Manufacturing is forced to become export oriented

Photo: Pilseta24.lv

About the industry, in brief:

• the three whales of Latvian industry are: food processing, timber industry, as well as metal working and mechanical engineering. During the last years, the pharmaceutical industry undergoes rapid development;
• light industry, woodworking, metal working and mechanical engineering acquire up to 70% of their income at foreign markets;
• the value of the output product of processing industry has increased by 0,7 billion EUR (2010 vs 2009);
• 107’000 people have been employed in processing industry in 2009.

Latvia has historical roots of processing industry; however, significant changes have taken place during the last twenty years.

The result is significant decrease in the total contribution of industry to Gross Domestic Product (approx. 42% in 1990, only 12,2% – in 2010); what’s more, several sub-branches of processing industry have ceased to exist.

In 2009, the processing industry of Latvia has experienced the most rapid decrease in the amounts of production over the recent years due to both the decrease of demand and the landslide of prices. The processing industry production value has decreased by 2,13 billions EUR (2009 vs 2008).

In 2010 there were one of the fastest recovering: processing industry output growth was more than 0,7 billion euros.

In 2010 the best results of recovery has achieved woodworking, but also metal working, mechanical engineering, as well as other branches of industry show significant growth.

Many Latvian manufacturers did not have the need to focus on external markets during the period of 2004–2008 – the time, when consumption at the internal market was rapidly growing. In 2009, with the beginning of the market breakdown, the manufacturers have begun to reorientate themselves towards foreign markets.

Export now is considered as the only opportunity for the industry of Latvia. The main export partnership states for the output of Latvian industry are Lithuania, Estonia, the European Union, as well as Russia.

Latvian manufacturers are quite small and they cannot compete for large amount orders with the manufacturers from the states with very low expenses (China, India, Bangladesh, Pakistan etc.).

The opportunity of Latvia is its relatively small distance from the largest outlets of Europe, the production of niche products, as well as attractiveness for investors from the states, which deem the production base in European Union essential.

1Q, 2011: Manufacturing output was close to the pre-crisis achieved maximum

According to the data in June 2011 industrial production output according to calendar adjusted data at constant prices increased by 15.2%, including mining and quarrying – by 23.8%, in manufacturing - by 17.5% and in electricity and gas supply - by 5.2%. Experts indicate that in June 2011 manufacturing output according to seasonally adjusted data was close to the pre-crisis achieved maximum.
Growth in the 1st half of 2011 as compared to the same time period in 2010 was registered in such industries as production of timber (+14.4%), ready-made metal products (+36.1%), furniture (+9.0%), manufacture of other non-metallic mineral products (+34.9%), clothing (+48.9%), as well as computers, electrical and optical equipment (+19.3%). A drop has been registered in the production of beverages (-2.8%), chemical substances (-4.1%), and paper and paper products (-2.0%).
The Bank of Latvia experts indicate that the overall manufacturing data for the 1st quarter is very positive, yet one should be more cautious when evaluating the future prospects for the industry. The majority of operational and preliminary indicators point to a possible deterioration of the situation in manufacturing. The business confidence indicator collected by the European Commission (EU) improved only in July for the first time in the last five months, yet the majority of preliminary indicators (the expected output, employment expectations etc.) point to a possible drop in industrial production in the coming months. The index of new orders in manufacturing has also been dropping for four consecutive months and particularly rapidly in the export markets.
Majority of economic indicators characterising national economy point to a slackening of global economy and in the 2nd half of 2011 the industrial growth in the world will diminish, which can have a detrimental effect on the Latvian industry, particulary those enterprises that export raw materials (i.e. timber, metals).
The turnover of industrial production is gradually increasing in the domestic market. In the 1st half of 2011 as compared to the same period of time in 2010 according to calendar adjusted data turnover in manufacturing industry increased per 22,3%, according to the information provided by Central Statistical Bureau. In domestic market manufacturing turnover increased per 15.4% and export per 29,6%. Analysing separate turnover changes in manufacturing industry sector in the 1st half of 2011 (%) as compared to the 1st half of 2010 the fastest increase shows manufacture of machinery and devices (59.7%), ready-made metal products (41.2%) and manufacture of non-metallic mineral products (41%). As the Bank of Latvia experts indicate the dynamics of new orders is also growing more rapidly for production intended for the domestic market. Yet it must be noted that domestic consumption is not capable of carrying manufacturing and a deterioration of manufacturing output indicators is to be expected.
 

Factors affecting the industry

Food processing, timber industry, as well as the manufacturers of non-metallic products (construction materials) are primarily basing on the raw materials, which can be extracted in Latvia – agricultural products, timber, mineral deposits.

Metal working (with the exception of scrap metal processing), mechanical engineering, chemistry industry and light industry are based on the import of raw materials. These branches are extremely influenced by the adjustment of the worldwide prices on the main raw materials.

Such branches of industry, as light industry, woodworking, metal working and mechanical engineering, gain the lion share of their income (approximately 70–75%) abroad. The main risks for them are related to the devaluation of foreign market currencies, as well as to protectionism at the export markets.

State support

In 2010, the Coordination Council for Large and Strategically Important Investment Projects has been created.

Beginning with 2011, enterprise income tax abatements are renewed for investors, who will invest at least 7,1 millions EUR.

Processing industry output value (billion EUR)

TOP 5 largest companies of processing industry according to net turnover

Useful links

• The Association of Latvian Chemical and Pharmaceutical Industry
• Latvian wood industry portal
• Association of textile and clothing industry
• The Association of Mechanical Engineering and Metalworking Industries of Latvia
• Latvian Electrical Engineering and Electronics Industry Association