Bulgarian T&C Industry in 2006

1.-        GENERAL ECONOMIC ENVIRONMENT AND EVOLUTION OF THE TEXTILE/CLOTHING INDUSTRY IN 2006.

The macroeconomic situation in 2006 was largely influenced by Bulgaria's forthcoming accession to the European Union as of 1 Jan. 2007. According to preliminary data of the Bulgarian National Bank compared to the previous year the 2006 GDP rose with 6.3 per cent, exports (FOB) with 26 per cent, FDI with about 32 per cent reaching 4.1 billion EUR thus covering the deficit of the Balance of payments' current account. In 2006 a new phenomenon was observed - higher rate of increase of national exports than the registered increase in imports. Again as in previous years industrial output (textile and clothing sectors included) with a 9.8 per cent increase has boosted the growth rate of the overall Gross value added. Expectations for business climate development were positive during the whole 2006 as well as in the beginning of 2007 (record levels of 8.05 points of the ESTAT index in Jan. 2007 according to the Centre for Economic Development). The new corporate tax rate of 10 per cent as of 1 Jan. 2007 is a major signal for further up streaming development.

Nevertheless in 2006 there was a new increase in consumer prices indices of 6.5 per cent as well as lower growth of overall productivity rate (1.5%) compared to the increase in employment (3.8%). Labour force qualification and education which is not always adequate to expectations of the market remain a problem for many entrepreneurs.

The Bulgarian textile and clothing industry of 2006 was subject to overall trends of development as of the last years. There was an overall increase in value of the production exported (compared to the slight decrease in 2005) which however is not manifested in terms of physical volume of the apparel exported. Apparently there is a moderate increase in average prices per unit exported which is accompanied by respective increase in salary levels in spite of the reduction of national social security burden (as of 1 Jan. 2007 a 3% decrease for pension provisions made by employers).  In order to keep their market positions firms need to implement further reorganization activities (towards increase of productivity). Some firms are also already exploring possibilities to uphold competitive levels of costs of production through employment restructuring (e.g. "importing" of cheaper foreign workforce) or relocation of production units (within the country or in lower cost regional destinations). The sector remains predominantly export orientated. Textile exports retain a relatively high share (14.9%) of overall national exports including about 27% of aggregated exports to the EU-25 countries.

2.-        EVOLUTION OF TEXTILE/CLOTHING ACTIVITY.

2.1.      Production index

Production index has been constantly growing in the last more than five-year period. Growth rate was particularly high  in 2004 (see table) although it was moderate in 2005 as it is expected to be in 2006. Estimations of the BAATPE indicate an overall rate of increase of the production index of less than 3 points in the first half of 2006. According to the Bulgarian Industrial Association (BIA) during the first 6 months of 2006 there was an increase of the physical volume of apparel production with more than 8 per cent compared to the same period of the previous year. On the contrary textile production alone (e.g.. raw materials, fabrics, etc.) is rather decreasing (big decrease for cotton and cotton fabrics).

Source: National Statistical Institute (NSI)

2.2.      Business trends - total turnover

According to estimations of BIA experts the total turnover in the apparel sector for the first half of 2006 evaluated to 834 million BGN which represents more than 7% increase compared to the same period of the previous year. It is difficult to give exact information as it concerns corporate profit margins. Apparel branch consultants and experts estimate levels of profits of below 10 per cent, although there are also opinions in the opposite direction.

As in previous years predominant part of production is on CM and CMT basis and is mainly destined to exportation. Sales on the internal market are in the range of 10 per cent or lower of the total output of the sector. BIA experts even consider a share of about 1% of the volumes produced to be placed on the domestic market. Nevertheless not a few producers, small entreprises incl., are registering or have their own trademarks that they intend to impose on the market.

There is a clear tendency to improve overall productivity in the last years which is indirectly manifested in the increase in average salaries. However it is difficult to provide exact figures on annual basis. Capacities are traditionally full in the apparel sector  more precisely in winter and spring production cycles as entrepreneurs sometimes experience difficulties in recruiting qualified personnel in order to meet market demand fluctuations.

3.-        FACTORS INFLUENCING TEXTILES/CLOTHING AND THEIR EVOLUTION

3.1.      Domestic demand

Domestic demand of textiles and apparel production sustains relatively low levels compared to the volume of exports. The approximate share of the costs for apparel and shoes remains below 4% of the aggregated household expenditures in 2006. As of various end-uses the leading positions in domestic sales were hold by women's shirts and blouses (294 347 pcs.), men's woollen pullovers and vests (259 043 pcs.), bottoms and slips (appr. 194 000 pcs.), women's suits (appr. 53 000 pcs), men's and women's trousers, sportswear (tops). As of average prices of apparel production they remain on considerably lower levels than the ones on the Western European market. As an example according to the NSI the average price of men's suits sold in 2006 was 110.3 leva (1 EUR = 1.95583 BGN), of women's coats - 48.3 BGN, of women's trousers - 29.6 BGN, men's pullovers - 15.3 leva, etc. It is to be mentioned however that average prices do not always reflect real market development. There is a clear tendency of a growing domestic demand, incl. demand of firm's own products in parallel with an active penetration into the market of bigger shopping centres and malls.

3.2.      Exports - Imports (excluding textile fibres)

Bulgaria's textile and clothing exports in 2006 have reached 1.784 billion EUR (Chapters 50-63 of the HS) which represents a 7% increase over the previous year. It is a remarkable result compared to the slight decrease observed at the end of 2005 (-0.8%). As of products exported the biggest increase was achieved for knitted fabrics (approximate double increase in value), for synthetic threads, for woollen products. Traditionally overwhelming proportion of textile exports in absolute value again was held by woven apparel (more than 863 million EUR or 48.3% of overall exportations under Ch.50-63) and knitted apparel (almost 584 Mio EUR). The increase for both groups was the highest registered in the last three years (see table).

Apparel exports - major product groups (in Million BGN and %)

Source: NSI, own calculations

Nevertheless in terms of physical volumes exported (kg. and units) surprisingly there was a decrease in 2006 with respectively near 0.9 per cent for knitted apparel and more than 6 per cent for woven garments. The explanation is in the increased average prices such as 41.47 BGN per kilo of woven apparel exported in 2006 compared to 37.56 BGN in 2005, and 26.25 BGN compared to 24.55 BGN for knitted garments. Thus the 2006 growth of exports of textile and clothing production relates to improved competitiveness measured in terms of price/quality ratio instead of bigger quantities or lower factor costs. On the contrary 2006 was the year with the highest increase of average sector salaries in a mid-term period. Consequently the better export performance in 2006 is an evidence of improved competitiveness obviously as it relates to higher productivity rates and better quality of production. That is to say the clothing industry in the country has a substantial potential to uphold international market positions in the framework of ongoing EU integration.  

The exports to the EU-27 member countries (incl. Romania) represented 89.5 per cent of overall exports of woven apparel in 2006 (compared to less than 83% share at the end of 2005). Germany has regained the place of the biggest customer for Bulgarian made apparel (share of about 1/3 of total woven apparel exports to the EU), traditionally followed by Greece (predominantly knitted apparel customer), Italy and France.

Apparel exports to major customers in the EU, 2006 (in million BGN and %)

Source: NSI, own calculations

Instead the exports of woven apparel to the USA have dropped down with more than 28 per cent reaching 41.4 Mio BGN in 2006. On the contrary exports to EFTA countries (of which Switzerland is the major customer) have almost doubled.

Exports to new industrialized countries and China are as usual rather insignificant (total exports of apparel production of less than 1 Mio BGN) combined with a general tendency of a stable decline (e.g. almost double decrease of exported woven apparel to Hong Kong region within the P.R.C. in 2006). The exports of textile production have been traditionally high to Turkey (about 52 Mio BGN of knitted and woven garments exported) however there was an overall decrease (more than 18 per cent for woven apparel) in 2006 compared to 2005.

As of main products exported those as in previous years were women's blouses, dresses, skirts, men's and women's suits and trousers, ensembles and jackets, knitted blouses, shirts and pullovers. The industry is in particular competitive in the production of sophisticated apparel produced in smaller series and under short terms of delivery. It is a segment that will be further exploited in the years to come.

Overall textile imports rose with 7.5 per cent in 2006 reaching 1.46 billion EUR. The sector's positive foreign trade balance has amounted to 324 Mio Euro in 2006 which represented slight increase (with 4.2 per cent compared to the previous year). Nevertheless on the difference of previous years during 2006 there was an increase in imports for all textile chapter positions (Ch. 50-63 according to the HS) with a biggest increase (18.9 per cent) for knitted fabrics. However in terms of absolute value of textiles imported the top positions were as usual occupied by cotton fabrics and raw materials (460.7 Mio BGN), knitted apparel (432.8 Mio BGN), wool and woollen fabrics and raw materials (374.8 Mio BGN), synthetic fabrics, fibres and threads, woven apparel.

As it concerns main areas of destination for textile imports into Bulgaria in 2006 those again traditionally were the EU member countries that were supplying raw materials, fabrics and accessories for final processing within local subcontractors. As an example imports of cotton and cotton materials from Italy amounted to approximately 122.8 Mio BGN, to 60 Mio BGN from Greece, 46.7 Mio BGN from Germany, while correspondent imports from Turkey and China respectively represented less than 84.2 Mio BGN and 12 Mio BGN. Imports of woollen fabrics and raw materials from Italy amounted to 119.9 Mio BGN, 47.1 Mio BGN from Germany and about 31.3 Mio BGN from Turkey. Although the share of the EU countries in the overall imported textile goods was relatively lower than the correspondent figures as it concerns textile and clothing exports it has remained on the levels as of previous years (over 70 per cent).

As it concerns apparel products imported the 2006 leading positions were held by Greece for knitted apparel (with more than 247 Mio BGN or about 57.1 per cent of overall knitted garments imported), Turkey (57.6 Mio BGN) and Italy (32.6 Mio BGN). Main importers of woven apparel by country of destination come from Greece (61.7 Mio BGN) and Italy (42.4 Mio BGN). Imported woven garments from Germany amounted to less than 10 per cent of overall imports under Ch. 62 of the HS (or 27.6 Mio BGN), similar share for Turkey as well (25.8 Mio BGN). Respective figures for China amounted to 24.8 Mio BGN for knitted and as much as 37.3 Mio BGN for woven garments which represents a considerable annual double digit increase for both product groups (+24.6 per cent for knitted and +11.3 per cent for woven apparel).

3.3.      Prices.

Production price indexes had small fluctuations in 2006 compared to the previous year. As of specific positions the most substantial increase was in the production of fibres and yarns (106.8, 2005=100), followed by production of woven apparel (103.3) and other textile articles (102.8). The production price index as it concerns knitwear almost did not change (100.06), while for the knitted and woven fabrics there was a slight decrease (respectively 98.1 and 99.2).
As it concerns consumer prices index it was accordingly 113.2 in 2005 (2000=100), 110.9 in 2004 and 104.3 in 2003.
Expected levels of increase of the 2006 index are slightly higher than the 2005 figures.

4.-        OTHER ELEMENTS CHARACTERIZING TEXTILE/CLOTHING ACTIVITY IN 2006

4.1.      Employment trends

According to the National Statistics Institute there is a big variation in registered numbers of persons employed within the textile and clothing sector in 2005-06. Recent data indicates 167 880 persons employed which represents a slight decrease (less than 0.7 per cent) compared to 2005. It should be mentioned that the NSI have revaluated the number of workers in 2005 from more than 177 thousand to about 169 000. The difference is explained with methodological considerations as it concerns employment under labor contracts and the so-called civil contract relations.

Experts estimations mark a passed over peak in textile and clothing employment. The unsufficient growth in productivity does not allow for appropriate increase in salaries of the workers. Thus it is sometimes hard to minimize employment fluctuations that are particularly manifested in the summer season. There are already examples of entrepreneurs seeking for foreign seamstresses (e.g. from Ukraine and Moldova) or for relocating production units (such as a big knitted apparel production firm that has moved into a close border region of Serbia inhabited by a Bulgarian minority).

4.2.      Wages trends

The increase of wages in 2006 was at record levels compared to the previous year as it was substantial in terms of relevant index in a mid-term horizon (See table). Average salaries remain relatively low in a European context and it is expected that they will grow further upon country's EU accession.

Average wages in the textile and clothing sector, 2000-2006 (BGN and %)

Source: NSI, own calculations

4.3.      Importance of investment

The need of investment towards modernization of production equipment or for newly established production facilities remain among the major strategic priorities. However the financial potential of a major part of the local entrepreneurs in that respect remains rather low. Foreign investors are traditionally regarded as a good example in establishing and organizing their production facilities. Neverhteless FDI in the sector in the last two years with the perspective of the approaching EU accession were rather small. As an opportunity in line with the EU membership more Bulgarian apparel and textile companies have been proactive in developing projects within respective grant schemes (towards modernization and restructuring of production, for the development of human resources).

4.4.      Possibly: The impact of evironmental legislations on the industry activity and the costs beared by companies

The firms in the sector do not have substantial problems as it concerns national environmental legislation that is completely harmonized with relevant EU directives and regulations. In that respect the local textile and apparel production is in strict compliance with European Ecotex standards. Local companies are rather concerned about the costs in relation to introduction where needed of appropriate environment and quality management systems, as well as social standards compliance (e.g. ISO, OSHS).

5.-        EVOLUTION OF TEXTILE/CLOTHING ACTIVITY DURING THE FIRST MONTHS OF 2007   AND PROSPECTS

In the first months of the current year textile and clothing activity is traditionally intense in preparing collections for the new season. Local apparel producers are planning production in order to have sufficient capacity in particular during the summer months of the year. As of specific niche companies are developing into the international markets where demand is characteristic with preferences for smaller series of women's and men's woven apparel with a complex design produced within shorter terms of delivery. As of a particular segment companies are developing into the mid and the upper-mid price levels of the European confection market. Those are positions that Bulgarian apparel producers will be able to keep and further explore during the current as well as in the years to come.