Weak ruble attracts global clothiers to Russia

Getty Images
While the Russian ruble continues to remain weak against major currencies, the lower costs are tempting some of the world’s leading clothes retailers to consider relocating their production facilities to Russia. The owners of the Zara, Pull & Bear, and Massimo Dutti brands are among those in talks with the authorities.

 

The world’s second most wealthy person, Amancio Ortega, 79, the owner of the Inditex clothing empire, received an unexpected offer from Russia in March 2016. Russian authorities invited the billionaire (Forbes estimates Ortega’s fortune in 2016 at $67 billion) to move his factories to Russia where, because of the weak ruble, production costs have become lower than in China.

Inditex already has an active presence in the Russian market: Its brands Zara, Pull & Bear, Massimo Dutti, and Bershka enjoy a consistent demand in Russia.

The company is now considering relocating its production facilities to Russia and is in talks with the Russian Industry and Trade Ministry, the latter said. Other manufacturers, including H&M, IKEA and Decathlon, are ready to follow Ortega’s example.

Why Zara?

Zara’s interest in Russian factories is driven by the favourable conditions that have emerged in Russia after the economic crisis. With the devaluation of its national currency, Russia now figures on the list of countries with the world’s cheapest labour.

According to data from Infoline, the information and analysis agency, the monthly expense on a textile factory worker in China is now $250-300, whereas in Russia it is just $200 (15,000 rubles). In these circumstances, the drive to develop the country’s textile industry is a clever move on the part of the Russian authorities, market analysts agree.

“Given the rise in unemployment and higher labour force available, the situation from the point of view of retail production is becoming more interesting,” said Mikhail Burmistrov, head of Infoline-Research.

It is not surprising that Inditex has turned its attention to production capacities in Russia. The group is known for its effective fast-fashion business model, by which the time lag between the time a model is created and the time it hits the stores is reduced to two weeks.

Inditex now makes its clothes at factories in Vietnam, Indonesia, China, Turkey and Europe. The group runs 485 stores in Russia and, despite the crisis, managed to open 30 new outlets in 2015, increasing its Russian network by 6 percent, the company’s annual report states. This makes Russia the third biggest market for Inditex (after Spain and China, with 1,826 and 566 stores respectively).

The interest of foreign players in the Russian textile industry has been further spurred by tensions in Russia’s relations with Turkey, after Ankara downed a Russian military aircraft on the border with Syria in November 2015.

After that incident, Russia cut the amount of Turkish imports dramatically. Textiles, however, were not subjected to any restrictions. In December 2015, Kommersant business daily reported that the Russian government may extend the sanctions against Turkey to include retail clothes also.

In late 2015, the conservative Russian magazine Expert cited the Turkish T24 TV channel as reporting that Zara, Mango and H&M had asked their Turkish partners to remove the “Made in Turkey” label from their clothes. Thus, the relocation of production to Russia could remove the problem with goods identity, given the current political tensions.

How competitive are Russian factories?

So far, Russian factories have been working only with local retailers and customers. It remains to be seen how competitive Russian factories are compared with Chinese or Vietnamese ones, which operate several shifts and turn out a hundred times as much output.

Source: Getty ImagesSource: Getty Images

“One particular feature of international brands is that they operate in a global sourcing system, i.e. they sign a contract for making clothes with a factory in one country and then sell the ready goods in stores all over the world,” said Mikhail Burmistrov.

This system requires strict standardization procedures and very serious investment from factories – a challenge that Russian manufacturers are yet to meet.

If clothes under the Zara or H&M brand are made in Russia, their quality will not be adversely affected, insists Lyudmila Ivanova, head of the Fashion Industry Committee under the Russian Textile Industry Union.

“We have already learnt how to make good-quality clothes. Many Russian brands are popular with consumers in our country. Unless you are told that something is made in Russia; in the Ivanovo, Vladimir, Yaroslavl or Voronezh regions; you probably would think that it is made in Europe,” she said.

Major Russian clothes brands, including Gloria Jeans and Sela, have so far been making their clothes at Asian factories.

“At the moment, we place our orders with factories in China and Bangladesh, but we are interested in Russian manufacturers,” said Eduard Ostrobrod, vice-president of the Russian clothes chain Sela. The company is now looking for opportunities to move production to Russia.

Source: Getty ImagesSource: Getty Images

“At an Industry and Trade Ministry textile industry forum recently, we met some very interesting Russian manufacturers and we are keen to cooperate with them,” he added.

Who has already relocated?

When the economic crisis began, many Russian retailers started moving their production from Asian countries to Russia, and local brands Befree, Zarina and Love Republic have increased the number of orders they place with Russian factories.

Kira Plastinina has launched its own production in the Moscow Region, not far from the capital. The brand was created by the founders of Russia’s biggest juice company Wimm-Bill-Dann, which was sold to PepsiCo in 2011 for $3.8 billion. Representatives of another Russian brand, Incity, told RIR they are also planning to move production to Russia.

The list of those contemplating a move to Russia is not limited to just Russian brands. The MMD East and West group of companies, that forms part of the Bosco di Ciliegi group, (which makes clothes for Russia’s Olympic team) intends to build a sports clothing factory in the Kameshkovo industrial part in Vladimir Region (130 miles southeast of Moscow). Investment in the project is estimated at 1 billion rubles ($17.4 million).

Meanwhile, the French sports clothing retailer Decathlon has signed a memorandum of intent with the Novosibirsk-based factory S-Tep to produce trainers. To begin with, the factory will produce trainers for Decathlon’s stores in Russia but in future, for the chain’s global network too, business daily Vedomosti reported in February 2015.

Source: Press photoSource: Getty Images

However, many Russian manufacturers are not overjoyed at the prospect of the arrival of foreign players.

“One can and should base their production facilities in Russia. But one should start not with global players but with those who are already working in Russia for real,” said Burmistrov, adding that the Russian authorities should support local manufacturers and ensure an adequate level of integration between them and customers.

Another thing that authorities should focus on is improvement of the investment climate, so that foreign companies are not afraid to invest in their own factories in Russia.

“The effect the devaluation of the ruble will have will not last forever,” said Burmistrov. “We’re talking of two to four years, depending on the situation in the external markets. Unless Russia can offer some other competitive advantages, there is no point in making long-term investment or developing relations with local manufacturers.”

Examples of successful integration between global business and the Russian consumer goods industry exist. The Swedish company IKEA which, along with clothing companies, has received an invitation from Russian authorities, has been successfully cooperating with Russian manufacturers. IKEA first opened its purchasing office in Russia in 1991, long before its first store.

All rights reserved by Rossiyskaya Gazeta.

More exciting stories and videos on Russia Beyond's Facebook page
Read more

This website uses cookies. Click here to find out more.

Accept cookies