Assessing Competitiveness In Moldova's Economy - Economic Growth

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Development Alternatives, Inc. Moldova Competitiveness Appraisal: The Hides & Leather Cluster Figure 20: Markets for Moldova’s shoe exports The activity is limited to assembly, with all materials and inputs imported duty-free under the EU’s Outward Processing Traffic protocol. The current arrangement reflects, in part, a learning process. Following independence, Zorile sought to compete in external markets on its own, only to be brought to the brink of bankruptcy; it survived solely because the lack of an effective bankruptcy system in Moldova kept it from going out of business. It is now considering the working arrangements with the European buyers as a kind of apprenticeship for learning to survive in global markets, and perhaps to move to higher value-added activities, as a new generation takes over. For now, the contracts provide steady employment for the workforce, although there remains considerable excess capacity. Within that structure, the Zorile management is exploring other markets, with some success. It is sourcing leather from suppliers abroad, and is producing for markets in nearby countries. The pattern of all shoe exports is shown in Figure 20. The “other” destination is mostly the U.S., where Moldovan shoe exports reached US$2.9 million in 2003, almost one-tenth of total shoe exports. Demand Conditions The demand for raw hides and skins is a derived demand, linked to the demand for leather in the target markets, much of that driven by demand for leather upholstery in automobiles. The market is mature and quality standards and requirements well established. It appears that Moldovan exporters (and re-exporters) of raw hides and skins understand demand requirements and market architecture, as well as the requirements for maintaining volume, as reflected in the rapid expansion of their market share July 2004 • DRAFT Page 4
Development Alternatives, Inc. Moldova Competitiveness Appraisal: The Hides & Leather Cluster Companies producing shows for the domestic market are facing increasing competition from imports, especially from Asia. In fact, there has been a tendency to cede the market for summer shoes to imports, and to focus production on sturdier shoes for the winter. In terms of outsourcing activities, the demand remains strong; yet Moldovan producers remain dependent on the sourcing decisions of the buyers, primarily in the EU. There has been a steady increase in the volume of orders, but as conditions shift, so may the selection of suppliers. Complementors With the exception of a good portion of the raw materials, most of the upstream inputs— chemicals, shoe hardware, and the like—are imported. With smaller tanneries coming onstream that target the domestic market for leather, some backward integration may occur. The financial system could (and should) play a role as a major complementor, facilitating the transformation of the cluster and addressing the working capital needs. The orientation of domestic shoe producers to target seasonal (winter) demand puts heavy demands on working capital, as long as producers want to maintain year-round operation. Since the financial system lacks the wherewithal to respond to these needs, producers and suppliers tend to develop their own arrangements to survive and continue doing business. Typically, suppliers may accept not getting paid for a period of time to facilitate transactions and meet working capital requirements. In fact, most of the smaller shoe producers, like most of the small and medium-sized enterprises overall, seek ways to minimize demands on their cash flow by operating on the edge of the informal sector, even if they employ as many as 25 or 30 people. Their margins are small, and efforts to upgrade and compete more effectively are hampered by the business environment. Entrepreneurial energy is diverted to staying afloat and minimizing costs, rather than seeking ways to improve quality or move into new markets. Inadequate financial intermediation and facilitation sap much of the innovative capacity in the cluster. Prospects One striking aspect of the structure of the leather cluster is the effective lack of integration. The structure of the sector is characterized more by vertical relationships with the companies’ foreign partners than by linkages among the cluster elements. For example, virtually all of the leather produced by the tannery is exported. Shoe producers aiming at the local market— including Zorile—source their leather from Turkey, since there are no other tanneries in Moldova that produce leather suitable for shoes (although two small ones are reportedly coming on line). There is a small operation in Chisinau that imports and distributes other materials needed in shoe production, including some leather. The exporters of raw hides and skins get their merchandise from local sources, as well as from Ukraine, relying on networks dating back to Soviet times. Again, Moldova has an edge in terms of access to the EU. In turn, the local tannery sources very little in the way of its raw materials locally, relying instead more on Ukraine. July 2004 • DRAFT Page 5
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Assessing Competitiveness In Moldova's Economy - Economic Growth

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