MADE IN AZERBAIJAN

Amid declining oil prices, the government of Azerbaijan is making every effort to accelerate the process of economic diversification. Among other things, the country plans to establish a network of industrial estates, where small light industry enterprises will be concentrated. The creation of the first entity of this type has already started in Neftcala District. In the near future, it is also planned to create specialized industrial estates that will accommodate manufacturers of furniture and its accessories.

The effect of cooperation

According to the plan of industrialization adopted in the country, large industrial facilities are developed in industrial parks, while innovative start-up projects are located in business incubators. The idea of forming another component of the industrial triad - industrial estates - is relatively new for Azerbaijan. In contrast to industrial parks and business incubators, it is planned to locate here production and service entities of small and medium-sized businesses, the scope of which is oriented mainly to the domestic market. These are companies involved in repair or services, engineering organizations, small-scale garment and shoe manufacturers, and of course, small workshops manufacturing building materials, furniture, various consumer goods, etc.

The acceleration of the development of the new form of concentration of production was mentioned at a meeting of the working group on light industry. This is one of the eight working groups on industrial development established by the Ministry of Economy and Industry of Azerbaijan (MEI) in 2014. The agenda of the meeting included proposals for the development of light industry in industrial estates. They also talked about the prospects for the export of local goods, provision of industrial estates with raw materials and training of qualified personnel for new entities.

In general, according to experts, the new form of establishing local production will significantly expand business activities, as industrial estates will be exempt from the cost of building the infrastructure and will mainly use local resources, while the profitability of production will increase, including through the strengthening of cooperative relations. As in the case of industrial parks, the state represented by the Ministry of Economy and Industry agrees to put territories allocated for industrial estates in a suitable condition and create the necessary infrastructure for business activities. This refers, in particular, to the improvement of internal and external utilities and transport infrastructure, the development of communication systems, provision of fire protection, construction of administrative and other facilities. The Ministry of Economy and Industry is also tasked with subsequent support for business entities operating here: it is the issue of preferential credits, advisory services, holding of training sessions and training of personnel.

The first step in this direction has already been made. In Neftcala District, a plot of 10 hectares has been allotted and preparations have begun for the establishment of the first industrial estate. It is planned to establish small manufacturing plants and mixed-type processing factories here.

However, the Ministry of Economy and Industry is also considering creating another type of industrial estates specializing in the manufacture of a particular product. In particular, experts of the Ministry of Economy and Industry suggest creating industrial estates for the production of furniture in the regions. The proposal was announced at a meeting of the working group on the wood and furniture industry. "As part of the creation of furniture industrial estates in Azerbaijan, it is also planned to establish production of furniture accessories, and training of qualified personnel for the industry will be organized, which is why it is planned to study the experience of Turkey, Italy, Germany, etc.," the Ministry of Economy and Industry said in a report.

Beneficial devaluation

What is the advantage of creating local furniture production in industrial estates and to what extent will these processes affect the growth in the profitability of the industry as a whole?

In Soviet times, Azerbaijan had no developed furniture industry due to the lack of raw materials suitable for the industrial production of wood supplies. The few enterprises of republican subordination produces furniture for educational institutions and government agencies, using raw materials imported from other Soviet republics. This commodity dependence remained in the future, when numerous small workshops specializing in the assembly of kitchen furniture, chairs, tables from materials imported mainly from Turkey- chipboard, MDF, furniture fittings and other accessories - began to appear in Azerbaijan in the 1990s. At the same time, little workshops using local wood - oak, beech, hornbeam, walnut, ebony and chestnut trees - for the production of furniture, doors, window frames and flooring appeared in Baku, Ganca, Sumqayit, Naxcivan, Zaqatala, Xacmaz, Lankaran and Masalli. Subsequently, due to the tightening of environmental measures and restrictions on the felling of relict forests and the commercial use of precious types of wood, almost all furniture makers of Azerbaijan shifted to recycled lumber imported from Russia.

The need to import most of the components for the assembly of furniture did not help reduce production costs, and for a long period the industry kept afloat due to high domestic demand for inexpensive products. At the same time, the products of local workshops could not compete with premium class furniture imported from Europe and partly from Southeast Asia. And, of course, there was no talk of the export of any significant volumes of local products.

The situation began to change at the beginning of the new century, when several large companies (Embawood, Saloglu), which not only assembled furniture at factories, but also organized production of laminated boards, blind veneer, MDF profiles, lacquered and PVC facades, upholstery fabrics, accessories, etc. appeared in Azerbaijan. Due to the creation of the local manufacture of materials and components directly in Azerbaijan, it proved possible to significantly increase the profitability of production, and as a result, the furniture industry gained visible export potential. So, today a significant portion of products made at several major factories of upholstered furniture is exported to Georgia, Kazakhstan, Kyrgyzstan, Turkmenistan, Iran and Russia. A plant located in Sumqayit - the region's largest manufacturer of beds from metal pipes and profiles - is also engaged in export.

One way or another, over the past decade and a half, the furniture industry, supported by the construction boom, has become one of the four most developed areas of the non-oil sector along with the production of food, building materials and clothing industry. According to statistics, in the peak year 2012, the production of furniture in the country reached 157,000 units and provided a growth of 21.5 per cent compared to 2007 figures. The processes of import substitution have been progressing equally rapidly in recent years: furniture made in Azerbaijan today occupies more than 5/6 of the local market. According to the latest data from the State Statistics Committee, in the first quarter of 2015 the volume of production in the furniture industry increased by 11.7 per cent against the same period of 2014. The reasons for the growth are related primarily to the fact that local furniture is much cheaper than imported and therefore, retains its competitive advantage. And after the recent devaluation of the manat, imported products that rose in price ceded their positions even more.

The fall in the rate of the national currency of Azerbaijan created conditions for boosting local furniture production in the country and increasing its volume. The construction of new large furniture factories is very expensive and is fraught with complexity of return on investment, and most importantly, with the need to find new markets. After all, relying solely on domestic demand in large commodity production is a very risky decision, especially as the market demand for furniture in the country is close to saturation.

However, ministry experts believe that there is a much more effective form of establishing local furniture production in industrial estates. What will sectoral clustering give furniture production? First of all, it will be possible to overcome the main problem of small-scale production in workshops and reduce costs by optimizing the entire production chain. In particular, the volume of orders of components and raw materials from abroad will be expanded and a unified supply chain will be created. The cooperative system will make it possible to ensure the division of labour: specialized firms ensuring technological processes will appear here, others will be engaged in the development of design and engineering of new products, and others will ensure their sales, including on foreign markets. It is possible that in industrial estates that will house a large number of assembly plants, companies willing to start the production of furniture fittings and accessories on the ground will appear, which will further reduce the production costs. Finally, as part of such industrial estates it will be possible to create a unified system of vocational education and training of employees.

The benefits of creating local furniture production are obvious, especially as there have been established mechanisms of such sectoral cooperation in the world for quite some time. Examples of successful cooperation projects are furniture clusters in Italy. In the last decade, these entities proved their high efficiency in China, Vietnam, Indonesia and Bangladesh.