Light Industry 1991-2000
Light industry occupies a special place among Russian manufacturing enterprises: a huge number of people work here, while financial flow is high. At the same time, the majority of players are small businesses, and even the large players cannot compare in size with enterprises in the oil or metallurgical industries.
In contrast to many other industries, light industry was in fairly good condition just before the collapse of the Soviet Union. In 1989-1990, many enterprises underwent refitting. Thanks to the efforts of Nikolai Ryzhkov, the last premier of the USSR, they were granted special credits at 4% to buy Italian and German equipment.
The economic crisis of 1998 had a beneficial effect on light industry. Devaluation of the ruble led to a decrease in imports on the market; as a result, in the last two years, production in Russian light industry increased 46.5% and reached the level of 1995. This is the fastest growth rate of all branches of industry.
However, in spite of the production increase, domestic light industry fills only 20 to 25% of market demand. The rest is made up of imports-up to 80% consist of cheap Chinese and Turkish consumer goods.
HISTORY: 1991-2000
The fate of light industry has turned out relatively well. Scandals and redistribution of property, which have shaken other industry sectors, have happened here on a lesser scale. In many respects, light industry has escaped this thanks to privatization carried out by orders from above. Thus, in 1991, the Ministry of Textiles and the Ministry of Light Industry of the RSFSR were transformed into state concerns, and then into joint-stock companies two years later. The industry's relatively calm development has helped many enterprises to continue operating, mainly on goods made on commission for foreign companies which also provided raw materials. Today, the industry is on the rise. However, the growth is not due to the old giants: the goods in greatest demand are produced by small private companies.
1991
The Ministry of Textiles of the RSFSR was transformed into the state concern Russian Textiles (Rostekstil). At the time the concern was formed, its founding members were 350 enterprises from 36 Russian regions. The stated goal of creating Rostekstil was to develop the country's textile enterprises.
The Skorokhod factory was privatized according to the first model. Prior to this, several of its subsidiary factories had become independent, in particular, the Proletarian Victory (Proletarskaya pobeda) factory, which was renamed Victory (Pobeda). The labor collective became the owner of the factory. Large investors were not interested in Skorokhod, and as a result, 88% of its shares belonged to the workers (the remaining 12% went to various investment funds).
1992
On the basis of the Ministry of the Light Industry of the RSFSR, the joint-stock company Russian Light Industry (Roslegprom) was formed, and Aleksandr Biryukov became its president. More than 400 light-industry enterprises, retail and wholesale businesses, scientific and educational institutions, and engineering plants became Roslegprom shareholders.
The textile mill Trekhgornaya manufactura (Trekhgorka) was turned into a joint-stock company with a charter capital of 215 million rubles. Its employees became owners of the controlling block of shares.
In Rostov-on-Don, local entrepreneur Vladimir Melnikov founded the Gloria Jeans company to manufacture children's jeans wear. By the end of the 1990s, the company had become the largest clothing business in Russia. Gloria Jeans owns three factories and controls more than 35% of the children's jeans wear segment. In 2001, the company's turnover was about $100 million.
The Rostekstil state concern was transformed into an open join-stock company, and with time became the largest operator on the textile market; it owns controlling blocks of shares in 15-20 light-industry enterprises.
1993
The last phase of privatization was completed at Trekhgornaya manufactura. According to preliminary results of a check auction, 56% of its shares remained with the labor collective and 29% belonged to the State Committee for the Management of State Property (Goskomimushchestvo, or GKI). Three Russian companies bought another 15%, and 5% went to the corporatization fund of the company's workers.
On November 12, an investment tender for shares of the Bolshevichka clothing factory headed by Vladimir Gurov was held. The British corporation Illingworth Morris Ltd., whose general manager and owner was Alan Lewis, acquired 49% of the shares. One condition was laid down when specialists at the factory were working out Bolshevichka's privatization plan: all undistributed shares (49% of the total) had to go to one investor. The criteria for determining the winner were as follows: a license to manufacture clothing under the brand name of well-known designers, e.g., Christian Dior, Crombie, etc., and the largest offered price for the share package. The individual private enterprise Obergan, another tender participant, owned by Vladimir Obergan, former chief designer at Bolshevichka, considered the tender committee's decision to award victory to the British firm biased and filed a suit against the Moscow Property Fund in a court of arbitration.
1994
On February 15, the Moscow Court of Arbitration ruled in favor of Obergan, naming it the winner of the investment tender. On February 28, the Moscow Property Fund decided to appeal against the court's decision.
OAO Kvarton Concern was created on the basis of the St. Petersburg thread-spinning combine Sovetskaya zvezda and the factory Krasnaya nit. Gennady Ivanov, the former general director of Sovetskaya zvezda, became general director of the new concern.
1995
The Presidium of the Superior Court of Arbitration rejected Obergan's suit against the Moscow Property Fund on declaring invalid the tender committee's protocol on the sale of the block of Bolshevichka's shares. Obergan had requested that the court recognize its victory in the investment tender because it had offered a higher price for the share block. However, the court considered the main criterion for determining the winner to be the amount of investment rather than the price of the share block, and Obergan had not provided guarantees that it would carry out an investment program.
The Property Management Committee of Ivanovo region gave notice of an investment tender for the sale of a block of shares of the joint-stock companies Yakovlev Flax-Processing Combine and N.F. Samoilov Combine. The Samoilov combine was a major producer of cotton fabrics. A block of shares constituting 10% of the charter capital (19 924 shares) was put out for tender. The face value of the block was 95 970 thousand rubles. The enterprise had been privatized under the first preference option. The Yakovlev combine located in Ivanovo region produced linen fabrics for household use and combed fiber and also processed waste fiber. A sizable package of 30% of the charter capital (32 420 shares) was put out for tender. The selling price of the shares was 162 100 thousand rubles. In addition to the shares of the Yakovlev combine, stocks of another 20 textile-industry enterprises in Ivanovo and Ivanovo region were put out for auction. The most important of these were Shuya Chintz (charter capital 409 million rubles), Teikovo Textile (248 million rubles), Textile (921 million rubles), Vychug Clothing Factory (223 million rubles), and the Balashov Factory (242 million rubles). Fairly large blocks of 9-20% of the charter capital were offered for auction.
On September 1, the MENATEP Group's management company Rosprom was registered. Mikhail Khodorkovsky became chairman of Rosprom's board of directors. By that time, MENATEP already owned large share blocks (20-30% of the charter capital) in about 50 enterprises. Most of them were concentrated in the metallurgy, mining, chemical, oil-refining, pulp and paper, construction, textile, and food industries. The light-industry enterprises in which MENATEP Bank owned a controlling share were the Rostekstil holding and the factories Shelk (silk fabrics production), Sobiteks, Parihzskaya Kommuna; AO Moscow Cotton Fabric Factory; and AO Artistic Mural.
The heads of the Bolshevichka factory and Illingworth Morris Ltd., Vladimir Gurov and Alan Lewis, began to accuse each other of not following up on their investment agreements.
1996
The first session of the Moscow Court of Arbitration was held concerning a suit of the Moscow Prosecutor's Office against the Moscow Property Fund, which had allegedly unlawfully drawn up a sale contract for 49% of Bolshevichka's shares in 1993.
In spring 1996, the financial and industrial group Russian Textile Consortium was created, with German Zolotarev as general director. The consortium was based on seven industrial enterprises in which Rosprom owned controlling blocks of shares. The Trust and Investment Bank, the Central Research Institute of the cotton fabric industry, Tatyana Fedorova's Business Style fashion house, and other organizations were also part of the consortium.
The Moscow Court of Arbitration agreed with the Moscow Prosecutor's suit against the Moscow Property Funds and Illingworth Morris Ltd. (IML). The plaintiff, the Bolshevichka factory, demanded that the sale contract for 49% of the Bolshevik clothing factory's shares concluded between the Fund and IML, as well as the investment contract between the factory and the British company, be declared invalid. The Bolshevichka factory was dissatisfied with its Western partner, who allowed it to use the license on the Christian Dior brand name in only two countries and not worldwide as had been promised. The Prosecutor's Office found formal grounds for canceling the said contracts, and the shares were returned to federal ownership.
1997
Another five Russian light-industry enterprises joined OAO Kvarton Concern, including the Pskov Hosiery Factory and the Moscow thread factory Moskovskie nitki.
1998
Outside investors actively bought up shares in the Lomonosov Porcelain Works (LFZ). By fall 1998, almost 60% of the shares were in the hands of the American TUSRIF and KKR investment funds.
1999
In spring 1999, foreign companies declared their rights to the Lomonosov Porcelain Works, after which the labor collective began to appeal to all power structures to reverse the results of privatization.
In September, governmental decree #783 revoked preferential duties on light-industry goods imported into Russia for commercial purposes. In this way, the authorities tried to restrict the unregulated trade business carried out by individuals who brought small lots of textiles and clothing from abroad without paying duties (the so called "shuttle" business which developed on a large scale throughout Russian in the 1990s). However, preferential duties on the same goods for "personal use" remained in force. Duties were not levied on imports of goods valued at up to $1000 and weighing up to 50 kg; on imports of goods valued at up to $10 000 or weighing up to 250 kg, duties amounted to 4 euros per kg (for example, according to resolution #783, the duty on an imported mink coat was 9-14 euros). The new rules hit only at the business of companies, but did not affect the shuttle trade, whose market share of light-industry goods was 60-70%
In October, the Court of Arbitration of St. Petersburg and Leningrad region declared the constituent agreement of ZAO Lomonosov Porcelain Works illegal.
In December, the same court dismissed a complaint of the foreign shareholders. TUSRIF and KKR now own 58% of the shares, and overall, foreigners own 80% of ZAO Lomonosov's shares.
The Federal Court of Arbitration of the Northwest District dismissed the appeal of ZAO Lomonosov shareholder Lyudmila Pudovkina, who claimed that the decision to deprivatize the company infringed on her property rights.
2000
On January 20, a meeting of the shareholders of ZAO Lomonosov Porcelain Works (LFZ) decided to reelect the entire supervisory board and remove general director Evgeny Barkov from his post. At the request of the major shareholders-the Russian-American investment fund TUSRIF and the American investment company KKR-Douglas Boyce, who had previously worked for Delta Capital, was elected the new head of LFZ.
On December 31, having considered a suit filed by an individual LFZ shareholder, the Nevsky District Court of St. Petersburg prohibited the decisions of an extraordinary meeting of Lomonosov Factory shareholders from being carried out.
The Federal Court of Arbitration of the Northwest District made a sensational decision by declaring the constituent agreement of ZAO Lomonosov Porcelain Works legal. This meant that the company would not be deprivatized.
On April 5, the director of Kvarton Concern, Gennady Ivanov, was murdered in St. Petersburg. Kvarton's registration documents had been confirmed by the Russian government, and Ivanov should have been the head of this financial and industrial group.
LFZ's management received official confirmation from the Prosecutor's Office in St. Petersburg of the sale of its trademark to the offshore company Forrekastl Ltd.
A special auction was held, at which about 30% of the shares in the Bolshevichka factory of Moscow were sold. The Russian Fund for Federal Property did not succeed in selling 49% of the company's shares. The factory's managers were the main buyers of the shares.
On October 6, Nikolai Yarulov, who had succeeded Gennady Ivanov as general director at Kvarton, was found hanging in his office. The murder was not solved, although the investigation related it to the conflicts in the management and a competitive struggle -- Kvarton was an aggressive player on the market; in particular, it had bought up shares of moribund light-industry enterprises for peanuts.
In 1992, the Roslegprom joint-stock company was formed with Aleksandr Biryukov as its president. More than 400 light-industry enterprises, retail and wholesale businesses, scientific and educational institutions, and engineering plants became Roslegprom shareholders.
On September 1, 1995, the MENATEP Group's management company Rosprom was registered; it was headed by Mikhail Khodorkovsky. In spring 1996, the Russian Textile financial and industrial group was created on the basis of the six light-industry enterprises in which Rosprom owned a controlling share, namely, the Rostekstil holding; the silk fabrics factory Shelk, and the Sobiteks and Parihzskaya Kommuna factories; AO Moscow Cotton Fabric Factory; and AO Artistic Mural.
On January 20, 2000, a meeting of the shareholders of ZAO Lomonosov Porcelain Works (LFZ) decided to reelect the entire supervisory board at the request of the major shareholders- the Russian-American investment fund TUSRIF and the American investment company KKR. Douglas Boyce, who had previously worked for Delta Capital, was elected the new general director of LFZ.
by Sergei Kanunikov, Marina Kochetova
PRESENT
One of the distinctive features of light industry is that it has produced no so-called oligarchst. However, this does not mean that there are no outstanding personalities here. Never mind that many of them had problems with the law at the beginning of their careers, and others gained notoriety only because they were involved in scandals among shareholders.
The scarcity of prominent personages in the industry (on Russia-wide scales) is due to the fact that an oligarch is first of all an investor, and this industry is not particularly popular with investors. In addition, even enterprises that are large by industry criteria cannot compare with enterprises in the extractive, engineering, or financial sectors of the economy either in turnover or in strategic importance to the country. Thus, the managers of large light-industry enterprises are very rarely in the center of public attention.
Nevertheless, individual representatives of the industry have managed to arouse the curiosity of the media. Thus, five years ago, the general director of the Bolshevichka Clothing Factory, Vladimir Gurov, was in the center of a scandal involving a company shareholder, the British company Illingworth Morris Ltd., which had bought 49% of Bolshevik's shares at an investment tender in 1993 (for details of the conflict, see the preceding section).
The stubborn attempts to cancel the investment contract were a "hot" topic in the media in 1995-1996 thanks to the efforts of PR specialists on both sides. During the struggle, Vladimir Gurov displayed the typical traits of an old school executive, relying primarily on administrative resources to solve the enterprise's problems. Since it was obvious that the dispute would be resolved in favor of the one who knew how to win the Moscow authorities over to his side, Mr. Gurov worked hard for this objective, using the mass media to make his struggle look like a set-off between the "honest labor collective" and the "capitalist plunderers" who were trying to get control over the flagship of the domestic clothing industry for peanuts. His efforts were successful, and in April, Bolshevichka managed to get the investment contract annulled with the support of the Moscow Prosecutor General's Office. However, once the story ended, the public lost interest in the head of the Bolshevichka factory.
Of much more interest are new players on the clothing market who were able to make their way into the ranks of clothing-industry leaders in a short time. Regardless of the size of enterprises they control, all of them have a number of qualities in common: a strongly pronounced entrepreneurial streak, aggressiveness, and personal charisma. Most importantly, these people became accustomed to working from the very beginning under highly competitive market conditions at a time when there was still no such market. They set up their production literally from scratch rather than on the basis of former state enterprises and furthered their production by skillfully using marketing and management techniques.
Anatoly Klimin, the creator of the Tom Klaim brand of women's clothing, is a typical example of the new type of executive. It was a sign of good form among the public who were informed about the Russian origin of this brand to sharply criticize Klimin's clothing, which acquired the image of "clothes for secretaries," with provocative decollete, short skirts, and a rather vulgar style. However, no one could deny that Klimin had chosen his target audience unerringly: he made inexpensive clothing designed for the huge army of women of modest means who wanted to look showy. And the clothing sold.
Klimin's entrepreneurial career was typical of the new wave of light-industry managers. In Ufa, at the age of 14, the future Tom Klaim first produced and sold posters and T-shirts with popular musical groups, then primitive tape recorders, sunglasses, jewelry, women's jean dresses with fake labels, and stenciled designs onto clothes. In those days, such illegal business carried penalties of up to 15 years in prison.
In 1991, the situation changed and Anatoly Klimin set up a perfectly legal trading house in Ufa with a branch in Moscow. He sold everything on end by wholesale and retail: furniture, appliances, and clothing. In 1992, he successfully concluded a contract with Canadian partners and registered the firm Tom Klaim in Canada; by 1993, all his products were sold exclusively under this trademark The choice of name was also extremely apt for those times: uneducated Russian customers had heard of the name Calvin Klein through hearsay, and this significantly reduced advertising expenses for the Tom Klaim brand.
Just before the crisis of 1998, turnover at Klimin's stores had passed the $100-million mark. The crisis seriously cut his business; merchandise turnover decreased sixfold, a number of stores were closed, and he lost several regional partners. However, the entrepreneur reacted quickly to the changed circumstances by cutting the "deluxe" production line to 5% and then coming out with a new line, TK Fashion, at more affordable prices.
Still another well-known representative of light industry is Aleksandr Panikin, the general director of the Paninter concern, a leading Russian knitwear manufacturer. A man with a theatrical education, he had also first produced consumer goods illegally under the Soviets, and with the start of perestroika became the owner of a cooperative. In 1987, criminal charges were brought against him, ending in his arrest. However, the case was soon closed for lack of corpus delicti.
Aleksandr Panikin loves to emphasize that his company has developed almost exclusively through internal working capital, and in this way, the business he started with six sewing machines and 10 employees expanded in ten years to 15 stores in Moscow and Moscow Region and more than 1500 employees.
Vladimir Melnikov, the head of the Gloria Jeans Company, had a career similar to that of the two preceding entrepreneurs, as he also started with illegal production of consumer goods under the Soviets and went on to become a respectable businessman in present-day Russia. At three factories in Rostov-on-Don, he produces inexpensive jeans wear for children that has became so popular in the country that according to expert estimates, it has more than a 20% share of the market and is a recognized leader in this segment. The company has developed at a tremendous rate, with production and sales volumes increasing one and a half to two times every year. Thus, although the Gloria Jeans Company's turnover in 2000 was less than $40 million, this year's turnover is forecast to increase to $60 million.
Meanwhile, by his own admission, made in an interview with journalists, Melnikov did time in prison twice for speculation in goods and once for contraband foreign currency during the Soviet regime, serving close to nine years altogether.
He began his business in the 1980s with an illegal workshop for producing jeans, which in those days was an even more stunningly profitable business than today. At present, more than 6000 employees at factories in Novoshakhtinsk, Shakhty, and Bataisk produce more than 1 million jeans wear items per month, and more than ten highly qualified foreign specialists help the company to develop marketing policy and optimize the management system. Although the original idea has proven its effectiveness time and again, there is no doubt that the ante on cheap, mass-produced clothing of reasonable quality belongs to Vladimir Melnikov.
by Sergei Ivanov
TRENDS
Despite the growth in light industry, there are barriers that slow the pace of its development. Unable to compete with imported goods in quality, some domestic producers hope for state support. Others see the future of the industry in large holdings that would link all units of the production chain into a complete cycle.
Textiles
The concentration of production is most noticeable in the textile branch. Today, the textile industry in Russia is mainly controlled by large holdings like the Yakovlevsky Trading House and the Power International and Konteks companies.
Although since 1998, the light industry has been growing 20% per year, the growth may soon come to an end. On July 1, 2001, Part Two of the Tax Code, which imposes a 20% value-added tax (VAT) on raw materials imported from CIS countries, came into force. Soon, Russian fabrics will be comparable in price to materials imported from Asia. This will inevitably hit Russian textile exports as their price will increase 20%.
Clothing
According to various estimates, there are anywhere from 1350 to 1450 clothing factories in Russia. Although the majority of them are operating at full capacity, garment production is only about 8% of the production level recorded ten years ago, as most of these factories make goods on commission, filling orders from outside. Industry specialists believe that its future lies in the dynamic development of private producers, first of all, Turn, Paninter, Malyugina Clothing Factory, Gloria Jeans.
The Fur Industry
It appears that Russia has after all lost its status as a world major producer of furs, and in future will most likely remain just a supplier of raw materials to foreign manufacturers.
According to expert information, at present, about 80% of furs are imported into Russia from abroad, while the country's available production facilities are operating at only 20-30% of capacity. In 2000, imports were supplanted mainly on the market of cheap goods, primarily fox and sheepskin. Expensive furs are still generally exported: domestic goods cannot compete with imported ones in quality of workmanship.
Shoes and Leather Goods
The upturn in the shoe industry that began in 1998 did not last long. By autumn 2000, stagnation had set in, and today, specialists are talking about a slump. Market players are now arguing over what kind of state intervention might help the industry to develop.
Besides general economic and tax problems, domestic shoe manufacturers are suffering from stiff competition on the part of "grey" imports. Thus, in 2000, according to State Customs Committee information, of the 180 million pairs of shoes sold on the Russian market, about 70 million pairs were made at Russian enterprises, about 10 million were brought into the country officially, and more than 100 million were imported without duties and taxes by using cargo carriers, "green" corridors, shuttle traders, etc.
Shoe manufacturers and tanners are demanding the repeal of the governmental resolution #783 of July 10, 1999, which allows shuttle traders to transport up to 50 kg of goods duty-free and up to 200 kg with a duty of 4.5 euros per kg.
For the time being, the government supports producers by other means. At the end of last year, an order was issued on reducing customs duties on certain groups of goods (State Customs Committee Order #1182 of December 20, 2000). In addition, the VAT has been abolished on imported production equipment bought on contracts concluded before 1999, and import duties reduced to 5% on imported equipment the analogues of which are not manufactured in Russia.
A reduction in duties on imported shoes and components is of interest to those who produce shoes in Russia from foreign components or who place all their orders at foreign factories. However, these measures would put other market players at a disadvantage.
Thus, the Russian Tanners' Association is of the opinion that reducing duties on imported shoes and components will ruin large enterprises. On May 15, 2001, the Association and trade unions organized a joint protest action at Government House. Their main demands were for a ban on exports of hides and suppression of shadow shoe imports.
On August 10, 2001, the export duty on hides was raised to 500 euros per t.
Sergei Kanunnikov, Aleksandr Grishin, Adelya Fatekhova
All the Article in Russian as of Nov. 06, 2001
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