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Globalization Can Save Russia's Light Industry

Russian light industry is slowly dying, and the only way for it to survive is to become integrated into the global supply chain. Support measures, other than keeping businesses afloat for a while, are not likely to make a difference, states the report 'Is it Possible to Save Russia's Light Industry?', presented by Vadim Radaev, the HSE's First Vice Rector and Head of the Laboratory for Economic and Social Research

An Industry Destined to Die

With the collapse of the USSR, the country's light industry fell into deep crisis, with production declining five to eight times across its different segments, says the report. “All signs and circumstances indicated that the industry should have died in the early 1990s; yet, it survived and showed steady, if not rapid, growth," comments Vadim Radaev. “Profitability trends have improved in recent years and do not seem so bad by international standards."

Comprising the textile, clothing, leather, and other manufacturing sectors, light industry is extremely heterogeneous in Russia. A few modern and successful enterprises exist, but the overall picture does not inspire optimism. Today, the industry's production volumes are slightly more than 15% of the Soviet level, while on average, labour productivity is 1.5 times lower than in Russia’s other manufacturing industries.

Employment in light industry has dropped manifold over the past twenty years and continues to decline by some 3%-4% annually. The workforce outflow is only partially due to more efficient technology; the main reasons are low wages – in the textile and clothing sector they are just about half of the national average – and poor working conditions.

Many light industry production facilities (especially in the textile sector) desperately need investment, since much of the equipment is physically worn out. Yet some two-thirds of those large and medium-sized industry players surveyed are not making the needed investments and belong to "a cluster of stagnant enterprises," as the author puts it. Notably, most of the industry's enterprises are not planning to attract strategic investors, and such investors are not interested in this segment of the Russian economy.

The country has a fairly large domestic market where Russian companies sell up to 90% of their products. However, this market is gradually being penetrated by foreign competitors. The dependence on imports has been rising – reaching 80%-85% for clothes and footwear, and increasing pressure is being exerted by so-called 'black' and 'grey' imports and counterfeit products. By various estimates – more accurate data is not available – such products comprise from 10%-50% of the market. "No matter what you do, it is difficult to compete against products of dubious origin that are at least 40% cheaper than yours," says Radaev, noting that the establishment of the Customs Union and the Common Economic Space has further increased these risks.

No Taxes, No Imports

The industry's challenges, as seen by company owners and executives, can be categorized into four groups:

  • High taxes, lack of macroeconomic stability, and problems with finance;
  • Institutional factors, such as unpredictable government regulations, a lack of business transparency, etc.
  • Administrative barriers, such as customs regulations, difficulty obtaining land plots and construction permits, etc.
  • An underdeveloped industrial infrastructure (electricity, transportation, communications, etc)

Industry practitioners see potential solutions primarily in reducing the tax burden and in freezing the tariffs of natural monopolies. Many company executives seek bigger government contracts. A significant portion of the market’s participants would like to see restrictions on imports, and just a few believe that the government should provide export incentives.

According to Radaev, some of these suggestions are reasonable, and, if introduced, could help keep companies afloat, at least for a while. Radaev argues, however, that neither government assistance nor import restrictions could provide a long-term solution for Russia’s light industry. In order to survive and thrive, domestic industry should be integrated into the global division of labour.

A New Trade Revolution

Over the past 40 years, the textile and clothing industry has developed as a global business, in which international trade networks play a major part. The role of trade capital has increased once again, but in contrast to the era of mercantilism, it now moves production facilities, rather than products, between countries. Since World War II, trading companies and global brand owners have contributed toward building the global supply chains that form the basis of today’s global light industry.

In order to lower their costs, traders and brand owners have moved their production from more developed to less developed countries – first to Japan, then to South Korea, Hong Kong, and Taiwan, and later to Southeast Asia and China.

New manufacturing processes and management practices accompany the transfer of physical facilities. As countries develop, they switch to manufacturing sophisticated, high added-value products and move more basic and labour-intensive production to less developed countries. As an example, Radaev mentioned Wal-Mart moving their manufacturing orders from China to Bangladesh.

Radaev examines the examples of China, Turkey, and Germany. China joined the global supply chains from the bottom up by undertaking cheap and labour-intensive production. Germany’s integration was from the top down: the country’s formerly extensive textile industryhas shrunk in recent decades, and now its domestic manufacturing focuses on high-quality, high added-value items (such as technical textiles). Labour-intensive, low value-added production has been moved to the former Eastern bloc countries.

Different from both China and Germany, Turkey has benefited from its skilled workforce and a favorable institutional environment for business. Russia, however, does not fit any of the above models.

Stake on Export

"We have no prospects unless we integrate ourselves into the global supply chain," says Radaev. He suggests that Russia should help a few of its viable textile companies survive and grow, while focusing on the production of synthetic fabrics, such as technical textiles, to meet increasing global and domestic demand. In Russia, in contrast to China, the current leader in technical textiles, cheap oil is available to support this production.

If successful, this strategy will place Russia among the countries with high added-value manufacturing industries. "Focusing on the domestic market will inevitably lead to losing this market," Radaev argues. It is therefore necessary to encourage export-oriented production.

Additionally, measures should be taken to help Russia's light industry attract foreign investment. A better institutional environment will send positive signals to potential investors, butthis will take time.

Other needed measures include co-financing the costs of marketing Russian products internationally, investing in infrastructure, reducing red tape, supporting technological innovation, and dealing with unfair competition, such as counterfeit and grey imports.

These measures, even if implemented, will not guarantee survival for all or most companies; according to Radaev, in the long run, just one-third of Russian companies will find their place in the global division of labour.

 

Author: Гринкевич Владислав Владимирович, February 06, 2014