SHOE PRODUCERS SCARED BY IMPORT DUTY CUTS
Last week, Russian footwear producers' desperation reached new heights - they sent a telegram to Prime Minister Mikhail Fradkov and an open letter to President Vladimir Putin, asking them to let the current customs duty on footwear imports stand. On July 1, the government plans to slash the duty, by as much as 40 percent in some cases. This is just the beginning as Russia braces itself to enter the World Trade Organization (WTO). Last month, Russia's Economic Development and Trade Ministry said that in 2011 customs duties on footwear imports would be halved and completely scrapped for some product categories. Producers believe that this will lead to a boom in imports,destroying the domestic footwear industry which has only just managed to regain some lost ground.
A Shoe That Doesn't Rub
A brown shoe sits on the desk of Andrei Berezhnoi, the creator of Russia 's Ralf Ringer footwear brand. It's this model that made the company's name in the market. The secret of its success is the combination of classic and modern features - it was fashionable 10 years ago when the brand was entered the market; and it is still popular today. Asked about his own preferences, Berezhnoi raises his foot so I can clearly see the company logo on the sole - it's a Ralf Ringer.
"You need to be wearing the shoes you manufacture to understand their advantages and disadvantages," he says, adding that he tests the company's ambitious slogan "Ralf Ringers Don't Rub" every day with his own feet.
The German-sounding brand name was picked in the light of Russian consumers' mentality in the 1990s when domestic products were largely shunned. Today, Ralf Ringer men's shoes successfully compete in the mid-level price segment of the market with West European brands. Why only men's shoes? Because women's collections have to be renewed every season, whereas men's only require a 50 percent recast twice a year. The director's philosophy is very rational: If a product's top commercial feature is its functionality, why pull last year's best-selling items off the market?
Interestingly, only 30 percent of the 2,500 components used to make Ralf Ringer's fall and winter collections were supplied by Russian producers. The company has partners in Italy , Germany , Brazil , Taiwan , India , China and Turkey . Yet the shoes "Rolling the Earth" (according to an advertising slogan) are a Russian product. The company employs domestic designers, chemists and other specialists who have been with it since day one and are the core asset of Berezhnoi's business. It was they who learnt to make a European-quality shoe for the Russian market; and invented a shoe using a straight-cast method with a thermopolyurethane-based sole that never wears down.
He started 15 years ago with a trial batch of 19,000 pairs made at Moscow 's Burevestnik factory. Today, Ralf Ringer holds the "Brand of the Year" award and Berezhnoi owns three factories in Moscow , Vladimir and Zaraisk that employ 3,000 people. When I ask him why he doesn't move production facilities to China , he replies: "That's not interesting." Remembering his early entrepreneurial days, Berezhnoi recalls shuttling to India to buy boots and then selling them at Moscow 's Luzhniki outdoor market. Soon, he got bored with that. Today, when a million pairs are not enough to cover his dealers' demand, Berezhnoi again refuses to follow the crowd. Instead of setting up production in a country famous for its cheap labor, he believes that "domestic manufacturing is a point of resistance to China".
"Our company should be regarded as some kind of a beacon, at which people look and think: ‘Maybe it will work out!' This is a heavy burden, but someone's got to carry it. After all, there are always individuals and teams of people behind dream ideas. Would the Renaissance ever have taken place in Italy without Michelangelo or Lorenzo the Magnificent? I doubt it."
Tax That Cuts Both Ways
The other romantics whose dream about reviving Russia's footwear industry include the directors of the Yegoryevsk factory producing children's footwear, the Chelyabinsk-based Unichel factory, the Tula factory and many factories in the so-called ‘Rostov cluster'. They all make good quality products that meet global standards. However, there are also a number of top managers whose business practices have not changed since the Soviet days of command economy management. Such businesses and their obsolete products discredit the concept of ‘domestic industry'; and are the chief counterargument offered by import lobbyists and the so-called ‘system companies' (Econika, Tervolina, Alba, Carlo Pazolini and others), which outsource production abroad.
"I can hardly find one good word to say about the domestic footwear industry," Natalia Demidova, general director of the National Footwear Manufacturers Union (NOBS), told The Moscow News . Whilst that may sound contradictory given her union's name, NOBS is actually mockingly dubbed the ‘Chinese Footwear Manufacturers Union', by Russian shoe producers.
But Demidova doesn't take offense. "We badly need Chinese footwear. Domestic production only covers 16 percent of national demand. Moreover, in the low-price niche, we are completely uncompetitive. Any old granny today can tell you that an ugly-looking pair of black slippers doesn't mean comfort".
According to Demidova, Russia 's shoe industry will disappear not because of imports, but because manufacturers are failing to certify their products in compliance with world standards. "They have had plenty of time to do it, at least 10 years. If they start manufacturing good-quality products, the industry will survive", - she says.
Two years ago her union was the main lobbying force behind the Russian government's decision to temporarily reduce the customs duty on footwear imports: since January 1 2006 , it has been 10 percent (but not below 1.8 euros) per pair of leather shoes. Demidova insists that this decision helped to increase the volume of legal imports almost four-fold last year, providing an extra $200 million in budget receipts and contributing to a 14-percent growth of domestic footwear production.
These figures eventually prompted the Economic Development and Trade Ministry's expert group to propose making the duty cutbacks permanent from July 1, 2007 . The only objection came from the Industry and Energy Ministry, which believes that import duties shouldn't be reduced until Russia actually joins the WTO to avoid federal budget losses of 450 million euros. But Demidova is undeterred.
"We don't intend to wait for WTO entry", - she said. "We will push for import duties to be reduced to zero".
The NOBS head does believe that domestic production should meet 30 percent of internal demand, targeting primarily the children's footwear segment where Russia has achieved notable success.
Resisting foreign competition
"Domestic footwear production has indeed grown, but not because of import duty cuts - that is ridiculous," says Alexandra Andrunakievich, managing director of the Russian Tanners and Footwear Producers Union (RSKO). "There are a few companies that have driven this growth. What are they after at NOBS? Having us go bankrupt?"
It was RSKO which appealed to Fradkov and Putin. The Russian producers are outraged that they weren't even invited to the meeting of the governmental working group where the final decision to slash the duty was made.
"We are not against imports as such," Andrunakievich says. "Indeed, there are niches in which Russian producers are uncompetitive - for example, women's high-heel shoes. But there should be equal conditions for all. Judge for yourself - the capacity of the Russian footwear market is huge, approximately $10 billion. Living standards are improving, consumption is growing, so logically production should also grow. However, it's almost at a standstill because of the pressure of imports, which grew by 54 percent last year alone."
According to the Industry and Energy Ministry, the import of women's leather boots alone increased from 1 million to 11 million pairs in 2006. RSKO figures suggest that the boot importers grossed $75 million in profits. In all, 106 million pairs of shoes were legally imported in 2006. Meanwhile, Russian producers' revenue growth has declined from 15-20 percent to 7-10 percent in the eighteen months since the introduction of the reduced import duty.
Boot and shoe makers see only one way out - establishing a unified, flat import duty at 16.5 percent. The EU recently introduced such a duty to protect its market against Chinese expansion. China itself - which currently accounts for about 60 percent of global boot and shoe production - is developing its own industry largely behind high import duties (25 percent). As a result, the Chinese footwear industry is awash with investment from Germany , Italy and Spain . Meanwhile, Russian shoe makers dread WTO entry which for them spells the beginning of the end.
"According to our estimates, the import duty after WTO accession will be 5 percent. This is a catastrophe," Andrunakievich says.
Russia 's successful producers are also concerned that they will not survive in the face of new competition. Berezhnoi was not overly optimistic.
"Struggling enterprises will cease to exist. All profit-making companies will see their positive trends decline. For example, we are currently expanding the Zaraisk boot and shoe making factory, installing 1.5 million euro worth of equipment there. But we will definitely have to stop massive investment. What will we do? Open joint ventures in China , India , wherever. In other words, there won't be any purely Russian footwear anymore, which is a pity."
Nevertheless, Berezhnoi does not intend to give up without a fight. He says his trump card is producing unique footwear components that no other company can produce.
"I don't want to turn into a guy working on a parking lot or gas pipeline. I was educated to make aircraft and satellites. Unless we continue to develop domestic production, tomorrow we'll have to pay more for imported footwear from our oil and gas," he warns. "But I want my children and your children to have enough oil and gas left, so let's make our own shoes".