Central Asia is bouncing back from the coronavirus (COVID-19) pandemic and after three decades of growth, incomes have risen to a point where a middle class is emerging in the steppe. And nothing says middle class more than a hoover.
“Incomes are going up and one of the first thing people will spend their money on is the appliances that help to make household chores a little easier. That means buying a hoover,” Bektemir Murodov, the CFO of Artel, Central Asia’s biggest maker of white goods, told bne IntelliNews in an exclusive interview.
Central Asia is coming of age and Uzbekistan, as by far the most populous country in the region, is going through a dramatic transformation since President Shavkat Mirziyoyev opened the country up to the rest of the world in 2016. It has been putting in 6% growth a year and it is rapidly embracing its role as the natural production centre for the region; Uzbekistan is by far the largest of the five ‘Stans, by virtue of its young and fast-growing population, and is the only one of the five countries in the region to have borders with all the others.
Consumer electronic sales are mushrooming in the large domestic market of 38mn consumers, the third-largest consumer market in the CIS, which provides a solid base for the growing manufacturing base. With an average age of only 29 years, Uzbekistan’s population is due to double to 70mn by 2050, according to the UN. Leading companies like Artel and the national car maker UzAvto have also started to export to their neighbours, with Kazakhstan as the richest country in the region, thanks to its oil, being the most popular destination.
The low cost of labour and good transport connections to the rest of the Former Soviet Union (FSU) have made manufacturing in Uzbekistan a profitable business.
In the first half of this year Central Asia became the world’s leader in wage growth, according to the International Labour Organisation, while almost all of the other countries in the FSU are seeing incomes decline, led by Ukraine. According to its Global Wage Survey, average earnings in the region rose by 2.5% in six months, showing the most positive dynamics. For comparison, in 2021 it was 12.4%.
The increase comes at a time when for the first time in 20 years, global wage growth has not been able to outpace inflation and has fallen by an average of 0.9%, and excluding China, was down by 1.4%.
The maximum decline among the regions of the world is in Eastern Europe (3.3%), where Ukraine saw the biggest fall and could lose some 15% of its jobs, according to the ILO. By contrast, the biggest gains were recorded in the countries of Central Asia (up 2.5%) and the Asia-Pacific region (1.3%).
What is creating the middle class, and the shopping habits that comes with it, has been rising incomes. Nominal wages have been climbing consistently since 2000 and the trend continued after President Mirziyoyev took over from Islam Karimov, Uzbekistan’s first and only president, after he died in 2016.
Looking at incomes in dollar terms and the story is a bit more complicated, as Karimov, shocked at the ballooning current account deficit as consumers rushed to buy imported products in the late 1990s, introduced a harsh exchange rate regime to keep most of the hard currency in the state’s coffers, and killed off international investors’ interest in the process. However, Karimov did manage to diversify the economy during the boom years of the noughties, which led to genuine quality of life gains in both nominal and dollar terms.
A “feel good” factor arrived in decade-long boom after the US sub-prime crisis. Both nominal and dollar-term incomes were rising by 20-50% a year, with real incomes climbing too as the Central Bank of Uzbekistan managed to hold inflation to between 3%-8% for two decades.
The pace of growth of nominal wage growth slowed in the next “teenies” decade to 15-20% a year but remained well ahead of the official inflation rate.
Everything changed after Mirziyoyev took over and began to remove the tight controls on the economy. Inflation soared in about 2017 as price controls came off, and then in August 2017 the currency controls were removed. Inflation jumped to around 20% and income in dollar terms halved, although continued to rise in nominal terms.
In 2000 the soum was trading at UZS24 to the dollar but sank a 100-fold over the next two decades to UZS2,000 at the end of Karimov’s life.
The soum slumped in value again from UZS4,153 to the dollar at the start of August 2017 to UZS8,105 a week later after exchange rate was freed.
Since then, the soum exchange rate has become more stable but continues to depreciate slowly. It is currently hovering at UZS11,198 to the dollar as of November 21. (chart)
All in all, between 2000 and 2022 the soum has experienced a 146-fold devaluation.
The currency dynamics have had a big impact on real wages in dollar terms. At the start of the new millennium annual incomes in Uzbekistan looked relatively high, rising to around $3,600 in 2002, but this was deceptive, as without a freely traded currency the local currency was kept artificially strong. The dollar-equivalent wages shown in the chart for the noughties should be taken with a pinch of salt as a result.
It wasn’t until the teenies decade following the US sub-prime crisis that real incomes started to significantly get better, and Uzbeks remain grateful to Karimov for the real material improvement he brought.
Under Mirziyoyev nominal annual incomes have continued to accelerate to top UZS400mn a year – double the level they were when he took office – which has been fuelling the “feel-good” factor.
Real incomes have also risen, as in parallel to freeing the currency the CBU has also launched a successful campaign to anchor inflation and bring rates down, further improving the spending power of the average household.
Inflation has risen from a low of 9.7% in March to 12.2% in October, fed by the global food and energy crises, but it is expected to fall back to 11% next year, according to the Asian Development Bank. (chart)
Taken together, the rising nominal incomes and falling inflation have resulted in big gains in spending power for the average household in the last few years. When Mirziyoyev stood for re-election in 2021, he won by a landslide.
While Uzbekistan has come in for some criticism because the elections were not free and fair by international standards, with vox-popping voters on election in Tashkent, this correspondent could not find a single person who voted against Mirziyoyev: he is genuinely popular with the electorate. When asked why, all the voters had the same answer: their lives had materially and visibly improved since he came to power.
The story is similar in Kazakhstan, but wages, both nominal and in dollar terms, have been rising for decades on the back of the booming oil business and are much higher than in Uzbekistan.
The per capita income in PPP terms (purchase power parity) in Kazakhstan was $24,970 in 2021, the second highest in the Commonwealth of Independent States (CIS) after Russia ($32,000), and way ahead of Uzbekistan ($8,520).
Of course, the Kazakh oil money is not evenly distributed amongst the population, where there is significant income inequality; nevertheless, the Kazakh consumer market is significantly richer than Uzbekistan’s.
Wages in dollar terms have also been climbing steadily from KZT12,890 ($172) per month in February of 2000 and have averaged KZT101,375 over the last two decades, rising to an all-time high this September of KZT322,900 ($696) per month, according to Trading Economics. That compares with Russia, where salaries decreased to RUB59,907 ($974) per month in August, down from an all-time high of over $1,000 a month shortly after the war in Ukraine started.
In Uzbekistan, the average salary in September was UZS1,716,330 ($153), although there are substantial differences between the various wage surveys, and the different classes of job command large differences in pay. Much depends on a worker’s profession and in which city they live.
White goods a burgeoning business
The growing wealth of the residents of the Former Soviet Union (FSU) and now Central Asia has drawn in most of the international household names, but it has also fuelled the growth of the Soviet-era manufacturers that have modernised and compete on the same market, albeit mostly in lower price brackets.
White goods manufacturing is already well established in the CIS, with most of the factories exporting across the whole region, including Central Asia. Long ignored by the international manufacturers, Uzbekistan’s leading maker of white goods Artel has had the market largely to itself and built up a business that dominates the region. It is now expanding into other markets as it can price its goods below those of the international names, but increasing can offer products comparable to the international brands. And in July, Artel signed off on a deal to supply M.Video, Russia’s leading consumer electronics retailer, with goods, as many international names suddenly disappeared from the Russian market.
As the biggest consumer market of all, most of the international brands traditionally set up production in Russia, which has 18 major factories, of which five are Western household names (Ariston, Bosch, Indesit, LG and Samsung).
These factories make everything from Samsung TV sets, through LG’s refrigerators, Indesit’s microwave ovens, to Ariston’s boilers. More changes are in the works as international brands continue their exit from Russia, and according to reports, LG is amongst those looking at Central Asia as a destination if they relocate to a different FSU country.
The factories’ production is exported regionwide, but the bulk of the sales are targeting Russia, where the population enjoyed the highest per capita incomes in the CIS.
The leading Russian producers have a narrower product range, typically concentrating on fridges, washing machines and ovens. Outside Russia there are more factories in Belarus (4), Ukraine (3), Kyrgyzstan (1) and Turkmenistan (1), which are all exclusively Eastern European brands, except for an Electrolux factory in Kyiv that makes washing machines.
Belarus has the longest history of consumer electronics production, as it was the leading producer during the Soviet era; the “Minsk fridge” is still well-known across the CIS with a competitive offer of low price but decent quality.
In the last three years these producers have modernised, and new companies have entered the market. Belarus’ Atlant is the biggest, producing 1.2mn pieces a year, including refrigerators, freezers and washing machines. Gefest is another leading brand, making 900,000 pieces a year but focusing on ovens and cookers.
Ukraine has the second-largest population in the CIS of some 42mn people, although it will soon be overtaken by Uzbekistan, as Ukraine’s demographics are collapsing while Uzbekistan’s are swelling. Apart from the Electrolux factory in the capital, Ukraine is also home to Greta that makes gas ovens and DonFrost that makes fridges and air conditioners – although production has been suspended thanks to the war.
Kyrgyzstan has one factory, Avangard, that makes around 180,000 washing machines and fridges a year. And Turkmenistan produces TVs and computers at the Aydyn Gijeler factory.
Artel is one of the unsung success stories of the “new Uzbekistan” that Mirziyoyev is trying to build. The company already dominates its home market, selling to the ballooning middle class, and has seen exports explode in the last few years.
Like many of the successful companies emerging from the chaos of the 1990s, the holding group that gave birth to Artel began life as a trading operation. The company imported aluminium and plastic products such as door and window frames that were in high demand in the noughties, before eventually going into the production of white goods in the teenies to become Uzbekistan’s leading privately owned company today.
Starting with gas cookers, the company quickly expanded into things like vacuum cleaners, including a joint venture with Samsung, but today makes over 50 different items, including the de rigueur washing machines, fridges and TVs.
The pandemic caused a pause in the company’s growth, thanks to supply chain disruptions, but as Uzbekistan’s economy bounced back strongly, so have the company’s sales. Across the majority of product lines, Artel Group products now occupy 40-60% market share.
Regional market in the making
One of the changes Mirziyoyev has brought is increasing regional integration amongst the Central Asia states. Kazakhstan may be richer than Uzbekistan but with only 19mn inhabitants spread out over a territory the size of Europe, it is a dilute market and not an obvious production centre. Now Uzbekistan’s manufacturing sector is coming of age, exports to Kazakhstan are an obvious next step. The same argument applies to Tajikistan and Kyrgyzstan, which are also important export destinations, and increasingly to Azerbaijan, another oil-rich country with only 10mn people.
Since 2018 Artel’s exports to Kazakhstan have exploded and will hit a forecast $50mn for this year, an increase of 124% year on year. Those to Tajikistan are up by a quarter over the same period, while Artel is now in the process of opening the Kyrgyz and Azerbaijani markets.
“We are exporting the same goods as we sell in the local markets, but we decided to export with 0% profit while we build up our market share. In Kazakhstan we already earn profits, as we have a strong presence there now, but most of the other markets, particularly in the CIS, are still in development," said Murodov. “Next year we will further build on our export to MENA countries as well and expect good growth there too.”
Artel is also looking further afield and has begun exports Africa in the last couple of years. Certain product lines have now also received certification that will allow them to be exported to Europe. For example, since Uzbekistan won export duty privileges to the EU in the last years, textile exports have exploded. Domestic sales still account for more than two thirds of its business.
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