Printer Friendly

A tanning industry for Texas.

A Tanning Industry for Texas

In the wake of the economic bust of the mid-1980s, economists, politicians, and the business community have scrambled to expand the state's economic base, trying to attract new industries, especially high tech operations, to Texas. Unfortunately, in focusing their efforts on new industries, they have overlooked some of the state's existing resources, assets that could produce benefits exceeding those of any single high tech industry and in a much shorter time frame. One such asset is the leather tanning industry. This article evaluates the economic potential of a Texas leather tanning industry working in conjunction with finished goods production in Mexico.

The U.S. Leather Industry. Although the United States produces approximately one-fourth of the developed world's hides, the U.S. leather industry has been, until recently, in decline. An overseas exodus of the major market was the primary cause of this decline. In 1988, over 70 percent of the cattle hide production in the United States was shipped overseas at a value of $1.47 billion. Korea and Japan were by far the largest importers, with 40 percent and 29 percent respectively. The loss of processing capability has resulted in a U.S. hide and leather products trade deficit of $9.4 billion, a 460 percent increase since 1976. Also since 1976, U.S. leather production has decreased 48.5 percent, despite very strong market indicators. In the last decade, high domestic labor rates drove the labor-intensive shoe industry, which represents the bulk of the leather market, to the Far East, forcing more than 60 percent of the nation's tanneries to close. Environmental costs accelerated the changes.

Today, however, the leather industry in the United States is stabilizing. Despite the considerably higher wages they must pay, U.S. tanners remain the most productive in the world. Rising raw material, energy, and environmental costs, as well as production refinements, have created a much more capital-intensive process. (Labor currently accounts for approximately 12 percent of production costs. Environmental measures have become attainable at reasonable cost. Vertical integration and exporting have played a key part in the process.

The Mexican Maquiladora Industry. Many Texas businessmen are familiar with Mexico's maquiladora program. Maquilas, as they are commonly called, have experienced dramatic growth lately by providing American businesses with finished goods at a substantial savings in labor, tariff, and transportation costs. One of the major advantages of Mexican production is low labor costs. Wages in Korea, the closest major competitor in the shoe industry, are 72 percent higher than those in Mexico; for comparison, U.S. wages are 700 percent higher than Mexico's. Also the transportation costs incurred by shipping hides to Mexico are virtually nonexistent when compared to the cost of shipping to Far Eastern firms. According to recent shipping quotes and assuming hide prices are 90 cents per pound, transportation adds 8 to 10 percent to a Far Eastern firm's raw material costs, compared to a 2 percent addition for a maquila. (This calculation does not take into account the costs of shipping finished goods back to the United States.)

These substantial savings in transportation and labor costs give maquila finished goods production an impressive competitive advantage. It is puzzling, then, that the bulk of Texas leather products is being transported halfway around the world to be processed by labor more costly than that of our nearest neighbor.

A Texas/Mexico Collaboration. With ready access to both supply and demand, Texas is a natural location for a tanning industry. Texas is already located strategically to supply leather to the maquila shoe industry, and Texas could supply that industry with high quality tanned hides if the state established tanning capacity. Almost 6 million hides per year, 17 percent of the nation's total, are produced in Texas, and it is inefficient to transport the hides to the northeastern United States for tanning when energy and labor costs are lower in Texas.

A Texas leather industry and a maquila finished goods operation could prove a profitable and complementary combination. Transportation and labor costs would be minimized; supply lines and reaction times, shortened. If the maquila effort could garner just 1 percent of the total business from shoe and leather products imported into the United States every year, the result would be a $110 million industry. In addition, it is estimated that the value added through the processing of 10 percent of the hide production of Texas is more than $55 million annually.

David L. Huff Director of Research Bureau of Business Research and Lewis Brazelton Research Assistant Bureau of Business Research
COPYRIGHT 1990 University of Texas at Austin, Bureau of Business Research
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1990 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Author:Huff, David L.; Brazelton, Lewis
Publication:Texas Business Review
Date:Aug 1, 1990
Previous Article:The Texas economy: supply responses to changes in the price of oil or gas.
Next Article:The Texas economy: market-based instruments and energy policy.

Terms of use | Copyright © 2016 Farlex, Inc. | Feedback | For webmasters