75 a pair. Price and comfort are the major concerns for the middleend market consumers. This group belongs to the lowmiddle to middle-high end in the economic scale and is

OVERVIEW

15

normally composed of the working and professional groups, for whom value for money is a primary consideration. Shoes produced for this market are normally of good quality, and prices range from US$12 to US$ 30 a pair for ladies and mens leather shoes. This group normally purchase from locally famous boutique shops that have carved themselves a niche in the market. At the low end of the footwear market, products basically cater to the mass market made up of a relatively large low to middle income groups, who may opt to forego quality for price. Taking price into account, this group usually invests in a few pairs of dress, formal shoes. The price points of these products would be around US$ 6 to US$ 8 a pair. The majority of the shoes would be of the casual, simple kind, with prices in the neighborhood of US$ 2.50 a pair.

World Market
The global market for footwear of all types was estimated at US$ 48.8 billion in 2001. Much of this figure is composed of non-leather products, which accounted for almost half of the market in 2001. The chart on the next page shows the distribution of footwear products in the world market.

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The world market for footwear has remained stagnant during the last few years. From 1997 to 2001, there was no significant growth in the global imports of footwear. Among the various products, only non-leather footwear and sandals and slippers indicated any positive growth during the period. Leather shoes declined by an average of 5.32% yearly, while sports shoes decreased at an average rate of 4.08% annually. Table 3 on the next page provides some details.

OVERVIEW

17

The United States is the worlds largest importer of footwear. In the year 2000, the U.S. market bought some US$ 15.58 billion worth of footwear products, representing about a third of the global market for the year. Other major buyers include Hongkong, Germany, the United Kingdom and Japan. (Please refer to Table 4 for the footwear imports of these countries.)

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STATE OF THE SECTOR REPORT - PHILIPPINE FOOTWEAR

Among the major importers of footwear, only the United States and the United Kingdom have shown a positive growth trend during the last few years. From 1996 to 2000, imports by the U.S. averaged an annual increase of 4.25%. The U.K. market grew yearly by an average of 3.04%. (Table 5 shows the growth trends in the worlds major markets for footwear.)

OVERVIEW

19

China is the dominant supplier of footwear in the global market. In 2000, it sold about US$ 20.78 billion worth, accounting for some 44% of the world market. Italy was the second largest supplier for the year, but its exports are relatively small compared to China. Other major footwear suppliers include Vietnam, Indonesia and Brazil. (Table 6 provides more details.) The presence of two other Asian countries among the five leading footwear exporters may indicate a trend towards the migration of orders to developing countries in the Asia-Pacific Region due to perceived cheaper production costs.

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Exports of Footwear
Exports of local footwear products totaled US$ 47.79 million in 2002. Sports shoes comprised almost half (49.76%) of this amount. Consigned footwear accounted for about a fourth of the total while non-leather footwear constituted around 23% of exports. (Please see the chart on the next page for details.)

OVERVIEW

21

The Netherlands is the largest market for Philippine footwear exports. In 2002, about US$ 12.93 million worth of footwear products were sold to the Netherlands. Other major markets include Japan, Great Britain, Germany, Mexico and the United States. (Table 7 on the next page shows the exports to these countries in 2002.)

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Exports of Philippine made footwear have declined significantly during the last few years. From US$ 146.61 million in 1998, the exports shrank to only US$ 47.79 million in 2002. On the average, it declined by about 22.83% yearly during this period. Stiff competition has driven down exports of the sector. (See Table 8 for details.)

OVERVIEW

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Local Footwear Market

The local consumption of footwear is currently estimated to be around 46 million to 51 million pairs per year. Most firms in the industry are engaged in the manufacture of ladies shoes, either as their sole product line or the bulk of their general product lines. The inclination of the local footwear sector to cater to ladies footwear is dictated by fashion. Women have a penchant for purchasing more than three or four pairs of footwear per year, depending upon their income level. Stiff competition in the domestic footwear market come from imports, such as those from China, which can be priced more cheaply. In 2002, footwear imports totaled US$ 54.62

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million. The bulk of footwear imports is comprised of nonleather shoes basically made of synthetic, textile and similar materials which accounted for about 50% of footwear imports in 2002. The table below shows the type of footwear imported by the country.

About three fourths of footwear imports in 2002 came from China and Hongkong. China supplies around 47% of Philippine footwear imports while Hongkong, the second major supplier, has a 27 share%. (Table 10 shows the imports of footwear products in the country for 2002.)

OVERVIEW

25

The growth in imports from both China and Hong Kong has been significant. From US$ 16.09 million in 1998, footwear from China reached US$ 25.66 million by 2002. This represents an average growth of 16.86% yearly. Imports of footwear from Hong Kong grew yearly by an average of 12.68%. (See the chart on the next page for details.)

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PROFILE OF THE FOOTWEAR MANUFACTURING SECTOR

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4
PROFILE OF THE FOOTWEAR MANUFACTURING SECTOR
The Pearl2 project conducted a survey of members of the Philippine Footwear Federation Inc. and Sikap Mo, Inc. to gauge the situation within the sector. A response rate of about 44% was obtained during the survey, with 46 out of a combined membership of around 105, responding to the survey. The following section contains the significant findings from the survey. Please note that some questions in the survey elicited multiple answers from the respondents which affect the figures indicated when the responses were tabulated.

Key Findings from the Survey

Date of establishment The majority of the companies or 48% were established during the years 1970-1989. As the shoe-making business attracting more interest, 15 more companies or 32% of the respondents joined as industry players in the period 19901999. Around 20% are relatively new, having been

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established only since 2000.

Company size In terms of assets, a large proportion or 86% of respondents are either micro or small in size. Micro and small enterprises had identical proportions of 43% each of the total firms surveyed. Companies referred to as medium-sized represented 12% of total respondents while large-sized firms comprised 2% of the total.

Company setup Only a minority of survey respondents or 23% are established as corporations. Most (77%) of the companies surveyed are set up as single proprietorships.

Product lines A large number of firms or 40% of those surveyed produce leather footwear. Companies manufacturing non-leather footwear accounted for 30% of respondents while 26% produced sandals and slippers. The remaining 4% of respondents are into other product lines such as sportswear, bags and belts and parts of footwear. Most firms produce a variety of products, meaning a mix of leather and other types of footwear. Only a few firms concentrate on a single product line. Among the respondents, only about 17%

PROFILE OF THE FOOTWEAR MANUFACTURING SECTOR

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focused exclusively on leather footwear only. Some 2% produced only sandals and slippers. Another 2% only manufactured unit soles.

Ownership of facilities Traditionally started as family businesses, the majority or 80% of the manufacturing facilities are set-up on owned properties. The remaining twenty per cent (20%) of the companies work in rented facilities. These producers consist mainly of micro and small-sized companies.

Employment The survey respondents reported 2,950 employees, of which 67% are involved in production, 26% in marketing, and 7% in administration. A large proportion or 90% of firms surveyed have their own in-house production system. The number of production workers range from 10 to 155. Of these firms, more than half have 30 or fewer workers in production. About 17% have from 31 to 60 production personnel while 31% have more than 60. The number of marketing personnel range from a minimum staff of 2 to an extensive sales network involving 80 to 600

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employees. The majority of the firms surveyed or 85% have only 5 or fewer marketing workers. Some 4% have from 6 to 10, while 11% have more than 10 marketing staff. Those with a large marketing network have their own retail outlets, either independent stores or selling areas within malls, located within and outside of Metro Manila. A large majority of respondents or 80% have a minimum administrative staff of from 1 to 5 employees. About 17% have from 6 to 10 in administrative positions, while only 3% have more than 10 administrative staff. There was one producer who had around 50 in its administration and support departments. By gender, there is almost an equal number of male (49%) and female (51%) employees among the survey respondents. In both production and marketing, male and female workers are almost equally represented. In production, 51% are male and 49% are female. In marketing, the reverse ratio is noted, with 51% women and 49% men. It is in administrative positions where females (71%) vastly outnumber the men (29%).

Subcontractors The majority or 78% of the total survey respondents do not use any subcontractors. Only 22% of respondents employ

PROFILE OF THE FOOTWEAR MANUFACTURING SECTOR

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subcontracting work. Of those that use subcontractors, 67% are small size producers, 22% are considered medium or large, while 11% are micro in size. Among firms not using subcontracted work, most or 58% are micro level companies, 29% are small and 13% are medium sized enterprises.

Sources of raw materials Nearly half or 43% of the firms surveyed use mainly local materials complemented with imported materials. About 29% of the companies use more imported materials than local ones. The remaining fourteen per cent (14%) use, on the average, equal parts of imported and local materials. Another 14% use only local materials in their products. Local materials include leather, pig skin, insole, heels, lining, shoe lasts, adhesive, buckles and other accessories. Imported materials and components cover a similar range of natural/synthetic leather, insole/outsole, leather lining, uppers, shank, plastic heels, eyelets, buckles, glue, thread and other accessories. These are mainly sourced from neighboring Asian countries and partly from Europe. A large majority or 82% of surveyed firms source their materials from the open market. Some 6% produce their own materials, while 12% source both internally and from the open market.

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Mode of Production Almost two thirds or 65% of respondents stated that they use semi-automated means of production. Some 31% use manual production, while 4% have a fully automated setup. Automation is defined as the presence of mechanized process for cutting, skiving, installing shoe lasts, sealing, drying, testing and others. A manual-based production produces an average of 1,000 pairs per week. This can accelerate to 3,000 5,000 pairs per week with a semiautomated process.

Capacity Utilization Twenty-eight per cent (28%) of respondent companies stated that they had a 100% utilization of their production capacity. These companies represent a cross-range of small (46%), micro (31%) and medium/large-sized companies (23%). The remaining 72% of surveyed firms had underutilized production capacities. Three main reasons were cited for unutilized capacity. Some 58% of firms said that inadequate supply of raw materials was the primary cause for low production capacity. This includes poor raw material quality and shortage of materials. In addition, 55% of respondents also indicated machine limitations as the cause for unutilized capacity. About 28% cited lack of space as another reason. Other reasons include manpower problems and

STATE P ROFILE OFOF THE THE SECTOR FOOTWEAR REPORT MANUFACTURING - COSTUME S JEWELRY ECTOR

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financial limitations. Some companies reported more than one reason for low-capacity use, resulting in multiple responses. The majority or 71% of respondents plan to expand company production space, while 63% stated they had plans to increase machinery investment.

Research and Development More than half or 63% of companies surveyed had R&D facilities. Among these firms, 46% said they had in-house R&D, and 20% used outside product and design development services provided by government or private agencies. Lacking R&D activities were 37% of the companies, the majority or 76% of which are micro-sized, and about 24% are small-sized firms. Of the total companies surveyed, with or without R & D setup, 65% develop products based on buyers specifications.

Quality control The majority of the survey respondents or 60% stated that they conduct quality control measures. Some 56% of the companies have in-house quality control and testing setup,

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while 4% utilize outside test facilities such as those provided by TESDA and the Philippine Army.

Market coverage The majority or 93% of the respondents cater solely to the local market, while the remaining 7% sell both in the local and export markets. The majority or 55% of surveyed companies manufacture and sell products aimed at the middle market segment. About 29% of firms target the highend market while 16% cater to the low segment of the market. Companies defined market segments based on a price range relative to the type of products manufactured. Each firm stated general price ranges for all its product groupings, with one given price range covering both leather and nonleather footwear. No medium-sized company sells in the low end of the market, a segment dominated by small (67%) and microsize (33%) companies. The majority (52%) of the companies producing for the middle-end market are small-sized. About 29% of those who target this segment are micro enterprises and 19% are medium-sized. High-end suppliers are also mainly small-size companies (38%) with micro firms

S ROFILE OFOF THE THE SECTOR FOOTWEAR REPORT MANUFACTURING - COSTUME S JEWELRY ECTOR PTATE

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comprising 31% and medium-size companies making up another 31%. Most companies cater to consumers within the age segments of teenage to adult level. Young adults or those aged from 19 to 39 are the leading clientele for 37% of respondents. Adults or those aged from 40 to 60 years old were targeted by 25%. Some 22% of respondents primarily catered to teenagers while 8% targeted children from 12 years and below. Mature adults beyond 61 years of age were the primary clients of 8% of companies. Most of the companies deal with more than one target segment. Market access and distribution A majority or 83% of the companies market their products through their own direct contacts or established buyers. Twenty-four per cent of respondents participate in trade fairs such as the bi-annual Department of Trade IndustryCITEM F.A.M.E, and in U.S. trade fairs (Hawaii & New Jersey). Around 19% use referrals to get orders. A company usually uses one or two of these methods to get buyers. Specialty stores such as boutiques are the leading channels of distribution for respondents. About a third of the firms surveyed said they use these stores for product distribution. Other marketing channels include department stores (25%),

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trading companies (18%), retail stores (12%) and direct selling (11%). The latter is a common setup for exclusive manufacturers of a specific brand.

Competitors Among the respondents, nearly all of the companies or 90% identified China as their major competitor. Citing Chinas fully-mechanized operations, they pointed out that Chinese shoe factories now have the capacity to produce large volumes of fashionable and even branded shoes which are sold at relatively low prices. Other minor competitors mentioned include Thailand with its access to local materials and components.

Concerns Regarding their concerns, 59% of the companies cited uncompetitive pricing as the foremost problem in marketing their products. This was followed by unsuitable packaging, reported by 16%, unsuitable design by 13% and unacceptable quality by 6% of the respondents. Some 3% of them reported difficulties with both insufficient technology and marketing.

Sales For the year 2002, respondent firms indicated a wide range of sales figures, from below Php 1 million to more than Php

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100 million. Most firms or 39% of the companies generated sales within the range of Php 1 million to Php 10 million. About 22% had sales within the range of Php 20 million to Php 50 million; 19% indicated sales below Php 1 million; 14% had more than Php 10 million to Php 20 million sales; and 6% generated sales of more than Php 50 million.

Financing About 61% of surveyed companies are dependent on internal sources to support expansion plans. Forty two per cent of firms said they depend on bank credit lines for funding. Around 50% of the respondents are still sourcing their funds as of the time of the survey.

Operating Expenses More companies are spending on R&D, with about 41% of surveyed firms saying this was their major operating expenditure. Administrative and marketing expenditures were reported as the biggest cost item by 32% and 27% said marketing was their leading cost category. Most firms or 60% of respondents say they use their own funds for operating expenses. About 33% borrow from banks and 7% use funds from cooperatives.

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Needs Indicated Almost all of the respondents or 97% have never availed of direct assistance from any foreign-funding agency. Companies who participated in the survey rated their needs as follows: supply chain sources (30%), financial (28%), technology (22%), training (13%), marketing (11%), production/quality (9%), product development (9%) and government policies (7%).

VALUE CHAIN ANALYSIS

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5
VALUE CHAIN ANALYSIS
Structure of the Philippine Footwear Sector
The local footwear industry is a labor-intensive operation, with most of the firms small and micro in size. Production is seasonal work, with peak periods before Christmas season and school opening. Workers are hired on a piece-rate basis, as most manufacturers cannot afford to employ workers the whole year. A major area of concern for the sector is the sourcing of raw materials. The country does not have a competitive tanning infrastructure that processes semi-finished or finished leather hides. Therefore, procurement of leather and shoe-related components such as shoe lasts, heels, counters and top lift are sourced abroad. Almost 80% of these items are not locally available and are generally imported by the manufacturer. Major firms in the industry normally produce their own brands and may manufacture a name brand. Some firms

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use sub contractors for various stages of the production process. These companies undertake direct or in-house production but may also use subcontractors to manufacture footwear that are labeled with their own brand. Another type of manufacturer engages in contract manufacturing of a foreign brand for export. Some producers are known as manufacturer/suppliers, whose production facilities are contracted by another manufacturer. Other players in the industry are traders with their own brand names. The latter group does not engage in any direct production but contracts with either a manufacturer/exporter or a manufacturer/subcontractor to produce the goods. The distribution network of the sector is multi-faceted. It may include stand-alone boutiques in shopping malls or concessionaire setups inside major department stores. A recent trend initiated by an independent cooperative organization, Sikap Mo, Inc., is the networking-clustering system. The system entails subcontracting the manufacturing process to a select group of qualified manufacturers (mostly small or micro small firms) within a framework of strict standards. The organization then undertakes the marketing of designs to target buyers.

VALUE CHAIN ANALYSIS

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Process Flow in the Industry

Production of footwear starts with the sourcing of leather, accessories and components from accessible suppliers. In the footwear industry, the suppliers include leather tanners, shoe-last manufacturers, shoe-component manufacturers and accessories manufacturers/suppliers (they are also referred to as shoe-supplies stores/ importer-traders). Leather footwear use either genuine or synthetic leather. The type of hide and finishing or tanning determines the value of the leather. Surface skin has a higher value than the section taken from the middle of the hide. Other shoe components procured include insoles and outsoles made of different materials such as rubber, pvc-plastic and polyurethane. Soles can be purchased in molded sole form (most commonly used), pre-trim sole (which comes in standard sizes of small, medium and large), and sheet sole (uncut). Shoe lasts are obtained from both local suppliers and importers. About 70% of the shoe manufacturers use wooden lasts. Only 30% use plastic shoe lasts due to its higher cost. Materials such as chemicals, buckles, threads, foam, etc., are sourced from various shoe supply stores. Samples of materials for product development are initially obtained by the shoe manufacturer. Development of samples

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does not usually involve creating an entirely different design concept, but is merely a revision of existing designs sourced from magazines, retail stores and other sources. After an order is confirmed, procurement of materials begins. Production is either in-house or through subcontractors. Patterns and lasts are made before the materials arrive to save time. The initial steps include pattern-making for the uppers, covering all required sizes; then, materials are cut according to the pattern. All of the work is done manually by most manufacturers, except in cases where orders are large. The process is labor-intensive, involving local craftsmanship aided by machines at certain stages such as skiving and sewing. The next step is the assembly process, which puts all the parts together. Then the shoe is taken for roughing and finishing. At the end of the production, another person conducts quality control and remedies any perceived defects. Complete production of one pair of shoes normally takes two days. A typical footwear firm using manual production produces an average of 1,000 pairs per week. This volume can increase to 3,000-5,000 pairs per week with semiautomated processes.

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The Footwear Value Chain Diagram

Given on the next page is the value chain diagram for the footwear industry. This diagram applies to the sector as a whole and was based on research materials on the industry, as well as interviews with several companies.

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Key Findings from the Value Chain Analysis

The value chain analysis of the footwear sector gave rise to certain significant concerns in the sourcing of raw materials, particularly the sourcing of leather hides, and in the nature of the production process. Local leather is still not of the desired quality and price for the sector, so the sector relies on imported hides. There are also some issues in the manufacturing process that affect the quality of the finished product. These include the widespread use of wooden rather than plastic lasts, the lack of worker skills and inadequately updated facilities. The industry also has difficulty developing a standard sizing system for their products. Shoe sizes vary, depending on the specifications followed by manufacturers. The industry has tried to address some of their technical concerns by establishing a Footwear Academy. This institution focuses on skills training to upgrade the level of workers capabilities. The Marikina footwear sector has also established a marketing group to promote one common brand or image for the entire industry. Both are relatively recent undertakings by the sector and would need sustained support. More details on the value chain of the sector are presented

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in the following table. This table provides the findings together with the concerns about these issues and some recommended measures to address them.

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NEEDS ASSESSMENT OF THE SECTOR

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6
NEEDS ASSESSMENT OF THE SECTOR
The value chain analysis of the local footwear sector has identified some issues and needs of the industry. They are as follows:

Inbound Logistics y The industry needs a reliable source of good quality

leather hides. At present, local hides are not up to the standards required by the footwear sector in terms of quality and price, so producers have to rely heavily on imported leather.

y The cost of chemicals and other supplies for treating

local hides is quite high. Prices for these materials must be lowered.

y Importation procedures for raw materials and other

components take too much time and effort because of bureaucratic procedures. Representations must be made with government in order to streamline the importation process.

y There is a need to develop the shoe component industry,

which provides the needed accessories for footwear

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manufacturers. At present, component parts of the right quality and price are sometimes difficult to source locally.

y Tariffs and duties on imported shoe components are

relatively high. Again, representations must be made with the government to settle this issue.

Operations y The technology used in the industry is outdated and

technology adoption rate of new technologies by producers is low. Efforts should be made to accelerate the pace of technology adoption among shoe manufacturers.

y Lack of production specialization among workers leads

to inefficiencies at some stages of the manufacturing process. Continuous training in key areas of production is needed to upgrade specific worker skills.

y Research and development activities on products must

be expanded. Currently, research work is limited and not sustained on the industry level.

y Production planning procedures are inadequate.

Companies should develop skills in planning manufacturing operations and adopt a systematic approach for managing production activities.

y The industry suffers from low worker productivity and

NEEDS ASSESSMENT OF THE SECTOR

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efficiency. Aggravating this situation is the strong resistance by labor to changes proposed by management to correct this problem. This situation needs a well planned program of value formation, change management and productivity improvement to overcome worker resistance and institute needed reforms on the shop floor.

y The industry suffers from high operating expenses,

particularly for electricity and other power costs. Producers must find ways to manage their operating costs more effectively.

y Product standardization is lacking. The fit of shoes for

a given size can vary among the different manufacturers, since there is no common standard. Most producers usually conform to the specifications set by their buyers, but the industry needs an appropriate set of standards for all producers to adopt and use.

y The shoe industry as a whole needs a comprehensive

training program, especially on the standardization of procedures for shoe manufacturing. This will facilitate the use of modern technology and accelerate the learning curve for workers.

y The sector has to increase the available pool of skilled

manpower. At present, there are few labor entrants with the right kind of skills.

y The working environment for production, especially

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among the smaller producers, need to be improved. Facilities and operating conditions should be upgraded. Such an effort will also contribute to workers well being and productivity.

y Producers should upgrade their management knowledge

and skills to be able to put in place a more systematic work process and improve workflow.

Marketing and Sales y Marketing should be focused through product

specialization. Not only will this conserve marketing resources and efforts, but also allow more sustained development efforts in specific areas.

y A brand identity will facilitate product promotions to

target buyers. It will create a common image for local footwear, especially in the export market.

y The current distribution system for the local market

needs improvement, especially among small producers who cannot afford to open their own boutique stores or rent spaces in malls.

y There is lack of any sound pricing policy for the industry.

A suitable pricing structure should be developed, based on product lines and target markets.

y Exporters in the industry do not have a comprehensive

marketing plan to boost sales abroad, as well as deal

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with competitors. A strategic marketing plan is needed to guide promotional efforts and direct resources at specific targets.

y The industry needs to find a way to quickly deal with

the problem of cheap footwear imports, mainly from China, which are eating into their share of the local market. The sector has to adopt measures to prevent any further loss of market share and increase their competitiveness over the long term.

Services y The inconsistent sizing system in the industry requires

good after-sales service to deal with customer complaints on shoe size problems. This is needed particularly for high-end products promoted and priced on the basis of their quality.

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PROPOSED AREAS FOR INTERVENTION

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7
PROPOSED AREAS FOR INTERVENTION
Based on the analysis of the needs of the industry, the following measures and activities are recommended:

1. Simplify importation procedures for raw materials

To address the need for competitively priced raw materials, the industry should adopt an integrated approach on simplifying the importation procedures for leather and footwear components. This will facilitate the entry of rawhides, skins, finished leather and accessories with the desired quality. To achieve this, there is a need to maintain continuous dialogue and advocacy with the government.

2. Encourage consolidation of raw material imports

Given the volume of materials and components bought by footwear producers from abroad, it may be practical to consider a consolidation of their orders. Bulk importation can reduce per unit cost and limit the amount of time and resources spent on this process. The industry should consolidate import requirements and coordinate delivery

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schedules with the inventory and production of manufacturers.

3. Provide support to shoe-component suppliers

To augment the local supply of hides and components, there should be institutional support for producers of these items. This would include increasing their access to affordable credit and containing technical smuggling of shoe components from abroad. Collaboration and trading with transnational companies supplying footwear components should also be encouraged with the objective of establishing joint ventures or investments in the country.

4. Develop reliable sources for raw materials

Over the long term, there must be serious efforts to develop the raw material base for leather while exploring alternative indigenous raw materials that can complement, supplement or substitute for leather. This would require research and development work, as well as forging linkages with groups working on alternative or substitute materials. Specific agencies such as the Department of Science and Technology and the Fiber Development Authority are some possible sources of information and research work. The leather tanning industry would also require sustained support in terms of new technologies and production systems to bring

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their products up to the standards desired by the footwear manufacturers. The leather tanners should coordinate closely with the shoe industry for their specific quality requirements and should anticipate changes in specifications of leather materials.

5. Implementation of proper standardization among shoe-last producers

Standards should be set for manufacturers of shoe lasts, in order to develop a consistent level of quality for their products. Specifications for shoe lasts should meet the needs of footwear producers. Shoe-last producers would have to upgrade their facilities and technology to conform to the changing needs of the industry. Other components (heels, insoles and outsoles) would also benefit from the standardization of shoe lasts.

6. Encourage the use of more plastic shoe lasts

Since a plastic last is more reliable than a wooden one for setting footwear sizes, the use of plastic lasts needs to be more widely adopted in the industry. To offset the high cost of plastic lasts, efforts should be made to attract more firms to invest in this business. The footwear sector should coordinate with government to make shoe-last investment a priority area.

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7. Make technology transfer and facilities acquisition easier for small firms
A program should be established to allow micro and small enterprises in the footwear industry to obtain modern tools and equipment at affordable financing terms. Guarantees by either the local or national government can be worked out to support this program. In addition, technology transfer from larger firms in the industry to smaller subcontractors should be sustained. The sector needs to expand present levels of cooperation and linkages among producers to accelerate the technical capabilities of smaller companies.

8. Improve and upgrade skills of workforce

The recent establishment of the Philippine Footwear Academy (PFA) is a favorable development for the local footwear industry. The PFA, together with the Cottage Industry Technology Center (CITC), an agency under the DTI, should take the lead in rehabilitating the skills and values of the present labor force in the industry. A consistent flow of training programs in modern skills and techniques, business values, work ethics and related concerns should be maintained for the workers. The programs must also take into consideration the multi-faceted training schemes of workers, as the industry practice requires workers to be aptly skilled in one or two processes, while supervisors must be able to shift from one production process to another.

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Training programs must cover the whole spectrum of shoemaking operations including shoe-last technology, raw materials preparation, sizing, grading, cutting, uppermaking, skiving, stitching and assembly.

9. Undertake entrepreneurial and management training for producers

The industry should provide adequate training programs for their supervisors, middle and top level managers. The objective of such programs should be to professionalize the management of shoe firms. Given the work load of these personnel, training can be modular in structure and provided during off-hours. Among the topics which can be covered are: operations planning, marketing, labor management, inventory control and financial management. For owners of micro and small firms, who usually operate as subcontractors, courses in entrepreneurship can be offered to provide them with the knowledge and skills to expand their businesses.

10.Develop specific market niches

Given the influx of cheap imported footwear from China and nearby Asian countries, the industry should reassess its market and focus on certain segments in which it can compete successfully. There may be opportunities in the market between the extremely low-priced goods of low

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quality and the high-end imported American and European branded shoes. The niche in the local market is within a price range of quality leather footwear between US$ 18.00 US$ 80.00, perfectly crafted, using primary leather hides and imported shoe components. For the global market, the industry can focus on their design and craftsmanship and avoid competing based on price alone.

11. Sustain the branding concept for the industry

The present branding for local footwear, initiated by Sikap Mo, Inc. and supported by the PFFI, should be maintained. A local brand provides a competitive advantage to producers and can eventually be used to launch a distinctly Filipino image in the export market. Adequate promotional efforts and programs to project a quality image should be implemented consistently.

12.Develop an industry price structure

The development of an industry-accepted pricing structure for different footwear products is also recommended. This could be implemented through an actual cost study analysis of the production setup of the industry in order to establish the range of pricing, given the setup of the producers. A systematic pricing policy can help maintain profitability and allow more effective responses to changing market conditions.

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13.Continue support for exporters

A small group of manufacturers who are already in the export business, the Marikina Council of Fashion, should be assisted and supported by both the local and national governments in their quest to promote Filipino-made shoes in the global market. Specific areas of assistance include support for the participation of the group to foreign footwear exhibits or the conduct of a focused selling mission abroad. A well planned promotions program should also be developed for the group.

14.Strengthen institutional support for the industry

A cohesive network among the footwear industry and national government offices should be supported to facilitate the industrys access to information and programs relevant to their needs. In particular, footwear producers could benefit from closer linkages with such offices as the Fiber Industry Development Authority (FIDA) of the Department of Agriculture to develop locally available materials that could be used as alternatives to leather.

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ANNEXES

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ANNEXES

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ANNEXES

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Annex 1 Value Chain Analysis as Used in the Sectoral Enhancement Component of Pearl2 The Value Chain Concept
Value chain analysis is a method for identifying and understanding the various activities of an organization that provide value to its products or services and the linkages among such activities. It is used to determine which aspects of a firms operation can be enhanced, where to reduce costs, optimize resource use, or even reconfigure the entire chain of operations for better performance. The end result of this effort is increased product or service value, lower costs of operation or both. A value chain covers of two sets of activities. The first refers to the primary activities of a firm and consists of inbound logistics, operations, outbound logistics, marketing & sales and service. These are the activities that organizations engage in to produce a product or service. The second set covers support activities that indirectly contribute to the firms operations. These include organization infrastructure, human resource management, technology development and procurement. All these activities are linked together and work in a process

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which can be structured into a value chain diagram. A firms value chain can also be linked with external chains such as those of its suppliers or buyers.

Value Chain Analysis in Sectoral Enhancement

An adaptation of the generic value chain described in Michael Porters book, Competitive Advantage, was used to analyze the structure and performance of industries or sectors covered in Sectoral Enhancement. Originally, the value chain was designed for company-level evaluation. In the Pearl2 project, however, it was used to develop a framework for understanding how a particular industry operates with the objective of determining the needs of that sector. On the basis of such needs assessments, it is possible to identify areas where appropriate assistance can be provided. Basically, work on the sectors included designing the value chain diagram, developing a table describing the main components of the value chain and analyzing the flow of the chain to identify issues, problems and recommended courses of action. Such an assessment brought out the needs of the sector and allowed closer evaluation of them. The value chain analysis focused primarily on producers who are members of the Business Support Organization (BSO) identified for the sector. The analyses are not by any means comprehensive and

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do not involve any cost estimates for the chain or a comparison of the industry value chain with similar structures in other countries or regions. No references were made to external value chains. Time and resource constraints did not permit such additional work.

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ANNEXES

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Annex 3 Brief Background on the Philippine Footwear Federation, Inc. (PFFI)

The Philippine Footwear Federation, Inc. (PFFI) was established on December 20, 1992. Formerly known as the Marikina Footwear Federation, Inc. or MFFI, the federation was founded through the joint efforts of Architect Tereso V. Pasco, Sr., the late Mr. Rogelio G. Villareal and Mr. Renato A. Florencio after a meeting attended by various NGOs, civic organizations, cooperatives, trade associations and various footwear manufacturers in Marikina. The PFFI is composed of footwear manufacturers, retailers, cooperatives and allied industries. At present, the organization has about 63 members. The majority of the members are from Marikina, Laguna, Bulacan, San Mateo and Cebu. Most of the members are classified as small and medium enterprises (SMEs) and are often family-owned. The PFFI is currently manned by a Director General with two staff members, an Assistant Director General and a clerk/messenger. From 1993 to 1998, it was the MFFI that provided the footwear industry with training, seminars and workshops on the various aspects of footwear making. The federation

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also helped to establish the Footwear Productivity Center (FPC) and the Footwear Industry Promotions Building (FIPB). FPC is now named the Philippine Footwear Academy (PFA), the first and only footwear school in the ASEAN Region. The PFA is located within the premises of the Cottage Industry Technology Center of the Department of Trade and Industry (CITC-DTI) in Marikina. The idea behind establishing the PFA was to provide the industry with technology transfer, skills training, technical consultancy services, as well as a common facility for services. The Leather Footwear Industry Master Plan. which was prepared in cooperation with CITC-DTI, provided the basis for the PFA. The CITC also provided the Computerized Shoe Pattern Engineering (CAD/CAM) System, now housed at the PFA, which provides fast and cost-saving shoe patterns for the use of the shoe industry. In addition, the FIPB was established as a onestop shop for all information relating to footwear, which included a display center, as well as the head office of the federation. In 1999 the MFFI, as a new member, participated in the 18th Asian Footwear Conference held in Vietnam. That same year, in its effort to revitalize itself in order to provide more services to the majority of footwear manufacturers and its allied industries, the federation called an assembly of shoe manufacturers to discuss current issues concerning

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the industry. During the meeting it was agreed that in order to attract membership from other parts of the country, the word Marikina of the MFFI should be changed to the Philippine Footwear Federation, Inc. (PFFI). Thereafter, an agreement was signed by all participants to signify their commitment to support all the endeavors of the PFFI. The PFFI hosted the 20th Asian Footwear Conference on July 26-27, 2001 at the EDSA Shangri-La Plaza Hotel, Manila. Footwear manufacturing associations from China, Hongkong, India, Japan, Korea, Malaysia, Taiwan, Thailand , Vietnam and the Philippines came to discuss the policies, issues and concerns of the footwear industry in the region. Now the PFFI is internationally recognized as a footwear industry association and is a trading partner of the Footwear Distributors & Retailers Association of America and the Apparels and Footwear Association of America.

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Annex 4 Brief Background on Sikap Mo., Inc.

Sikap Mo, Inc. is a joint venture of companies comprising the Marikina shoe industry. The group aims to make the footwear sector become more competitive and win back the local market share it has lost to imported shoes. Sikap Mo pools together the resources of its members in an association in order to achieve the following objectives:

y Re-engineer the Marikina shoe industry by introducing

more efficient manufacturing and updated marketing methods. It is determined to retrain the whole shoe industry, from the factory workers to the owners.

y Create an exciting collection of comfortable, durable,

fashionable and affordable genuine leather shoes.

y Build a unified brand name Marquina through

advertising and promotions.

y Launch a collective selling effort to retail and wholesale

companies nationwide. Sikap Mo has 62 members. The organization has undertaken an aggressive project to improve the quality and promote the products of the Marikina shoe industry by focusing on the following aspects: 1. Selling the project idea and forming the corporation 2. Designing the products and improving marketing

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3. Advertising and starting to sell 4. Manufacturing of products according to manuals 5. Delivery on time without quality problems To date, Sikap Mo has reached the second stage, which involves training in shoe production (including advanced shoe production) and marketing. Recently, the group also launched the Marquina brand, which aims to create a prestigious image in the shoe sectors market. The activities of Sikap Mo have received wide support in the media, as well as from celebrity endorsers.

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Annex 5 Carcar United Footwear Manufacturers Association, Inc. (CUFMAI)

Fifteen shoemakers from Carcar, Cebu decided to come together in August, 2001 and organize themselves into a non-profit, non-stock association. On October 4, 2001, the Carcar United Footwear manufacturers Association, Inc. (CUFMAI) came into existence legally under SEC registration no. C200100989. The association seeks to deal with the fast-paced changes affecting the footwear industry, which include technological innovations, market competition, flooding in the local market of low-priced shoe products from China and Vietnam, as well as the pirating and migration of laborers. The vision of CUFMAI is stated as follows: To become a dynamic association recognized as a major change agent in making the footwear industry in Carcar, Cebu, globally competitive by effecting structural changes and making strategic alliances To achieve these aims, the group plans to undertake the following:

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y Enhance the entrepreneurial/managerial capability of

the members thru the conduct of training, seminars and workshops

y Facilitate technology transfer programs in order to

upgrade the technical skills of the members

y Network with financial institutions for resource

generation

y Establish a production center to house a common service

facility for the benefit of other members of the association

y Establish a marketing/display center to showcase major

product lines of the members

y Secure accreditation with the appropriate GA/LGU/

Federation necessary in establishing local and global linkages In partnership with government, the association will look into and interpret the changes facing the industry, and provide direction to the industry on how to position themselves in the global arena. About two years ago, the association held a workshop to create their development plan, the CUFMAI Development Plan, which would serve as its guide for the next three years. The Association has been chosen as one of the beneficiaries of Isang Bayan, isang Produkto, Isang Milyung Piso

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program of the Department of Trade and Industry in coordination with the Cebu Provincial Government. The DTI has provided numerous interventions to the organization, including technical training, organizational strengthening, financing and market matching, and business linkages to affiliate associations.