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1. Background

2. Upgrading in the textile and apparel value chain

2.1 Bulgaria
2.2 The Baltic countries
2.3 Portugal
2.4 Romania
2.5 Serbia
2.6 Turkey

3. Taxation and control of material remnants and waste in inward processing trade in other

4. Recommendations

4.1 Upgrading in the textile and apparel value chain

4.2 Taxation and control of material remnants and waste


1. Background

The objective of this report is two-fold: First to present examples of how other countries have
developed their textile and apparel sectors and how Government can help the T/C sector to
transit from low-value added processing such as CM to higher value-added operations such as
Full-Package, Private Label and Own Label, secondly to recommend how to control and regulate
material consumption in inward processing trade and how to deal with cutting remnants.

The sourcing concepts used in apparel sourcing are often defined as follows:

The manufacturer sells cutting and manufacturing services only and all materials imported for
processing as well as ready made goods to be exported are owned by the customer.

The same as CM except the manufacturer buys some of the accessories like sewing thread,
buttons, etc.

Full-Package (Full Price, FOB)

The manufacturer buys all materials according to the customer’s specifications and invoices the
full value of the product at delivery.

Private Label
The manufacturer designs collections independently or jointly with the customer. The full-value
products are delivered under customer’s trademark.

Own Label
The manufacturer designs own collections and sells them under his own brand.

Box 1. Sourcing concepts

The customers may be classified into three main categories: manufacturers, wholesalers and
retailers. Manufacturers prefer often CM and CMT, while wholesalers and retailers favor Full-
Package, Private Label and Supplier Brands. According to Palpacuer the French retailers seem
to favor Full-Package to traditional buying and CMT, and the dominant objectives in French
fashion retailers’ sourcing policy are as follows:

• Develop direct sourcing without intermediaries.

• Increase continuous sourcing (instead of seasonal buying) and replenishment
• Centralize and rationalize sourcing.
• Work with selected suppliers on long term basis.
• Supply chain integration.

The French retailers’ main criteria for selecting suppliers in sequence of importance are:

• Price
• Quality
• Delivery time
• Ability to communicate
• Product specialization

• Product design
• Ability to engage in stable relations
• Ability to acquire retailer-specific skills
• Financial stability and production volume

Upgrading to higher value adding concepts require special skills, more advanced technology and
financing as presented in Figure 1.


Manufacturing Manufacturing Manufacturing Manufacturing Manufacturing

Accessories Material sourcing Material sourcing Material sourcing
Skills sourcing Material testing Material testing Material testing
needed Pattern design Pattern design
Garment design Garment design

Production Production Production Production Production

machinery machinery machinery machinery machinery
Technology Internet Internet Internet Internet Internet
needed Testing lab Testing lab Testing lab
Pattern design Pattern design Pattern design
Garment design Garment design

Cash at delivery
Terms of Cash at delivery Cash at delivery or 30 days credit 30 days credit
payment 30 days credit

Financing Labor costs Labor costs Labor costs Labor costs Labor costs
needed Duty 5-10 % Duty 5-10 % Duty 5-10 % Duty 5-10 %
VAT 20 % VAT 20 % VAT 20 % VAT 20 %
Receivables Receivables Receivables
30 days 30 days 30 days

Table 1. Skills, technology and financial needs with different sourcing concepts (Source:
Trade diagnostic study of Moldova - modified)

According to the World Bank’s trade diagnostic study of Moldova, 93 % of Moldova’s apparel
exports were done on CMT basis in 2004. Virtually no textile materials, i.e. fabrics or accessories
for apparel products are produced in Moldova. Furthermore the bureaucratic trade regulations
did not encourage the apparel companies to upgrade towards more value added concepts.

In CM the producer receives materials from the customer and pays only customs handling charge
(in apparel 0.04 %) but no duty or VAT, as long as the customer owns the materials and the

products during processing. Duty drawback means that duty (5-10 %) and/or VAT (20%) are
payable when the producer imports the materials, but they are refunded when products made of
these materials are exported. Duty drawback would apply to CMT, Full-Package, Private Label
and Own label concepts. Many countries especially in emerging economies use such a system in
order to make their export industries competitive in the world market. This is beneficial to local
garment manufacturers but not to local accessories and fabric producers. According to
comprehensive studies by Elena Ianchovichina of the World Bank the conclusion seems to be
that duty draw backs have a positive impact on export competitiveness and employment in export
oriented industries, but could lead to exports with low domestic value added since it does not
stimulate investments into domestic material producing capacity.

The total fabric waste in apparel production consists of cutting loss, roll ends and removed
defects. Cutting loss is fabric between product components (sleeve, collar, back piece, etc.). Roll
ends are pieces of fabric that are too short to make a garment. Fabric defects are removed either
in spreading or later by re-cutting the defected part. All this is usually considered garbage with no
commercial value. Moldovan Customs, however, sees this differently and does not exempt them
from duty and VAT as they are considered material staying behind in Moldova. This procedure
originates probably from Soviet era as it is used in Russia, Belarus and Ukraine at least by certain
Customs offices. But in countries like Romania, Poland, Serbia and the Baltic countries it has not
been exercised.

2. Upgrading in the textile and apparel value chain
In order to enhance the value added of any industry the producers should move up in the apparel
value chain from very low priced CM and CMT to Full-Package, Private label and Own label.
This, however, does not seem to be easy and usually takes a considerable length of time as
demonstrated in the World Bank’s Trade diagnostic study of Moldova (Figure 2).

70s 80s 90s 00s

Own Italy Italy Italy Italy


Private Portugal
Label Portugal
Hong Kong
Portugal Kong
FOB Hong China
CM/CMT China area
Hong Other Other

Figure 2. The apparel industries in Portugal and Hong Kong have gradually transformed
from CM/CMT production to FOB/Private Label producers. The Baltic area is
becoming a FOB area while the rest of the CIS countries are CM/CMT producers

Experiences and plans for upgrading from selected countries are presented on the following

2.1 Bulgaria

The textile and clothing industry employs 155 000 people in Bulgaria with 7.5 % share of
industrial production and 23.4 % of total exports. The main export market in 2005 was Germany
(28 %) followed by Greece (16%) and Italy (14%).

According to Textile Intelligence the Bulgarian production of textiles and clothing grew by 152 %
and 109 % respectively between 2000 and 2006. Despite of difficulties, such as a large grey
economy, illicit working practices, high investment needs, low labor productivity and reliance on
imported textile materials, the article concludes that the outlook for Bulgarian textile and clothing
industry is good, because of:

• The sector consists mainly of flexible and fast-to-the-market SMEs.

• Favorable geographical location close to other EU countries
• Low wages
• Removal of trade barriers due to EU membership

Bulgaria’s apparel industry is very export oriented. According to Bulgarian Association of Apparel
and Textile Producers and Exporters most garment exports are done on CM and CMT basis.
Although many local producers have registered trade marks less than 10 % of total output is sold

The Bulgarian Apparel Sector Strategy (

produced under the Ministry of Economy’s coordination in 2004 estimates that the share of
Bulgarian producers’ participation in product development was only16 % while the rest of the total
output was pure CM or CMT. The following trends were identified by the companies:

• Most producers are export oriented often without any domestic sales.
• A big part of companies depend solely on 1 to 2 foreign customers.
• Trade intermediaries (customers buying offices in Bulgaria) cut the producers off from
market information and make it difficult to find and approach new customers.
• The companies are interested in joint marketing projects, but very few have been carried
out so far.
• The very high proportion of CM production and designs by customers decrease the
added value and make low price the only means of competition.
• Many companies have registered trade marks, but do not use them.
• Only 1 % of the T/C sector companies are ISO9001 certified.
• Although a quality certificate is often a pre-condition for exports, the smaller companies
cannot afford them.
• High dependence on imported materials prevents the Bulgarian textile sector from
developing successfully.

The strategic objectives for the Bulgarian T/C sector are as follows:

• The sector will be dynamically developed in regards to design capability, management

and marketing skills, work force skills, inter-firm networks.
• Sale of end-products will be promoted by increasing the number of local companies
manufacturing products under international brands, creating and increasing sale of own
brands and increasing sale of private label services.
• Selling to the global market by diversification of markets and client structure, promoting
Made in Bulgaria products and entering niche markets with higher added value.

The action plan for achieving the strategic targets includes the following:

• Increase the number and improve the quality of company web pages.
• Joint participation in international trade fairs.
• Increase cooperation between firms, i.e. marketing chains, etc.
• Join international distribution networks.
• Cooperate in material purchases in order to optimize volume and price.
• Introduce quality, environmental, social and other international standards.
• Encourage companies to implement design and ITC systems.
• Establish domestic brands and introduce them at export markets.
• Increase participation in international B2B fairs (materials, etc.)
• Establish real marketing departments in companies
• Improve the efficiency and legitimacy of industry associations and increase their dialogue
with the Government.
• Adapt the objectives of higher, medium and vocational education to company needs.
• Establish R&D centers specializing in technology, design and production,
• Establish a Design and Fashion Support Centre for providing fashion trend services to
member companies.

• Establish a Productivity Support Center and a Marketing Support Centre.
• Stream-line customs clearing procedures.
• Improve taxation in order to promote re-investment of profits.
• Establish an export promotion fund for financial support of trade fair participation, etc.

2.2 The Baltic countries

After gaining independence the Baltic countries quickly turned into important garment suppliers.
The Nordic countries, especially Finland and Sweden, as well as Germany set up sub-contracting
production in the area. There were several well equipped garment factories, some of which were
totally reorganized with modern machinery during the last years of Soviet Union. During the
privatization period many of these companies were bought by foreign apparel firms and the
industry became a part of Nordic and German T/C clusters .

All production in the 90s was CM as the companies were not experienced in sourcing materials
and most of them did not have sufficient funds for financing material purchases. The Baltic
countries are small in area and population (Estonia 1.6 million, Latvia 2.3 million and Lithuania
3.4 million). The small size of these countries may be one of the reasons that several companies
have been able to upgrade further from the basic CM or CMT. The other reason is rapidly rising
costs and today many companies in the Baltic area are delocalizing their garment manufacturing
to Belarus, Ukraine, Russia and further.


At the beginning of 90s Estonia’s garment industry was very similar to what Moldova’s apparel
industry is today. Nearly everything was produced on CM or CMT basis for export with hardly no
own brands. The few textile producers concentrated on home textiles or knitwear materials. Most
apparel fabrics had to be imported. Several textile and apparel firms were bought fully or partly by
foreign companies during privatization. These FDIs were mostly acquisitions rather than new
investments. As result many factories were turned into foreign companies’ production subsidiaries
selling CM services and there was no interest to upgrade towards more value-added concepts.
Estonia’s own textile and apparel firms started gradually to develop their own brands and
collections selling them first in the domestic market and then in other Baltic states and Russia. As
the GDP level in Estonia grew foreign retail chains started to enter the market from mid 90s. At
that time there was no competition from local retailers and the market was soon dominated by
foreign brands.

The main export markets for apparel products according to Estonian Clothing and Textile
Association (ETCA) in 2005 were Finland (31%), Sweden (20%), Russia (9%), Germany (6%),
UK (5%), Latvia (5%), Norway (5%) and Lithuania (4%). Exports to Russia and other Baltic
countries are likely to consist of Estonian brands while the rest of the exports are CM or CMT.
The reasons why after gaining independence the Estonian T/C industry became such an
important supplier to Scandinavia and Germany are as follows:

• Most garment and textile firms were well equipped with modern machinery and they had
well trained personnel.
• Most factories were small and flexible and could respond quickly to customers’ requests.
• The general cost level was very competitive in the 90s.
• Estonia is close to these markets, and communications and logistics were easy and

According to Purju the special conditions that have shaped the development of the T/C sector in
Estonia are as follows:

• Trade union representation is very weak and their bargaining power is limited. Only 14%
of the total labor force belongs to labor unions.
• There are huge wage level differences from one industrial sector to another.
• Estonian Clothing and Textile Association (ECTA) was established in 1993 for promoting
the interests of Estonian T/C industry, but its influence on governmental policy is not as
strong as in West European countries. The T/C cluster, like other industrial clusters in
Estonia, is not well organized and lacks bargaining power.
• Only a few Estonian brands have been successful in Estonia and abroad.
• Well educated young people are currently moving to other EU countries and the skilled
workers are leaving the T/C sector to work in higher paying sectors like electronics and
• Taxation policy is favorable both for corporations and individuals. Profits are not taxed if
invested back into the company. Personal income tax is not progressive.

During the past 3 to 4 years the T/C sector in Estonia has gone through big changes. The
minimum wage level is still applied in the apparel industry while the electronics industry is paying
much higher wages. According to Estonian Clothing and Textile Association the wages paid in
the apparel industry are 65 % of the average industrial wage level. People have started to move
to better paying jobs and it is nearly impossible to recruit new people. Direct wage costs at
minimum level and other operating costs (gas, electricity, etc.) are increasing 20% to 30%
annually. The impact on the T/C sector has been the following:

• The Estonian branded manufacturers (Baltika, Klementi, PTA, etc.) are converting from
producers to wholesalers and branded retailers. The factories are closed in Estonia and
products are sourced from lower cost countries in East Europe and Asia.
• Foreign companies with sub-contracting operations or own factories in Estonia are
delocalizing their production to lower cost countries. The total production value of the
apparel sector has been declining since 2002.
• The delocalization process in most regions in Estonia does not seem to cause
employment problems as people are leaving the T/C sector anyway and there are jobs
available in better paying sectors, such as electronics and services.


The textile sector is the oldest branch of Latvian industry. Many companies date back to the 19th
century. The industry was modernized and developed during the Soviet times and in 1990 when
Latvia became independent there were a number of apparel companies and textile mills
producing cotton, flax and silk fabrics. Exports to the West European markets started gradually in
the 90s. Today a big part of exports are apparel products, but many textile companies have
survived and developed internationally known textile brands (Lauma, Ogre, Rita, Aurora-Baltika,

During the privatization process the large state-owned firms were restructured and many new
flexibly operating apparel companies were established, often with foreign capital. The T/C sector
comprised 664 companies employing 25 000 people in 2005, which is 14 % of total industrial
workforce. According to Latvia’s Central Statistics Bureau the main export markets for T/C
products in 2005 were Germany (14%), Sweden (13%), Estonia (10%), Denmark (10%) and
Russia (9%).

According to the Latvian Investment and Development Agency the critical success factors for the
textile and clothing industry have been as follows:

• Short lead times and reliable deliveries due to proximity to the main markets and
advanced production management. Small orders are accepted and delivery time varies
between 2 to 6 weeks.
• Ability to produce high quality products both for subcontracting and own brands.
• Good design skills for own brands. The Latvian Academy of Arts has high quality
education for designers.
• Well trained workforce due to well organized vocational education. The workforce is also
flexible in terms of working time.
• Well educated and experienced engineers from Riga Technical University.
• Capable and dedicated senior management with good English and German language
skills and which often are co-owners in the company.
• Modern production facilities and many companies have carried out considerable
investment programs during the past years.
• A combination of low labor costs and high labor productivity.
• Several companies have quality certificates, such as Oeko-tex, ISO9001 and ISO14000.
• There are strong companies both in the textile and garment sector, for example in ladies
underwear, which makes Latvia a one-stop-shop for the customers.

The main problem that Latvia’s textile and clothing sector faces today is increasing costs. As
result many firms have started to delocalize their production to Belarus, Ukraine and Russia.


The historic background of the Lithuanian textile and clothing industry is very similar as in Latvia.
The sector employs 47 000 people and 2/3 of the companies are apparel producers and 1/3
textile manufacturers. The key trading partners today are UK, Germany, Sweden, Denmark and
Italy. Most of exports are on CM and CMT basis, but several firms have also developed their own
brands and sell them domestically and to export to neighboring countries. As a part of the global
textile and apparel value chain Lithuanian producers are facing increasing competition from lower
cost regions, especially from Asia. Many CM and CMT customers are currently shifting their
order away from Lithuania.

To survive the Lithuanian T/C sector feels that it is important to develop flexible production
systems for small fashion orders and to emphasize own brand development. Several companies
have been successful in introducing their brands in the domestic and nearby markets, for
example Audejas, Audimas, Utenos Trikotazas, Roze and Omnitekas, but the domestic market is
dominated by foreign brands and retail chains. The National Development Strategy for the Textile
and Clothing Sector, 2005-2010 lists the following objectives for maintaining the competitive
advantage of the sector:

• Lithuania’s T/C sector must emphasize its ability to produce and supply flexibly well
designed high quality products, such as fabrics, trimmings, auxiliary materials and
apparel products.
• By using new multi-functional materials, new generation textile products with high added
value can be developed for medical purposes, automobile, aviation and space industries
as well as for safety and protective garments.
• Further funding must be sought from EC for structural development as well as for
research and development projects.

SWOT analysis by Glinskiene et al defines the current situation in the Lithuanian textile and
clothing industry as follows:


• Large workforce in the sector.

• More than 80 % of products are exported.
• Export volumes larger than imports.
• Labor productivity is competitive compared to European suppliers.
• Workforce is experienced and highly qualified.
• Advanced technologies in use.


• Exports consist mainly of CM and CMT.

• Profitability is low.
• Export volume is decreasing.
• Investments are decreasing.
• Direct foreign investments are decreasing since 2000.
• The lowest labor productivity among all Lithuania’s industrial sectors.
• Labor cost forms a large part of the cost structure due to CMT.


• Lithuania is still regarded as a favorable trading partner by EU customers.

• Certain competitive advantage can be achieved by developing flexibility.


• Competition from Chinese suppliers.

• Low material and direct foreign investment does not allow for upgrading of technology.
• Increasing labor costs.

2.3 Portugal

Portugal became an important supplier of garments to the rest of Europe already in the 80s.
Although there was a large textile industry in Portugal, most exports were CM and only a few
companies started to offer CMT. After Portugal became a member in EU support money became
available. The Ministry of Industry organized special funds co-financed by EU at the end of 80s
and early 90s for the industry to get grants and loans for investments and productivity
developments. The focus of these development funds and programs was to improve productivity
and to upgrade the industry to more value-adding businesses. In the 90s Portugal’s Government
set up a special office for supporting the SME sector of Portugal, called IAPMEI
( IAPMEI’s mission is to ‘Design and carry out policies
that support and enable companies to expand. IAPMEI focuses in particular on upgrading and
innovation for small and medium-sized enterprises operating in the secondary and tertiary
sectors, including T/C sector’.

A special investment initiative RETEX was set up in 1994 in order to modernize the Portuguese
T/C industry ( ). The total budget of
the program was € 542 million, and the money was available to the T/C sector only. EU financed
75 % while the Portuguese Government put up the rest. Altogether 1756 projects were carried
out during 1994-1999. The maximum grant for investments was 50 % and for consulting services
70 %. RETEX was followed by other similar programs, like PEDIP and PEDIP II. Each program
focused on specific topics, such as investments, capacity development, improvement of
management know how, exports, etc. RETEX was organized as follows:

RETEX was a special program for textile and clothing industry (1992-1999). Companies
interested in project funding had to present a project proposal to the Ministry. The application
had to be supported by a diagnostic study, strategy plan, project plan and project proposal.

Diagnostic Study
Strategy Preparation
Project Plan
Project Proposal
Project Implementation
Consulting services

Final report with estimated

Financial records with invoices

Grant money was available for the following costs:

Costs Grant max % Grant max €

Consulting fees for preparation of diagnostic

study, strategy plan, project plan and project 70 % 50 000 €
proposal, as well as final reports.

Consulting fees for productivity built up 60 % 125 000 €

IT, CAD and CAM systems and equipment 50 % 75 000 €

Transport systems in production and warehouse,

quality control systems and equipment together with 40 % 150 000 €

Refurbishing of factory buildings and environment 60 % 200 000 €

Dissemination, i.e. organizing an open door workshop

to show other companies what was done and 100% 25 000 €
what was achieved.

Project preparation and supervision was carried out by consulting consortiums, which consist of
local and international consultants bringing international consulting know how into the country and
enhancing the skills of local consultants.

By 2001 the textile and clothing industry in Portugal employed more than 200 000 people, 25 %
of the total industrial workforce. Of the total 13 000 T/C companies more than 70 % employ less
than 10 people. Such small companies may export themselves, but several trading companies
were established, which on behalf of these SMEs collect orders from customers and distribute

them to small producers. Unfortunately the Portuguese apparel companies were slow in
developing own brands and international fashion chains took over the Portuguese market in the
90s. Today relatively few firms have own brands and companies that sell Full-Package services
or Private label are moving their production to lower cost countries like Romania, Ukraine and

2.4 Romania

Before EU membership Romania was for years the third largest extra EU supplier of apparel
products to EU after China and Turkey. Currently the 360 000 people representing 14 % of the
total workforce are employed by the Romanian apparel industry, which stands for 25 % of
Romania’s total exports. In 2005 over 90 % of T/C sector’s output was exported to EU.
Most of the apparel exports are done on CM and CMT basis and the range of customers vary
from top level European brands to low cost retailers. The labor cost is relatively high compared to
near-by countries. In 2006 the average monthly direct wage level in the textile industry was € 217
and in the garment industry € 190. The labor productivity is not very high. Romania’s garment
exports to EU have been decreasing since 2005.

The success of Romania’s textile and clothing sector was largely built during the socialist era and
right after Romania became a market economy. The large state owned enterprises were
reorganized and privatized and several new privately owned SMEs were established. There are
several high quality and high volume producers of heavy apparel (men’s suits, ladies blazers,
overcoats, etc.) in Romania, and they are still able to fully sell their capacity. Currently Romania
is facing the following problems:

• Most of exports are CM and CMT with only some Full-package sales.
• High labor costs together with low labor productivity makes Romania less interesting to
CM and CMT customers.
• There is a shortage of labor in the T/C sector as people go after better paying jobs. The
salaries in the textile and clothing sector are 30 % lower than the average paid in
Romanian industry.
• Implementation of EU customs tariffs on January 1st 2007 is likely to lead Romanian CMT
and Full-package providers to source materials from Asia, which will weaken the position
of domestic textile industry.
• Since 2004 all major T/C sector indicators (production volume, exports, employment and
foreign and domestic investments) have been heading down hill.
• According to some estimates CMT production, which accounted for 68% of total garment
output and 80 % of total exports in 2005 will largely move out from Romania by 2010.
Half of the 8 000 textile and apparel companies could disappear reducing the total output
by 10% to 25%.

Despite of increasing cost pressure the Romanian apparel industry is confident that it will be able
to compete in the future, because:

• Proximity to EU.
• Specialization in high quality heavy apparel, where, like in men’s suits, very little
competition comes from Asia.
• Still low standard minute cost and skilled labor.
• Gradual transition from CMT to Full-Package production.
• Despite of growing invasion of foreign brands and retail chains popular domestic retail
chains also exist.
• Romania has a large domestic market.

2.5 Serbia

During the transition period since 2000 Serbian macro economy has stabilized and the real
annual GDP growth has varied between 2 % and 5.3 %. The textile and garment production
represented 7 % of total manufacturing output and 3 % of GDP employing 75 000 people in 2003.
Before disintegration of the former Yugoslavia textile industry was one of the main export
industries and over 70% of exports went to European customers. During the embargo most textile
and apparel companies were forced to focus on the domestic market. Several large scale state
owned textile mills had to scale down their volume and some ended up in bankruptcy. But at the
same time a number of new SMEs especially in the apparel sector was set up. By focusing on the
domestic market with very little foreign competition they built strong brands and own retail chains.
Today the value of apparel exports is € 200 million and 70 % is exported to EU usually on CMT

The labor costs in Serbia’s T/C sector are among the lowest in Europe, way below 100 €/month in
the T/C sector. The cost price of one production minute is very competitive. The labor force is
skilled and experienced. There are special schools for training sewing operators and technicians,
and 100 textile engineers graduate annually.

The Serbian apparel industry depends heavily on imported fabrics as most of domestic fabric
production has collapsed. The free trade agreements between Serbia and EU, Russia and
Central European countries have reduced import duties to 0%.

According to Serbian Investment and Export Promotion Agency the keys to success for the local
T/C sector are as follows:

• One of the most price competitive textile and apparel industries in Europe.
• Quick and flexible deliveries and low order minimums.
• Closeness to main European markets, especially Italy.
• Good educational system produces highly skilled workers and management.
• Serbian industry is a supplier to high quality brands in Europe and USA and through
these contact understands top quality requirements.
• Strong domestic brands and retail chains can compete in the local market and near-by

2.6 Turkey

According to the Association of Turkish Clothing Industry the Turkish apparel industry is:

• The driving engine of Turkish economy in terms of investment, production and

• Apparel is the leading export product.
• Turkey is the 5th largest global and 2nd largest EU supplier.
• The industry is internationally competitive and has growth potential.

There are about 40 000 textile and clothing producing companies in Turkey, mostly family owned
SMEs. But also 25 % of the 500 largest enterprises in Turkey are T/C firms. About 10 000 of
these companies are exporters. All kinds of textiles and garments are produced in Turkey, which
makes Turkey a one-stop-shop for the customers. Because of this Turkish T/C companies are
primarily Full-Package providers, although CM and CMT is still largely available. Several Turkish
firms have also developed their own brands and sell them domestically and also for export.
Another strong point is that many of the larger firms have made investments in backward and
forward linkages thus controlling a longer piece of the supply chain. This has attracted many
large US customers like Liz Claiborne, Tommy Hilfiger and GAP. The firms that have made

downstream investments, i.e. they have became retailers, have developed their own product and
retail brands.

Development of export trading companies (ETCs) were promoted already in the 1980s.
According to Neidik et al, ETCs were formed when small firms came together to get better
financing and marketing support, and today there are 31 ETCs accounting for about 30 % of
Turkish textile and apparel exports. Some of the earlier ETCs were set up by large T/C producers
and gradually they started to export goods made by other companies as well. The trading
companies are active exporters of Turkish made goods with excellent Internet trading sites and
sales offices in EU and the USA.

Neidik et al define the following points to be behind the Turkish T/C success:

• The sector consists mainly of family run SMEs, which are flexible and able to rapidly
respond to demand changes. This has been a critical factor in Tukey’s as Turkey’s T/C
sector relies on EU rather than US. EU buys smaller runs and more fashionable products.
• There are both integrated firms (fabric and garment manufacturing) and several
independent material producers and apparel producers. This makes it easy for Turkey to
offer Full-package services as well as Private Label.
• Turkish brands and retail chains have meant that Turkish companies have been able to
maintain a meaningful share of the domestic retail market. Now these firms are
expanding to export markets with their brands and retail chains.
• Textile and apparel sector has managed to attract foreign direct investments, although in
general the number of FDIs is low in Turkey. Well known international companies with
investments in Turkey include firms like Levi Strauss, VF, Hugo Boss, Polgat and Adidas.
• The free trade agreement and Customs Union with EU opened the EU market for Turkey.
Turkey participates very actively in several EU organizations even though they are not an
EU member. The Association of Turkish Clothing Manufacturers is a member of
EURATEX enabling them to participate in lobbying EU in textile policy making.
• Turkish T/C firms have actively set up partnerships with international companies outside
Turkey in order to capitalize on low cost production and to be directly at the market.
Some of these firms are production companies and some trading companies. Examples
of these are Turkish investments into the near-by countries like Romania, Moldova,
Uzbekistan, Jordan and Turkmenistan. According to some estimates there are around
3 000 Turkish firms from various industries operating in Bulgaria alone.

The Turkish Clothing Industry Horizon 2010 Road Map by the Association of Turkish Clothing
Manufacturers lists, among others, the following strategy objectives for the industry:

• Lower the share of sub-contracting service sales in exports.

• Replace the low cost simple products by upper middle class products in sub-contracting
• Increase the share of upper middle class Turkish branded fashion products in exports to
50 % by 2010.
• Switch from passive to active marketing and change the approach from production to
• Switch to flexible production methods.
• Improve integration level in production.
• Increase partnerships with international companies in terms of production and marketing.
• Promote e-commerce infrastructure.
• Improve training and education in technical, design and marketing areas.
• Increase Government support in R&D, investments, quality and market development.
• Ensure favorable finance conditions for investments and operational needs.
• Promote mergers in textile and clothing industries.

• Promote Turkish retail chains.
• Form national clothing industry advisory board.
• Set up clothing industry development fund.
• Establish a clothing research institute.
• Develop e-design ability and form a design agency.
• Reduce dependency on wholesalers and go directly to EU end customers.
• Target sales to international retail customers as they buy Full-Package services and
Turkish brands while international branded manufacturers favor CMT.

3. Taxation and control of material remnants and waste in inward
processing trade in other countries

Customs offices in many countries are concerned that all material sent out for processing may not
actually be used for the order. Due to fabric defects, order quantity and different kinds of
production equipment it is not possible to exactly define the consumption in advance.
Furthermore, customers usually send out extra fabric in order to ensure that the producer is able
to complete the order. Cutting waste is normally between 10 % and 25 % of total material sent out
for processing. Left over material may be useful for the producer or the customer, but cutting
remnants are garbage and have no value. Based on interviews of customers and produces the
material consumption control procedures in different countries are described on the following


The customer presents an estimate on material quantity and value to be consumed for each order
to domestic Customs office as well as to the producer. The producer presents this estimate to
the local Customs office in Belarus when clearing customs for incoming material. When exporting
the ready made products the quantity of products is checked against the order. Any left over
fabric is either returned or used for making new samples for the same customer. The producer
pays no import duty or VAT providing that all material is used or still usable leftovers are returned.
Officially there are three ways to deal with cutting remnants:

1. They are returned to the customer (no duty, no VAT)

2. They are destroyed under supervision of the Customs (no duty, no VAT)
3. The producer clears customs for them and pays duty and VAT

Local Customs Offices seem to apply the regulations differently, as defined by A. Goer of Barn

‘For example one our contactors in Belarus sends back all the waste (physically in the truck)
according to the document. Another, from the same country, sends only 1 small box per month,
but in documents he writes all what is needed. A third one sends nothing back, only in
documents. This all depends on the policy of local customs office and the relation between the
factory and the customs.’

The current Customs Code of the Republic of Belarus valid since 1996 is being harmonized with
the Russian Customs Code. The current Code does not specify how processing waste should be


As an EU member these formalities do no more concern production in Bulgaria. Before the

membership, when exporting the ready-made goods, the producer reported actual consumption
of all materials in detail. Some left over material was acceptable and could stay in Bulgaria, but

not in large quantity. Such material imports as well as cutting remnants were exempt from duty
and VAT.


Before EU membership it was possible to produce CM products for EU customers without paying
import duty on fabric. A permission had to be applied from the local Customs Office for each
import and EUR1 certificate was required in order to be tax and duty free. When exporting the
ready made goods the producers had to present to the Custom office, along with the export
invoice, a consumption note in order to justify the consumption of imported fabric. Usually around
2 % of waste and left over fabrics were allowed. Larger quantities were returned to the customer
in order to avoid duty and tax consequences. The companies usually declared their total waste to
be 2 % and did not pay duty or VAT.


No duty is paid for materials imported to Russia for production as long as the ready made goods
are exported. Russian customs request a document, which states the total consumption of
various materials per garment. When the ready made products are exported they control that the
equal number of garments is shipped. In case the number of garments is lower than initially
defined, for example due to high number of defects in fabric, there are normally no duty
sanctions. The customs procedures vary greatly from one location to another in Russia. Some
regional Customs offices allow small quantities of left over fabric to stay in Russia and levies no
duty on it or on cutting remnants. Another Customs office may request that such materials are
burned at the presence of a Customs official to avoid paying duty and VAT.

The new Customs Code of Russia from 2003 ( stipulates in Atricle
183 only in general terms how waste is treated under inward processing scheme and does not
specify how it should be done for clothing production. Article 183 stipulates that ‘The wastes
which have formed as a result of the goods inward processing procedure shall be liable for
customs duties and taxes equivalent to those applicable to the goods imported to the customs
territory of the Russian Federation in that state, except:

(a) The said wastes have been exported from the customs territory of the Russian
Federation, or
(b) Processed into the state in which their further commercial utilisation on the customs
territory of the Russian Federation is no longer possible and they cannot be restored to
their original state by any economically feasible method’

The Article stipulates further that

‘ Wherever it is impossible to determine the wastes’ customs value using the method based on
the value of a transaction with imported goods or identical goods, the waste’s customs value shall
be determined as equivalent to one of the following values:
- the price of sale of the appraised wastes at the instance of their initial sale in the
customs territory of the Russian Federation to a buyer who is not interdependent upon
any participant of the goods processing transaction;
- the price of sale of the goods identical to or homogenous with appraised wastes
provided said goods were manufactured as a result of analogous processing operations
under the terms and conditions of the inward processing procedure at the instance of
their initial sale in the customs territory of the Russian Federation to a buyer who is not
interdependent upon any participant of the goods processing transaction;
- the price of a transaction with the goods identical to or homogenous with appraised
wastes which were sold as export goods to the Russian Federation and imported to the

Russian Federation in the period concurrent with the time of declaration of the
appraised wastes;
- the price of the goods identical to or homogenous with appraised wastes transacted
at the domestic market of the Russian Federation between independent buyers and
sellers less the taxes levied on said goods at their sale in the Russian Federation.

The text is general and leaves room for interpretation regarding cutting waste, and local Customs
Offices seem to interpret it differently.


No duty or tax is levied on material imported for CM production. An import document for CM
production is issued for each order by the local Customs office stating the quantity and value of
fabric, the number of garments to be made and consumption per piece. Goods must be exported
in 90 days. An extension of 60 days can be applied in case unexpected problems occur. If a part
of the fabric remains in Serbia the producer must pay import duty and VAT, which currently are 2
% and 18 %. Import duty for fabrics from EU will be 0% from the beginning of 2008.


Imported textile goods are subject to customs duty and VAT (20%). Customs clearance is further
subject to a processing fee, which is 0.2 % of the goods’ customs value. Materials imported for
processing are exempt from these taxes, providing that:

• Re-export takes place within 90 days.

• The material and the finished goods belong to the foreign customer.
• The tariff code must change as a result of processing.
• The cost of raw material must be at least 20 % of the value of the finished goods.
• The imported raw material must be the main component at each stage of production.

The time period that materials stay in Ukraine may be extended from the 90 day limit for
production reasons. Importers of textile goods must issue an obligation for import duties and VAT
to the tax authorities in order to have the taxes cancelled. Any material that stays in Ukraine after
re-export will be taxed. Customs regulations treat the cutting remnants in a similar manner as in
Belarus, but also in Ukraine local customs offices enforce the regulations differently

Importation must be supported by the following documentation:

• Import customs declaration.

• Cross-border contract.
• Obligation for import duties with consumption calculations.
• Customer order and invoice.
• Waybill.
• Compliance certificate.
• Certificate of origin.
• Any other documents as may be requested by Customs.

The new Customs Code of Ukraine, which came into force in 2003, is currently available only in

4. Recommendations

The draft of report ‘Program on Development of the Light Industry of the Republic of Moldova until
Year 2015’ and the ‘Action Plan’ were discussed in detail with the CEED Team as well as with the
representatives of local apparel industry and the Ministry of Industry and Infrastructure. The
Program and the Action Plan were found to be well prepared. Several adjustments were,
however, decided during the visit especially regarding how to support upgrading and how to
stimulate the industry in improving productivity.

4.1 Upgrading in the textile and apparel value chain

Recommendations discussed in detail with the CEED Team during the visit can be summarized
as follows:


Improving of higher education should be done with international help. EU offers support for this
area through special initiatives like Tempus and Erasmus:
Tempus II came to an end at the end of 2006, but Tempus III is currently under preparation.
Under this scheme Moldovan University signs an agreement with one of the European
Universities, which will then provide recommendation and assistance for improving the quality of
education. Erasmus funds exchange of students and professors. The initiative to participate in
these schemes must come from Moldova.

So called Dual system for vocational training, as in Germany, is currently discussed in Moldova.
The education would consist of training at vocational school as well as practical training in an
industrial company. Such a system is highly recommended, and assistance for establishing it
should also be sought from international sources.

Internship is compulsory to students in most Technical Universities in Europe. The objective is

that the student understands how the industry operates as well as to bring the University and
industry closer to each other. During the internship the students are paid by the companies for
their work and they also receive credits for their studies at the University.

Special training courses organized by the companies should also be supported by public funding.
The company must set up a training class with all necessary machinery and hire an instructor.
The cost of training as well as wages of workers, at least partly, should be paid by the

The quality of designer education should be improved in order to make it possible for the industry
to employ qualified designers when they upgrade to Full-Package, Private Label and Own Label.
This can be done in cooperation with an EU Design University, for example through Tempus and
Erasmus schemes.

The State University of Technology should approach AUTEX and apply for membership. AUTEX
( is the Association of Textile Universities of Europe and they organize scientific
conferences, and many other kinds of events. Also they promote joint research projects funded
by EU. Non EU member Universities are welcome to participate in such projects. The projects
would contribute to improving the quality of research and education in Moldova.

Association of Apparel Industry

Moldova’s Association of Light Industry was established in 2006, but it does not yet have any
permanent staff and its strategy and responsibility areas are still being discussed. Most members
are from apparel and footwear industries, and in order to be more effective the association should
consider concentrating on these industries only and change the name to Association of Apparel
Industry. An efficiently organized industry association can lobby the Government in policy issues,
improve the image of the industry and offer its members different kinds of services like the
Finnish Federation of Textile and Clothing industry ( Finatex is
administrated by a Board of Directors. The Executive Director and office staff, all permanently
employed, are responsible for operations :

Finatex – Fed

Figure 3. Areas of responsibility of Finatex

The Moldovan Association should seek international assistance in organizing the Association, for
example in form of a study tour to Portugal. By visiting ANIVEC, the Association of Apparel

Industry of Portugal they would be able to see how an Industry Association operates, how the
Project Funding Schemes were carried out in the 90s and 00s and what kind of services a
Fashion Center offers its members. During the same trip the participants should also visit
individual companies and CITEVE, a Competence Center of Portugal, which offers technical

28 me
assistance and services to the textile and clothing industries.

A high quality web site should be created by the association. The image of apparel industry,
which in the minds of Moldovan workforce and students is not very high, can be improved by an
exciting web site. Furthermore, the web site can be used for commercial purposes by presenting
its members, their production services and products, like in Portugal: Sales 37

An industry association is an independent and private organization financed by its members. The
Moldovan Government should encourage and support such associations by recognizing that they
play an important role in improving and upgrading industrial operations in Moldova.

Fashion center to distribute fashion trends

A Fashion Center should be established in Moldova, either independently or as part of the

Association of Apparel Industry. The Fashion Center does not offer design services, but provides
the apparel industry with fashion trends collected from various sources. The representatives of
the Fashion Center visit all main fabric and fashion fairs in Europe and are in contact with
Fashion Trend companies like Promostyl ( By combining all this
information the Fashion Center then presents the Moldovan apparel producers color and fashion
trends regarding next seasons, organizes trend shows, etc.

Upgrading of Moldovan apparel industry

Establishing of Moldovan brands and retail chains should be supported as in order to set up a
branded business the goods must be sold in the domestic market first. The fashion retail market
in Moldova is still not very developed and there are only a few stores selling domestic brands.
Once international retail chains like Mango, Hugo Boss and Steilmann have taken over the
Moldovan market it will be too late to develop Moldovan brands.

But the first step for many Moldovan apparel producers is to upgrade from the basic CM to CMT
and Full-Package. CM customers often consist of branded manufacturers, which are looking for
the lowest price. Branded marketers and branded retailers prefer CMT and Full-Package, but
they avoid Moldova as such services are not available. In order to motivate and stimulate the
Moldovan apparel industry to upgrade, one to two buyers from such companies in EU should be
invited to a workshop in Chisinau to highlight the services they are looking for. Technical
assistance for finding Full-Package customers is recommended. The assistance could be a list of
companies with contact information and visits to the companies jointly with Moldovan producers.

International standards, such as ISO 9000, ISO 14000, OecoTex, may be important for
companies that producer more advanced garments, such as protective wear and military
garments. They demonstrate that the company is well organized and willing to comply with
international requirements. Other standards, for example regarding harmful substances in fabrics,
or special properties are equally important to follow. Many Moldovan producers may not be aware
of such standards. The Association of Apparel Industry of Moldova or the Competence Center
described below should take an active role in making the standards known.

The Moldovan Government should recognize that the customs procedures are complicated and
not consistent in different parts of Moldova, as highlighted already by the World Bank’s Trade
Diagnostic Study published in 2004. The current procedures increase direct and indirect costs
making Moldovan producers less attractive. Furthermore, they do not encourage the industry to
upgrade to CMT, Full-Package or Private Label, as the manufacturers would face further
complications in clearing customs and would need additional financing due to slow repayment of
duty and VAT. Drawback of both duty and VAT in Full-Package exports is applied by many
competing countries, but in Moldovan drawback applies to VAT only. Streamlining of customs
procedures with international assistance is highly recommended.

Anti-dumping duties are an instrument widely used by EU for protecting domestic industry from
international dumping and unfair competition. Anti-dumping action is initiated by EU industry
against an individual company or country, and the duties are set for particular products. Moldova
could exercise similar procedures regarding the very low cost garment imports from the Far East,
which disrupt the domestic market and make it difficult for Moldovan producers to compete.

As no accessories, such as buttons, rivets, labels, fusibles, sewing thread, etc. for apparel
products are produced in Moldova, they have to be imported. This is another barrier for the
industry to upgrade to CMT as they may not have direct contacts to international accessories
suppliers, and importing has to be financed. A feasibility study for establishing such industry in
Moldova should be carried out with donor or Government funding and presented to potential
international or domestic investors.

Project funding

Project funding schemes have been used in several countries for improving and upgrading
industries, as described earlier in this report in regards to Portugal. Most countries have also a
special Government agency for funding technology and R&D projects like TEKES in Finland
( A project funding scheme is highly recommended for improving
Moldovan apparel industry. The scheme should focus on capacity building, exports, technology
improvement, design and product development skills and upgrading to CMT, Full-Package,
Private Label and Own Label. For each project a detailed strategy and project plan supported by
a diagnostic study of the company would be required. Project funding would be more effective in
stimulating improvements and upgrading compared to direct export support or exemption from
VAT on machinery imports, as the companies would have to commit themselves to these projects
for development and upgrading.

The scheme could be co-funded by international donors and administrated by Moldovan

Government. The first step would be to develop a concept and a business plan for the scheme.

Center of competence

Competence centers operate in many countries. They are set up for a specific industry or for the
industry in general. These centers offer technical services for improving technology and
management skills in the industry. CITEVE ( is a competence center set up in
Portugal with the following mission:

‘CITEVE’s mission is the development of technical and technological capacities of the Portuguese
textile and clothing industries through innovation, encouragement and dissemination, promotion
of quality improvement and also as an instrument for the definition of industrial policies for the

The first step in this case as well would be to develop a concept.

4.2 Taxation and control of material remnants and waste

Import duty and value added tax are used in Moldova in the same manner as in most competing
countries. Import of material for processing (CM) is exempt of duty and VAT. Regarding more
value adding concepts like CMT, Full-Package and Private Label, drawback of VAT but not import
duty is available once the ready made goods are exported, while many competing countries allow
drawback of import duty as well. It should also be noted, that drawback of VAT in accessories
import may put the domestic accessories industry into an unfavorable position as VAT is include
in their prices when they sell to exporting garment industry.

Taxation of cutting remnants in CM and CMT are treated in Moldova in a same way as in Belarus,
Russia and Ukraine. They are regarded as material staying in the country and thus liable to VAT
and import duty, unless destroyed under the supervision of the Customs or returned to the
customer. For companies with no domestic sales this is a problem, as VAT does not apply to
export prices and the VAT on purchases prices can not be deducted. Cutting remnants can be up

to 15% - 25 % of the total material allocated for the order, so the cost impact is considerable.
Furthermore, taxation is not consistent in the various customs offices and companies are treated
differently. Elastic materials, such as circular knits with elastic yarns produce a further problem.
The total meters supplied declines before production due to relaxation and shrinking.

This, however, is not the case in Serbia or Asian countries, where cutting remnants are regarded
as garbage with no commercial value and therefore exempt of VAT or import duty. From the
beginning of next the import duty on fabrics will be eliminated in Serbia. In order to be competitive
Moldova must find a way to renew taxation on processing materials. Two alternative solutions
should be considered:

(A) All imports of textile materials are exempt from import duty and VAT as long as they are
used for manufacturing of garments for domestic market or for export. Cutting remnants
would not be an issue any longer, and this would encourage and stimulate the industry to
develop own brands and retail chains for domestic sales.

(B) Cutting remnants are regarded as garbage with no commercial value. Technical
instructions are prepared for the Customs regarding the remnants as follows:

1. A council of experts consisting of representatives of the Moldovan apparel industry,

Moldovan customs and an international expert should be appointed to draft technical
instructions for the Customs offices in regards to how to tax waste and cutting remnants.
2. The principle should be that the processing waste, consisting of remnants between
product components, edge and end loss, removed defected parts and roll ends should be
considered as garbage with no commercial value and therefore exempt from import duty
and VAT, unless the company sells them or uses them commercially.
3. Standards for cutting waste with certain tolerance should be set for different types of
products, for example trousers: 15 %, shirts:18 %, ladies fashion 25 %, etc. The
tolerance could be +/- 4 %. Once the cutting loss stays within these standards the waste
is free of duty and VAT. Further allowance for shrinking of elastic materials must also be
defined, depending on the amount of elastic yarns.
4. Each company should be obliged to keep records of their cutting loss by recording the
weight of cutting loss from each cut. When clearing customs the meters and weight g/m2
are reported and by using these figures the total weight of fabric received can be
5. Customs officials are allowed to check the records when necessary.


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