How to increase the profitability of light industry to 900 billion tenge per year? | FinReview
7 April 2020

How to increase the profitability of light industry to 900 billion tenge per year?

Now the industry’s profitability is about 45 billion tenge. In the structure of GDP, light industry forms 0.2%, while domestic enterprises cover the consumer market by only 7%.

Considerable attention is paid to the development of light industry in many countries, since the industry is of social and economic importance, providing high employment. The importance of this industry also lies in the fact that in terms of consumption, light industry is in second place, second only to the food sector.

In global GDP, the share of light industry is about 3%, while in the largest manufacturing countries the figure exceeds 10%. For example, in Portugal – 22%, China – 21%, Italy – 12%. In Kazakhstan, the impact of the industry on the economy is practically negligible – 0.2% in the structure of GDP, and its share in the manufacturing industry is not more than 1.2%.

Kazakhstan light industry is on the periphery of state attention due to the overwhelming role of extractive industries in the economy

During the years of independence, the share of light industry in the structure of GDP decreased from 15.8% to 0.2% today. This significant drop was due to the fact that sectors with high added value were identified as priority areas for the formation and development of the national economy. In particular, Kazakhstan has long been building up the potential of the economy through extractive industries. Nevertheless, while previously light industry was a key sector of the economy, Kazakhstan now has great potential for its development.

Today, the light industry of Kazakhstan carries out both primary processing of raw materials and production of finished products. This is a complex field, including more than 20 sub-sectors, which can be combined into three main groups: textile, sewing, as well as leather, fur and shoe. The largest share in the structure of light industry is occupied by textile products (36.6%) and garments (35.2%).

However, 96% of enterprises in the industry are represented in the form of small ateliers and artels. So, out of 1071 enterprises involved in light industry, only 40 are large and medium-sized. Their average capacity utilization is about 26%, and the number of employees is only 12.7 thousand people, or an average of 12 employees per enterprise.

93% of light industry products in the consumer market are imported goods

The production of light industry over the past ten years has increased annually by an average of 15%. Following the results of two months of 2020, the volume of production increased by 12.4% and amounted to 18.9 billion tenge. The main production was in textile products – products worth 11.7 billion tenge were produced, followed by the production of clothing (5.6 billion tenge) and the production of leather products (1.6 billion tenge).

Despite this, imports of products have grown much more intensively – in clothing production by 34%, in textile products by 13%, and in the segment of leather and leather products by 35%. The reason for the high demand for imported products is its low cost. In this aspect, domestic producers cannot compete with foreign enterprises, since in Kazakhstan there is a need for raw materials of a certain quality and raw materials that are not produced in the country. In some products, the cost of raw materials in the cost of goods reaches 50%, and the duty on its supply – from 5% to 10%.

30 light industry enterprises export their products

In Kazakhstan, about 10% of light industry products are exported. At the same time, export deliveries are carried out by only 30 enterprises. Their products are mainly directed to the markets of China, Russia, Kyrgyzstan, Italy, Lithuania, Uzbekistan.

At the end of 2019, the volume of exports exceeded $ 20 thousand. The main product groups were cotton fiber, textile materials, impregnated, coated or dubbed with plastics, bedding.

To stimulate the export of products, enterprises are reimbursed up to 50% of transportation costs. This should allow to reduce the cost of production by 10%, as well as expand the geography of exports and the range of goods.

Four reasons hindering the development of light industry

Firstly, the high cost of production. The technical depreciation of equipment at some enterprises reaches 80%, the cost of raw materials in the cost of production can be about 50%, and labor productivity reaches 15% – 20% of the corresponding figure in developed countries. As a result, enterprises are forced to make a minimum premium, losing industry profitability. However, despite this, its price exceeds the cost of imported goods.

Secondly, the equipment renewal ratio is 3% – 4% per year and is carried out at the expense of enterprises and loans. In foreign markets, this indicator is 15% – 17% per year and is largely associated with investment support from the state.

Thirdly, a low level of investment for the modernization and restructuring of production and a lack of working capital. In 2019, the industry attracted about 74 million tenge of investments in fixed assets. In turn, foreign investments show an outflow of funds for the second year in a row – in 2019, the outflow amounted to $ 1.1 million.

Fourth, the presence of shadow imports of products. Now, Kazakhstan imports 17 times more products than it exports. And with the increase in e-commerce, the number of online stores that supply goods from abroad has increased. At the same time, it is not uncommon for individuals to supply goods, the cost of production of which is significantly lower than that of domestic manufacturers due to the absence of taxes and duties.

Investments – as an opportunity to save domestic light industry

Now the industry needs investments, since in addition to the lack of financial resources, new technologies, innovative solutions and business processes are needed. And in this matter, Kazakhstan has advantages – financial institutions that are engaged not only in financing new projects, but also help existing ones enter the capital markets in order to raise funds for their development. These include the Eurasian Development Bank, the Development Bank of Kazakhstan, the European Bank for Reconstruction and Development, Astana International Financial Center, BCC Invest, KazakhExport, Kazyna Capital Management, Damu Fund, etc. For example, the Eurasian Development Bank invested in 76 Kazakhstan projects 3.3 billion US dollars, and the European Bank for Reconstruction and Development is participating in an even larger number of projects – 263 projects worth almost 8.4 billion euros.

Attracting investment funds by light industry enterprises will not only increase capital, but also expand the geography of exports and identify new markets for the purchase of raw materials. Moreover, the market potential for businessmen and investors is quite high – it accounts for half of all non-food consumer goods. If Kazakhstan producers manage to cover domestic demand, then their total annual income may amount to over 900 billion tenge. So far they receive only 45 billion tenge.