Mongolia --- Export Potential Assessment

Export Potential Assessment in Mongolia

Project MON/A1/01A: Creation of Geographical Indications in Mongolia

Co-financed by the European Commission & the International Trade Centre

Market Analysis Section International Trade Centre

January 2006

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Table of contents

Preface ..........................................................................................................................5

Executive summary......................................................................................................6

Introduction ................................................................................................................14

1. Comparative analysis of the industries ...............................................................19 Index 1: Mongolia’s current export performance .............................................................20 Index 2: Domestic supply conditions...............................................................................22 Index 3: World markets...................................................................................................23 The overall export potential index ...................................................................................27

2. In-depth analysis by industry................................................................................28 Hides, skins, and leather ................................................................................................28 Textile fibres ...................................................................................................................35 Knitwear products ...........................................................................................................45 Meat ...............................................................................................................................51 Carpets ...........................................................................................................................57 Blankets..........................................................................................................................62 Vodka .............................................................................................................................65

Conclusion..................................................................................................................70 Crosscutting issues.........................................................................................................70 Crosscutting recommendations ......................................................................................71

Bibliography ...............................................................................................................73

Annex ..........................................................................................................................76 Annex 1. Composite indices ...........................................................................................76 Annex 2. Preferential tariff index.....................................................................................78

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List of tables Table 1. Sector positioning according to the potential and the importance of exports in 2003 ....7 Table 2. Export potential of industries and priority actions ..........................................................8 Table 3. Mongolia’s main exported sectors and products .........................................................15 Table 4. Mongolia’s exports of the seven selected product groups...........................................16 Table 5. Mongolia’s exports of the seven product groups and product items............................17 Table 6. Underlying indicators for the composite index “Mongolia’s export performance”.........21 Table 7. Underlying indicators for the composite index “domestic supply” ................................23 Table 8. Underlying indicators for the composite index “world markets” ...................................24 Table 9. Overall index of the export potential of industries........................................................27 Table 10. SWOT analysis for hides, skins and leather..............................................................29 Table 11. Mongolia’s exports of hides, skins and leather..........................................................30 Table 12. Mongolia’s production and exports of hides and skins ..............................................31 Table 13. Selected livestock in Mongolia (1,000 heads) ...........................................................31 Table 14. SWOT analysis for textile fibers ................................................................................37 Table 15. Mongolia’s exports of textile fibers ............................................................................38 Table 16. Head of goats and raw cashmere production in Mongolia.........................................39 Table 17. Production, purchase and exports of cashmere in Mongolia .....................................39 Table 18. Comparative table of Chinese and Mongolian cashmere quality indicators...............40 Table 19. Camel population in Mongolia (1,000 heads) ............................................................42 Table 20. Number of yak and yak hybrids in different years (in 1,000)......................................43 Table 21. SWOT analysis for knitwear products .......................................................................47 Table 22. Mongolia’s exports of knitwear products ...................................................................48 Table 23. Comparison of the cashmere yarn industry in Mongolia and China...........................50 Table 24. SWOT analysis for meat ...........................................................................................52 Table 25. Mongolia’s exports of meat .......................................................................................53 Table 26. Number of livestock, meat production and exports....................................................54 Table 27. SWOT analysis for carpets .......................................................................................58 Table 28. Mongolia’s exports of carpets ...................................................................................59 Table 29. SWOT analysis for blankets......................................................................................63 Table 30. Mongolia’s exports of blankets ..................................................................................63 Table 31. SWOT analysis for vodka..........................................................................................66 Table 32. Mongolia’s vodka exports..........................................................................................66 Table 33. How to standardise indicators from 1 (low) to 5 (high): An example..........................76 Table 34. Indicators for the composite index of export potential ...............................................77

List of figures Figure 1. Export potential index: Underlying dimensions and indicators ...................................19 Figure 2. Mapping industries: Mongolia’s export performance versus world markets ...............26

List of boxes Box 1. Supporting Industries.....................................................................................................23 Box 2. Environmental issues and hides and skins sector..........................................................34 Box 3. A comparative analysis of cashmere quality in China and Mongolia ..............................40 Box 4. Camel wool supply, regional origins and quality ............................................................42 Box 5. The characteristics of the yak production in Mongolia....................................................43 Box 6. Cashmere production steps ...........................................................................................48 Box 7. Pet food export opportunities for Mongolian meat..........................................................55 Box 8. Carpets characteristics of the major country producers .................................................59 Box 9. Shortages of wheat production in Mongolia ...................................................................67

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Preface

This export potential assessment for Mongolia is part of the Technical Cooperation Project “Creation of Geographical Indications in Mongolia” (MON/A1/01A). A geographical indication is a sign used on goods that have a specific geographical origin and possess qualities or a reputation that are due to that place of origin. Most commonly, a geographical indication consists of the name of the place of origin of the goods (WIPO).

The project is implemented by the International Trade Centre UNCTAD/WTO (ITC) and the Mongolian Ministry of Industry and Trade (MIT), and co-funded by the European Commission and ITC through the Asia Trust Fund (ATF). The project is intended to

− (i) facilitate an informed policy decision of the Mongolian authorities on its international position related to geographical indications, including the implementation of its obligations regarding geographical indications under the WTO framework, in particular the TRIPs agreement; and

− (ii) familiarize relevant Mongolian interlocutors (Ministry of Industry and Trade, International Trade Research Centre, business associations, government agencies, interested companies, etc) with the concept of geographical indications and build capacity so as to enable Mongolian Industry and communities to use relevant geographical indications to their advantage.

This report was prepared by Dr. Thierry Paulmier (Associate Expert) and Dr. Michael Freudenberg (Senior Market Analyst) at the Market Analysis Section of the International Trade Centre UNCTAD/WTO (ITC).

The report benefits from major input of three national consultants, who collected sector-specific information in Mongolia and conducted interviews with enterprises:

− Mr. Dovdonbaljir Javzan (for research on cashmere fibres, knitwear, and blankets);

− Ms. Ariuntuya Tsend-Ayush (for research on raw hide skins, camel wool and yak wool); and

− Ms. Tsolmongerel Tsilaajav (for research on vodka and carpets and meat).

The authors would like to thank Dr. Jean-Michel Pasteels (Market Analyst) for discussions, comments and suggestions, and Ms. Aïssatou Diallo (Consultant) and Ms. Maike Barth (Intern) for excellent research assistance.

The authors would also like to thank the ITC/MIT team for their support, especially Mr. Koen Oosterom, Office for Asia-Pacific, Latin America & the Caribbean (OAPLAC), Division of Technical Cooperation Coordination (DTCC), International Trade Centre and Mr. A. Erdenepurev, Deputy Director, Policy Coordination & Strategic Planning Department, Ministry of Industry and Trade of Mongolia. Lastly, the authors would like to thank all interviewees who kindly answered the ITC questionnaire.

While efforts have been made to verify the information contained in this document, the International Trade Centre UNCTAD/WTO cannot accept responsibility for any errors that it may contain. The opinions and comments reported in this study reflect those of the authors and do not necessarily concur with those of the experts, their organisations or the Mongolian Ministry of Industry and Trade. The usual disclaimers regarding responsibilities apply to this report.

For further details on the present study, please contact Thierry Paulmier (email: [email protected]) or Michael Freudenberg (email: [email protected]).

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Executive summary

This study assesses the export potential of seven sectors in Mongolia. It compares and ranks sectors according to several dimensions, including Mongolia’s current export performance, the international environment (dynamism of world demand and Mongolia’s market access conditions), and domestic supply conditions. Statistical analysis and a literature survey are complemented by interviews with local stakeholders in Mongolia, both from the public and private sector, to gain first-hand insights into the domestic business environment that affects enterprises in Mongolia in the various product sectors.

The report also includes an in-depth analysis of individual industries, including an assessment of strengths, weaknesses, opportunities and threats (SWOT analysis), and possible target markets for diversification for each industry. In addition, the study provides information on the socio-economic impact of each industry. The study also identifies key areas of intervention and related policies that can promote future export growth.

Mongolia’s export potential appears highest for hides, skins and leather and for textile fibres. In contrast, the export potential seems limited for meat products and cashmere knitwear. Vodka is in an intermediate position.

Measuring the export potential of sectors and identifying industry-specific policies can only be part of a much larger undertaking that tackles the real issues at stake in Mongolia. The authors would like to stress that Mongolia should not only support specific industries, but also provide a business environment that is conducive to risk-taking, entrepreneurship, creativity and innovation in all sectors.

Background and purpose Broadening the industrial basis and diversifying the export base is a major issue for Mongolia, especially because its trade balance shows a structural deficit. Mongolia is a small, landlocked, developing economy in Northern Asia. As such, it displays a number of characteristics that render its socio-economic situation difficult. Mongolia’s exports are extremely dependent on mineral and agricultural products, which are mainly exported with little added value, due to the absence of significant domestic downstream activities. As a landlocked country remote from major world markets, Mongolia suffers from transportation costs that are significantly higher than those of many of its competitors. As a result, Mongolia’s enterprises are disadvantaged in processing inputs and producing goods that are heavy or voluminous, or for which delivery time is a major issue. In addition, given the small domestic market, enterprises in Mongolia tend to produce small volumes and are thus disadvantaged in sectors based on economies of scale.

The objective of this study is to identify sectors that have significant potential for export growth in Mongolia. When a government, donors and other stakeholders want to support non-traditional sectors, it is essential to focus on those with the highest potential for future growth.

Method To gauge the export potential, each of the sectors is examined along three main dimensions: (i) current export performance, (ii) the domestic supply conditions, and (iii) world markets.

− The current export performance of Mongolia, such as its exports in value, world market share, and growth rates of exports.

− The domestic supply capacity, such as the quality of products and the efficiency of supporting industries.

− The characteristics of world markets, such as growth of world demand and Mongolia’s access to international markets;

In total, the study uses 14 indicators and provides rankings for each dimension as well as an overall ranking of export potential that can be used to draw the attention of policy-makers. The

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resulting industry rankings however should be interpreted with caution, especially when absolute differences are small, since many indicators lack precision.

The study is based on inputs by ITC’s market analysis team and three national consultants. The research was undertaken during Summer 2005. It combines desk research with fieldwork in the country, and is based both on quantitative information, including trade statistics and market access data, and qualitative information, including a survey of existing studies and information collected from field interviews with enterprises.

− Quantitative information includes trade statistics and market access data. For market access conditions, tariff data are from ITC’s Market Access Map database (http://www.macmap.org/). Trade data come from ITC’s Trade Map (www.trademap.org), which is an online database of global trade flows and market access barriers for international business development and trade promotion, providing detailed export and import profiles and trends for over 5,300 products in 200 countries and territories. Users in Mongolia have free access to Trade Map. The International Trade and Market Research Center of Mongolia ([email protected]) or Mr. Erdenepurev at the Ministry of Industry and Trade ([email protected]) provide free usernames and passwords (see http://www.trademap.net/mongolia/login.htm).

− Qualitative information included a review of relevant literature and information collected from surveys based on an ITC questionnaire and interviews with enterprises and business associations. The latter is to validate the results and to gain first-hand insights into the domestic business and policy environment that affects enterprises in the various product sectors. In addition, national consultants identified sector-specific government strategies. It was unfortunately not possible to examine domestic supply conditions via interviews with enterprises for all industries.

Main results Bringing together the three indices of Mongolia’s current export performance, world markets, and domestic supply conditions into a summary measure suggests that Mongolia’s export potential is highest for hides, skins and leather and for textile fibers. These are not only Mongolia’s currently most important breadwinners in terms of export turnover among those industries under review, but also they are likely to remain so in the future, as they have the highest export potential index (Table 1).

In contrast, the export potential seems limited for meat and animal products; cashmere knitwear and carpets and wall covering. Vodka is in an intermediary position.

Industry-specific findings and main recommendations are summarised in Table 2.

Table 1. Sector positioning according to the potential and the importance of exports in 2003

Low potential Medium potential High potential

Important (More than USD 40 million)

--- --- Hides, skins and leather

Textile fibers

Medium Cashmere knitwear

Meat and animal products --- ---

Less important (Less than USD 1 million)

Household and furnishing textiles

Carpets and wall covering

Vodka ---

Source: TradeMap and Market Access Map, survey with enterprises and business associations. * The export potential does not take into account domestic supply conditions due to lack of comparable data.

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Table 2. Export potential of industries and priority actions

Industries (Evaluation:

index) Comments Priority actions

Hides, skins and leather (High: 3.7)

Large and dynamic international demand for leather product. Good exports performance despite fierce international competition. Favourable market access conditions throughout the world, but not in China, which takes almost all of Mongolia’s exports. Little value-added, as most hides and skins are exported either in raw form or only after the first stage of processing (“wet blue”). Poor and declining quality. Poor sanitary and veterinary services and slaughtering system. Outdated and highly polluting tanning process. Smuggling to China and Russia is major problem.

Increase the value-added of domestic manufacturing by further processing goods. Focus on market niches to avoid competing on price against Chinese and other products. Acquire and use of modern equipment and methods, especially Environmentally Sound Technologies (E.S.T.). Attract foreign direct investment that brings technological transfer, know how, and modern management methods to Mongolia.

Textile fibers (High: 3.3)

Mongolia’s textile fibres mainly composed of cashmere, camel and yak wools. Cashmere is the third most valuable commodity in Mongolia after gold and copper, and the cashmere industry is Mongolia’s single largest source of employment. A principal source of livelihood for Mongolia’s poor. One of the major world suppliers for fine animal hair products. Recent decline of exports Herding sector may well have surpassed the total herd size that can be sustained by Mongolia’s pasturelands. Good quality of Mongolian cashmere although recently declined. Most Mongolian cashmere is exported with only little value added, mainly in the form of raw or dehaired/tops cashmere. About half of Mongolian production is unofficially exported, mainly as raw cashmere to China for processing. Mongolian companies underutilize their production capacities, as they lack cash flow to buy raw cashmere, and suffer from the fierce competition of Chinese companies. Optimistic outlook for cashmere products. As a luxury fibre, cashmere commands some of the highest prices in the world of textiles. Cashmere will also have increased demand in blends: silk, wool, cotton and synthetics. Very rare camel species called Bactrian, but decreasing rapidly and in danger of extinction in the years to come. Very low Mongolian camel wool production and poor quality Lack of modern de-hairing plants and equipment. Second population of yaks of the world after China.

Provide long-term loans to herders with low interest rate and short-term loans to purchase raw cashmere. Review the cashmere export tax system and reduce income tax Remove distortionary taxes –including export taxes. Tax holidays for processors could also be used to lower their costs, Adapt the current customs valuation methods for processed cashmere to international standards. Improve access to market information Introduce a special policy for cashmere export development and promotion. Support the Cashmere Association to encourage the breeders to produce a finer and whiter fibre. Develop attractive production sites for cashmere products. Improve the cashmere production/supply chain management. Introduce Environmentally Sound Technologies (E.S.T.) urgently in wool, and cashmere processing industries. Set-up an Export Processing Zone (EPZ) in Mongolia, especially in an existing industrial area. Encourage aid agencies to provide long-term technical assistance in production, quality control, design and marketing. The cashmere producers should be encouraged to participate in trade fairs and exhibitions, to build partnership with foreign trading houses and to seek long-term contacts with retail store chains. Improve quality: Better understanding of quality control processes and systems. Improve technology of dehairing processes to reduce coarse hair content.

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Vodka (Medium: 2.8)

Around 200 companies operate in the vodka sector, employing several thousands of people. Marginal share of Mongolian exports. Questionable social impact because of alcoholism. Favourable market access conditions in major importing markets, whereas Mongolia’s neighbouring countries are rather protective. Declining export value despite a fast growing international demand. Long production experience of Mongolian companies Few companies seem able to export High quality of vodka with a unique soft taste. Modern process technology Reasonably low production costs compared to major world and regional exporters. Improving business environment especially in terms of tax laws. Lack of a brand image although relatively high marketing skills. Low capacity utilization due to lack of raw materials and too numerous local companies. Poor packaging services.

Render taxation policy stable and tightly control vodka producers in terms of tax discipline. Control the quality and licensing of vodka producers. Control the quality of imported products. Improve the bureaucratic handling of service to businesses, with more flexibility and less control.

Household and furnishing textiles (Low: 2.5)

Fast growing exports in dynamic international market High quality of Mongolian camel and cashmere blankets. Limited local production capacities. Positive outlook for cashmere-weaving industry.

See also textile fibers Develop spinning capacity and improve technology or better usage of existing spinning equipment to improve yarn quality.

Carpets and wall covering (Low: 2.5)

Exports remain marginal, although growing strongly in a context of declining international demand in recent years. Mainly exporting to China and Russia. Favourable market access conditions except in the neighbouring countries. Future global demand for carpets may be negatively affected by the existence of substitutes and changes in consumer preferences. Only few carpet producers in Mongolia. Poor quality, old and not very original designs. Most inputs and equipments are imported. Outdated and inflexible equipment in plants Higher production costs relative to major regional exporters, such as China. Carpet plants do not operate at full capacity, because of an insufficient supply of sheep wool. Low marketing skills.

Provide domestic producers with the same tax breaks that are given to foreign and joint venture companies, such as import duty and VAT exemption. Investment for new production machinery is crucial for the domestic producers. Resolve the bad debt problem of the domestic producers Assist domestic producers taking part in fair and exhibitions and making contacts with foreign buyers and trading houses. Producers should learn how to utilize internet-based promotion and advertising, and to position themselves in the international market. Address the problems of poor end-user behaviour with the help of practical research and development on scouring and setting stages in the production process. Improve designs and product development capabilities in collaboration of the Mongolian Textile Institute (MTI) and through linkage programmes with foreign design institutes.

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Cashmere knitwear (Low: 2.4)

One of the major manufacturing and employing sectors, providing approximately 28% of all industrial employment in Mongolia. Its importance for exports is limited though, representing only 2.6% of total exports, a share in relative decline. Weak export performance, strongly concentrated geographically. Four fully integrated producers of knitwear products in Mongolia. Domestic processing companies operating below capacity. Product quality satisfies the high demands of foreign buyers in Europe or the United States, but design remains basic. Higher production costs than in China, and low labour productivity. Almost inexistent domestic supporting industries, and insufficient spinning capacities. Poor marketing skills, and channels of distribution almost inexistent. High and sometimes discriminatory tariffs applied to Mongolia in its current exporting markets.

See also textile fibers. Develop spinning capacity, and improve technology or better usage of existing spinning equipment to improve yarn quality.

Meat and animal products (Low: 2.4)

High socio-economic impact. Around 380,000 herdsmen and 170,000 herdsmen’s families. Limited quantity of Mongolian processed meat. Little export-oriented and exports little value-added products, mostly raw meat, with a prevalence of beef, Rapidly changing composition of exports in favour of horsemeat. Almost exclusively exported to one country, Russia. “Natural meat”, unique taste and ecologically clean. Bad packaging, lack of chilling and refrigeration facilities, and inadequate quality control. Higher production costs relative to major regional exporters (Russia, China). Difficult collecting animals from the small-scale farmers. Opportunities for product diversification (pet food and horsemeat). Highly concentrated International demand for the meat products on a very few market and not particularly dynamic. Not favourable market access, especially for beef, while conditions are slightly better for horsemeat.

Secure funding for the modernization of factories and the development of adequate and efficient storage and transport facilities, notably by giving access to loans at low interest rate. Reduce VAT rate. Reduce import duties on machineries and equipments to facilitate the modernization and the development of the industry. Improve veterinary services to meet the international sanitary norms of the WHO/FAO Codex Alimentarius. Formulate a long-term strategic vision, jointly with the public and private sector, for the (long-term) development of the meat industry, to utilise the country’s large livestock resources. Intensify government-to-government negotiations to reduce the high import tariff on some big markets, such as Russia, and to get technical assistance to address the non-tariff barriers related to hygiene and sanitation in the EU and US markets.

Source: TradeMap and Market Access Map, survey with enterprises and business associations in Mongolia. * Points range from 1 (lowest potential) to 5 (highest potential). Industry rankings should be interpreted with caution, especially when absolute differences are small, since many indicators lack precision. But very low rankings may indicate potential areas for improvement..

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Crosscutting issues

Low volume Mongolia is a small economy with a limited workforce. In many sectors, insufficient production capacity was mentioned as one of the major obstacles to export growth, mainly due, according to those interviewed, to a lack of available capital.

Limited value added In many sectors, one of the major obstacles to export and export earning growth is the inability to process the commodities, and accordingly to add value and diversify products. Again, the results of the surveys indicate a lack of available capital along with a shortage of skilled workers.

Insufficient cost competitiveness In most sectors, Mongolia’s exports are curbed by high production costs. The government and other stakeholders need to pay attention to two major cost factors compromising Mongolia’s competitiveness: labour cost vs. productivity and transportation costs.

High transportation cost The national transport network faces two weaknesses: the small density of the population and the physical barriers of the country (for example mountains and deserts). As a result, Mongolia suffers from high shipping costs. Despite an increase in competition between the transporting companies, the costs for intra-regional transportation are still higher than for international transportation.

Limited entrepreneurship and marketing skills From Mongolian companies interviewed, there is evidence that Mongolia entrepreneurs lack basic skills for export business and a genuine entrepreneurship mentality. Very few of the interviewed managers speak English, which is essential for trading. Some acknowledged they do not know how to find clients abroad. The general lack of awareness of the importance of quality is another issue. Therefore there is a wide gap in terms of export readiness between foreign and domestic companies.

In addition, professional consulting and advisory services are not available in Mongolia. Since exporters cannot find any information on foreign markets in Mongolia, they tend to rely on families and friends living abroad. Companies indicate they are prepared to pay for services they require, especially for advisory, consultancy, information and training services and have resources to do so.

Moreover, Mongolian exporters marketing and promotion activities are very limited. The main promotion instrument is a participation of foreign fairs organized by the Chamber of Commerce or other organizations. Instead of actively looking for partners and buyers, they rather wait until a potential buyer will find them in Ulaan Baatar.

Limited access to finance Exporters underline that financing export from Mongolia is one of the major constraints to export development. They do not have sufficient working capital that could support the process of exporting. The other difficulty is lack of reliable source of information about foreign markets, tariff, documents, packaging and labelling as well as competition.

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Limited access to raw material supply Another major problem indicated by exporters is deficit of traditional Mongolian raw material such as cashmere and leather. Cashmere and leather are sold and smuggled to China and their storage on the domestic market makes prices higher.

The SME’s Research Centre at the Technical University carried out in 2004 a survey in order to find out what kind of policy entrepreneurs are expecting from the Government and how the current policy affects their business. In the opinion of the entrepreneurs, the main obstacles to business development are taxation, corruption, unfair competition, high interest rates, obtaining external finance, shortage of human resources, lack of access to new ideas and technology, and shortage of business development services.

Crosscutting recommendations

Support entrepreneurship and marketing skills Entrepreneurs are at the core of the economic dynamism, since they take a risk, undertake investment and innovation and create business activities, wealth, jobs and development. The government could provide courses to Mongolian entrepreneurs on the basic skills relative to business (English, accounting, marketing).

It is essential to know and to meet the taste and the needs of customers as well as their demands in terms of product characteristics and quality, time delivery, packaging and related services. In addition, the government could provide needed market information and promote their participation to international exhibitions.

Introduce measures to attract foreign investment The distinction between Mongolia companies and foreign companies is economically irrelevant. There are just companies who are competitive, creating wealth, jobs and reducing poverty and companies who are not. In addition, foreign companies bring into the country marketing skills and modern process technologies, in additional to financial resources. As such, they are a major channel for knowledge transfer and capacity building.

The government could give preferential treatment to foreign companies that can bring into the country capital, technology, technical and marketing expertise, and training. Staff from Ministries in contact with foreign companies needs to be able to communicate in English.

Promote the image of Mongolia Inc. There is evidence that Mongolia is not well known around the world. However some small countries have managed to raise their international profile. For example, awareness of Botswana recently increased because it was ranked number one in Africa for the Corruption Perceptions Index (Transparency International) and thanks to Miss Botswana who recently became Miss Universe. Likewise, New Zealand has become better known internationally because the movies “Lord of the Rings” were shot in the country. Since then, the tourism industry has boomed in New Zealand. To a much lesser extent, the Mongolian movie “Weeping Camel” also impacted tourism industry in Mongolia.

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Possible next steps The study has examined the potential for export growth in the seven pre-selected product groups using a conceptual framework mainly based on relatively “objective” economic judgements (Mongolia’s export performance and supply conditions, and global demand patterns). There are three main extensions to the study:

− Obtain additional information on less-examined industries. For some industries, it was problematic to obtain background information (statistics, reports, studies, industry news) from business associations or relevant Ministries, and to find enterprises to respond to the questionnaire. Though for some industries, absence of information might be an indication of missing export potential, this is certainly not true for all industries. Future studies should thus make a special effort to cover these industries better and monitor closely domestic supply conditions.

− Increase the scope of the study and include services. Services, which are the fastest growing component of international trade, were excluded from the current study mainly for reasons of comparability of the method. Future studies should certainly adapt the methodology and examine selected services.

− Select priority sectors out of those with high potential. If the government wants to select a limited number of industries for particular treatment (e.g. sector-specific export strategies), the analysis of the export “potential” has to be complemented with an evaluation of various socio-economic criteria (social desirability) that allow identifying “priority” sectors. For this, more subjective criteria can be introduced, by taking into consideration sector socio-economic impact and political objectives. The Government of Mongolia could set priorities in its export strategy by taking into account additional factors, such as job creation, rural and female employment, poverty reduction, technology advancement and industrialisation, backward and forward linkages with other sectors and spillover effects to the rest of the economy, foreign currency generation, environmental sustainability and food security.

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Introduction

Background Mongolia is one of the largest developing economy, landlocked in Northern Asia between China and Russia. As such it displays a number of characteristics that renders its socio-economic situation difficult:

− Mongolia is a small developing economy. With a population of 2.7 million and a gross domestic product (GDP) of USD 1.2 billion in 2004, per capita income amounted to USD 480. About 36% of the population earn less than the minimum wage of about USD 1 per day. Mongolia is one of the poorest countries in the world, currently ranked 114th out of 177 countries in terms of human development by UNDP (2005). In economic terms, this means that Mongolia is a small player for most sectors on both the supply and the demand side. As such, Mongolia can be considered a price taker both for inputs and outputs, having insufficient productive capacity and a small domestic market with low purchasing power. Individual enterprises in Mongolia, since they tend to produce small volumes, are also disadvantaged in sectors based on economies of scale. This translates into difficulties in penetrating major foreign markets. Mongolia industrial basis is narrow, and raw materials and commodities from mining or agricultural sectors dominate production. Due to the absence of significant domestic downstream activities, the bulk of exported goods have little added value. Infrastructure and the education system are not efficient and are of low quality, and the stock of human capital and of skilled workers is limited.

− Mongolia is a large country with very few inhabitants. With a land area of 1,564,116 km2 and a population of about 2.7 million, the population density is very low (1,5 hab/km2). Land is the abundant production factor in Mongolia so this country has a natural advantage for industries that use land intensively, and not labour intensive industries.

− Mongolia is a landlocked country remote from major world markets. Mongolia is landlocked by the People’s Republic of China (PRC) and the Russian Federation and is remote from major developed markets. This results in high transport costs. Given these factors, Mongolian enterprises are disadvantaged in processing inputs and producing goods that are heavy or voluminous, or for which delivery time is a major issue. The distance from major world markets reinforces this disadvantage. Fast moving markets demand short response times to buyer’s requirement. Mongolia could require appropriate cross-border agreements with the two neighboring countries. Meanwhile, Mongolia can serve as a corridor for transit traffic between the two countries, reducing their transport costs and providing a sustainable source of foreign exchange earnings for Mongolia.

− Mongolia’s exports depend on a few products. Mongolia is heavily dependent on commodity exports, notably copper, gold and cashmere (Table 3). Mineral products, of which copper concentrate is the largest single item, accounted for half of total export earnings in 2003. This dependence makes the economy vulnerable to shifts in world commodity prices. Mongolia also exports agricultural commodity goods, such as cashmere (Mongolia accounts for 30% of worldwide cashmere production), textiles, and meat.

Given these constraints, broadening the industrial base and diversifying the export base is a major issue for Mongolia on its national policy agenda, especially as its trade balance shows a structural deficit.

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Table 3. Mongolia’s main exported sectors and products

2-digit and 4-digit groups of Harmonised System Export value (USD 1,000)

Share of total (%)

1999 2000 2001 2002 2003 2003

26 Ores, slag and ash 128,363 166,667 153,197 150,451 179,341 29.1 2603 Copper ores and concentrates 119,215 160,276 147,902 140,238 163,707 26.6 2613 Molybdenum ores and concentrates 9,025 6,155 5,078 10,117 15,300 2.571 Pearls, precious stones, metals, coins, etc 3,124 6,074 684 76,282 139,904 22.7 7108 Gold unwrought or in semi-manuf. forms 3,088 6,058 682 76,278 139,877 22.762 Articles of apparel, accessories, not knit or crochet 30,682 74,274 73,079 59,270 61,852 10.0 6204 Women's suits, jackets, dresses skirts etc. & shorts 3,832 19,670 22,877 21,179 31,449 5.1 6203 Men's suits, jackets, trousers etc & shorts 5,527 28,288 26,589 14,474 11,743 1.9 6205 Men's shirts 10,170 12,476 10,411 10,334 9,556 1.6 6201 Men's overcoats, capes, windjackets etc 5,990 6,397 3,910 2,988 3,424 0.6 6208 Women's singlets, slips, briefs, pyjamas, bathrobes etc 146 70 229 750 2,480 0.4 6207 Men's singlets, briefs, pyjamas, bathrobes etc 90 608 2,577 7,039 2,133 0.341 Raw hides and skins (other than furskins) and leather 24,059 38,141 57,389 45,521 54,499 8.8 4105 Sheep/lamb skin leather 0 3,090 30,738 26,326 33,948 5.5 4104 Leather of bovine/equine animal 61 85 8,779 7,383 10,311 1.7 4101 Raw hides&skins of bovine/equine animals 10,071 18,232 10,121 7,484 5,963 1.0 4106 Goat/kid skin leather 0 19 845 417 3,020 0.561 Articles of apparel, accessories, knit or crochet 22,332 31,454 29,204 42,590 53,973 8.8 6110 Jerseys, pullovers, cardigans, etc, knitted or crocheted 20,073 25,944 18,913 18,792 20,451 3.3 6104 Women's suits,dresses,skirt etc&short, knit/croch 296 393 1,674 4,924 10,987 1.8 6106 Women's blouses & shirts, knitted or crocheted 225 576 1,291 2,724 7,210 1.2 6105 Men's shirts, knitted or crocheted 405 54 224 7,912 6,741 1.1 6103 Men's suits,jackets,trousers etc&shorts, knit/croch 902 712 116 4,040 3,265 0.5 6109 T-shirts, singlets and other vests, knitted or crocheted 14 132 3,507 2,608 2,875 0.5 6107 Men's underpants,pyjamas,bathrobes etc,knit/croch 5 0 0 72 1,808 0.351 Wool, animal hair, horsehair yarn and fabric thereof 73,245 84,897 67,568 41,417 46,073 7.5 5105 Wool & fine or coarse animal hair, carded or combed 48,736 56,465 58,991 32,709 27,616 4.5 5102 Fine or coarse animal hair, not carded or combed 16,902 24,116 3,670 2,881 11,602 1.9 5101 Wool, not carded or combed 6,012 2,950 3,898 3,990 5,293 0.9 5103 Waste of wool 1,008 383 720 1,363 1,362 0.225 Salt, sulphur, earth, stone, plaster, lime and cement 17,027 19,406 20,347 19,022 21,363 3.5 2529 Felspar; leucite; nepheline & nepheline syenite; flourspar 17,014 19,356 20,319 16,956 21,057 3.427 Mineral fuels, oils, distillation products, etc 1,322 2,260 3,838 3,434 13,879 2.3 2701 Coal; briquettes, ovoids & similar solid fuels manuf. from coal 0 0 0 1 5,846 0.9 2709 Crude petroleum oils 1,161 1,813 1,778 3,093 4,547 0.7 2710 Petroleum oils, not crude 156 441 2,050 280 3,474 0.62 Meat and edible meat offal 15,617 16,046 17,614 20,248 13,469 2.2 202 Meat of bovine animals, frozen 13,194 14,283 12,020 13,826 9,321 1.5 205 Meat of horses, asses or mules - fresh, chilled or frozen 28 5 3,070 5,342 3,831 0.605 Products of animal origin, nes 5,706 6,603 7,469 7,083 6,951 1.1 0504 Guts, bladders and stomachs of animals other than fish 4,038 4,645 5,115 5,104 4,986 0.8 0503 Horsehair 541 646 1,367 1,088 1,339 0.272 Iron and steel 2,709 3,213 1,996 1,467 3,962 0.6 7207 Semi-finished products of iron or nonalloy steel 0 13 7 11 2,369 0.484 Machinery, boilers, nuclear reactors, etc. 3,398 1,348 1,699 1,086 3,063 0.5 8431 Machinery part 787 795 530 6 1,063 0.274 Copper and articles thereof 2,560 1,695 2,299 2,374 2,392 0.4 7403 Refined copper and copper alloys, unwrought 2,411 1,229 2,161 2,330 2,378 0.401 Live animals 277 239 934 1,377 1,874 0.3 0106 Live animals, nes 173 239 831 1,377 1,867 0.355 Manmade staple fibres 4 0 8 791 1,579 0.3 5514 Woven fabrics of synthetic staple fibres, mixed with cotton 0 0 0 790 1,579 0.373 Articles of iron or steel 1,187 233 167 114 1,242 0.288 Aircraft, spacecraft, and parts thereof 2,405 0 1,096 111 1,165 0.297 Works of art, collectors pieces and antiques 7 19 29 21 1,123 0.2 9706 Antiques of an age exceeding one hundred years 2 4 0 2 1,110 0.2All products 358,194 465,889 448,474 480,453 615,866 100

Only items with an export value of more than USD 1 million in 2003 are shown. Source: TradeMap, calculations by ITC.

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Purpose The objective of this study is to identify sectors that have significant potential for export growth in Mongolia. Mongolia disposes of several products that contain certain qualities that are specific for Mongolia.

These products, primarily meat, cashmere, leather and vodka have good potential to increase exports. Geographical indications (GIs) could be an effective tool to support value-added exports for these products and decrease Mongolia’s dependence on volatile raw material prices. As a side effect, this would also facilitate protection to European GIs on the Mongolian market.

The study has a strategic focus, and aims to guide the government, the private sector and civil society towards the most promising sectors. This is of particular relevance in the initial stage of a National Export Strategy exercise.

Selected product groups The Ministry of Industry and Trade of Mongolia together with ITC’s market analysis team selected seven product groups for an in-depth examination of their export potential (Table 4).

Table 5 reveals one challenge of the study: the selected product groups differ substantially in terms of export value and the number of underlying products. For instance, some product groups are made of only product items (e.g. vodka), while others consist of more than a dozen product items, as is the case for example for hides, skins and leather. It would have been desirable to also include services to get an overall picture of potential sectors in Mongolia, but it was decided to focus only on the goods sector, for which the assessment can be done in a comparable manner.

Table 4. Mongolia’s exports of the seven selected product groups Value

(USD 1,000) Share of total exports

(%)

1999 2000 2001 2002 2003 1999 2000 2001 2002 2003

Hides, skins and leather 25,005 32,949 38,265 45,585 54,572 7.6 7.5 9.2 9.7 8.9

Textile fibers 65,691 80,898 64,684 36,866 42,858 20.0 18.3 15.6 7.8 7.0

Cashmere knitwear 19,344 26,236 16,839 13,435 16,157 5.9 5.9 4.1 2.8 2.6

Meat and animal products 12,671 14,067 14,813 19,125 13,151 3.9 3.2 3.6 4.1 2.1

Carpets and wall covering 118 152 379 779 872 0.0 0.0 0.1 0.2 0.1

Household and furnishing textiles 113 257 72 102 279 0.0 0.1 0.0 0.0 0.0

Vodka 812 907 3 40 47 0.2 0.2 0.0 0.0 0.0

Sub-total seven sectors 123,754 155,466 135,055 115,932 127,936 37.7 35.2 32.6 24.6 20.8

Total 328,547 441,911 414,692 471,993 615,368 100.0 100.0 100.0 100.0 100.0

Source: TradeMap, calculations by ITC.

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Table 5. Mongolia’s exports of the seven product groups and product items

HS 1996 6-digits Product label

Exports (USD 1,000)

Share of product in Mongolia's

exports (%)

Mongolia's rank in world

exports

Mongolia's share in

world exports

(%)

Trend growth of exports in value

(% p.a. from 1999-2003

1999 2000 2001 2002 2003 2003 2003 2003 Mongolia World

Hides, skins and leather 25,005 32,949 38,265 45,585 54,572 8.86 .. 0.32 19 14410512 Sheep or lamb skin leather, otherwise pre-

tanned 0 247 25,992 26,318 33,948 5.51 4 11.15 .. 4

410422 Bovine leather, otherwise pre-tanned 23 31 1,757 7,109 10,009 1.63 27 0.43 480 -5410110 Bovine skins, whole, raw 445 587 1,327 5,980 5,397 0.88 30 0.46 108 41410612 Goat or kid skin leather, otherwise pre-

tanned 0 0 476 416 3,017 0.49 9 1.66 .. 24

410221 Sheep or lamb skins, pickled, without wool on 0 250 3,070 832 828 0.13 20 0.32 .. 1

410129 Hide sections, bovine, fresh or wet-salted 449 521 1,201 905 432 0.07 42 0.16 5 37410431 Bovine and equine leather, full/split grains 0 0 33 29 302 0.05 72 0.00 .. 17410310 Goat or kid hides and skins, raw 682 551 521 348 157 0.03 39 0.41 -29 21410390 Raw hides and skins of animals 58 578 97 187 155 0.03 54 0.07 9 13410121 Bovine hides, whole, fresh or wet-salted 6,799 13,088 246 598 134 0.02 92 0.01 -67 0410790 Leather, nes 0 0 0 0 74 0.01 58 0.02 .. -5430219 Tanned or dressed furskins, whole, not

assembled 196 214 935 400 57 0.01 62 0.01 -17 9

410210 Sheep or lamb skins, raw, with wool on 10,684 13,290 2,604 2,460 43 0.01 76 0.01 -72 30430180 Raw furskins nes, whole 5,669 3,592 6 3 19 0.00 39 0.02 -84 23Textile fibers 65,691 80,898 64,684 36,866 42,858 6.96 .. 3.56 -16 -6510530 Fine animal hair, carded or combed 48,702 56,438 58,918 32,696 27,600 4.48 2 6.75 -15 -8510210 Fine animal hair, not carded or combed 16,153 23,715 3,476 2,842 11,582 1.88 4 9.87 -24 -17510121 Degreased shorn wool, not carded,

combed or carbonised 836 745 2,290 1,328 3,676 0.60 12 0.54 42 1

Cashmere knitwear 19,344 26,236 16,839 13,435 16,157 2.62 .. 0.31 -10 -1611010 Pullovers, cardigans and similar article of

wool or fine animal hair, knitted 19,312 25,641 14,795 12,996 15,740 2.56 32 0.33 -10 -2

610461 Women’s/girls’ trousers and shorts, of wool or fine animal hair, knitted 0 73 199 134 114 0.02 32 0.21 .. -9

610210 Women’s/girls’ overcoats, anoraks etc., of wool or fine animal hair, knitted 0 238 13 4 81 0.01 55 0.09 .. 0

610451 Women’s/girls’ skirts, of wool or fine animal hair, knitted 1 134 1 169 74 0.01 39 0.19 142 -14

610110 Men’s/boys overcoats, anoraks etc, of wool or fine animal hair, knitted 0 0 0 1 66 0.01 45 0.09 .. 10

610341 Men’s/boys trousers and shorts, of wool or fine animal hair, knitted 29 61 95 78 49 0.01 39 0.05 14 21

611691 Gloves, mittens and mitts, nes, of wool or fine animal hair, knitted 0 8 15 30 15 0.00 47 0.03 .. 5

611410 Garments nes, of wool or fine animal hair, knitted 2 68 1,680 1 10 0.00 62 0.01 -10 15

610441 Women’s/girls’ dresses, of wool or fine animal hair, knitted 0 13 41 22 8 0.00 52 0.03 .. -20

Meat and animal products 12,671 14,067 14,813 19,125 13,151 2.14 .. 1.10 4 2020210 Bovine carcasses and half carcasses,

frozen 10,378 13,799 9,880 11,196 7,329 1.19 5 3.56 -9 0

020500 Horse, ass, mule or hinny meat, fresh, chilled or frozen 28 5 3,070 5,342 3,831 0.62 12 1.14 437 0

020220 Bovine cuts bone in, frozen 2,265 263 1,863 2,587 1,991 0.32 16 0.31 22 0Carpets and wall covering 118 152 379 779 872 0.14 31 0.07 76 -7570110 Carpets of wool or fine animal hair, knotted 118 152 379 779 872 0.14 31 0.07 76 -7Household and furnishing textiles 113 257 72 102 279 0.05 40 0.22 9 4630120 Blankets (o/t electric) & travelling rugs,of

wool or fine animal hair 113 257 72 102 279 0.05 40 0.22 9 4

Vodka 812 907 3 40 47 0.01 71 0.00 -59 36220860 Vodka 812 907 3 40 47 0.01 71 0.00 -59 36


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Structure of the report The structure of the report is as follows:

− Chapter 1 highlights the main findings, by comparing the seven industries along each of the three main dimensions (Mongolia’s current export performance and the domestic supply conditions, and world markets) and along the overall index of export potential assessment.

− Chapter 2 presents the main findings for the industries with the highest export profile. It includes, to the extent possible, a SWOT analysis and identifies possible target markets for diversification in each product group.

− The conclusion examines the major crosscutting issues that affect the competitiveness of all sectors.

− Finally, the annex presents in more detail the methodology used to calculate each of the indicators. It discusses the conceptual framework, the definition of the relevant indicators, and the limitations of the method. It also discusses how the underlying indicators are transformed so that they can be compared, and how the indices are weighted to obtain an overall measure of the export potential for each industry.

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1. Comparative analysis of the industries

This chapter seeks to estimate and compare the export potential of Mongolia in seven industries. The term “export potential” is used here in a broad sense and is defined as the capacity to expand exports. Some industries can be considered as having high potential because they have an already established and proven export record, as witnessed for example by high export values or high export growth rates over the last years. For other sectors, however, exports may still be negligible, but many of the necessary conditions for future growth may be in place.

An assessment of the export potential of industries requires taking into account very diverse multidimensional factors, both from the demand and the supply side. The large amounts of heterogeneous information are summarised using composite indicators, which provide a broad, albeit simplistic, picture of reality that can be used to draw the attention of policy makers. To do so, each industry is examined along three main dimensions: Mongolia’s current export performance; world markets; and Mongolia’s domestic supply conditions (Figure 1). In total, 14 indicators are used in this study (Annex, Table 34).

To allow comparisons, the underlying variables for each dimension have to be normalised before they are aggregated into composite indicators. The normalisation method used here converts each indicator into a range of 1 (weak performance) and 5 (best performance). For each indicator, it gives 1 point to industries with values below a certain threshold value and 5 points to industries with values above the threshold value.

For the overall measure of export potential these three dimensions are combined: the most interesting industries are those where all three indices are high, i.e. industries for which there are not only an important and dynamic international demand, but also an efficient and competitive domestic supply and an already good export performance. In other words, the export potential is considered highest in those industries:

− where international demand is growing fast and where Mongolia enjoys low or preferential access conditions in major international markets;

− where Mongolia’s exports are important, represent a high world market share and are growing fast;

− where production processes in Mongolia’s enterprises are efficient and product quality high; and where domestic supporting industries are efficient and enhance the sector’s competitiveness.

Figure 1. Export potential index: Underlying dimensions and indicators

Exports in value

World market share

Relative trade balance

Growth in exports

Current export performance

Processes and products

Supporting industries

Domestic supply conditions

Dynamism of world demand

Market access conditions

World markets

Export potential index

20 / 20

It must be noted here that composite indicators have some limitations. They are sensitive to the choice and weight of the underlying indicators. Therefore, the indices provide only a crude measure of the performance and potential of individual industries. The choice of indicators was partly driven by data availability. For example, in order to assess market access conditions, it would have been useful to incorporate not only tariff barriers but also non-tariff barriers, especially technical barriers to trade (TBT) and sanitary and phytosanitary measures (SPS). However, though this information is available for many sectors, it does not lend itself easily to strict quantitative comparisons. In addition, the selected indicators are backwards looking (prospects are based on recent trend growth). Though a measure that takes into account the recent past does not necessarily have a strong predictive power of future trends, it reveals structural shifts in the world economy. Finally, informal exports cannot be examined for obvious reasons.

To minimise these limitations, the statistical analysis and literature survey are complemented with interviews with local stakeholders in Mongolia, both from the public and private sector. A member of ITC’s Market Analysis team and three national consultants carried out a survey of companies in Summer 2005, based on an ITC questionnaire. This was done not only to give a better understanding of the situation in the examined sectors, but also to come up with judgements that were used for the composite index of export potential.

Index 1: Mongolia’s current export performance The first main composite indicator for the study, Mongolia’s current export performance, gauges how successful its enterprises perform in the international markets for the selected product groups. Well-performing sectors have already proven their export capacity and can thus be considered as also having high potential for future exports. The composite index is made up of four sub indices that can show such capacity: (1) Mongolia’s exports in value; (2) Mongolia’s world market share; (3) Mongolia’s relative industry’s trade balance, and (4) Mongolia’s export growth.

In total, the index for Mongolia’s export performance is highest for textile fibres; hides and skins; and meat. In contrast, Mongolia’s export performance is particularly unfavourable for vodka. Carpets; cashmere knitwear and household and furnishing textiles are in an intermediate position.

Exports in value From a strategy point of view, big export sectors are Mongolia’s current “bread winners”, and as such require special attention. Exporters in these sectors have already proven their competitiveness over recent years, and should be well positioned for future exports. In other words, the larger a sector’s exports are currently in value terms, the greater is its potential for future growth.

Mongolia has significant exports for hides, skins and leather (accounting for almost USD 55 million in 2003); followed by textile fibers (about USD 43 million); cashmere knitwear (USD 16 million); and meat and animal products (USD 13 million) (Table 6). In contrast, exports are negligible for the moment for vodka; household and furnishing textiles; and carpets and wall covering (less than USD 1 million).

World market share This sub-index calculates Mongolia’s world market share in each individual product group. This indicator is partly to compensate for the previous indicator --export value--, which favours large industries and thus introduces a bias against small industries. However, by dividing export value by world exports, even small sectors can achieve a high market share, as is for example the case for honey. The world market share is thus a good indicator of the competitiveness of an

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industry. In 2003, Mongolia represented 0.01% of total world trade. A product group with a world market share above that number represents an “over-performer”, suggesting a competitive sector. Those below 0.01% are considered to be relative “under-performers”.

Mongolia has a substantial world market share in textile fibres (3.6%), meat (1.1%), and to a lesser extent in cashmere knitwear and hides and skins (each about 0.31%, Table 6). In contrast, Mongolia’s world market share for vodka (0.004%) is significantly below the national average.

Relative trade balance This sub-index uses Mongolia’s trade balance in 2003 as an indicator to gauge the efficiency of the productive capacity of industries. The trade balance for a product group is calculated as the difference between exports (X) and imports (M). If exports exceed imports representing a trade surplus, national production exceeds national consumption. All things being equal, this suggests that the industry has efficient productive capacity and can be considered competitive. In contrast, if exports are lower than imports representing a trade deficit, national production is not sufficient to cover national consumption. Rather than presenting the trade balance (X-M) in absolute terms (e.g. US dollar), it is presented relative to the industry’s total trade (X+M). This reduces bias against large industries, which tend to have either strong deficits or surpluses.

On the basis of the relative trade balance in 2003, it appears that hides and skins, textile fibers, carpets, meat, knitwear products and blankets are almost exclusively exported and not imported at all (Table 6). In contrast, available statistics suggest that Mongolia is a net importer for vodka.

Export value growth Sectors with rapid export growth in value terms between 1999 and 2003 suggest that Mongolia is competitive on the world markets, while stagnant or declining growth rates indicate the reverse. Everything else equal, fast growing exports, even in small absolute numbers, point at product groups for which Mongolia has a particular potential worth studying more in detail. These trends are likely to reflect Mongolia’s future trade.

Over the period 1999-2003, carpets and wall covering experienced exceptional growth, growing more than 50% per year on average between 1999 and 2003 (Table 6). Other industries with positive growth rates are hides and skins (+19% per annum), household textiles (+9%) and meat and animal products (+3.8%). In contrast, three sectors show declines of exports: vodka (-88% per year), textile fibres (-16%), and cashmere knitwear (-10%).

Table 6. Underlying indicators for the composite index “Mongolia’s export performance” Export

value, 2003 Mongolia’s

world market share

Relative trade balance

Export value growth,

1999-2003

(USD million)

Sub-index

(%) Sub-index

(%) Sub-index

(p.a.%) Sub-index

Index Current export performance

Textile fibers 42.858 4.1 3.574 5.0 100 5.0 -16.4 3.0 4.3Hides, skins and leather 54.572 5.0 0.319 1.4 100 5.0 18.9 4.0 3.8Meat and animal products 13.151 2.0 1.075 2.2 100 5.0 3.8 3.5 3.2Carpets and wall covering 0.872 1.1 0.063 1.1 100 5.0 56.3 5.0 3.0Cashmere knitwear 16.157 2.2 0.311 1.3 99 5.0 -10.3 3.2 2.9Household and furnishing textiles

0.279 1.0 0.215 1.2 96 4.9 8.8 3.7 2.7

Vodka 0.047 1.0 0.004 1.0 -69 1.0 -88.2 1.0 1.0

The indices range between 1 (lowest ranking) and 5 (best ranking). For each indicator, the three industries with values above the upper threshold obtain 5 points, and the three with values below the lower threshold value obtain 1 point. All other industries obtain between 1 and 5 points, depending on their distance from the two threshold values. Industry rankings should be interpreted with caution, since many indicators lack precision. Source: Comtrade, calculations by ITC.

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Index 2: Domestic supply conditions For domestic supply conditions, the study is based on qualitative information stemming from a survey of companies with a questionnaire and interviews carried out by national consultants in Summer 2005.

Favourable supply conditions may not only exist in already exporting industries (those that score high in the index “current export performance”), but also in industries that do not yet export but that are “export ready”. The better the supply conditions and competitiveness, the greater the future export potential, everything else equal. The composite index concerning Mongolia’s domestic supply conditions used here indicates whether domestic productive capacities are well-performing and competitive in terms of (1) the efficiency of the production process and the product quality, and (2) the importance of backward and forward linkages and the efficiency of supporting industries.

In total, this index is highest for hides and skins; and vodka. In contrast, Mongolia’s domestic supply is unfavourable for carpets and wall coverings; and meat and animal products. Textile fibers; Household and furnishing textiles; and Cashmere knitwear are in an intermediary position.

Product quality and efficiency of production processes The more efficient the production process and the higher the product quality, the higher the export potential can be considered. An efficient production process means that production costs are low and/or productivity is high compared to competitors.

The questionnaire used for this study included five questions: (1) The quality of exported products; (2) Labour productivity in comparison with major world and regional exporters; (3) Labour cost relative to major world and regional exporters; (4) Production cost relative to major world and regional exporters; and (5) The state of the process technology in the sector. Each of these criteria was scored from 1 (worst possible performance) to 5 (best possible performance). A simple average score for “process and products” was then calculated (Table 7).

The composite index for “product and process” is highest for hides and skins; vodka; textile fibers; and household textiles. In contrast, the index is relatively low for carpets; and meat and animal products.

Importance of backward and forward linkages and efficiency of supporting industries

Industries that are strongly integrated into the national economy through backward (upstream) and forward (downstream) linkages and that benefit from efficient supporting industries tend to have a higher export potential. A dollar of exports of one industry may not affect the economy in the same way as a dollar of exports of another industry, as their added value may be very different. Some industries are effectively integrated into the national economy (through backward linkages to suppliers and forward linkages to clients for further processing), whereas others are not. As such, strongly integrated industries can exert positive pull and push effects for other domestic industries. But the effect can also go the other way, i.e. industries with important upstream linkages tend to benefit more if the supporting industries are efficient. Thus, the higher the upstream or downstream linkages to the economy and the more efficient the supporting industries, the more attractive it is for the economy, everything else being equal.

The questionnaire thus included two questions relative to (1) the general efficiency of supporting industries (Box 1); and (2) the extent of upstream or downstream inter-industry linkages. Each criterion was scored from 1 (worst possible performance) to 5 (best possible performance).

The composite index for “supporting industries” is highest for hides and skins and for vodka (Table 7). It is lowest for carpets; meat; and household and furnishing textiles.

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Box 1. Supporting Industries

Supporting industries refers to the supply of intermediate inputs into the production of finished products, i.e. the “industry” in the middle of a vertical supply chain. Activities include parts manufacturing (screws, springs etc) and processes (pressing, forging etc.), though the definition of supporting industries depends on the sector (some also include services, such as human resource development). The type of industry also determines the scale of supporting industry necessary. The rationale for supporting industries is to increase competitiveness of assembly firms, so it is vital that these companies can satisfy quality, cost and delivery standards.

Source: Ichikawa (2005), Ohno (2005).

Table 7. Underlying indicators for the composite index “domestic supply” Sub-index 1

Process and product Sub-index 2

Supporting industries

Number of interviewed companies

Prod

uct

qual

ity

Labo

ur

prod

uctiv

ity

Labo

ur c

osts

Prod

uctio

n co

sts

Proc

ess

tech

nolo

gy

Aver

age

Infra

--st

ruct

ure

Link

ages

Aver

age

Index Domestic

supply conditions

Hides, skins and leather 4 3.0 2.5 4.5 3.7 2.7 3.3 2.7 1.7 2.2 2.7Vodka 2 4.0 2.0 3.5 3.3 3.5 3.3 3.0 1.3 2.1 2.7Textile fibers 3 3.7 4.0 2.5 2.5 3.5 3.2 2.3 1.5 1.9 2.6Household and furnishing textiles 1 4.0 3.0 3.0 3.0 3.0 3.2 2.5 1.0 1.8 2.5Cashmere knitwear 2 3.5 2.5 3.3 3.0 2.5 3.0 2.0 1.8 1.9 2.4Meat and animal products 1 3.0 2.0 4.0 2.0 2.0 2.6 2.5 1.0 1.8 2.2Carpets and wall covering 1 3.5 1.0 2.5 2.5 1.0 2.1 2.5 1.0 1.8 1.9

The indicators and indices range between 1 (lowest ranking) and 5 (best ranking). Industry rankings should be interpreted with caution, especially when absolute differences are small, since many indicators lack precision. No information is available for cashew nuts and other nuts; coffee; communications and telecommunications equipment; cut flowers; dairy products; honey; jute and products made from jute; packaging materials; and wood and wood products. Source: Based on ITC survey with enterprises in Mongolia, calculations by ITC.

Index 3: World markets The third composite indicator concerns the characteristics of world markets, examining whether the international environment is favourable for Mongolia for the selected product groups. It is made up of two sub-indices taking into account respectively (1) the dynamism of world imports between 1999 and 2003 and (2) Mongolia’s relative market access conditions. Where import markets are dynamic and access conditions are favourable, this study assigns a higher potential.

Based on the indicators used, the international environment is very favourable for vodka and hides and skins. World markets are also favourable for textile fibers. In contrast, the international environment is particularly unfavourable for meat and cashmere knitwear.

Dynamism of world imports Fast growing global markets are more likely to produce net gains for an exporting country than slow growing, stagnant or declining markets. All things being equal, the more dynamic world imports (or “international demand”) the higher the probability of future export growth.

The dynamism of international demand for each industry is measured by the trend growth rate of world imports between 1999 and 2003. The growth rate of imports is measured both in value terms (e.g. US dollar) and in volume terms (e.g. tons).

The most dynamic industries in terms of world import growth rate were vodka (+18% per year in value); and hides and skins (+14%) (Table 8). In contrast, world imports declined for textile fibers (-5.5%), carpets (-5.1%), and cashmere knitwear (-1.4%).

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Market access conditions for Mongolian exporters Tariffs can penalize and even prevent an export-ready industry from translating export potential into real exports. All things being equal, the better the country’s market access conditions, the higher an industry’s export potential. These conditions can be absolute and relative, i.e. tariff barriers can be low in absolute terms or low relative to main competitors.

Mongolia benefits from various international trade agreements. As a developing country, Mongolia is currently a beneficiary of the Canadian, EU, Japanese and US preferential schemes under the Generalized System of Preferences (GSP). The authorities are concerned that the envisaged full integration of textiles into the multilateral trading system by the end of 2004 would promote relocation abroad of joint ventures in the textiles sector. Mongolia is currently negotiating a Transit Transport Framework Agreement with China and Russia to aid the transit of Mongolian products through its neighbouring countries to third countries. The authorities expect that this would help to make the transit of Mongolian exports in the North-East Asian region more efficient, which would improve the international competitiveness of Mongolian products destined for third countries. Mongolia has also concluded various bilateral trade-related arrangements.

The “preferential margin index” indicates to what extent Mongolia enjoys preferential treatment in international markets in terms of tariff barriers (Annex 6). Based on the data, each product group is determined either to have preferential or discriminatory access to world markets. In the case of Mongolia, however, all industries tend to face discriminatory access, though to different degrees, and are at the best “neutral”.

In fact, Mongolia suffers from discriminatory market access for all sectors under review: it has rather disadvantageous tariffs throughout the world. However, market access conditions are relatively better in textile fibers, vodka, and hides and skins (Table 8). Access conditions throughout the world are particularly unfavourable for meat, blankets and knitwear products.

It would have been useful to incorporate not only tariff barriers but also non-tariff measures, especially technical barriers to trade (TBT) and sanitary and phytosanitary measures (SPS). Non-tariff measures have become more and more important for several reasons: the growing concern of consumers (especially in developed countries) regarding environmental and sanitary risks; the argument of environmental risks is sometimes a convenient justification to protectionism; and the growing relative importance of residual obstacles when tariffs are very low. Unfortunately, though this information is available for some sectors, it does not lend itself easily for strict quantitative comparisons and therefore these barriers are not included in the indices. Non-tariff barriers will be included, where possible, in the brief descriptions for each product group.

Table 8. Underlying indicators for the composite index “world markets” World

imports* Growth of

world imports Mongolia's access to international markets

(USD million) (Value,% p.a.)

(Volume,% p.a.)

Sub-index

(-100,100)

Sub-index

Index World

markets

Vodka 1,309 17.8 5.0 -1.5 4.7 4.8Hides, skins and leather 16,753 14.3 7.2 4.7 -2.3 4.4 4.6Textile fibers 1,076 -5.5 -7.4 1.0 -0.4 5.0 3.0Carpets and wall covering 1,341 -5.1 -1.2 1.9 -6.6 3.2 2.5Household and furnishing textiles 122 3.1 6.3 3.6 -12.9 1.3 2.4

Cashmere knitwear 5,464 -1.4 -2.1 2.1 -11.6 1.6 1.9Meat and animal products 1,359 2.3 -0.9 2.6 -13.7 1.0 1.8

* For information only The indices range between 1 (lowest ranking) and 5 (best ranking). Industry rankings should be interpreted with caution, especially when absolute differences are small, since many indicators lack precision. Source: Comtrade, calculations by ITC.

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Comparing the indices for “Mongolia’s current export performance” and “world markets”

Mapping the industries along the two dimensions of “Mongolia’s export performance” and “world markets” brings out four polar cases (Figure 2):

− Performers in attractive markets, where both world markets and Mongolia's export performance are high and/or dynamic. This is the case for hides, skins and leather. Textile fibers can also be considered to be part of this group. Exporters of these products from Mongolia have proven their competitiveness over recent years. Trade promotion efforts for these products are less risky, as there are national success stories that can serve as reference points. Promotional efforts should aim at broadening the supply capacity.

− Underachievers in unattractive market: represent the opposite case, as both world markets and export performance for these industries are low and/or have little dynamism. Trade promotion efforts for product groups in this category face an up hill task, as export prospects tend to be bleak. None of the industries under review is part of this group.

− Underachievers in attractive markets: while world markets for these industries are favourable, export performance by enterprises from Mongolia is at present weak. These industries represent particular challenges for trade promotion efforts in Mongolia, as the bottleneck is in general not world markets (demand is strong and/or markets are open), but domestic supply factors. It is essential to identify and remove the specific bottlenecks that impede a more dynamic expansion of exports. Vodka belongs to this group.

− Performers in unattractive markets, where export performance by enterprises from Mongolia is strong, but where world markets are unfavourable. These industries represent particular challenges for trade promotion efforts in Mongolia. Niche marketing strategies are required to isolate the positive trade performance from the overall decline in these markets. Meat and to a lesser degree cashmere kniting are in this group.

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Figure 2. Mapping industries: Mongolia’s export performance versus world markets

Meat

Cashmere knitwear

BlanketsCarpets

Textile fibers

LeatherVodka

1

1.5

2

2.5

3

3.5

4

4.5

5

1 1.5 2 2.5 3 3.5 4 4.5 5

Mongolia's export performance

World markets

Underperformers inattractive markets

Performers inattractive markets

Underperformers inunattractive markets

Performers inunattractive markets

Nota Bene: The size of the bubbles corresponds to the value of Mongolia’s exports in 2003. Export values are not included in the Mongolia’s export performance index in this chart. That explains the scores are slightly different from those in table 8. Source: TradeMap and Market Access Map, calculations by ITC.

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The overall export potential index Bringing together the three indices of world markets, country’s current export performance and domestic supply conditions into a summary measure suggests that Mongolia’s export potential is highest for hides, skins and leather and textile fibers (Table 9). In contrast, the export potential seems limited for meat and animal products; cashmere knitwear and carpets and wall covering. Vodka is in an intermediary position. It should be noted however that industry rankings should be interpreted with caution, especially when absolute differences are small, since many indicators lack precision.

The remainder of this chapter provides detailed information on these overall results and compares product groups along the three important dimensions of export potential: the first section examines the current export performance, the second one the domestic supply; and the final one presents findings relative to the world markets.

Table 9. Overall index of the export potential of industries Export value

(USD million)Index* 1

Export performance

Index* 2World

markets

Index* 3 Domestic

supply conditions

OverallExport

Potential Index*

Export Potential

Assessment

Hides, skins and leather 54.572 3.8 4.6 2.7 3.7 HighTextile fibers 42.858 4.3 3.0 2.6 3.3 HighVodka 0.047 1.0 4.8 2.7 2.8 MediumHousehold and furnishing textiles 0.279 2.7 2.4 2.5 2.5 LowCarpets and wall covering 0.872 3.0 2.5 1.9 2.5 LowCashmere knitwear 16.157 2.9 1.9 2.4 2.4 LowMeat and animal products 13.151 3.2 1.8 2.2 2.4 Low

* The index ranges from 1 (lowest ranking) and 5 (best ranking). Industry rankings should be interpreted with caution, especially when absolute differences are small, since many indicators lack precision. Source: Comtrade data, ITC survey with enterprises in Mongolia, background reports by national consults, calculations by ITC.

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2. In-depth analysis by industry

This chapter presents the main results for the seven sectors. The sectors are presented in descending order in terms of the export value in 2003.

Hides, skins, and leather The socio economic impact of hides, skins, and leather for Mongolia is high. Taken together, these products represent about 15% of total industrial outputs and almost 10% of exports. Though the direct employment impact is relatively small and decreasing, indirectly this industry generates substantial revenues to herders. Livestock is the main source of livelihood in Mongolia.

The export potential of hides, skins, and leather appears high. There is a large and dynamic international demand for leather products, and Mongolia’s exports have performed well over the last five years, despite fierce international competition. The composition of exports has changed dramatically within a few years, away from hides and skins towards leather. Mongolia’s market access conditions for hides and skins are favourable throughout the world, but not in China, which takes almost all of Mongolia’s exports.

However, Mongolia has to face numerous challenges. The industry generates little value-added, as most hides and skins are exported either in raw form or only after the first stage of processing (“wet blue”). The quality of hides and skins is considered poor and seems to be declining. Sanitary and veterinary services in Mongolia are poor, the slaughtering system has been deteriorating in recent years, and the leather process technology in the tanneries is outdated and highly polluting, thus having a negative impact on the environment. In addition, a significant share of the production of hides is commonly smuggled to China and the Russian Federation.

Priority actions to improve the export potential of Mongolia’s hides, skins, and leather sector include the following:

Industrial policy:

− Increase the value-added of domestic manufacturing by further processing goods (most hides and skins are currently exported only in raw or semi-processed form).

− Focus on market niches to avoid competing on price against Chinese and other products.

− Acquire and use of modern equipment and methods, especially Environmentally Sound Technologies (E.S.T.) that are most urgently needed in the leather processing industry.

− Strengthen the Armono Leather Research Centre to provide consultancy services to the leather product industries.

Business environment:

− Encourage the banking sector to advance working capital on commercial basis to tanneries, which require large amounts of cash during the relatively short slaughtering season of November-December.

− Attract foreign direct investment that brings technological transfer, know how, and modern management methods to Mongolia.

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Table 10. SWOT analysis for hides, skins and leather Strengths (to build on) Weaknesses (to cover)

Production: Low labour costs and production costs. Large excess capacity in production facilities.

Supporting industries: Large livestock available.

Infrastructure: Low costs for utilities (electricity, water, etc.).

Business environment: Strategic location between the Russian Federation and China offers big export opportunities.

Product: Poor quality of hides and skins. Limited value added: only semi-finished products, and most hides and skins exported in raw form or as wet blue. Quality of finished products is highly variable.

Production: Declining labour productivity. Limited capacity of SMEs to produce export quality products. Outdated technology and design in large tanneries. Lack of modern de-hairing plants and equipment. Limited amount for research & development activities.

Marketing: Lack of in-house marketing skills to explore new markets, to provide incentives for herders and farmers. Lack of market information.

Business environment: Weak veterinary services. No enough incentives for FDI, limited number of foreign companies. High transport costs via China by land and sea.

Opportunities (to cover) Threats (to defend against)

International demand: Dynamic and large for leather products.

Market access: Free access into EU markets. Very low tariff in the United States.

Production: Sanitary conditions, including animal diseases and malnutrition.

Business environment: Smuggling of hides to China and Russia. Competition of Korea and Turkey, which enjoy duty-free access to the Mongolian market. Bad climate (Harsh winters, dry summers) Desertification Socio-economic impact: Environmental pollution.

Source: Interviews with companies, UNIDO (2002), WTO (2005).

Current export performance Hides, skins, fur skins and leather are one of the most important industries for Mongolia, and represent 9% of Mongolia’s total exports in 2003. Exports have more than doubled between 1999 and 2003, from USD 25 million in 1999 to USD 55 million in 2003, corresponding to an average growth rate of 19% per annum over the period (Table 11).

Hides, skins and leather in Mongolia can be considered as “Performers in attractive markets”, since both Mongolia's export performance and world markets are high and/or dynamic. Mongolia has gained world market shares, as its exports grew faster (19% per year on average) than world exports (14%). This suggests that Mongolian exporters of hides, skins and leather have proven their competitiveness over recent years, and promotional efforts should aim at broadening the supply capacity.

The composition of exports within the sector has changed dramatically within a few years, away from hides and skins towards leather products. Between 1999 and 2003, exports of hides, skins and fur skins declined from USD 25 million to USD 7 million, while leather products grew from insignificant amounts to USD 47 million in 2003. Especially in the case of sheepskins, it seems that Mongolia has successfully moved down the value chain, away from exporting raw materials (from almost USD 11 million in 1999 to USD 43 000 in 2003) towards pre-tanned or tanned products (from no exports in 1999 to USD 34 million in 2003). Sheep or lamb skin leather

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(HS 410512) has become by far the most important export item, corresponding to almost two thirds of total exports in the sector, followed by bovine leather (HS 410422).

Mongolia’s exports are extremely concentrated geographically, which suggests scope for market diversification. China represents about 99% of all exports, the rest going to markets such as the Russian Federation, the Czech Republic, Spain, Japan, and Hong Kong.

Mongolia has become a leading world exporter for sheep and goat leather. Mongolia is the fourth biggest exporter of sheep and lamb skin leather in the world, with a market share of more than 10%, and is also among the top ten world exporters for goat or kid skin leather.

Table 11. Mongolia’s exports of hides, skins and leather


Exports (USD 1,000)


exports (%)


exports

Mongolia's share in

world exports

(%)


(% p.a. from 1999-2003)

1999 2000 2001 2002 2003 2003 2003 2003 Mongolia World

Hides, skins and fur skins 24,982 32,671 10,007 11,713 7,222 1.17 .. 0.12 -30 ..410110 Bovine skins, whole, raw 445 587 1,327 5,980 5,397 0.88 30 0.46 108 41410221 Sheep or lamb skins,

pickled, without wool on 0 250 3,070 832 828 0.13 20 0.32 .. 1

410129 Hide sections, bovine, fresh or wet-salted 449 521 1,201 905 432 0.07 42 0.16 5 37

410310 Goat or kid hides and skins, raw 682 551 521 348 157 0.03 39 0.41 -29 21

410390 Raw hides and skins of animals 58 578 97 187 155 0.03 54 0.07 9 13

410121 Bovine hides, whole, fresh or wet-salted 6,799 13,088 246 598 134 0.02 92 0.01 -67 0

430219 Tanned or dressed fur skins, whole, not assembled 196 214 935 400 57 0.01 62 0.01 -17 9

410210 Sheep or lamb skins, raw, with wool on 10,684 13,290 2,604 2,460 43 0.01 76 0.01 -72 30

430180 Raw fur skins, whole 5,669 3,592 6 3 19 0.00 39 0.02 -84 23

Leather 23 278 28,258 33,872 47,350 7.69 .. 0.42 644 ..410512 Sheep or lamb skin leather,

otherwise pre-tanned 0 247 25,992 26,318 33,948 5.51 4 11.15 .. 4

410422 Bovine leather, otherwise pre-tanned 23 31 1,757 7,109 10,009 1.63 27 0.43 480 -5

410612 Goat or kid skin leather, otherwise pre-tanned 0 0 476 416 3,017 0.49 9 1.66 .. 24

410431 Bovine and equine leather, full/split grains 0 0 33 29 302 0.05 72 0.00 .. 17

410790 Leather 0 0 0 0 74 0.01 58 0.02 .. -5

Hides, skins and leather 25,005 32,949 38,265 45,585 54,572 8.86 .. 0.32 19 14


Domestic supply conditions Most hides and skins produced in Mongolia are sheep or goat skins (Table 12). Mongolia produces annually more than 6 million pieces of sheep and goat skin, followed by horse and cow hides, and some 30,000 pieces of camel hide. Exports in volume are composed mostly of horse hides (200,000 pieces in 2004) and sheep skins (100,000 pieces). China, Kazakhstan, and Japan are prominent buyers of Mongolian hides. Hides are commonly smuggled to China and to Russia, where import taxes for skins and hides imposed by Russian authorities are high (UNIDO, 2002).

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Table 12. Mongolia’s production and exports of hides and skins Production

(1,000 tons) Exports

(1,000 pieces)

1999 2000 2001 2002 2001 2002 2003 2004

Sheep skin 4,571 5,183 5,131 4,425 853 449 91 98

Goat skin 3,302 3,020 2,689 2,269 87 69 32 6

Cow hide 857 1,265 1167 586 370 55 13 2

Horse hide 394 712 590 489 355 439 360 199

Source: Mongolian Statistical Yearbook, 2004. Chinese companies dominate the sector in Mongolia. There are currently 66 hides and skins processing SMEs, of which some 20 operate properly. Since 1997 Chinese companies have become increasingly active in Mongolia, and most SMEs are Chinese-Mongolian joint ventures. The companies were mainly established for primary processing, but also for processing of fur, leather and tanneries products. All exports semi-processed leather (wet-blue) is going to China source.

There are some signs of interest from foreign companies to invest in Mongolia’s hides and skins processing industry. Recently, Korean, Chinese and Russian companies made some investments, which brought the installed capacities of the industry to the level of being able to provide initial processing for the raw materials collected in the country1.

The domestic value-added of hides, skins and leather in Mongolia is limited. Most hides and skins are exported in raw form or as wet blue to China, and the production of leather products remains very low. Low Mongolian customs duty on export of raw materials, and comparatively high prices offered by Chinese traders for hides and skins entail a scarcity of raw materials in Mongolia. In addition, local processing units are unable to compete with mass production and technology-intensive production abroad, though recently an integrated leather garment and shoe factory was established for production for both domestic consumption and export.

The processing industry in Mongolia suffers from problems with the procurement of raw material, linked both to the herding sector and the slaughtering system.

− The decrease in the number of livestock potentially endangers the steady supply of hide and skin for domestic processing. The provision of services to the livestock sector is very difficult because of a severe continental climate, extremely large distances and a nomadic system, which has expanded dramatically since the break-up of state livestock farms (FAO, 2000). The collection of hides and skins across the countries is difficult. In addition, the number sheep, goats and cows has decreased over the last years (Table 13) due to natural disasters (harsh winter), draught and animal disease.

Table 13. Selected livestock in Mongolia (1,000 heads) 1970 1980 1990 2000 2001 2002 2003 2004

Sheep 12,631 14,400 14,265 15,191 13,876 11,937 11,797 12,000

Goats 3,902 4,715 4,959 11,034 10,270 9,591 8,858 9,000

Cattle 1,991 2,477 2,693 3,825 3,098 2,070 2,054 2,200

Horses 2,249 2,079 2,200 3,164 2,661 2,192 2,200 2,100

Camels 635 600 558 356 323 285 275 272

Source: FAO Statistics (www.fao.org).

− The decline of the slaughtering system in Mongolia. The development of the hide and skin processing industry in Mongolia is based in the raw materials of about 8–9 million animals

1 Source: Interview with Mr. Tuvshinbat President of Leather Association, Aug 2005.

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slaughtered yearly in Mongolia. During the socialist period, raw skins were supplied from abattoirs, while nowadays only 60% raw skins are purchased from butchers or household slaughters. In slaughtering houses, the quality of raw skins is under control, de-hiding is done mechanically, excluding possible damages with knives. In contrast, in household or manual slaughtering, there is a lack of control over the process, leading to damages and waste: plenty of cuts are found in the suede, the flesh is not evenly taken off, the salting process is not done properly or at times its not done at all. However, private slaughtering activities are widely practices in Mongolia2.

The leather process technology in Mongolian tanneries is outdated and highly polluting, compared to processing techniques in other countries (UNIDO, 2002). There has been an increase in the number of tanneries in Ulaanbaatar following the industry’s virtual collapse in the 1990s. Some tanneries are located in the Leather Association Industrial Park; most of them are in the Tolgoit area of the city. The latter group is unconnected to any pre-treatment facility discharging either directly into the Central Waste Water Treatment Plant (CWWTP), causing its serious malfunctioning, or dumping the waste, causing serious soil and groundwater contamination. Almost none of the tanneries satisfy CWWTP inflow standards3. Unsafe storage of chemicals and use of outdated Chinese technology are common and enforcement of Environmental Investigation Agency (EIA) provisions has been ineffective. The pre-treatment plant of the skin processing companies is fast becoming inoperable. According to some observers, the processing of animal skins in central Ulaanbaatar is in violation of current sanitary restrictions on the movement of animal products into the city (ADB, 2004).

The quality of hides and skins is poor and has deteriorated over the last ten years. The National Metrology & Standardisation approved 30 standards for leather processing in 2001. On a scale of 1-5 used internationally, Mongolian leather ranks only 4, because most skins are damaged by parasites like ticks or by perforation. The perforations render the production suitable only for small items, such as bags, boots or wallets. According to experts, this situation stems from mistakes made by the privatisation of veterinary services and the lack of differences in the pricing policy considering quality of skin. This lack of difference in the price policy has affected the production quality of Mongolian skins, because herders pay attention not to quality but quantity. Hides and skins are paid according to length, leading to stretching and damage. In addition, Mongolian animals have smaller size and weight4.

Sanitary and veterinary services are considered poor. After privatisation, veterinary services bankrupted because the herders have lost interest in promoting the required sanitary standards. International Veterinary Medicine (IVM), which is in charge of the study and diagnosis of livestock diseases and the development of vaccine, is the only organization for veterinary education and research in Mongolia. However, after the transition to a market economy, information from overseas was stopped, and the progress of research technology in IVM stagnated. As a result, the quality of public livestock sanitation service declined in IVM. Consequently, outbreaks of serious infectious diseases among the livestock are likely to happen, which might impede the government’s plan to increase agricultural farming products (JICA, 2002).

Mongolia displays a large excess capacity in production facilities. It is estimated that larger companies, such as Buligar, Shevro, Nekhii and Sor are operating at only 10% of their production capacity.

Labour costs are considered low, but transportation and communication infrastructure in Mongolia seems costly and ineffective. Though labour costs are lower in Mongolia than in China, Indonesia and India (UNIDO, 2002), labour productivity appears to be declining (WTO, 2005). Limited domestic and international transportation and communication infrastructure render the collection of raw materials ineffective. Moreover, the small size of the economic

2 Source: Interview with Mr. Tuvshinbat President of Leather Association, Aug 2005 3 Concentrations 5-20 times the permitted norm are not unusual, e.g. 50 mg/l of chromium against 2.5-5.0 permitted. 4 Source: Interview with Mr. Tuvshinbat President of Leather Association, Aug 2005

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activity, especially in rural area, cannot support the construction of necessary infrastructure facilities.

The sector suffers from a lack of marketing and distribution channels. Marketing and promotional efforts are of prime importance for the sector, together with marketing training for the companies’ staff. Companies interviewed also recognized the need to adjust their product, design and packaging to the requirements of foreign markets. In terms of marketing positioning, a focus on the luxury leather product market is desirable to avoid fierce price competition from Chinese and other products, but seems currently unrealistic because of the quality and design requirement (GTZ, 2005).

World markets International demand is particularly dynamic for skins and hides: Over the period 1999-2003, world demand increased particularly strongly for bovine skins (HS 410110, 41% per annum) and bovine hide sections (HS 410129), but declined for bovine leather (HS 410422) by -5% (Table 11).

Mongolia is a major player on the world market for sheep or lambskin leather. For sheep or lambskin leather (HS 410512), Mongolia’s exports represented some 11% of the world market in 2003, its main competitors being New Zealand (world market share of 14%), Iran (13%), and Saudi Arabia (12%). By contrast, Mongolia is a marginal supplier (less than 1% of the world market) for bovine leather (HS 410422) and bovine skins (HS 410110), where it has to compete with very large suppliers such as the United States, Australia, and Brazil.

Mongolia’s market access conditions for hides and skins are favourable, except however in its main current export destination. The European Union and the United States are very open, with MFN tariffs of 0% for the EU and between 0 and 3% for the US in leather products. Russia also applies low tariffs (5%). By contrast, China’s tariffs are much higher, between 9% and 20% according to the products.

Socio-economic impact The direct impact on employment of leather industry is small and decreasing. While the leather industry employed 15,000 workers before 1990, it employed only less than 2,000 workers in 2002. The leather sector corresponds to 15% of total industrial outputs and 10% of exports.

Indirectly, this industry generates substantial revenues to herders. Animal husbandry account for one-third of Mongolia’s GDP and comprises three-quarter of its agricultural output.

The leather industry has a negative impact on the environment: chemicals used in leather processing are generally untreated and pollute rivers and streams. Fragments of skins and offal thrown away also contribute to environmental pollution (UNIDO, 2002).

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Box 2. Environmental issues and hides and skins sector

ADB has provided technical assistance to help the Government deal with environmental issues and to incorporate environmentally sound technologies and subcomponents within ADB-financed projects. Although there have been initial efforts to promote cleaner production processes, not been much success has been achieved for the following reasons:

− 1. Shortage of investment sources.

− 2. Relatively low understanding on Environmentally Sound Technology (EST) among businesses in the private sector.

− 3. Insufficient training and awareness activities on cleaner production and ESTs.

There are, however, some positive efforts among export oriented factories. An example is the shoe leather production company, "Buligaar", which reconstructed its technology and lines and its production activities will be using technology on recycling and reusing chromium solutions, which have negative impacts on the environment*. ADB has also been helping the Government to strengthen the environmental management capability including reviewing the comprehensive environmental law, developing national environmental standards, institutionalising the environmental impact assessment process, strengthening environmental monitoring capabilities, preparing a permit system, and developing a public awareness and information program. The environmental impact of livestock production on the ecological systems is an important issue and ADB has assisted Mongolia to formulate policies, strategies, and an action plan for sustainable management of the extensive livestock production systems. The Government’s priority is to use grant rather than loan funds to address environmental issues. Support for environmental improvement will continue to be provided through ADB’s sectoral operations, especially in agriculture. Wherever possible, proactive environmental components will be included in ADB financed projects. A range of interventions is planned under the Agriculture Sector Development Program to assist Mongolian agriculture to become more sustainable and robust. The severe winter conditions and subsequent large scale livestock losses experienced in 2000 underlined a range of issues, including overgrazing and deterioration in herd quality, which have emerged during the transition.

*Economic Aspect of Sustainable Development 1998, United Nations Commission of Sustainable Development, New York*

Source: ADB (2003)

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Textile fibres Mongolia’s textile fibres are mainly composed of cashmere, camel and yak wools. The textile industry in Mongolia employs over 20,000 people. The textile fibres industry concerns three types of wool: cashmere wool, camel wool and yak wool. Cashmere is the third most valuable commodity in Mongolia after gold and copper, and the cashmere industry is Mongolia’s single largest source of employment, accounting for 16% of the workforce, about 18% of agricultural GDP and 6.3% of GDP. It is a principal source of livelihood for Mongolia’s poor.

The export potential of cashmere, camel and yak wools appears high. Mongolia is one of the major world suppliers for fine animal hair products, though Mongolia’s exports have declined in recent years. The supply and reserves of raw cashmere has doubled between 1993 and 2004, but the herding sector may well have surpassed the total herd size that can be sustained by Mongolia’s pasturelands. The quality of Mongolian cashmere is considered good, although it has recently declined.

The cashmere industry (herding and processing sectors) is facing some difficulties. Most Mongolian cashmere is exported with only little value added, mainly in the form of raw or de-haired/tops cashmere. About half of Mongolian production is unofficially exported, mainly as raw cashmere to China for processing. Mongolian companies underutilize their production capacities, as they lack cash flow to buy raw cashmere, and suffer from the fierce competition of Chinese companies. As a result, the Mongolian cashmere industry becomes a major supplier of raw and de-haired cashmere for the Chinese cashmere sector. China is the world’s main source of cashmere, and the main buyer of Central Asian cashmere. As a luxury fibre, cashmere commands some of the highest prices in the world of textiles. The outlook for cashmere products is very optimistic. Cashmere will also have increased demand in blends: silk, wool, cotton and synthetics.

There is less information on the two other sub-sectors of wool, camel and yak wool. Mongolian camels are a very rare species called Bactrian, which are decreasing rapidly and are in danger of extinction in the years to come. The Mongolian camel wool production remains very low, and Mongolia lacks modern de-hairing plants and equipment. The quality of Mongolian camel wool is considered poor. Concerning yaks, Mongolia has the second population of yaks of the world though far behind China.

Priority actions identified by interviewees and national consultants to improve the export potential of the Mongolian cashmere industry include:


− Provide long-term loans to herders with low interest rate.

− Provide long-term, low interest rate bank loans for preparation of cashmere raw material.

− Provide short-term loans to purchase raw cashmere, which require large amounts of cash during the relatively short cut season of March-May.

− Review the cashmere export tax system and reduce income tax

− Remove distortion taxes –including export taxes– in order to reduce smuggling and increase the supply of raw cashmere to the domestic processing capacity.

− Tax holidays for processors could also be used to lower their costs,

− Adapt the current customs valuation methods for processed cashmere to international standards5.

− Improve access to market information for the whole cashmere industry (not just herders) on fabric trends, technologies, seasonal styles, and colours, and above all on companies that contract for cashmere goods production and their requirements.

5 Customs officials now arbitrarily determine the price of dehaired cashmere for exports, usually using the highest export price quoted on the market for a given shipment. This practice is against the World Customs Organization guidelines on valuations.

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Trade policy:

− Conduct domestic industry protection policy.

− Introduce a special policy for cashmere export development and promotion.

Industrial policy:

− Support the Cashmere Association to encourage the breeders to produce a finer and whiter fibre.

− Improve cashmere supply/production, preparation chain and supply management.

− Introduce an appropriate breed policy aiming to improve the cashmere yield of goats

− Introduce a policy to develop spinning facilities and attract knitting industries.

− Develop attractive production sites for cashmere products.

− Develop the whole textile and garment related industries with an integrated approach moving away from commodity low cost products toward unique added value.

− Improve the cashmere production/supply chain management.

− Introduce Environmentally Sound Technologies (E.S.T.) urgently in wool, and cashmere processing industries.

Investment incentives for foreign investors:

− Encourage all garment producing companies, whether foreign or Mongolian owned, to operate in Mongolia. Incentives may need to be given to attract companies to Mongolia, but this administration needs to provide adequate safeguards to ensure that these benefits are not abused (USAID, 2004).

− Review the export tax regime.

− Set-up an Export Processing Zone (EPZ) in Mongolia, especially in an existing industrial area, for example in Ulaanbaatar.

Fundamentals:

− Encourage aid agencies to provide long-term technical assistance in production, quality control, design and marketing for cashmere products to the firms in the processing sector. (USAID, 2005).

− The cashmere producers should be encourage to participate in trade fairs and exhibitions, to build partnership with foreign trading houses and to seek long-term contacts with retail store chains (UNIDO, 2002).

− Development of spinning capacity. Improve technology or better usage of existing spinning equipment to improve yarn quality.

− Improve quality improvement: Better understanding of quality control processes and systems.

− Improve technology of dehairing processes to reduce coarse hair content.

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Table 14. SWOT analysis for textile fibers Strengths (to build on) Weaknesses (to cover)

Product: Good quality of Mongolian cashmere. Highest length. Unique camel wool: Bactrian species

Supporting industries: High reserve of goats and increasing Second biggest cashmere producer in the world Second population of yaks of the world and increasing population

International demand Neighbouring from China, the largest market.

Product: Lower quality than Chinese cashmere, which has a better size of micron and colour.

Production: Low added value. High labour and production costs compared to other countries. Little export sales capabilities. Lower economy of scale. Mainly basic technology and low efficiency.

Supporting industries: Relatively small population of Bactrian camels Lack of domestic spinning capacity

Business environment: Administrative procedures. High transport costs. Lack of comprehensive training system for skilled workers and technicians.


International demand: Strong and increasing demand for cashmere products, especially luxury items.

Market access: New EU GSP: duty free access and no quota restrictions for Mongolian textile products to the EU market from July 2005 (to 2015) Restrictions applied to China by the EU and the US.

International demand: Fierce competition with countries such as China, India or Pakistan since the expiration of the WTO Multi Fiber Agreement.

Supporting industries: Sustainability of the pastureland for the size of the herding sector Rapidly decreasing population of camels

Production: Decrease in foreign investment in the textile sector due to competition of China and India.

Business environment: Environmental issues (desertification). Smuggling of Mongolian cashmere to China.

Current export performance The fibre sector is a significant exporting sector for Mongolia. In 2003, exports accounted to USD 43 million, or 7% of Mongolian total exports (Table 15). “Fine animal hair, carded or combed” (HS 510530) account for almost USD 28 million or two thirds of the sector’s exports, followed by “Fine animal hair, not carded or combed” (HS 510210). Exports of “Degreased shorn wool, not carded, combed or carbonised” are for the moment limited, though strongly increasing.

Mongolia is one of the major world suppliers for fine animal hair products. Mongolia is the second biggest exporter of “Fine animal hair products, carded or combed” (world market share of 7%) and the fourth biggest of “Fine animal hair, not carded or combed” (world market share of 10%).

However, Mongolia’s exports have declined in recent years. Mongolia has lost world market share for fine animal hair, since Mongolia’s exports declined stronger than world exports, whether animal hair is carded or combed (–15% versus –8%) or not (–24% –17%). Overall, the sector’ share in Mongolian export fell from 18% to 7% in the 5 years from 1999 to 2003.

Mongolia exports are very concentrated geographically. Most exports go to China and Italy, followed by Japan, Hong Kong and the United Kingdom.

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Table 15. Mongolia’s exports of textile fibers


Exports (USD 1,000)


exports (%)


exports

Mongolia's share in

world exports

(%)


(% p.a. from 1999-2003

1999 2000 2001 2002 2003 2003 2003 2003 Mongolia World

510530 Fine animal hair, carded or combed 48,702 56,438 58,918 32,696 27,600 4.48 2 6.75 -15 -8

510210 Fine animal hair, not carded or combed 16,153 23,715 3,476 2,842 11,582 1.88 4 9.87 -24 -17

510121 Degreased shorn wool, not carded, combed or carbonised 836 745 2,290 1,328 3,676 0.60 12 0.54 42 1

Textile fibers 65,691 80,898 64,684 36,866 42,858 6.96 .. 3.56 -16 -6


Domestic supply conditions

Mongolia enjoys a high livestock population including 12 million goats, 600,000 yaks and 260,000 camels (Mongolian Statistical Yearbook, 2004)6.

Only half of the around 80 companies involved in textile business operate according to the Mongolian wool and cashmere federation, because of insufficient access to raw materials.

Foreign companies, especially Chinese ones, dominate the sector. Out of 80 companies, 5 are Mongolian whereas 75 are foreign (75% are Chinese, the others are from Japan, Germany, Italy and the United States). Foreign investments (especially Chinese) increased significantly when the Government of Mongolia prohibited exports of raw cashmere over the period 1993-1997. After 1997, Mongolia became WTO member and converted the export ban in export duties, which amounted to 30,000 Tugruk/kg in 2004.

All joint ventures do only primary processing: they produce and export semi-finished products (dehaired cashmere). In contrast with Mongolian companies, they have enough working capital so that they can buy the needed raw material.

Three subsectors can be distinguished: cashmere wool, camel wool and yak wool.

Cashmere wool The fine cashmere hair has its origins in the Kashmir goats raised by Tibetans living in the Himalayas and Central Asia, mainly in the Gobi desert, subdivided between Mongolia and China. Beside these regions, cashmere is also sourced from Iran, Afghanistan and Turkey, as well as from the some small farms in New Zealand and Scotland.

Mongolia is the second biggest cashmere producer in the world. In 2004, Mongolia produced over 3,200 tons of raw cashmere (Table 16), which represents about 20% of world production, second only to China with 10,000 tons or two thirds of the world total (GTZ, 2004). The yield per head is much lower in Mongolia than in China: 300g per head and per year against 400g in China. Thanks to breed methods, China improved its yield. Mongolia exports mostly raw cashmere, dehaired cashmere and cashmere tops.

The supply and reserves of raw cashmere has doubled between 1993 and 2004 (from 1,500 t to 3,200 t), as has the number of goats (from 6 to 12 million heads).

However, the herding sector may well have surpassed the total herd size that can be sustained by Mongolia’s pasturelands. Its herds may already be causing desertification; yet the herding sector receives substantial subsidies from the Government of Mongolia: almost no taxation, free medical care, free water services for their herds, health and disability contributions.

6 These figures are somewhat different from FAO estimates (see Table 13).

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Table 16. Head of goats and raw cashmere production in Mongolia Unit 2001 2002 2003 2004

Goats 1,000 heads 9,591 9,135 10,653 12,238

Raw cashmere 1,000. tons 3.1 2.9 2.7 3.2

Source: Mongolian statistical yearbook 2004

Most Mongolian cashmere is exported with only little value added, mainly in the form of raw or dehaired/tops cashmere. The Mongolian cashmere sector is specialized in cashmere fibers, as most of the companies located in Mongolia process raw cashmere only up to the dehairing stage. According to GTZ (2004), the Mongolian cashmere sector has only four fibre-spinning companies and around ten knitting and garment manufacturing companies. Only 15-20% of the 3,000 tons of domestically produced raw cashmere is processed into garments in Mongolia. Another 20% produced raw cashmere is semi-processed into de-haired cashmere by local or joint venture companies and sold to garment producers in China, Italy and the United Kingdom. The bulk of cashmere production (60%) crosses the Chinese border either legally or through smuggling (UNIDO, 2002). In order to retain more raw materials in the country for further processing activities, the Government of Mongolia has imposed export duties on fibres, yarns and fabrics (e.g. about 12% tariff for raw cashmere). However these tariff barriers seem to be inadequate to prevent the flight of raw cashmere.

About half of Mongolian production is unofficially exported, mainly as raw cashmere to China for processing. A recent study estimates that the informal cashmere sector represents half of the whole production (GTZ, 2004), by comparing estimated production figures, export statistics, and purchases reported by cashmere companies (Table 17). This could also explain why Mongolia’s cashmere processing industry has not grown in step with world demand, particularly at the final goods stage.

Table 17. Production, purchase and exports of cashmere in Mongolia 2000 2001 2002 2003 2004

Total supply of cashmere (ton) 3,266 3,100 2,900 2,700 3,200

Total purchase by industries (ton) 927 2,145 1,215 .. ..

Total export with custom duty (ton) 714 25 59 .. ..

Source: GTZ/MWCF, Survey on production & manufacturing of the wool, cashmere and camel hair.

The quality of Mongolian cashmere is considered good, although it has recently declined. The international market pays less for Mongolian (dehaired) cashmere than for Chinese cashmere. The size of micron and colour of Chinese cashmere is far the best: Chinese cashmere is finer and white, while Mongolian cashmere is light grey and unsuitable for producing pastel shade

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women knitwear. However, the fibre in Mongolian cashmere is longer and considered better for spinning. (Box 3, Table 18).

Box 3. A comparative analysis of cashmere quality in China and Mongolia

The cashmere fibre comes from the cashmere goat. The coat of this animal consists of a fine inner layer and a more coarse outer layer of straight hair. The fibres of the undercoat are known as cashmere. Cashmere is scarce and expensive but its softness, warmth and excellent draping qualities create a demand for it; it is especially used in luxury articles such as stoles and scarves and also possibly blended with fine wool- in coat fabrics for overcoats and dressing gowns. Cashmere is specialty fine fibres, which has its own unique physical characteristics, and due to this cashmere is most valuable among the other textile fibres. The quality of cashmere wool is measured by its length, texture, and the diameter of the fibre.

− The cashmere fiber is classified by fineness and graded as cashmere, cashgora, angora. The fineness of fiber ranges from cashmere fiber (13-17.5 micron), cashgora fiber (17.5 – 19 micron) to angora goat fiber (over 19 microns). The diameter of fibre of the Mongolian cashmere was 14.5 micron for the last 20 years, but recently it is becoming larger (15.5 to 16.5 micron).

− The length of cashmere fiber is an important determinant of quality and enhances the technological characteristics of the fiber, especially for increasing its capability for the spinning process. The Mongolian standard for length of cashmere fiber is 38-43 mm. The Chinese cashmere fiber‘s length ranges 33–35 mm.

− Good cashmere is coloured white, or fawn to light grey.

The quality is affected by the climate, and nutrients that the goats consume. The climate and geography of Mongolia is especially suited for herding goats because they thrive in harsh dry mountainous climates. The highest quality of wool is found in these climates. Goats cannot grow the downy coats that produce cashmere in moderate climates (www.american.edu/TED/mongolia.htm).

Source: GTZ (2003), Gobi corporation website, CBI Market Survey on Natural fibers.

Table 18. Comparative table of Chinese and Mongolian cashmere quality indicators Chinese cashmere Mongolian cashmere Advantage

Fineness (diameter in micron) 13.5 – 14.5 15.5 – 16.0 China

Length (mm) 33 – 35 38 – 43 Mongolia

Colour White, pale Pale, dark China

Source: GTZ (2003). Gobi corporation website, CBI market survey on Natural fibers.

Consequently, as Mongolian companies lack cash flow to buy raw cashmere, they underutilize their production capacities. In the processing sector, many companies have ceased to operate or have downsized their operations over the past eight years, yet processors still operate on average at less than 50% capacity. The rate of underutilization varies according to the stage of the processing: scouring (40% capacity utilization in 2004); spinning (42%); knitting (77%) and weaving (52%).

Mongolian companies suffer from the fierce competition of Chinese companies. There are several reasons for this:

− The technical know how is higher in China. China has long years of excellent production know-how and manufacturing experience, whereas the industry was developed only recently in Mongolia.

− China has large factories, using different locations within the country and abroad, while only small factories operate in Mongolia.

− China enjoys an excellent supply chain and distribution channel, due notably to Hong Kong and Taiwan, thus contrasting with Mongolia.

− Dehairing costs are significantly lower in China (USD 2-3 per kg of finished product) than in Mongolia (USD 6-8) (World Bank, 2002).

− China has lower transportation cost and a shorter delivery time than land-locked Mongolia.

− The business environment in China is relatively more favourable than in Mongolia.

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− China is more attractive for foreign direct investment.

− Chinese companies are final product suppliers (notably knitwear), while Mongolian companies are mainly raw material and depilation suppliers (GTZ, 2004).

− Finally, Chinese companies compete with Mongolian companies to buy Mongolian raw cashmere so that the latter suffer from a lack of access to the raw materials.

As a result, the Mongolian cashmere industry becomes a major supplier of raw and dehaired cashmere for the Chinese cashmere sector.

Camel Wool Mongolian camels are a very rare species called Bactrian. There are in total 19 million camels in the world, of which only 0.8 million are two-humped or Bactrian camels. These camels can only be found in Central Asia, namely Mongolia, Inner Mongolia and Kazakhstan. 30% of all Bactrian camels in the world are in Mongolia7.

Camel wool is from the extremely soft and fine fur from the basecoat of the camel. The finest and best quality wool is obtained from Bactrian yearlings with a fibre diameter of 16-18 microns. Because of the beauty of the colour, products made of camel wool are usually left in the natural camel colour or dyed a darker brown. Camel wool is lightweight, soft and smooth (Box 4). The male camel has long and thick hair. Female camel has short, soft and thin hair similar to cashmere but differ in microns.

7 Source: Web site: Ministry of Food and Agriculture Mongolia. http://gate1.pmis.gov.mn/mofa/moncamel/ENGLISH/P1.htm.

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Box 4. Camel wool supply, regional origins and quality

The camel wool supply is divided into four regions, depending on camel location, camel number and quality of camel hair are as follows:

− Southern region: Dornogobi, Dundgobi, Omnogobi aimags supplies reddish, brown not very downy hair which amounts to 45% of the total camel hair supply.

− Western region: Bayan Ulgii, Bayanhongor, Govi Altai, Zavkhan, Uvs, Khovd aimags (provinces) amount 39% of total supply. The characteristic of hair is light coloured, yellowish and white containing larger proportion of downy and fine-grained hair.

− Central region: Uvurkhangai, Arkhangai, Bulgan, Tov, Selenge, Hovsgol aimags, supplies reddish, brown not downy hair which amounts 8% of total camel hair supply.

− Eastern region: Dornod, Sukhbataar, Khentii aimags supplies a mixed colour and average grained camel hair, which amounts 8% of total supply.

There are four types of camel wool:

− Soft hair of young camels: Soft, downy, fine-grained hair with intermediate fibre and coarse hair.

− Coarse wool of main corps: The hair is coarse, long, less downy relative to classification (I) and arid. Hair taken from the shoulder side, belly and thigh of different aged camels, both female and male.

− Hair taken from knee and beard of the adult male camel: Long, less downy, fine, coarse and grained hair taken from the neck, nape of the neck and knees areas.

− Tangled hair: Camel hair gets less likely tangled, the hair of classification IV is hardly found.

Altantsetseg D., G. Yondonsambuu (2003), Survey on production and manufacturing of the wool, cashmere and camel hair, Mongolian Wool and Cashmere Association & joint Mongolian-German Project on International Trade Policy/WTO, Ulaanbaatar

Mongolian camels are decreasing rapidly and are in danger of extinction in the years to come. The population of Bactrian camels in Mongolia was divided by three in half a century, falling from around 900,000 in 1954 to less than 300,000 in 2004. However, since 2002, the population has remained relatively stable around 250,000 heads according to Mongolian statistics, which somewhat differ from FAO statistics (Table 19). Camels are mostly slaughtered for their wool. In addition, in recent years, people slaughtered them for their meat as well. Statistically every year 10% of the camels are used for consumption by the nomadic tribes, hence leading to another factor of rapid reduction in the animal’s existence. Severe draughts also have an impact on livestock population. Almost two-thirds of Mongolia’s camels are in the Gobi region. Over the past decade, the population in the Gobi has also been steadily declining, as herders have moved to urban areas in search of economic opportunities.

Table 19. Camel population in Mongolia (1,000 heads) Source 1970 1980 1990 2000 2001 2002 2003 2004

Mongolian Statistical Yearbook .. .. .. 323 285 253 257 257

FAO 635 600 558 356 323 285 275 272

Source: FAO Statistics (www.fao.org) and Mongolian Statistical Yearbook, 2004.

The Mongolian camel wool production remains very low as well as the quality. Mongolian total production is about 2500 tons including 1000 tons of female type of wool. It is possible to collect 3-4 kg per head until camels are four years old, and then 4-5 kg per head till 15 years old. According to an expert from the Textile Institute of Mongolia, it might possible to make about 2 pieces of knitwear per head, that is a maximum capacity around 400,000 knitting pieces8.

Mongolia lacks modern de-hairing plants and equipment. Raw material is sent to China for processing, causing distortion in financial returns between actual growers (Mongolians) and the traders (Chinese). Mongolian producers resent this arrangement. Preferential import duty on

8 Source: interview with the Textile Institute of Mongolia.

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Mongolian raw material in China adds to the distortions in trade. Raw material from Mongolia is also exported to Italy and the United Kingdom for processing9.

Yak wool Mongolia has the second population of yaks of the world though far behind China. In 2000, there was a domestic population of more than 3 million cattle, of which 610,000 were yaks (Table 20). World yak population is estimated around 14.5 millions, of which 13.5 millions are located in China.

The yak population has been increasing over the last three decades, after having declined from 1940 to 1970. Yaks are found in 13 provinces of Mongolia and 9 of these have 90% of the entire yak. There are a few small herds in districts of the central and southern Gobi province. 70% of the yak herds are concentrated in the Hangai and Hovsgol mountains, 29% in the Mongolian Altai and only about 1% in the Gobi Altai and Hentii mountains. The yak population works out at just under one yak for every three of the human population in Mongolia (Magash, 2003).

Table 20. Number of yak and yak hybrids in different years (in 1,000) 1940 1950 1960 1970 1980 1990 2000

Yak 726 561 495 452 555 567 610

Hybrid yak 74 52 69 69 51 70 66

Source: Grassland and pasture crops, FAO (2003)

Yak wool is warmer than camel wool and much more solid than goat wool but it cannot be dyed otherwise it loses its elasticity and its properties against the cold.

Box 5. The characteristics of the yak production in Mongolia

Two types of yak can be distinguished in Mongolia, according to the area where they are raised: the Hangai and the Altai mountain yak. 70% of the yak herds are concentrated in the Hangai and Hovsgol mountains, 29% in the Mongolian Altai and only about 1% in the Gobi Altai and Hentii mountains.

− Hangai yak: The large-framed Hangai yak stems from the traditional yak-keeping provinces of Arhangai, Ovorhangai, Bayanhongor and Hovosgol were yak are found on mountainous and woodland pastures at elevations of 1,800 – 3,000 m, with a dry and cold climate. The type is large and fecund and is used for transport, meat and milk. Colours vary greatly and up to 90 percent of the animals are polled. They are good at compensatory growth and rapidly regain in the spring and summer the weight losses sustained over the previous winter. A breeding station for the improvement of yak production has been in existence in the Ih Tamir district of Arhangai province since 1983.

− Altai yak: As the name implies, these yak come from the Mongolian Altai region. The climate is characterized by great temperature fluctuations, inadequate precipitation and dry air. The average temperature over the year is 0oC and reaches a minimum of -30oC. The Altai yak is an alpine type and less good on the plateau. These yaks utilize the high mountain grazing, which do not provide a secure supply of feed and are frequently overgrazed. The yaks are able to withstand long periods of nutritional deprivation. Colours are predominantly black or black and white. The majority have long, well-developed horns. The body is long and covered with thick hair. In reproductive terms, the Altai yak is similar to the Hangai. The Altai yak is thought to be capable of improvement, particularly in relation to meat production.

In Mongolia, yaks are shorn in Spring and between 1310 and 1750 gms of fibre are obtained from adults, though this consists of the three components whose proportions vary with age: coarse outer hair, wool and down. Coat colour varies greatly, but black and brown are the predominant colours with black genetically dominant. Spotted and white animals also occur

Source: Grassland and pasture crops, FAO “Yak in Mongolia” by A. Magash 2003

World markets China is the world’s main source of cashmere, and the main buyer of Central Asian cashmere. Recent Chinese government policies have restricted the populations of goats and removed tax rebates on exporting cashmere. The result has been a rise in the price of non-Chinese

9 Source: Indian Mongolian Economic Relations: http://www.indiainbusiness.nic.in/commercial-relation/mongolia.htm.

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cashmere in two other major producing countries, Mongolia and Iran, as well as in Central Asia (UC Davis, 2005).

As a luxury fibre, cashmere commands some of the highest prices in the world of textiles. Demand for the best quality cashmere normally exceeds supply. In 2004, the price of cashmere has been stabilized at around USD 64/kg, though over the longer term, cashmere prices are volatile, depending on fashion, weather and production trends. The cashmere producers, especially in China, have tried to increase the price using their large market share. The production of cashmere fibre has increased both in China and Mongolia in the recent years. Mongolia usually supplies the low price segment of Chinese and Hong Kong markets (also the Italian market), while China supplies the luxury segment of Italian and Scottish markets.

The outlook for cashmere products is very optimistic. The demand in major markets is expected to remain high (UC Davis, 2005), especially in markets such as the United States and the European Union after the quotas are abolished. The production will furthermore be concentrated and dislocated from EU to China in order to reduce production costs. Prices are likely to remain under strong pressure, due to the competition and idle production facilities in China and Hong Kong.

Cashmere will also have increased demand in blends: silk, wool, cotton and synthetics. Due to the high cost of raw material, the stability of finished products and consumer preferences, cashmere blends will be in strong demand in the future. Here China has a real competitive advantage. Product developments will expand the availability of cashmere at lower costs into the middle market, and even into the low cost/high disposability lower end market. Mongolian cashmere is therefore fortunate that the decline in the average quality of the raw cashmere it produces should not have a negative impact on the competitiveness of its product (USAID, 2005).

The market access conditions are rather favourable in the major world markets except in China. Italy, Japan and most of other importers of “Fine animal hair, not carded or combed” apply no tariffs, while China has a very high tariff of 90% that it applies to all exporters. China has an undiscriminating tariff of 7% on imports of “Fine animal hair, carded or combed”; other importers, including Italy, impose (mostly undiscriminating) tariff in the range of 2% to 10%. The market access for shorn wool is generally free. Thanks to the new EU GSP, Mongolia has free access to the EU markets since 2005.

Socio-economic impact Cashmere is Mongolia’s third largest official export, after copper and gold. Cashmere accounted about 10% of overall Mongolian exports. However, the share of cashmere in total Mongolian exports has declined in recent years, falling from 17% in 1996 to 9% in 2002 (WTO, 2005).

The cashmere industry is the economy’s single largest employer, providing jobs for over 16% of the work force, and accounts for about 18% of agricultural GDP and over 6.3 % of GDP over 1993-2001. The sector is one of the major manufacturing and employing sectors providing approximately 28% of all Mongolian industrial working places.

It is a principal source of livelihood for Mongolia’s poor. It is estimated that it provides income to over one third of its 2.4 million people. According to the World Bank (2005), cashmere is “a principal source of livelihood for Mongolia’s poor” and that “the best way of improving the livelihoods… and reducing poverty will be by increasing the price margin obtained by herders compared to international prices”.

There is less information on the two other sub-sectors of wool, camel and yak wool. However the socio-economic impact seems important in some regions of the country (the Gobi region for camel, high mountain regions for yak) where camels and yaks represent an indispensable part of the animal husbandry, a means for transport and production and a source of livelihood.

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Knitwear products

The socio economic impact of the knitting industry in Mongolia is relatively high. The sector is one of the major manufacturing and employing sectors, providing approximately 28% of all industrial employment in Mongolia. Its importance for exports is limited though, representing only 2.6% of total exports, a share in relative decline. Spinning is an important factor and the lack of facilities is hampering the sector development.

Mongolia’s export performance for knitwear products is relatively weak, with export value declining on average by 10% per annum between 1999 and 2003. Mongolia exports are strongly concentrated geographically, as almost three quarters of exports of pullovers and cardigans go to only to three markets: the United States, Germany and Japan.

There are four fully integrated producers of knitwear products in Mongolia that process cashmere from the raw materials to finished products. The sector seems to be in financial trouble, and domestic processing companies are operating below capacity. Concerning product quality, Mongolian knitwear products satisfy the high demands of foreign buyers in Europe or the United States and are successfully sold, though the design remains basic. Production costs seem higher in Mongolia than in China, and labour productivity is relatively low. Domestic supporting industries are almost inexistent. In particular all, Mongolia needs spinning capacities to supply to the yarns knitting and weaving industries and to attract more knitting companies. Marketing skills in Mongolia are poor, and channels of distribution almost inexistent, with the exception of Gobi.

The international demand and supply are highly concentrated for Mongolia’s main export article, knitted pullovers, cardigans and similar articles of wool or fine animal hair. The United States, Japan, Hong Kong, Italy, Germany, the United Kingdom and France consume more than 75% of world imports, and three countries (Hong Kong, Italy and China) export around 60% of world exports. Tariffs applied to Mongolia in its current exporting markets are high and sometimes discriminatory.

Priority actions identified by interviewees to improve the export potential of the Mongolian cashmere industry include:


− Provide long-term loans to herders with low interest rate.

− Provide long-term, low interest rate bank loans for preparation of cashmere raw materials.

− Provide short-term loans to purchase raw cashmere, which require large amounts of cash during the relatively short cut season of March-May.

− Review the cashmere export tax system and reduce income tax

− Remove distortionary taxes –including export taxes– in order to reduce smuggling and increase the supply of raw cashmere to the domestic processing capacity.



Trade policy:

− Conduct domestic industry protection policy.

− Introduce a special policy for cashmere export development and promotion.


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Industrial policy:

− Improve cashmere supply/production, preparation chain and supply management.

− Introduce a policy to develop spinning facilities and attract knitting industries.

− Develop attractive production sites for cashmere products.

− Develop the whole textile and garment related industries with an integrated approach moving away from commodity low cost products toward unique added value.

− Improve the cashmere production/supply chain management.

− Introduce Environmentally Sound Technologies (E.S.T.) urgently in wool, and cashmere processing industries.

Investment incentives for foreign investors:

− Encourage all garment producing companies, whether foreign or Mongolian owned, to operate in Mongolia. Incentives may need to be given to attract companies to Mongolia, but this administration needs to provide adequate safeguards to ensure that these benefits are not abused (USAID, 2004).



Fundamentals:

− Encourage aid agencies to provide long-term technical assistance in production, quality control, design and marketing for cashmere products to the firms in the processing sector. (USAID, 2005).

− The cashmere producers should be encourage to participate in trade fairs and exhibitions, to build partnership with foreign trading houses and to seek long-term contacts with retail store chains (UNIDO, 2002).



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Table 21. SWOT analysis for knitwear products Strengths (to build on) Weaknesses (to cover)

Product: Mongolia has a good international reputation as a cashmere country.

Supporting industries: Adequate raw material.

Product: Basic design, with high dependence on imports of design. Product features: limited white and fine hair.

Production: Low volume. Limited technical expertise in production and design.

Supporting industries: Inadequate support equipment in terms of testing Quality Assurance system and product development.

Marketing: Limited marketing know-how.


International demand: Strong demand.

Production: Potentially high added value. Increasing spinning capacity. New variety of yarns.

Market access: Duty free access and no quota restrictions for Mongolian export products (including clothing) to the EU market from July 2005 (to 2015) under the new EU trade preference scheme.

World markets: Competition from China and countries eligible for AGOA. Very mature business.

Current export performance Mongolia exported some USD 16 million of knitwear products in 2003. “Knitted pullovers, cardigans and similar articles of wool or fine animal hair” (HS 611010) are by far the main exported items within the industry (Table 22).

Mongolia’s export performance for knitwear products is relatively weak. Mongolia has underperformed in this particular segment as compared to the world. Its export value declined on average by 10% per annum between 1999 and 2003, faster than the 2% decline of the world market. As a result, the importance of the wool-knitting sector for Mongolia has declined, from a share of 5.4% of total exports in 1999 to 2.6% in 2003.

Mongolia exports are strongly concentrated geographically. Almost three quarters of exports of pullovers and cardigans go to only to three markets: the United States (36%), Germany (23%) and Japan (13%). Italy and Hong Kong are other destinations.

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Table 22. Mongolia’s exports of knitwear products


Exports (USD 1,000)

Share of product in Mongolia's exports (%)


exports

Mongolia's share in

world exports (%)


(% p.a. from 1999-2003

1999 2000 2001 2002 2003 2003 2003 2003 Mongolia World

611010 Pullovers, cardigans and similar article of wool or fine animal hair, knitted

19,312 25,641 14,795 12,996 15,740 2.56 32 0.33 -10 -2

610461 Women’s/girls’ trousers and shorts, of wool or fine animal hair, knitted

0 73 199 134 114 0.02 32 0.21 .. -9

610210 Women’s/girls’ overcoats, anoraks etc., of wool or fine animal hair, knitted

0 238 13 4 81 0.01 55 0.09 .. 0

610451 Women’s/girls’ skirts, of wool or fine animal hair, knitted 1 134 1 169 74 0.01 39 0.19 142 -14

610110 Men’s/boys overcoats, anoraks etc, of wool or fine animal hair, knitted

0 0 0 1 66 0.01 45 0.09 .. 10

610341 Men’s/boys trousers and shorts, of wool or fine animal hair, knitted 29 61 95 78 49 0.01 39 0.05 14 21

611691 Gloves, mittens and mitts, nes, of wool or fine animal hair, knitted 0 8 15 30 15 0.00 47 0.03 .. 5

611410 Garments nes, of wool or fine animal hair, knitted 2 68 1,680 1 10 0.00 62 0.01 -10 15

610441 Women’s/girls’ dresses, of wool or fine animal hair, knitted 0 13 41 22 8 0.00 52 0.03 .. -20

Cashmere knitwear 19,344 26,236 16,839 13,435 16,157 2.62 .. 0.31 -10 -1


Domestic supply conditions There are four fully integrated producers of knitwear products in Mongolia that process cashmere from the raw materials to finished products (Gobi, Buyan, Eermel and Mongol Amical). The sector seems to be in financial trouble. Gobi Cashmere Company, the largest of the four and the only state-owned enterprise, has been losing about USD 2 million per year for the past four years11. Buyan, the second largest integrated cashmere producer, is also in financial trouble and is not able raise funds to buy raw cashmere (USAID, 2005).

Box 6. Cashmere production steps

There are five steps to cashmere production:

− (1) Collection: Cashmere fibers are collected by either combing or shearing the animal during the spring molting season.

− (2) Sorting and scouring: Hand sorting for coarse hair takes place. After sorting, the fiber is washed to remove dirt, grease and any vegetable matter gathered in the collection process.

− (3) Dehairing: The scoured material is then dehaired. Prior to dehairing all cashmere is considered raw/greasy cashmere. This step removes vegetable matter, dandruff and coarse outer guard hair.

− At the end of this process, the cashmere is ready for (4) spinning into yarns for (5) weaving or knitting.

The export ban applies to the first two steps, the collection and sorting and scouring.

Domestic processing companies are operating below capacity. The cashmere-processing sector in Mongolia has seen significant exits over the eight years after the ban on exports was lifted in 1997 and the coincident fall in the world price of cashmere. More firms will most probably exit the industry or reduce their knitting capacity due to the expiration of the Multi Fiber Agreement that occurred in December 2004. Yet, despite this reduction in capacity, substantial excess capacity still remains at every stage of processing: scouring (40% capacity utilization in 2004), dehairing (52%), spinning (42%), knitting (77%), and weaving (52%). Major companies are

11 Gobi was supposed to be privatised since 2000. However in 2005, the Government has decided to postpone sine die the privatisation.

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operating at approximately 10-20% of their capacity. This underutilization of existing capacity is indeed ironic, since over 50% of Mongolia’s production of raw cashmere is smuggled to China, without any processing in the Mongolia. There would be potential to triple employment in the processing industry to more than 9.000 jobs if all established processing factories were to operate at full capacity (World Bank, 2002).

Concerning product quality, Mongolian knitwear products satisfy the high demands of foreign buyers in Europe or the United States and are successfully sold, though the design remains basic.

Production costs seem higher in Mongolia than in China. The cost of processing raw material to one kg of finished product is between USD 8 to USD12 in China, whereas it is averaging around USD 24 in Mongolia (World Bank, 2002). Overall, at each stage of the value added chain, production costs are 30% - 40% higher in Mongolia than in China. However, according to the entrepreneurs interviewed, production costs are average relative to major world exporters.

Labor productivity is low relative to major world exporters. Compared to China, wages are higher and labour laws concerning overtime are much stricter. The lack of demand for skilled textile workers (knitters, sorters) in Mongolia has led in recent years to substantial migration of female workers to work in Chinese and Russian wool and cashmere factories.

The process technology in Mongolia is below average. According to the USAID (2005), Gobi’s plant and equipment are generally old and not well maintained. The quality of much of its processing equipment has declined due to misuse and inadequate maintenance and repair.

Domestic supporting industries are almost inexistent. There are no high-end suppliers in packaging and accessories in Mongolia. Skilled mechanics are in short supply and, since there are no machinery producers in Mongolia, parts must be shipped from China or Europe causing substantial downtime when equipment breaks.

Above all, Mongolia needs spinning capacities to supply to the yarns knitting and weaving industries and to attract more knitting companies. Basically, there are only two main companies with spinning facility: Gobi and Buyan (Table 23). According to USAID (2005), Gobi’s yield from de-haired to spun yarn is well below best practice. Gobi does not sell large finished yarn quantities to local knitting factories.

Marketing skills in Mongolia are low and channels of distribution almost inexistent, with the exception of Gobi. Gobi runs its foreign marketing and management through its representative offices and affiliates in the United States (New York), Japan (Tokyo), Belgium (Brussels) and the Russian Federation (Moscow). Gobi has traditional purchasers in Asia, Europe and the United States, with whom cooperation goes back up to 20 years. Today, cashmere products with the Gobi label are being sold in around 20 cities around the world, including Tokyo, New York, Hamburg, Moscow, London, Paris, Seoul and Brussels.

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Table 23. Comparison of the cashmere yarn industry in Mongolia and China Key factors Mongolia China

Quantity of yarn spinning mills

Limited spinning facilities, with only 2 companies: Gobi and Buyan.

Large capacities with new spinning technology and idle capacity.

Quality of yarns in terms of fineness

Good quality and consisting length, large quantities of raw cashmere.

Large variety of fines, but also huge amount of minor quality.

Quality of yarns in terms of material composition Only 100% cashmere.

Long experience in blends: 55% cashmere and 45% silk

(also 70%-30% blends and use of acrylic).

Variation of yarn types Only 1/28 max. 2/18 yarn titles available. High technological skills by co-operating with EU companies up to 2/56 yearn title,

super fine quality.

Natural colours Limited light shades for pastel colouration; large amounts of dark melange.

All colours available, high amount of light beige and whites.

Source: Comparison and Benchmark Analysis of Cashmere Industry of Mongolia and China, GTZ, International Trade Policy/WTO, 2004 by Mr. Dietmar Stiel.

World trade markets The international demand for “Knitted pullovers, cardigans and similar articles of wool or fine animal hair” (HS 611010) is highly concentrated in a few major markets: the United States, Japan, Hong Kong, Italy, Germany, the United Kingdom and France consume more than 75% of world imports.

The international supply is highly concentrated, as three countries export around 60% of world exports: Hong Kong, Italy (22% each) and China (16%). There are also other European exporters of pullovers, such as the United Kingdom, Germany and Romania, but they represent small market shares (1% - 4%). Mongolia is a very small exporter of finished cashmere products (0.33%).

International demand of knitted pullovers of wool or fine animal hair is slightly falling, declining on average by 1% p.a. between 1999 and 2003. The downward trend in world imports is due to the decline in some major markets: the United States (-4% p.a.), Hong Kong and France (-3% p.a.), and Japan and Germany (-1% p.a. each). By contrast, two big consumers have strongly increased their imports: Italy (+12%) and the United Kingdom (+5%).

Tariffs applied to Mongolia in its current exporting markets are high and sometimes discriminatory. For knitted pullovers of wool or fine animal hair, the United States, the European Union and Japan apply tariffs between 10-15% to Mongolia. Moreover, the European Union and, to a lesser extent, Japan grant free access to some of Mongolia’s competitors, thus discriminating against Mongolian pullovers. However, from 2005 to 2015, Mongolia can benefit from the EU “GSP +”, where around 7,200 products from Mongolia will enter the EU duty free, including apparel products. Hong Kong, another major importer, gives a free access to all countries.

Socio economic impact Wool knitting sector accounted for 2.6% of total exports in 2003. In other terms, the wool industry (essentially cashmere) is Mongolia’s third largest official export, after copper and gold.

The cashmere industry is the economy’s single largest employer providing jobs for over 16 percent of the work force and income to over a third of its 2.4 million people. It is a principal source of livelihood for Mongolia’s poor. Mongolian herders directly receive the earnings from sale of cashmere that boosted them to grow the number of goats. It is also one of the major manufacturing and employing sectors providing approximately 28% of all Mongolian industrial working places (GTZ, 2004). Over 2,800 people are employed by cashmere processing industry in Mongolia (World Bank, 2002).

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Meat

The socio-economic impact of the meat sector is high. The share of agriculture in GDP, which consists of mainly livestock, amounted to 20% in 2002. In 2003, there are around 380,000 herdsmen and 170,000 herdsmen’s families. For the herdsmen the livestock and its outputs such as meat, wool and cashmere are the single most important source of income. Herdsmen are regarded as self-employed and it is share in the total employed is around 40%. However, the sector represents only 2% of total exports.

Only a limited quantity of Mongolian meat is processed. The meat industry is little export-oriented and exports little value-added products, mostly raw meat, with a prevalence of beef, though the composition of exports is rapidly changing in favour of horsemeat. Mongolia exports its meat almost exclusively to one country, Russia.

Mongolian meat is a “natural product” and ecologically clean, and has some unique features. The plants consumed by the animals are very varied and specific, and include medicinal plants in some areas, which can highly influence taste and quality. In addition, Mongolian meat in comparison with other meats is “juicier”, and gets “softer” when it is boiled, contrasting with what happens with meat from other countries that gets “tougher”.

However, Mongolia’s meat production has dramatically fallen over the last period, from around 310,000 tons in 2000 to some 150,000 tons in 2003. Mongolian meat suffers from a bad packaging, lack of chilling and refrigeration facilities, and inadequate quality control. Mongolia displays higher production costs relative to major regional exporters (Russia, China). Moreover, companies face difficulties collecting animals from the small-scale farmers that are disseminated throughout the countries, and the quality of utilities such as energy and water is not always adequate.

There are opportunities for product diversification in the meat sector, for example for pet food and horsemeat. Mongolia can benefit from the assistance of the EC, the US and Russia to improve the meat processing technology and bring standards of meat and meat products to international levels.

International demand for the meat products exported by Mongolia is highly concentrated on a very few market and not particularly dynamic. Market access for Mongolian meat is not favourable, especially for beef, while conditions are slightly better for horsemeat. However, non-tariff measures applied to meat are becoming more and more demanding in developed markets such the EU, the US and Japan. There is a need of product and market diversification of Mongolian exports in this sector.

Priority actions for government to promote the export of meat industry might include following statements:

Business environment

− Secure funding for the modernization of factories and the development of adequate and efficient storage and transport facilities, notably by giving access to loans at low interest rate.

− Reduce VAT rate.

− Reduce import duties on machineries and equipments to facilitate the modernization and the development of the industry.

Infrastructure

− Improve veterinary services to meet the international sanitary norms of the WHO/FAO Codex Alimentarius.

Industrial policy

− Formulate a long-term strategic vision, jointly with the public and private sector, for the (long-term) development of the meat industry, to utilise the country’s large livestock resources in a sustainable manner.

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Trade Policy

− Intensify government-to-government negotiations to reduce the high import tariff on some big markets, such as Russia, and to get technical assistance to address the non-tariff barriers related to hygiene and sanitation in the EU and US markets.

Table 24. SWOT analysis for meat Strengths (to build on) Weaknesses (to cover)

Product: Good local breeds. Good quality of Mongolian meat: Good taste; low on cholesterol, devoid of heavy metals, radioactive substances and pesticides due to natural pasturage conditions.

Production: Low labour costs.

Location: Strategic location between two large markets, China and Russia.

Demand: High domestic demand.

Production: Poor pasture and breeding management and veterinary services Outdated slaughter technology: inadequate butchery techniques. Lack of facilities for storage, chilling and refrigeration, and refrigerated container. Inadequate meat quality control. Lack of appropriate hygienic and safety standards. Under utilization of production capacity. Presence of animal diseases

Supporting industries: Lack of domestically produced supporting materials

Business environment: High transportation costs. High utility costs. High interest rate for working capital. Delay in the receivables from sale.

Market access: Constraining sanitary and phytosanitary measures in the EU and US markets.


Production: Modernization of the factories. Centralization in meat production. Free import duties on machineries and equipments.

Market diversification: Southeast Asia (Philippines, Viet Nam), Middle-East (Egypt, Kuwait), Europe, and China.

Product diversification: Various meat products Attractive Mongolian horsemeat. Pet food, especially for the Japanese and Korean markets.

Market access: Opening of European markets. Implementation of international sanitary standards, enabling Mongolian producers to access new markets and obtain higher prices. Horsemeat does not suffer from diseases subject to bans.

Production: Animal infectious diseases such foot and mouth disease.

Market access: High import tariffs applied by Russia on Mongolian meat. Strong SPS measures on EU market, with numerous quality controls for health reasons.

Current export performance Mongolia exports mostly raw meat, with a prevalence of beef. In 2003, Mongolia exported about USD 13 million worth of meat, mainly frozen bovine carcasses and half carcasses (HS 020210), frozen bovine cuts with bone in (HS 020220), as well as “horse, ass, mule or hinny meat, fresh, chilled or frozen” (HS 020500, Table 5).12

12 A hinny is the offspring of a male horse and a female donkey (jennet or jenny). They are rarer than mules, which are the children of a male donkey (jackass or jack) and a female horse (en.wikipedia.org/wiki/Hinny).

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The share of the meat sector in Mongolian exports has been dramatically decreasing over the period 1999-2003, falling from 4% of total exports in 1999 to 2% in 2003.

The composition of exports is rapidly changing in favour of horsemeat. In 1999, Mongolia exported almost exclusively beef. Five years later, however, horsemeat represented almost one third of meat exports, because horsemeat exports boomed while beef exports decreased.

Mongolia exports its meat almost exclusively to one country, Russia, a feature that goes back to the time of the Soviet Union. In 2003, 100% of beef and 98% of horsemeat exports went to Russia, the remaining 2% going to Japan. This excessive dependence on one market is an issue for Mongolia, especially because Russia has been decreasing its imports over the last decade. After the transition, Russian demand declined due to the lower purchasing power of its population and the imposition of high import tariffs on Mongolian meat (20% on raw meat and 40% on meat products, UNIDO, 2002). In recent years, the export volume has decreased to 5,000 tons in 2004, due to harsh winters causing animal disaster. In addition, according to the Ministry of Food and Agriculture, the Russian Ministry of Agriculture has a strategy to reduce dramatically meat imports.

Table 25. Mongolia’s exports of meat

HS 1996 6-digits Product label Exports

(USD 1,000) Share of

product in Mongolia's exports (%)


exports

Mongolia's share in

world exports (%)


(% p.a. from 1999-2003

1999 2000 2001 2002 2003 2003 2003 2003 Mongolia World

020210 Bovine carcasses and half carcasses, frozen 10,378 13,799 9,880 11,196 7,329 1.19 5 3.56 -9 0

020500 Horse, ass, mule or hinny meat, fresh, chilled or frozen 28 5 3,070 5,342 3,831 0.62 12 1.14 437 0

020220 Bovine cuts with bone in, frozen 2,265 263 1,863 2,587 1,991 0.32 16 0.31 22 0Meat 12,671 14,067 14,813 19,125 13,151 2.14 .. 1.10 4 2


Domestic supply conditions Mongolia produces raw meat and processed meat, but only a limited quantity of meat is processed13. The production of meat products (sausage, salami, canned meat, etc.) is limited, even though there is an important demand in the international market. In the domestic market, raw meat is mainly sold as whole meat carcasses (including bones) and not in the form of portioned boneless cuts, butchered and packed as required by international market. The average annual consumption of meat in Mongolia is 120 kg per person.

The meat industry is little export-oriented and exports little value-added products. Almost all products are consumed on the domestic market: in 2003, only 10% of the production (or 15,000 tons out of 153,000 tons) was exported. Mongolian companies export meat in the form of very low value-added products such as frozen carcasses of large animals.

Major Mongolian meat exporters, such as Makh-Impex, consider that the quality of meat is average compared to international standard. However, according to Dévé (2005), the consumers can perceive the unique qualities of the Mongolian meat, which are linked to the Mongolian animal rearing conditions. First, the plants consumed by animals influence the taste of the meat and are very varied and very specific. In some areas, animals consume medicinal plants, which can highly influence taste and quality. Second, Mongolian meat in comparison with other meats is “juicier”, and gets “softer” when it is boiled, contrasting with that from other countries which gets “tougher”.

Mongolian meat is a “natural product” and ecologically clean, as it comes from animals raised under natural pasturage conditions. Consequently, Mongolian meat is low on cholesterol,

13 Processed meat in Mongolia includes sausages, salami, canned meat, small intestine, bone meal, dried blood, casings, canned products, tallow, edible fats, and soaps.

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devoid of heavy metals, radioactive substances and pesticides. This livestock management system has the advantage of low production costs, but it suffers from low productivity levels and high exposure to climate risks. Therefore, pasture management is inefficient in Mongolia and must be improved. Likewise, hay stocks are low and need to be increased.

The management system in processing, packaging and quality control is weak in Mongolia. In addition, the state of process technology is low. Mongolia has a long tradition concerning cuts types and the process techniques, but butchery techniques are inappropriate for exports: meat carcasses are cut into three non-standard parts only, whereas at least fifteen different parts of boneless meat are sold on the international market. Meat is also exported in carcass form while boneless meat incurs lower transportation costs and commands higher prices. The majority of slaughterhouses are equipped with outdated machinery imported mainly from former East Germany in the 1970s. Only few recently established meat-processing plants like Meat Market have modern technologies from Japan and Korea. Makh-Impex envisages renewing its production plant14.

Mongolian meat suffers from a bad packaging, and the lack of chilling and refrigeration facilities15. The quality control of Mongolian meat is inadequate: industrial slaughterhouses handle just 7% of all livestock slaughtered. The remaining 93% of animals are slaughtered in backyard facilities without sanitary surveillance and under poor hygienic conditions. Mongolian veterinary services cannot inspect these slaughtered animals, and veterinary drugs are expensive in Mongolia. Therefore, the quality control of slaughtered animals in Mongolia does not match the code of hygienic practice for fresh meat and the code published by the joint FAO/WHO Codex Alimentarius Commission. Not surprisingly, there is a prevalence of animal diseases, including foot and mouth disease, brucellosis, anthrax, and glanders. However, it is not an issue to export to Russia, as usually Russian veterinarians come to Mongolia to control the meat quality.

Mongolia displays higher production costs relative to major regional exporters (Russia, China). Labour costs are low relative to major world and regional exporters but labour productivity alike. Average salary level is about USD 120.

Mongolia’s meat production has dramatically fallen over the last period: it halved from around 310,000 tons in 2000 to some 150,000 tons in 2003. Beef production was particularly affected (Table 26). During the 1990’s, the livestock population has been growing steadily and reached its peak in 1999. Since 1999, due to harsh winter (a natural phenomena called Dzud) and dry summer it decreased almost by 50%. In 2004, meat production has recovered and reached about 200,000 tons. Annually, about 20-25% of total livestock is slaughtered which equals to 200-250,000 tons of meat.

Table 26. Number of livestock, meat production and exports 2000 2001 2002 2003 2004

Number of livestock (million heads) 30.2 26.1 23.9 25.4 28.0

Meat production (1,000 tons) 310.6 226.4 204.4 153.4 199.3

of which beef 113.4 66.9 60.7 43.6 52.3

mutton and goat 120.0 104.6 94.9 80.9 98.1

Exports (1,000 tons) 16.7 19.8 23.3 15.1 8.05

Source: Ministry of Food and Agriculture, 2005

Moreover the supply of animals is inefficient: companies face difficulties collecting animals from the small-scale farmers that are disseminated throughout the countries. Consequently, factories do not operate under full capacity.

14 Information collected by interviews during a mission in August 2005 15 Cf. http://www.investmongolia.com/index.php?sel=menu&mnl=5_1).

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The quality of utilities such as energy and water is not always reliable and satisfactory. Water infrastructure needs to be rehabilitated. Most of the meat producers have their own utility generators to work independently from the less reliable Government-provided central system. Regarding transportation, Russian costumers provide the carriage of the meat.

Mongolia seems to have limited supply capacity. There are 22 combined slaughterhouses and meat-processing plants in Mongolia. Large-scale meat plants are located in Ulaan Baatar, Darkhan and Choybalsan, while there are medium and small-scale enterprises near the Trans-Mongolian railway (UNIDO, 2002). Mongolia has over 60 SMEs that produce meat products for domestic consumption. Mongolian slaughterhouses have limited capacity. Meat-processing plants operational in Mongolia have a total processing capacity of 60,000 tons of meat and by-products16. Mongolian nomadic livestock gives the possibility to export only 40-50,000 tons of meat a year, which is very small compared to world meat demand. For example, Russia alone already imports 1 million tons beef each year.

There are opportunities for product diversification in the meat sector, for example for pet food and horsemeat. Because of quotas and import bans due to livestock epidemics, the Mongolian meat industry has been put under pressure to seek new export opportunities.

− Pet food could be an interesting export product for the Mongolian meat industry, especially due to the size of the Japanese market and the rapid growth of the Korean market. According to USAID (2005), pet food is most often based on meat by-products, fully cooked and sterilized, thus reducing the risk of contamination. It is distributed in sealed packages at room temperature, thus allowing for more economic transportation and longer shelf lives. The processed nature of pet food is likely to help Mongolian producers overcome the barriers they face when trying to export fresh meat to its neighboring markets. While pet ownership has stabilized in mature markets like North America an Europe, consumer spending per pet is still on the rise in many countries, particularly in dynamic markets and changing societies of Eastern Asia, including Japan and Korea (Box 7).

− Horsemeat is another niche market to consider. Mongolia has already successfully exported horsemeat in recent years, and may export more in the years to come. Horsemeat is cheap and culturally acceptable in many Asian markets. Moreover it does not suffer from any disease-related bans.

Box 7. Pet food export opportunities for Mongolian meat

A recent study from USAID recommends Mongolian companies to concentrate on fully-processed products domestically. “This allows Mongolian companies to (1) bypass stricter import regulations applicable for fresh meat, (2) achieve lower transportation costs applicable to more shelf-stable products, and (3) capture higher profit from value-added activities in Mongolia.”

Of the main three pet food product categories – wet food, dry food and treats–, Mongolian companies should focus on producing premium 100% meat canned products and dry treats made from 100% animal by-products. Thus, Mongolian companies can seize the maximum benefit from the competitive position using meat as a raw material.

Regarding the market access, the highest priority is to develop marketing and branding power. One option for Mongolian products for entering sophisticated and brand-conscious Japanese and Korean markets is to search partnerships with importers and manufacturers in the destination country. Also cooperation with multinational brands interested in accessing Mongolian environmentally clean agricultural resources is an interesting option.

Source: USAID document on Mongolian pet food, June 2005.

Mongolia can benefit from the assistance of the EC, the US and Russia to improve the meat processing technology and bring standards of meat and meat products to international levels. Three projects are being implemented at the Ministry of Food and Agriculture: “Meat Export”, “Livestock quality, breeding and services” and “Livestock health”. Modern technologies for de-boning, cutting, and packaging have been introduced in several companies, including Makh-Impex, BC-Mongol, Meat-market, Darkhan Makh-Expo and Mongol Makh-Expo. In 2004, 160 tons of horsemeat were exported to Japan. In 2004, the Russian Rusmyasprom Company

16 Cf. http://europa.eu.int/comm/external_relations/mongolia/intro/nip_04-06_en.pdf.

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established a new meat storage in Darkhan-Uul Aimag. The company Khatan Suih Inpex established the meat storage factory with 20 tons of meat. The company exported 75 tons of meat to South Korea (Ministry of Food and Agriculture, 2005).

World markets The international demand for the meat products exported by Mongolia is highly concentrated on a very few markets. The Korean Republic represents 62% of the world market for frozen bovine cuts, bone in (HS 020220), while the Russian Federation absorbs 72% of world exports of Bovine carcasses and half carcasses, frozen (HS 020210). Three European markets import more than two thirds of world exports of Horse, ass, mule or hinny meat, fresh, chilled or frozen (HS 020500): France (28%), Belgium (23%) Italy (18%).

International demand for these products is not particularly dynamic. World imports in value of frozen bovine cuts bone in and horsemeat have been continuing growing over the period 1999-2003, but at a lower pace than world trade, respectively 3% and 1% per annum against 6%. By contrast, world imports of frozen bovine carcasses and half carcasses have decreased (-4% p.a.) over the same period, mainly due to the decline of Russian imports.

Market access for Mongolian meat is not favourable, especially for beef. Russia, its almost unique market, applies peak tariffs on Mongolian beef, respectively 17% and 15% on frozen bovine carcasses and half carcasses and frozen bovine cuts bone in. Likewise, Japan and China apply very high import tariffs on Mongolian frozen bovine cuts bone in, respectively 50% and 25%.

For horsemeat, market access conditions are slightly better. Russia applies a tariff of 18% to horsemeat, but Japan grants a free access and the EU applies a very low tariff (3%).

However, non-tariff measures applied to meat are becoming more and more demanding in developed markets such the EU, the US and Japan. Meat is one of the sectors subject to the highest number of quality controls inside the EU for health reasons. Mongolian products currently do not meet European hygiene and sanitary requirements (Cecoforma, 2004). Mongolia is not yet able to trace the ancestry of the animal, to prove that residue levels are acceptable, and that the animal has been slaughtered and the meat processed in hygienic conditions. In addition, disease onsets such as avian influenza and bovine spongiform encephalopathy (BSE) will continue to restrict international trade.

Trends in world meat market are very promising. Liberalization of trade, improved production efficiency, economic development, and population growth are the key drivers behind the global meat industry’s sustained growth in recent years. In line with the pace of development, meat consumption per capita should continue to increase in most of markets.

As world markets conditions in terms of demand and market access are not satisfactory, there is a need of product and market diversification of Mongolian exports in this sector.

Socio-economic impact The socio-economic impact of the meat sector is high. In Mongolia, agriculture consists of mainly livestock, which represents more than 80% of agricultural outputs.17 However, the share of agriculture in GDP dropped sharply, from some 36% in 1999 to 20% in 2002, due to a decline in agriculture outputs and increases in services and industry.

Livestock is the single most important source of income for the herdsmen. In 2003, there are 378,000 herdsmen and 172,000 herdsmen families in Mongolia. Herdsmen are regarded as self-employed and they represent more than 40% of total employment (Statistical Yearbook, 2004).

17 Cf. www.investmongolia.com

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Carpets

Carpets have a relatively low socio-economic impact in Mongolia. Exports remain marginal, though they have grown strongly in recent years and the sector generates significant indirect revenues to herders.

Mongolia’s exports have been growing tremendously, despite declining international demand in recent years. Mongolia exports mainly to its two neighbouring countries, China and the Russian Federation. Market access conditions for Mongolian carpets are relatively favourable, except in the neighbouring countries, but future global demand for carpets may be negatively affected by the existence of substitutes and changes in consumer preferences.

By contrast, domestic supply conditions are far from adequate. There are only few carpet producers in Mongolia. The quality of Mongolian carpets is poor compared to its major competitors, and designs are old and not very original. Most inputs and equipments are imported. The equipment in plants is outdated and inflexible, and production costs are higher relative to major regional exporters, such as China. Most carpet plants do not operate at full capacity, because of insufficient supply of sheep wool. In addition, Mongolian companies display low marketing skills.

Priority actions to improve the export potential of Mongolia carpet industry include:

Investment incentives:

− Provide domestic producers with the same tax breaks that are given to foreign and joint venture companies, such as import duty and VAT exemption. Investment for new production machinery is crucial for the domestic producers.


− Resolve the bad debt problem of the domestic producers in order to improve the possibilities of raising working capital and long-term investment loans.

Marketing:

− Assist domestic producers taking part in fair and exhibitions and making contacts with foreign buyers and trading houses.

− Producers should learn how to utilize internet-based promotion and advertising, and to position themselves in the international market.

Product characteristics:

− Address the problems of poor end-user behaviour with the help of practical research and development on scouring and setting stages in the production process.

− Improve designs and product development capabilities in collaboration of the Mongolian Textile Institute (MTI) and through linkage programmes with foreign design institutes.

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Table 27. SWOT analysis for carpets Strengths (to build on) Weaknesses (to cover)

Business environment: Stable demand in the local market.

Product: Poor quality of wool and end-user products. Outdated design.

Production: Out-dated and inflexible facilities and processes. Lack of economies of scale.

Infrastructure: Bad roads and inadequate infrastructure causing high transportation costs.

Supporting industries: Much of the wool produced in the countryside is discarded.

Marketing: Little experience in international trade. Insuffisant market information.

Business environment: Long-term debt problem of carpet companies.

Market access: High import tariffs in Russia and China.


Production: Underutilisation of production capacity.

Market access: New generalized system of preferences (GSP) agreement with the EU. Possible protectionist action by the USA against Chinese imports may give opportunities to Mongolia. Future entry of Russia in the WTO improves Mongolia’s market access.

International demand: 2008 Olympic games in China. Potential market for hand-woven carpets.

Business environment: China may take control over the industry.

International demand: Declining trend in Western markets due to changes of preferences, with growing demand of wood and ceramic products for the flooring market.

Current export performance The current export performance of Mongolia in carpets seems very satisfactory. Within the last five years Mongolia has had a 8-fold increase in the value of the exports in the carpet industry, from USD 118,000 in 1999 to USD 872,000 in 2003 (average growth rate of 76% per year), and this despite a decline in international demand (Table 5). Therefore, Mongolia gained market shares in the world, though it still accounts for only 0.07% of the world’s market. Carpets are still a marginal sector for Mongolia, with a share of some 0.1% of total Mongolian exports in 2003.

Mongolia exports mainly to its two neighbouring countries, China (79%) and the Russian Federation (19%), but is also present on the US market (1%). The export performance has been varying depending on the partners: exports to Russia and China have been booming, while those to the USA have been decreasing strongly.

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Table 28. Mongolia’s exports of carpets

HS 1996 6-digits Product label Exports

(USD 1,000) Share of

product in Mongolia's exports (%)


exports

Mongolia's share in

world exports (%)


(% p.a. from 1999-2003

1999 2000 2001 2002 2003 2003 2003 2003 Mongolia World

570110 Carpets of wool or fine animal hair, knotted 118 152 379 779 872 0.14 31 0.07 76 -7


Domestic supply conditions There are only few major carpet producers in Mongolia. Only two companies are producing and exporting machine-made carpets: Erdenet Carpet and Ulaanbaatar Carpet.

The quality of Mongolian carpets is very low compared to the major competitors. Carpets are 100% made of sheep wool and have a high density. However, according to UNIDO (2002), Mongolian carpets have a large amount of loose fibres on their surface and bad odour due to grease residue.

Carpet designs are old-fashioned and not original. Mongolia does not have traditional know how and designs comparable with those from the major world supplier country (Box 8). In addition, carpet producers lack design development capabilities. Their designs remain outdated and unfashionable for foreign markets.

The low quality and outdated design translate in low export prices. For example, the average unit value of Mongolian carpet exports was 4,075 USD/ton, as compared to 26,000 USD/ton for Iran, 31,000 USD/ton for China and 39,000 USD/ton for India.

Box 8. Carpets characteristics of the major country producers

Iran’s hand-made carpets are known for their high quality and distinctive designs. The art of rug weaving has been cultivated in Iran for more than 2,500 years. Persian rug weavers have achieved a worldwide reputation for creativity, ingenuity, and craftsmanship.

Rug weaving was virtually unknown in India until the 16th century until a change in preferences of the ruling class for the Persian arts. Therefore, the Indian rug weaving industry was greatly influenced by Persia. Almost all Indian rug designs of today are imitations of famous Persian designs. Since India does not have a nomad or village weaving industry, all rugs are made in city workshops and are highly homogeneous stylistically.

Much of what can be said about India's rug weaving industry applies to Pakistan as well. Pakistan was also highly influenced by Persian technique and design. Today, most of Pakistan's rugs follow either famous Persian designs or Turkoman and Caucasian (Bokhara) designs. Pakistani carpets are priced somewhere in between Iranian and Chinese carpets.

The style of Chinese carpets is very different from that of Islamic countries and has included traditional Chinese elements. Many Chinese rugs are made with silk, most often in combination with wool. Carpets from different parts of China also have their own distinctive traits: Some production area is known for its luxury-grade products, while other is known for its mass-market products. China has developed its carpet industry during the past 20 years and emerged as a formidable competitor for Iran, since silk rugs produced in China have a very high quality and sell at much lower prices than Persian Carpets.

Source: www.rughomestore.com/rugcountries.html.

The process technology for Mongolian carpets is very low. The equipment in the plants is outdated and inflexible. “The most modern machines in the world are ten times more productive than ours,” said a representative of a Mongolian carpet company. Moreover, machines are not flexible --it is not easy to change the design very often-- and consequently not cost-efficient. Like the manufacturing sector in general, this sector suffered from a lack of investment during the 1990s. Major producers (Ulaanbaatar Carpet and Erdenet Carpet) have been until recently burdened with bad debts and are still facing difficulties for raising working capital and long-term investment loans. According to interviewees, loan interest rates are very high, up to 2.5%/month.

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Source: Ulanbaatar Khivs factory in Ulanbaatar.

The efficiency of the domestic supporting industries is very low, and most inputs and equipments are imported, except the sheep wool. Mongolia produces a large amount of cheap and relatively low quality wool, but a considerable amount of this is abandoned in the countryside due to notably to bad roads and inadequate infrastructure. Moreover, the price of the sheep wool has been increasing because Chinese merchants compete with potential Mongolian buyers.

Production costs are higher relative to major regional exporters such as China. Labour costs in Mongolia are much higher than in China, while labour productivity is much lower. In addition, transportation costs are higher in this landlocked country.

Most of the carpet plants do not operate at full capacity. Both the Erdenet Carpet plant and the Ulaanbaatar Carpet operate at 35%-40%, of their capacity due to the lack of wool. This low utilisation rates does not allow reaping economies of scale and further pushes up production costs (UNIDO, 2002).

Mongolian companies display low marketing skills. In addition, they lack market information and contacts with foreign buyers.

World markets World supply and world demand are highly concentrated. The world market of carpets totalled USD 1,3 billion in 2003, but four countries account for almost four-fifths of exports in the world: Iran (41%), followed by Pakistan (17%), India (12%) and China (10%). Other significant suppliers include Turkey and Nepal. Imports are even more concentrated, with the European Union and the United States accounting for almost 80% of imports, the German market alone taking in over 20% of global imports. The United Arab Emirates and Switzerland are also important importers.

The international demand for carpets declined between 1999 and 2003. World imports decreased by 5% annually. The import trends have been varying for the major markets: Imports from the EU and Switzerland have declined during that time period, while those from the United States and the United Arab Emirates increased.

Future global demand may be affected negatively by the existence of substitutes and changes in consumer preferences. In the world carpet and flooring markets, wool carpets have to compete with synthetic carpets. Wood (Laminate), ceramic and other non-resilient products are likely to increase in sales in the near future because of better characteristics (notably in terms durability). Moreover, overall consumer preference for high-end natural products has been increasing as income levels rise18. Nevertheless, according to one estimate for 2005, carpet products still dominate in the US with a 60% market share, followed by ceramic (14%), wood

18 Freedonia Group 2005, C.f.http://www.mindbranch.com/listing/product/R154-1245.html.

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(10%) products (NAFCD 2002). The machine-made carpet market in China has also very potential, mainly due to the construction surge, especially because of the 2008 Olympic Games. For instance, hotels and offices demand three-meter wide wall-to-wall carpets (UNIDO, 2002).

Market access conditions for Mongolian carpets are relatively favourable, except in Russia and China. Mongolia’s largest trading partners, China and Russia, apply higher tariffs for carpet imports than the biggest importers of the world: China applies a general tariff of 22%, and Russia applies a tariff of 20% to all exporters except CIS countries (for which it applies a preferential tariff). The forthcoming entry of Russia in the WTO might lower its tariffs. By contrast, the biggest importers apply low tariffs for Mongolian carpets: European Union (7%19), the United States (2%), the United Arab Emirates (4%), and Switzerland (3%).

Socio economic impact The socio-economic impact of the carpet sector seems to be very low. Altogether, the two major companies employ around 1,000 persons in Mongolia, and exports of carpets accounted for less than USD 1 million in 2003.

19 Since 2005, Mongolia gets duty-free access to the EU: Mongolia benefits from the generalised system of preferences (GSP) agreement which allows ten years of duty-free access of Mongolian imports.

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Blankets

The international demand for blankets and travelling rugs is dynamic, but market access conditions throughout the world are not particularly favourable. Mongolian blanket exports have grown very fast over the last years. The quality of Mongolian camel and cashmere blankets is quite high. However, local production capacities are very limited, and so far only Gobi displays a significant production. The cashmere-weaving industry seems to have a future in Mongolia, especially because woven fabric is a much more suitable use for most of Mongolian cashmere than knitting.

Priority actions include the following:

Legal framework and trade policy

− Tax holidays for processors could also be used to lower their costs, allowing them to meet Chinese prices.

− Support the Cashmere Association to encourage the breeders to produce a finer and whiter fibre.

Investment incentives for foreign investors



Business environment

− Remove distortionary taxes –including export taxes– in order to reduce smuggling and increase the supply of raw cashmere to the domestic processing capacity.



Fundamentals




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Table 29. SWOT analysis for blankets Strengths (to build on) Weaknesses (to cover)

Domestic/international demand: Strong local and international demand good image for “Mongolian cashmere”.

Supporting industries: Vast resources of suitable specialty fibres, including cashmere and camel wool.

Production: Low labour costs. Mongolian Cashmere fibres more suitable for weaving than for knitting

Infrastructure: Low costs for industry supply (electricity, water, etc.,).

Production: Mostly outdated equipment. No blends available. Limited value added

Supporting industries: Lack of spinning capacity.

Business environment: Not FDI oriented, limited number of foreign companies.

Marketing: Lack of market information.


Production: Development of spinning capacities.

Domestic/international demand: Increasing demand for 100% cashmere products.

Market access: New EU GSP granting free access to EU markets.

World markets: Upcoming regional competition, mainly from China.

Current export performance Mongolian blanket exports have grown very fast in recent years, at an average annual growth rate of 9%. In 2003, total exports of blanket and travelling rugs items (HS 630120) were up to USD 280,000, which represents a very small portion of Mongolia’s total exports and a marginal world market share (0.2%). Mongolia exports both camel wool and cashmere blankets (Table 30).

Mongolia exports blankets mainly to five destinations. Russia is by far the most important market (43% of Mongolian exports), followed by Japan (25%), Italy (13%), the United Kingdom (7%) and the Republic of Korea (5%).

Table 30. Mongolia’s exports of blankets Value

(USD 1,000) Quantity (unit)

2002 2003 2004 2002 2003 2004

Cashmere blankets 31.7 85.2 114.1 879 697 1,494

Camel wool blankets 70.1 126.5 153.5 1,564 4,065 2,613

Source: Statistical Yearbook, 2004.

Domestic supply conditions The production capacities are very limited. Only Gobi displays a significant production of woven cashmere fabric.

The current quality of camel and cashmere blankets is reasonably high. However the production is mainly destined to the local market, and only a small amount is exported.

The cashmere weaving industry seems to have a potential in Mongolia. According to an interviewed Mongolian expert of cashmere industry, “the introduction of weaving techniques and capabilities in Mongolia is essential, since woven fabric is a much more suitable use for 60% of Mongolian cashmere than is knitting. Knitting just happens to be easy entry, and easy to learn, but Mongolia could really compete in woven with the quality of raw material it has.” Indeed,

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weaving requires stronger and longer fibers than knitting. That is why Mongolian fibers are more suitable for weaving.

World markets

The international demand is dynamic, growing on average by 4% per year in value between 1999 and 2003. The major markets are the United States, Spain, the United Kingdom, Oman, Italy and France, and all have substantially increased their imports. The major suppliers of blankets are China, Italy, India, Lithuania, and the United Kingdom. Since the end of the Multi Fibre Agreement (MFA) on 1st January 2005, regional competition is becoming fiercer, notably from China.

Market access conditions are not particularly favourable. Tariffs applied by importing countries to Mongolian blanket and travelling rugs (HS 630120) are rather high, especially those applied by the countries in the region (China: 22%; Russia: 20%; and Korea: 10%). Mongolia benefits from the GSP on the Japanese market (1% instead of 6% under the MFN regime) and EU markets (10% instead of the 12% MFN tariff). Thanks to the new EU GSP, Mongolia has free access to the EU markets since 2005.

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Vodka

Around 200 companies operate in the vodka sector, employing several thousands of people. However, vodka still represents a marginal share of Mongolian exports. The social impact of this sector is questionable, as an increased production of vodka might contribute to the rise of alcoholism.

Vodka is the world's most popular spirit drink, and the international demand is highly dynamic. In addition, Mongolia’s market access conditions are favourable in the major importing markets, which grant free access, whereas Mongolia’s neighbouring countries are rather protective. The vodka market is highly competitive and Mongolia has underachieved over the last period, since its export value has drastically dropped in a context of fast growing international demand.

This poor export performance seems paradoxical, because domestic supply conditions are favourable. Mongolian companies have a long experience in Vodka production, but only few companies seem to be able to export vodka. However, the sector seems ready to start competing on an international level. The quality of their vodka is high and has a unique soft taste. Their process technology is modern, and production costs are considered reasonably low compared to major world and regional exporters. The business environment for vodka sector is improving. Mongolia government is becoming more supportive notably by introducing amendments to the Excise and VAT tax laws. The two major companies lack of a brand image but their marketing skills are high compared to the other sectors. Some issues remain. In general, Mongolia companies do not run at full capacity due to lack of raw materials and the excess number of local companies shrink domestic sales. Packaging is also one of the major weaknesses of Mongolian vodka industry. The major part of supporting materials is obtained from abroad. The sector likely needs to be restructured and rationalized, as too many companies produce vodka in Mongolia and consequently do not run at full capacity.

Priority actions of government:


− Render taxation policy stable and tightly control vodka producers in terms of tax discipline.

− Control the quality and licensing of vodka producers.

− Control the quality of imported products.

Administration:

− Improve the bureaucratic handling of service to businesses, with more flexibility and less control.

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Table 31. SWOT analysis for vodka Strengths Weaknesses

Product: High quality and unique soft taste.

Production: Modern technology. Competitive pricing at international level.

Production: Beginner in the vodka exporting business. Low supply capacity.

Domestic supporting industries: Dependent on imported supporting materials (e.g. bottles).

Marketing: Lack of brand image. Lack of marketing expertise.

Business environment: Poor government support.

Opportunities Threats

International demand: New markets to target, including EU and China.

Production: Possibility to expand production capacity.

Marketing and distribution channels: Partnership with foreign companies.

Production: Logistics.

Business environment: Unstable tax environment.

Current export performance Mongolia seems to have underachieved in vodka sector over the last period. After a slight increase in 2000, export value has drastically dropped by 59% per annum, falling from around USD 800,000 in 1999 to less than USD 50,000 in 2003. By contrast, the international demand was dynamic and total world exports rose by 36% per annum in the same period of time. Consequently, Mongolia lost market shares, which is now less than 0.01%. However, exports data in volume from the Mongolia’s Ministry of food and agriculture shows another trend, with booming exports in volume over the same period (Table 32).

Mongolia reports exporting only in neighbouring countries: almost a half of its vodka to the Democratic Republic of Korea, more than a third to the Republic of Korea, and less noteworthy amounts to China, the Russian Federation and Japan. However, from interviews with the major companies suggest that Mongolian companies already export to the United States and Canada. Mongolian companies also are seeking opportunities to opening European market.

Table 32. Mongolia’s vodka exports Source Unit 1999 2000 2001 2002 2003 2004

Quantity MFA 1,000 litre .. .. 1.4 19.8 24.3 40.8

Quantity ITC tons .. 437 0 0 27 ..

Value ITC USD 1,000 812 907 3 40 47 ..

Source: International Trade Centre (ITC); Ministry of Food and Agriculture (MFA), 2005.

Domestic supply conditions Mongolian companies have a long experience in Vodka production. The Mongolian vodka industry has 80 years of history. Currently, around 200 entities are engaged in the vodka production business, with a total capacity estimated at around 40,000 tons per year. Two companies dominate the sector: Spirit Bal Buram Company (SBB) and APU21. SBB was established almost 50 years ago, and fully privatized in 1997, the MCS group being the major shareholder. APU was established in 1924, and transferred from a State-owned factory into a Joint Stock Company in 1992, the State keeping 51% of the stocks and selling 49% to private

21 APU also produces diverse alcohol products, soft drinks and bottled mineral water.

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owners. However, with the full privatization of most state owned industries, APU was also privatized in 2001.

The vodka business in Mongolia focused on the domestic market until recently, and only few companies have a long experience in exports. In 1975, Mongolia started to export vodka to the former Soviet Union, East Germany, and Hungary. Mongolia obtained many awards from international exhibitions in Leipzig, Plovdiv and Zagreb.22 Currently only SBB and APU are involved in the vodka export business and both started exporting recently.

The quality of Mongolian vodka can be considered as high. The Chinggis Khan vodka exported by SBB is produced under strict control in accordance with the international standards and certified with ISO 9001. It is made of ecologically pure spirit distilled in traditional natural way. The vodka undergoes five levels of filtration, which gives it purity and smooth taste. Raw materials and ingredients satisfy the requirements of international quality standard. Use of membrane filter for filtrating vodka makes it smoother, clearer and cleaner. This results in reduced instances of alcohol sickness even after heavy consumption of the product. The water, which greatly affects the vodka taste, comes from underground of untouched steppes23. Chinggis Vodka gained international acclaim through its participation in the Association of Wine and Spirit Wholesalers of America’s 61st Fair. The Company APU also has installed a new filter that would make the Mongolian vodka production competitive to international market (Zuunii Medee, 2005). The APU Company established contacts with international laboratories in the United Kingdom and the United States and samples have been tested as of good quality. Laboratories have ISO 9001 international quality and standard certification.

Mongolian vodka has a unique soft taste. The spirit used is of high quality because it is made out of wheat that has grown in natural land in the northern part of Mongolia. Indeed, vodka is typically distilled from potatoes, turnips, or grain in Russia, Poland and other countries in Central and Eastern Europe. The unique taste is also due to the local water being used. APU Company uses water from a well close to the sacred Bogd Uul Mountain. However, according to Dévé (2005) there is no evidence concerning the specificity of the chemical composition of the waters being used. The origin of the wheat being used is a matter of concern, since other supply sources might be used in times of need (Box 9). The current main strategy regarding the quality of export products is to produce “pure vodka” blended with water that would contain no ingredients and no additives.

Box 9. Shortages of wheat production in Mongolia

Wheat is virtually the only cereal grown in the country. Production in 2004 is officially estimated at 135,600 tonnes, some 15.5% below the previous year, reflecting the dry summer weather in the major wheat growing regions. Harvesting of 2005 wheat crop is underway and the output of this crop is provisionally forecast at 110 000 tonnes, below the level of last year, reflecting the drought weather in most part of the country this summer. This output covers only about 28 percent of domestic wheat utilization, leaving an estimated import requirement for 2005/06 of 285 000 tonnes. Given that the country has a serious balance of payment problem, commercial imports will only cover part of this requirement and food aid will be necessary to meet the deficit. The United States Department of Agriculture (USDA) has committed to donate 20 000 tonnes of wheat to Mongolia under the Food for Progress programme. Besides, the private US charity, Mercy Corps, will sell the wheat in Mongolia for an estimated US$ 2.9 million to help rural development projects

Source: FAO/GIEWS (Global Information and Early Warning System) - Foodcrops and Shortages - 10/2005

The process technology of the two major exporting companies is high. The companies have invested in the improvement of the entire factory, including storage facilities. SBB equipment at the Spirit Plant has been fully modernized over the last few years. Likewise, the APU company utilizes new modernized plants: with equipment supplied from Germany, Austria, and Italy24. All production lines are fully automated and have reached international standards in technical and technological terms. All sections use stainless equipment, including pipes and tanks which positively impact product quality. Sterilization, sanitation and cleaning in the production process are undertaken by modern methods on an automated basis. The companies have their own

22 http://www.apu.mn/index.php?sel=intro 23 Cf. http://www.alibaba.com/catalog/10735995/Chinggis_Khan_The_Premium_Mongolian_Vodka.html 24 Cf. http://www.apu.mn/index.php?sel=intro.

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R&D laboratories and have developed relations with other reference laboratories, in the UK for instance.

Source: APU factory in Ulanbaatar

Production costs are considered low to average relative to major world and regional exporters. Labour productivity is high due to modernization and full automatization at major factories, while labour cost is low compared to major regional exporters like Russia. The average salary level is 85-120 USD a month.

In general, Mongolia companies do not run at full capacity due to lack of raw materials and the excess number of local companies that shrink domestic sales. In 2001 this industry utilized only 40% of its total capacity. If vodka producers are operated at full capacity, they require around 16,000 tons of spirits, which is 36% of the capacity of spirit producers in Mongolia. This suggests that Mongolia has the potential to export vodka and spirits (Ministry of Food and Agriculture, 2005). SBB has the capacity to produce 4.7 million liters of spirit per annum, including 300-500,000 liters of vodka a year25. APU production capacity amount to 6-8 million liters of alcohol, wine, and cocktails, and 5-6 million liters of beverage, water, and juice.

Producers in Mongolia consider transportation costs low. The companies use mainly railway and to limited extend the sea shipment.

Packaging is one of the major weaknesses of the Mongolian vodka industry. The major part of supporting materials is obtained from abroad. More recently, some parts for supporting materials are produced locally, including beer caps and labels.

The business environment for vodka is improving. Mongolia government is notably introducing amendments to the Excise and VAT tax laws. It is envisaging zero VAT and exempting vodka and alcoholic products for exports from excise taxes, which is c Clearly an incentive and support to promote Mongolian vodka products overseas.

The two major companies lack a brand image, though their marketing skills are high compared to the other sectors. For instance, Spirit Bal Buram Co. benefits from its partnership with a foreign company and has negotiated with several companies the export of Chinggis vodka. SBB already exports to the United States and is planning to open an office in the US market for handling export and distribution channels. It has also been negotiating a deal with a Russian company to produce with a license.

World trade markets Vodka is the world's most popular spirit drink. It accounts for a quarter of all spirits consumed around the world, with 3 billion liters sold each year for an amount of about USD 1.2 billion26. Vodka is now the biggest selling spirit in the US market, the world’s biggest importer of vodka

25 Cf. http://www.sbb.mn/index1.htm. 26 Cf. Fortune online, market research, Globus NTBD.

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with around 57% world market share in 2003. Far behind the other major markets are Spain (5%), Germany (4%), Canada (4%) and the UK (2%).

The world vodka market is very dynamic but also highly competitive. The vodka category has hundreds of brands produced in all parts of the world. Smirnoff has held the position as the world's number one selling premium vodka brand for many years. Over 15 million cases of Smirnoff are sold annually in 150 countries worldwide. Nevertheless, many brands manage to be leaders on small niche markets. The US market is notably dominated by Diageo’s Smirnoff, Bacardi’s Grey Goose and Sweden’s Absolut owned by Vin & Spirit. The major supplier countries are Sweden (45% of the world market), France (9%), Netherlands (9%) and UK (5%).

Market access conditions are favourable in the major importing markets although not in the neighbouring countries. Major markets such as the US, the EU and Canada grant free access to their market. However, Mongolia faces protected market access in all of its most important markets. Korea applies undiscriminating 20% tariff to all vodka imports, China 38% and Japan 16%. Russia has the most protected market, imposing a discriminating tariff of 45%i on Mongolian vodka imports, whereas it gives preferential 0% tariff to CIS countries.

Socio economic impact Around 200 companies operate in this sector employing several thousands of people. In 2004 there were 183 companies, but in 2005 government had to close down 56 vodka-producing companies. The government also suspended production of 30 companies in order to proof their minimum quality requirements. If they will not be able to do it within specified period of time the companies will lose their license27. The two major exporting companies employ around 1,200 workers.

However, the vodka sector still represents a marginal share of Mongolian export revenues: its share in total Mongolian exports was less than 0.01% in 2003.

The social impact of this sector is also questionable since it might contribute to the rise of alcoholism. The excess use of vodka by many Mongolians can destroy the health, family, and in turn productivity of heavy drinkers. This is an important issue that is drawing the Government’s attention, and which has introduced legislation to fight and prevent alcoholism. Attention should focus to increase exports of vodka, without increasing domestic consumption.

27 Source: Ministry of Food and Agriculture of Mongolia, 2005.

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Conclusion

Experts and policy makers debate the usefulness of “picking winners”, i.e. favouring some sectors to the detriment of others, rather than “creating a level playing field” that improves the business environment for all industries. In reality, however, many governments are taking a pragmatic approach that lies somewhere in-between these two extreme cases, and include elements of both. Indeed, identifying sectors with significant export potential must be led together with the identification of the crosscutting issues that affect the competitiveness of all sectors.

Decision makers from various sectors repeatedly mentioned several crosscutting problem areas during our interviews (volume, value added, cost competitiveness, transportation and delivery time). In addition, the authors have identified entrepreneurship as a major issue.

Crosscutting issues

Volume Mongolia is a small economy with a limited workforce. In many sectors, insufficient production capacity was mentioned as one of the major obstacles to export growth, mainly due, according to those interviewed, to a lack of available capital.

Value Added In many sectors, one of the major obstacles to export and export earning growth is the inability to process the commodities, and accordingly to add value and diversify products. Again, the results of the surveys indicate a lack of available capital along with a shortage of skilled workers.

Cost Competitiveness In most sectors, Mongolia’s exports are curbed by high production costs. The government and other stakeholders need to pay attention to two major cost factors compromising Mongolia’s competitiveness: labour cost vs. productivity and transportation costs.

Transportation and delivery time The national transport network faces two weaknesses: the small density of the population and the physical barriers of the country, such as mountains and deserts.

Mongolia suffers from high shipping costs. Despite an increase in competition between the transporting companies, the costs for intra-regional transportation are still higher than for international transportation.

Entrepreneurship From Mongolian companies interviewed, there is evidence that Mongolia entrepreneurs lack basic skills for export business and a genuine entrepreneurship mentality. Very few of the interviewed managers speak English, which is essential for trading. Some acknowledged they do not know how to find clients abroad. The general lack of awareness of the importance of quality is another issue. Therefore there is a wide gap in terms of export readiness between foreign and domestic companies. 58% of entrepreneurs say that they need support in technology innovation and technology transfer, 43% need information services and 33% need training and advisory services (Goty-Debnicka, Baigalmaa, 2005).

Professional consulting and advisory services are not available in Mongolia. Since exporters cannot find any information on foreign markets in Mongolia they have to ask their families and

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friends living abroad. Companies indicate they are prepared to pay for services they require, especially for advisory, consultancy, information and training services and have resources to do so.

So far, Mongolian exporters marketing and promotion activities are very limited. The main promotion instrument is a participation of foreign fairs organized by the Chamber of Commerce or other organizations. Instead of actively looking for partners and buyers, they rather wait until a potential buyer will find them in Ulaanbaatar.

Finance Exporters underline that financing export from Mongolia is one of the major constraints to export development. They do not have sufficient working capital that could support the process of exporting. The other difficulty is lack of reliable source of information about foreign markets, tariff, documents, packaging and labelling as well as competition.

Raw material supply Another major problem indicated by exporters is deficit of traditional Mongolian raw material such as cashmere and leather. Cashmere and leather are sold and smuggled to China and their storage on the domestic market makes prices higher.

The SME’s Research Centre at the Technical University carried out in 2004 a survey to find out what kind of policy entrepreneurs are expecting from the Government, and how the current policy affects their business. In the opinion of the entrepreneurs, the main obstacles to business development are taxation (82%), corruption (81%), unfair competition (78%), high interest rates (70%), obtaining external finance (69%), shortage of human resources (62%), lack of access to new ideas and technology (55%), and shortage of business development services (40%, Goty-Debnicka, Baigalmaa, 2005).

Crosscutting recommendations

Support entrepreneurship and marketing skills Entrepreneurs are at the core of the economic dynamism, since they take a risk, undertake investment and innovation and create business activities, wealth, jobs and development. The government could provide courses to Mongolian entrepreneurs on the basic skills relative to business (English, accounting, marketing).

It is essential to know and to meet the taste and the needs of customers as well as their demands in terms of product characteristics and quality, time delivery, packaging and related services. In addition, the government could provide needed market information and promote their participation to international exhibitions.

Introduce measures to attract foreign investment The distinction between Mongolia companies and foreign companies is economically irrelevant. There are just companies who are competitive, creating wealth, jobs and reducing poverty and companies who are not. In addition, foreign companies bring into the country marketing skills and modern process technologies, in additional to financial resources. As such, they are a major channel for knowledge transfer and capacity building.

The government could give preferential treatment to foreign companies that can bring into the country capital, technology, technical and marketing expertise, and training. Staff from Ministries in contact with foreign companies needs to be able to communicate in English.

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Promote the image of Mongolia Inc. There is evidence that Mongolia is not well known around the world, like most small countries. However some small countries have managed to raise their international profile because they became number one in something. For example, awareness of Botswana recently increased because it was ranked number one in Africa for the Corruption Perceptions Index (Transparency International) and thanks to Miss Botswana who recently became Miss Universe. Likewise, New Zealand has become better known internationally because the movies “Lord of the Rings” were shot in the country. Since then, the tourism industry has boomed in New Zealand. To a much lesser extent, the Mongolian movie “Weeping Camel” also impacted tourism industry in Mongolia.

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Korda V. (2005), Entrepreneurial capacity building and export promotion for production of woolen and felted artisanal products in Zuunmod, Tov Aimag, International Trade Centre, Geneva.

National Statistical Office of Mongolia (2004), Mongolian Statistical Yearbook, Ulanbaatar.

Magdash A. (2003) “Yak in Mongolia” Food and Agriculture Organization (FAO), Ulaanbaatar

Mongolian University of Science & Technology, Promoting Business & technology incubation for improved competitiveness of small and medium industries through application of modern and efficient technologies in Mongolia, Ulaanbaatar.

Nemekhbayar Sundui MA (2003), The effect of the entry into WTO of the Mongolia’s economy, joint Mongolian-German Project on International Trade Policy/WTO, Ulaanbaatar.

The Asia Foundation (2005), The future of the apparel industry in Asia, San Francisco, CA.

Textile Intelligence (2004), Textile Outlook International, May-June.

Silies C., (2004), Reducing Price Risk of Mongolian Commodity Exports through Market-based Risk management, Joint Mongolian-German Project on International Trade Policy/WTO, Ulaanbaatar.

United Nations Conference on Trade & Development (UNCTAD) (2003), FDI in brief: Mongolia, Geneva.

United Nation Development Programme (UNDP) (1999), Mongolia Export Promotion Opportunities, Ulaanbaatar.

United Nations Industrial Development Organization (UNIDO) (2002), Mongolia, Industrial and Trade Development Policy Review, Ulaanbaatar.

(1999) Islamic Republic of Iran: Industrial sector survey on the potential for non-oil manufactured exports, NC/IRA/94/01D/08/37.

United Nations Conference on Trade and Development (UNCTAD) & Common Fund for Commodities (2004), Commodity Atlas, New York and Geneva.

United Nations Conference on Trade and Development (UNCTAD) & Cyclope (2003), World Commodity Survey 2003-2004: Market, Trends and the World Economic Environment, New York and Geneva.

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United Nations Economic & Social Commission for Asia & the Pacific (UNESCAP) (2003), Trade Finance Infrastructure Development in Mongolia .

United States Agency for International Development (USAID) (2005), A value chain analysis of the Mongolian cashmere industry, Economic Policy Reform and Competitiveness Project, Ulaanbaatar.

United Nations Commission on Sustainable Development (UNCSD) (1998), Economic aspects of sustainable development in Mongolia, New York

(2005), Potential market for Mongolian pet food products, Economic Policy Reform and Competitiveness Project, Ulaanbaatar.

(2004), Potential impact of the end of the multi fibre agreement on Mongolia’s textile industry Economic Policy Reform and Competitiveness Project, Ulaanbaatar.

(2004), Mongolian garment industry: Likely effects of abolition of quotas and actions that urgently required, Ulaanbaatar.

US Trade Department (2005), Doing Business with Mongolia, Washington.

Vernon Roningen, The Impact of a Ban on Mongolian Raw Cashmere Exports”, Gobi Regional Economic Growth Initiative.

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Websites:

Centre for the promotion of imports from developing countries www.cbi.nl

Euromonitor www.euromonitor.com

Invest Mongolia www.investmongolia.com

Joint Mongolian-German Project on International Trade Policy/WTO http://www.trade-policy.mn/

Mongolian Business and Economic Information Services & consultancy http://www.bizmongolia.mn/

Mongolia Export Promotion http://www.exportmongolia.com/

Mongolia Ministry of Industry & Trade http://mit.mit.pmis.gov.mn/

Food And Agriculture Organization of the United Nations http://www.fao.org/

http://ubpost.mongolnews.mn/

Ministry of Food and Agriculture Mongolia http://gate1.pmis.gov.mn/mofa/moncamel/ENGLISH/P1.htm Indian Mongolian Economic Relations: http://www.indiainbusiness.nic.in/commercial-relation/mongolia.htm

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Annex

Annex 1. Composite indices An assessment of the export potential of industries requires taking into account very diverse multidimensional factors. Composite indicators are valued because they enable to integrate large amounts of heterogeneous information and to provide a broad, albeit simplistic, picture of reality that can be used to draw the attention of policy makers. The steps to be followed in constructing composite indicators include developing a conceptual framework and defining relevant variables; standardising indicators to allow comparisons, and weighting the indicators to come up with an overall index.

Standardising variables to allow comparisons Variables need to be standardised or normalised before they are aggregated into composite indicators. Variables come in a variety of statistical units and different variable sets have different ranges or scales. Variables need to be put on a common basis to avoid problems in mixing measurement units (e.g. firms, people, money). Several techniques can be used to standardise or normalise variables, with each method having its advantages and disadvantages (EC Joint Research Centre, 2002; Freudenberg, 2003).

The normalisation method used here converts each indicator into a range of 1 (weak performance) and 5 (best performance). It gives 1 point to industries with values below a certain threshold value and 5 points to industries with values above the threshold value. The thresholds are used to avoid having extreme values dominate and also to partially correct for data quality problems, as there is reason to believe that values extremely far from the average or normal range are more likely to reflect poor underlying data.

As a result, the thresholds used here are the values of the third best and third weakest industries. In other words, the three best performing industries have 5 points, the three weakest performers only 1 point. All other industries obtain points between 1 and 5 depending on their relative distance between these two thresholds, according to the following formula:

threshold Lowerthreshold Upper

theshold Lower Value*41−

−+

If the value of the industry equals the upper limit, the ratio is 1 and the term becomes 1+4*1=5. If the value equals the lower limit, the ratio is 0 and the term becomes 1+4*0=1. Table 33 gives an example on how to standardise the growth of exports in value for two industries.

Table 33. How to standardise indicators from 1 (low) to 5 (high): An example Hides, skins and leather Cashmere knitwear

Average annual export value growth, 1999-2003 (%) 18.9 -10.3

Upper threshold 56.3 56.3

Lower threshold -88.2 -88.2

Value – lower threshold 18.9 - -88.2 = 107.1 -10.3 - -88.2 = 77.9

Upper– lower threshold 56.3 - -88.2 = 144.5 56.3 - -88.2 = 144.5

(Value – lower threshold) / (Upper– lower threshold) 107.1 / 144.5 = 0.7 77.9 / 144.5 = 0.5

1 + 4 [(Value – lower threshold) / (Upper– lower threshold)] 4.0 3.2

Source: TradeMap, calculations by authors.

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Weighting indicators to obtain an aggregate, composite index Normalised indicators that are aggregated into a composite indicator have to be weighted -- all variables may be given equal weights or they may be given differing weights that reflect the significance, reliability or other characteristics of the underlying data. The weights given to different variables heavily influence the outcomes of the composite indicator, and the rank of an industry on a given scale can easily change with alternative weighting systems. For this reason, weights ideally should be selected according to an underlying theoretical framework or conceptual rationale for the composite indicator. A stated method should be used for determining weights and should be explained transparently. One approach is to give equal weights to all sub-indices or sub-components (which may comprise varying numbers of indicators), which implies that each grouping of indicators has the same impact on the performance being measured. Largely for reasons of simplicity, all indicators are given common weights in the next higher index. For example, “International demand” and “market access conditions” both have a weight of 50% for the index “world markets”.

Table 34. Indicators for the composite index of export potential Overall score of export potential Composite index Sub-index Indicator used

Weight in total index

Total index of export potential Index 1. Current export performance 1/3 1a. Export value 1/12 Mongolia’s exports in value, 2003 1/12 1b. Export growth 1/12 Mongolia’s export growth, 1999-2003 1/12 1c. World market share 1/12 World market share 1/12 1d. Trade balance 1/12 Relative trade balance 1/12 Index 2. World markets 1/3 2a. Dynamism of international demand 1/6 Growth of world imports in volume between 1999 and 2003 1/12 Growth of world imports in value between 1999 and 2003 1/12 2b. Mongolia’s relative market access conditions 1/6 Tariff advantages or disadvantages (“Preferential margin index”) 1/6 Index 3. Domestic supply 1/3 3a. Process and product 1/6 Labour productivity relative to major world and regional exporters 1/30 Labour cost relative to major world and regional exporters 1/30 State of the process technology 1/30 Technological threats and opportunities 1/30 Quality of exported products 1/30 3b. Supporting industries 1/6 General efficiency of supporting industries 1/18 Existence of upstream or downstream inter-industry linkages 1/18 Extent to which key inputs are imported 1/18

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Annex 2. Preferential tariff index The purpose of this index is to examine whether Mongolia enjoys preferential tariffs relative to its main competitors.

We calculate the ad valorem equivalent tariff rate faced by enterprises from Mongolia to the main exporting countries (at least USD 5 million of export or a world market share above 0.5%), for each product (defined at the 6-digit level of the Harmonized System, for example HS 120100: soya beans) and for each import market (for example Japan).

We compare the tariffs applied to Mongolia’s to the tariff of the median country (i.e. the top 50% of the countries, which is rank 50 in this example), the 25% of the countries with the lowest rates (rank 25) and the 5% of the countries with the lowest rates (rank 5).

We then calculate the difference between the tariff applied to each of the three groups (top 50%, top 25%, top 5%) and the rate applied to Mongolia. A positive difference indicates a preferential treatment for Mongolia, as the reference group faces higher tariffs than Mongolia. Countries where the difference is 50% or higher obtain 10 points, those where it is –50% or lower obtain –10 points.

We then calculate an average of the three discrepancies for each product and importer, by weighting twice the discrepancy between Mongolia and the countries benefiting from the most favourable tariffs in the US (top 5%). Countries can have up to 40 points (10 from the top 50%, 10 from the top 25% and 20 from the top 5%).

For each product, we then aggregate over all markets, by weighting the preferential margin by the size of each market.

For each industry, we then compute the mean across all products belonging to the industry.

The resulting number for a particular industry has no real meaning. It is only useful when it is compared across industries to identify which ones have high or low indices. To this end, the resulting numbers are standardised again to range between 1 (highest tariffs of all industries) and 5 (lowest tariffs).

Median (50%)of countries

Top 25%of countries

Top 5%of countries

Ad valorem tariff equivalent applied to countriesexporting a given product (e.g. HS 220860 Vodka)to a given market (e.g United States)

Exporting countries are ranked in decreasing order of the ad valorem tariff equivalent

Mongolia

i Ad valorem equivalent tariff, according to the Mac Map methodology in 2003.

Documents

Mongolia --- Export Potential Assessment