'At a time when everyone is talking about Bangladesh and compliance, I can proudly say that we have a tannery that is compliant and respects the environment.'

Interview with Ibnul Wara, Managing Director, Austan Ltd.

by Marianne Scholte, 19 September 2015, Dhaka 

Scholte: When did you become Managing Director of Austan?

Wara: Four years ago. We suddenly and unexpectedly had the opportunity to buy Austan. It was a Korean tannery that supplied leather to Picard, and it went bankrupt. So we had to make a decision. They were not one of our key suppliers, but they were supplying a few important leathers, plus it was a compliant tannery. If it had shut down, it would have impacted our sourcing.

Scholte: You had to jump in and learn by doing.

Wara:  Absolutely, we took a chance and jumped into a business that was a bit risky. I remember the first day I walked into the tannery. All the workers were sitting outside on the lawn, and there was absolutely no work. I knew almost nothing about tanning. I had some idea about leather goods and leather, because I was already doing marketing for Picard. But basically everything I learned about tanning was on the job.

Scholte: So what is the capacity of Austan?

Wara: We manufacture about 300,000 square feet a month.

Scholte: What about chemical disposal?

Wara: We have a central effluent treatment plant (ETP). The Export Processing Zone (EPZ) built it and we supported it. We were involved throughout the whole process – along with the other factories in the EPZ. They built the ETP based on the waste water samples supplied by all the factories.

Scholte: When was it up and running?

Wara: I think it has been a year and a half.

Scholte: Before that you had your own ETP?

Wara: Yes. We stopped using that. It is safer to use the big ETP, because they have the full responsibility. We were happy to pay the extra amount. It will pay off in the long run. At a time when everyone is talking about Bangladesh and compliance, I can proudly say that we have a tannery that is compliant and respects the environment.

Scholte: How much of your output goes to Picard?

Wara: I would say about 50% on average over the year.

Scholte: Who are the other customers?

Wara: I supply a few shoe manufacturers in Bangladesh, and I export to leather goods and footwear manufacturers, mainly in China and Vietnam.

Scholte: And you are growing?

Wara: Austan’s output grew about 30% last year. In the last 10 months, Bangladesh as a whole had about 70% growth in leather goods, 33% growth in the tannery sector, and 30% in footwear. A lot of orders are shifting from China to Bangladesh. Buyers are looking at Bangladesh, India and Vietnam. Of these three, Bangladesh is the smallest but the most competitive. One of the advantages we have over Vietnam is that we have our own raw material.

Scholte: So do you expect this rapid growth to continue?

Wara: Our leather sector is growing at an astonishing rate. We recently reached the one billion dollar mark. And now we are saying that if we address environmental and social compliance, we can easily turn this into a five billion dollar sector. But will depend to a considerable degree on government policies. The government needs to keep an eye on this sector and provide all the necessary support.

Scholte: For example?

Wara: The sector needs urgently to deal with the huge chemical and environmental issues all along the supply chain. The government is playing a major role in addressing these. For example, they have pushed for relocation of all the tanneries from Hazaribagh to a new site in Savar with a central effluent treatment plant.

Scholte: That discussion has been going on for 15 years…

Wara: Yes, but honestly, I was just at the new site two days ago and some of the tanneries are actually building there. There has been significant progress in the last year – it actually looks like something is going to happen. The target is middle of next year, but it might take a bit longer.

But it is not just a matter of relocating the Hazaribagh tanneries and environmental compliance. There need to be policy changes as well…

Scholte: For example?

Wara: At this point, Bangladesh is exporting a major part of our leather in the form of crusts to Korea, to Italy, etc. However, if Bangladesh leather goods and footwear continue to grow, the demand for crusts inside Bangladesh will increase at a significant rate, and the tanneries must be encouraged to sell more to the local manufacturers – or we will be forced to buy the same raw material from overseas at a higher price.

Scholte: So the tanneries get a better price from their overseas buyers than they get inside Bangladesh?

Wara: Not necessarily. It is a matter of the export incentives – the government pays the tanneries a certain percentage of the value of the crusts when they export. Until recently, there wasn’t much demand in the local market, whereas the international demand was always there. That is the main reason that a lot of leather is exported at such an early stage. But now with the growing demand for finished leather in Bangladesh, we have the opportunity to create a lot more value addition – by turning the leather into a bag or a shoe and exporting it for a much higher price. So, the export incentives need to be adjusted.

Scholte: Is there some movement on the part of the government?

Wara: Not yet. But it will definitely have to happen. The government is taking it one step at a time – first addressing the compliance issues. Once those are addressed, the other issues will come to the forefront.

Scholte:  But don’t the tanneries actually want to hang onto their incentives? It seems that they would not have the same interests as the leather goods and footwear manufacturers.

Wara: That is when government policy becomes interesting. The policy will have to be designed in such a way that none of the parties lose out. There is no point in dividing the leather sector. We have to be united, and we have to come up with a solution where no one is disadvantaged. We need to bring all the stakeholders together under one platform – the tanners, the finished leather, leather goods, and footwear manufacturers and exporters. This would be helpful for the sector and help us lobby the government more effectively. If we stop the export of crusts, this will help the whole leather sector.

Scholte: Is there enough raw material in this country to take the leather sector to five billion dollars?

Wara: Up to four or five billion dollars of exports, I think we can support it, but if this kind of growth continues over a longer period, a time will come when we will become dependent on the import of raw material as well. At that point the export of our crusts would be dangerous.

Scholte: In a week or two is Eid al-Adha. How much of the annual supply is obtained right after Eid?

Wara: About 50% to 60% of the annual collection is done then. This is a very important time of year for the whole sector. This is when the price is set. If the price of rawhide goes up, it impacts not only the tanneries, but the leather goods and the footwear manufacturers as well, because they are buying finished leather, the price of which is directly correlated to the price of rawhide.

Scholte: So what are you expecting the price to be this year compared to last year?

Wara: It has to go down. Last year was a very high year. It impacted the price of finished leather significantly – an increase of about 20%.

Scholte: And still you grew at this fantastic rate?

Wara: Yes. This is what makes me a little bit nervous as Eid approaches. If there is another 20% increase, we won’t be able to keep this up. But the signals are that it will go down, at least 10%. [In fact, prices fell by 8-10%, as Wara predicted.]

Scholte: What things would you still like to change in the tannery?

Wara: Innovation and R&D play a crucial role in the leather sector. We have a Korean technician, who works with us to develop articles that are different from what other tanneries can make. This is very important, because we can regularly show our customers new developments. But I believe that eventually we will have to go into backward integration and reduce our dependency on the suppliers, because that would give us a competitive edge. When you are talking about leather, how you process it right from the start impacts the finished output a lot.

The key area we need to focus on now is service to the customer. We believe in the partnership model, and we focus on service. For example, we work very hard to reply promptly to customer enquiries, so they feel they have a connection with us, even though we are thousands of miles away. This is a free market. We have good products and we try to offer the best possible price, but not a price we cannot keep in the long run. Everyone knows the prices. I am not buying my raw material at a better price than someone else. Our competitors can offer a lower price in the short run and they can copy our articles, but they cannot compete with our service.

Scholte: It looks like you are enjoying this.

Wara: I am loving it.

Scholte: Thank you.