Brands popular around the world are considering taking advantage of the weakness of ruble and relocating their production facilities to Russia. Spain’s Inditex, the holding company behind such brands as Zara, Pull & Bear, and Massimo Dutti among those is in talks with officials in the country
In March 2016, Amancio Ortega, the founder of the Inditex clothing empire, received an unexpected offer. Russian authorities invited the billionaire to move his factories to the country, where thanks to the falling ruble, production costs are now lower than in China. Inditex, whose brands include Zara, Pull & Bear, Massimo Dutti, and Bershka, is now in talks with the Ministry of Industry and Trade about a potential move, and the firm isn’t the only company taking a new look at the Russian market.
Cheap labor, convenient location
The decline in the value of the ruble over the past two years has created favorable conditions for investors in the textile industry because it has made Russian labor in this field among the world’s cheapest. According to data from the Infoline information and analysis agency, the cost of a textile factory worker in China is now $250-300 per month, compared to just $200 (15,000 rubles) per month in Russia, where workers are also generally more educated and experienced than those in other parts of the world. In addition, the country’s economic downturn has resulted in an increase in qualified workers looking for jobs. Given this situation, it makes sense for the authorities in Moscow to develop strategies to attract textile producers.
“Given the rise in unemployment and more labor force available, the situation from the point of view of retail production is becoming more interesting,” said Mikhail Burmistrov, managing partner at Infoline.
Inditex brands are known for their successful fast-fashion business model, which brings clothing items from design to sales floor in just two weeks rather than the several months required by more traditional retailers. Currently, Inditex makes its clothes at factories in Vietnam, Indonesia, China, Turkey and Europe. The group runs 485 stores in Russia and, despite the crisis, opened 30 new outlets in 2015, increasing its network by 6 percent, according to the company’s annual report. This country is the third-biggest market for Inditex following its native Spain (with 1,826 stores) and China (with 566). One of the key elements in making the fast-fashion model work is the proximity of manufacturing to markets. Moving production to Russia could cut the delivery time for the latest models even further for local stores as well as for other outlets in Eastern Europe and Eurasia.
The interest of foreign textile manufacturers in moving production to Russia was further spurred by the downturn in relations between Ankara and Moscow. After Turkey downed a Russian military aircraft on the border with Syria in November 2015, Russia restricted imports of Turkish goods. Textiles were not subjected to any restrictions, but in December, the Kommersant business daily reported that the Russian government was considering extending the sanctions to include clothing retail. Moscow-based magazine Expert, citing Turkey’s T24 TV channel, reported that Zara, Mango and H&M had asked their Turkish partners to remove the Made in Turkey label from their clothes in order to avoid the possibility that the items would not be able to be imported to Russia. Although Turkish President Recip Tayyip Ergodan is making overatures to mend relations, the situation remains uncertain enough to give retailers and manufacturers pause.
Ready for “Made in Russia”?
Because local textile factories up to this point have worked only with domestic companies, it is unclear how competitive production in Russia will be compared with that in China or Vietnam.
“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 Infoline’s Mikhail Burmistrov. Working in such a system requires factories to invest in strict standardization procedures to make sure the quality of items is maintained no matter where they are produced.
Russian manufacturers have yet to invest in or work under such a system, but Lyudmila Ivanova, head of the Fashion Industry Committee of the Russian Textile Industry Union says that if clothes sold under the Zara or H&M brands are made in Russia, their quality will not be adversely affected.
We have already learned how to make good-quality clothes. Many local brands are popular with consumers in our country. Unless you are told that something is made in Russia — in the Vladimir, Yaroslavl or Voronezh regions — you probably would think that it is made in Europe
Although many brands are as popular with domestic buyers as their foreign counterparts, many of their items are also made abroad. Successful Russian clothing companies such as Sela and Gloria Jeans do most of their manufacturing in Asia, although they are open to the possibility of moving production home.
“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 Sela clothing brand. “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.
The start of a trend
Since the beginning of the economic crisis, a number of Russian retailers have started moving their production home. Local brands Befree, Zarina and Love Republic have increased the number of orders they place with Russian factories, and Kira Plastinina has launched its own production facility in the Moscow Region. That 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.
Many others have plans to move their production. The MMD East & West group of companies, part of the Bosco di Ciliegi group, which makes clothes for Russia’s Olympic team, intends to build a factory for the production of athleticwear in the Kameshkovo industrial park in the Vladimir Region. Investment in the project is estimated at 1 billion rubles ($17.4 million). Russian brand Incity has also said that it is exploring the possibilities for moving production.
French sports clothing retailer Decathlon, which operates a number of popular stores in major cities of the country, has signed a memorandum of intent with the Novosibirsk-based factory S-Tep to produce athletic shoes. Initially the factory will produce shoes for Decathlon’s Russian stores only, but there are plans to expand the production to supply shoes to the chain’s global network in the future, business daily Vedomosti reported.
Success begins at home
Analyst Burmistrov says that while it makes sense for industry players already operating on the Russian market to invest in local production facilities, the government needs to do more to convince global players without sales outlets in Russia that the country can be a good place to do business if it wants to take business away from other production centers, particularly in Asia.
The effect of the devaluation of the ruble will not last forever. We are talking two to four years, depending on the situation on 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
According to Burmistrov, the government should demonstrate its willingness to work with business by doing more to encourage domestic companies to produce locally. “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,” Burmistrov said.
Lessons from other industries
The experience of Swedish fast furniture powerhouse IKEA could be informative for other global brands interested in Russian manufacturing. IKEA’s Russia purchasing office opened in 1991, long before its first store. At that time, the company was sourcing for export rather than for items that could be sold locally. Having the infrastructure set up helped IKEA when it did open its first retail outlets in Russia in the early 2000s. According to the IKEA Russia press service, 50 percent of the items sold in local IKEA stores, including 40 percent of items in the textiles category, are locally produced.“By increasing the amount of purchases from local suppliers, it is possible to considerably reduce costs, mainly transport costs and customs duties,” a company representative said.
Currently, the Swedish retailer sources its goods from some 60 Russian factories, and the items are fully integrated into the company’s global production and distribution chain. Russian-made goods can be found in IKEA stores in Europe, the Americas and Asia.
IKEA owns four factories in the country and is planning to launch a fifth one soon.
AMANCIO ORTEGA LIFE MILESTONES
March 28, 1936 — The youngest of four children, Amancio Ortega Gaona was born in Busdongo de Arbas, a small village of less than 100 residents located in the León region of northern Spain.
1950 — At the age of 14, Ortega left school and started working as a shop assistant at a local company called Gala where he learned to make clothes by hand.
1950s — In Galicia, Spain, Ortega started to organize women into sewing cooperatives. His product line included lingerie, baby clothes and nightgowns.
1963 — Amancio Ortega Gaona launched his first company, Confecciones GOA, S.A. (his initials read backward).
1975 — Ortega opened his first storefront in downtown La Coruña. The shop was called Zorba, after Ortega and his first wife’s favorite movie. The name was soon changed to Zara after the owner of a nearby bar, also called Zorba, complained.
Early 1980s — Zara stores open in several Spanish cities.
1985 — Together with his first wife, Rosalía Mera, Amancio Ortega integrated Confecciones GOA into Inditex, a holding company controlling such brands as Zara, Pull&Bear, Massimo Dutti (1991), Stradivarius (1994), Bershka (1998), Oysho (2000) and Uterqüe (2008).
2000 — By the turn of the millennium, Inditex brands were being distributed in more than 30 international markets.
2001 — Inditex launched an I.P.O. on the Madrid stock exchange with a valuation of $8 billion.
2011 — Ortega announced his retirement from Inditex. Company vice-president and C.E.O. Pablo Isla took his place handling day-to-day operations.
2015 — Amancio Ortega briefly overtook Bill Gates to become the world’s richest man.
Discover more at rbth.com