The textile industry in Ukraine

The textile industry in Ukraine Introduction International competition and globalisation constantly makes it necessary for companies in any line of business to seek minimisation of production costs. However, another facet of globalisation is that it gives companies the opportunity to make investments across borders and enjoy the advantages of different locations. The textile industry, which is very flexible and low cost seeking, has undergone an extensive internationalisation process. In order to produce at a low cost, many western European companies started 15-20 years ago relocating their textile production to the southern part of Europe, where the production cost was considerably lower than in the northern part of Europe. The end of the cold war made production in Central and Eastern Europe possible at an even lower cost. Especially Poland and the Baltic countries became attractive to invest in. In accordance with the economic development in these countries the salaries and total production cost has risen, thereby forcing many of the Western European companies to look for new attractive countries for their textile production. Ukraine offers a unique possibility for companies working in the textile industry. The country offers a low cost-structure; a well-educated workforce; a textile sector with huge potential; proximity for the European markets and finally a domestic market with nearly 50 million consumers. A growing economy will also contribute to a larger amount spent on clothing. After a rapidly decline in output, in the years following the break-up of the former Soviet Union, the Ukrainian textile industry has begun to show sign of growth. In 2000 the growth rate in the textile industry came to 27.9 percent. However, the total outcome is still far from previous figures and as a result of this buildings, machinery and knowledge is still available at very attractive prices. This paper seeks to outline the advantages by investments in Ukraine due to its low cost structure; a short historic and present overview of the textile industry; a short introduction to the Ukrainian textile market and the relations between Ukraine and the European market; and finally outline the prospects of the industry in the near future. Overview of the Ukrainian textile industry Introduction During the former Soviet Union Ukraine developed as one of the largest centres of textile industry possessing approximately 50 percent of the entire textile industry. Following the break-up of the Soviet Union, the textile production started to decrease rapidly. As an indicator of the decline in output the figures of annual production of cotton based fabric can be used. From 1990 until 1997 the output of these specific products experienced a decline from 200,000 t to 10,000 t. A natural consequence of the decreased level of output has been an increase in unemployment in the regions affected, which have put pressure on the salary level in the industry. 1

However, the industry is slowly starting to recover. The sector saw its first positive growth trend in 1998 since Ukrainian independence, and the growth has continually increased ever since. Another positive development, which can boost the Ukrainian textile industry even further, is the recent agreement with the European Union, which by 2004 will abolish all trade restrictions on textile and clothing between Ukraine and the European Union. The growth rates of the industry are listed below. Textiles/garments output, real % change 1996-2000 Textiles/garments real change in output 1996 1997 1998 1999 2000 2001 Jan.-Oct. -24.6-5.2 1.5 5.7 39.6 11.5 A further indicator of the decline of the industry is the share by which the textile industry contributes to the Ukrainian GDP. In 1991 total production in the textile industry equalled 11 percent of GDP, while this figure had dropped to 1.6 percent in 2000. The geographically composition in the industry Geographically the textile industry is mostly located in the Western-, Central-, and to a lesser extent the Eastern parts of Ukraine, while the Northern- and Southern regions are less developed. As a result of this, most of the industry is within a short distance from the European market. The time of transport used to the Western parts of Ukraine, is often similarly to the time on transport used to the eastern parts of Textile production of Ukraine, 2000 31% 7% 11% 23% 28% Eastern Ukraine Western Ukraine Northern Ukraine Southern Ukraine Central Ukraine Poland, where the Polish textile production is mainly located. Furthermore, Ukraine has a fairly good infrastructure. Ukraine is fairly close to the Western European markets, and has a large potential of local consumers, and a fairly good infrastructure, which makes Ukraine a recommendable production place in terms of geography. The Ukrainian textile market When describing the Ukrainian market for textile and clothing products a number of features stand out as significant. Thus it is characteristic that second-hand clothing forms a high share of the market. In total the Ukrainian market for textile and 2

clothing amounts to 354 million Euro annually out of which 120 million are used on second-hand clothing. The second-hand clothing is mostly imported from the EU amounting to 80 percent of the total second-hand clothing market. However, it should be noted that there is a general upward trend in prices, and also one should remember that the general economic growth temporarily experienced in Ukraine would most likely have an effect on the future market situation. Distribution channels used in the textile sector can be divided into three main channels. The most commonly used is through bazaar vendors. Approximately 80 percent of the entire Ukrainian textile production is channelled through these. The biggest textile bazaar centres is located in Odessa, Kharkiv and Chernivtsi. Besides bazaar vendors the distribution channels also include producers shops and small intermediate companies. The composition of the Ukrainian textile sales can be seen in the diagram below. The sewing industri increased production of suits, pants, and shirts (by 27-43%), bedclothes and jackets (by 17-19%). Textile Sales in Ukraine, 2000 19% 22% 59% 59% Sewn garments 22% Knitwear 19% Fabric Import-export As is shown above, the two main textile products in Ukraine are sewn garments and to a lessor extent knitwear. In regard to the import-export situation for these two products is it worth noting that both products experienced a high increase in export from 1999 till 2000. Thus export of sewn garments in 2000 rose with 15 percent as compared to 1999 and an even bigger increase was seen in the knitwear export. Knitwear export 2000 increased with 50 percent compared to 1999 figures. The regional breakdown of import and export can be shown as follows. 3

Import of sewn garments 2000 50% 40% 30% 20% 10% 0% Germany Italy Chile USA Other Export of sewn garments 2000 60% 50% 40% 30% 20% 10% 0% Germany USA France Other Import and export of knitwear 2000 40% 30% 20% 10% 0% Germany Hungary Denmark USA Other Export Import As it is clearly seen in the diagrams the single most important trading partner is Germany. However, when it comes to knitwear Denmark, is the third single most important partner for the Ukraine. An important factor in terms of imports and exports is the EU. During the last ten years developments between EU and Ukraine have made trading substantially easier. 4

In the beginning of the 1990 es EU established quotas on the import of some Ukrainian textile products, but these have all been repealed again in 2001. Ukraine, on the other hand, has also liberalised their legislation considerably during the last ten years of independence. In 2001 Ukraine abolished all its export quotas for textile products and also reduced the obstacles to import textile products. Coststructure of the Ukrainian textile industry In order to utilise the low coststructures some Western companies have already moved part of their production to Eastern Europe. However, even in Eastern Europe, only few countries can match the low coststructures of Ukraine, with salaries well below the normal average in Eastern Europe. The low salaries are in fact the most important incitement for investing in Ukraine. One should be aware that the salary varies depending on the location of the factory, i.e. size of the town and where the factory is located. Foreign companies often pays higher salaries than local companies. Thus, the average salary per hour for a sewing girl is USD 0,45, compared to USD 2,54 in Poland, USD 4,66 in Portugal, USD 2,41 Latvia, and USD 1,74 in Slovakia and USD 1,66 in Estonia. Furthermore the efficiency in for instance Poland and Ukraine is almost identically. Some experiences suggest that Western textile companies can save up to USD 0,5 million a year only by relocating 100 sewing girls from Poland to Ukraine. A major reason for the low Ukrainian salaries is the excess supply of labour in the textile industry. Officially the number of employee in the textile sector in Ukraine amounts to 200,000 people, whereas 70,000 employees work in Western Ukraine. This however, is often said unofficially to be slightly underestimated. On the other hand there is approximately 50,000 people unemployed workers in Western Ukraine alone, putting a downward pressure on salaries. The general educational background amongst the workers is normally described as fairly good, with three different levels of education. Thus the Ukrainian textile industry contains labour from vocational schools, technical schools and academies and institutes. It should be noted that 60-70% of the educated workforce is located in larger cities. To capitalise on the first mover advantages- now is the time to make the investment. The level of the salaries will be increasing, hence increasing the total production cost. Another advantage in investing now, is that there are still a lot of idle machinery and skilled/educated workers, which can be very beneficial to the foreign company. The growing number of foreign companies in Ukraine will eventually make the human resources scarce. Future prospects for the industry Despite a certain amount of challenges that await the one, who wishes to do business in Ukraine, the textile industry also presents enormous potentials and possibilities for business development. In most companies there are to a large degree idle capacity, which therefor can lower the initial investment needed in the early stages. Purely 5

Ukrainian textile companies are run rather inefficiently, and crucial factors in achieving success in Ukraine, is to bring management, know-how, new machinery and capital. Also knowledge about the country itself is naturally recommendable. As noted above, a future growth in household incomes will most likely have a positive effect on the amount spent on clothing. The real GDP growth in 2000 and 2001 is of significance in this respect. Also important however, is the growth in demand, which can be expected as the government gradually pays off total wage arrears of approximately 1 billion USD. Part of this money will definitely be spent on clothing. On the export side the removal of EU quotas in 2001 will certainly have a positive effect for Ukrainian based producers. Import share in 2000 was 4 percent and thus made the annual change +20 percent. The embassy forecast that it would grow by 20 percent in 2001, by 17 percent in 2002 and by 15 percent in 2003. As regards the production scheme, the most popular is tolling, or production by orders from abroad. In 2000, about 80-95 percent of textile production, 71 percent of knit production and 19 percent of hosiery were manufactured on tolling basis. The forecast for industrial output in textile makes annual change of +25 percent in 2001, +15 percent in 2002 and also +15 percent in 2003. At the moment there is a growing international interest for involvement in the Ukrainian textile sector. Around 100 foreign companies are at present active in Ukraine, and the registered FDI amounts to 24 millions Euro. Most of the investments are placed in the Western part of Ukraine, whereas most of these investments are placed in the Oblast close to the border. What the true amount invested in the textile industry in Ukraine is difficult to determine, because the indirect investments, for instance leasing, are not registered. But the indirect investments are actually believed to be bigger than the registered FDI. Source: The Royal Danish Embassy in Kiev. 6