Made not in Ukraine

I became a witness of one interesting situation in a clothes store. One girl came up to the shop assistant and asked to be shown a reasonably priced, decent, non-synthetic dress. The shop assistant advised her to go to a signature store for good quality items or to a second-hand store for a reasonable price. How did it happen that Ukrainians began to buy quality and clothes separately? Why is it so that for 17 years now domestic markets have been brimming over with junk and second-hand items, while our national producers have been forced to try and make ends meet? Is there really no light industry in Ukraine that could offer good-quality clothes? Is our domestic light industry able to produce fetching outfits? The Day asked customers and market experts these questions.

VESTIGES OF OLD GLORY

The clothes industry ranks high in the world, with manufacturing industry topping the list. Fabrics, clothes, and footwear are all products that every person needs. The light industry consists of 20 subbranches that represent the following groups: textile industry (cotton, flax, wool, silk, and knitted fabric production), as well as sewing, leather, shoe, and fur industries. According to the experts’ estimates the annual volume of Ukraine’s light industry market is 50 billions hryvnias, with Ukrainian-made products accounting a mere 20 percent and the rest coming from China, Turkey, and other countries. Salesmen bring over the border everything they can get their hands on: from throwaway socks to most expensive fur coats.

Is it really so that there are no more powerful shoe and clothes production centers left in Ukraine? Let us look at some information to better understand the light industry center distribution in Ukraine. Cotton fabric production is well-developed in Ternopil, Donetsk has cotton spinning factories, Poltava — spinning factories, and Kyiv — wadding weaving facilities. Wool industry is centered in Kharkiv, Luhansk, Odesa, and Cherkasy. Wool carpets are made in Chernivtsi region and Transcarpathia. Although there is virtually no natural silk production left in Ukraine, we can boast the full flax production and processing cycle, with factories producing tarpaulin, fire hoses, and raw materials for shoe industry. Italians, Germans, and the French wear with a great pleasure our sewing industry products, which is centered in Ternopil, Kyiv, Lviv, Dnipropetrovsk, Odesa, Kharkiv, and Donetsk. This is in contrast to Ukrainians, who prefer junk made in China. It is still possible to buy domestically produced footwear in Kyiv, Kharkiv, Zaporizhia, and Odesa.

It has always been difficult to procure Ukrainian-made fur to make fur coats. The reason was that until recently fur production was carried out in primitive conditions and on a seasonal basis. Now recently launched factories are operating in Kharkiv and Odesa, producing both natural and artificial fur.

Valentyna Izovit, president of the Association of the Ukrainian Textile and Clothing Industry (Ukrlehprom), says: “The light industry’s current output is one-tenth of its Soviet-time volumes. We simply crashed because first there was the unrestrained privatization and then we were the first ones to enter the WTO and cut all customs duties.” Recently the industry has been experiencing improved conditions: since 2000 it has grown by an annual 15-20 percent. However, in the 11 months of 2008 the actual production volumes dropped by two percent, with the average profitability rate at 2-3 percent.

GORDIAN KNOT

Chinese and Turkish clothes, footwear, and toys enjoy great popularity on the Ukrainian market. The same kinds of products made in Ukraine are not as attractive to Ukrainian customers. Most Ukrainians try to save as much money as possible on purchases, refusing to admit that synthetic products and second-hand clothes are not healthy. This argument may not be known to everyone (at least its effect cannot be observed), but probably everyone knows how much these items yield to wear and tear. There is no doubt that among one can find clothes of good quality imported products. However, if they were imported legally, they will be priced on a par with Ukrainian products.

“Today importers have monopolized the market, bringing goods primarily from China and Turkey. It means that there exists a price level which is impossible to compete with,” explains Izovit.

From what Ukrainian producers say, a lot of goods cross the border as part of illegal arrangements—it means that they are not taxed. Valerii Lomach, head of the supervisory board of Teksterno, gives an example of the popular arrangements of such kind. The importers declare a lower value of their goods at the customs or bring them over as items in a different code. “The sums differ according to different merchandize,” he says. For example, the customs value of cotton fabrics may be reduced to one-fifth of its actual value. This means that the importer does not have to pay either VAT or any other taxes except import duty. “How can Ukrainian producers hold out against such competition?” sums up the businessman.

The light industry producers say that another reason why they lose the competition is that some individual entrepreneur importers operate based on the simplified taxation system and pay VAT at the same time. Such schemes were allowed by the Cabinet of Ministers until Dec., 20, 2008. But after December 20 the Cabinet passed decree No.1118, abolishing this scheme for entrepreneurs. However, recently it decided to suspend this decree. People in Ukrlehprom said that they sent an official letter with their arguments to Prime Minister Yulia Tymoshenko, asking to revise this decision. “Our company paid all the welfare payments for every single worker for the last year — 5,000 hryvnias apiece. At the same time, one entrepreneur (who combined the simplified taxation system and VAT payments — Author) pays about 800 hryvnias in taxes for the entire year. It is obvious that it is more difficult to make ends meet in these circumstances,” says Stela Stankevych, president of the Trembita company.

Oleksandr Sokolovsky, president of the All-Ukrainian Union of Regional Light Industry Employers believes that, after considering all the arguments, the government could pass a decision for the benefit of both businessmen and the state. “All the smuggled goods that enter the country are being sold all over the market through entrepreneurs on the simplified scheme. What does it mean? The state does not receive all the taxes it should.” It turns out that clothes, footwear, and other light industry goods produced in Ukraine are more expensive because the producers pay all the taxes. The profits tax, payments to all kinds of funds, and the VAT make up a greater part of the production costs. According Stankevych’s estimates, domestic producers have to pay 0.75 hryvnia in taxes out of each hryvnia they earn. This leaves the producer with only 0.25 hryvnia, and then he has to work more to pay the workers their wages.

Furthermore, producers believe that the sales of second-hand clothes hinder the development of the market. “Goods that are brought into the country are of the lowest quality. The sanitary inspection or other inspection services do not check them. Just look at the numbers in the information about second-hand items — quite a sad picture. The figures boggle the mind. Isn’t it obvious to everyone that everything is being thrown into this pit? I mean brands and really high-quality products — they can be found among second-hand items. Why is that so? Because no one controls it,” says Lomach, sharing his observations.

The problems that have accumulated over the years are further aggravated by the crisis. Many companies have partners abroad (for example, textile suppliers) and pay them in US dollars. That is why the producers are now setting stricter conditions for selling goods. They no longer allow postponements and are switching 100-percent advance payment. The production volumes are also going down.

In addition to setting tasks for the government, the producers have their share of work. Mykhail Voronin, head of supervisory board of Shveina Fabryka ‘Voronin,’ says that apart from crisis, his company is experiencing a lack of high-quality textiles. “We buy everything from abroad because Ukrainian companies do not produce good fabrics, lining materials, trimmings, or threads. Therefore, we cannot purchase in Ukraine everything that is needed to produce nice men’s suits.” We need to review and revamp the facilities to produce high-quality textiles.

SAVING THE DROWNING MAN

Representatives of the light industry have recently invited Volodymyr Novytsky, Minister of Industrial Policy, to attend a discussion of the industry’s problems. The producers’ main requests to the Cabinet of Ministers included equal conditions on the market, elimination of customs and tax loopholes, tax relief on equipment imported to modernize production facilities, lower gas prices for the industry achieved by removing the VAT from price calculation, and making energy costs a part of the producers’ gross expenditures.

“We need to itemize the specific problems experienced by the industry,” said Novytsky to The Day after the meeting. “What concerns the VAT relief for the gas consumed by the industry, this is a very complicated question. If we remove it, this will lead to lower production costs and stronger competitiveness. But the specific mechanism has to be discussed, and this may take more than a day.” When asked whether he meant searching for alternative sources of financing, the minister said that this is a part of the solution. At the same time, he did not rule out that the Cabinet of Ministers may pass a positive resolution on the VAT proposal. “On the other hand, this kind of mechanism worked in some chemical industry enterprises that used gas as raw material.”