The Rs 100 crore (Rs 1 billion) Forward Shoes recently signed an agreement to manufacture shoes for Start Rite, a 211-year-old United Kingdom-based children's footwear brand, from India. Muhammad Yavar Dhala, Managing Director, Forward Shoes, feels that there is a $12 billion European market waiting for the Indian leather industry to tap.

With the cost of manufacturing touching a new high and the young Europeans averse to working in the non-glamorous manufacturing industries, the European companies are looking at India as a place for outsourcing, says Dhala to rediff.com's Shobha Warrier. Excerpts from the interview:

Forward Shoes recently signed an agreement to manufacture shoes for Start Rite (a 211-year-old United Kingdom-based children's footwear brand) from India. On the Start Rite contract, you had said that this is the first step towards many more things to come as European footwear companies have started looking at India as a major place for outsourcing. When did you first get the signal that Europe would look at India as a major destination?

We saw the first signs around 12 months ago. Most of our partners to whom we were giving uppers started giving indication that they were either going to reduce or shut down manufacturing in Europe. Then they gave us enough indication to upgrade ourselves to make shoes for them. It was a kind of strategic information passed on to us. That was the first sign.

The second sign came when SARS hit China.

Does that mean the Europeans had already been outsourcing from China?

No, they had decided to shut down manufacturing but they had not made up their mind where to place their orders. But when SARS hit China, they started looking at India quite seriously. Also, those who had done some business with China were not that successful especially in the middle to top end of the market.

But the advantage that China has over us is that it is a nation that performs and delivers; that is the impression about the Chinese in general worldwide. Whereas the perception about India is that it has got its own small problems.

You mean bureaucracy?

Bureaucracy, infrastructure... logistics... it takes a longer time to get things delivered.

Not quality?

Definitely not. Not quality, not prices. It is just that it is much more difficult to work in India. Even the environment is harder compared to China.

It is actually a combination of factors. Around 12-18 months ago, the Europeans had decided to shut down manufacturing there, and trials were done in both India and China. I think the Indian trials have worked well.

Did those to whom you supplied uppers ask you to give full shoes then?

We started getting additional business. We were asked to make new kinds of shoes, which we had never made before. The indications turned into orders soon. That was what really confirmed our suspicions that the Europeans have stopped manufacturing.

Is the rising cost the only reason why the European shoe manufacturers are looking at outsourcing?

Yes, rising cost is the only reason.

How big is the European shoe market?

It is about $12 billion in terms of import. India exports about $300 million worth of shoes, which is a small percent. This is going to grow significantly. Majority of shoes going into Europe are of the lower segment - sports footwear, synthetic footwear, etc.

Now, you will see an increase in activities in the leather footwear side from India.

The shift in manufacturing has already taking place, and the place is India.

Forward Shoes is a Rs 100 crore company. How much do you expect to grow now that the European shoe companies are turning to you for outsourcing?

We expect additional revenue of Rs 50 crore (Rs 500 million) in the next 2 years. The industry has set itself a target to grow by about 5 times in the next five years. Currently, they are doing about $300 million exports to Europe. By the year 2008, we want that to be $1.5 billion.

How do the Europeans and European companies in general look at anything that is manufactured in India?

The tag 'Made in India' had a stigma. I will add the word 'had' several times. It is changing because there are large retailers in Europe who have now adopted India in a big way.

Notable examples are Clarks, Next, Hush Puppies, etc. They have understood that the Indian products are comparable to or better than the European products. Even in the minds of consumers, the perception is changing.

Now, there is absolutely no stigma about the Indian products amongst the large brands or retailers.

You say that it is for the Indian industry to go and exploit the situation now. Do you see that happening already?

Those who are daring to go and get the business are getting business. For example, we are very strong on men's footwear.

I know a couple of companies that are strong on children's footwear and they have had great success in the European market because they have been forward thinking enough to go and get that business.

The only concern I have is in the ladies' shoe business. We seem to struggle a little bit there for many reasons, both historical and logistical. Eastern Europe, which still does manufacturing, will be a competitor in terms of women's footwear where there has to be a quicker reaction as far as the fashion is concerned. They have a logistical advantage.

There was a time when the major textile labels of the developed countries were outsourcing hosiery products from small units in Tiruppur. With China entering the field in a big way, it has affected India very badly. Eventually, do you expect something of this sort happening in the leather industry also?

If you take the European market as a triangle, manufacturing the top premium segment will remain in Europe itself. I see the low segment going to China and the medium segment coming to India and also to Eastern Europe.

Eastern Europe will take care of the ladies' shoes segment, while India will be the place for men's, ladies (the segment that has more stability in styles) and the children's wear.

The lower segment is about 60 per cent of the market, while the middle segment is about 35 per cent and the top segment about 5 per cent.

There is no way we can achieve the economies of China where they have huge production facilities and significantly lower labour costs and high levels of productivity.

But this segment is mainly non-leather. It is very important for us to note this because we are leather shoemakers and not non-leather shoemakers.

We are weak on synthetics, and that is because our textile industry has not developed any good synthetic products. On the other hand, the Taiwanese are very good in synthetics.

Revenue wise, which segment is bigger?

The middle segment. All of us are quite focussed on this segment of the market because we know we don't have an opportunity in the lower non-leather segment. Here, we will score over the Chinese because we are better in making better quality leather shoes.

That is again because we have a better leather background than the Chinese. What we manufacture in India is better quality leather. Secondly, our workers are good craftsmen. They may not be very productive but they are better craftsmen.

Compared to the European market, the US market is bigger. Is the Indian leather industry aiming to capture that market too?

The US companies too have now started looking at India very seriously in the last six months. They had already been buying from China.

In your case, 90 per cent of your products go to UK. Which are the other countries you are targeting now?

In Europe, we see big opportunities in Italy, Spain, France, Holland and Portugal.

Would the companies you are dealing with be interested in investing in Indian companies, or are they only for outsourcing?

They are interested in investing here. A large amount of investment, which could have come to India, has already gone to China because they welcomed them with open arms and offered them everything on a platter. But it is never too late.

We feel that the feel-good factor will percolate and bring in investments.

Do you feel in the future, majority of the manufacturing industries from the developed world would shift base to developing countries like China and India?

It is quite possible. I don't know about other industries but the leather industry, which is very labour intensive and non-glamorous will move to developing countries like India and China.

It is not a glamorous industry to be associated with in Europe especially for the younger generation. The same thing will be applied to manufacturing of apparels.

The Indian government and even the CII lament about the lack of growth in the manufacturing sector in India. As a person who is in the manufacturing sector, what do you feel is affecting this sector?

It is very sad. Information technology and BPO provide employment to the urban educated population. But there are millions in the villages and in the small towns who need employment which can be provided by the manufacturing sector only.

The government needs to wake up to this fact.

The government can do several things. They have already done something by easing the cost of credit. But in terms of investment, there is not a single state in the country which has a really investor friendly policy.