Rating agency of Regional financial center of Almaty JSC office 9, floor 9 136, Dostyk avenue, 050051 Almaty, Republic of Kazakhstan LIGHT INDUSTRY OF THE REPUBLIC OF KAZAKHSTAN Analytical department of Rating Agency of RFCA: The Head of research: Sheikin Dmitriy Analyst: Shinkeyeva Gaukhar Tel: (727) 2244841 (727) 2244844 shinkeyeva@rfcaratings.kz http://www.rfcaratings.kz Almaty 1 2015
General information According to the State Classification of Economic Activities, light industry of the Republic of Kazakhstan is represented by 3 types of economic activity - manufacture of textiles, manufacture of clothing and manufacture of leather and related products. Figure 1. Structure of light industry in Kazakhstan Light industry Manufacture of textiles Manufacture of clothing Manufacture of leather and related products Spinning, weaving and finishing of textiles Manufacture of textiles Manufacture of finished textile products Manufacture of other textiles - manufacture of knitted fabric, - manufacture of finished textiles, excluding clothing, - manufacture of carpets and rugs, - manufacture of cordage, ropes, yarns, strings, bands and netting, - manufacture of unwoven fabrics excluding clothing, - manufacture of other technical and industrial textiles, - manufacture of other textiles, not included in other categories Manufacture of clothing, excluding clothing made of fur; - manufacture of leather clothes, - manufacture of work clothes, - manufacture of outer garments, - manufacture of underwear, - manufacture of other wearing apparel and accessories, Manufacture of furs, Manufacture of knitting and stockinet goods and apparel; - manufacture of knitting and stockinet hosiery; - manufacture of other knitting and stockinet goods Tanning and currying of leather; manufacture of suitcases, bags, saddlery; currying and dyeing of fur: - Tanning and currying of leather; currying and dyeing of fur; - manufacture of luggage suitcases, handbags etc., saddlery and harness; Manufacture of footwear 2
In general, there are 1 492 registered legal entities and individual entrepreneurs in sectors of light industry as of 01/12/2015. Among them 58.9% or 879 are acting entities. The number of employees in the industry amounts to more than 9.7 thousand people at the end of the 3Q2015. Light industry has a rather large number of small enterprises - 94% or 830 of the total. 99.66% of the total are private enterprises by ownership. The half of the large enterprises of light industry is located in the South Kazakhstan. This primarily depends on the proximity of markets, raw materials and labor availability. Sector Table 1. Number of acting enterprises in the sectors of light industry by ownership State Total Privately owned, including with the state joint participation enterprises (without foreign (with foreign participation) participation) Foreign Manufacture of textiles 256 1 13 18 Large 9 1 1 Medium 10 2 1 Small 237 1 10 16 Manufacture of clothing 2 496 16 13 Large 7 1 Medium 12 1 1 Small 2 477 14 12 Manufacture of leather and related products 84 1 10 10 Large 1 1 Medium 7 1 1 Small 76 8 10 Total 2 836 41 Source: Committee on statistics of the Republic of Kazakhstan Light industry production Light industry production is the one of the most important and invariable item of consumption costs of Kazakhstan's population. Therefore, at the end of the 3Q2015, non-food products per capita averaged 26.5% of their costs, including 10.8% spent on clothing, textiles and footwear. In general, Kazakhstan consumers spend to 11% of their overall costs on light industry products and a quarter of the costs on non-food products. And this share is relatively stable over the last 7 years. Table 2. Non-food products in the structure of personal consumption, % Indicator 2009 2010 2011 2012 2013 2014 3 quarter of 2015 Non-food products 27.22 26.89 28.05 26.50 28.50 28.06 26.54 Clothing, textiles and footwear 9.69 9.31 9.59 10.09 10.46 10.20 10.8 Source: Committee on statistics of the Republic of Kazakhstan 3
The specific weight of light industry in manufacturing industry is 1.26% and 0.5% in the overall industrial production by economic activity. The production of light industry increased by 2.3 times over almost 7 years. Table 3. Dynamics in light industry production (goods, services), KZT mln. Sector 2009 2010 2011 2012 2013 2014 January November of 2015 Manufacture of 13 508 18 416 18 080 23 490 31 588 32 236 30 998 textiles Manufacture of clothing 11 672 12 450 17 590 25 237 29 341 27 447 27 777 Manufacture of leather and related products 2 757 3 363 3 979 4 880 4 048 6 173 5 840 Total 27 937 34 229 39 648 53 608 64 978 65 856 64 615 Source: Committee on statistics of the Republic of Kazakhstan Since 2014, as we can observe the cotton output began to decline. The fact is that this species was planted less than in the previous year due to the problems related to the predominance of this monoculture in the South Kazakhstan. Those problems include the shortage of water during the growing season and the deterioration of irrigated lands. The Action Plan for diversifying the acreage of cotton in 2014-2016 was developed to solve those problems. The Plan involves a reduction of cotton crops with the expansion of the area under melons and watermelons, alfalfa and vegetables, orchards and vineyards. The production of carpets and rugs significantly increased through the program "Business Road Map", which promoted joint Kazakhstan-Turkish enterprises in Free Economic Zone "Ontustyk". Diagram 1. Dynamics in light industry production of Kazakhstan 70 000 60 000 50 000 40 000 30 000 20 000 10 000 0 9,87% 41,78% 9,83% 10,04% 36,37% 44,36% 9,1% 47,08% 6,23% 9,37% 9,04% 45,16% 41,68% 42,99% 48,35% 53,8% 45,6% 43,82% 48,61% 48,95% 47,97% 2009 2010 2011 2012 2013 2014 January - November of 2015 Manufacture of leather and related products Manufacture of clothing Manufacture of textiles Source: Committee on statistics of the Republic of Kazakhstan, RA of RFCA 4
The situation in such a sector as clothing is more stable. 70-80% of enterprises in textile and garment industry of Kazakhstan operate in the clothing market, mainly targeting their product line to the needs of law-enforcement bodies and production of overalls. The sector of raw materials processing is gradually developing. For example, less than 3% of wool and skins is processed in our country, while 97% of the raw materials are exported abroad, mainly to China. In 2013-2014 the rate of leather processing from cattle skins has significantly increased with the state support - an increase from 200 euros per ton to 500 euros in the customs duty on the export of raw skins. Table 4. Dynamics in goods production of light industry in natural units Indicator 2009 2010 2011 2012 2013 2014 January November of 2015 MANUFACTURE OF TEXTILES Cotton, carded and combed, ton 97 062 91 404 75 544 105 813 105 969 73 787 49 888 Cotton fabrics, thous. sq.m. 35 335.4 35 434.5 19 192.3 23 721.9 24 454.2 20 996.1 21 620.3 Yarn cotton from combed and uncombed cotton 8 679 10 404 3 474 4 164 4 701 4 355 8 451* fibers for retail; cotton threads, ton Finished textile products, excluding 2 496.9 3 959.8 3 958.8 3 911 4 805.3 5 798.3 4 557.4 clothing, thous. pcs. Carpets and rugs, thous. sq.m. 2.0 6.1 8.2 5.7 158.4 2 128.9 1 686.6* Unwoven fabrics and products made of unwoven fabrics, 1 178.1 1 172.3 1 328.3 1 976.7 2 295.7 2 359.8 1 439.7 excluding clothing, thous. sq.m. Felt, KZT thous. 296 452 708 528 722 318 804 681 606 774 562 756 395 232 Milled and felt footwear, thous. pairs 176.6 316.4 296.5 228.7 168.1 134.0 87.9 MANUFACTURE OF CLOTHING Outer garments, pcs. 352 121 576 302 647 414 474 295 554 857 607 180 636 113 Clothing and apparel accessories for infants, 20 824 351 120 360 328 203 327 205 472 135 645 58 600 KZT, thous. Underwear, KZT thous. 99.1 30.1 606.4 568.9 566.6 882.9 545.1* Hats and headwear, KZT thous. 374 451 275 778 398 861 854 753 1 044610 1 114952 1 247356 Articles of clothing, apparel accessories and other products made of natural fur 248 880 188 211 181 823 126 126 213 553 404 650 213 186 (except headwear), KZT, thous. Pantyhose, tights, stockings, socks and 5,6 8.3 268 553 388 436 479 930 439 547 284 496* 5
other stockinet hosiery, cotton, knitted or crocheted, KZT, thous. Sweaters, jumpers, pullovers, cardigans, waistcoats, pcs. 98 409 95 190 60 314 106 494 108 005 97 187 55 829 MANUFACTURE OF LEATHER AND RELATED PRODUCTS Leather of bovine cattle or equine animals without 245 225 99 742,9 64 261,9 60 681,4 104 872,5 343 758,8 137 642,2 hair, thous.sq.dm. Footwear, excluding sport, protective and orthopedic, thous. pairs 719,2 1 153,6 1 388,6 1 066,5 732,8 712,9 1 741,3 * - information for January September of 2015 Source: Committee on statistics of the Republic of Kazakhstan Regionally the South Kazakhstan, Pavlodar and Almaty are primarily engaged in tailoring fabrics, Almaty, South Kazakhstan and North Kazakhstan s are engaged in currying of leather, South Kazakhstan, Kostanay, Karaganda and Almaty s as well as Almaty city are engaged in shoe stitching. Export and import of light industry products The share of light industry in Kazakhstan's export is very low and at the end of January- October of 2015 is equaled to 0.47%. The exports of light industry products for 10M2015 amounted to USD 183.2 mln., that is 37.5% increase vs. the same period of 2014. Tanning raw materials, furs and products from them Table 5. Dynamics in goods production of light industry, USD thous. Textile and textile products Footwear, headwear and haberdashery Total Export Import Export Import Export Import Export Import 2011 Total, including 35 695.5 47 275.6 136 495.4 636 740.2 40 718.6 191 654.0 212 909.5 875 669.8 CIS 5 632.0 9 862.3 78 092.0 205 698.9 40 661.5 46 376.3 124 385.5 261 937.5 Other world countries 30 063.4 37 413.2 58 403.5 431 041.3 57.1 145 277.7 88 524 613 732.3 2012 Total, including 26 349.2 88 076.6 130 263.1 1 129268.4 52 215.8 360 799.1 208 828.1 1 578144.1 CIS 10 202.9 11 520.0 77 839.7 371 247.6 51 978.0 65 677.4 140 020.6 448 445 Other world countries 16 146.3 76 556.6 52 423.4 758 020.8 237.8 295 121.7 68 807.5 1 129699.1 2013 Total, including 39 298.8 151 965.8 184 065.4 1 422011.6 47 944.6 580 178.7 271 308.8 2 154156.1 CIS 15 574.2 14 091.9 96 457.8 429 529.1 47 648.7 93 241.3 159 680.7 536 862.3 6
Other world countries 23 724.6 137 874.0 87 607.6 992 482.5 296.0 486 937.4 111 628.2 1 617293.9 2014 Total, including 32 413.1 138 276.2 122 769.6 1 425391.2 24 377.8 661 611.4 179 560.5 2 225278.8 CIS 10 892.3 17 635.6 73 028.2 446 489.3 23 100.9 111 901.0 107 021.4 576 025.9 Other world countries 21 520.8 120 640.6 49 741.4 978 901.9 1 276.9 549 710.4 72 539.1 1 649252.9 January October of 2015 Total, including 27 972.1 81 210.2 78 839.9 783 459.1 76 414.1 319 815.5 183 226.1 1 184484.8 CIS 8 712.0 11 562.2 45 652.1 265 122.8 75 276.1 69 264.3 129 640.2 345 949.3 Other world countries 19 260.1 69 648.0 33 187.8 518 336.3 1 138.0 250 551.2 53 585.9 838 535.5 Source: Committee on statistics of the Republic of Kazakhstan Diagram 2. Dynamics in export of products of light industry in Kazakhstan, USD mln. 300,0 250,0 200,0 150,0 100,0 50,0 0,0 48,0 40,7 52,2 24,4 76,4 184,0 136,5 130,2 122,8 78,8 35,7 26,3 39,3 32,4 28,0 Footwear, headwear and haberdashery Textile and textile products Tanning raw materials, furs and products from them Source: Committee on statistics of the Republic of Kazakhstan, RA of RFCA Cotton is the only product of light industry, which neither has been exported nor imported, but was allocated to the needs of the domestic market for the last 2 years. The export decreased by USD 88 mln. versus 2013, mainly due to lower leather and footwear exports by 28.8%, textile products - by 57.2%. The export of footwear, headwear and haberdashery increased by 59.4%. The main exports of textiles (materials and products) are concentrated in the Russian Federation, Moldova, Belarus, China and Turkey. The import of light industry products for 10M2015 decreased by 39% from the same period of 2014, due to decline in imports of clothing, leather and related products. This trend resulted from the abandonment of the exchange rate band and transition to a freely floating exchange rate, and continual reduction of the consumer purchasing power. The main imports are products of the footwear industry, clothing, hosiery and traveling bags, suitcases, handbags. The bulk of shoes and clothing are shipped from China, Russia, Kyrgyzstan and Turkey. Sacs, suitcases, handbags were supplied mainly from China. 7
Diagram 3. Dynamics in import of products of light industry in Kazakhstan, USD mln. 2 500,0 2 000,0 1 500,0 1 000,0 500,0 0,0 580,2 661,6 360,8 319,8 191,7 1 422,0 1 425,4 1 129,3 783,5 636,7 47,3 88,1 152,0 138,3 81,2 Footwear, headwear and haberdashery Textile and textile products Tanning raw materials, furs and products from them Source: Committee on statistics of the Republic of Kazakhstan, RA of RFCA We would like to note that in terms of value imported textiles and shoes several times (7 times) exceed the volume of the exported product: USD 155.2 mln. of export against USD 1 103.2 mln. of import over the past 10M2015. At the same time we consider the so-called informal imports, which are not accounted, and their extent might amount to a half of the official imports. It is also specific that the gap imports and exports in volume terms, as a rule, is more than 1.5-2 times in value terms. This indicates that the imported products are much cheaper of the same category of exported products. There is a similar development scheme in dynamics of imports and exports almost all over product categories. Initially, imports grow at a moderate pace, then, while import substitution exhausts its potential, imports rapidly gather momentum. The liberalization of foreign trade regulation determines the imports expansion in value terms. At the same time, the exportoriented activities in the sectors are not enough developed, therefore there is a need for government to support exports. Investments in fixed capital Investments in fixed capital of light industry of Kazakhstan, from 2011, evidence an unstable trend in all sectors, which is associated with a specific interest with the enterprises set in operation. Investments in fixed capital of light industry in January-November of 2015 amounted to KZT 4.3 bln. There is a surge in investments this year in the manufacture of clothing. At the same time investments in the manufacture of textiles reduced almost in 2 times, in manufacture of leather and related products up to 10 times. Considering the specifics of activity, namely the operating cycle of production and sales of products, textile enterprises are characterized by a high demand for industrial facilities and material resources. Therefore, shortage of current assets can lead to deceleration or suspension of the production. In general, investments in fixed capital are injected by state subsidies. Kazakh 8
companies represented by the overwhelming majority of small business entities that do not have own sufficient resources. Debt financing is almost unavailable because of the growing pledging requirements, existence of credit history, long-term agreements. Table 6. Investments in fixed capital, KZT mln. January 2011 2012 2013 2014 November of 2015 Manufacture of textiles 3 872.1 2 083.4 5 075 4 143.2 1 783.3 Manufacture of clothing 1 043.7 607.8 704.2 764.5 2 322.1 Manufacture of leather and related products 96.2 22.1 66.4 1 949.9 163.2 Light industry 5 012 2 713.4 5 845.6 6 857.7 4 268.5 Source: Committee on statistics of the Republic of Kazakhstan Diagram 4. Investments in fixed capital of light industry in Kazakhstan, % 100,00 80,00 60,00 40,00 20,00 1,92 0,81 1,14 20,82 22,40 12,05 77,26 76,78 86,82 3,82 28,43 11,15 54,40 60,42 41,78 Manufacture of leather and related products Manufacture of clothing 0,00 Manufacture of textiles Source: Committee on statistics of the Republic of Kazakhstan, RA of RFCA Another important factor is the duration of credit lines. As a rule, the banks are trying to issue short-term loans up to 1 year, and in this case, such short-term resources are not able to support the full operating cycle of production. Investments in fixed capital of the production of leather and footwear industry were growing overall in 2011 11M2015, made leap up in 2014. At the same time, since 2013, the traditional dominance of internal funds significantly increased in the structure of sources of financing. So, internal funds accounted for 86.3% in 2014, but in 2015 the industry has not raised borrowed funds. According to the indicator, leather industry is well-funded. Existing measures of state support and development of light industry At present there are 8 large companies in Free Economic Zone "Ontustyk" with a total investment of more than USD 144 mln., providing with 1445 workplaces. These companies 9
work in such sectors of manufacture, as carpeting, yarns, corrugated fibreboard, paper, clothing, etc. There are 11 projects in the implementation phase with a total investment of more than USD 490.5 mln. and a work creation with 6420 employees. The Government works out a question to attract investors for the realization of 7 projects on manufacture of denim fabrics, wipes, paper, textiles and other products in the amount of USD 409 mln. and for a work creation with 5042 employees. As a result of the financial support to light industry enterprises in the framework of the program "Business Road Map 2020", there were supported 115 projects to the value of KZT 23.6 bln. in the 1H2015. There are 342 concluded long-term contracts totaling KZT 182 bln. with Kazakhstan enterprises of light industry. Today 24 al projects in light industry are carried out as a part of the program "Industrialization Map". Table 7. Projects of Industrialization Map, which were set in operation in 2010-2014 Projects Project applicant Region 1. Felting and manufacture of felts 2. Construction of a sewing room and a room of drywashing of work clothes in Zhetybay village «Ayagoz Suyrly» Rural consumer cooperative «Zhanarys» LLP 3. Construction of a carpet factory «Nazar-Textile» LLP 4. Management of a shoe factory «shoe factory» LLP 5. Construction of a shoe factory «Khayat» LLP 6. Extension of a textile factory, construction of finishing and clothing factories «South Textiline KZ» LLP 7. Clothing factory Khyvayeva G. IE 8. Cattle and small cattle leather processing factory «Umalp» LLP 9. Modernization of polypropylene packaging production with expansion to 1.5 million big bags per year «Novopek» LLP East-Kazakhstan Mangistau Akmola 10. Construction of polypropylene bags plant «Universal» LLP Almaty 11. Modernization of the acting clothing factory «GLASMAN» LLP Almaty 12. Wool processing facility «Taushyk aul sharuashylygy» LLP Mangistau 13. Modernization of a clothing manufacture «Utariya Ltd.» LLP Karagandy 14. Modernization of a textile manufacture «Tecnoprom-tex» LLP Pavlodar 15. Clothing factory of garments «Imazhanov Nurzhan» IE 16. Manufacture of polypropylene bags «South Bags» LLP 17. Management of cotton wool manufacture «Atameken МК» LLP 10
Projects Project applicant Region 18. Complex automated vertical combine «Охy-Textile» LLP 19. 20. Manufacture of absorbent cotton batting, cotton cellulose and technical carboxymethylcellulose Construction of clothing factory with conveyer stream and application material shops «Khlopkoprom Cellulose» LLP «MC «AGF group» LLP 21. Carpet and rugs factory «Bal textile» LLP 22. Unwoven sheet factory «Nuribal» LLP Leather fur mill with a capacity for 125 thous. sq.dm. 23. «SKMK» LLP per year Reconstruction of existing production areas for the «Technology of comfort» 24. management of construction gloves factories LLP Source: Ministry for investments and development, Republic of Kazakhstan East-Kazakhstan East-Kazakhstan Summarizing the review we can come to conclusion that the state administrative and financial support of all sectors of light industry is quite extensive. So why does not the production still exceed even 1% of the total industrial production? There are some actual problems that hinder the development of industry. According to the ownership structure, the most enterprises in light industry are private and owned by residents. The share of foreign ownership is minimal. The ownership of light industry enterprises is not transparent and belongs to the few. Light industry as well as economy at large is characterized by illegal actions such as informal payments to speed up state services or positive decision making on behalf of the government authorities, and also the widespread practice of bribery and kickbacks for government contracts. The industry might keep up with the current dynamics under the domestic demand stimulation by the state orders, but is unlikely to suffer substantial changes as the corruption is pending. Many entities in the industry are managed without a clear and any long-term strategy. The intention to gain the market of traditional products is the main strategic guidelines in many cases. At the same time, a factor to achieve a good balance of price and quality of products is not always a stimulating demand factor. Another important problem is the lack of professionals. The main reasons include not only the lack of skilled staff on local labor markets, but also the inability of many companies to pay competitive wages. Taking into account obsolete equipment in the industry, we evidence the use of old methods of production and low labor productivity. All this will require additional training and changes in the job approach of the labor force. The problem of unfair competition using the counterfeit products, parallel imports and illegal tax and payments evasion schemes are detrimental for light industry entities. Inauthentic products are sold primarily through the small shops and retail markets. Online counterfeit trade is gaining ground. Taxation is another issue to consider. The declaration of the raw materials for production by issued import invoices, paying customs duties and fees, and VAT included increase the production costs. The interplay of the absence of domestic consumer market, skilled staff, the necessity in 11
continual government support, attempts to recover the supply partners are traditionally considered when discussing the light industry issues in Kazakhstan. At the same time, the role of external factors such as to attract foreign investment to innovation, export promotion is often ignored. 12