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17 Mar 2008


US Economic Slowdown: Impacting Thai Leather and Footwear Industry (Business Brief No.2120)

Demand for leather products and footwear, one of the consumer products, is primarily subject to economic cycles. The leather and footwear industry in Thailand has so far been export-dependent. Therefore, volatilities in trade partners' economies will inevitably affect both manufacturers and exporters via consumer purchasing power at home and abroad, plus the costs of production and transportation, selling prices as well as manufacturers' income. The export-oriented production of the Thai leather and footwear industry has, until now, made up more than half of the overall Thai market turnover and is poised to rise in line with expansion in global economy.
Among the key markets for Thai-made leather products and footwear are the US, European Union and Japan where purchasing power is comparatively higher than elsewhere. However, imports of the products into these three markets in 2007 posted slower growth than the previous year, blamed on the economic downturn in the US and other regions. With regard to production, the Thai leather and footwear industry needs to import raw materials totaling around 50-60 percent of the content used. Given this, the forex rate volatility has much to do with costs. It is, therefore, undeniable that the changing global economic and financial situation will affect the Thai leather and footwear industry via imports from key markets and forex rates.
KResearch has come up with some suggestions about the impact of the US economic slowdown based on the forecast of US Federal Reserve's GDP growth rate adjusted downward to 1.3-2.0 percent. This will be a risk for the Thai leather and footwear industry given sagging demand in the US market. In 2007, the US GDP growth rate that plunged to -0.7 percent causing the US import growth rate of leather products and footwear to decline by -2.7 percent and -5.5 percent, respectively. Meanwhile, the Fed Fund Rate reductions forced Thailand to follow suit which helped lower financial costs for Thai manufacturers though the move caused regional currencies including the Baht to appreciate rapidly. Despite the positive effect of Baht appreciation on reduced production costs for the leather and footwear industry, this situation has adversely affected the income realized in Baht for exporters and made-to-order suppliers. Worse, manufacturers have been plagued with the world's steep oil prices that have raised production and transportation costs. As a consequence, the rising inflation rate has in turn pushed the prices of goods and raw materials higher while eating into the purchasing power of consumers both at home and abroad.

This year, manufacturers and exporters of leather products and footwear must keep a close watch on the US economic development, a major factor for global economy and trade volume. Focus will be especially on countries having close trade relations with the USA. Manufacturers highly dependent on the US market should adopt market risk diversification, reduce their dependence on the US market and expand their export markets to other high performing countries like China, Russia, the Middle East, South Africa, etc., These countries are regarded as potential markets where the proportion of Thai leather products and footwear is still minimal. Entrepreneurs should thus brace for any future changes such as possible fluctuation in the interest rate, the stronger Baht and the world's oil price volatilities. They should also closely monitor the situation so as to ensure effectiveness in their production cost and inventory management, upgrades in logistics system along with foreign exchange hedging.

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