Although Ukraine has the potential to be the top East European clothing supplier to Western Europe, the industry's growth is hampered by a lack of foreign investment. But this could be about to change following the 'Orange Revolution' at the end of 2004 and the decision in March this year to lift the last remaining restrictions on trade with the EU. Jozef De Coster reports from Kiev.

Apparel industry consultants, who have been watching developments in Eastern Europe since the early 1990s, generally believe that Ukraine has the best chance of succeeding Romania as the number one East European clothing supplier to Western Europe. This position was previously held by Yugoslavia (until 1993), then Poland (until 1999).

It appears, however, that the Ukrainian textile and clothing industry continues to suffer from a number of handicaps, which greatly hamper the industry's ability to grow.

"Employment in the sector tumbled from 700,000 in 1990 to less than 200,000 today. And the sector continues to lose 10,000 jobs per year," complains Olga Yefimenko, chairwoman of Ukraine's textile and clothing Labour Union.

In 2004, Ukraine exported only €492 million worth of textile and clothing products (of which 90 per cent were clothing) to the 25 EU member countries, while corresponding EU exports to Ukraine amounted to €764 million.

Probably the most serious handicap of Ukraine's apparel manufacturers is the lack of capital to either enhance their capabilities as CMT producers or to develop and export their own clothing collections. This is where foreign investors could step in to help accelerate the industry's growth.

Olga Yefimenko

Foreign investment

Until now, the Ukrainian textile and garment industry has attracted little foreign investment.

Tamara Kirichenko, director of the Ukrainian Association of Light Industry, can hardly believe estimates published in a recent USAID-financed study, according to which around 130 wholly or partly foreign-owned CMT companies have been set up in Ukraine over the last ten years.

Although she has heard about some Turkish investments in the Donetsk region and knows that some Scandinavian and West European clothing contractors have provided machinery and CAD equipment to their Ukrainian subcontractors.

It's not difficult to understand why western investors haven't been eager to invest in Ukraine. Like Russia, the country had a bad reputation because of its bureaucracy and 'irregularities.'

But since the 'Orange Revolution' at the end of 2004, which brought president Viktor Yushchenko to power, potential investors are showing a keen interest in the country. A high-profile investment conference on Ukraine, held in London on 15-16 April 2005, attracted 400 delegates.

Since 2000, Ukraine's economic growth has averaged almost 9 per cent a year, reaching 9.4 per cent in 2003 and 12.5 per cent in 2004. Personal incomes are rising, and Ukraine will probably join the WTO by the end of 2005.

As for the textile and clothing trade with the EU, quantitative restrictions were lifted in early 2001. On 9 March 2005, Ukraine and the European Union agreed to lift the last remaining restrictions on trade. Both sides also agreed to keep tariff levels low (not exceeding 4 per cent for yarns, 8 per cent for fabrics and 12 per cent for clothing).

Opportunities for investors
What are the most obvious opportunities and threats awaiting potential foreign investors in Ukraine's apparel sector?

Ukraine's low labour cost offers opportunities. Though wages in the labour intensive garment sector are rapidly increasing - they have more than doubled since 2000 - they are still very competitive.

In 2004, average monthly nominal wages in the Ukrainian textile and clothing industry were 409 Hryvnias (€60), well below the average wages recorded in the total industrial sector (743 Hryvnias). Wages in cities are much higher than in rural areas.

Semen Frenkel, commercial director of the leading knitwear producer JSC Rosa, which is based in the capital Kiev (2,000 workers), claims that each worker costs the company on average US$200 per month.

Another advantage of Ukraine is its great tradition as a textile and clothing producer. When it was a Soviet republic, Ukraine accounted for half of the Soviet Union's total textile and clothing production.

As a result, the country still has the whole textile chain, from cotton, wool, flax and manmade fibre up to woven and knitted clothing. In addition, and contrary to the situation in most new CMT-countries, Ukraine has plenty of experienced, middle-aged workers in its sewing and knitwear factories.

Not surprisingly, the country has carved a niche for itself in more 'difficult' items, such as suits, overcoats, blouses and shirts.

Proximity to Europe also distinguishes Ukrainian apparel exporters from their Asian competitors. A number of freight forwarders (including Danzas and Schenker) send trucks to the European markets each week. But due to long waiting times at the Ukrainian border, delivery still takes 4-5 days.

Huge grey economy

Voronin Menswear

Among the comparative disadvantages suffered by the Ukrainian economy, probably the biggest are: the predominance of the grey economy (up to 70 per cent of GDP, according to some observers), unclear trade and fiscal legislation, corruption and red tape.

A dominant problem, mentioned by virtually all Ukrainian and foreign exporters, is to get value added tax (VAT) refunds after export. By law, exporters should get the 20 per cent VAT in their exports back from the state, but hardly anybody does.

The actual situation is that legal exporters pay an export tax of 20 per cent and bribing exporters pay an export tax of 8-10 per cent. However, Yushchenko's government promises to bring order to the country's economy.

In early April 2005, Valentina Izovit, president of Urklegprom, the Ukrainian association of Light Industry (predominantly the textile and clothing industry), met Prime Minister Yulia Tymoshenko in order to discuss current sector problems.

"People in the street think that nothing has changed since the Orange Revolution. We, however, who as a professional organisation are involved in the preparation of new legislative texts, see real change ahead," Mrs Izovit says.

A major problem that cannot be quickly resolved without foreign investment is the poor state of the equipment in most textile and garment factories. According to Finpro (a Kiev-based organisation which is promoting Finnish investment in the Ukrainian industry), about 60 per cent of all machines in the garment industry are still of Russian origin, while average age varies between 10-12 years.

But things are slowly improving. The new machines installed are mainly of German and Japanese origin and CAD/CAM investments are rising.

Sergei Kotelnikov, Gerber Technology's representative for Russia and Ukraine, mentions that automatic cutters from Gerber are already installed in garment factories in Kharkov, Vinnitsa, Lviv and Khmelnitsky.

Leading men's wear manufacturer Michael Voronin, in Kiev, is using a Lectra CAD/CAM system, while leading women's wear producer Dana, also in Kiev, boasts two Investronica cutters. Dana also uses a Gerber CAD system, for easy communication with Berghaus, one of its main customers.

The most ambitious Ukrainian garment manufacturers are longing for capital to make investments in new machinery as well as in new services. Most of them want to partly or wholly break away from the tough CMT business where margins are just high enough to survive.

They dream of designing their own collections (many already do so for sales on the Ukrainian and Russian markets) and exporting them under their own labels to the rich western markets.

To get a better cash flow than the company can earn from its CMT-business with Marks & Spencer, Berghaus, Danwear, Artex etc, women's wear producer Dana recently invested in four of its own shops. There isn't too much competition on the local market yet, so Dana expects its retail business to be much more profitable than CMT.

Fast growing local market

Tekstil Kontact

Though Ukraine's economy is growing at a deft pace, the purchasing power of most of the country's 48 million consumers is still very low. In 2004, per capita GDP was estimated at US$1,324.

But, as Viktoria Bernadska, the apparel sector specialist at the French Embassy in Kiev stresses: "Clothing is very important for Ukrainians, especially for women. 13-17 per cent of the household budget is spent on clothing." In 2004, the domestic clothing market was estimated at nearly €1.4 billion.

The big majority (70 per cent) of Ukrainians still buy their clothing at open-air markets. On the street market near Lybidska Metro, in Kiev, numerous Chinese and Vietnamese vendors are at work, offering clothing under Asian brands such as Jing Cheng and Aolon.

Other stalls offer clothing items imported from Russia (Gloria Jeans) and from Turkey, as well as imitations of western brands, such as Wrangler, Diesel and Adidas.

Several leading Ukrainian clothing manufacturers such as men's wear producers Michail Voronin and Arber, the knitwear producer Rosa, and the women's wear producer Dana have set up their own shops to cater for the mid-market segment where they compete with foreign labels such as Mexx, Benetton, Mango, Naf-Naf, Inwear Matinique, and Tommy Hilfiger.

In the centre of Kiev, there isn't a shortage of upmarket brands either - with Dior, Pierre Cardin, Christian Lacroix, Armani and Escada all having a presence.

Interesting changes are also taking place in the clothing retail sector. Since 2000, several Ukrainian and Russian clothing chains have made an appearance and their current market share is estimated at 2 per cent.

In December 2004, the dynamic Ukrainian textile and clothing group Tekstil-Kontact opened a clothing trade centre in Kiev (the 'Alta Centre') - a totally new concept for Ukraine.

Aleksandr Sokolovskiy, director general of Tekstil-Kontact, says: "For the first time, Ukrainians have access to a broad range of clothing under one roof. Alta Centre is a shopping centre of 23,500 m², with a hall of 2,000 m² for Ukrainian clothing (TUSO), one of 3,000 m² for imported European clothing (ZZZ) and a Fashion Lab of 2,500 m², where some of the best Ukrainian designers have their own boutiques."

According to Sokolovskiy, Tekstil-Kontact will open 10 more clothing shopping centres in Ukraine this year, three of which will be in Kiev.

By Jozef De Coster.