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Kyrgyzstan's Textile Industry Will Face Hardships On The New Silk Road

• By  Henry Dsouza
• March 31, 2018

Kyrgyzstan, the second stop on the Belt & Road Initiative (BRI), after Kazakhstan, will need to up its industrial and market policy reforms if it wants its textile and clothing industry to survive.

The Kyrgyz government is making some attempts at bringing in investments into one of its largest industrial sector. But the slow pace of reforms may not be enough to face the oncoming rush of Chinese goods on the New Silk Road.

Kyrgyzstan's apparel exports have burgeoned with help from China

For one, Kyrgyzstan's textile manufacturing industry has all but disappeared. The fledgling apparel manufacturing sector does make some clothes for the export markets. But a very large part of Kyrgyzstan's apparel exports are fuelled by Chinese apparel. Kyrgyzstan finds a huge market for apparel in neighbouring Russia and Kazakhstan. Unfortunately, these apparel are not manufactured in Kyrgyzstan but imported from China and reexported to its two largest markets. A large part of the country's domestic demand too is fulfilled by apparel imported from China.

Till 2010, the country faced political instability and economic stagnancy, which resulted in an absence of economic reforms and policies to help the industrialisation of the country. With the result, the country's clothing industry is facing technological obsolescence, low labour productivity, and absence of manufacturing and quality standards.

In contrast, China is ramping up investments in its western region of Xinjiang to better service textile and apparel demand of the world. Till some years ago, apparel sourced from western China were of low quality, and this had spurred some Kyrgyz companies to better their products for the Russian and Kazakh markets.

However, China's textile and apparel qualities have improved significantly, thus restoring demand in these important Kyrgyz markets. And with more direct access for China to these markets, the informal trade of Chinese and local apparel from Kyrgyzstan could be limited. Kyrgyzstan caters to just 2-5% of the Russian market demand.

And China has already become a very important supplier of high quality apparel to this market.

Besides China, Kyrgyzstan is pitted against bigger, formal players like Bangladesh, India, Turkey in this region, who have a diverse range of qualities and products to offer.

Informal trade accounts for 60% of Kyrgyzstan's total apparel exports

It is estimated that almost 60% of Kyrgyz trade is in the informal sector, in the form of selling in bazaars, and cross-border trade. However, it is this informal trade that has supported the growth of manufacturing and re-export activities.

These centres are quite specialised today, some are oriented internationally, and others are for local goods only. All offer a wide range of products, within their niche segments too. And all have well developed logistics, warehousing and transportation services.

Kyrgyzstan's textile and apparel sector is dotted with small sized units, encouraged by government policies. The textile and apparel cluster in Bishek houses 740 registered units, or 96% of the total units in the country. Seventy-eight percent of these units are sole proprietorships with less than 30 employees.

So effectively, these are largely trading companies, and design houses.

Most of the foreign investors in the sector left the country after the 2010 revolution. Almost 90% of the apparel production in the cluster is exported to Russia and Kazakhstan, via mainly one logistics company - BIEK Cargo. This sector accounts for at least 12% of the labour force. And suffers from seasonal demand, resulting in high layoffs. This in turn has resulted in low skilled, low quality workforce in the apparel industry. The lack of sophisticated, long term, contracts with large international clients adds to this problem.

Formalisation is not lucrative

Kyrgyzstan's tax policies are not quite conducive to formalisation of trade. The tax systems incentivise small companies. However, once they attain a certain size, companies are burdened with taxes, audits, leading to pay-offs and bribes, as corruption plagues the country. The cost of formalisation is high. Kyrgyzstan does not have a well developed financial system. And so, the industry does not have access to easy and low cost bank loans. Lending rates of banks are as high as 20-30%, according to a Kyrgyzstan industry report.

Cut-make-trim operations are on the rise

There is potential for the Kyrgyz textile and apparel industry, if it acts fast. Since 2014, the sector has grown by approximately 1100%, according to a USAID report. In 2016, garment industry production was estimated at US$ 375 million.

After years of producing for the bazaar trade, without firm orders, Kyrgyz garment manufacturers are now beginning to fulfill "cut-make-trim" contracts with fabric and fixtures provided by clients, with a few advanced firms involved in design, branding and production.

As global competition in the sector has accelerated in recent decades, Kyrgyz garment manufacturers have been forced to adapt to shifts in supply chains and are now positioning themselves to meet this international demand. 

USAID partnered with SMEs in the garment and apparel industry to increase their export potential. Through this cooperation, Kyrgyz apparel manufacturers have undergone BSCI social and labour audits and certification, enhanced their quality control systems and expanded their base of suppliers. As a result, they were able to attract new buyers to include international retailers from Europe in addition to their traditional Russian and Kazakh clients.

However, several other short- and medium-term challenges persist, including a lack of access to finance and modern inputs, and underdeveloped capacity to market to demanding, yet lucrative European buyers.  The Kyrgyz Republic's accession to the Eurasian Economic Union in August 2015 raised tariffs on several inputs into the garment manufacturing process, and the country continues to harmonise its laws and regulations to conform with the standards of the EAEU.

Opportunities

The garment and apparel manufacturing industry presents opportunities for US and European retailers to diversify their supply chain away from countries with troubling labour standards, and particularly those seeking to export to the larger, nearby markets of Russia and Kazakhstan. 

International retailers committed to low carbon footprints will also be encouraged by the fact that 80% of electricity is generated from renewable hydro power assets. Opportunities also exist for professional service providers that specialise in certification and standardisation and assist garment manufacturers in navigating the export process.

On balance, the sector requires significant capital expenditures to upgrade machinery in order to remain competitive, which offers prospects for US, European and Chinese producers of advanced and specialised sewing, processing and cutting equipment.

Investments remain elusive

Even as investments are needed to set up modern garment manufacturing facilities, there has been a dearth of investors. In February 2017, Tekstil Trans Ltd. opened a new textile factory worth US$ 9.5 million, in the northern Chuy province of Kyrgyzstan.

The Russian-Kyrgyz Development Fund has provided close to US$ 7.5 million for the factory. The factory is likely to reduce the company's dependency on imports of textile products like fabrics and prove beneficial for the domestic sewing industry.

The new factory will create 150 jobs and produce 9-10 tonnes of products per day initially. The capacity will be increased to up to 30 tonnes per day. The new unit uses advanced equipment and high-quality raw materials sourced from China, Uzbekistan and Tajikistan. (KD)

While this is a welcome move, this is not enough to substitute imports and meet the varied demands of the apparel sector. The encouraging news is that the country's textile and apparel manufacturing showed an increase in January this year. To further develop its textile and apparel sector, the government is looking for collaborations with the Bangladesh industry.

Government officials said, "They have created the necessary conditions for business development, ensuring full protection of investments, to woo Bangladeshi businessmen”. Kyrgyzstan has not done well in the doing business rankings of the World Bank in parameters such as protecting investments. Given a backward financial infrastructure, this could well be the case.

Weak economics

Besides the above challenges, Kyrgyzstan's economy is fundamentally weak. The country has a GDP per capita of US$ 1,100. Remittances of around 800,000 Kyrgyz migrants working in Russia represent 40% of Kyrgyzstan's GDP.

It has a huge government debt to GDP ratio of 56.6%.  And China is expected to account for 71% of Kyrgyz debt as BRI related projects are implemented. Kyrgyzstan needs the Chinese investments to develop its weak infrastructure. Transport in Kyrgyzstan is severely constrained by the country's alpine topography. Roads have to snake up steep valleys, cross passes of 3,000 metres altitude and more, and are subject to frequent mudslides and snow avalanches. Winter travel is close to impossible in many of the more remote and high-altitude regions.

Additional problems come from the fact that many roads and railway lines built during the Soviet period are today intersected by international boundaries, requiring time-consuming border formalities to cross where they are not completely closed.

At the end of the Soviet period there were about 50 airports and airstrips in Kyrgyzstan, many of them built primarily to serve military purposes in this border region so close to China. Only a few of them remain in service today. The Kyrgyzstan Air Company provides air transport to China, Russia, and other local countries. Other facilities built during the Soviet era are either closed down, used only occasionally or restricted to military use.

Kyrgyzstan appears on the European Union's list of prohibited countries for the certification of airlines. This means that no airline which is registered in Kyrgyzstan may operate services of any kind within the European Union, due to safety standards which fail to meet European regulations.

The Chuy Valley in the north and the Ferghana valley in the south were endpoints of the Soviet Union's rail system in Central Asia. Following the emergence of independent post-Soviet states, the rail lines which were built without regard for administrative boundaries have been cut by borders, and traffic is therefore severely curtailed. The small bits of rail lines within Kyrgyzstan, about 370 km in total, have little economic value in the absence of the former bulk traffic over long distances to and from such centres as Tashkent, Almaty, and the cities of Russia.

So, China's interest in Kyrgyzstan is welcomed with enthusiasm by Kyrgyz government. If and when completed, the physical infrastructure and regional connectivity will help the country to export its minerals and metals across borders competitively.

And will have access to mass produced textiles and apparel, especially from China for its population of 6.1 million, a third  of which lives below the poverty line, and mostly in rural areas. It does seem a distant reality for Kyrgyzstan to find domestic and international demand for its textile and clothing products in the current scenario. 

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