Located among the hills and caves of Guanghe County in the north of China, the Gansu Hongliang wet-end tannery employs 300 people in a newly built facility. The company’s focus is almost entirely on making upper leather for women’s fashion footwear and the company enjoys strong ties to some of China’s most prominent footwear brands.

Li Chen, chairman of Gansu Hongliang Leather Technology Limited, is a veteran of the hard but noble work of collecting hides from the cattle farmers spread across the expanse of China’s north-west. Strictly speaking, his base 100 kilometres from the old Silk Road city of Lanzhou, capital of Gansu province, is in the geographical centre of the country, but it’s always referred to as the north-west. The Gobi Desert begins a few hundred kilometres to the west, and there are road signs on new, impressive toll-controlled highways for Lhasa, capital of the remote autonomous region of Tibet.

Farmers here are used to harsh conditions, but are willing to sell their cattle hides to people they know and trust, people who understand their culture, people who pay cash most of the time. Li Chen’s name began to resonate with them 20 years ago when he first arrived here, bringing eight years’ experience of trading cattle hides across China. A Muslim like many of the people in this region, he quickly built a reputation for fairness and for reliability and became a dominant player in gathering hides from Gansu, as well as from neighbouring provinces in this area, which has a large share of China’s total usable, for livestock rearing purposes, grassland, and of its cattle population (around 130 million in total, according to the UN Food and Agriculture Organisation).

After years of selling the hides he collected to tanneries in the region (of which there were once at least 40) Mr Li decided to set up his own in 1997, and Gansu Hongliang Leather Limited was established in Guanghe County, part of the Linxia Hui autonomous prefecture set up for Muslim people in the region. An important part of his motivation, he says, is that he wanted to create jobs there and to help Gansu and the surrounding provinces add as much value as possible to the raw material on their doorstep.

The original tannery became too small in the second half of the last decade and work began on a new, bigger building in 2008. Production in this second-phase of the facility began in June 2010. About 100 local people made up the original Hongliang workforce; now the company has 650 employees and is turning over a sum of around ¥300 million ($46 million) a year.

Another major change that the business has undergone has been to carry out crust and wet blue production in Guanghe, and transporting the hides at a skilfully negotiated preferential air-freight rate to Guangdong Province in the south of the country, to a finishing plant Mr Li built there, in Jiangmen City, in 2006. He has negotiated the special price of RMB ¥1.8 (less than 30 US cents) per kilo in weight, which works well because, by the time the tannery has turned a raw hide into crust, its weight can easily fall from an initial 25 kilos to just two. So a crust hide costs Li Chen less than ¥4 (just over 60 cents) to air-freight down to Guangdong, when the standard rate would be closer to three times that amount. The air freight company drives from Lanzhou airport to the tannery to collect the cargo, with a driver from the finishing plant meeting the plane at the other end; it’s a distribution system that works well and gives Hongliang a competitive edge, the chairman feels.

In touch with fashion

Chinese expertise is also welcome in this regard, with speakers from the country’s two universities with a major interest in leather production—Sichuan University and the North West Institute of Light Industry in Xianyang—also regular attenders at Hongliang. These links to the universities have proved to be a good source of technical talent for the tannery; Guanghe may be remote for people from many parts of China, but those in the know in the leather industry recognise it to be a good place to work and there has been no shortage of graduates willing to work and develop their careers there.

Customer knowledge

On the customer side, the biggest and best are good at providing samples of the leathers they require, but the tannery also carries out its own research and has the freedom to make its own suggestions to these important players.
Five hundred of Mr Li’s employees are in the south, more than in the wet-end plant at Guanghe. It was a move that was two years in the planning before the move in 2006, and it has proved visionary, so much so that Li Chen says now that he wonders if Gansu Hongliang Leather Limited would otherwise have come through the enormous changes that the Chinese domestic footwear industry has experienced in the last five years.

He harbours a suspicion that the Gansu operation on its own might have been too remote, at a distance of 2,000 kilometres, from the company’s clients to be able to keep developing at the same pace as they are. Moving the finishing plant to a distant and very different part of China was a big decision for Mr Li, but he carried out his research carefully and soon felt sure he had made the right choice.

Developments in the north

The plant in Guanghe County also has customer requirements at the forefront of what it does. Recent demand from footwear groups such as Aokang and Belle for ammonia-free liming, for veg- and semi veg-tanned leathers necessarily affect the work that goes on there. Growth in Guanghe is fundamental to the company’s ambitions. Construction of a third phase of the Guanghe tannery is already planned and will include a finishing operation. Around 30% of the company’s finished output is black leather. The plan is to produce standard black shoe upper leather in Gansu Province and have the company’s southern resources concentrate exclusively on other fashion colours and special fashion finishes, either in response to ideas that customers want to try out, or to carry out firmed-up design decisions. 

However, for black shoes and boots, Mr Li is convinced it will make commercial sense to produce the finished leather in Guanghe, where labour and the cost of doing business are cheaper. The location in the north is good because a substantial proportion of China’s raw materials are here, which makes you wonder why other tanning groups across China have so far failed to move in on the action. There are new highways and new high-speed rail links across the region are under construction. Lanzhou airport has good connections. However, this is a land of traditional values and Mr Li places great store in the relationships he has spent a business lifetime building up. Other tanneries coming to the region would find it tricky to call on farmers and try to collect hides from them. They already have a buyer for their hides, one who has been knocking on their doors for decades, paying them what they regard as a fair price, usually in cash. Any other leather producing companies that are active at the moment are working through agents, he says, which means that even those that are able to stake a claim for some of the local raw material are paying a premium, putting themselves at a price disadvantage compared to Hongliang Leather. For many of those operating close to eastern and souther seaports, it’s probably a lot easier to bring in hides from Europe, Brazil or the US.

If you take everything into account—labour, energy, transportation costs for raw material and so on—the cost of production in Gansu Province, compared to Guangdong, is lower, in Mr Li’s estimation, by a factor of ¥0.7 per square-foot of leather, taking into account that Hongliang’s output is for women’s shoes, which usually cost more and use less material than men’s. Women love shoes and are prepared to pay a higher price for them; it’s the way of the world.

Debate about domestic market size

The domestic women’s footwear market in China is a fine segment to be focused on right now. This is an ongoing debate for us, and even the China Leather Industry Association has admitted that it finds it difficult to piece together a completely reliable picture of footwear consumption in China, but the organisation’s president, Madam Zhang Shuhua, said towards the end of last year that she felt an average across the nation of 1.5 pairs per year was probably accurate at the moment. However, she said her organisation expects that figure to double in the coming years. A doubling of the consumption of shoes in China, with its population of 1.3 billion, has huge implications for raw materials, tanners and footwear manufacturers everywhere. It means the global footwear industry will soon have to find a way of sourcing enough raw materials, including leather, to supply China with an extra two billion pairs of shoes a year.

Li Chen’s take on these figures is interesting. He anticipates that demand will double and has been trying to stock up on raw material for about a year and storing it so that he can take in his stride any sudden rush for leather on the part of his customers. His store of wet blue and crust is “maybe the largest in China”, he says. His area of expertise is shoe uppers for the women’s market. According to the research he has carried out—which he says is extensive—today, in China’s cities, the average woman buys five pairs of shoes and two pairs of boots each year: three pairs of shoes for spring and summer, plus two and two pairs of boots for winter. In the countryside, things are different, and two pairs per woman per year is the figure for footwear consumption that Li Chen believes to be accurate. Nevertheless, seven pairs of footwear for each female member of the urban population is a huge figure.

For illustrative purposes, the CIA World Factbook’s figures for 2007 suggested the male population of China was slightly larger than the female. It also suggested an urban population across China of 562 million people (42.3% of the total population). If we assume, stressing that this is for illustrative purposes only, that the proportions of men and women are the same among the urban population as in rural communities, we could put the number of Chinese women living in cities at more than 272 million. Li Chen says they are averaging an annual consumption of seven pairs of shoes and boots each, giving a total of 1.9 billion pairs. It means that, if he’s correct, the overall consumption figure for China must be much, much higher than two billion. It’s almost two billion before any men or anyone living in the country buys any shoes at all. Those same CIA Factbook figures give a rural population of 767 million. And, making the same assumption as above about urban and rural populations having the same proportions of men and women, the male urban population is around 290 million. At a conservative estimate, we could examine the effect on the overall figures of rural people buying one pair of shoes per year and urban men buying 1.5 (clearly very conservative numbers). This would add 1.2 billion to the total and put China’s total footwear consumption today at 3.1 billion pairs a year, a billion more than many industry observers believed until now. Play with the numbers further to put rural consumption at 1.5 pairs per year and urban male consumption at two pairs per year and you have a total that is closer to 3.5 billion pairs.

Mr Li thinks the figure of seven pairs per prosperous city woman per year is unlikely to go much higher, say between now and 2015. However, people in smaller towns, influenced by friends and family or by people they watch on television or see in magazines, will imitate them and growth of the overall total is certain to come. The idea of the total doubling still resonates with him strongly; it’s just that the base his calculations start from is substantially higher than the figures we have seen until now. He consults frequently with big footwear companies that concentrate on China’s domestic market and says their projections tally with his. They are opening new shoe stores right across China and selling more shoes online. Perhaps it’s a good job he has been stocking up on raw materials. The Hongliang chairman is confident enough of ongoing strong demand and of future success to be preparing to float on the Shenzhen Stock Exchange in 2012. Between eight and ten large footwear manufacturers are preparing similar moves; as a partner working as closely with them as it can, the Hongliang Leather Technology Company believes it can follow suit.

Local authority support

The company believes it has backing from the local authorities for its ambitions, and the evidence is compelling. Within sight of the Guanghe tannery, a new raw materials centre is being built. It is one of five facilities that the public sector is building and will run across this region. There will be an abattoir and facilities for pickling and distributing cattle hides. Li Chen’s belief is that this new set-up will allow his company to consolidate its “dominant position” as the main collector of these hides, help it keep its prices down and keep its major footwear customers buying.

Good relations with the authorities have earned the tannery the right to take water for production from the nearby Tao River, a tributary of the great Yellow River, which flows through this region. The company has its own purification plant at the entrance to the tannery site.

Raw hide consumption at the Hongliang tannery averages 3,000 per day, although at peak production times, which the company says are in April and July to meet manufacturers’ seasonal surges, this can rise to 6,000 hides per day. From this, the company makes a daily average of 150,000 square-feet of leather. The target for 2011 is 50 million square-feet. At the moment, only 5% of raw materials come from outside China. Li Li Chenkes the quality of hides he imports through an agent in Hong Kong from the United Kingdom because, he says, the grain works particularly well for women’s shoes.

Hongliang Leather Limited has been the recipient of a long list of local, regional and national awards, ranging from certificates from a bank confirming AA+ credit status to confirmation from the China Leather Industry Association that the company is one of the top ten leather producing companies in the whole country for 2011.

Most of the people, between 80% and 90%, who work at the Guanghe facility are local, but the site is far enough from Lanzhou and other major centres of population for a 500-bed workers’ dormitory facility to be popular. The staff canteen, which serves breakfast, lunch and dinner, is well regarded and the food is free. The main administration building has accommodation for managers on one floor, comfortable rooms with private bathrooms. The company insists that all employees receive good salaries and other benefits, including health insurance. Sundays are work-free, allowing those workers who are within touching distance to visit their families. For some, perhaps 10%, who come from other provinces, visits home have to wait for official holiday times such as Chinese (Lunar) New Year. According to state law, workers are entitled to seven days’ holiday at New Year, but it is company policy at Hongliang Leather to offer more, to give workers more time at home, work permitting.

Back at the tannery, there are facilities for basketball, table tennis and cycling, and groups of workers gather for tai chi, singing, drawing and painting. The company has multimedia training resources that it makes available to workers who want to further their careers, and there are bonus payments for people who achieve good qualifications. According to the company, all of this combines to make a business that the employees believe in, and they want to share in its future success.

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