Investment Opportunities in Manufacturing of …...Sources: KPMG; PWC, World Bank 0.11 41.7 37.8...

INVESTMENT OPPORTUNITIES IN MANUFACTURING OF APPAREL,

FOOTWEAR AND BAGS IN GEORGIA 2019

INVESTMENT CLIMATE & OPPORTUNITIES IN GEORGIA

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COUNTRY OVERVIEWGEORGIA

Area: 69,700 sq. km

Population: 3.7 mlnLife expectancy at birth 2018: 74 years

Georgian

Literacy: 99.8 %

Capital: Tbilisi

Currency (code): Lari (GEL)

GDP 2018: USD 16.2 billionsGDP real growth rate 2018: 4.7 %GDP CAGR 2013-2018 (GEL): 4 %GDP per capita 2018: USD 4346Inflation rate (December) 2018 (Y-o-Y): 1.5%Total Public Debt to Nominal GDP (%) 2018: 42.2%

INVESTMENT OPPORTUNITY OF MANUFACTURING FOOTWEAR AND BAGS IN GEORGIA

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OVERVIEW OF MANUFACTURING SECTOR

APPAREL BRANDS CURRENTLY PRODUCED IN GEORGIA

Source: Geostat; KPMGNote: *-preliminary data

Georgia has a rich history of manufacturing apparel, textile and footwear, dating back to Soviet times

Contract manufacturing of apparel is well developed in Georgia and existing factories produce apparel for famous international brands, such as Moncler, Tommy Hilfiger, Nike, Adidas, Mexx, Zara, Puma, Autograph, Lebek, Hawes & Curtis, M&S, HM, etc.

Footwear and bags manufacturing sector has emerged recently and local manufacturers have started to export their products to different international markets

In addition, leather production is also developing in Georgia and Georgian leather is already being exported to Italy and Turkey

RUSSIA

ARMENIA AZERBAIJAN

TURKEY

BLACK SEA

Anaklia

Existing clusters

Thriving locations

Main Roads

Poti

Batumi

Samtredia

Ozurgeti

Zugdidi


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Georgia

Deep and Comprehensive Free Trade Agreement (DCFTA) with EU

Free Trade Agreement with People’s Republic of China (including Hong-Kong)

Free Trade Agreements (FTA) with EFTA Countries ( Iceland, Norway, Switzerland, and Liechtenstein), Turkey, Ukraine and CIS countries

GSP agreement with USA, Canada, Japan

Member of WTO

LIBERAL TRADE REGIMES

Very simple and service oriented customs policy and administration – customs clearance in 5-6 minutes

80% of goods free from import tariffs

No quantitative restrictions

PREFERENTIAL TRADE REGIMES

Free Trade Agreements with 2.3 billion marketand access without Customs Duty


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Category GEL kWh including VAT (18%)

USD kWh including VAT (18%)

Tbilisi220/380 volt

(average) 0.213 0.079

6–10 kv

6–10 kv

0.169 0.06235 – 110 kV 0.161 0.060

Rest of Georgia:

220/380 volt (average) 0.211 0.078

0.163 0.06035 – 110 kV 0.149 0.055

Category GEL/m3 including VAT

USD/m3 includingVAT

Tbilisi: 4.4 1.63Drinkable water

Drinkable water

3.33 1.23

4.307

1.35

0.66

3.65

0.24

Sewerage system water

Sewerage system water

(average official GEL exchange rate in 1H of 2019: 1 USD - 2.7034 GEL)

1.07 0.40

Batumi 4 1.48

Drinkable water 2.50 1.92Sewerage system

Other parts of Georgia (there are few exemptions):

water 1.50 0.55

1.59

UTILITY COSTS NON-RESIDENTIAL ELECTRICITY POWER RATES:

MAXIMUM RATES OF WATER

ELECTRICITY

Starting from 2017, deregulation of electricity consumer market has begun and by 2025 all non-residential custom-ers will be trading on electricity market through the direct agreement and they can negotiate on any price.Below are prices of balancing electricity as well as current tariffs for residential and non-residential customers, varying depending on the region and voltage.

WATER

Maximum rates of drinkable water and water for sewerage system are deter-mined by Government decree and are as follows:

GAS

Natural gas rates are deregulated for industrial use and companies can negotiate the price with supplier. Average cost of gas per cubic meter amounts to around USD 0.25-0.35


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COMPETITIVE LABOR COSTS

YOUNG LABOR FORCE

LOW TAX BURDEN

FAVORABLE LABOR CODE

FLEXIBLE REGULATIONS

TAX

Average monthly salary in manufacturing industry amounts to USD 360 (2018)

According to Heritage Foundation, Georgia ranks 20th globally on Labor Freedom Index

The tax payable based on the salary is personal Income tax, which is flat 20% Insurance isn’t mandatory in Georgia

Pension Contribution - 2% paid by Employer, 2% paid by Employee, 2% by Government

The country doesn’t have minimum wage regulations and compensation for labor depends on the agreement between employee and employer

All core ILO conventions are ratified by Georgia

No working permits are required

Citizens of 98 countries can stay in Georgia without visa during whole 1 year, which helps attracting professional employees from other countries in the wider region

56% of the unemployed population is in the 20-40 age category

Unemployment rate is 12.7% (2018)

YOUNG, SKILLED AND COMPETITIVELY PRICED LABOR FORCE


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TRADE FLOWS, PRODUCTION AND CONSUMPTION APPAREL, FOOTWEAR AND BAGS MANUFACTURING

Note: Footwear and bags manufactured by Georgian companies

155 181 195 198

86 80 86 82 55 51 71

123 152

180

50 100 150 200 250

2015 2016 2017 2018

Apparel, mln USD

Import Export Production Consumption

67 73 83 82

2.1 2.1 1.4 2.2 2.6 2.7 3.0

67 74 85

50

100

2015 2016 2017 2018

Footwear, mln USD


14 15 19 20

1.3 0.6 0.8 0.6

7 4.8 5.1

20 20 23

5

10

15

20

25

2015 2016 2017 2018

Bags and accessories, mln USD



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Access to 2.3 billion market

— Strategic location –Georgia offers direct access to European, Gulf Cooperation Countries and CIS markets.

— Possibility to save up to 20-30% duty -With existing free trade agreements, products which are originated in Georgia, can have zero import tax to EU, Turkey and CIS countries for footwear and bags, which otherwise amount up to 17% for EU and Turkey and up to 30% for CIS countries.

Competitive costs

— Labor cost - average salary in apparel manufacturing is USD 300, in footwear manufacturing USD 290 and in bags manufacturing – up to USD 450.

— Low electricity cost - Electricity costs for industrial consumers range between between USD 0.055 to USD 0.079 per kWh

GEORGIA’S COMPETITIVE ADVANTAGES

Low taxes

— Free Industrial Zones - there are 4 free industrial zones in Georgia, which are exempt from all taxes, except personal income tax;

— Tax payable on salaries is personal income s tax-20%, plus 2% pension contributio

—

Government incentives

— Free land - Government of Georgia can transfer

Liberal taxation system - 0% profit tax on reinvested profit;

state owned property for manufacturing project for free of charge, with investment obligation.

— Financial support mechanisms - Program “produce in Georgia” provides interest

local banks; State investment fund-JSC

equity in investment projects.

— Education - State owned vocational educational institutions provide courses in shoemaking and sewing;


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BENCHMARK ANALYSIS OF GEORGIA WITH COMPETITOR COUNTRIES

Sources: KPMG; PWC, World Bank

0.11

41.7

37.840.9

9.9

40

Total Tax & Contribution Rate (%) ), 2018

0.1

0.06 0.06

Moldova

Average gross salary in the sub-sector of garment and footwear, 2017

Construction costs per square meter, 2017

Electricity tariffs, 2018

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* Financial calculations are based on KPMG study. For full report, please contact us

Project details*

Investment cost USD 33 743 000

Capacity, units 8 446 000

Construction timeline 1

Annual maintenance CAPEX USD 1 687 000

Export sales, % 100

Project NPV USD 8 135 000

IRR 15.2%

Payback period 9

Georgia has a potential to produce different type of leather footwear for international brands;

Products can be exported to EU, CIS and middle east.

It is possible to source part of raw materials locally as well as import it easily from Europe or Asia. There are 5 leather manufacturing companies in Georgia.

KPMG has done high level calculations and according to the study, leather footwear manufacturing plant with annual capacity of 8.4 million pairs is feasible.

INVESTMENT PROPOSAL OF MANUFACTURING LEATHER FOOTWEAR


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INVESTMENT PROPOSAL OF MANUFACTURING SPORTS FOOTWEAR AND FOOTWEAR WITH UPPERS OF TEXTILE

Georgia has a potential to produce sports footwear for international brands;

Products can be exported to EU, CIS and middle east.

Raw materials can be easily imported from Europe or Asia.

KPMG has done high level calculations and according to the study, sports footwear manufacturing plant with annual capacity of 8.6 million pairs is feasible.

Project details*





Export sales, % 100


IRR 15.9%

Payback period 8.8

* Financial calculations are based on KPMG study. For full report, please contact us.


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Project details*





Export sales, % 100


IRR 17.1%

Payback period 8.5

Georgia has a potential to produce travelling bags for international brands.

Products can be exported to EU and CIS countries.

Raw material can be easily imported from Europe or Asia.

KPMG has done high level calculations and according to the study, travelling bags manufacturing plant with annual capacity of around 6 million units is feasible.

* Financial calculations are based on KPMG study. For full report, please contact us

INVESTMENT PROPOSAL OF MANUFACTURING BAGS (SUITCASES AND TRAVELLING BAGS)


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Mission: supporting of manufacture and agriculture industries Government offers:

— Subsidies for loan interest payment

— Free lands/buildings for factory construction

Four Free Industrial Zones (FIZs) operate in Poti (sea port), Kutaisi (second largest city) and Tbilisi (capital city)

If a company produces goods for export in FIZ, it is exempted from all taxes except Personal Income Tax (20%), which is paid from employees’ salaries

PARTNERSHIP FUND

— 100% state owned fund

— Estate, Manufacturing, Agribusiness

— Finances up to 49% of equity in new investment projects

PRIVATE FUNDS AND INTERNATIONAL FINANCIAL ORGANIZATIONS— Georgian Co-Investment Fund— European Bank of Reconstruction and

Development (EBRD)— International Finance Corporation (IFC)— Asian Development Bank (ADB)— European Investment Bank (EIB)

INCENTIVES AND ACCESS TO FINANCE

PRODUCE IN GEORGIA FREE INDUSTRIAL ZONES


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LEPL “Enterprise Georgia” operates under the Ministry of Economy and Sustainable Development

“One-stop-shop” for investors to support companies before, during & after investment process

Moderator between investors, government and local companies

Information

General data, statistics, sector researches

Communication

Access to Government at all levels & connection to local partners

Organization

Organization of site visits and accompanying of investors

Aftercare

Legal advising & Supporting services

CONTACT INFORMATION:18 Uznadze str. 0102 Tbilisi, GeorgiaTel: (+995 32) 2 960 010E-mail: [email protected]

ENTERPRISEGEORGIA

LOCAL COMPANIES

INVESTORS

GOVERNMENT

ENTERPRISE GEORGIA

OUR SERVICES

ENTERPRISE GEORGIA


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FOR NOTES

2019ENTERPRISE GEORGIA

Investment Opportunities in Manufacturing of …...Sources: KPMG; PWC, World Bank 0.11 41.7 37.8...

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