Essay: Why Producing Raw Cotton in Uzbekistan for Russia is a Smart Business Choice

Description of the product
As stated in the introduction, after much thought and consideration, our group decided for our MNC to produce raw cotton with home base located in Uzbekistan (Tashkent), and ship it to Russia, our target country. We substantiate our choice with the following reasoning: cotton, a soft, fluffy stable fiber, is very popular and in-demand as it is cultivated all around the world and can be found almost everywhere, be it apparel, home textiles, paper, cooking oil, animal feed, packaging, biofuels, even the USD notes or the key personal defense against the pandemic and the world’s most purchased product – surgical face masks. The benefits and versatility of cotton are numerous. Cotton’s unique and distinctive properties, its softness, breathability, insulation, absorbency, durability, and the fact that it possesses hypoallergenic and weatherproof qualities are the reasons why it is so appealing to customers. With the development of new techniques, cotton has also been imparted with values such as wrinkle resistance, oil or water resistance, which adds even more utility to an already highly functional fabric. Besides, it is the material of choice when it comes to baby clothing and is widely used in production of medical products. If executed properly, a business like this is bound to be a success.
Target country and its demand for the product
To begin with, Russia has traditionally been the largest importer and cotton trading partner of Uzbekistan. As stated in the USDA’s Foreign Agricultural Service report prepared by Caglar Erdogan (2020), “Uzbekistan exported 158.2 million m2 of cotton fabrics to Russia in MY 2019/20, which is a 27 percent increase compared to the previous MY. In the first two months of MY 2020/21, Russia imported 28.6 million m2 of Uzbek cotton fabrics”. Altogether, the Russian textile industry is known to rely heavily on the foreign investors (primarily Uzbekistan) rather than the local investors.
To continue, cotton is the most in-demand natural fiber in Russia and it holds 54% of all textile market share.
On top of that, in a business like this, there will be no language barrier. Despite not having official status, Russian language is Uzbekistan’s lingua franca and is an essential language for interethnic communication. Geographic proximity of two countries will also come handy. Hanson and Xiang (2004) authenticate that the gains from trade may be greater for nearby countries, due to the lowered cost of transportation and lesser risk of a disruption. Similarly, a country is said to gain greater security through cooperating with another country that is close by, increasing the benefits to cooperative behavior (Seiglie, 1988; Schiff and Winters, 1997).
All in all, there is a clear competitive advantage, if Uzbekistan’s historical experience, Russia’s demand and the relationship between two countries is taken into consideration.
The “RAXTA” company’s primary marketing strategy will be distributor marketing. This way we can avoid logistics issues and trade-related risks. The distributor will be responsible for the shipment of goods, and the accompanying customs formalities and paperwork.
Other than that, our MNC plans to heavily utilize all types of digital marketing. It includes E-commerce and social media promotion. The main objectives for this would be to increase our business visibility and brand recognition. Likewise, we desire to build customer trust and loyalty by establishing a two-way relationship between our company and customers, and social media is arguably the best way to achieve this.
We will create social media profiles for our business. The PR and IT team will be responsible to create the following:
http://www.raxta.com – our official website. There will be an overview of our MNC, information about our executive team, annual reports, our history, research and development sections, ethics and compliance sections, and a showcase of our products.
Instagram: @raxta – for regular posts, strong visual content, news and official announcements. By changing the account to a “business” one, we will be able to access the insights and built-in analytics tool.
Twitter: @raxta – mainly for connecting directly with customers and engaging with the consumer base.
Facebook, VK: “RAXTA” – private groups where paying customers can join, interact, pose questions, and have a personalized experience with the brand. Through page customization, we will highlight important information, such as contact information, hours of operation and others.
LinkedIn: “RAXTA” – networking, looking for potential business partners, posting strictly polished and professional content, establishing our thought leadership and authority in the textile industry and possibly attracting new talent.
Reddit: r/raxta – mainly to ask questions and get feedback on different parts of our business (ad campaigns, web design, new products, and more).
By regularly updating our social media profiles, we believe it will lead to increased traffic, better search engine optimization, improved brand loyalty, healthier customer satisfaction and much more.
Evidence and rationale that consumers in the target country would buy the product
Exceptional quality of our product.
As stated by Moazzam Mekan, IFC Regional Manager for Central Asia: “Cotton from Uzbekistan has been recognized in international markets for its good quality”.
In the meantime, Alexey Chichkin believes, despite the existing stable demand for innovative textile products in Russia at present, many of local producers may face with tough times this year already, due to the lack of the much-needed state support. Under the command economy, the textile sector was – on the one hand – generally neglected due to the systemic bias towards heavy industry.
Russia has had some recent struggles in their textile market. Their main focus was on making cotton goods, but due to the severe winters and weather, growing the natural elements for textile production in the country was challenging. Up until recently they had yet to focus on creating a scientific side of their textile industry to create synthetic fibers in house. This has hobbled their market by making them reliant on other countries’ exports to create their textiles.
“Cotton from Uzbekistan has been recognized in international markets for its good quality,” said Moazzam Mekan, IFC Regional Manager for Central Asia.
Special state subsidies are provided to farmers, particularly those involved in cotton production, for fertilizers, maintenance and operation of irrigation systems, fuel, and machinery services (Bobojonov, 2008). Cotton farmers benefit implicitly from a steady supply of agricultural inputs, such as fertilizers and diesel, that the GoU guarantees especially for cotton production. The share of implicit subsidies to cotton producers was 33 percent of all subsidies.
Foreign inputs purchase and hiring foreign labor to sell overseas
It will be elaborated further into the report, but we are planning to open a subsidiary in Russia, therefore, at the very least, the foreign labor will be required there. Howbeit, the distributor will follow the importing regulations and take all further costs.
Production and marketing expenses in the target country’s currency
The production is expected to be carried out in Uzbekistan. The labor and inputs are local, meaning that the production related expenses will be in the local currency – sum. As it was mentioned earlier, the marketing related costs are to be covered by our distributor in Russia. Outsourcing will be denominated in Ruble. To ensure the greatest quality of our product, we consider the possibility of hiring specialists from the target country to assist us. Their salaries will obviously be paid in Ruble.
Factors such as tariffs/quotas that can affect trade in goods/services between our home country and the target country and how they affect the demand for our product
· Political issues: the international boycott
The first and foremost problem is the ongoing international boycott. Since 2007, a coalition of human rights groups known as the Cotton Campaign has advocated with governments, companies and investors to use their leverage to end the “continuous and systematic human rights violation and state-led forced labor systems” of Uzbekistani cotton production. It is supported by more than 300 apparel manufacturers and retailers and its impact on the country’s textile industry is quite severe. That being said, “RAXTA” company will strictly comply with the national laws and not hire anyone under the age of 18 which is stated to be a minimum age for hazardous work as per Articles 241 and 245 of the Labour Code (22) and, let alone, anyone under age of 16 which is a minimum age for work in general as per Article 77 of the Labour Code; Article 20 of the Law on the Guarantees of the Rights of the Child; Article 49-1 of the Administrative Code (20-23). “RAXTA” will only practice ethical business and will fully respect the workers’ rights. Along with the child labor, it will be our direct responsinility to not permit any kind of forced or involuntarily labor, and no one must discriminate in hiring and employment practices. Corporal punishment and physical or mental coercion will also be strictly prohibited.
· Uzbekistan’s reputation tainted by its past experiences and the curse of cotton
Returning to the previous point, cotton production, not just in Uzbekistan but across the world has a history of plagued egregious human rights violations. The Uzbek government used to force farmers to grow cotton and deliver harvest quotas under threats of penalty, including the loss of the lease to farm the land, criminal charges, loss of social security benefits and fines. Despite the fact that a report for the year 2019, published and written by International Labour Organization (ILO) claims that systemic use of child labour and forced labour in Uzbekistan’s cotton industry has come to an end, some individuals, businesses and entities might still be hesitant about associating and partnering with Uzbekistan.
· COVID-19
In the COVID-19 pandemic year, the cotton value-chain, like others, has faced unprecedented disruptions. Due to coronavirus itself and the subsequent economic and logistic factors, the demand for cotton has decreased to 11.0% and the global trade of cotton has taken a downturn. The imposed global restrictions has resulted in shutting down of ginning mills due to cancellation and suspension of orders by customers.
· Tariffs
Due to unstable world situation, tariffs of CIS can increase sharply.
· Currency risk
Both Uzbekistan and Russia have relatively weak and unstable currencies. They are exceptionally sensitive to dollar change and fluctuation and often depreciate, denoting that there is a possibility of losing money due to unfavorable moves in exchange rates.