Nepal-made footwear products are on the cusp of losing a big chunk of share in the growing domestic footwear market, as smuggled products, under-invoicing of imported products and lack of incentives for manufacturers have started eroding their competitive edge.

Nepal now sees sales of around Rs30 billion worth of footwear, including shoes, sandals and slippers, per year. This market is growing at the rate of around 20 percent per year.

As the market is growing, the contribution of locally-made footwear in the domestic shoe market is also increasing. In the fiscal year 2015-16, 1,501 shoe factories, established at a cost of around Rs20 billion, manufactured almost 44 million pairs of shoes, sandals and slippers. 

With this, the contribution of Nepal-made footwear products has surged to 50 percent in the domestic footwear market, as against 20 percent seven years ago. 

But the share occupied by locally-manufactured footwear products in the domestic footwear market is likely to come down as shoes smuggled from India and China are flooding the market, according to Manoj Kumar Shrestha, founder and director of Sky Shoes. 

If Shrestha’s estimates are anything to go by, sales of smuggled shoes have gone up by up to 30 percent in the recent days.

“This is posing a big threat to us,” said Shrestha.

The government levies a customs duty of 20 percent and value added tax of 13 percent on imported shoes. “These taxes are evaded when foreign shoes are smuggled into the country. This automatically raises the profit margin, enabling traders engaged in smuggling to sell shoes at cheaper rates,” said Shrestha.

Another bigger threat facing the domestic footwear industry is under-invoicing of imported products. This means invoices submitted by importers at customs offices include marked-down costs of footwear products-a technique used by importers to pay less taxes.

In the fiscal year 2015-16, for instance, the average value of per pair of footwear product imported into the country stood at Rs88, a surprisingly low price. In contrast, the average value of per pair of footwear product exported from Nepal in the same year hovered around Rs283.

Because of the price difference, many retail shoe stores have started replacing Nepal-made shoes with smuggled goods or imported products to earn better profits, according to Rabin Kumar Shrestha, president of the Footwear Manufacturers Association of Nepal (FMAN).

This is creating an uneven playing field for domestic shoe manufacturers, who have made huge investment to set up factories and have provided jobs to an estimated 50,000 people.

Those selling imported shoes, however, do not buy these arguments.

“Nepali shoes are cheaper than imported ones. But they are poorly designed and finishing is not that great,” said Ramkrishna Thapaliya of RK Fancy Stores at Bagbazaar, who sells imported shoes. “These are the reasons why many prefer imported shoes.”

Although the modern history of Nepali shoe industry dates back to 1962 when Bansbari Leather Shoe Factory was set up, the sector could not grow in a proper manner for a long time as it was not fully open to the private sector. This limited competition and innovation.

The domestic shoe industry started flourishing only after the restoration of the democracy in early 1990s. New democratic governments that started steering the country then liberalised the economy, paving the way for entry of private players in the footwear business. But the growing industry faced another misfortune circa 2000, as cheap Chinese products started penetrating the market. 

“Most of the Chinese shoes were cheap. But they were not made of leather like Nepal-made shoes,” FMAN President Shrestha said. “Yet Nepali consumers fell for those cheap products.”

Despite such threats, the domestic shoe industry has continued to grow. Today, the domestic industry produces all types of footwear products, ranging from school, party, official and sports shoes to various types of sandals and slippers.

And, lately, a slew of exhibitions organised by domestic footwear manufacturers-a trend which began in 2012-has started drawing interest of Nepalis towards Nepal-made shoes. Because of these reasons, per capita footwear consumption has now grown to 2.7 in the country, meaning every Nepali purchases an average of around three shoes or slippers per year.

In spite of this rosy scenario, domestic shoe manufacturers are worried by the onslaught of cheap imported products.

In the five-year period between 2011-12 and 2015-16, average footwear imports have gone up by around 13 percent per year. In the fiscal year 2015-16 alone Nepal imported around 38 million pairs of shoes, sandals and slippers worth Rs3.3 billion. But again the value of a big chunk of imported shoes is depressed because of under invoicing, which poses threat to domestic footwear industry. 

This problem of under-invoicing has lately started hitting shoe sole manufacturers in the country as well.

Customs offices in Nepal fix the duties on soles based on quantity that is imported. For instance, the value of a kg of PVC soles, which includes two pairs, has been fixed at Rs110 by customs offices. On the other hand, the value of a kg of PU soles, which includes four pairs, is valued at Rs560.

“But importers assign the value of PVC soles while importing PU soles. This means importers are bringing in four pairs of PU soles at the cost of Rs110,” a report 

prepared by the FMAN says. “This kind of undue advantage is pushing around 50 sole manufacturing companies in Nepal to the verge of collapse.”

These instances imply that the problem of under-invoicing, on the one hand, is 

raising the spectre of foreign footwear products gradually displacing Nepali products, while on the other hitting the government’s revenue collection.

“To arrest this situation the difference between taxes levied on imported products and raw materials imported by domestic footwear manufacturers should be at least 

15 percent,” said Ram Krishna Prasain, managing director of Shikhar Shoe, one of the largest shoe manufacturers in Nepal.

Footwear facts

• Domestic production in 2015-16 - 43.96m pairs 
• Per capita footwear consumption - 2.7
• Share of Nepal-made footwear in domestic market - 50.2pc
• No of footwear manufacturers in Nepal - 1,501
• No of large and medium footwear enterprises - 221
• Production capacity of Nepali footwear industry - 111.97 pairs 
• Estimated investment in footwear industry - Rs19.94b
• Estimated job creation - 50,000

Source: Footwear Manufacturers Association of Nepal