Opportunities in the Textile Sector of Uzbekistan

September 2006

Prepared by Mr. Jahangir Kakharov,
BISNIS Representative, Tashkent, Uzbekistan

This report explores market opportunities in the textile sector of Uzbekistan. With its strategic location in the heart of Central Asia, abundant raw textile materials, and accelerated development rates of the textile sector during the last few years, Uzbekistan represents a desirable and affluent market for U.S. made advanced textile equipment.

SUMMARY

At present, the textile industry of Uzbekistan is a pivotal sector of the economy of Uzbekistan. The textile sector accounts for approximately one fifth of the total gross national product and one third of all workers are concentrated in the textile sector. The share of light industry in the total volume of consumer goods manufactured in Uzbekistan comprises approximately 55%. It also should be noted that the sector forms a significant part of the state budget.

Since Uzbekistan is one of the top 5 producers of cotton in the world, the textile sector of Uzbekistan has a reliable local raw material source. Another important factor contributing to Uzbekistan’s competitiveness is solid government support - political as well as financial for the cotton industry. Higher value-added exports are seen as a way of increasing the inflow of foreign currency and resolving many economic and social issues, so cotton processing has become a top economic priority. The Government of Uzbekistan pays close attention to the development of the textile sector and grants benefits on taxes and import duties described in detail below.

As a result, Uzbekistan’s textile industry has seen impressive growth over the past few years, and an ambitious strategy is in place to attract further foreign investment and increase textile exports. In the beginning of 2005, the government of Uzbekistan adopted a program of attracting investments into the textile industry, in order to implement 94 projects for revamping and technical re-equipment of textile enterprises. Some other comparative advantages of the textile sector of Uzbekistan include relatively low cost of other necessary inputs – power, gas, fuel, and water. The cost of labor in Uzbekistan is also lower than many countries specialized in production of textile such as India, Pakistan, Turkey, and Malaysia. Some negative factors affecting the competitiveness of the textile sector in Uzbekistan include a high level of transportation costs and relatively high level of customs duties for Uzbekistan textile exports.

A. MARKET HIGHLIGHTS AND BEST PROSPECTS

MARKET PROFILE

The Uzbek textile industry has a very deep and rich history. During Great Silk Road period, the most expensive fabrics were in high demand in many European and Asian countries. However, Uzbekistan did not have a developed cotton-processing industry until 1920 and the industry was only truly formed during the industrialization period of the ex-USSR. The first industrial garment factory was built in Tashkent in 1924. Before World War II, garment factories in Samarkand, Bukhara, Kokaant, Tashkent, Urgench and Andijan were put into operation. During and after the war a number of garment factories were built in Chirchik, Karshi, Namangan and Khiva.

The knitting sector started its development in early 1930-40s. During this period, a number of large textile mills were built and produced 80 million square meters of fabric. The production of cotton fabric increased 89% between 1940-1960. Having such a growth rate, Uzbekistan could have become a leading textile manufacturer, but it was decided in the 1960s that Uzbekistan would specialize in cotton growing only. Development of the textile industry was halted and constructions of plants were stopped. The idea of turning Uzbekistan into the textile hub of the Soviet Union did not materialize.

However, the situation changed after Uzbekistan gained its independence. In mid 1990s, Uzbekistan stabilized its macroeconomic situation and began reforms in the textile sector. During 1995-2000, 9 large textile mills were built and put into operation.

Uzbekistan plans by 2008 to increase domestic cotton fiber processing from current 28% to 50% of production within the framework of the program aimed at attracting investment to the textile industry. Also within this framework, Uzbekistan plans about 100 investment projects in the next three years to modernize and set up new production in the textile industry worth more than $1 billion, increasing export potential by $1.1 billion. To achieve these targets the state has taken unprecedented steps to support potential investors, including providing tax and customs breaks. But the investors have certain obligations as well. Textile enterprises must export at least 80% of their product. The program will yield an additional 329,900 tons of cotton yarn, 34,800 tons of knit, 144.4 million meters of fabric, 186.6 million knit items, 65.5 million garments, and 59.5 million hosiery products. Annual exports are planned at $1.17 billion. The new enterprises will create 46,400 jobs.

MARKET DEMAND

Uzbekistan is one of the world’s largest producers of cotton and the second-largest exporter, yet only less than one third of the cotton is processed domestically. The rest is exported unprocessed, representing a large loss of potential earnings for the country.

The Uzbek market for textile equipment is directly related to its growth potential. As noted above, Uzbekistan is trying to increase in-house processing of its cotton up to 50% by 2005-2008. In 2004, Uzbekengilsanoat (a shareholding company comprised of 132 textile enterprises)

implemented 17 projects worth total value of $180 million. Direct foreign investments stood at $99 and $97 million in 2004 and 2005 respectively. Between 1995 and 2006, the textile sector of Uzbekistan attracted foreign investments to the tune of $940 million. Forty joint ventures were set up with the participation of foreign investors. As a result, textile exports increased from $7.76 million in 1994 to $279.8 million in 2004. At present, there is also a tendency to increase yarn production. Out of the yarn processed in Uzbekistan only 50-60 percent meets high quality requirements, with local textile mills processing the remainder into lower quality yarn. All of the yarn that meets the high quality standards is currently being exported abroad. Local textile mills are left with lower quality yarn, which would not allow them to produce high quality ready-made textile products. The reason to export the high quality yarn is to earn hard currency to repay loans. However, at this point, Uzbek textile mills have learned how to make a higher quality yarn and it is only a matter of time of increasing the volume of production. Having succeeded in yarn, Uzbek textiles mills are moving forward to the next steps to further processing the yarn. This means that the demand for weaving, knitting, dyeing, and finishing will increase. There are already a number of projects undertaken by joint venture enterprises to establish integrated plants. However, taking into consideration this tendency, there are already projects aimed at establishing dyeing and finishing commission shops. The U.S. textile machinery producers have an advantage in this sector and could be successful in sales of dyeing and finishing equipment both for knitting and weaving. There is also a high demand for a modern equipment line to manufacture denim and terry products.

Complete lines of modern sewing machinery would be a good prospect for sales to Uzbek sewing factories. There are a number of fast growing sewing factories that can afford this machinery.

Besides textile equipment, there is a high demand for textile dyes, accessories and packaging materials, which are not produced in Uzbekistan.

MARKET SIZE

The Market size of the Uzbek textile industry varies each year depending on several factors, such as the availability of financing, industry performance, and cotton prices. As mentioned above, Uzbekistan has an investment program in place to develop its textile sector and intends to spend approximately $1 billion in the next three years. The Uzbek government welcomes foreign investors into the textile sector and grants significant privileges and tax incentives. If companies that are selling textile equipment are able to bring financing or offer soft loans, it can help to increase the volume of potential sales. Uzbekistan’s textile industry is still in its initial stage of development and has huge potential for further development but requires the import of modern textile equipment from abroad.

B. COMPETITIVE SITUATION

DOMESTIC PRODUCTION

Uzbekistan has had a traditionally well-developed machine-building industry. Many industrial plants were moved into Uzbekistan from other parts of the Soviet Union during World War II. Factories, such as aircraft manufacturing plants, tractor plants, and others moved into Uzbekistan. During the Soviet era, Uzbekistan became an industrial and scientific hub of the Soviet Union in the South. As Uzbekistan was the largest cotton producer in the Soviet Union, it has a well-developed textile machinery plant in Tashkent. This plant used to provide most of the textile mills in neighboring republics as well. However, after independence, Tashkent Textile Machinery Plant has experienced difficult times due to the collapsed economic relations with the republics of the Soviet Union, diminished annual orders for textile equipment by Moscow, and stoppage of industry subsidizing. Tashkent Textile Machinery Plant still faces financial problems and survives by manufacturing consumer goods and commission metal works. The Plant used to employ several thousand employees and had its own social infrastructure (which became a financial burden), but now is trying to privatize all unnecessary assets.

Currently local textile mills are trying to import modern textile equipment from abroad. Local mills need modern and efficient equipment, which are able to produce high quality product and sold abroad. Tashkent Textile Machinery Plant has not been able to meet the requirements of textile mills and could not sell any equipment for many years. The Uzbek Machinery Building Association is taking steps to vitalize this plant, however, it is still far from being competitive with international players.

THIRD COUNTRY IMPORTS

Most of the textile equipment has been imported from abroad. Among foreign manufacturers, the following have been active in Uzbekistan: Rieter, Saurer Gruppe, Trutzschler, Zinser, Schlafhorst, LTG, Murata, Vamatex, Toyoda, Tiss, MCS, Brookner, and some others.

U.S. MARKET POSITION

Until recently, the U.S. market position in the Uzbek textile sector was almost non-existent. However, this situation changed when some textile joint venture enterprises started importing equipment produced by US manufacturers such as Vanguard Supreme. Several U.S. textile equipment manufacturers also have started paying attention to this market. US companies are strong enough in the finishing part of the textile processing and it is their niche. The receptivity of the US textile equipment is very high, however, unfamiliarity and absence of presence of US companies makes it a bit difficult. There is a plan to modernize and re-equip a number of textile mills, where US companies might have a comparative advantage due to its advanced and unique technologies.

C. END USER ANALYSIS

STATE AND PRIVATE SECTORS

Before Uzbekistan gained independence, there was no private ownership and all textile enterprises were state owned. Only after 1991, Uzbekistan began its transition to market economy and allowed private ownership. All textile enterprises were converted into shareholding companies by 1995. Uzbekengilsanoat is now essentially a shareholding company. The relationship between the association and its members is purely financial; Uzbekengilsanoat does not oversee or seek to influence the operations of the companies in which it has interest. Textile companies are not required to belong to the association, and mills do not have to have Uzbekengilsanoat’s capital in order to join the association.

Private textile enterprises began operating after 1995 and currently there are hundreds of small and medium size private sewing factories throughout the country. There are many new projects initiated within the private sector, which are playing a more dominant role in the development of the textile industry.

The total number of enterprises that Uzbekengilsanoat unites is 132. Uzbekengilsanoat, the former Ministry of Textiles, has its share in the charter capital of 40 joint-stock companies, owning from 2.8 to 25% equity, and being also the cofounder of a number of joint ventures in which the foreign investors own the majority of shares. The other 92 enterprises are associated members of Uzbekengilsanoat.

From 1999 to 2004, about 100 enterprises in the textile sector had been privatized (11 large textile enterprises were privatized in 2004). In 2005-2006 42 textile enterprises are planned to be privatized. Presently, Uzbekengilsanoat is acting on behalf of the Uzbek government and is trying to help textile mills attract foreign investors, obtain hard currency from the government, and promote industry development. It is shifting its role from a supervisory function to industry promotion. Textile enterprises are also trying to establish business links with foreign investors directly and enter foreign markets.

D. MARKET ACCESS

IMPORT CLIMATE

The import climate for textile machinery and equipment is favorable, since the Uzbek government has abolished all tax and import duties on equipment and technologies. The government realizes the importance of the textile sector and creates favorable conditions for further development of the sector. However, there could be delays with convertibility of the local currency from time to time and this situation may cause certain problems with payment. Many of the recent deals were made under a buy-back scheme or paid by loans received in hard currency. U.S. textile machinery dealers should pay attention to the after sale services, maintenance and quality. Potential buyers prefer direct contact with equipment manufacturers. Establishing a presence in the market and being available at any time plays a key role in the decision-making process. U.S. companies should be ready to offer financing and to be innovative in coming up with payment methods.

GENERAL ECONOMIC SITUATION

Uzbekistan’s economy is still in the transition period and is moving to a market economy. The government has been undertaking economic reforms and is trying to move gradually but without major shocks to general population. Despite the fact that this strategy of a gradual transition resulted in a painless transition to market economy with less harm to a broad spectrum of the population in the beginning, eventually it resulted in a stagnation of reforms. The Government is undertaking steps to develop its economy where government plays a major role. The Government of Uzbekistan pays close attention to the development of the textile sector and grants benefits on taxes and import duties. Incentives for foreign investors include exemptions from all types of taxes except for VAT for producers with foreign investments specialized in manufacturing of ready-made garments providing these garments are sold on the domestic market. Currently 94 enterprises are included in a program of revamping and technical re-equipment of textile enterprises and are conducting technical re-equipment. These enterprises are exempt from paying customs duties (with the exception of customs fees paid for customs registration) on imported equipment and spare parts. Companies united under the umbrella of State Joint Stock Company Uzbekengilsanoat (Uzbek Light Industry) are exempt from payment of customs duties for imported chemicals, dyes, and accessories. Moreover, the textile companies with foreign investments also get a 15% discount when purchasing cotton fiber.

DISTRIBUTION/BUSINESS PRACTICES

The textile industry of Uzbekistan is still in its initial stage of development. Even though Uzbekistan is second largest exporter of cotton, it is still yet to be a major textile hub such as Pakistan, Turkey, China, and India. There are no dealers or distributors of major textile machinery companies; they all contract directly with potential customers or work with Uzbekyengilsanoat on modernization projects. U.S. companies aiming to enter this market should have technical maintenance and service staff in the region. Foreign companies should also be familiar with local laws and regulations.

FINANCING

Sources of financing within Uzbekistan are scarce. Many foreign investors bring financing from abroad and invest their own money. Uzbek commercial banks, the National Bank of Uzbekistan (NBU) and Asaka Bank are essentially the main financial gates between Uzbekistan and the rest of the world. They are the main channels for the inflow, distribution and servicing of foreign financing and investments. As of recently, Asaka bank started playing a significant role in financing textile projects in Uzbekistan.

A LIST OF SPECIAL PRIVELGES AND PREFERENCES FOR ENTERPRISES IN THE TEXTILE SECTOR

· until January 1, 2009, enterprises with foreign investments specializing in production of garments and apparel and hosiery products are exempted from all kinds of budget taxes and duties, except for VAT

· enterprises, included into the Investment Program and undergoing re-equipment process, are exempted from the payment of customs duties on imports of technological and auxiliary equipment, technological accessories and spare parts for industrial needs;

· until January 1, 2009, enterprises importing chemicals, dyes, accessories and other auxiliary materials not produced domestically are exempted from payment of customs duties;

· until January 1, 2009, an additional 5% discount is granted to the exporter-enterprises, which have a full production cycle;

· an exclusive right to set the maturity date of the letter of credit up to 90 days;

· until January 1, 2009, exporter-enterprises enjoy the right to purchase textile semi-finished products (yarn, fabrics, knitted cloth and cotton spinning wastes) for hard currency (with zero rate VAT charge) in the domestic market

· until January 1, 2009, income tax (uniform tax) exemption for income, received from production, included into the localization projects;

· until January 1, 2009, property tax exemption in the part of the assets, involved in the localization projects;

· until January 1, 2009, customs duties exemption for imported equipment, spare parts and materials, not produced domestically and used in the localization projects.

Contacts

U.S. companies and individuals interested in learning more about Uzbekistan’s textile industry are encouraged to contact BISNIS, Uzbekistan. BISNIS offers advisory services and logistical support to assist U.S. companies to enter this market. For additional information about how BISNIS can help your business, or for answers to specific questions regarding the sector, please direct inquiries to:

Jahangir Kakharov,

BISNIS Representative in Uzbekistan

Tel.: (998-71) 133-65-76

Fax: (998-71) 133-84 - 67

E-Mail: bisnis.tashkent@bcc.com.uz

Address:

56 Buyuk Turon Street,

Hotel Tashkent Palace, room 243,

Tashkent, 700029, Uzbekistan

Below is contact information for Uzbekengilsanoat and Asaka Bank:

State Joint-Stock Company

Uzbekengilsanoat

45 Babur Str., Tashkent, 700100,

Uzbekistan

Tel (998-71) 139-17-11, 115-22-91

E-mail: info@legprom.uz

http://www.legprom.uz

Asaka Bank

Nukus Street, 67,

Tashkent700015, Uzbekistan
Tel:(998-71) 120-81-11
120-81-15
Fax:(998-71) 120-86-91
(998-712) 55-23-27
E-mail: contact@asakabank.com

For more information on Uzbekistan, visit BISNIS online at:

http://www.bisnis.doc.gov/bisnis/country/Uzbekistan.cfm

BISNIS (www.bisnis.doc.gov) is part of the U.S. Commercial Service (www.export.gov)