Georgia S Potential For Footwear Bags Accessories Manufacturing

Georgia's potential for
footwear, bags &

accessories
manufacturing
June 2018
Disclaimer
The study of the investment potential of manufacturing footwear, bags and accessories in Georgia is performed based on the Agreement N 32-
30-I signed on 16 March 2018 –between Enterprise Georgia LEPL and KPMG Georgia LLC. As per the Terms of Reference the scope of works
include:
— Stage I: Analysis of the footwear and bag manufacturing sectors in the world
— Stage II: Evaluation of the potential of Georgia
— Stage III: Benchmarking of Georgia with competitor countries
— Stage IV: Investment Proposals for footwear, bag & accessories manufacturing in Georgia
Our findings, observations and/or recommendations are those that we could reasonably derive from the procedures or scope of services
performed. The specific procedures performed were agreed with Enterprise Georgia LEPL (the Client) and were performed by us as set forth in
the Report.
Our work was carried out solely based on the publicly available research data.
We have indicated within our Report the sources of the information presented and have satisfied ourselves, so far as possible, that the
information presented in our Report is consistent with other information which was made available to us in the course of our work in accordance
with the terms of the Contract. We have not, however, sought to establish the reliability of the sources by reference to other evidence.
All recommendations, provided to you with/in this Report that refer to the future have some limitations in the sense that they are based on the
assumptions valid on the issuance date. These assumptions could change with time, after the date of this Report issuance, and so could lose
their value.
References to 'KPMG Analysis' in this Report indicate only that we have (where specified) undertaken certain analytical activities on the
underlying data to arrive at the information presented; we do not accept responsibility for the underlying data.
© 2018 KPMG Georgia LLC, a company incorporated under the Laws of Georgia; a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative 2
(“KPMG International”), a Swiss entity. All rights reserved.
Contents
Page
The contacts at KPMG
in connection with this
report are: — Stage I: Analysis of the footwear and bag manufacturing sectors in the world 4
Irina Gevorgyan — Stage II: Evaluate the potential of Georgia 93

Partner,
Head of Advisory department — Stage III: Benchmarking of Georgia with competitor countries 121
Tel: +995 (32) 293 57 13

— Stage IV: Investment Proposals for footwear, bag & accessories manufacturing in 137
Mob: +995 (599) 503 556 Georgia
[email protected]
Tamar Kavtaradze
Manager, Advisory
Tel: +995 (32) 293 57 13

Mob: +995 (599) 41 52 52
[email protected]
Stage I: Sector review
in the global and
regional context
Value chain analysis of
footwear, bags and
accessories industries
Abbreviations and Glossary of Terms
Abbreviations Glossary of terms
RIP Regional Investment Project OBM Original Brand Manufacturer IRAP Regional production tax
TASED Territories of Advanced Social and Economic ODM Original Design Manufacturer IRES Corporate income tax
Development OEM Original Equipment Manufacturer
Statista One of the world’s leading online portals
USD United States Dollars TRY Turkish Lira of statistics, market research and business intelligence
USA United States of America VAT Value Added Tax
The following measures were used throughout the report
RF Russian Federation CNY China Yuan Renminbi
1 pair of footwear = 0.6 kg
HS Harmonized System RUB Russian Ruble
EU European Union AED United Arab Emirates Dirham 1 unit of bag = 1.8 kg
CIS Commonwealth of Independent States Below are the exchange rates used throughout the report
COGS Cost of Goods Sold Average Exchange Rates, 2016
SEZ Special Economic Zone
EUR/USD 1.11
SPIC Special Investment Contracts TL/USD 0.33
R&D Research and Development CNY/USD 0.15
ITC International Trade Center RUB/USD 0.015
EUR Euro AED/USD 0.27
Source: xe.com
FDI Foreign Direct Investment
FTZ Free Trade Zone Average exchange rates
CIT Corporate Income Tax 2017A 2018F 2019F 2020F 2021F 2022F
FIE Foreign Invested Enterprise USD/EUR 0.9 0.8 0.8 0.8 0.8 0.8
DIFC Dubai International Financial Centre USD/RUB 58.3 60.5 60.2 60.7 60.3 58.9
USD/AED 3.7 3.7 3.7 3.7 3.7 3.7
UAE United Arab Emirates
USD/TRY 3.6 4.0 4.2 4.4 4.6 4.8
LLC Limited Liability Company USD/CHY 6.8 6.4 6.6 6.6 6.7 6.8
IIC Investment Incentive Certificate Source: Economic Intelligence Unit
Value chain analysis of footwear, bags and accessories industry
Overview of the structure of footwear, bags and accessories industry

Industry overview
 Key factors in the footwear, bags and accessories industry are tradition of innovation, successful introduction of products, fashion,
demographics, age and population growth. The profitability of firms is directly linked to their ability to satisfy the continuously evolving
consumer preferences. Advertising and marketing of brand names is essential for sales growth and product differentiation. Brands
extensions are common strategy for the industry to increase market share and customer reach (e.g. Steve Madden, DSW, COACH, etc.)
 Main industry players are companies involved in the design, manufacturing, wholesaling, and retailing of various products, including
men’s, women’s, and children’s footwear, bags and accessories.
 The integration among the industry manufacturers is not vertical. Many companies outsource production to manufacturing vendors in
emerging markets to reduce labor costs, improve the scale of production, and focus on design, wholesaling, marketing, and retail
activities.
 The main financial drivers in the industry include consumer confidence, disposable income and supply-chain costs (labor,
transportation and raw materials).
Footwear brands Bags and accessories brands

Footwear sector includes athletic, casual, and dress shoes, as well Bags and accessories are mainly differentiated into 3 major
as boots, sandals, and slippers. Major companies (brands, country) categories: fashion (e.g. handbags and purses), business (e.g.
in the sector include Nike Inc. (NIKE, USA), Skechers briefcases) and travel. The major representative companies
(SKECHERS,USA), Wolverine World Wide (Chaco, Keds,
(brands) in the industry include Gap Inc. (GAP), H&M (H&M),
Wolverine, etc.,USA), Crocs (CROCS, USA), Adidas AG (adidas,
Germany), Puma SE (PUMA, Germany), Asics (asics, Japan), Inditex (ZARA), Guess (GUESS), PVH (Calvin Klein and Tommy
Tod’s (TOD'S, Italy), etc. Global brands have a large number of Hilfiger), Burberry Group Plc. (Burberry).
subcontractors for manufacturing around the world. For instance,  Leading luxury brands in handbags, purses and accessories
Nike has about 556 subcontractors, of which 28 located in the EU, market are Michael Kors, Chanel, Prada, Givenchy, Gucci,
228 – in Asia, 7 – in the Middle East, 131 – in China and 4 – in Hermes, Coach, Louis Vuitton, etc
Turkey. Mainly there is no clear commitment for companies  Famous brands for travel bags, briefcases include
to publish the list of their subcontractors. Samsonite, Delsey,Travelpro, Victoniox, etc.
Value chain analysis of footwear, bags and accessories industry (1/3)

Production inputs Value Chain Analysis
Main raw material inputs used in the footwear, bags and accessory
sectors include production materials (e.g. leather, cotton, nylon,
polyester, rubber and oil, as well as accessory materials (e.g.
precious metals and stones)) and packing materials.
Raw materials are often inspected upon delivery or a day after.
Local and international producers, also dealers/merchants are the
key suppliers of materials. Main raw material supply countries are
located in Asia and Europe (China, India, Vietnam, Indonesia,
Ethopia, Italy, etc.)
Manufacturing and design
Depending on the type of the product and size of the firm, the
manufacturing processes varies. Production in medium-size
enterprises is more organized and automated, while small
enterprises, generally, have no established system in managing
production.
The key stages of production process of footwear include drafting of
designs, production of prototype, assembly, quality control and final
packaging. The manufacturing is conducted by either company itself
or independent contract manufacturers/vendors.
Depending on the degree of involvement in the manufacturing
process, three types of producers are differentiated:
 OEM (Original Equipment Manufacturer): Purchaser provides
own specifications, licenses the manufacturer to make finished
products, and later sells the merchandise under its own brand
name. Source: KPMG Analysis

 ODM (Original Design Manufacturer): designs and produces the Lion’s share in manufacturing belongs to Asia (China, Vietnam,
finished product, but sells to wholesalers instead of selling Indonesia, India, etc). Products for export are manufactured
directly to the market. Pou Chen Group, claiming to be the largest according to internationally recognized guidelines.
athletic footwear manufacturer in the world, acts as an OEM
and/or ODM for renown brands such as Nike, Adidas, Reebok, Packaging and control
Asics, Under Armour, New Balance, Puma, Converse, Salomon Before final packaging the products undergo thorough quality check.
and Timberland. Production monitoring is conducted through budgeted material
 OBM (Original Brand Manufacturer): Entity markets their own consumption, daily and work-in-progress and final reports, delivery
branded products that are either the entire products or and other forms. Packaging materials for firms include boxes, labels
components produced by a second party. They sell the goods and paper linings, etc.
under their own brand name in order to add value. The OBM is Transportation and delivery/export
responsible for all stages of the entire value chain from R&D to Products are shipped to retail stores/outlets, wholesale customers
sales and marketing. An example of a footwear OBM is ISCA
via express delivery providers and common carriers. Some
International footwear group that designs, produces and sells own
brands. companies consolidate warehousing and shipping functions into
own distribution centers.
In case of production of bags, cutting, sewing, assembly and quality
Larger manufacturers bypass wholesalers and distribute footwear
control are usually done in-house. Most bag manufacturers have
cutting, sewing, embossing and printing equipment at their factories. products in own retail outlets. Key participants in the chain include
wholesales, retailers and intermediary agents. The table below
At various stages, quality control team conducts random inspection illustrates the shares of the top five exporting countries in the world’s
and testing of semi-finished and finished products using special export of footwear, bags and accessories.
tools (e.g. micrometers, tensile testers, etc.). In addition, large
Shares of top exporting countries in the world's export
companies also maintain a quality control staff near foreign
Footwear Bags & Accessories
manufacturers to control supply chain process from product design
Country 2015 2016 2017 Country 2015 2016 2017
to manufacturing. China 39.9% 36.2% 34.0% China 41.5% 37.9% 37.4%
Product designs are carefully developed by the in-house designer Viet Nam 9.3% 10.3% 14.0% Italy 10.7% 11.1% 11.8%
team, supported with a strong marketing team, which analyzes Italy 7.8% 8.2% 7.9% France 8.4% 9.3% 9.6%
Germany 3.9% 4.6% 5.3% Hong Kong, China 7.1% 6.5% 6.1%
sales, market trends and consumer preferences to identify market
Belgium 4.0% 4.6% 4.6% Viet Nam 3.6% 4.1% 5.1%
opportunities and each season's design process.
Source: ITC

Marketing and sales industry, undermining the role of offline retailers and shops in
In most cases the wholesalers act as the link between the the value chain. Specifically, this is important for recognition of
manufacturers and the retailers, which in turn sell to the general small brands. In addition, international sales allow companies
public. Some large-scale chain retailers skip this stage by contracting greater customer reach and create opportunities to expand.
production of their specific designs directly to footwear — New emerging technologies are expected to shape the
manufacturers. Retailers of footwear exist in a multitude of forms and customer experience and the efficiency of e-Commerce in
sizes. Online retailers have grown in significance in recent years different ways. Due to virtual “fitting rooms”, customers will have
ensuring high online revenues, which is thanks to the presence of an option to create 3D avatars, to better feel for the products.
multichannel retailers. E-commerce sales are increasingly important Less returns (thus, reduced costs for the vendor), higher
for the industry sales. Manufacturers may sell items directly to the customer satisfaction are the key motives, leading to
consumer via their company's website, or through discount retail
sites. According to Statista the share of e-commerce in the global optimization of distribution, also marketing and sales channels.
retail business has risen from 7.4% in 2015 to 8.6% in 2016 and to a — “Fast fashion” retailers (i.e. Zara, H&M) decrease the time
new high of 10.2% in 2017. It is expected that the figure will reach between picking up trends and making them available for their
11.9% in 2018 and as high as 17.5% in 2021. customers (i.e. “time to market”), through optimized value
chains. For instance, Zara produces six months in advance to
US is the largest consumption market for the companies, followed by only 15% - 25% of a season’s line. The rest of the product is
Europe (Germany, France, Italy UK), South America and Asia-Pacific.
Key participants in the chain include, retailers (department stores and manufactured during the season by quickly picking up the
specialty stores), independent sales representatives and online styles and designs based on ongoing market research and
shops. Marketing activities are conducted through several channels, continuous feedback collected by the store managers. Zara
including direct marketing activities and national, regional and local also has extra capacity on hand to respond to demand as it
advertising (e-mails, catalogs, TV advertisements, cooperative develops and changes.
advertising programs with major retail customers, etc.). — Own label collections suggested by known brands and online
Market trends and opportunities shops (e.g. Asos) allow greater product differentiation from
other vendors, as well as higher margins due to bypassing the
Nowadays, several industry trends are changing the conventional middleman. This promotes sales and improves market
value chain process flow. Some of key trends and industry positioning.
opportunities include:
— Customer data analysis allows companies to determine
‒ Internet sales create sales channel for both wholesalers and customer needs and tastes, identify shopping behaviors and
retailers to place orders and make purchases. The growth in e- develop products tailored to customer expectations and
commerce sales and the willingness to shop without boundaries
changes the structure and processes of marketing and sales in the preferences, thus, ensuring greater customer satisfaction.
Analysis of the footwear and bag manufacturing sectors in the selected regions
Comparative Analysis
Based on the results of the performed market study of the sectors footwear, bags and accessories the following has been identified:
Footwear
 For the period of 2013-2017 only EU and Turkey had a positive CAGR of footwear export value equaling to 2.6% and 1.5% correspondingly.
For the same period Middle East reported the highest decrese in the export value of footwear equaling to negative CAGR of 12.5%.
 For the period of 2013-2017 China reported the highest CAGR of footwear import value equaling to 16.9%, while the highest decrease of the
same indicator was reported by Turkey equaling to negative CAGR of 9.2%.
 For the forecast period of 2018-2022 the consumption value of footwear in Russia will have the highest increase equaling to CAGR 2.3%,
while the same indicator will have the highest decrease in Turkey equaling to negative CAGR of 3.2%.
 For the forecast period of 2018-2022 the production value of footwear in China will have the highest increase equaling to CAGR 2.85%, while
the same indicator will have the highest decrease in Turkey equaling to negative CAGR of 2.87%.
Bags and Accessories
 For the period of 2013-2017 only EU had a positive CAGR of bags and accessories export value equaling to 3.4%. For the same period
Middle East reported the highest decrese in the export value of bags and accessories equaling to negative CAGR of 16.6%.
 For the period of 2013-2017 China reported the highest CAGR of bags and accessories import value equaling to 8.2%, while the highest
decrease of the same indicator was reported by Turkey equaling to negative CAGR of 13.9%.
 For the forecast period of 2018-2022 the consumption value of bags and accessories in Russia will have the highest increase equaling to
CAGR 3.3%, while the same indicator will have the highest decrease in Turkey equaling to negative CAGR of 0.9%.
 For the forecast period of 2018-2022 the production value of bags and accessories in Middle East will have the highest increase equaling to
CAGR 6.4%, while the same indicator will have the highest decrease in Turkey equaling to negative CAGR of 0.7%.
Government Incentives
All the analyzed countries/regions do not have considerable government incentives specifically relevant to the sectors of footwear, bags and
accessories, however, all the coutries/regions have FTZs and/or SEZs, which offer favorable investment climate for the foreign investors.
Note: The detailed analysis of the selected regions/countries is included in the following sections
Analysis of the footwear,
bags and accessories
manufacturing sectors in EU
Analysis of the footwear and bag manufacturing sectors in EU
Market Trends of Footwear

Footwear export and import value trend Consumption volume forecast of footwear in Italy
180
80.0 20% Women's Footwear
13%
11% 10% 120 83 83 83 83 84
Men's Footwear
mln units
10%
9% 5% 8%
8% 57.3 Children's Footwear
USD bln
51.6 53.6
40.0 48.3 3% 49.5 59.8 0% 60
44.7 43.2 45.1 61 62 62 63 63
(6%) 55.4
(10%) 21 22 22 22 23
(11%) 0
2018 2019 2020 2021 2022
Source: Euromonitor
0.0 (20%)
2013 2014 2015 2016 2017 Consumption value forecast of footwear in Italy
Export Import 10
Export growth rate (right axes) Import growth rate (right axes)
Source: ITC
During the period of 2013-2017 both EU’s footwear exports and imports Women's Footwear
in value terms increased at CAGRs of 2.6% and 3.7%, correspondingly. 4.7 4.6 4.5 4.6
USD bln
4.6
Italy was the EU’s top footwear exporting country in the analyzed period, Men's Footwear
5
with an average share of 25% in EU’s total footwear exports. Children's Footwear
While Italy’s footwear consumption in volume terms is forecasted to rise 2.8
2.8 2.7 2.7 2.7
at a moderate CAGR of 0.55% during the period of 2018-2022, the
consumption in value terms is forecasted to slightly decline - at a CAGR 0.9 0.9 0.9 0.9 0.9
of 0.2%. 0
2018 2019 2020 2021 2022
Although forecasts for the market growth are moderate, according to the
Euromonitor, it is expected that as a result of economic recovery Italian 13.8 13.8 14.1 14.3 14.6
consumers will have more money to spend on footwear. Consequently, it
is expected that there will be a rise in demand for high-quality and Production value forecast, USD bln
premium products as well as more functional footwear, including sport-
specific footwear. Even though Italian consumers are likely to remain Source: (1) Euromonitor, (2) KPMG Analysis
price-sensitive when buying footwear, the offer of better value for money Besides, sports-inspired footwear and performance footwear are
is expected to contribute to future value consumption growth. expected to be very popular over the forecast period.
Note: The list of EU countries is included in the analysis is presented in Appendix 4
Market Trends of Bags and Accessories

Bags and accessories export and import value trend Consumption volume forecast of bags and accessories in Italy
40.0 15% Backpacks
12% 11% 4.1 4.1 4.2 4.3 4.3
30 4.1 Business Bags
10% 3.7 3.7 3.8 3.8
10% 3.8 3.8
mln units
7% 7% 5.0 5.0 4.9 4.9 Handbags
6% 5.1 5.0
5% 20 2.2 2.3 2.3 2.4
26.6 27.5 5% 2.1 2.2 Crossbody Bags
25.5 24.3 25.0 25.2 26.1 25.7 29.1 4.8 4.8
27.1 4.9 4.8 4.8 4.8
USD bln
20.0 Duffel Bags

2% 0% 10
8.2 8.5 8.8 9.0 9.1
8.0 Wallet and Coin Pouches
(5%) 1.3 1.3 1.3 1.3 1.3 1.4
3.0 3.1 3.2 3.2 3.3 Other Small Bags
(5%) 0
3.0
2017 2018 2019 2020 2021 2022 Luggage
(8%)
- (10%) Source: Euromonitor
2013 2014 2015 2016 2017 Consumption value forecast of bags and accessories in Italy
Exporters Importers 4
Export growth rate (right axes) Import growth rate (right axes) Backpacks
Source: ITC 0.4
0.4 0.4 0.4 0.4 Business Bags
During the period of 2013-2017 both EU’s bags and accessories exports 3 0.4
0.1
0.1
0.2
0.1
0.2
0.1
0.2
0.1
0.2
0.1
0.2
0.1
and imports in value terms increased at CAGRs of 3.4% and 3.2%, 0.1 Handbags 0.1 0.1 0.1
USD bln
0.2 0.2 0.2 0.2
0.1 0.2 0.2
correspondingly. Italy was the EU’s top bags and accessories exporting 2 0.2 Crossbody Bags
country in the analyzed period, with an average share of 32% in EU’s
2.1 Duffel Bags
total bags and accessories exports. 1
1.8 2.0 2.0 2.0 2.0
According to Euromonitor, more positive volume and value development Wallet and Coin Pouches
of consumption is expected in Italy over the period of 2017-2022, at a 0.2 0.2 0.2 0.2 0.2
0.1 0.1 0.1 0.1 0.1 Other Small Bags
0.1 0.1
CAGR of 1.09% and 2.2%, correspondingly. However, low purchasing 0
2017 2018 2019 2020 2021 2022 Luggage
power and a great deal of political uncertainty continue to affect
purchases of bags and luggage nationwide, luxury brands in particular. 8.8 9.4 9.6 9.9 10.2 10.5
The consumption of luxury brand bags and luggage in Italy is notably
fueled by Chinese and Japanese tourists visiting and shopping in Rome, Production value forecast, USD bln
Milan and Florence. Due to financial or economic insecurities among
consumers many Italians consider bags and luggage to be luxury goods Source: (1) Euromonitor, (2) KPMG Analysis
that do not need to be bought or replaced on a regular basis. Low-priced result, volume consumption of bags and luggage are expected to
products and alternatives, therefore, might be more popular and as a perform slightly better than value consumption in the forecast period.
Import Analysis of Footwear, Bags and Accessories

Analysis of top importing countries of footwear to EU Analysis of top importing countries of bags and accessories to EU
In 2017 Germany, France and United Kingdom had the largest In 2017 France, Germany and United Kingdom had the largest import
import values of footwear among EU countries equaling to USD values of bags and accessories among EU countries equaling to USD
12,462 million, USD 7,948 million and USD 6,778 million 4,705 million, USD 4,634 million and USD 3,541 million
correspondingly. correspondingly. China, Italy and France were the EU’s key suppliers of
China, Viet Nam and Italy were the EU’s key suppliers of footwear bags and accessories both in 2016 and 2017. In 2016 the imported
both in 2016 and 2017. In 2016 the imported quantity from China, quantity from China, Italy and France equaled to 411 million units, 25
Viet Nam and Italy equaled to 2 billion pairs, 362 million pairs and million units and 15 million units correspondingly.
266 million pairs, correspondingly. In 2017 the EU’s total import of bags and accessories equaled to USD
In 2017 the EU’s total import of footwear equaled to USD 59,768 27,546 million, the 53.6% of which was performed from the top 3
million, the 42% of which was performed from the top 3 supplying supplying countries (China – 31.4%, Italy – 13.3%, France – 8.9%).
countries (China – 21.1%, Viet Nam – 11.1%, Italy – 9.7%).
The detailed breakdown of the EU’s footwear import value in 2017 is The detailed breakdown of the EU’s bags and accessories’ import
presented in the chart below. value in 2017 is presented in the chart below.
Footwear import value breakdown by country, 2017 Bags and Accessories import value breakdown by country, 2017
China China
Viet Nam Italy
19% 15%
21% Italy France
Germany Germany
1% 32%
Belgium 1% India
2% 2%
Netherlands 2% Viet Nam
2%
3% 59,768 Indonesia
2%
3%
27,546 Netherlands
11% France Spain
3% USD million 4% USD million
Spain Belgium
3%
Portugal 4% United Kingdom
4%
10% India Pakistan
4% 6% 13%
Romania Switzerland
5% 6%
5% 8% United Kingdom 9% Poland
Source: ITC Other Source: ITC Other
Export Analysis of Footwear, Bags and Accessories

Analysis of the top EU exporting countries of footwear Analysis of the top EU exporting countries of bags and
Both in 2016 and 2017, EU top exporting countries of footwear were accessories
Italy, Germany and Belgium1, which for both years together Both in 2016 and 2017, EU top exporting countries of bags and
accounted for around 51% of the regions footwear export in value accessories were Italy, France and Germany, which for both years
terms. together accounted for around 66% of the EU’s bags and
Footwear exports from the above-mentioned countries in volume accessories export in value terms.
terms were as follows in 2016: Bags and accessories exports from the above-mentioned countries
• Italy – 431 million pairs; in volume terms were as follows in 2016:
• Germany – 303 million pairs; • Italy – 41 million units;
• Germany – 48 million units;
The chart below illustrates the EU footwear export values by country • France – 24 million units.
in 2017. The chart below illustrates the EU bags and accessories export
values by country in 2017.
Footwear export value breakdown by country, 2017 Bags and Accessories export value breakdown by country, 2017
Other EU countries 4,846

Slovakia 1,158 Other EU countries 2,642
Poland 1,488 Poland 531
Romania 1,524 Czech Republic 609
United Kingdom 2,157
United Kingdom 1,139
Portugal 2,271
Spain 1,369
Spain 3,188
Belgium 1,468
Netherlands 3,677
France 3,700 Netherlands 2,166
Belgium 6,592 Germany 2,552
Germany 7,615 France 7,460
Italy 11,315 Italy 9,177
0 2,000 4,000 6,000 8,000 10,000 12,000 0 2,000 4,000 6,000 8,000 10,000
Source: ITC mln USD mln USD
Source: ITC
Note (1): The data on the export volume from Belgium is not available
Trade Analysis of Footwear

EU trade analysis by product
The chart below illustrates the EU footwear trade breakdown by product value for 2016 and 2017. In addition, the chart identifies the top three
footwear products based on trade values in 2016 and provides trade volumes for the selected products.
For the period of 2016-2017, the highest increase in the import value was reported by the “Sports footwear, incl. tennis shoes, basketball shoes,
gym shoes, training shoes and the like, with outer soles of rubber or plastics and uppers of textile materials” equaling to 20.7%. While the
“Footwear with outer soles of rubber or plastics and uppers of textile materials (excluding sports footwear, incl. tennis shoes, basketball shoes,
gym shoes, training shoes and the like, and toy footwear)” reported the highest growth of export value equaling to 26.4% for the same period.
Footwear trade breakdown by product, USD million
Import Volume
100% 1,879 1,963 Footwear with outer soles and uppers of leather (excluding covering the ankle,
3,799 3,815 incorporating a protective metal toecap, with uppers which consist of leather straps
2,458 2,458 a
90% 1,488 across the instep and around the big toe, sports footwear, orthopaedic and toy footwear)
6,423
1,373 In 2016 – 586 million1 pairs
6,185
5,198 5,745 Footwear covering the ankle, with outer soles and uppers of rubber or plastics (excluding
80% e waterproof footwear of heading 6401, sports footwear, orthopaedic footwear and toy b
6,733 7,063 footwear) In 2016 – 315 million1 pairs
4,270 4,705
70%
Footwear with outer soles of rubber, plastics or composition leather, with uppers of
7,802 4,045 5,112 leather, covering the ankle (excluding incorporating a protective metal toecap, sports c
60% 6,823 c footwear, orthopaedic footwear and toy footwear) In 2016 – 718 million1 pairs
5,169 f 6,047 Footwear with outer soles and uppers of rubber or plastics (excluding covering the ankle
50% 6,963 8,403 or with upper straps or thongs assembled to the sole by means of plugs, waterproof
b Export Volume
footwear of heading 6401, sports footwear, orthopaedic footwear and toy footwear)
40%
Footwear with outer soles of rubber or plastics and uppers of textile materials (excluding d
11,246 12,016 sports footwear, incl. tennis shoes, basketball shoes, gym shoes, training shoes and the In 2016 – 341 million1 pairs
30% 11,967 12,654
like, and toy footwear)
a d
Sports footwear, incl. tennis shoes, basketball shoes, gym shoes, training shoes and the e
20% In 2016 – 188 million1 pairs
like, with outer soles of rubber or plastics and uppers of textile materials
10% 10,809 12,073 9,217 10,184
Footwear with outer soles of rubber, plastics or composition leather, with uppers of f
leather (excluding covering the ankle, incorporating a protective metal toecap, sports In 2016 – 112 million1 pairs
0%
2016 2017 2016 2017
footwear, orthopaedic footwear and toy footwear)
IMPORT EXPORT
Other
Source: ITC
Note (1): The data on the import quantity from Belgium is not available and is not included in the figure of total import/export volume
Trade Analysis of Bags and Accessories

EU trade analysis by product
The chart below illustrates the EU’s bags and accessories trade breakdown by product value for 2016 and 2017. In addition, the chart identifies
the top three bags and accessories’ products based on trade values in 2016 and provides trade volumes for the selected products.
For the period of 2016-2017, the highest increase in the import value was reported by the “Handbags, whether or not with shoulder straps, incl.
those without handles, with outer surface of leather, composition leather or patent leather” equaling to 14.5%. While the “Travelling-bags,
insulated food or beverage bags, toilet bags, rucksacks, shopping-bags, map-cases, tool bags, sports bags, jewelry boxes, cutlery cases,
binocular cases, camera cases, musical instrument cases, gun cases, holsters and similar containers, with outer surface of plastic sheeting or
textile materials (excluding trunks, briefcases, school satchels and similar containers, handbags and articles carried in the pocket or handbag)”
reported the highest growth of export value equaling to 18.5% for the same period.
Bags and Accessories trade breakdown by product, USD million
Import Volume
100% Wallets, purses, key-pouches, cigarette-cases, tobacco-pouches and similar articles
1,348 1,477
2,297 2,593 carried in the pocket or handbag, with outer surface of leather, composition leather or
1,427 1,537 a
90% patent leather
1,929 2,107 In 2016 – 258 million units
1,679 1,677
Articles of leather or composition leather (excluding saddlery and harness bags; cases
80% 1,409 1,446 and similar containers; apparel and clothing accessories; whips, riding-crops and similar
2,626 2,837 b
1,714 1,952 of heading 6602; furniture; lighting appliances; toys; games; sports articles; In 2016 – 23 million units
70%
Articles of apparel, of leather or composition leather (excluding clothing accessories,
3,310 3,465 3,065 3,374 c
c e footware and headgear and parts thereof, and goods of chapter 95, e.g. shin guards,
60% fencing masks) In 2016 – 102 million1 units
4,541 Trunks, suitcases, vanity cases, executive-cases, briefcases, school satchels and similar
50% 3,966
b containers, with outer surface of plastics or textile materials
7,291 8,417 Export Volume
40%
d Handbags, whether or not with shoulder straps, incl. those without handles, with outer d
5,432 5,942 surface of plastic sheeting or textile materials In 2016 – 18 million units
30%
a 2,892 3,428
f Handbags, whether or not with shoulder straps, incl. those without handles, with outer e
20% In 2016 – 52 million units
surface of leather, composition leather or patent leather
10% 5,398 5,733 5,142 5,626
Travelling-bags, insulated food or beverage bags, toilet bags, rucksacks, shopping-bags, f
map-cases, tool bags, sports bags, jewellery boxes, cutlery cases, binocular cases, In 2016 – 83 million units
0%
2016 2017 2016 2017
camera cases, musical instrument cases, gun cases, holsters and similar containers
IMPORT EXPORT
Other
Source: ITC
Note (1): The data on the import quantity from Belgium is not available and is not included in the figure of total import/export volume
Analysis of Main Competitive Advantages

The European footwear, bags and accessories industry is strong thanks to the following competitive advantages:
• Long tradition and cultural heritage in the production of footwear, leather goods and fashion design, which has enabled the development
of a number of distinguishing traits such as the nurture of creative talent, innovations within traditional manufacturing methods and the
development of a skilled labor pool that enables the quality-led leadership of European footwear.
• Distinguished excellent design and quality, giving more kudos to the EU production. To compete in the top tier of the global footwear,
bags and accessories market against the Asian low-cost manufacturers, European manufacturers positioned themselves at the high-end
market (e.g. Italy produces more luxury shoes than any other country). The average export price of the main European countries is
significantly higher than the worldwide average, which is not only due to high production costs, but also due to products high quality and
design.
• Skills and competencies of the specialized workforce that allow maintaining the competitive edge in high-end production. The presence
of more than 40 specialized schools and training centers across Europe is an important indicator, demonstrating the robustness of the
footwear sectors cultural roots in Europe and extensive support/devotion to the development of a specialized workforce.
• Proximity between market and supply chain, as well as, free trade between EU countries. A well-structured and highly developed
supply chain within European territories (one of the most important leather goods markets in the world) provides a competitive advantage to
retailers in fulfilling immediate consumer demands. European footwear manufacturers benefit from a close co-operation with the suppliers
of materials and accessories, having easy access to important infrastructures and stakeholders, such as industry associations, trade
unions, research and development centers and training institutes.
• Potential and capability to innovate both process- and product-wise, i.e. innovations in fashion, style and product appearance,
advancement of footwear functionalities or product-services (such as customization of specialized footwear - orthopedic, protective, sports
footwear, etc.) and enhancement of factories and the supply chains effectiveness and efficiency.
Italy, being one of the top EU footwear and leather products exporters, apart from having the above-mentioned competitive advantages, ranks
first in the world tanning industry, with 17.2% of world leather exports in 2017 (even though Italy livestock resources are quite scarce). Italy
is recognized as having some of the best tanneries in the world with its extremely skilled tanning techniques and equipment. Moreover, Italy
is the world’s leading exporter of the machinery for preparing, tanning or working hides, skins or leather and for making or repairing
footwear or other articles of hides, skins or leather, with more than 40% of world exports (2017).
Production Analysis of Footwear, Bags and Accessories by countries

In 2016 the EU’s total production value of footwear equaled to USD 20,657 million, with top three producers of Italy (51.3%), Spain (12.8%)
and Portugal (10.8%). In volume terms, 546 million pairs of footwear were produced in EU countries in 2016, with top three producing
countries being Italy (30.2%), Spain (18.7%) and Portugal (12.9%).
In 2016 the EU’s total production of bags and accessories equaled to USD 10,916 million, with top three producers of Italy (52.2%), France
(15.2%) and Spain (6.4%). In volume terms, 152 million units of bags and accessories were produced in EU countries in 2016, with top three
producing countries being Italy (43.5%), France (9.1%) and Spain (8.7%).
The charts below illustrate the footwear, bags and accessories production values by EU countries in 2016.
Footwear production value breakdown by country, 2016 Bags and Accessories production value breakdown by country, 2016
Other EU countries 1,874 Other EU countries 1,323
Austria 325 United Kingdom 133
France 351 Croatia 157
Poland 465 Germany 290
Germany 736 Romania 379
Romania 1,447 Hungary 572
Portugal 2,231 Spain 704
Spain 2,635 France 1,663
Italy 10,594 Italy 5,696
- 2,000 4,000 6,000 8,000 10,000 12,000 - 1,000 2,000 3,000 4,000 5,000 6,000
mln USD mln USD
Source: Eurostat Source: Eurostat
Production and Consumption Analysis of Footwear

EU production and consumption analysis by product
In 2016 the footwear with leather uppers had both the highest production and consumption values with the production volume equaling to
around 338 million pairs. It is worth mentioning that the production value exceeded the consumption value of the footwear with leather uppers
by around USD 340 million, which shows that the local customer demand was fully met by the local production and even exceeded in 2016.
The products “Footwear with rubber or plastic uppers”, “Footwear with textile uppers” and “Sports footwear” had the highest gaps between the
consumption and production, with the consumptions exceeding by USD 3.7 billion, USD 3.2 billion and USD 2.1 billion correspondingly.
The graph below illustrates the detailed analysis of the EU’s footwear production and consumption in 2016.
EU footwear production and consumption, USD million, 20161

16,000
13,059
14,000 13,399
12,000
10,000
8,000
6,000
4,208 4,183 3,973
4,000 2,842 3,452
1,422
2,000 699 1,101 793
368 525
202 225 14 231 148 30
0
(61)
(2,000)
Waterproof footwear Footwear with Sports footwear Ski footwear Parts of footwear Footwear with Footwear Footwear with textile Footwear with Other footwear with
rubber or plastic wooden parts incorporating a uppers leather uppers plastic and rubber
uppers protective metal toe- parts
Production Consumption cap
Source: ITC, Eurostat
Note: (1) The mapping of the product labels is presented in Appendix 1
(2) The figures of consumption are estimated by KPMG
Production and Consumption Analysis of Bags and Accessories

EU production and consumption analysis by product
In 2016 the handbags had the highest production value with the production volume equaling to around 55 million units. It is worth mentioning
that the production exceeded the consumption of handbags by around 3.1 billion dollars, which shows that the local customer demand was
fully met by the local production and greatly exceeded in 2016.
The products “Travelling bags”, “Trunks, suitcases, vanity cases, briefcases, school satchels and similar containers of leather, composition
leather, patent leather, plastics, textile materials, aluminum or other materials” and “Gloves, mittens and mitts” had the highest gaps between
the consumption and production, with the consumptions exceeding by USD 2.9 billion, USD 735 million and USD 386 million correspondingly.
The graph below illustrates the detailed analysis of the EU’s bags and accessories’ production and consumption in 2016.
EU bags and accessories production and consumption, USD million, 2016
5,000 4,493
4,500
4,000
3,274
3,500
3,000
2,500
1,804
2,000 1,334 1,337
1,348 1,304
1,500 1,154 533
884
1,000 599 411 450 491 492 533
105 169 242
500 64 93 162
0
Trunks, suitcases, Travelling bags Gloves, mittens and Handbags Articles normally Belts and Clothing Articles of apparel Articles for technical Articles of leather or Saddlery and
vanity cases, mitts carried in pocket or bandoliers, of accessories of of leather or of use, of leather or of composition harness
briefcases, school handbag leather or leather or composition leather composition leather leather, n.e.c.
satchels and similar composition leather composition leather
containers of
leather, composition
leather, patent Production Consumption
leather, plastics,
textile materials,
aluminium or other
materials
Government Support Mechanism and Incentives in Italy (1/2)

Italy is selected for this analysis as the major exporting country in minimum EUR 30,000 annually during the period of 2015-2019,
EU. The government of Italy established different incentives to may be entitled to benefit from a tax credit up to EUR 5 million per
attract investments, especially to the southern Italy and certain year and per beneficiary.
depressed mountain areas in central and northern Italy. In particular, to the extent the annual R&D costs incurred are higher
Budget Law 2018 than the average of the same costs incurred in the 2012-2014 fiscal
years, the taxpayer can benefit from a tax credit equal to;
Budget Law 2018 includes a number of measures, which are stated to
be some initial steps towards promoting Italy as an attractive — 50% of the costs related to specific qualified personnel
destination for workers and capital. The key benefits are as follows; involved in R&D activities;
— Extension of the extra depreciation/amortization of certain — 50% of the costs related to research agreements signed with
tangible/intangible assets: universities, comparable research bodies or innovative start-
up businesses
The Budget Law 2018 extends the ‘Super' and ‘Hyper’ depreciation — 25% of the depreciation costs relevant IRES (corporate
regimes, as well as, the regime extra amortization of intangible assets income tax) tax purposes related to laboratory instruments or
for ‘hyper’ depreciation taxpayers. As a result, the taxpayers are equipment, with certain limits; and
allowed to increase their depreciation, thus reducing their taxable base. — 25% of the costs related to purchases of know-how, patent
 ‘Super’ depreciation – The new measure sets 30% increase in rights for industrial or biotechnological invention patents,
the depreciable cost but does not apply to vehicles and other product topography, semiconductors or new plant varieties
means of transportation,
 ‘Hyper’ depreciation’ - This rule allows a 150% increase in the FDI Visa
purchase cost of certain tangible assets used in the The Italian Ministry of Economic Development developed a digital
technological and digital development of enterprises, platform using an online bilingual platform in Italian and English to
 Extra amortization of intangible assets for ‘hyper’ radically simplify the bureaucratic process for foreign investors.
depreciation taxpayers - This rule allows a 40% increase in The new visa targets three types of foreign investors;
the cost of certain intangible assets
– Investors committing to stable investments of EUR 2 million in
– Full deduction, for IRAP (regional production tax) purposes, Italian governmental bonds that they can not sell for at least
of the cost of seasonal workers: For fiscal year 2018, resident two years,
corporations (including insurance and finance companies) can
deduct 100 percent of the cost of seasonal workers employed for – Investors buying a minimum of EUR 1 million in equity
at least 120 days in a two-year period. Deduction is allowed from instruments of an Italian company (with start-ups, this figure is
the start of the second contract signed with the same employer reduced to minimum of EUR 500,000),
within two years of termination of the first contract. – Investors that donate at least EUR 1 million to philanthropic
R&D Credit funding projects of public interest in fields such as culture,
education, scientific research or restoration of cultural assets.
Companies, that make investments in the R&D activities equaling to
Source: (1) Italy: Budget Law 2018 -New IRES and IRAP measures for enterprises, 2018, KPMG, (2) Mobility: tax alert, 2016, EY, (3) Taxation and Investment in Italy 2016, Deloitte (4) FDI intelligence,
(5) Startup Overseas, (6) Euromonitor
Government Support Mechanism and Incentives in Italy (2/2)

Law 181/89 Special Economic Zones
Law 181/89 establishes a support mechanism for re-industrializing On 27 February 2018 the Regulation for the establishment of SEZ
and revitalizing industrial areas. Companies of all sizes operating in came into force, which was mainly aimed to the development of
the mining and quarrying, manufacturing, power generation and southern Italy.
service industries that invest in subsidized areas can take According to the above mentioned regulation, two SEZs are
advantage of this mechanism. allowed for each of the 6 southern regions (Campania, Basilicata,
The subsidies consist of grants to cover up to; Puglia, Calabria, Sicily and Sardinia), which will have “zero
– 25% of eligible costs for the entire investment project in central bureaucracy” and additional tax benefits compared to the ordinary
and northern Italy, corporate tax system applicable in southern Italy (eligible
investments up to EUR 50 million).
– 40% of eligible costs for the entire investment project in the
South,
– Companies may also obtain subsidized financing covering 30%
of eligible investments. It consists of a soft loan with a 10 year
duration and pre depreciation in 3 years.
Free Trade Zones
The FTZs allow to bring goods of foreign origin to Italy without
payment of taxes or duties, as long as the material is to be used in
the production or assembly of a product that will be exported.
Moreover, the FTZ law also allows a company of any nationality to
employ workers of the same nationality under that country's labor
laws and social security systems.
There are two main FTZs in Italy – FTZ located in Trieste and FTZ
located in Venice. The FTZs offer the following key privileges;
– Deferment of duties and taxes for 180 days from the time that
the goods leave the free-trade zone to enter another EU
country,
– Transformation of goods free of any customs restraints,
– Obtaining exemption from any duties on products coming from
a third country
Source: (1) Italy: Budget Law 2018 -New IRES and IRAP measures for enterprises, 2018, KPMG, (2) Mobility: tax alert, 2016, EY, (3) Taxation and Investment in Italy 2016, Deloitte (4) FDI
intelligence, (5) Startup Overseas, (6) Euromonitor
manufacturing sectors in CIS
Analysis of the footwear and bag manufacturing sectors in CIS

Footwear export and import value trend Consumption volume forecast of footwear in Russia
7 40% 400
36%
6.5
5 20%
13% 5.3 10%
mln units
8% 188 192 198 Women's Footwear
4.5 182 184
10% 200
(3%)
Men's Footwear
USD bln
3 3.4 0%
3.3
(18%) 80 81 83 85 87 Children's Footwear
(18%)
1 0.64 0.69 0.57 0.47
(18%) 0.52 (20%) 46 47 48 50 52
0
2018 2019 2020 2021 2022
-1 (40%) Source: Euromonitor
(36%)
2013 2014 2015 2016 2017 Consumption value forecast of footwear in Russia
Export Import 14.0
Source: ITC
During the period of 2013-2017 both CIS footwear exports and imports in Women's Footwear
value terms decreased at CAGRs of 5% and 8.8%, correspondingly. 8.2 8.5
USD bln
7.8 7.9 7.9
Russia was the CIS top footwear exporting country in the analyzed 7.0
Men's Footwear
period, with an average share of 30% in CIS total footwear exports. Children's Footwear
Russia’s footwear consumption both in volume and value terms is
forecasted to rise - correspondingly at a CAGR of 2.2% and 2.3% during 3.0 3.0 3.0 3.1 3.2
the period of 2018-2022. International brands prevail over local brands, 1.3 1.3 1.4 1.4 1.5
although domestic players posted more dynamic value growth in 2017. 0.0
2018 2019 2020 2021 2022
According to Euromonitor, both in women’s and men’s footwear, there is
a growing demand for athleisure in Russia and the trend towards 9.0 9.3
8.9 9.0 9.7
athleisure is expected to continue driving sports footwear consumption in
the forecast period. Economic constraints, lower disposable income and Production value forecast, USD bln
desire for the high-status global brands attract many Russian consumers
to low-priced counterfeit products that reached record levels in 2017. Source: (1) Euromonitor, (2) KPMG Analysis
According to Euromonitor, the presence of counterfeit and unregistered
products is the main threat to the forecasted performance of footwear.
Note: The list of CIS countries is included in the analysis is presented in Appendix 4

Bags and accessories export and import value trend Consumption volume forecast of bags and accessories in Russia
120 8.5
8.0 8.2 4.8
2,000 37% 7.7 7.7 7.8
4.4 4.5 4.6 Backpacks
4.3 4.3 10.4 10.8
24% 30% 9.8 9.8 10.0 10.2
27% Handbags
mln units
80
1,500 8% Wallet and Coin Pouches
10%
9% 1,543 Other Small Bags
1,323
(9%) 90.1 92.6
(10%) 86.3 86.3 87.0 88.1
mln
1,000 (18%) (12%) 40 Other Bags

1,107
(14%)
884 (30%)
806
500 (33%) 3.9
0 3.6 3.6 3.6 3.7 3.8
(50%)
128 139 2017 2018 2019 2020 2021 2022
114 101 128
Source: Euromonitor
- (70%) Note: The category “Other Bags” includes categories “Luggage”, “Business Bags”, “Crossbody
2013 2014 2015 2016 2017 Bags” and “Duffel Bags”
Exporters Importers
Export growth rate (right axes) Import growth rate (right axes) Consumption value forecast of bags and accessories in Russia
Source: ITC 4
0.7
During the period of 2013-2017 both CIS bags and accessories exports 0.6 0.6 0.6 0.6
Backpacks
3 0.6 0.2
and imports in value terms decreased at CAGRs of 0.02% and 8%, 0.2 0.2 0.2 0.2 0.2
0.6
correspondingly. Russia was the CIS second top bags and accessories 0.5 0.5 0.5 0.6 0.6 Handbags
exporting country in the analyzed period, with an average share of 34%
USD bln
2
in CIS total bags and accessories exports. Wallet and Coin Pouches
2.0 2.1
During the period of 2017-2022 the consumption of Russia’s bags and 1 1.9 1.8 1.9 1.9 Other Small Bags
accessories both in volume and value terms is projected to see increase
at CAGRs of 1.5% and 2.4% correspondingly. According to Other Bags
0 0.2 0.2 0.2 0.2 0.2 0.2
Euromonitor, there is a rising trend for low-cost bags and accessories 2017 2018 2019 2020 2021 2022
due to lower consumer income in light of unfavorable economic
conditions. The development of bags and accessories market in Russia 2.7 2.5 2.6 2.7 2.8 3.0
is set to be determined by the performance of the national economy
over the forecast period.
Production value forecast, USD bln
The main potential threat to forecast growth is a worsening economic
situation resulting in a sharp lowering of consumer spending power. Source: (1) Euromonitor, (2) KPMG Analysis
Counterfeiting remains a major concern for bags and luggage players in Note: The category “Other Bags” includes categories “Luggage”, “Business Bags”, “Crossbody
Bags” and “Duffel Bags”
Russia with international brands as the main targets of counterfeiters.

Analysis of the top importing countries of footwear to CIS Analysis of the top importing countries of bags and accessories to
In 2017 Russian Federation, Kyrgyzstan and Kazakhstan had the CIS
largest import values of footwear among CIS countries equaling to In 2017 Russian Federation, Ukraine and Kazakhstan had the largest
USD 3,175 million, USD 302 million and USD 276 million import values of bags and accessories among CIS countries equaling to
correspondingly. USD 778 million, USD 87 million and USD 63 million correspondingly.
China, Viet Nam and Italy were the CIS’s key suppliers of footwear
both in 2016 and 2017. In 2016 the imported quantity from China, China, Italy and France were the CIS’s key suppliers of bags and
Italy and Viet Nam, equaled to 524 million pairs, 13 million pairs and accessories both in 2016 and 2017. In 2016 the imported quantity from
18 million pairs correspondingly. China, Italy and France equaled to 43 million units, 747 million units and
In 2017 the CIS’s total import of footwear equaled to USD 4,514 166 million units correspondingly. In 2017 the CIS’s total import of bags
million, the 72.6% of which was from the top 3 supplying countries and accessories equaled to USD 1,107 million, the 71.3% of which was
(China – 54.9%, Italy – 9.9%, Viet Nam – 7.8%). performed from the top 3 supplying countries (China – 53.1%, Italy –
The detailed breakdown of the CIS’s footwear import value in 2017 14.1%, France – 4.1%).
is presented in the chart below. The detailed breakdown of the CIS’s bags and accessories’ import value
in 2017 is presented in the chart below.
Footwear import value breakdown by country, 2017 China Bags and Accessories import value breakdown by country, 2017
Italy China
Viet Nam 1% 8% Italy

9%
1% 2% 1% France
1% 1% Turkey
2%
1% 1% India
Russian Federation 2%
1% 2%
2% Viet Nam
Indonesia 2%
3% Hungary
2%
3%
4%
4,514 India
Portugal
3% 1,107 Turkey
Russian Federation
55% 4% 53%
USD million Belarus USD million Pakistan
8% Poland 4% Germany
Spain Poland
United States of America
10% Romania 14%
Spain
Ukraine
Other
Source: ITC Other Source: ITC

Both in 2016 and 2017, top CIS countries exporting footwear were Russia, Ukraine and Belarus that in 2017 together accounted for about
79% of footwear regional exports in value terms. Footwear exports from those countries in volume terms were as follows in 2016: Russian –
19 million pairs; Ukraine – 17 million pairs; Belarus – 15 million pairs.
In 2016, top CIS countries exporting bags and accessories were Russia, Ukraine and Kazakhstan that together accounted for about 75% of
bags and accessories regional exports in value terms, while in 2017 the export of Kazakhstan dropped by 80% and Moldova entered the list
of top 3 exporting countries in CIS. Bags and accessories exports from the top exporting countries in 2016 in CIS were as follows: Russia –
726 thousand units; Ukraine – 227 thousand units; Kazakhstan – 282 thousand units.
The CIS countries' main competitive advantages in the footwear, bags and accessories industry are as follows:
• Sanctions imposed by Western countries on Russia that give a strong impetus to import substitution and further development of
manufacturing industry of Russia, which is one of the largest footwear, bags and accessories producer in CIS
• CIS growing middle-class population, which results in the increased buying power of CIS consumers and hence a larger market for
realizing CIS production within the region
The charts below illustrate the footwear, bags and accessories export values by CIS countries in 2017.
Other CIS countries 23 Other CIS countries 13
Moldova, Republic of 33
Armenia 7
Kyrgyzstan 52
Moldova, Republic of 15
Belarus 59
Russian Federation 46
Ukraine 171
Russian Federation 183 Ukraine 47
- 50 100 150 200 - 10 20 30 40 50

Source: ITC mln USD Source: ITC mln USD

CIS trade analysis by product
The chart below illustrates the CIS footwear trade breakdown by product value for 2016 and 2017. In addition, the chart identifies the top three
footwear products based on trade values in 2016 and provides trade volumes for the selected products.
For the period of 2016-2017, the highest increase in the import value was reported by the “Uppers and parts thereof (excluding stiffeners and
general parts made of asbestos)” equaling to 82.5%. While the “Parts of footwear; removable in-soles, heel cushions and similar articles;
gaiters, leggings and similar articles, and parts thereof (excluding outer soles and heels of rubber or plastics, uppers and parts thereof other
than stiffeners, and general parts made of asbestos)” reported the highest growth of export value equaling to 516% for the same period.
62 Import Volume
100% 114 Uppers and parts thereof (excluding stiffeners and general parts made of asbestos)
99 123 24 36
11 a
90% 332 490 In 2016 – 47 million pairs
33 71
Parts of footwear; removable in-soles, heel cushions and similar articles; gaiters,
80% leggings and similar articles, and parts thereof (excluding outer soles and heels of rubber b
555 19
748 or plastics, uppers and parts thereof other than stiffeners, and general parts In 2016 – 138 million pairs
70% c 72 53
Footwear covering the ankle, with outer soles and uppers of rubber or plastics (excluding
d
waterproof footwear of heading 6401, sports footwear, orthopaedic footwear and toy c
60% 490
756 71 footwear) In 2016 – 62 million pairs
63 Footwear with outer soles of rubber or plastics and uppers of textile materials (excluding
50% f sports footwear, incl. tennis shoes, basketball shoes, gym shoes, training shoes and the
570
53
like, and toy footwear)
Export Volume
40% b 817 44
Footwear with outer soles of rubber, plastics or composition leather, with uppers of d
86 leather, covering the ankle (excluding incorporating a protective metal toecap, sports In 2016 – 8 million pairs
30% footwear, orthopaedic footwear and toy footwear)
717 64
913 e Footwear with outer soles and uppers of rubber or plastics (excluding covering the ankle e
20% In 2016 – 6 million pairs
a or with upper straps or thongs assembled to the sole by means of plugs, waterproof
132 footwear of heading 6401, sports footwear, orthopaedic footwear and toy footwear)
10%
479 65 Footwear with outer soles of rubber, plastics or composition leather, with uppers of f
553
leather (excluding covering the ankle, incorporating a protective metal toecap, sports In 2016 – 7 million pairs
0%
2016 2017 2016 2017
footwear, orthopaedic footwear and toy footwear)
IMPORT EXPORT
Other
Source: ITC

CIS trade analysis by product
The chart below illustrates the CIS’s bags and accessories trade breakdown by product value for 2016 and 2017. In addition, the chart
identifies the top three bags and accessories’ products based on trade values in 2016 and provides trade volumes for the selected products.
For the period of 2016-2017, the highest increase in the import value was reported by the “Trunks, suitcases, vanity cases, executive-cases,
briefcases, school satchels and similar containers, with outer surface of plastics or textile materials” equaling to 54.3%. While the “Articles of
apparel, of leather or composition leather (excluding clothing accessories, footwear and headgear and parts thereof, and goods of chapter 95,
e.g. shin guards, fencing masks)” reported the highest growth of export value equaling to 236% for the same period.
Bags and Accessories trade breakdown by product, USD million Import Volume
100%
30 40 3 4 Wallets, purses, key-pouches, cigarette-cases, tobacco-pouches and similar articles
39 58 8 carried in the pocket or handbag, with outer surface of plastic sheeting or textile materials a
90% 19 In 2016 – 10 million units
77 94 6
3 Articles of leather or composition leather (excluding saddlery and harness bags; cases
80% b
68 105 and similar containers; apparel and clothing accessories; whips, riding-crops and similar
12 20 of heading 6602; furniture; lighting appliances; toys; games; sports articles; In 2016 – 1 million units
70% e
115 Articles of apparel, of leather or composition leather (excluding clothing accessories,
c 171 6 c
footware and headgear and parts thereof, and goods of chapter 95, e.g. shin guards,
60% 10 fencing masks) In 2016 – 5 million units
30 Trunks, suitcases, vanity cases, executive-cases, briefcases, school satchels and similar
50% 134 171 16 containers, with outer surface of plastics or textile materials
b Export Volume
40%
d
Handbags, whether or not with shoulder straps, incl. those without handles, with outer d
11 19
30% 190 f
surface of plastic sheeting or textile materials In 2016 – 114 thousand units
275
a Handbags, whether or not with shoulder straps, incl. those without handles, with outer e
20% In 2016 – 328 thousand units
surface of leather, composition leather or patent leather
28 35
10% 152 192 Travelling-bags, insulated food or beverage bags, toilet bags, rucksacks, shopping-bags, f
map-cases, tool bags, sports bags, jewellery boxes, cutlery cases, binocular cases, In 2016 – 442 thousand units
0%
camera cases, musical instrument cases, gun cases, holsters and similar containers
2016 2017 2016 2017
IMPORT EXPORT Other
Source: ITC
Analysis of the footwear and bag manufacturing sectors in Russia
Production and Consumption Analysis of Footwear, Bags and Accessories

Footwear consumption value Total footwear Russia’s production and consumption analysis by product
production value
Russia is the biggest manufacturer of footwear, bags and
14,000
accessories among the CIS countries. The graphs illustrate the
12,000
USD 8,071 2016
consumption value breakdowns by product of the footwear, bags
10,000 and accessories for the period of 2016-2017.
million
USD million
8,000 8,010
6,624
6,000 It is worth mentioning that in 2016 the consumption value exceeded
4,000 the production value of both footwear and bags and accessories by
2,513
3,065 USD 9,420 2017 the amounts equaling to USD 2,178 million and USD 572 million
2,000
1,336
million correspondingly. The image was the same in 2017 with the
1,111
0
2016 2017 production gaps equaling to USD 2,992 million and USD 732 million
Children's Footwear Men's Footwear Women's Footwear
for the sectors of footwear and bags and accessories
Source: (1) Footwear In Russia, 2017, Euromonitor International
(2) KPMG Analysis
correspondingly.
Bags and Accessories consumption value Total bags and accessories According to Euromonitor International, both in women’s and men’s
production value
4,000 footwear, there was a growing trend towards athleisure in Russia at
3,500 173 the end of 2017. A growing number of women stopped wearing high
USD million
195
143
3,000 USD 2,235 2016 heels in favour of a comfortable flat sole, aware of the harm that can
163 533
2,500 million be caused by high heels.
441
2,000
1,500 1,880
1,562
126
For the period of 2016-2017, Crossbody Bags faced the largest
1,000 150
177 USD 2,659 2017 consumption growth equaling to 26.1%, followed by Backpacks
500 141
0 157 76 192 91 million (22.8%) and Luggage (21%). According to the Euromonitor analysis,
2016 2017 the athleisure trend and casual styles stimulated consumption of
Backpacks Business Bags Crossbody Bags Duffel Bags crossbody Bags and Backpacks in 2017.
Handbags Wallet and Coin Pouches Other Small Bags Luggage
Source: (1) Bags And Luggage In Russia, 2017, Euromonitor International
(2) KPMG Analysis
Government Support Mechanism and Incentives in Russia (1/2)

Russia is selected for this analysis as the major exporting  Profit tax paid to the regional budget – 0-13.5% for up to 49
country in CIS. Recently, the Russian government works years (applicable tax rate in the RF is 17%)
intensively to attract foreign businesses thus expands the  Property tax – 0% for up to 10 years (applicable tax rate in the
number of offered tax incentives. RF is 2.2%)
Regional Incentives  Land tax – 0% for up to 5 years (applicable tax rate in the RF
is 1.5%)
The federal legislation grants the regional authorities wide  RF pension fund – 8-20% for 2017-20191 (applicable tax rate
opportunities to provide a series of tax incentives in the in the RF is 22%)
corresponding region.  Social insurance fund – 2-2.9% for 2017-20191 (applicable tax
— Profit tax: Regional authorities have the right to reduce the rate in the RF is 2.9%)
regional allocation of profit tax from 18% to 13.5%  Federal mandatory health insurance fund – 4-5.1% for 2017-
(consequently the minimum of the overall tax rate will be equal 20191 (applicable tax rate in the RF is 5.1%)
to 15.5%, which also includes the 2% owed to the federal A competitive advantage of a SEZ for investors is a reduction in
government), initial expenditure up to 30% on capital investment, ensured by tax
— Property tax: Regional authorities have the right to provide a exemptions, customs and social preferences as well as
reduced rate or exemption from property tax chargeable at the construction of general engineering and transport infrastructure
maximum rate of 2.2% of the cadastral or residual value of financed from the federal and regional budgets.
fixed assets (depending on the regional legislation) — Customs Privileges: Exempted customs tariffs on import of
Depending on the region other incentives may be provided by the machinery, equipment, raw materials in the SEZ territory,
regional authorities, such as land tax incentives, loans at the — Ready-To-Use Infrastructure: The infrastructural privileges
subsidized interest rates, etc.. include provision of engineering infrastructure, industrial
Special Economic Zones infrastructure, customs infrastructure and innovation
infrastructure
According to the Ministry of Economic Development of the Russian — Favorable Administrative Procedures: The administrative
Federation, there are 25 SEZs in the Russian Federation, including privileges include provision of a complex of public services in
9 Industrial productions SEZs. The SEZ residents in Russia have a one place (system of “one-window”) and the right to the land
number of tax, customs, infrastructural and administrative privileges. buyout, as well as, guaranteed sound investment climate
− Tax Exemptions: Tax exemptions include privileges of Special Tax Regimes
accelerated depreciation and accelerated deduction of R&D There are three special tax regimes, which are available for the
expenditure, as well as, other federal and regional tax investments in the Far east and Siberia: RIPs, TASEG and the free
privileges. The industrial production SEZ tax privileges include port of Vladivostok.
but are not limited to; – RIPs: One of the key privileges of the RIPs is that investors
may take advantage from the reduced profit tax rate;
Note (1): Applied for an Industrial Production SEZ residents who signed a contract with the SEZ Management company concerning technology innovative activity Source: (1) Doing Business in Russia,
2017, KPMG, (2) Special investment contract as a new instrument for investors support, (3) Doing Business in Russia, 2017, Deloitte, (4) Euromonitor
Government Support Mechanism and Incentives in Russia (2/2)

 A zero tax rate for the first 5 years after the resident makes a  5% on the profit tax (0% to the federal budget and not more
profit and 10% for the following 5 years for RIPs in Siberia or than 5% to the regional one);
the Far East;  0% of the land tax for 5 years;
 10% starting from the year in which the total amount of tax  0% of the property tax for 5 years and 0.5% for the next 5
incentives received equals the amount of capital investments years;
for RIPs in any region other than Siberia and the Far East.  10 days accelerated procedure for VAT refund
 In order to benefit form the privileges available for RIPs, the Special Investment Contracts
investors should meet certain criteria.
− TASED (Territories of Advanced Social and Economic As state support mechanisms, the SPICs were introduced by the
Development): In 2015 incentives became effective for TASED, RF legislation in 2015 as radically new incentives aimed at
which is a concept aimed at developing certain regions of the encouraging the development of the manufacturing and innovation
RF, e.g. Far East and others. According to the RF Ministry for sectors of the Russian economy, as well as welcoming foreign
the development of the Russian far east, currently there are 18 investors with localization plans to invest in the RF.
TASEDs in the RF. The key tax incentives available for TASED The main tax incentives of the SPIC are as follows1;
residents are as follows;  Federal budget: 0% tax rate;
 A declarative procedure for VAT refunds;  Regional budget: tax rate can be reduced to 0%;
 A reduced profit tax rate – 0-5% for the first 5 years, 12-20%  Accelerated depreciation coefficient;
for the next five years, depending on the region  Possibility to apply reduced property tax rate can be
 A reduced regressive social insurance contributions’ rate of stipulated by regional authorities;
7.6% rate for 10 years.  Other tax incentives can be established by
– Free Port of Vladivostok: The area has special customs regional/municipal authorities
regimes, tax, investment, and related regulation in accordance Regulatory measures for footwear, bags and accessories sectors
with the Federal Law of 12.10.2015 «On the Free Port of
Vladivostok». The special regime extends to extended to 15 According to the Russian Ministry of Industry and Trade, counterfeit
municipalities of the Primorsky Krai, including the capital of the footwear, bags and accessories reached record levels in 2017. To
region and to the key harbors of the Far East, including the combat illegal trade and counterfeiting, the RF governmental
Khabarovsk Krai (Vaninsky District), the Sakhalin Region bodies began to develop additional measures in 2017.
(Korsakovsky Urban Okrug), the Kamchatka Territory International brands are the main targets of counterfeiters,
(Petropavlovsk-Kamchatsky), the Chukotka Autonomous District especially the most coveted, in particular;
(Pevek), and the Primorsky Krai (Lazovsky Municipal District).
The key tax benefits available for the residents are as follows; – Footwear: NIKE and Adidas
 7.6% of the total amount of insurance fees for 10 years, upon
the receipt of the resident status within 3 years after the – Bags and accessories: Louis Vuitton, Prada, Gucci and
adoption of the law; Michael Kors.
Note (1): Incentives are provided in case of compliance with conditions stipulated by legislation – the preliminary analysis is required (amendments to the tax legislation specifying the conditions and
procedure for obtaining tax incentives are under consideration)
Source: (1) Doing Business in Russia, 2017, KPMG, (2) Special investment contract as a new instrument for investors support, (3) Doing Business in Russia, 2017, Deloitte, (4) Euromonitor
manufacturing sectors in
Asia and Middle East
Analysis of the footwear and bag manufacturing sectors in Asia and Middle East
Market Trends of Footwear in Middle East

Footwear export and import value trend Consumption volume forecast of footwear in UAE
30
6 16% 20%
11%
14% 5.46 10.5 10.9
6% 10.2
mln units
5.21 20 9.8 9.9
4.91 4.95 4.96 Women's Footwear
4 5% 0%
(5%) 0.1%
8.6 Men's Footwear
(5%) 8.0 8.1 8.3 8.4
10
USD bln
Children's Footwear
2 (20%) 6.9 7.3 7.6
6.4 6.6
(21%)
1.61 1.69 0
1.33 1.41 2018 2019 2020 2021 2022
0.94 (33%)
0 (40%) Source: Euromonitor
2013 2014 2015 2016 2017 Consumption value forecast of footwear in UAE
Export Import 4.0
Source: ITC
During the period of 2013-2017 Middle East’s footwear exports in value 3.0
1.3 1.3 Women's Footwear
1.2 1.2 1.3
terms significantly decreased – at a CAGR of 12.5%. At the same time
USD bln
footwear imports in value terms slightly increased - at a CAGR of 0.2%. 2.0 Men's Footwear
UAE was the Middle East’s second top (after Turkey) footwear exporting
1.4 1.5 1.5 Children's Footwear
country in the period of 2013-2017, with an average share of 33% in 1.4 1.4
1.0
Middle East’s total footwear exports.
UAE’s footwear consumption both in volume and value terms is 0.6 0.6 0.6 0.7 0.7
forecasted to rise - correspondingly at a CAGR of 2.8% and 1.3% during 0.0
2018 2019 2020 2021 2022
the period of 2018-2022. According to Euromonitor, in UAE sports
footwear has benefited from the developing health and wellness trend,
2.09 2.07 2.11 2.13 2.12
which has led to the population adapting to healthier lifestyles. Moreover,
as UAE consumers become more active, the demand for fashionable Production value forecast, USD bln
footwear that is comfortable is growing. Since the trend evolves across
footwear globally, the demand for athleisure in UAE will strengthen and Source: (1) Euromonitor, (2) KPMG Analysis
remain strong during the forecast period. Nevertheless, men greatly
appreciate the Western style of dressing, and wearing fashionable the consumption of sandals, typically worn by the local male
footwear is important within their working and social circles, population still remains in demand.
Note: The list of Middle East countries is included in the analysis is presented in Appendix 4
Market Trends of Bags and Accessories in Middle East

Bags and accessories export and import value trend Consumption volume forecast of bags and accessories in UAE
10
4.00 20%
14% 0.8 Backpacks
10% 8 0.8
10% 0.7 1.8
12% 0.7 1.7 Handbags
mln units
3.00 3.36 1% 0.6 1.6
0.6
3.06 6% 0% 6 1.4 1.5 0.7 0.8
Duffel Bags
2.97 1.3
0.6
0.6 0.4 0.4
2.73 0.5 0.4
(9%) 2.70 0.5
0.3 0.3 0.4
4 Wallet and Coin Pouches
mlrd
2.00 (10%)
3.9 4.1
(9%) 3.5 3.7
(12%) (22%) 3.2 3.3 Luggage
(20%) 2
1.00 Other Bags
1.0 1.0 1.1 1.2 1.3 1.3
(30%) 0
0.79 0.84 (36%) 2017 2018 2019 2020 2021 2022
0.54 0.49 0.38 Source: Euromonitor
- (40%) Note: The category “Other Bags” includes categories “Business Bags”, “Crossbody Bags” and
2013 2014 2015 2016 2017 “Other Small Bags”
Exporters Importers Consumption value forecast of bags and accessories in UAE
Export growth rate (right axes) Import growth rate (right axes) 1,800
Source: ITC 109 109
107 Backpacks
During the period of 2013-2017 both Middle East’s bags and accessories 103 104
334 351
101 316
exports and imports in value terms decreased at CAGRs of 16.6% and 1,200 279 292
131 131 Handbags
USD mln
267 129 131 22
2.8%, correspondingly. UAE was the Middle East’s second top (after 126 127 21 21 22
Duffel Bags
21 21
Turkey) bags and accessories exporting country in the analyzed period,
Wallet and Coin Pouches
with an average share of 34% in Middle East’s total bags and 600 976 1,026 1,051
877 924
accessories exports. 839 Luggage
During the period of 2017-2022 UAE’s consumption of bags and Other Bags
accessories both in volume and value terms is projected to see increase 0 55
2017
57
2018
57
2019
59
2020
60
2021
61
2022
at CAGRs of 5.9% and 4.1%, correspondingly. According to Euromonitor,
consumer confidence is expected to be affected as costs increase and 0.52 0.5 0.52 0.58 0.63 0.63
salaries stagnate, resulting in more cautious spending by consumers.
While fashion-conscious consumers will try to maintain a trendy and Production value forecast, USD bln
stylish image, they will do so by either shopping for brands at a cheaper Source: (1) Euromonitor, (2) KPMG Analysis
price abroad when travelling or waiting for special offers. Counterfeit Note: The category “Other Bags” includes categories “Business Bags”, “Crossbody Bags” and
goods can lower confidence and restrict spending; therefore, the second- “Other Small Bags”
hand or informal market is a potential threat to forecasted growth, According to Euromonitor, though Dubai will continue to strengthen its
especially for luxury bags and luggage. position as a design and fashion hub, it might witness some decrease
in terms of consumption value during the forecast period.
Import Analysis of Footwear, Bags and Accessories in Middle East

Analysis of the top importing countries of footwear to Middle Analysis of the top importing countries of bags and accessories to
East Middle East
In 2017 UAE, Saudi Arabia and Turkey had the largest import values In 2017 UAE, Saudi Arabia and Turkey had the largest import values of
of footwear among Middle East countries equaling to USD 1,448 bags and accessories among Middle East countries equaling to USD
million, USD 751 million and USD 676 million correspondingly. 1,017 million, USD 455 million and USD 301 million correspondingly.
China, Italy and Viet Nam were the Middle East’s key suppliers of China, Italy and France were the Middle East’s key suppliers of bags
footwear both in 2016 and 2017. In 2016 the imported quantity from and accessories both in 2016 and 2017. In 2016 the imported quantity
China, Italy and Viet Nam equaled to 508 million pairs, 13 million from Middle East equaled to 126 million units, 1 million units and 553
pairs and 11 million pairs correspondingly. thousand units correspondingly.
In 2017 the Middle East’s total import of footwear equaled to USD In 2017 the Middle East’s total import of bags and accessories equaled
4,960 million, the 71.6% of which was performed from the top 3 to USD 2,730 million, the 76% of which was performed from the top 3
supplying countries (China – 55%, Italy – 9.4%, Viet Nam – 7.2%). supplying countries (China – 55.1%, Italy – 11.3%, France – 9.2%). The
The detailed breakdown of the Middle East’s footwear import value in detailed breakdown of the Middle East’s bags and accessories’ import
2017 is presented in the chart below. value in 2017 is presented in the chart below.
China
China
9% Italy
1% 11%
1% Viet Nam 1% Italy
1%
1% 2%
2% 2% Turkey France
2%
2% Indonesia 2%
3% 2% India
India
3% 4,960 Hong Kong, China
Spain
5%
2,730 Germany
4% Hong Kong, China

55% 55%
USD million France 9% USD million
Spain
7% Thailand
United States of America Viet Nam
Portugal 11%
9% United States of America
Germany
Other Other
Source: ITC Source: ITC
Export Analysis of Footwear, Bags and Accessories in Asia1

Both in 2016 and 2017, top Asian countries exporting footwear were China, Vietnam2 and Indonesia, which for both years together accounted
for about 86% of footwear regional exports in value terms. Footwear exports from those countries in volume terms were as follows in 2016:
China – 7 billion pairs; Indonesia – 400 million pairs. Both in 2016 and 2017, top Asian countries exporting bags and accessories were China,
Hong Kong and Vietnam2, which in both years together accounted for about 83% of bags and accessories regional exports in value terms.
Bags and accessories exports from those countries in volume terms were as follows in 2016: China – 2 billion units; Hong Kong – 8 million
units. Asia’s main competitive advantages in the footwear, bags and accessories industry are as follows:
• Availability of low-cost workforce, which is the main reason why these countries are important manufacturing destinations for some of the
world’s leading footwear, bags and accessories brands. However, as wages and production costs in these countries continue to rise, they
gradually lose their unique low-cost manufacturing advantage over other competitors
• Average expenditure growth on clothing and footwear due to rising incomes and improving living standards and accelerated
population growth in Asian countries that increases the overall market size for footwear, bags and accessories, creating more
opportunities to realize production domestically
• Abundant leather resources
The charts below illustrate the footwear, bags and accessories export values by Asian countries in 2017.
Other Asian countries 4,701 Other Asian countries 4,028
Cambodia 1,798
Singapore 1,402
India 2,077
India 1,818
Hong Kong, China 2,901
Viet Nam 3,973
Indonesia 4,912
Hong Kong, China 4,771
Viet Nam 19,864
China 48,438 China 29,118
0 10,000 20,000 30,000 40,000 50,000 60,000 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000
mln USD mln USD
Note: (1) Except for the CIS countries, all the other Asian countries are included in the analysis. The list of Asian countries included in the analysis is presented in Appendix 4
(2) The data on the export volumes from Vietnam is not available
Trade Analysis of Footwear in Middle East

Middle East trade analysis by product
The chart below illustrates the Middle East’s footwear trade breakdown by product value for 2016 and 2017. In addition, the chart identifies the
top three footwear products based on trade values in 2016 and provides trade volumes for the selected products. For the period of 2016-2017,
the highest increase in the import value was reported by the “Footwear with outer soles and uppers of rubber or plastics (excluding covering
the ankle or with upper straps or thongs assembled to the sole by means of plugs, waterproof footwear of heading 6401, sports footwear,
orthopaedic footwear and toy footwear)” equaling to 50.6%. While the “Footwear with outer soles of rubber, plastics or composition leather,
with uppers of leather, covering the ankle (excluding incorporating a protective metal toecap, sports footwear, orthopaedic and toy footwear)”
reported the highest growth of export value equaling to 12.8% for the same period.
100%
Import Volume
192 159
75 85 Footwear with outer soles of rubber, plastics or composition leather, with uppers of leather,
193 166
236 28 7 covering the ankle (excluding incorporating a protective metal toecap, sports footwear, a
90%
393
260 135 25 orthopaedic and toy footwear) In 2016 – 132 million pairs
52
80% 353 68 Footwear with outer soles and uppers of rubber or plastics, with upper straps or thongs
assembled to the sole by means of plugs (excluding toy footwear) b
823 In 2016 – 62 million pairs
70% 201 200
883 Sports footwear, incl. tennis shoes, basketball shoes, gym shoes, training shoes and the
e c
b like, with outer soles of rubber or plastics and uppers of textile materials
934 168
f 131 Footwear with outer soles and uppers of leather (excluding covering the ankle,
50% 751
c incorporating a protective metal toecap, with uppers which consist of leather straps across
the instep and around the big toe, sports footwear, orthopaedic footwear and toy foo
Export Volume
232
40% d 173 Footwear with outer soles of rubber, plastics or composition leather, with uppers of leather d
918 1,383 (excluding covering the ankle, incorporating a protective metal toecap, sports footwear, In 2016 – 73 million pairs
30% a orthopaedic footwear and toy footwear)
Footwear with outer soles of rubber or plastics and uppers of textile materials (excluding e
20% sports footwear, incl. tennis shoes, basketball shoes, gym shoes, training shoes and the In 2016 – 24 million pairs
494
1,271 267 like, and toy footwear)
10% 998 Footwear with outer soles and uppers of rubber or plastics (excluding covering the ankle or f
with upper straps or thongs assembled to the sole by means of plugs, waterproof footwear In 2016 – 42 million pairs
0% of heading 6401, sports footwear, orthopaedic footwear and toy footwear)
2016 2017 2016 2017
IMPORT EXPORT Other
Source: ITC
Trade Analysis of Bags and Accessories in Middle East

Middle East trade analysis by product
The chart below illustrates the Middle East’s bags and accessories trade breakdown by product value for 2016 and 2017. In addition, the chart
identifies the top three bags and accessories products based on trade values in 2016 and provides trade volumes for the selected products.
For the period of 2016-2017, the “Wallets, purses, key-pouches, cigarette-cases, tobacco-pouches and similar articles carried in the pocket or
handbag, with outer surface of plastic sheeting or textile materials” recorded the highest growth of both the import and export values equaling
to 36.1% and 32.4% correspondingly.

Import Volume
100%
97 92 Articles of apparel, of leather or composition leather (excluding clothing accessories,
98 134 footware and headgear and parts thereof, and goods of chapter 95, e.g. shin guards, a
90% 147 fencing masks) In 2016 – 7 million units
151 123
119
281 Wallets, purses, key-pouches, cigarette-cases, tobacco-pouches and similar articles
80% 316
d carried in the pocket or handbag, with outer surface of plastic sheeting or textile materials b
In 2016 – 54 million units
70%
7
414 27 Wallets, purses, key-pouches, cigarette-cases, tobacco-pouches and similar articles
c 440 9 c
carried in the pocket or handbag, with outer surface of leather, composition leather or
60% 41
f 22 patent leather In 2016 – 16 million units
23 Travelling-bags, insulated food or beverage bags, toilet bags, rucksacks, shopping-bags,
50% 40
585 483 map-cases, tool bags, sports bags, jewellery boxes, cutlery cases, binocular cases,
24 Export Volume
a camera cases, musical instrument cases, gun cases, holsters and similar containers
40%
90 Handbags, whether or not with shoulder straps, incl. those without handles, with outer d
60
30%
e surface of plastic sheeting or textile materials In 2016 – 482 thousand units
546 657
36 24 Handbags, whether or not with shoulder straps, incl. those without handles, with outer e
20% b
surface of leather, composition leather or patent leather In 2016 – 4 million units
10% 461 90 72
390 Trunks, suitcases, vanity cases, executive-cases, briefcases, school satchels and similar f
containers, with outer surface of plastics or textile materials In 2016 – 2 million units
0%
2016 2017 2016 2017
IMPORT EXPORT Other
Source: ITC
Analysis of the footwear and bag manufacturing sectors in UAE

Footwear consumption value Total footwear UAE’s production and consumption analysis by product
production value, 2016
The UAE is the biggest manufacturer of footwear, bags and
3,500
accessories among the Middle East countries. The graphs illustrate
3,000
USD 2,335
the consumption value breakdowns by product of the footwear, bags
1,176 1,197
2,500 and accessories for the period of 2016-2017.
million
USD million
2,000
1,500
1,404 1,421
It is worth mentioning that in 2016 the consumption value exceeded
1,000 the production value of both footwear and bags and accessories by
500 the amounts equaling to USD 859 million and USD 885 million
613 628
0
correspondingly.
2016 2017
According to Euromonitor International, the local population
Source: (1) Footwear In UAE, 2017, Euromonitor International
(2) KPMG Analysis
continues to invest in children’s footwear, which naturally needs
frequent replacing for growing feet, thus giving the category higher
Bags and Accessories consumption value Total bags and accessories
production value, 2016
growth compared to men’s and women’s footwear in 2017.
1,600
Moreover, Footwear has benefited from the burgeoning health and
1,400
USD million
267
wellness trend, which has led to the population adapting to healthier
1,200 249
37 39 USD 457 lifestyles with greater exercise and eating healthily, consequently the
1,000 126 million
120 demand for athleisure has strengthened.
800
600
802
20
839 21 For the period of 2016-2017, Luggage faced the largest
400
17 17 consumption growth equaling to 7.3%, followed by Backpacks
200
52
43
55
45 (5.7%) and Business Bags (5.1%). According to the Euromonitor
0
2016 2017 analysis, both cabin and check-in baggage remain popular. This is
Backpacks Business Bags Crossbody Bags Duffel Bags because a large proportion of the country’s population consists of
Handbags Wallet and Coin Pouches Other Small Bags Luggage employed expatriates who often travel home, or abroad for business.
Source: (1) Bags And Luggage In UAE, 2017, Euromonitor International Also, many travelers take short trips to tourist destinations,
(2) KPMG Analysis
especially over public holidays.
Analysis of the footwear and bag manufacturing sectors in UAE
Government Support Mechanism and Incentives in UAE

UAE is selected for this analysis as the major exporting country – Other non tax incentives of the FTZs include;
in the Middle East. In UAE, investment incentives are widely  Simplified procedure for recruitment of employees, reasonable
provided for the companies operating in FTZs and no costs for skilled workforce,
considerable incentive is available outside the free zones.
 Highly developed infrastructure,
Free Trade Zones
 Abundant and inexpensive energy supply (often at subsidized
To encourage FDIs, the UAE has established FTZs, each of which rates),
has its own set of laws and administrative regulations. Currently,  Stable and reliable financial and monetary system,
there are more than 30 FTZs in the UAE, the majority of which are  Independent authority responsible for licensing and supporting
located in Emirate of Dubai. companies to establish their business,
Generally, the key incentives offered by the FTZs are as follows;  Shared services and synergies with other companies in the
— Guaranteed tax holidays ranging from 15 to 50 years free zone
(renewable) for businesses and their employees. For instance
the tax environment within DIFC is governed by Article 14 of Regulatory measures for footwear, bags and accessories sectors
Law No. 9 of 2004, which states;
In 2017, the government of UAE took a number of measures to
“The Centre’s Bodies and Centre Establishments and their contribute towards economy and stability, consequently supporting
employees shall be subject to a zero rate of tax for 50 (fifty) the recovery of the footwear, bags and accessories sectors.
years from the date of enactment of this Law, including the
income tax relating to their operations inside the Centre. The — In 2017 innovative retailing concepts were opened by the
zero rate of tax will also extend to transfers of assets or profits Dubai government-owned property developer Meraas Holding.
or salaries in any kind of currency to any party outside the One of the concepts was the La Mer, which opened in
Centre for 50 (fifty) years from the date of enactment of this Jumeirah 1 in October 2017 and includes shopping, dining and
Law. It is permitted to renew this period for a similar period entertainment options. Apparel and footwear options include
upon issuance of a resolution by the Ruler.” Trina Turk, Shaymartian and PaindeSucre, and Beach Bunny.
Other developments include the first phase of Al Seef by Dubai
– As per the UAE Commercial Companies Law, the foreign Creek that opened on December 2017, the second phase of
ownership of a LLC may not exceed 49%, with the balance of which is expected to open March 2018. Similar developments
51% to be held by a UAE national. In contrast, the foreign are also taking place in other Emirates such as Sharjah.
investors have the right to set up 100% fully-owned entities in
the FTZs. — In 2017 one of the major developments in UAE was the
publicized launch of Riyadh-based online platform Noon.com,
– 100% import and export tax exemption and 100% repatriation created by Emaar founder Mohammad Alabbar and backed by
of capital and profits Saudi’s Public Investment Fund (PIF) and Kuwait’s M.H.
The laws on granting tax incentives are not consistent among the Alshaya & Co.
different free zones, and each free zone should, therefore, — The government is largely addressing the issue of counterfeit
be considered separately goods by taking positive steps to counter the illegal trade.
Sources: (1) International Tax UAE, Highlights 2017, Deloitte, (2) Doing Business in the UAE, pwc, HSBC, (3) US Department of State, (4) Doing Business in the Dubai International Financial
Centre, pwc, (5) UAE Corporate – Tax credits and incentives, pwc, (6) Euromonitor
China
Analysis of the footwear and bag manufacturing sectors in China

Footwear export and import value trend Consumption volume forecast of footwear
60.0 40%
56.2 4
53.5 2.24 2.32
50.8 2.17 Women's Footwear
2.10
mln units
20% 47.2 48.4 2.02
40.0 17% 19% 20% Men's Footwear
10% 11%
USD bln
2 1.47
1.29 1.35 1.41 Children's Footwear
8% 11% 1.22
3%
20.0 0%
0.88 0.94 1.00 1.05 1.11
(5%) (12%) 0
2.0 2.3 2.7 3.1 3.7 2018 2019 2020 2021 2022
- (20%) Source: Euromonitor
2013 2014 2015 2016 2017 Consumption value forecast of footwear
Export Import 80
Source: ITC
During the period of 2013-2017, while China’s footwear exports in value 60 Women's Footwear
terms decreased at a CAGR of 1.2%, footwear imports in value terms 30.5 31.2 31.4
USD bln
29.6 29.7
significantly increased - at a CAGR of 16.9%. China was the top footwear 40 Men's Footwear
exporting country in the world in the period of 2013-2017, with about 38%
share in the world’s total footwear exports. Children's Footwear
23.4 23.7 24.6 25.3 25.7
20
China’s footwear consumption both in volume and value terms is
forecasted to rise - correspondingly at a CAGR of 4.3% and 2.3% during 8.9 9.3 9.8 10.3 10.7
the period of 2018-2022. According to Euromonitor footwear is expected 0
2018 2019 2020 2021 2022
to continue its steady growth in the forecast period underpinned by stable
demand for a variety of footwear, particularly sportswear. The improving
109 112 117 120 122
living conditions and China's hosting of the 2022 Winter Olympics are
expected to promote certain niche sports and types of exercise, like Production value forecast, USD bln
skiing, which is anticipated to trigger rising demand for ski boots.
Besides, with the advancement of technology in China, the artificial Source: (1) Euromonitor, (2) KPMG Analysis
intelligence is gradually being integrated into the production of footwear. technology. It is able to measure foot with the 3D scanner in several
For example, Xiemofang, or Shoe Cube is the first smart shoe seconds and to create a three-dimensional foot model to produce
customization platform, armed with a 3D foot scanner and virtual reality tailor-made shoes for customers.

Bags and accessories export and import value trend Consumption volume forecast of bags and accessories
40 40% 1,000 74
69 71
64 66 96 Backpacks
61 92 94
88 90
800 86 95 97 99
19% 90 92 6 6 6 Business Bags
mln units
20% 87 6 6 136
6 125 128 132
30.7 9% 30.4 31.0 600 117 121 Handbags
7% 29.1
3% 27.4 4% 222 227 233 Crossbody Bags
204 210 216
20 2% 6% 0% 400
2% Duffel Bags
mln
110 112 114

(1%) 104 106 108
200 Wallet and Coin Pouches
(12%) 236 243 250 257 264
(20%) 228
Other Small Bags
0
2017 2018 2019 2020 2021 2022 Luggage
1.9 2.1 2.1 2.2 2.6
2013 2014 2015 2016 2017 Consumption value forecast of bags and accessories
Export Import
Export growth rate (right axes) Import growth rate (right axes) 30
Source: ITC 5.9 6.1
5.4 5.4 5.7 Backpacks
1.2 1.2
During the period of 2013-2017 China’s bags and accessories exports in 4.9 1.2
1.4 Business Bags 1.1
1.3
1.1
1.3
1.4 1.4
value terms decreased at a CAGR of 1.3% and imports in value terms 20 1.0
bln USD
1.2 4.9 5.0 5.1
4.6 4.7
increased at a CAGR of 8.2%. China was the top bags and accessories 4.2 Handbags
exporting country in the world in the period of 2013-2017, with about 9.1 9.2 9.5 9.7 9.8 Crossbody Bags
8.3
39.5% average share in the world’s total footwear exports. 10
During the period of 2017-2022 China’s consumption of bags and 3.5 3.8 3.8 3.9 4.0 4.1
accessories both in volume and value terms is projected to increase at 4.1 4.5 4.5 4.7 4.8 4.9 Other Small Bags
CAGRs of 2.7% and 3.5%, correspondingly. According to Euromonitor, in 0
2017 2018 2019 2020 2021 2022 Luggage
the forecast period retail consumption value is expected to increase
steadily but at a slower rate as the category starts to mature. As
54 58 60 62 64 65
consumers are moving towards the higher priced market where products
are of a higher quality, this will lead to an increase in the retail Production value forecast, USD bln
consumption value of bags and luggage. However, as consumers pursue
higher quality products, which have a longer replacement cycle, retail Source: (1) Euromonitor, (2) KPMG Analysis
consumption volume is expected to decrease. On the other hand, the Overseas and spending on luxury products domestically. In the forecast
depreciation of the local currency is helping the slow recovery of China’s period, the average unit price of bags and accessories in China is
luxury market as consumers are no longer purchasing luxury goods expected to increase due to an increase in the production cost.

Analysis of the top importing countries of footwear to China Analysis of the top importing countries of bags and
Viet Nam, Indonesia and Italy were China’s key suppliers of accessories to China
footwear both in 2016 and 2017. Italy, France and Viet Nam were China’s key suppliers of bags and
In 2016 the imported quantity from Viet Nam, Indonesia and Italy accessories both in 2016 and 2017.
equaled to 70 million pairs, 30 million pairs and 5 million pairs In 2016 the imported quantity from Italy, France and Viet Nam,
correspondingly. equaled to 840 thousand units, 226 thousand units and 3 million
In 2017 China’s total import of footwear equaled to USD 3,650 units correspondingly.
million, the 73.1% of which was performed from the top 3 supplying In 2017 the China’s total import of bags and accessories equaled to
countries (Viet Nam – 41.1%, Indonesia – 16.3%, Italy – 15.8%). USD 2,628 million, the 68.9% of which was performed from the top 3
supplying countries (Italy – 38.2%, France – 16.5%, China –
The detailed breakdown of China’s footwear import value in 2017 is 14.11%). The detailed breakdown of China’s bags and accessories
presented in the chart below. import value in 2017 is presented in the chart below.
Viet Nam Italy
1% Indonesia
1% 6% 1% 9% France
1% 1%
2% 1% Italy
2% China
2% 2%
China
3% 3% Viet Nam
United States of America 38%
4% Spain
41%
10%
3,650 Spain
India
2,628 Korea, Republic of
9% India
USD million Thailand USD million
Philippines
Cambodia
16% Korea, Republic of
Germany
14%
Portugal Thailand
16% 17% Other

Other
Note: (1) According to ITC, trade between China and China can be explained by
the re-import activity.

Both in 2016 and 2017 the top three importing countries of footwear from China by the export value were USA, United Kingdom and Japan,
the exported quantity to which in 2016 equaled to 1 billion pairs, 450 million pairs and 336 million pairs correspondingly. Both in 2016 and
2017 the top three importing countries of bags and accessories from China by the export value were USA, Hong-Kong and Japan, the
exported quantity to which equaled to 385 million units, 67 million units and 83 million units correspondingly. China’s main competitive
advantages in the footwear, bags and accessories industry are as follows:
• Availability of low-cost workforce, which is the main reason why China is important manufacturing destinations for some of the world’s
leading footwear, bags and accessories brands. However, as wages and production costs in these countries continue to rise, they gradually
lose their unique low-cost manufacturing advantage over other competitors
• Average expenditure growth on clothing and footwear due to rising incomes and improving living standards and accelerated
population growth in China that increases the overall market size for footwear, bags and accessories, creating more opportunities to
realize production domestically
• Abundant leather resources
• Favorable government regulations for the production of raw materials, including leather
The detailed breakdowns of the China’s footwear, bags and accessories’ export value in 2017 is presented by the charts below.
Footwear export value breakdown by country, 2017 Bags and accessories export value breakdown by country, 2017
Other 18,540 Other 10,357
Netherlands 920 Singapore 604
Spain 933 Brazil 642
Kyrgyzstan 986 Spain 688
Belgium 1,003 Malaysia 705
Viet Nam 1,051 France 715
Korea, Republic of 1,067 Netherlands 738
Hong Kong, China 1,452 Italy 800
Kazakhstan 1,692 Korea, Republic of 900
Germany 1,837 Germany 1,083
Russian Federation 2,139 United Kingdom 1,305
Japan 2,255 Hong Kong, China 1,882
United Kingdom 2,533 Japan 1,887
United States of America 12,029 United States of America 6,811
- 5,000 10,000 15,000 20,000 - 2,000 4,000 6,000 8,000 10,000 12,000
Source: ITC USD mln Source: ITC USD mln

China’s trade analysis by product
The chart below illustrates China’s footwear trade breakdown by product value for 2016. In addition, the chart identifies the top three footwear
products based on trade values in 2016 and provides trade volumes for the selected products.
For the period of 2016-2017, the highest increase in the import value was reported by the “Footwear with outer soles of rubber or plastics and
uppers of textile materials (excluding sports footwear, incl. tennis shoes, basketball shoes, gym shoes, training shoes and the like, and toy
footwear)” equaling to 36.6%. While the “Footwear with outer soles and uppers of leather (excluding covering the ankle, incorporating a
protective metal toecap, with uppers consisting of leather straps on the instep and around the big toe, sports footwear, orthopaedic footwear
and toy footwear)” reported the highest growth of export value equaling to 21% for the same period.
95 115
Import Volume
100% 843 927
130 172 Uppers and parts thereof (excluding stiffeners and general parts made of asbestos)
177 191 603 693 a
155 202
238 261 Footwear with outer soles and uppers of leather (excluding covering the ankle,
80% c 17,053 17,169 incorporating a protective metal toecap, with uppers which consist of leather straps across b
223 271 the instep and around the big toe, sports footwear, orthopaedic and toy footwear) In 2016 – 33 million pairs
70% Parts of footwear; removable in-soles, heel cushions and similar articles; gaiters, leggings
d and similar articles, and parts thereof (excluding outer soles and heels of rubber or c
60% 1,984 1,849 plastics, uppers and parts thereof other than stiffeners, and general parts In 2016 – 15 million pairs
902
870 Footwear with outer soles and uppers of rubber or plastics (excluding covering the ankle
50% 5,645 5,784 or with upper straps or thongs assembled to the sole by means of plugs, waterproof
b f
footwear of heading 6401, sports footwear, orthopaedic footwear and toy footwear) Export Volume
40% Footwear with outer soles of rubber, plastics or composition leather, with uppers of
d
leather, covering the ankle (excluding incorporating a protective metal toecap, sports In 2016 – 3 billion pairs
11,597 12,670 footwear, orthopaedic footwear and toy footwear)
30%
960 1,310 Footwear with outer soles of rubber, plastics or composition leather, with uppers of leather
e
20%
(excluding covering the ankle, incorporating a protective metal toecap, sports footwear, e
orthopaedic footwear and toy footwear) In 2016 – 2 billion pairs
a
Footwear with outer soles of rubber or plastics and uppers of textile materials (excluding
10% 9,383 9,229 sports footwear, incl. tennis shoes, basketball shoes, gym shoes, training shoes and the f
310 342 like, and toy footwear) In 2016 – 489 million pairs
0%
Other
2016 2017 2016 2017
IMPORT EXPORT
Source: ITC

China’s trade analysis by product
The chart below illustrates China’s bags and accessories trade breakdown by product value for 2016. In addition, the chart identifies the top
three bags and accessories products based on trade values in 2016 and provides trade volumes for the selected products.
For the period of 2016-2017, the highest increase both in the import and export values was reported by the “Travelling-bags, insulated food or
beverage bags, toilet bags, rucksacks, shopping-bags, map-cases, tool bags, sports bags, jewellery boxes, cutlery cases, binocular cases,
camera cases, musical instrument cases, gun cases, holsters and similar containers, with outer surface of plastic sheeting or textile materials
(excluding trunks, briefcases, school satchels and similar containers, handbags and articles carried in the pocket or handbag)” equaling to
36.2% and 17.7% correspondingly.
100% 598 635
Import Volume
114 102 340 290
127 Trunks, suitcases, vanity cases, executive-cases, briefcases, school satchels and similar
111 containers, with outer surface of leather, composition leather or patent leather a
90%
172
193 In 2016 – 2 million units
80%
Belts and bandoliers, of leather or composition leather
152 207 9,368 9,901 b
70% 208 229
c d Trunks, suitcases, vanity cases, executive-cases, briefcases, school satchels and similar
containers, with outer surface of plastics or textile materials c
60% 303 In 2016 – 338 thousand units
256 b
4,169 4,907 Travelling-bags, insulated food or beverage bags, toilet bags, rucksacks, shopping-bags,
50% f map-cases, tool bags, sports bags, jewellery boxes, cutlery cases, binocular cases,
618 592 camera cases, musical instrument cases, gun cases, holsters and similar containers Export Volume
40% Wallets, purses, key-pouches, cigarette-cases, tobacco-pouches and similar articles
839 1,027
5,721 carried in the pocket or handbag, with outer surface of leather, composition leather or d
6,177
30% patent leather In 2016 – 748 million units
e Handbags, whether or not with shoulder straps, incl. those without handles, with outer
1,837 surface of plastic sheeting or textile materials e
20% a 1,878 In 2016 – 309 million units
Handbags, whether or not with shoulder straps, incl. those without handles, with outer
10%
350 439 4,716 4,738 surface of leather, composition leather or patent leather f
0% Other
2016 2017 2016 2017
IMPORT EXPORT
Source: ITC

Footwear consumption value Total footwear China’s production and consumption analysis by product
production value
The graphs illustrate the consumption value breakdowns by product
60,000
of the footwear, bags and accessories for the period of 2016-2017.
50,000
USD 98,521 2016
40,000 26,620 27,283
million It is worth mentioning that in 2016 the production value exceeded
USD million
30,000
the consumption value of both footwear and bags and accessories
by the amounts equaling to USD 44,140 million and USD 45,000
20,000
20,521 21,323 million correspondingly. The image was the same in 2017 with the
10,000 USD 101,261 2017 consumption gaps equaling to USD 44,788 million and USD 45,810
7,241 7,867 million million for the sectors of footwear and bags and accessories
0
2016 2017 correspondingly.
Source: (1) Footwear In China, 2017, Euromonitor International
(2) KPMG Analysis
Following years of robust development, footwear in China continued
to steady develop in 2017, with sportswear remaining the key driver.
Bags and Accessories consumption value Total bags and accessories Moreover, the introduction of the two-child policy in 2016 was a
30,000 production value
great incentive for the sector’s development.
25,000 4,853
4,608
1,043
20,000
1,009
1,173 1,222 USD 71,303 2016 For the period of 2016-2017, luggage faced the largest consumption
USD million
million growth equaling to 5.3%, followed by Crossbody bags (4.8%) and

8,003 8,344
15,000
141 146
Backpacks (4.5%). According to the Euromonitor analysis, the
10,000 4,030 4,225 growth rate of consumption value of bags and luggage in 2017 was
5,000 3,407 3,528 slower than that of 2016, which was due to the slowdown of the
USD 73,281 2017
3,932 4,110
0 million Chinese economy in general, causing a decrease in consumers’
2016 2017 confidence.
Backpacks Business Bags Crossbody Bags Duffel Bags
Handbags Wallet and Coin Pouches Other Small Bags Luggage
Source: (1) Bags And Luggage In China, 2017, Euromonitor International

(2) KPMG Analysis
Government Support Mechanism and Incentives in China

China’s government gives a high importance to providing Withholding tax
thorough and up to date industrial guidance for FDI, as FDIs
make a considerable contribution to Chinese economy. – Dividends: The withholding tax is lowered from 20% to 10%
Special Economic Zones Free Trade Zones on the dividends paid to a nonresident company, unless the
rate is reduced under a tax treaty. To further promote FDI, the
FTZs are a specific type of SEZs, where goods can be imported, government has issued rules providing deferral of withholding
handled, manufactured, and exported without direct intervention from tax on dividends and profits distributed to foreign investors
Customs. Currently China has 11 FTZs, which are of critical and reinvested into encouraged investment projects in China,
consideration for foreign firms, and the choice is highly dependent on with retroactive effect from 1 January 2017.
an investor’s business focus and growth prospectus. – Royalties: The withholding tax is lowered from 20% to 10%
The key incentives provided by the China’s FTZs are as follows; on the royalties paid to a nonresident company, unless the
– Tax incentives: The following FTZs offer a reduced CIT of 15%, rate is reduced under a tax treaty.
if the firm meets certain criteria
Regulatory measures for footwear, bags and accessories sectors
 Hengqing New Area, Guangdong FTZ,
 Qianhai Shenzhen-Hong Kong Modern Service Industry In 2017 both the markets of footwear and bags and accessories
Cooperation Zone (Qianhai Shenzhen- Hong Kong Zone), have seen a stable growth, which was contributed by the
Guangdong FTZ supportive government policies.
 Pingtan Comprehensive Experimental Area, Fujian – Footwear: The sportswear remains the key driver for the
In Shanghai FTZ, a FTZ-registered company can pay CIT in Chinese footwear sector’s steady growth. The supportive
installments over a five-year period if the value of its interest in a government policies include;
portfolio company increases because of non-cash restructuring.  National Fitness Program (2016-2020) – The program
Moreover, unless otherwise specified, most FTZs allow duty free stimulates more local consumers to participate in various
import for any machinery and other equipment for company self-use sports and in taking exercises, like jogging,
– Custom clearance: The customs clearance process is more  Long-distance Races – The races promote running as a
streamlined within the FTZs. In case of adequate guarantees, healthy hobby. As such, running shoes are in great
the company can pay tax in a one-off lump sum payment within demand
a specified period for goods that have already been imported. China's hosting of the 2022 Winter Olympics are likely to
For instance, in the Shanghai FTZ, border clearance can be promote certain niche sports and types of exercise.
done on a monthly or quarterly basis with all waybills. Goods
shipped to the FTZ can be directly sent to the warehouse – Bags and accessories: In 2017 due to the rise of the grey
without having to first clear customs. market in China, the government took measures to curb cross
border commerce making it increasingly difficult for
– Industry-specific liberalization: Due to the sector, for FIE consumers to purchase luxury goods overseas for resale
there are some liberalized policies, that are not widely available purposes in the domestic market.
in China (e.g. foreign ships can ship to other domestic ports).
Sources: (1) China Tax Alert,2017, KPMG, (2) Taxation and Investment in China, 2017, Deloitte, (3) International Tax China Highlights, 2018, Deloitte (4) Insights from Global Mobility, (5) Euromonitor
Turkey
Analysis of the footwear and bag manufacturing sectors in Turkey

Footwear export and import value trend Consumption volume forecast of footwear
1.0 40%
32% 0.99 0.95
200
91.3 91.7 92.0 92.2 92.4 Women's Footwear
mln units
0.79 0.77 20% Men's Footwear
0.72 0.72
0.67 0.70 0.73 0.68
15% 100 59.2 59.8 60.1 60.3 60.5 Children's Footwear
USD bln
0.5 5% 9%
(1%)
0% 67.3 68.2 68.9 69.4 69.9
(7%)
(4%) (8%) 0
(8%)
(17%) 2018 2019 2020 2021 2022
0.0 (20%) Source: Euromonitor
2013 2014 2015 2016 2017 Consumption value forecast of footwear
Export Import 4
Source: ITC
During the period of 2013-2017, while Turkey’s footwear exports in value 3
Women's Footwear
terms increased at a CAGR of 1.5%, footwear imports in value terms 1.2 1.2 1.3 1.3 1.3
USD bln
significantly decreased - at a CAGR of 9.2%. Turkey was the Middle Men's Footwear
East’s top footwear exporting country in the period of 2013-2017, with 2
about 50% average share in Middle East’s total footwear exports. 1.4 1.4 1.4 1.5 1.5 Children's Footwear
Turkey’s footwear consumption in volume terms is forecasted to rise at a 1
CAGR of 0.57% during the period of 2018-2022. Although Turkey’s
footwear consumption in value terms in local currency (TRY) is 0.6 0.6 0.6 0.7 0.7
0
forecasted to rise at a CAGR of 1.2% in the analyzed period, due to 2018 2019 2020 2021 2022
forecasted depreciation of TRY against USD, the CAGR of footwear
consumption in USD is negative – 3.2%. 4.1 4.0 3.9 3.8 3.7
According to Euromonitor, the shift from unregistered and unbranded
footwear to branded footwear continues and is expected to have a Production value forecast, USD bln
positive impact on the overall performance of footwear over the forecast
period. Consumption growth will be also driven by the expansion of the Source: (1) Euromonitor, (2) KPMG Analysis
middle class and increased number of working women. Besides, demand expected to increase. Moreover, the increasing number of people
for medical and therapeutic footwear such as extra-depth shoes for with active and healthy lifestyles has led to a fast increase in sports
diabetics, as well as shoes appropriate for medical professions, is footwear demand in Turkey.

Bags and accessories export and import value trend Consumption volume forecast of bags and accessories
20
2000 20% 1.6
13% 1.6 Backpacks
1.5 1.8
1.5 1.7
10% 15 1.4
1.4
1.6
1.7 Business Bags
1.5 3.7
1% 3% 1.5 3.7
1500 3% 3.7 0.3 Handbags
mln units
3.7 0.3 1.1
0% 3.6 3.6 0.3 0.3 1.0
1% 10 0.3 0.9
1.0 Crossbody Bags
(9%) 0.3 0.9 4.3
mln
0.8 3.8 4.0

1000 (12%) (10%) 3.3 3.6 Duffel Bags
(14%) 3.1
1.0 1.1 1.1
5 1.0 1.0 Wallet and Coin Pouches
1.0
(24%) (20%) 4.9 5.3 5.8
(28%) 3.6 4.0 4.4 Other Small Bags
500
548 555 486 (30%) 0 Luggage
421 427 2017 2018 2019 2020 2021 2022
323 294 349 303 301
2013 2014 2015 2016 2017 Consumption value forecast of bags and accessories
Export Import
Export growth rate (right axes) Import growth rate (right axes) 121
Backpacks
600 113
Source: ITC 13 109 108 107 107
Business Bags 12
During the period of 2013-2017 both Turkey’s bags and accessories 51
21 47
12
45
12
43
12
41
12
40
exports and imports in value terms significantly decreased at CAGRs of 19 19
USD mln
Handbags 19 19 19
400
7.9% and 14%, correspondingly. Turkey was the Middle East’s top bags
and accessories exporting country in the analyzed period, with more than Crossbody Bags
397 373
50% average share in Middle East’s total bags and accessories exports. 365 362 362 361
200
Turkey’s bags and accessories consumption in volume terms is
forecasted to rise at a CAGR of 5.2% during the period of 2017-2022. Other Small Bags
31 28 27 26 26 25
Although Turkey’s bags and accessories consumption in value terms in 0 44 42 42 42 42 42 Luggage
local currency (TRY) is forecasted to rise at a CAGR of 3.3% in the 2017 2018 2019 2020 2021 2022
analyzed period, due to forecasted depreciation of TRY against USD, the
CAGR of bags and accessories consumption in USD is negative – 2.2%. 0.68 0.65 0.64 0.63 0.63 0.63
According to Euromonitor International, the bags and accessories market
growth is moderate due to consumer price sensitivity and the willingness Production value forecast, USD bln
to delay purchases due to the continued effects of unstable economic
and political environment in Turkey. However, industry experts suggest Source: (1) Euromonitor, (2) KPMG Analysis
that the overall conditions in the country are likely to improve from 2018. in athletics and sports amongst the Turkish population. The
Moreover, bags and accessories is expected to continue recording increasing number of shopping centers that are expected to open
positive growth as there is increasing interest in fashion and participation throughout the country will attract more retail brands into Turkey.

Analysis of the top importing countries of footwear to Turkey Analysis of the top importing countries of bags and accessories to
China, Viet Nam and Italy were Turkey’s key suppliers of footwear Turkey
both in 2016 and 2017. China, Italy and India were China’s key suppliers of bags and
In 2016 the imported quantity from China, Viet Nam and Italy accessories in 2016. In 2016 the imported quantity from China, Italy and
equaled to 30 million pairs, 10 million pairs and 3 million pairs India equaled to 4 million units, 172 thousand units and 278 thousand
correspondingly. units correspondingly.
In 2017 Turkey’s total import of footwear equaled to USD 676 In 2017 Turkey’s import value of bags and accessories from India
million, the 72.8% of which was performed from the top 3 supplying dropped by 40% compared to 2016, as a result of which France entered
countries (China – 37.4%, Viet Nam – 20.9%, Italy – 14.5%). the list of top 3 supplying countries. In 2017 Turkey’s total import of
bags and accessories equaled to USD 301 million, the 65.1% of which
The detailed breakdown of Turkey’s footwear import value in 2017 is was performed from the top 3 supplying countries (China – 38.5%, Italy
presented in the chart below. – 19.7%, France – 6.9%).The detailed breakdown of Turkey’s bags and
accessories import value in 2017 is presented in the chart below.
China China
1% 9%
Viet Nam 16%
2% Italy
2%
2%
Italy
2% France
37% 3%
Indonesia 38%
4%
10%
676 Portugal 301 India
Spain 5% Hungary
USD million USD million
Cambodia Viet Nam
7%
14% India
Germany
Romania 7%
21% Other
Other 20%

In 2016 the top three importing countries of footwear from Turkey by the export value were Iraq, Germany and Saudi Arabia, the exported
quantity to which equaled to 26 million pairs, 4 million pairs and 12 million pairs correspondingly. In 2017 the export value to Russia increased
by around 160%, as a result Russia entered the list of top 3 export markets. In 2016 the top three importing countries of bags and accessories
from Turkey by the export value were Germany, United Kingdom and France, the exported quantity to which equaled to 573 million units, 461
million units and 209 million units correspondingly. In 2017 Turkey increased the export value to Italy by 39%, while the export to United
Kingdom decreased by 11%, as a result of which Italy entered the list of top 3 export markets. Turkey’s main competitive advantages in the
footwear, bags and accessories industry are as follows:
 Favorable new tax regulations, which increased the customs union tax for imported footwear and footwear parts, led leading companies
within footwear to invest in local production in Turkey,
 Favorable investment policy,
 Skills and competencies of the specialized workforce,
 Rapid growth in demand, which is due to the economic growth and increased urbanization,
 High quality of supplies from domestic market,
 Proximity to European markets
The detailed breakdown of the Turkey’s footwear, bags and accessories’ export values in 2017 is presented by the chart below.
Footwear export value breakdown by country, 2017 Bags and accessories export value breakdown by country, 2017
Other 291 Other 86
Azerbaijan 13
United Arab Emirates 5
Kazakhstan 14
Netherlands 15 Denmark 5
Algeria 15 Switzerland 6
Serbia 17 Austria 6
Italy 18 Spain 10
Israel 19 Russian Federation 12
Spain 20 Netherlands 12
United Kingdom 23 Iraq 13
Romania 27
United States of America 17
Saudi Arabia 36
Bulgaria 45 United Kingdom 26
Germany 47 France 30
Russian Federation 73 Italy 32
Iraq 94 Germany 44
0 100 200 300 0 20 40 60 80 100
Source: ITC USD mln Source: ITC USD mln

Turkey’s trade analysis by product
The chart below illustrates Turkey’s footwear trade breakdown by product value for 2016 and 2017. In addition, the chart identifies the top
three footwear products based on trade values in 2016 and provides trade volumes for the selected products.
For the period of 2016-2017, the import values of the all types of footwear products reported decreases. While the “Footwear with outer soles
of rubber, plastics or composition leather, with uppers of leather, covering the ankle (excluding incorporating a protective metal toecap, sports
footwear, orthopaedic footwear and toy footwear)” reported the highest growth of export value equaling to 41.9% for the same period.

100%
Import Volume
28 24 14 14
29 27 43 44
waterproof footwear of heading 6401, sports footwear, orthopaedic footwear and toy a
90% 38 37 footwear)
56 79 In 2016 – 17 million pairs
53 47 8 Footwear with outer soles and uppers of leather (excluding covering the ankle,
80% 10
incorporating a protective metal toecap, with uppers which consist of leather straps across b
95 88 141
the instep and around the big toe, sports footwear, orthopaedic footwear and toy foo In 2016 – 8 million pairs
70% c 156 Footwear with outer soles of rubber, plastics or composition leather, with uppers of leather,
d
covering the ankle (excluding incorporating a protective metal toecap, sports footwear, c
60% orthopaedic and toy footwear) In 2016 – 7 million pairs
162 141 Sports footwear, incl. tennis shoes, basketball shoes, gym shoes, training shoes and the
123
50% b e 155 like, with outer soles of rubber or plastics and uppers of textile materials
Export Volume
40% Footwear with outer soles and uppers of rubber or plastics (excluding covering the ankle or
116 with upper straps or thongs assembled to the sole by means of plugs, waterproof footwear d
207 f 121 of heading 6401, sports footwear, orthopaedic footwear and toy footwear) In 2016 – 45 million pairs
30% 217
Footwear with outer soles of rubber, plastics or composition leather, with uppers of leather
(excluding covering the ankle, incorporating a protective metal toecap, sports footwear, e
20% a In 2016 – 17 million pairs
orthopaedic footwear and toy footwear)
204 Footwear with outer soles of rubber or plastics and uppers of textile materials (excluding
187
10%
114 106 sports footwear, incl. tennis shoes, basketball shoes, gym shoes, training shoes and the f
like, and toy footwear) In 2016 – 36 million pairs
0% Other
2016 2017 2016 2017
IMPORT EXPORT
Source: ITC

Turkey’s trade analysis by product
The chart below illustrates Turkey’s bags and accessories trade breakdown by product value for 2016. In addition, the chart identifies the top
three bags and accessories products based on trade values in 2016 and provides trade volumes for the selected products.
For the period of 2016-2017 the import values of all the bags and accessories products did not report increase. While the “Wallets, purses,
key-pouches, cigarette-cases, tobacco-pouches and similar articles carried in the pocket or handbag, with outer surface of plastic sheeting or
textile materials” reported the highest growth of export value equaling to 99% for the same period.

100% 4
Import Volume
17 7
21 11 12 Wallets, purses, key-pouches, cigarette-cases, tobacco-pouches and similar articles
90%
14 11 carried in the pocket or handbag, with outer surface of plastic sheeting or textile materials a
32 28 In 2016 – 66 thousand units
80% 28 28 Trunks, suitcases, vanity cases, executive-cases, briefcases, school satchels and similar
containers, with outer surface of plastics or textile materials b
70% 29 119 116
62 Articles of leather or composition leather (excluding saddlery and harness bags; cases
a and similar containers; apparel and clothing accessories; whips, riding-crops and similar c
60% of heading 6602; furniture; lighting appliances; toys; games; sports articles; In 2016 – 1 million units
52
d Articles of apparel, of leather or composition leather (excluding clothing accessories,
50% 52 footware and headgear and parts thereof, and goods of chapter 95, e.g. shin guards,
48 fencing masks) Export Volume
39
40% 54 e Handbags, whether or not with shoulder straps, incl. those without handles, with outer
54 c surface of leather, composition leather or patent leather d
17 f 16 In 2016 – 426 thousand units
30% 13
14
Travelling-bags, insulated food or beverage bags, toilet bags, rucksacks, shopping-bags,
57 55 map-cases, tool bags, sports bags, jewellery boxes, cutlery cases, binocular cases, e
20% In 2016 – 360 thousand units
b camera cases, musical instrument cases, gun cases, holsters and similar containers
77 81 Handbags, whether or not with shoulder straps, incl. those without handles, with outer
10%
44 39
surface of plastic sheeting or textile materials f
In 2016 – 954 thousand units
0%
Other
2016 2017 2016 2017
IMPORT EXPORT
Source: ITC
Production and Consumption Analysis of Footwear

Turkey’s production and consumption analysis by product
In 2016 the footwear with leather uppers had both the highest production and consumption values with the production volume equaling to
around 61 million pairs. It is worth mentioning that the production value exceeded the consumption value of the footwear with leather uppers
by around USD 18 million dollars, which shows that the local customer demand was fully met by the local production and even exceeded in
2016.
The products “Footwear with textile uppers” and “Sports footwear” had the highest gaps between the consumption and production, with the
consumptions exceeding by USD 77 million and USD 27 million correspondingly.
The graph below illustrates the detailed analysis of Turkey’s footwear production and consumption in 2016.
Turkey's footwear production and consumption, USD million, 20161
800 717
735
700
600
500
400
298
271 284
300
179 207
187
200 129
119
98
60 53 76 83 65
100 42 33
- 0.9
0
Waterproof footwear Footwear with Sports footwear Ski footwear Parts of footwear Footwear with Footwear Footwear with textile Footwear with Other footwear with
rubber or plastic wooden parts incorporating a uppers leather uppers plastic and rubber
uppers protective metal toe- parts
Production Consumption cap
Production and Consumption Analysis of Bags and Accessories

Turkey’s production and consumption analysis by product
In 2016 the articles of apparel of leather or of composition leather had both the highest production and consumption values with the production
volume equaling to around 2 million units. It is worth mentioning that the production exceeded the consumption of articles of apparel of leather
or of composition leather by around USD 57 million dollars, which shows that the local customer demand was fully met by the local production
and greatly exceeded in 2016.
The products “Handbags” and “Travelling bags” had the highest gaps between the consumption and production, with the consumptions
exceeding by USD 47.7 million, USD 36.2 million correspondingly.
The graph below illustrates the detailed analysis of Turkey’s bags and accessories’ production and consumption in 2016.
Turkey bags and accessories production and consumption, USD million, 20161
250
220
200
163
150 129
99
100 84 81
60
50 27 38
24 20 18
5 3 10 10
0
Trunks, suitcases, vanity Handbags Travelling bags Articles normally carried in Belts and bandoliers, of Clothing accessories of Articles of apparel of Articles for technical use,
cases, briefcases, school pocket or handbag leather or composition leather or composition leather or of composition of leather or composition
satchels and similar leather leather leather leather
containers of leather,
composition leather, Production Consumption
patent leather, plastics,
textile materials,
aluminium or other
materials

Government Support Mechanism and Incentives in Turkey (1/2)

Turkey widely uses fiscal incentives to channelize domestic  Strategic Investment Incentives Scheme – To be supported
and foreign investments for industrial development and rural- by this scheme the following criteria should be met;
urban integration. o The domestic production capacity for the product to be
Investment Incentive Scheme manufactured with the investment shall be less than the
import of the product,
The investment incentives scheme is specifically designed to o The investment shall have a minimum investment amount of
encourage investments with the potential to reduce dependency on TRY 50 million (USD 16.5 million),
the importation of intermediate goods vital to the country’s strategic o The investment shall create a minimum added-value of
sectors. 40%,
Investment incentives are available to investors through an o The total import value of the product to be locally
“Investment Incentive Certificate” (IIC), which is obtained from the manufactured with the investment shall be minimum of USD
General Directorate of Incentive Practices and Foreign Capital under 50 million as of the past one year
the Ministry of Economy (“Authority”). In order to be granted an IIC,
the investments should meet the following criteria The incentives under an IIC are summarized below for each type of
 Minimum investment amount of TRY 1 million (USD 330 investment:
thousand) for the regions1 1 and 2 Support Instruments General Regional Large-Scale Strategic
 Minimum investment amount of TRY 500 thousand (USD Investment Investment Investment Investment
165 thousand) for other regions VAT Exemption V V V V
Customs Duty Exemption V V V V
It should be noted that the investment projects are still subject to
Tax Reduction V V V
Authority evaluation in order to be granted any incentives. The
Social Security Premium
investment incentive scheme is comprised of four different schemes Support (Employer’s Share) V V V
to which both the local and foreign investors have equal access. Income Tax Withholding
Allowance2 V V V
 General Investment Incentives Scheme – nearly all
projects meeting both the specific capacity conditions and Social Security Premium V V V
Support (Employee’s Share)2
the minimum fixed investment amount are supported within Interest Rate Support3 V V
the framework of this scheme, Land Allocation V V V
 Regional Investment Incentives Scheme - the sectors VAT Refund4 V
supported in each region are determined in accordance with
regional potential and the scale of the local economy, while Source: (1) Investment Support and Promotion Agency of Turkey,
the intensity of support varies depending on the level of (2) Investment in Turkey 2017, KPMG
Note: (2) Provided that the investment is made in Region 6
development in the region, (3) Provided that the investment is made in Regions 3, 4, 5 or 6 within the
 Large-Scale Investment Incentives Scheme – the framework of the Regional Investment Incentives Scheme.
footwear, bags and accessory sectors are not included in the (4) For construction expenditures of strategic investments with a minimum fixed
list of sectors supported by this scheme investment amount of TRY 500 million (USD 165 thousand).
Source: (1) Investment Support and Promotion Agency of Turkey, (2) Investment in Turkey 2017, KPMG, (3) Euromonitor
Note: (1) The classification of the Turkish regions is presented in Appendix 5
Government Support Mechanism and Incentives in Turkey (2/2)

Super Incentives The following key incentives are granted to investors investing into
the FTZs. These incentives are applicable until the end of the fiscal
The program envisages a project basis support enabling a flexible year in which Turkey fully accesses to the EU:
and customized incentive mechanism to the qualified investments. — The income derived from the sale of goods that are
The qualification of an investment will be determined based on manufactured by license holders in FTZ is exempt from income
whether these investments meet the current or future requirements or corporate income tax (Corporate income tax exemption does
of Turkey in line with the targets set in the development plans and not cover the dividend distributions).
annual programs and/or whether they could ensure continued — The salary payments made by taxpayers operating in FTZ to
supply, reduce dependence on foreign sources, achieve technologic their employees are exempt from income tax, provided that the
transition, be innovative, and add value as well as being R&D taxpayers export at least 85% of annual production
focused. — The documents and transactions regarding operations in FTZ
Investors are required to obtain an IIC from the Ministry of Economy are exempt from stamp tax and charges.
in order to benefit from the incentives. The incentives granted to the — The delivery of goods and performance of services in FTZs are
investors can be summarized as follows; excluded from VAT under VAT Code without any time
 VAT and customs duty relief, limitation.
 VAT refund possibility, Regulatory measures for bags and accessories sector
 Reduced tax rates or tax exemptions (corporate tax),
 Social security employer premium support, Sales of counterfeit branded bags and luggage remain a major
 Income withholding tax support, cause for concern for the manufacturers of bags and luggage in
 Qualified personnel salary support, Turkey.
 Interest support or Government grants, Replicas are widely available in street bazaars as well as in bags
 Capital contributions, and luggage specialist retailers as there is still not enough
 Support on energy expenses, government support of intellectual property to prevent counterfeit
 Government purchase guarantee, sales. However, the government is expected to take a more strict
 Land allocation and free of charge transfer of the land, approach to imitation and fake products, in line with EU transition
 Infrastructure support, regulations.
 Facilitation in bureaucratic process
Free Trade Zones
Investors should obtain a special license to be able operate in the
FTZs. These licenses are provided for a period from 15 years to 45
years based on the type of the operator.
Source: (1) Investment Support and Promotion Agency of Turkey, (2) Investment in Turkey 2017, KPMG, (3) Euromonitor
Cost structure analysis of
footwear, bags and
accessories sectors
Cost structure analysis of footwear, bags and accessories sectors
Footwear Cost Structure Analysis (1/2)

The cost structure for the companies in the footwear, bags and In particular, these costs include raw materials, supplies and
accessories industry varies depending on type of product, country, consumables, both direct and indirect labor, shipping and handling
labor and technology mix, also size and structure of the including freight costs, utilities, maintenance costs, depreciation,
manufacturer. The reliance on raw materials and outsourced packaging, and other manufacturing overheads and costs.
manufacturing makes industry profits vulnerable to key material
prices and wages overseas. The key inputs, including leather, natural and synthetic rubber,
plastic compounds, foam cushioning materials, nylon, canvas,
Purchases of raw materials account for significant portion of the polyurethane films, packaging items, buckles, laces and other
production costs of the firms operating in the industry. In the materials, amount around 23% of COGS (12% of total costs). In
footwear sector, the lion’s share in total costs of the footwear case of athletic footwear the COGS has a higher share in the total
segment belongs to the COGS, which includes expenses costs equaling to around 56%.
associated with producing and delivering the product.
Given high-level competition in the value chain, the average annual
profit margin in the footwear manufacturing sector amounts about
7%.
Footwear sector cost structure 100%

52.3%
25.9%
4.0% 6.8% 7.0%
1.7% 2.1%
R&D Interest and tax Depreciation and Advertising and Selling and General and COGS Total cost
amortization marketing distribution costs administrative
Source: (1) Annual reports of the sector representatives
(2) KPMG Analysis
Cost structure analysis of footwear, bags and accessories sectors
Bags and Accessories’ Cost Structure Analysis (1/2)

The bags and accessories segment is divided into three major Although cost structures vary among the firms, COGS, general and
product categories: travel, business and fashion (handbags, administration expenses dominate in the segment average cost
purses, belts, etc). Similar to the footwear segment, input costs structure with 48.9% and 24.2% shares, respectively, followed by
contribute major share in the cost structure. selling and distribution, advertising and marketing and other
expenses.
Some factors (generally, unpredictable and beyond firm’s control)
that significantly affect the raw material costs are weather, Advertising and marketing expenses include employee
consumer demand, speculation on the commodities market, the compensation, media space and production, advertising agency
relative valuations and fluctuations of the currencies of producer fees, new product design costs, public relations and market
versus consumer countries. research expenses. In case of travel bags the distribution costs
have higher share in the total costs equaling to around 30%.
The average profit margin in the segment is close to 7.4%, in the

range from 3% to 10%.
48.9% 100%
Bags and accessories sector cost structure
24.2%
11.3%
4.2% 7.1%
0.6% 3.7%
R&D Depreciation and Interest and tax Advertising and Selling and General and COGS Total cost
amortization marketing distribution administrative
Source: (1) Annual reports of the sector representatives
(2) KPMG Analysis
Analysis of raw materials’
availability for the footwear,
industries
Analysis of raw materials’ availability for the footwear, bags and accessories industries
Overview of raw materials for footwear, bags and accessories

Key raw materials used in footwear, bags and accessories industries
 Leather The raw materials used in footwear, bags and accessories production can be split into two main categories such as,
materials and energy commodities. The materials largely include natural materials such as cotton and leather.
 Cotton
Three leading producers are China, Brazil, and Italy, which have earned reputations as countries that supply key
 Nylon quantities of leather. Cotton production is dominated in India, China and USA, nevertheless Pakistan and Brazil also
have notable production volumes. The majority of farming is performed by small-scale farmers with individual holdings,
 Polyester although they are sometimes supported by larger organizations. Cotton is then turned into textile (e.g. canvas) used in the
 Rubber production of footwear, bags and accessories.
 Plastic The energy commodities category mainly consists of oil for use in the production of synthetic polymers such as nylon
and polyester.
 Oil Rubber is a key constituent of footwear and is produced both by natural means, i.e. from rubber trees, and also
synthetically by chemicals companies.
Sources: (1) Marketline, Global footwear report, March 2018, (2) KPMG Analysis
Key issues
- Animal welfare issues - The treatment and use of animals, for materials is a key consideration for producers of footwear, bags and
accessories. Much pressure has been applied in recent years to find synthetic alternatives and producers are increasingly aware of the
impact this can have on brand image. For instance, in January 2017, PETA acquired a stake in Louis Vuitton Moet Hennessey (LVMH)
in a bid to pressure it to stop selling shoes, bags and other products made from exotic animal skins.
- Issues to find sustainable textile solutions – With the development of the sector environmental pressures continue to mount.
Therefore, textile companies are working to develop sustainable materials that are not wholly dependent on oil as an input.
For instance, in 2015, Bayer MaterialScience developed Impranil eco, a new range of waterborne, bio-based polyurethane
dispersions which Bayer says will enable brand owners and manufacturers to address sustainability issues.
The trend towards bio solutions will continue.
Overview of Leather Availability in the Selected Regions

Leather1 export value breakdown by exporting/producing countries/regions, 2016 In 2016 86% of the leather’s export value of the selected regions was
performed by EU with Italy accounting for 37% of the total export value
of the selected regions. In 2016 the top three EU countries by the
Italy leather export value were Italy, Germany and France with the export
Turkey
2%
37% volumes equaling to 419 thousand tons, 198 thousand tons and 157
thousand tons correspondingly.
China Germany In 2016 the top three CIS countries by the leather export value were
6%
11.6 EU
10%
France
Russia, Ukraine and Belarus with the export volumes equaling to 18
thousand tons, 13 thousand tons and 16 thousand tons
Middle East 86% 6%
3% USD billion correspondingly. In 2016 Kyrgyzstan had the largest export volumes of
Spain
6%
leather equaling to 26 thousand tons.
CIS
3%
In 2016 the top three Middle East countries by the leather export value
Austria were Egypt, Iran and Saudi Arabia with the export volumes equaling to
5% 5 thousand tons, 24 thousand tons and 22 thousand tons
Source: ITC Other EU countries
correspondingly. The leather export volumes of China and Turkey in
Note: (1) The HS 41 was selected for leather analysis
22% 2016 equaled to 70 thousand tons and 23 thousand tons
correspondingly.
The top exported products from the selected regions were as follows;
 EU - Grain splits leather "incl. parchment-dressed leather", of the whole hides and skins of bovine "incl. buffalo" or equine animals, further
prepared after tanning or crusting, without hair on (excluding chamois leather, patent leather and patent laminated leather, and metallized
leather), the export value of which equaled to USD 2.6 billion (150 thousand tons) in 2016
 CIS - Full grains, unsplit and grain splits, in the wet state "incl. wet-blue", of hides and skins of bovine "incl. buffalo" or equine animals,
tanned, without hair on (excluding further prepared), the export value of which equaled to USD 131 million (69 thousand tons) in 2016
 Middle East - Skins of sheep or lambs, in the wet state "incl. wet-blue", tanned, without wool on, whether or not split (excluding further
prepared and pre-tanned only), the export value of which equaled to USD 78 million (30 thousand tons) in 2016
 China - Grain splits leather "incl. parchment-dressed leather", of the portions, strips or sheets of hides and skins of bovine "incl. buffalo" or
equine animals, further prepared after tanning or crusting, without hair on (excluding chamois leather, patent leather and patent laminated
leather, and metallised leather), the export value of which equaled to USD 259 million (12 thousand tons) in 2016
 Turkey - Leather further prepared after tanning or crusting incl. parchment-dressed leather", of sheep or lambs, without wool on, whether or
not split (excluding chamois leather, patent leather and patent laminated leather, and metallised leather)", the export value of which equaled
to USD 52 million (875 tons) in 2016
Overview of Cotton Availability in the Selected Regions

Cotton1 export value breakdown by exporting/producing countries/regions, 2016 In 2016 23% of the cotton’s export value of the selected regions was
Turkey performed by EU with Italy accounting for 6% of the total export value
7%
Italy
of the selected regions. Moreover, in 2016 China accounted for the
6% 61% of the total cotton export value of the selected regions. In 2016 the
top three EU countries by the cotton export value were Italy, Germany
Germany
4% and Spain with the export volumes equaling to 96 thousand tons, 117
thousand tons and 161 thousand tons correspondingly. In 2016
China
61% 24.7 EU
Spain
3% Greece had the largest export volumes of cotton equaling to 235
USD billion 23%
Greece
thousand tons.
2% In 2016 the top three CIS countries by the cotton export value were
Uzbekistan, Turkmenistan and Tajikistan with the export volumes
Belgium
1% equaling to 386 thousand tons, 262 thousand tons and 97 thousand
Middle East
CIS
6%
tons correspondingly.
Other EU countries
Source: ITC 3%
7%
Note: (1) The HS 52 was selected for cotton analysis
In 2016 the top three Middle East countries by the cotton export value were Egypt, UAE and Israel with the export volumes equaling to 84
thousand tons, 21 thousand tons and 19 thousand tons correspondingly. The cotton export volumes of China and Turkey in 2016 equaled to
1.7 million tons and 413 thousand tons correspondingly.
The top exported products by the selected regions were as follows;
 EU and CIS - Cotton, neither carded nor combed, the export value of which equaled to
 EU - USD 507 million in 2016 (310 thousand tons)
 CIS - USD 703 million in 2016 (463 thousand tons)
 Middle East and Turkey - Denim, containing >= 85% cotton by weight and weighing > 200 g/m², made of yarn of different colors, the export
value of which equaled to
 Middle East - USD 170 million in 2016 (24 thousand tons)
 Turkey - USD 276 million in 2016 (32 thousand tons)
 China - Plain woven fabrics of cotton, containing >= 85% cotton by weight and weighing > 100 g to 200 g/m², printed, the export value of
which equaled to USD 1.6 billion in 2016 (129 thousand tons)
Overview of Plastic Availability in the Selected Regions

Plastic1 export value breakdown by exporting/producing countries/regions, 2016 In 2016 78% of the plastic’s export value of the selected regions is
performed by EU with Germany accounting for the 12% of the total
Turkey
Germany export value of the selected regions. In 2016 the top three EU countries
12%
0.5% by the plastic export value were Germany, Belgium and Netherlands
Belgium
China
7% 11%
with the export volumes equaling to 12 million tons in 2016, 12 million
Netherlands
tons in 2016 and 8 million tons.
180 EU
8%
France In 2016 the top three CIS countries by the plastic export value were
Middle East USD billion 78% 5% Russia, Uzbekistan and Belarus with the export volumes equaling to
13%
Italy 1.3 million tons, 339 thousand tons and 330 thousand tons
3% correspondingly. In 2016 the top three Middle East countries by the
CIS plastic export value were Saudi Arabia, UAE and Iran with the export
1% Other EU countries volumes equaling to 13.5 million tons, 4.2 million tons and 3.2 million
39%
Source: ITC tons correspondingly.
Note: (1) The full list of HS codes is presented in the Appendix 3
The plastic export volumes of China and Turkey in 2016 equaled to 8 million tons and 681 thousand tons correspondingly.
 EU - Polyethylene with a specific gravity of < 0,94, in primary forms, the export value of which equaled to USD 9.3 billion (6.7 million tons) in
2016
 CIS and Middle East - Polyethylene with a specific gravity of >= 0,94, in primary forms, the export value of which equaled to
 CIS - USD 542 million in 2016 (463 thousand tons)
 Middle East - USD 9 billion in 2016 (8.6 million tons)
 China – “Polyethylene terephthalate", in primary forms, the export value of which equaled to USD 1.9 billion in 2016 (2.2 million tons)
 Turkey - Acrylic polymers, in primary forms (excluding “polymethyl methacrylate"), the export value of which equaled to USD 185 million in
2016 (174 thousand tons)
Overview of Nylon Availability in the Selected Regions

Nylon1 export value breakdown by exporting/producing countries/regions, 2016 In 2016 58% of the nylon’s export value of the selected regions was
Turkey performed by EU with Italy accounting for 15% of the total export value
3.8% of the selected regions. In 2016 the top three EU countries by the nylon
Italy
15% export value were Italy, Germany and Netherlands with the export
Germany
volumes equaling to 133 thousand tons, 62 thousand tons and 33
8% thousand tons correspondingly.
China In 2016 the top three CIS countries by the nylon export value were
31% 5.2 EU
Netherlands
8% Belarus, Russia and Ukraine with the export volumes equaling to 31
USD billion 58% Czech Republic thousand tons, 15 thousand tons and 18 tons correspondingly.
4% In 2016 the top three Middle East countries by the nylon export value
Slovenia
were UAE (35 thousand tons), Israel2 and Egypt2.
3% The nylon export volumes of China and Turkey in 2016 equaled to 371
Middle East
5% Other EU countries thousand tons and 41 thousand tons correspondingly.
CIS 20%
Source: ITC 2%

 EU - Textured filament yarn of nylon or other polyamides, with a linear density of > 50 tex per single yarn (excluding sewing thread and yarn
put up for retail sale), the export value of which equaled to USD 517 million in 2016 (124 thousand tons)
 CIS - High-tenacity filament yarn of nylon or other polyamides (excluding sewing thread, yarn put up for retail sale and high-tenacity filament
yarn of aramids), the export value of which equaled to USD 43 million in 2016 (22 thousand tons)
 Middle East - Woven fabrics of high-tenacity yarn, nylon, other polyamides or polyesters, incl. monofilament of >= 67 decitex and with a
cross sectional dimension of <= 1 mm, the export value of which equaled to USD 171 million in 2016 (38 thousand tons)
 China and Turkey - Tyre cord fabric of high-tenacity yarn of nylon or other polyamides, whether or not dipped or impregnated with rubber
or plastic, the export value of which equaled to
 China - USD 312 million in 2016 (103 thousand tons)
 Turkey- USD 73 million in 2016 (13 thousand tons)
Note: (2) The data on the nylon total export volumes of Israel is not available
Overview of Polyester Availability in the Selected Regions

Polyester1 export value breakdown by exporting/producing countries/regions, 2016 In 2016 17% of the polyester’s export value of the selected regions
was performed by EU with Germany accounting for 3% of the total
Germany export value of the selected regions. Moreover, in 2016 China
Turkey 3%
3.8% accounted for the 74% of the polyester export value of the selected
Italy
3% regions. In 2016 the top three EU countries by the polyester export
value were Germany, Italy and Spain with the export volumes
China
74%
26.3 EU
Spain
2% equaling to 109 thousand tons, 76 thousand tons and 79 thousand
17% Belgium tons correspondingly.
USD billion 1%
In 2016 the top three CIS countries by the polyester export value
France were Belarus, Russia and Ukraine with the export volumes equaling
1%
CIS to 114 thousand tons, 7 thousand tons and 13 thousand tons
1%
Middle East Other EU countries correspondingly.
4% 7%
Source: ITC
In 2016 the top three Middle East countries by the polyester export value were UAE, Iran and Egypt with the export volumes equaling to 154
thousand tons, 32 thousand tons and 19 thousand tons correspondingly. The polyester export volume of Turkey in 2016 equaled to 177
thousand tons.
 EU and Turkey - Woven fabrics of yarn containing >= 85% by weight of non-textured polyester filaments, incl. monofilament of >= 67
decitex and a maximum diameter of <= 1 mm, the export value of which equaled to
 EU - USD 413 million in 2016 (32 thousand tons)
Turkey - USD 248 million in 2016 (23 thousand tons)
 CIS - Staple fibres of polyesters, not carded, combed or otherwise processed for spinning, the export value of which equaled to USD 88
million in 2016 (86 thousand tons)
 Middle East - Woven fabrics of yarn containing >= 85% by weight of textured polyester filaments, incl. monofilament of >= 67 decitex and a
maximum diameter of <= 1 mm, dyed, the export value of which equaled to USD 530 million in 2016 (90 thousand tons)
 China2 - Woven fabrics of yarn containing >= 85% by weight of textured polyester filaments, incl. monofilament of >= 67 decitex and a
maximum diameter of <= 1 mm, dyed, the export value of which equaled to USD 5 billion in 2016 (608 thousand tons)
Note: (2) The data on the polyester total export volumes of China is not available
Overview of Rubber Availability in the Selected Regions

Rubber1 export value breakdown by exporting/producing countries/regions, 2016 In 2016 80% of the rubber’s export value of the selected regions was
performed by EU with Germany accounting for 22% of the total
Turkey Germany
export value of the selected regions. In 2016 the top three EU
1.1% 22% countries by the rubber export value were Germany, Belgium and
China France with the export volumes equaling to 1.4 million tons, 848
6% Belgium
15%
thousand tons and 497 thousand tons correspondingly.
In 2016 the top three CIS countries by the rubber export value were
Middle East 11.2 EU
France
Russia, Belarus and Ukraine with the export volumes equaling to 991
1% 9%
USD billion 80% thousand tons, 7 thousand tons and 2 thousand tons
Italy correspondingly. In 2016 the top three Middle East countries by the
CIS
8%
12% rubber export value were Iran (35 thousand tons), Saudi Arabia2 and
Poland UAE (10 thousand tons). In 2016 the rubber export volume of China
5%
and Turkey equaled to 390 thousand tons and 58 thousand tons.
Other EU countries
Source: ITC 21%

 EU - Rubber, unvulcanised, compounded with carbon black or silica, in primary forms or in plates, sheets or strip, the export value of which
equaled to USD 1.8 billion in 2016 (731 thousand tons)
 CIS - Isoprene rubber "IR", in primary forms or in plates, sheets or strip, the export value of which equaled to USD 354 million (288
thousand tons) in 2016
 Middle East - Halo-isobutene-isoprene rubber "CIIR" or "BIIR", in primary forms or in plates, sheets or strip, the export value of which
equaled to USD 32 million in 2016 (16 thousand tons)
 Turkey - Compounded, unvulcanised rubber in primary forms (excluding solutions and dispersions, those containing carbon black or silica,
mixtures of natural rubber, balata, gutta-percha, guayule, chicle or similar types of natural rubber with synthetic rubber or factice, and those
in the form of plates, sheets or strip), the export value of which equaled to USD 34 million in 2016 (15 thousand tons)
 China - Synthetic rubber and factice derived from oils, in primary forms or in plates, sheets or strip (excluding latex, styrene-butadiene
rubber "SBR", carboxylated styrene-butadiene rubber "XSBR", butadiene rubber "BR", isobutylene isoprene rubber "IIR", halo-isobutene-
isoprene rubber "CIIR" or "BIIR", chloroprene rubber "CR", acrylonitrile-butadiene rubber "NBR", isoprene rubber "IR" and non-conjugated
ethylene-propylene diene rubber "EPDM"), the export value of which equaled to USD 160 million in 2016 (64 thousand tons)
Note: (2) The data on the rubber total export volumes of Saudi Arabia is not available
Overview of Oil Availability in the Selected Regions

Oil1 export value breakdown by exporting/producing countries/regions, 2016 In 2016 53% of the oil’s export value of the selected regions was
China Turkey performed by Middle East with Saudi Arabia accounting for 22% of
3% 0.4%
the total export value of the selected regions. In 2016 the top three
EU
Saudi Arabia Middle East countries by the oil export value were Saudi Arabia, Iran
22% and Iraq with the export volumes equaling to 382 million tons, 169
23%
Iran million tons and 162 million tons correspondingly.

In 2016 the top three EU countries by the oil export value were
714 Middle East
7%
Iraq
7% Netherlands, United Kingdom and Belgium with the export volumes
53%
USD billion UAE equaling to 95 million tons, 63 million tons and 52 thousand tons
6%
correspondingly. In 2016 the top three CIS countries by the oil export
Kuwait
6% value were Russia, Kazakhstan and Azerbaijan with the export
CIS
Other Middle East
volumes equaling to 120 million tons, 20 million tons and 7 million
21%
countries tons correspondingly.
Source: ITC 5%
The oil export volumes of China and Turkey in 2016 equaled to 51 million tons and 7 million tons correspondingly. The top exported products
by the selected regions were as follows;
 EU and China - Medium oils and preparations, of petroleum or bituminous minerals, not containing biodiesel, n.e.s., the export value of
which equaled to
 EU - USD 86 billion in 2016 (223 million tons)
 China - USD 15 billion in 2016 (39 million tons)
 CIS - Petroleum oils and oils obtained from bituminous minerals, crude, the export value of which equaled to USD 101 billion in 2016 (338
million tons)
 Middle East - Petroleum oils and oils obtained from bituminous minerals, crude, the export value of which equaled to USD 307 billion in
2016 (868 million tons)
 Turkey - Light oils and preparations, of petroleum or bituminous minerals which >= 90% by volume "incl. losses" distil at 210°C "ASTM D 86
method" (excluding containing biodiesel), the export value of which equaled to USD 1.7 billion in 2016 (3.6 million tons)
Appendices
Appendix 1
Mapping of NACE, Rev.2 and HS for Footwear (1/3)

Label NACE code NACE label HS code HS label
Waterproof footwear incorporating a protective metal toecap, with outer soles and uppers of
rubber or of plastics, the uppers of which are neither fixed to the sole nor assembled by
640110
stitching, riveting, nailing, screwing, plugging or similar processes (excluding skating boots
with ice or roller skates attached, shin-guards and similar protective sportswear)
Waterproof footwear covering neither the ankle nor the knee, with outer soles and uppers of
640199 stitching, riveting, nailing, screwing, plugging or similar processes (excluding covering the
ankle but not the knee, footwear incorporating a protective metal toecap, orthopedic footwear,
Waterproof Waterproof footwear, with uppers in rubber or plastics skating boots with ice or roller skates attached and sports and toy footwear)
15201100
footwear (excluding incorporating a protective metal toecap)
Waterproof footwear covering the knee, with outer soles and uppers of rubber or of plastics,
the uppers of which are neither fixed to the sole nor assembled by stitching, riveting, nailing,
640191
screwing, plugging or similar processes (excluding incorporating a protective metal toecap,
skating boots with ice or roller skates attached, shin-guards and similar protective sportswear)
Waterproof footwear covering the ankle, but not the knee, with outer soles and uppers of
640192
stitching, riveting, nailing, screwing, plugging or similar processes (excluding incorporating a
protective metal toecap, orthopedic footwear, sports and toy footwear)
15201231 Town footwear with rubber or plastic uppers 640291
waterproof footwear, sports footwear, orthopedic footwear and toy footwear)
Footwear with Footwear with outer soles and uppers of rubber or plastics, with upper straps or thongs
640220
rubber or assembled to the sole by means of plugs (excluding toy footwear)
plastic uppers 15201210 Sandals with rubber or plastic outer soles and uppers
(including thong-type sandals, flip flops) Footwear with outer soles and uppers of rubber or plastics (excluding covering the ankle or
640299 with upper straps or thongs assembled to the sole by means of plugs, waterproof footwear,
sports footwear, orthopedic footwear and toy footwear)
Sports footwear with rubber or plastic outer soles and
Sports footwear, incl. tennis shoes, basketball shoes, gym shoes, training shoes and the like,
15202100 textile uppers (including tennis shoes, basketball shoes, 640411
with outer soles of rubber or plastics and uppers of textile materials
gym shoes, training shoes and the like)
Sports footwear with outer soles and uppers of rubber or plastics (excluding waterproof
Sports
640219 footwear of heading 6401, ski-boots, cross-country ski footwear, snowboard boots and
footwear
Other sports footwear, except snow-ski footwear and skating boots with ice or roller skates attached)
15202900
skating boots Sports footwear, with outer soles of rubber, plastics, leather or composition leather and
640319 uppers of leather (excluding ski-boots, cross-country ski footwear, snowboard boots and
skating boots with ice or roller skates attached)
Source: KPMG Analysis
Appendix 1

Ski-boots, cross-country ski footwear and snowboard boots, with outer soles and uppers of
640212
rubber or plastics (excluding waterproof footwear of heading 6401)
Ski footwear 32301200 Snow-ski footwear
Ski-boots, cross-country ski footwear and snowboard boots, with outer soles of rubber,
640312
plastics, leather or composition leather and uppers of leather
Leather uppers and parts thereof of footwear (excluding
15204020 640610 Uppers and parts thereof (excluding stiffeners and general parts made of asbestos)
stiffeners)
Parts of footwear; removable in-soles, heel cushions and similar articles; gaiters, leggings
Uppers and parts thereof of footwear (excluding stiffeners,
Parts of 15204050 640690 and similar articles, and parts thereof (excluding outer soles and heels of rubber or plastics,
of leather)
footwear uppers and parts thereof other than stiffeners, and general parts made of asbestos)
15204080 Parts of footwear (excluding uppers) other materials 640691 Parts of footwear, of wood
Parts of footwear (excluding outer soles and heels of rubber or plastics, uppers and parts
16291410 Wooden parts of footwear (excluding uppers, stiffeners) 640699
thereof, and general parts made of wood or asbestos)
Footwear with outer soles of rubber or plastics, with uppers other than rubber, plastics,
Footwear with a wooden base and leather uppers leather or textile materials; footwear with outer soles of leather or composition leather, with
15201330 (including clogs) (excluding with an inner sole or a 640590 uppers other than leather or textile materials; footwear with outer soles of wood, cork,
protective metal toe-cap) paperboard, furskin, felt, straw, loofah, etc., with uppers other than leather, composition
Footwear with leather or textile materials, n.e.s.
wooden parts Footwear with wood, cork or other outer soles and leather
Footwear with leather uppers, made on a base or platform of wood, with neither an inner sole
15201380 uppers (excluding outer soles of rubber, plastics or 640330
nor a protective metal toecap
leather)
Wooden footwear, miscellaneous special footwear and
15203200
other footwear n.e.c.
Footwear (including waterproof footwear), incorporating a Footwear, incorporating a protective metal toecap, with outer soles of rubber, plastics, leather
Footwear 15203120 protective metal toecap, with outer soles and uppers of 640340 or composition leather and uppers of leather (excluding sports footwear and orthopaedic
incorporating a rubber or of plastics footwear)
protective Footwear, incorporating a protective metal toecap, with outer soles and uppers of rubber or
metal toe-cap 15203150 Footwear with rubber, plastic or leather outer soles and
640230 plastics (excluding waterproof footwear of heading 6401, sports footwear and orthopaedic
leather uppers, and with a protective metal toe-cap
footwear)
Appendix 1

Slippers and other indoor footwear (including dancing and Footwear with outer soles of rubber or plastics and uppers of textile materials (excluding
15201444 640419
bedroom slippers, mules) with uppers of textile materials sports footwear and toy footwear)
Footwear with rubber, plastic or leather outer soles and
Footwear with uppers of textile materials (excluding with outer soles of rubber, plastics,
Footwear with 15201445 textile uppers (excluding slippers and other indoor 640520
leather or composition leather, orthopedic footwear and toy footwear)
textile uppers footwear, sports footwear)
Footwear with textile uppers (excluding slippers and other
Footwear with outer soles of leather or composition leather and uppers of textile materials
15201446 indoor footwear as well as footwear with outer soles of 640420
(excluding toy footwear)
rubber, plastics, leather or composition leather)
Men's town footwear with leather uppers (including boots Footwear with outer soles of rubber, plastics or composition leather, with uppers of leather
15201351 and shoes; excluding waterproof footwear, footwear with 640399 (excluding covering the ankle, incorporating a protective metal toecap, sports footwear,
a protective metal toe-cap) orthopedic footwear and toy footwear)
Women's town footwear with leather uppers (including Footwear with outer soles of rubber, plastics or composition leather, with uppers of leather,
15201352 boots and shoes; excluding waterproof footwear, footwear 640391 covering the ankle (excluding incorporating a protective metal toecap, sports footwear,
with a protective metal toe-cap) orthopedic footwear and toy footwear)
Children's town footwear with leather uppers (including Footwear with outer soles and uppers of leather (excluding covering the ankle, incorporating
Footwear with 15201353 boots and shoes; excluding waterproof footwear, footwear 640359 a protective metal toecap, with uppers consisting of leather straps on the instep and around
leather uppers with a protective metal toe-cap) the big toe, sports footwear, orthopedic footwear and toy footwear)
Slippers and other indoor footwear with rubber, plastic or Footwear with uppers of leather or composition leather (excluding with outer soles of rubber,
15201370 leather outer soles and leather uppers (including dancing 640510 plastics, leather or composition leather and uppers of leather, orthopedic footwear and toy
and bedroom slippers, mules) footwear)
Men's sandals with leather uppers (including thong type Footwear with outer soles of leather, and uppers which consist of leather straps across the
15201361 640320
sandals, flip flops) instep and around the big toe
Women's sandals with leather uppers (including thong Footwear with outer soles and uppers of leather, covering the ankle (excluding incorporating
15201362 640351
type sandals, flip flops) a protective metal toecap, sports footwear, orthopedic footwear and toy footwear)
Children's sandals with leather uppers (including thong
15201363
type sandals, flip flops)
Other footwear
Slippers and other indoor footwear with rubber or plastic
with plastic
15201237 outer soles and plastic uppers (including bedroom and 640620 Outer soles and heels, of rubber or plastics
and rubber
dancing slippers, mules)
parts
Appendix 2
Mapping of NACE, Rev.2 and HS for Bags and Accessories (1/3)

Trunks, Trunks, suitcases, vanity cases, executive-cases, briefcases, school satchels and similar
420211
suitcases, containers, with outer surface of leather, composition leather or patent leather
vanity cases, Trunks, suitcases, vanity cases, executive-cases, briefcases, school satchels and similar
briefcases, 420219 containers (excluding with outer surface of leather, composition leather, patent leather,
school plastics or textile materials)
satchels and
similar Trunks, suitcases, vanity cases, briefcases, school
containers of satchels and similar containers of leather, composition
15121210
leather, leather, patent leather, plastics, textile materials,
composition aluminium or other materials
leather, patent Trunks, suitcases, vanity cases, executive-cases, briefcases, school satchels and similar
420212
leather, containers, with outer surface of plastics or textile materials
plastics, textile
materials,
aluminum or
other materials
map-cases, tool bags, sports bags, jewellery boxes, cutlery cases, binocular cases, camera
Travel sets for personal toilet; sewing; or shoe or clothes
15121270 420292 cases, musical instrument cases, gun cases, holsters and similar containers, with outer
cleaning (excluding manicure sets)
surface of plastic sheeting or textile materials (excluding trunks, briefcases, school satchels
and similar containers, handbags and articles carried in the pocket or handbag)
map-cases, tool bags, sports bags, jewellery boxes, cutlery cases, binocular cases, camera
Travelling cases, musical instrument cases, gun cases, holsters and similar containers, with outer
420291
bags surface of leather, composition leather or patent leather (excluding trunks, briefcases, school
satchels and similar containers, handbags and articles normally carried in the pocket or
15121250 Cases and containers, n.e.c. handbag)
Travelling-bags, shopping or tool bags, jewellery boxes, cutlery cases and similar, with outer
surface of vulcanised fibre or paperboard; cases for binoculars, cameras, musical
420299 instruments, guns, holsters and similar containers with outer surface of materials (not leather,
plastic sheeting or textile materials) (excluding trunks, briefcases, school satchels and similar;
handbags; articles normally carried in pocket or handbag)
Appendix 2

Gloves, mittens and mitts, of leather or composition
14193175 420329 Gloves, mittens and mitts, of leather or composition leather (excluding special sports gloves)
Gloves, leather (excluding for sport, protective for all trades)
mittens and 32301510 Leather sports gloves, mittens and mitts 420321 Specially designed gloves for use in sport, of leather or composition leather
mitts Protective gloves, mittens and mitts for all trades, of
32991130
leather or composition leather
Handbags, whether or not with shoulder straps, incl. those without handles, with outer surface
420221
of leather, composition leather or patent leather
Handbags of leather, composition leather, patent leather, Handbags, whether or not with shoulder straps, incl. those without handles, with outer surface
420222
Handbags 15121220 plastic sheeting, textile materials or other materials of plastic sheeting or textile materials
(including those without a handle) Handbags, whether or not with shoulder strap, incl. those without handle, with outer surface
420229 of vulcanised fibre or paperboard, or wholly or mainly covered with such materials or with
paper
Wallets, purses, key-pouches, cigarette-cases, tobacco-pouches and similar articles carried in
420231
the pocket or handbag, with outer surface of leather, composition leather or patent leather
Articles
Wallets, purses, key-pouches, cigarette-cases, tobacco-pouches and similar articles carried in
normally 420232
the pocket or handbag, with outer surface of plastic sheeting or textile materials
carried in 15121230 Articles normally carried in pocket or handbag
pocket or Wallets, purses, key-cases, cigarette-cases, tobacco-pouches and similar articles of a kind
handbag normally carried in the pocket or handbag, with outer surface of vulcanised fibre or
420239
paperboard, or wholly or mainly covered with such materials or with paper, incl. spectacle
cases of moulded plastic material
Belts and
bandoliers, of
leather or 14193180 Belts and bandoliers, of leather or composition leather 420330 Belts and bandoliers, of leather or composition leather
composition
leather
Clothing
accessories of Clothing accessories of leather or composition leather (excluding gloves, mittens and mitts,
Clothing accessories of leather or composition leather
leather or 14193190 420340 belts, bandoliers, footware and headgear and parts thereof, and goods of chapter 95 [e.g.
(excluding gloves, mittens and mitts, belts and bandoliers)
composition shin guards, fencing masks])
leather
Appendix 2

Articles of
apparel of Articles of apparel of leather or of composition leather
Articles of apparel, of leather or composition leather (excluding clothing accessories, footware
leather or of 14111000 (including coats and overcoats) (excluding clothing 420310
and headgear and parts thereof, and goods of chapter 95, e.g. shin guards, fencing masks)
composition accessories, headgear, footwear)
leather
Articles for
technical use, Articles of leather or composition leather of a kind used in
of leather or 15121930 machinery or mechanical appliances or for other technical 420400 Articles for technical use, of leather or composition leather
composition uses
leather
Articles of leather or composition leather (excluding saddlery and harness bags; cases and
similar containers; apparel and clothing accessories; whips, riding-crops and similar of
420500 heading 6602; furniture; lighting appliances; toys; games; sports articles; buttons and parts
thereof; cuff links, bracelets or other imitation jewellery; made-up articles of netting of heading
Articles of 5608; and articles of plaiting materials)
leather or of Articles of gut, goldbeater's skin, bladders or tendons (excluding silkworm gut, sterile catgut,
15121960 Articles of leather or of composition leather, n.e.c. 420600
composition other sterile surgical suture material and strings for musical instruments)
leather, n.e.c.
Cutgut (excluding sterile catgut, other sterile surgical suture material and strings for musical
420610
instruments)
Articles of gut, goldbeater's skin, bladders or tendons (excluding silkworm gut, sterile catgut,
420690
other sterile surgical suture material and cutgut, incl. strings for musical instruments)
Saddlery and harness for any animal made from any Saddlery and harness for any animal, incl. traces, leads, knee pads, muzzles, saddle cloths,
Saddlery and
15121100 material (including traces, leads, knee pads, muzzles, 420100 saddlebags, dog coats and the like, of any material (excluding harnesses for children and
harness
saddle cloths, saddle bags, dog coats and the like) adults, riding whips and other goods of heading 6602)
Appendix 3
HS Codes Used for Analysis of Plastic

HS code Label
3901 Polymers of ethylene, in primary forms
3907 Polyacetals, other polyethers and epoxide resins, in primary forms; polycarbonates, alkyd resins, polyallyl esters and other polyesters, in primary forms
3902 Polymers of propylene or of other olefins, in primary forms
3903 Polymers of styrene, in primary forms
3904 Polymers of vinyl chloride or of other halogenated olefins, in primary forms
3906 Acrylic polymers, in primary forms
3909 Amino-resins, phenolic resins and polyurethanes, in primary forms
3908 Polyamides, in primary forms
3910 Silicones in primary forms
3911 Petroleum resins, coumarone-indene resins, polyterpenes, polysulphides, polysulphones and other polymers and prepolymers produced by chemical synthesis, n.e.s., in primary forms
3912 Cellulose and its chemical derivatives, n.e.s., in primary forms
3905 Polymers of vinyl acetate or of other vinyl esters, in primary forms; other vinyl polymers, in primary forms
3913 Natural polymers, e.g. alginic acid, and modified natural polymers, e.g. hardened proteins, chemical derivatives of natural rubber, n.e.s., in primary forms
Appendix 3
HS Codes Used for Analysis of Nylon

HS code Label
550110 Filament tow as specified in Note 1 to chapter 55, of nylon or other polyamides
550310 Staple fibres of nylon or other polyamides, not carded, combed or otherwise processed for spinning
550610 Staple fibres of nylon or other polyamides, carded, combed or otherwise processed for spinning
540261 Multiple "folded" or cabled filament yarn of nylon or other polyamides, incl. monofilament of < 67 decitex (excluding sewing thread, yarn put up for retail sale and high-tenacity yarn or
textured yarn)
540744 Woven fabrics of yarn containing >= 85% by weight of filaments of nylon or other polyamides by weight, incl. monofilament of >= 67 decitex and a maximum diameter of <= 1 mm,
printed
550319 Staple fibres of nylon or other polyamides, not carded, combed or otherwise processed for spinning (excluding those of aramids)
550911 Single yarn containing >= 85% nylon or other polyamide staple fibres by weight (excluding sewing thread and yarn put up for retail sale)
550912 Multiple "folded" or cabled yarn containing >= 85% nylon or other polyamide staple fibres by weight (excluding sewing thread and yarn put up for retail sale)
540241 Filament yarn of nylon or other polyamides, incl. monofilament of < 67 decitex, single, untwisted or with a twist of <= 50 turns per metre (excluding sewing thread, yarn put up for retail
sale, high tenacity yarn and textured yarn)
540245 Filament yarn of nylon or other polyamides, incl. monofilament of < 67 decitex, single, untwisted or with a twist of <= 50 turns per metre (excluding sewing thread, yarn put up for retail
sale, elastomeric yarn, high-tenacity yarn and textured yarn)
540251 Filament yarn of nylon or other polyamides, incl. monofilament of < 67 decitex, single, with a twist of > 50 turns per metre (excluding sewing thread, yarn put up for retail sale, high-
tenacity yarn or textured yarn)
540743 Woven fabrics of yarn containing >= 85% by weight of filaments of nylon or other polyamides by weight, incl. monofilament of >= 67 decitex and a maximum diameter of <= 1 mm, made
of yarn of different colours
540710 Woven fabrics of high-tenacity yarn, nylon, other polyamides or polyesters, incl. monofilament of >= 67 decitex and with a cross sectional dimension of <= 1 mm
540741 Woven fabrics of yarn containing >= 85% by weight of filaments of nylon or other polyamides, incl. monofilament of >= 67 decitex and a maximum diameter of <= 1 mm, unbleached or
bleached
540742 Woven fabrics of filament yarn containing >= 85% nylon or other polyamides by weight, incl. monofilament of >= 67 decitex and a maximum diameter of <= 1 mm, dyed
540210 High tenacity filament yarn of nylon or other polyamides (excluding sewing thread and yarn put up for retail sale)
540211 High-tenacity filament yarn of aramids (excluding sewing thread and yarn put up for retail sale)
540219 High-tenacity filament yarn of nylon or other polyamides (excluding sewing thread, yarn put up for retail sale and high-tenacity filament yarn of aramids)
540231 Textured filament yarn of nylon or other polyamides, with a linear density of <= 50 tex per single yarn (excluding sewing thread and yarn put up for retail sale)
540232 Textured filament yarn of nylon or other polyamides, with a linear density of > 50 tex per single yarn (excluding sewing thread and yarn put up for retail sale)
590210 Tyre cord fabric of high-tenacity yarn of nylon or other polyamides, whether or not dipped or impregnated with rubber or plastic
Appendix 3
HS Codes Used for Analysis of Polyester

HS code Label
540233 Textured filament yarn of polyester (excluding that put up for retail sale)
550120 Filament tow as specified in Note 1 to chapter 55, of polyesters
550320 Staple fibres of polyesters, not carded, combed or otherwise processed for spinning
550620 Staple fibres of polyesters, carded, combed or otherwise processed for spinning
540252 Filament yarn of polyester, incl. monofilament of < 67 decitex, single, with a twist of > 50 turns per metre (excluding sewing thread, yarn put up for retail sale and textured yarn)
540262 Multiple "folded" or cabled filament yarn of polyester, incl. monofilament of < 67 decitex (excluding sewing thread, yarn put up for retail sale and textured yarn)
540751 Woven fabrics of yarn containing >= 85% by weight of textured polyester filaments, incl. monofilament of >= 67 decitex and a maximum diameter of <= 1 mm, unbleached or bleached
540752 Woven fabrics of yarn containing >= 85% by weight of textured polyester filaments, incl. monofilament of >= 67 decitex and a maximum diameter of <= 1 mm, dyed
540753 Woven fabrics of yarn containing >= 85% by weight of textured polyester filaments, incl. monofilament of >= 67 decitex and a maximum diameter of <= 1 mm, made of yarn of different
colours
540754 Woven fabrics of yarn containing >= 85% by weight of textured polyester filaments, incl. monofilament of >= 67 decitex and a maximum diameter of <= 1 mm, printed
550921 Single yarn containing >= 85% polyester staple fibres by weight (excluding sewing thread and yarn put up for retail sale)
550922 Multiple "folded" or cabled yarn containing >= 85% polyester staple fibres by weight (excluding sewing thread and yarn put up for retail sale)
550951 Yarn containing predominantly, but < 85% polyester staple fibres by weight, mixed principally or solely with artificial staple fibres (excluding sewing thread and yarn put up for retail sale)
550952 Yarn containing > 50% to < 85% polyester staple fibres by weight, mixed principally or solely with wool or fine animal hair (excluding sewing thread and yarn put up for retail sale)
550953 Yarn containing predominantly, but < 85% polyester staple fibres by weight, mixed principally or solely with cotton (excluding sewing thread and yarn put up for retail sale)
551311 Plain woven fabrics containing predominantly, but < 85% polyester staple fibres by weight, mixed principally or solely with cotton and weighing <= 170 g/m², unbleached or bleached
551321 Plain woven fabrics containing predominantly, but < 85% polyester staple fibres by weight, mixed principally or solely with cotton and weighing <= 170 g/m², dyed
551323 Woven fabrics containing predominantly, but < 85% polyester staple fibres by weight, mixed principally or solely with cotton and weighing <= 170 g/m², dyed (excluding plain woven
fabrics)
551331 Plain woven fabrics containing predominantly, but < 85% polyester staple fibres by weight, mixed principally or solely with cotton and weighing <= 170 g/m², made of yarn of different
colours
551341 Plain woven fabrics containing predominantly, but < 85% polyester staple fibres by weight, mixed principally or solely with cotton and weighing <= 170 g/m², printed
551411 Plain woven fabrics containing predominantly, but < 85% polyester staple fibres by weight, mixed principally or solely with cotton and weighing > 170 g/m², unbleached or bleached
551421 Plain woven fabrics containing predominantly, but < 85% polyester staple fibres by weight, mixed principally or solely with cotton and weighing > 170 g/m², dyed
551431 Plain woven fabrics containing predominantly, but < 85% polyester staple fibres by weight, mixed principally or solely with cotton and weighing > 170 g/m², made of yarn of different
colours
551441 Plain woven fabrics containing predominantly, but < 85% polyester staple fibres by weight, mixed principally or solely with cotton and weighing > 170 g/m², printed
Appendix 3

HS code Label
551512 Woven fabrics containing predominantly, but < 85% polyester staple fibres by weight, mixed principally or solely with man-made filament
551513 Woven fabrics containing predominantly, but < 85% polyester staple fibres by weight, mixed principally or solely with cotton or fine animal hair
551519 Woven fabrics containing predominantly, but < 85% polyester staple fibres by weight, other than those mixed principally or solely with wool or fine animal hair, man-made filament,
viscose staple fibres or cotton
560420 High tenacity yarn of polyesters, nylon, other polyamides or viscose, impregnated or coated with rubber or plastics
590220 Tyre cord fabric of high-tenacity polyester yarn, whether or not dipped or impregnated with rubber or plastic
540243 Filament yarn of polyester, incl. monofilament of < 67 decitex, single, untwisted or with a twist of <= 50 turns per metre (excluding sewing thread, yarn put up for retail sale, textured
yarn and yarn of partially oriented polyester filament)
540247 Filament yarn of polyester, incl. monofilament of < 67 decitex, single, untwisted or with a twist of <= 50 turns per metre (excluding elastomeric yarn, sewing thread, yarn put up for retail
sale, textured yarn and yarn of partially oriented polyester filament)
540242 Filament yarn of polyester, incl. monofilament of < 67 decitex, single, untwisted or with a twist of <= 50 turns per metre, partially oriented (excluding sewing thread, yarn put up for retail
sale and textured yarn)
540246 Filament yarn of polyester, incl. monofilament of < 67 decitex, single, untwisted or with a twist of <= 50 turns per metre, partially oriented (excluding elastomeric yarn, sewing thread,
yarn put up for retail sale and textured yarn)
550959 Yarn containing predominantly, but < 85% polyester staple fibres by weight, other than that mixed principally or solely with cotton, wool, fine animal hair or artificial staple fibres
(excluding sewing thread and yarn put up for retail sale)
551312 Woven fabrics containing predominantly, but < 85% polyester staple fibres by weight, mixed principally or solely with cotton and weighing <= 170 g/m², in three-thread or four-thread
twill, incl. cross twill, unbleached or bleached
551313 Woven fabrics containing predominantly, but < 85% polyester staple fibres by weight, mixed principally or solely with cotton and weighing <= 170 g/m², unbleached or bleached
(excluding those in three-thread or four-thread twill, incl. cross twill, and plain woven fabrics)
twill, incl. cross twill, dyed
twill, incl. cross twill, made of yarn of different colours
551333 Woven fabrics containing predominantly, but < 85% polyester staple fibres by weight, mixed principally or solely with cotton and weighing <= 170 g/m², made of yarn of different colours
twill, incl. cross twill, printed
551343 Woven fabrics containing predominantly, but < 85% polyester staple fibres by weight, mixed principally or solely with cotton and weighing <= 170 g/m², printed (excluding those in three-
thread or four-thread twill, incl. cross twill, and plain woven fabrics)
Appendix 3

HS code Label
551412 Woven fabrics containing predominantly, but < 85% polyester staple fibres by weight, mixed principally or solely with cotton and weighing > 170 g/m², in three-thread or four-thread twill,
incl. cross twill, unbleached or bleached
551413 Woven fabrics containing predominantly, but < 85% polyester staple fibres by weight, mixed principally or solely with cotton and weighing > 170 g/m², unbleached or bleached
incl. cross twill, dyed
551423 Woven fabrics containing predominantly, but < 85% polyester staple fibres by weight, mixed principally or solely with cotton and weighing > 170 g/m², dyed (excluding those in three-
incl. cross twill, made of yarn of different colours
551433 Woven fabrics containing predominantly, but < 85% polyester staple fibres by weight, mixed principally or solely with cotton and weighing > 170 g/m², made of yarn of different colours
incl. cross twill, printed
551443 Woven fabrics containing predominantly, but < 85% polyester staple fibres by weight, mixed principally or solely with cotton and weighing > 170 g/m², printed (excluding those in three-
540220 High-tenacity filament yarn of polyesters (excluding that put up for retail sale)
540761 Woven fabrics of yarn containing >= 85% by weight of non-textured polyester filaments, incl. monofilament of >= 67 decitex and a maximum diameter of <= 1 mm
540769 Woven fabrics of yarn containing >= 85% by weight of mixtures of textured and non-textured polyester filaments, incl. monofilament of >= 67 decitex and a maximum diameter of <= 1
mm
551211 Woven fabrics containing >= 85% polyester staple fibres by weight, unbleached or bleached
551219 Woven fabrics containing >= 85% polyester staple fibres by weight, dyed, made of yarn of different colours, or printed
551511 Woven fabrics containing predominantly, but < 85% polyester staple fibres by weight, mixed principally or solely with viscose staple fibres
Appendix 3
HS Codes Used for Analysis of Rubber (1/2)

HS code Label
400122 Technically specified natural rubber "TSNR"
400219 Styrene-butadiene rubber "SBR"; carboxylated styrene-butadiene rubber "XSBR", in primary forms or in plates, sheets or strip (excluding latex)
400510 Rubber, unvulcanised, compounded with carbon black or silica, in primary forms or in plates, sheets or strip
400220 Butadiene rubber "BR", in primary forms or in plates, sheets or strip
400280 Mixtures of natural rubber, balata, gutta-percha, guayule, chicle or similar types of natural rubber with synthetic rubber or factice, in primary forms or in plates, sheets or strip
400270 Ethylene-propylene diene rubber "EPDM", non-conjugated, in primary forms or in plates, sheets or strip
400239 Halo-isobutene-isoprene rubber "CIIR" or "BIIR", in primary forms or in plates, sheets or strip
400110 Natural rubber latex, whether or not prevulcanised
400299 Synthetic rubber and factice derived from oils, in primary forms or in plates, sheets or strip (excluding latex, styrene-butadiene rubber "SBR", carboxylated styrene-butadiene rubber
"XSBR", butadiene rubber "BR", isobutylene isoprene rubber "IIR", halo-isobutene-isoprene rubber "CIIR" or "BIIR", chloroprene rubber "CR", acrylonitrile-butadiene rubber "NBR",
isoprene rubber "IR" and non-conjugated ethylene-propylene diene rubber "EPDM")
400121 Smoked sheets of natural rubber
400129 Natural rubber in primary forms or in plates, sheets or strip (excluding smoked sheets, technically specified natural rubber "TSNR" and natural rubber latex, whether or not
prevulcanised)
400591 Compounded rubber, unvulcanised, in the form of plates, sheets or strip (excluding rubber compounded with carbon black or silica, and mixtures of natural rubber, balata, gutta-percha,
guayule, chicle and similar natural gums containing synthetic rubber or factice derived from oils)
400211 Styrene-butadiene rubber latex "SBR"; carboxylated styrene-butadiene rubber latex "XSBR"
400599 Compounded, unvulcanised rubber in primary forms (excluding solutions and dispersions, those containing carbon black or silica, mixtures of natural rubber, balata, gutta-percha,
guayule, chicle or similar types of natural rubber with synthetic rubber or factice, and those in the form of plates, sheets or strip)
400259 Acrylonitrile-butadiene rubber "NBR", in primary forms or in plates, sheets or strip (excluding latex)
400260 Isoprene rubber "IR", in primary forms or in plates, sheets or strip
400251 Latex of acrylonitrile-butadiene rubber "NBR"
Appendix 3
HS Codes Used for Analysis of Rubber (2/2)

HS code Label
400251 Latex of acrylonitrile-butadiene rubber "NBR"
400249 Chloroprene "chlorobutadiene rubber, CR", in primary forms or in plates, sheets or strip (excluding latex)
400231 Isobutylene isoprene rubber "IIR", in primary forms or in plates, sheets or strip
400700 Vulcanised rubber thread and cord (excluding ungimped single thread with a diameter of > 5 mm and textiles combined with rubber thread, e.g. textile-covered thread and cord)
400300 Reclaimed rubber in primary forms or in plates, sheets or strip
400291 Synthetic rubber and factice derived from oils, in primary forms or in plates, sheets or strip (excluding styrene-butadiene rubber "SBR", carboxylated styrene-butadiene rubber "XSBR",
butadiene rubber "BR", isobutylene isoprene rubber "IIR", halo-isobutene-isoprene rubber "CIIR" or "BIIR", chloroprene rubber "CR", acrylonitrile-butadiene rubber "NBR", isoprene
rubber "IR" and non-conjugated ethylene-propylene diene rubber "EPDM")
401700 Hard rubber, e.g. ebonite, in all forms, incl. waste and scrap; articles of hard rubber, n.e.s.
400241 Chloroprene latex "chlorobutadiene rubber, CR"
400520 Compounded rubber, unvulcanised, in the form of solutions or dispersions (excluding rubber compounded with carbon black or silica, and mixtures of natural rubber, balata, gutta-
percha, guayule, chicle and similar natural gums containing synthetic rubber or factice derived from oils)
400610 Camel-back' strips of unvulcanised rubber, for retreading rubber tyres
Appendix 3
HS Codes Used for Analysis of Oil

HS code Label
270900 Petroleum oils and oils obtained from bituminous minerals, crude
271019 Medium oils and preparations, of petroleum or bituminous minerals, not containing biodiesel, n.e.s.
271012 Light oils and preparations, of petroleum or bituminous minerals which >= 90% by volume "incl. losses" distil at 210°C "ASTM D 86 method" (excluding containing biodiesel)
271011 Light oils and preparations, of petroleum or bituminous minerals which >= 90% by volume incl. losses" distil at 210°C "ASTM D 86 method"
271020 Petroleum oils and oils obtained from bituminous minerals (other than crude) and preparations n.e.s. or included, containing by weight 70 % or more of petroleum oils or of oils obtained
from bituminous minerals, these oils being the basic constituents of the preparations, containing biodiesel (excluding waste oils)
270799 Oils and other products of the distillation of high temperature coal tars; similar products in which the weight of the aromatic constituents exceeds that of the non-aromatic constituents
(excluding chemically-defined compounds, benzol "benzene", toluol "toluene", xylol "xylenes", naphthalene, aromatic hydrocarbon mixtures of subheading 2707.50, and creosote oils)
270730 Xylol "xylenes" containing > 50% of xylenes (excluding chemically defined)
270710 Benzol "benzene" containing > 50% of benzene (excluding chemically defined)
271099 Waste oils containing mainly petroleum or bituminous minerals (excluding those containing polychlorinated biphenyls [PCBs], polychlorinated terphenyls [PCTs] or polybrominated
biphenyls [PBBs])
270740 Naphthalene containing > 50% of naphthalene (excluding chemically defined)
270791 Creosote oils (excluding chemically defined)
270720 Toluol "toluene" containing > 50% of toluene (excluding chemically defined)
271091 Waste oils containing polychlorinated biphenyls [PCBs], polychlorinated terphenyls [PCTs] or polybrominated biphenyls [PBBs]
270760 Phenols containing > 50% of phenols (excluding chemically defined)
271095 Petroleum lubricating oils
271000 Petroleum oils and oils obtained from bituminous minerals (excluding crude); preparations containing >= 70% by weight of petroleum oils or of oils obtained from bituminous minerals,
these oils being the basic constituents of the preparations n.e.s.
271025 Kerosene lamp oil, motor kerosene, light diesel, etc
271029 Fuel oils nes, heavy distillates
Appendix 4
List of countries included in the analysis

List of EU countries List of CIS countries List of Middle East countries List of Asian countries
N Country N Country N Country N Country N Country
1 Austria 1 Russian Federation 1 Saudi Arabia 1 China 23 Myanmar
2 Belgium
2 Kazakhstan 2 United Arab Emirates 2 Japan 24 Sri Lanka
3 Bulgaria
3 Ukraine 3 Turkey 3 Hong Kong, China 25 Jordan
4 Croatia
5 Cyprus 4 Belarus 4 Iraq 4 Korea, Republic of 26 Oman
6 Czech Republic 5 Azerbaijan 5 Islamic Republic of Iran 5 India 27 Cambodia
7 Denmark 6 Uzbekistan 6 Israel 6 Singapore 28 Lebanon
8 Estonia 7 Turkmenistan 7 Qatar 7 Taipei, Chinese 29 Macao, China
9 Finland 8 Georgia 8 Kuwait 8 Turkey 30 Nepal
10 France
9 Moldova, Republic of 9 Oman 9 Viet Nam 31 Bahrain
11 Germany
10 Armenia 10 Egypt 10 Thailand 32 Yemen
12 Greece
13 Hungary 11 Kyrgyzstan 11 Bahrain 11 Malaysia 33 Lao People's Democratic Republic
14 Ireland 12 Tajikistan 12 Jordan 12 United Arab Emirates 34 Afghanistan
15 Italy Source: ITC 13 Lebanon 13 Indonesia 35 Syrian Arab Republic
16 Latvia 14 Yemen 14 Saudi Arabia 36 Mongolia
17 Lithuania 15 Syrian Arab Republic 15 Philippines 37 Turkmenistan
18 Luxembourg
16 State of Palestine 16 Israel 38 Democratic People's Republic of Korea
19 Malta
20 Netherlands Source: ITC 17 Pakistan 39 Tajikistan
21 Poland 18 Iran, Islamic Republic of 40 Brunei Darussalam
22 Portugal 19 Bangladesh 41 Maldives
23 Romania 20 Kuwait 42 State of Palestine
24 Slovakia 21 Iraq 43 Timor-Leste
25 Slovenia 22 Qatar 44 Bhutan
26 Spain
Source: ITC
27 Sweden
28 United Kingdom
Source: ITC
Note: All the classifications are performed based on the data provided by ITC
Appendix 5
Classification Regions Used in the Turkish Investment Incentive Scheme

Classification of Turkish regions based on the development level
Region 1 Region 2 Region 3 Region 4 Region 5 Region 6
Ankara Adana Balıkesir Afyonkarahisar Adıyaman Ağrı
Antalya Aydın Bilecik Amasya Aksaray Ardahan
Bursa Bolu Burdur Artvin Bayburt Batman
Çanakkale (Bozcaada &
Eskişehir Gökçeada excluded) Gaziantep Bartın Çankırı Bingöl
Istanbul Denizli Karabük Çorum Erzurum Bitlis
Izmir Edirne Karaman Düzce Giresun Diyarbakır
Kocaeli Isparta Manisa Elazığ Gümüşhane Hakkari
Muğla Kayseri Mersin Erzincan Kahramanmaraş Iğdır
Kırklareli Samsun Hatay Kilis Kars
Konya Trabzon Kastamonu Niğde Mardin
Sakarya Uşak Kırıkkale Ordu Muş
Tekirdağ Zonguldak Kırşehir Osmaniye Siirt
Yalova Kütahya Sinop Şanlıurfa
Malatya Tokat Şırnak
Nevşehir Tunceli Van
Bozcaada &
Rize Yozgat Gökçeada
Sivas
Source: Investment Support and Promotion Agency of Turkey
Stage I : Evaluate the
potential of Georgia
Glossary of terms
CAGR The compound annual growth rate n/a Not available
CIS The Commonwealth of Independent States Km Kilometre
DTT Double Tax Treaty kV Kilovolt
EUR Euro, official currency of the European Union kWh Kilowatt hour
FDI Foreign Direct Investment TCG Tax code of Georgia
FIZ Free Industrial Zone UK United Kingdom
FTA Free Trade Agreement USA United States of America
GDP Gross Domestic Product USD United States dollar
GEL Georgian Lari, official currency of Georgia VAT Value Added Tax
GoG Government of Georgia WTO World Trade Organization

GSP+ Component of the European Union Generalised Scheme of
Preferences for developing countries
Overview of
Georgia
Overview of Georgia
General overview
Georgia is located at the crossroads of Western Asia and Eastern Georgia with its advantageous location plays an important role in
— 3 international airports Europe, bounded to the west by the Black Sea, to the north by linking the east to the west. The countries’ main facilities include:
and two ports Russia, to the south by Turkey and Armenia, and to the southeast
• Black Sea ports – Batumi Sea Port and Poti Sea Port are
by Azerbaijan.
— Anaklia Deep Sea Port is already operating and Anaklia Sea Port is planned to start
Due to its location Georgia offers direct access to European, Gulf operations in 2020
planned to open in 2020, Cooperation Council and CIS markets. Additionally, Georgia is the
• Railway - with the total length of 2,084 km, covers almost full
that will be able to handle part of trans-Caspian corridor and is able to provide railway
territory of the country. During 2017, cargo of around 10.6
100 million tons of cargo transportation to the Republic of China by the shortest route
million tones were transported by the Georgian Railway to
per annum The capital and the largest city of Georgia is Tbilisi inhabited with different countries. The railway network terminates at the Black
around 30% of total population Sea giving easy access to on-shipment of cargo to the
— Railway link covering the Mediterranean basin and Europe
Country’s general information is as follows:
whole territory of Georgia • Road- total road lengths of 20,329 km. through Georgia
General Information
with easy access to the • Airports – three international airports in Tbilisi, Kutaisi and
Area 69,700 km2
ports Population 3,718,200 Batumi and two airports for domestic flights in Natakhtari and
Currency Georgian Lari (₾) (GEL) Mestia
— 4 free industrial zones
GDP per capita, 2017* 4,078 USD • Free Industrial Zones – Georgia has 4 FIZ (Tbilisi, Poti and 2 at
GDP real growth, 2017* 5% Kutaisi) in which business are exempt from all tax charges,
Workforce 1,998,300 except personal income tax
Unemployment rate 11.80%
Note: * Preliminary 2017
Population, workforce and unemployment rate as at 1 January 2017
Source: National Statistics Office of Georgia
FIZ
FIZ
FIZ
Note: International Airport Tbilisi

Port Kutaisi
Source: KPMG Analysis Batumi, Poti, Anaklia
Overview of Georgia
Economic indicators
GDP by sectors, 2017* Inflation Rate
— Manufacturing is second
Agriculture, hunting Year Rate, %
largest sector with 10% of and forestry; fishing
Other sectors 8% 2015 4.0
GDP 23% 2016 2.1
2017 6.0
— GDP has been growing at Industry
Source: National Bank of Georgia
16%
an average CAGR of 2.7%
since 2015 According to the National Bank of Georgia (NBG) the targeted
Public inflation rate represents 3% for 2018-2020, as a result of
administration
— Targeted rate of inflation 9% introduction of the following policies: refinancing loans, one month
Construction open market operations (manage short-term interest rates on the
of 3% for 2018-2020 9%
interbank money market), standing facilities, certificates of
Real estate, renting
and business deposits, operations with government securities, foreign exchange
activities Transport and interventions, minimum reserve requirements and other
7% communication
10%
instruments.
Trade
18%
Foreign exchange rate tend to be seasonal with lower rates during
Note: * Preliminary 2017 summer period and higher during winter period, as a result of
Industry comprise of manufacturing; mining and quarrying; electricity, gas and water increased activities in Tourism industry
supply and processing of products by households
Average Exchange Rates by Year

4
3.06
2.83
2.62
2.52
GEL
3
2.51 2.49
2.37
2.27
2
2015 2016 2017 1Q 2018
USD EUR
Source: National Bank of Georgia
Overview of Georgia
International Rankings
International Rankings of Georgia FDI by Sector 2017*
— Ease of Doing Business – Mining
Score (Out World Regional Other sectors 3% Manufacturing
9th place among 190 Index Year of 100) Rank Rank 9% 4%
countries worldwide Ease of doing Business 2018 N/A 9 N/A Energy sector
10%
Economic Freedom 2018 76 16 9 Financial sector
— Georgia’s credit ratings 16%
Corruption Perceptions 2017 56 46 1
are stable and positive for Safety 2018 80 5 N/A Construction
last 2 years Note: Regional rank: Europe for Economic Freedom and Eastern Europe and Central Asia for 16%
Corruption Perceptions
Real Estate
Source: The Heritage Foundation, Transparency International, Numbeo, United Nations
9%
— Around 60% of FDI Development Programme, The World Bank
Hotels and
represents the following Credit Ratings restaurants
5%
sectors: transportation Credit Rating Agency Date Rating Outlook Transports and
communications
and communications, Fitch 2018 BB- Positive 28%
Note: *Preliminary 2017
financial services and Moody's 2017 Ba2 Stable Source: National Statistics Office of Georgia
S&P 2017 BB- Stable
construction
Source: Fitch Ratings, Moody’s, Standard & Poor’s
FDI by Country, 2017*
— FDI in manufacturing
Key components for Ease of doing business rating: Other
Cyprus 11%
sector comprised around Azerbaijan
— companies and property registration within 2 days and 1 day, China 2%
3% 26%
USD75 million during respectively
Panama
2017 3%
— time for export documentary preparation of 2 hours and for UAE
border procedures of 15 hours 3%
USA
4%
Czech Republic Turkey

7% 15%
Netherlans
12% UK
14%
Overview of Georgia
Overview of Preferential Trade Regimes (1/2)

Deep and Comprehensive Free Trade Agreement with EU However, footwear, bags and accessories do not have a
 Georgia is the only limitation on the usage of imported materials from countries
country in the region with On June 27, 2014 Georgia and the European Union signed the
other than EU in the ex-works price of the product.
Association Agreement, including deep and comprehensive free
FTAs with China and the trade area (DCFTA) – which apart from other areas considers The only exception for footwear products is that assemblies of
European Union removing customs duties on imports and exports of certain goods. uppers affixed to inner soles or to other sole components of
heading N6406 (parts of footwear) do not comply with the definition
Standard import tax rates that are fully eliminated as a result of
 Since June 2000, Georgia of sufficient working or processing which confers origination status.
DCFTA vary by product and represent up to 17% for footwear and
is a full-fledged member of up to 9.7% for bags and accessories. Overview of Free Trade Agreements
the WTO, resulting in For importing goods to the EU market, import duty is calculated Georgia has signed FTAs with China, Turkey and CIS, resulting in
beneficial trade relations according to the following factors: price of the goods, commodity beneficial customs tax rates for export of goods
with the WTO member code and country of origin of the goods, as well as any other
— China
specific limitations and requirements applicable to individual cases.
countries (164)
Georgia and China have signed the FTA, which was ratified in
To benefit from this regime, the Rule of Origin must be fulfilled. The
November 2017 by the Parliament of Georgia (effective from
 The EU grants Georgia Origin means the “economic nationality” of the goods for
January 1, 2018). Georgia became the 11th country who obtained
GSP+ treatment, with duty international trade purposes. The Certificate of Origin is valid for 4
free trade regime with the Republic of China
months. According to the DCFTA, the goods are considered to
free treatment for more meet the criteria of Rule of Origin, in case the below criteria are — CIS countries and Turkey
than 7,000 products met:
Georgia has a multilateral free trade regime with CIS countries,
 Georgia benefits from zero — Materials used in manufacturing are entirely originated in which is regulated by the CIS multilateral agreement “on creating
Georgia or in EU, or free trade zone” (1994). Georgia has also concluded bilateral free
import tax to EU for trade agreements (FTA) with Turkey and several CIS countries.
— In case materials used in manufacturing are not entirely
footwear, bags and According to the FTA, specific goods are subject to income tax
originated in Georgia or in EU, then such materials have
accessories, which exemption, despite the TCG rules
undergone sufficient working or processing in Georgia. This
otherwise ranges from 4% means:
to 17% 1. The final product commodity sub code should be different
from the code of used materials; and
2. Total value of imported materials used in manufacturing
of the product should not exceed certain percentage of the
ex-works price of the product. Depending on the product
the limitation ranges from 30% to 50%.
Overview of Georgia
Overview of Preferential Trade Regimes (2/2)

Country Customs duty Criteria for the Certificate of Origin
 Georgia benefits from zero
- Materials used in manufacturing should be entirely originated in Georgia, or
import tax to Turkey, - In case materials used in manufacturing are not entirely originated in Georgia, then such materials have
China and CIS for undergone sufficient working or processing in Georgia. This means:
footwear, bags and 1. The final product commodity sub code should be different from that of the imported materials; and
Footwear: up
2. Total value of imported materials used in manufacturing of the product should not exceed certain percentage
accessories which to 17%;
of the ex-works price of the product. Depending on the product the limitation ranges from 30% to 50%.
Turkey Bags and
otherwise ranges from 5% However, footwear, bags and accessories do not have a limitation on the usage of imported materials.
accessories:
to 30% The only exception for footwear products is that assemblies of uppers affixed to inner soles or to other sole
up to 9.7%
components of heading N6406 (parts of footwear (including uppers whether or not attached to soles other than
outer soles); removable in-soles, heel cushions and similar articles; gaiters, leggings and similar articles, and
parts thereof) do not comply with the definition of sufficient working or processing which confers origination
status.
1. Materials used in manufacturing should be entirely originated in Georgia, or
2. Total value of imported materials used in manufacturing of the product should not exceed 40% of the ex-
works price of the product, except those goods listed in Appendix II.
Footwear: However, as per Appendix II, footwear, bags and accessories do not have a limitation on the usage of
10%-20%; imported materials.
China Bags and According to the FTA between Georgia and China, customs duties are generally eliminated, however there are
accessories: certain products for which customs duties are eliminated gradually. Selected products - footwear, bags and
10% - 24% accessories, fall in the category for which the customs duties are eliminated upon the agreement sign off date
(1 January 2018), except for the products under code N64029929 - footwear uppers of plastic, for which the
customs duty is eliminated gradually during 5 years as follows: Year 1) 19.2%; Year 2)14.4%, Year 3) 9.6%;
Year 4) 4.8%; Year 5) 0%.
- Materials used in manufacturing should be entirely originated in Georgia, or
- In case materials used in manufacturing are not entirely originated in Georgia, then such materials have
Footwear: undergone sufficient working or processing in Georgia. This means:
10%-30%; 1. The final product commodity sub code should be different from that of the imported materials; and
CIS Bags and 2. Total value of imported materials used in manufacturing of the product should not exceed 51% of the ex-
accessories: works price of the product,
5%-20% According to the FTAs between Georgia and CIS countries, customs duties for footwear mainly range between
10%-15%, however some countries have different specifications, such as 30% but not more than USD6 per
footwear product and USD2 per bags and accessories products imposed by Uzbekistan.
Overview of Georgia
Overview of Georgian Taxation System

 Georgia is a country with low tax rates and transparent tax Other tax rates in Georgia are as follows:
 New profit tax rule is system. Tax and customs legislation is unified under one tax
effective from 1 January  Withholding taxes for the payments made to non-residents
code and the collection of taxes and supervision of the tax
related to interest, dividend and royalty is generally 5%
2017 according to which environment is provided by the Georgia Revenue Service. All
tax administration procedures and customs clearances are  Georgia doesn’t have payroll, social security, capital gains,
Profit taxation shifts from online/web-based. The Taxes are calculated and paid in GEL wealth or inheritance tax
the moment of earning the Tax rates in Georgia  Foreign-source income of individuals is fully exempted
profits to the moment of Personal income tax 20%
 No restrictions on currency convertibility or repatriation of
their distribution Corporate Profit Tax 15%*
capital and profit
VAT 18%
 Double taxation treaties Customs/Import Tax 0%, 5% or 12%  VAT on Export/Re-export – The export/re-export of goods is
with 54 countries Excise Tax per type of good
exempt from VAT with a right to credit input VAT (i.e. like a
zero-rated transaction)
Property tax (except land) Up to 1%
 Special customs regime
Note: After 1st January 2017 the moment of taxation for profit tax is shifted from when profits are  Inward Processing Customs Regime – If the goods of foreign
for exporters earned to when they are distributed origin undergoes processing in Georgia and the product
Source: Georgian Tax Code
obtained as a result of the processing is exported, no taxes are
 On 13 May 2016 the Parliament of Georgia passed a bill on levied on this operation
corporate income tax reform (referred to as the ‘Estonian model
of corporate taxation’). Under these new rules the moment of  Georgia has approximately 54 effective Double Taxation
taxation is shifted from when profits are earned to when they Treaties (DTTs), see Appendix 1 for the detailed list. The rules
are distributed. These rules are effective starting 1 January and procedures for the application of tax concessions set by the
2017 for all Georgian commercial entities and Permanent provisions of DTT is determined by the Minister of Finance of
Establishments except financial institutions (such as banks, Georgia. According to the DTTs, the income is subject to
insurance companies, microfinance organisations, pawnshops) exemption or lower rate withholding tax
for which the law will become effective on 1 January 2023  Land tax cost - The annual base tax rate depends on type of
 Goods brought into Georgia are subject to customs procedures. land and is calculated based on certain rates per hectare. The
Import tax varies depending on the commodity code assigned price of non-agricultural land plot is GEL 0.24 per square meter
to the goods to be imported and is generally calculated as a (m2), which further can be adjusted by a territorial coefficient
percentage (0%, 5% or 12%) of the tariff value (i.e. customs not exceeding 1.5, determined by the local municipality
value). Commodity codes in Georgia are developed according
to the international convention on Harmonized Commodity
Description and Coding System
Overview of
manufacturing of
footwear, bags and
accessories market in
Georgia
Overview of manufacturing of footwear, bags and accessories market in Georgia
Overview of footwear, bags and accessories market

Main trends of Footwear, bags and accessories
— Overall, there is an
increasing trend in USD'000 2015 2016 2017*
consumption of footwear, Footwear 66,837 73,071 81,986

Import Bags and
bags and accessories 14,069 15,349 18,604
accessories
— During 2016, production Total 80,906 88,420 100,590
of footwear increased in Footwear 2,083 2,140 1,449
line with consumption by Export Bags and
1,303 568 772
around 10% accessories
Total 3,386 2,708 2,221
— Export represents around
Footwear 2,589 2,829 n/a
35% of local production
Production Bags and
of footwear, bags and
accessories 7,045 5,089 n/a
accessories
Total 9,633 7,918 n/a
Footwear 67,343 73,760 n/a
Consumption** Bags and
19,811 19,870
accessories n/a
Total 87,153 93,630 -
Note: * Preliminary 2017
** Statistical data is not available for consumption. Thus, the following formula was used
to estimate amount of consumption: Import-export+production
Foreign trade of Footwear in Georgia

 Footwear import increased Import of Footwear Export of Footwear
on average by CAGR of USD'000 2015 2016 2017* USD'000 2015 2016 2017*
7% since 2015 Footwear with outer soles and uppers of rubber
12,143 28,823 34,086 Footwear with outer soles and uppers of rubber or
or plastics 769 550 482
plastics
 Key driver for increase is Footwear with outer soles of rubber, plastics,
footwear with outer soles leather or composition leather and uppers of 13,385 18,177 21,320 Footwear with outer soles of rubber, plastics, leather
textile materials or composition leather and uppers of textile 271 464 475
and uppers of rubber or materials
Footwear with outer soles of rubber, plastics,
plastics with average leather or composition leather and uppers of 19,762 18,675 19,049 Footwear with outer soles of rubber, plastics, leather 972 945 463
CAGR of 41% increase leather or composition leather and uppers of leather
since 2015 Footwear with outer soles of rubber or plastics,
Footwear with outer soles of rubber or plastics, with 55 169 23
with uppers other than rubber, plastics, 18,700 4,226 4,331
uppers other than rubber, plastics, leather, textile
 Top importers in Georgia leather, textile
Footwear waterproof, with outer soles and Footwear waterproof, with outer soles and uppers 9 8 3
are China and Turkey with 1,725 1,866 1,964
uppers of rubber or plastics of rubber or plastics
around 42% and 21% of
Parts of footwear 1,122 1,304 1,236 Parts of footwear 7 4 3
total import, respectively
66,837 73,071 81,986 2,083 2,140 1,449
 Top country for export is Note: *Preliminary 2017 Note: *Preliminary 2017
Source: International Trade Centre-Trade Map, The National Statistics Office of Georgia Source: International Trade Centre-Trade Map, The National Statistics Office of Georgia
Armenia with 73% of total Import of Footwear by Country 2017* Export of Footwear By County, 2017*
Other
export for 2017 Russia 13% Azerbaijan Other
2% 2% 4%
Ukraine
Iran Turkey 5%
Hong Kong 2% 2%
2% Iran
China 3%
Germany
42% Russia
3%
5%
Spain
5%
Kyrgyzstan
6%
Italy
10%
Armenia
Turkey 73%
21%
Source: International Trade Centre-Trade Map Source: International Trade Centre-Trade Map
Foreign Trade of Bags and Accessories

 Import of bags and Import of bags and accessories Export of bags and accessories
accessories increased on USD'000 2015 2016 2017* USD'000 2015 2016 2017*
average by CAGR of 10% Trunks, cases (suit, camera, jewelry, cutlery), Trunks, cases (suit, camera, jewelry, cutlery), bags
bags (travel, tool, similar), wholly or mainly (travel, tool, similar), wholly or mainly covered by
since 2015 1,239 470 717
covered by leather, composition leather, 12,125 12,799 16,437 leather, composition leather, plastic sheeting, textile
plastic sheeting, textile materials, vulcanised materials, vulcanized fibre, paperboard
 China is top importer of fibre, paperboard
Articles of apparel and clothing accessories, of
bags and accessories in 63 98 54
Articles of apparel and clothing accessories, of leather or composition leather
1,722 2,343 1,885
Georgia leather or composition leather
Articles of leather or composition leather not
1 - 1
Articles of leather or composition leather not elsewhere classified
 Export to Armenia and elsewhere classified
147 121 174
1,303 568 772
Azerbaijan comprise more Saddlery and harness for any animal of any
75 86 107 Note: *Preliminary 2017
than 60% of total export material Source: International Trade Centre-Trade Map, The National Statistics Office of Georgia
14,069 15,349 18,604

Source: International Trade Centre-Trade Map, The National Statistics Office of Georgia
Imports of Bags and accessories by Country 2017* Export of Bags and accessories by County, 2017*
Other
Russia Poland 4%
Other 3%
3%
30%
Ukraine
3%
France
China
4%
45%
Iran
7%
Spain Armenia
6% Israel 54%
10%
Turkey
9% Italy
10% Azerbaijan
12%
Note: *Preliminary 2017 Note: *Preliminary 2017
Source: International Trade Centre-Trade Map Source: International Trade Centre-Trade Map
Overview of major players

Overview of major players in Georgia — Manufacturers of leather
 Georgia has a history of
production of leather, Georgia has a long history of production. During Soviet Union We identified 5 leather manufacturer companies operating in
period a number of leather and footwear manufacturing Georgia. The raw materials for leather production are purchased
footwear and textile companies were operating in different cities of Georgia, namely locally, while end product is mainly exported to Turkey and Italy.
products Tbilisi, Kutaisi, Batumi and Sokhumi. The produced goods were Only small portion is sold to local manufacturers (up to 5% of total
exported to different countries within the Soviet Union. In addition, production).
 Recently Georgia has seen Georgia had a well developed textile production almost in all major
In addition to the listed manufactures having a larger market share,
emerging local cities of Georgia (Tbilisi, Kutaisi, Batumi, Sokhumi, Poti, Gori, etc).
a number of individual entrepreneurs are involved in footwear,
manufacturers already Since the collapse of the Soviet Union, these enterprises stopped bags and accessories production. Also there are a number of local
operations, however in the recent years we see a gradual revival of designers producing customized products who export to different
exporting their products to
the industry. markets such as Europe, USA, etc. The demand for designer
different international products increases on annual basis.
Through our research we identified number of individual
markets enterprises with small production as well as relatively large local
manufacturers of footwear, bags and accessories with current
Our interview was conducted with companies in the following
production of 1,500-151,000 units per annum and maximum
sectors:
capacity of 250,000 units per annum. Some local manufacturers
are already exporting their production and some have started Manufacturers per sector
planning export activities. The results of our research are as
Manufacturers of footwear Vogg
follows:
Levanto
— Manufacturers of footwear Sad
We identified 4 footwear manufacturing companies, producing Miapoly
leather footwear, rubber boots and slippers, which are distributed Manufacturers of bags and accessories Humanoid Georgia
across Georgia. Gepherini
— Manufacturing of bags and accessories Manufacturers of leather Saba

Zurderi
We identified 2 bags and accessories manufacturers in Georgia, Geopeli
producing backpacks, waist bags, laptop bags, wallets, belts and
Deri Standard
other accessories from different materials (leather, eco leather,
textile). One of them already exports its products to USA, France, Filimaska
Russia, Ukraine, Azerbaijan, Sweden, Switzerland and
Kazakhstan.
Overview of labor
force
Overview of labor force
Distribution of population and unemployment rate

Overview of by
Population labor force
age, 1 January 2017 Population by region, 2017
 Unemployment rate of
000 Population Male Female Shida Kartli
around 12% 7%
<15 724 379 345
Kvemo Kartli
 Active population of 15-64 15 - 19 215 114 101 11% Tbilisi
30%
20 - 24 231 119 112
years represents 1,729,000 Samtskhe-Javakheti
25 - 29 278 140 138
4%
individuals
30 - 34 272 136 136
 Around 43% of population 35 - 39 250 124 126 Samegrelo-Zemo
Svaneti
40 - 44 242 119 123 9%
outside labor force is
45 - 49 237 115 122 Ratcha-Lechkhumi
between 20-60 years, Kvemo Svaneti Adjara
50 - 54 254 120 134 9%
1%
which means that 55 - 59 258 118 140 Mtskheta-Mtianeti Kakheti
9% Guria
additional 411,000 3% 3%
60 - 64 220 97 124 Imereti
14%
individuals can be 65> 537 202 335 Source: National Statistics Office of Georgia
available in the country in Total 3,718 1,782 1,937

addition to unemployed Unemployment rate by age
Distribution of population aged 15 and older by economic
209,000 individuals within status 35 31.9
30.0
the same age range 000 2014 2015 2016 30
Unemployment rate,%
Active population (labour force), total 1,991 2,022 1,998 25 21.6
Employed 1,745 1,780 1,763
20 16.1
Hired 692 753 745
15 12.8 11.9
Self-employed 1,046 1,018 1,011 11.2
9.7
Not-identified worker 7 8 7 10
6.0 5.3
Unemployed 246 242 235 5 1.5
Population outside labour force 1,004 958 963 0
Unemployment rate, % 12.4 12.0 11.8 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65+
Note: Population outside labor force represents individuals who did not work during last 7 days Source: National Statistics Office of Georgia
and no actively seeking a job during last 4 weeks. Also a person who was seeking a
job for the last 4 weeks, however in case of acceptance was not ready to start work for
the next 2 weeks
Labor Code and average monthly nominal earnings

Average monthly gross earnings by sectors, 2016
Average monthly nominal earnings of employees by
 Average gross salaries for
900 subsector
bags and accessories 800
775
USD 2015 2016
700
manufacturing of USD356 Manufacturing of Bags and Accessories 305 356
USD
600 535 508 530
483 499 484
per month is within the 500 386 397 Manufacturing of Footwear 93 80
400 328 334 340
243 276 264 Source: National Statistics Office of Georgia
actual gross salary ranges 300 227
200
of USD265 – USD625 100
0 Labor Code, amended in 2015
identified as a result of Legal Age 16 years old
interviews Minimum wage no minimum wage requirements
Probationary period up to 6 months
 Average gross salaries for
Standard working
footwear production hours 40 hours per week (48 hours for specified sectors)
amounts to USD80 per the Note: USD/GEL Average Exchange rate of year 2016 - 2.367 to be agreed between employer and emploee. Rest
Source: National Statistics Office of Georgia time of minimum 12 hours between working
statistical information, Overtimes and shifts days/shifts
however the actual gross Average monthly gross earnings for industry per regions, 2016 Payment for more than for standard hours, exact rate to be
salary identified during the overtimes agreed between employer and emploee
600 Holidays 24 working days paid and 15 days unpaid annually
interviews ranges from 500
400 Upon parties agreement but not more than 183
USD
USD155 to USD420 300

531 Maternity leave calendar days paid
200 416 384 433 369
326 289 305 279
240 238
100 202 1 month prior written notice and 1 month's salary or
 Georgia's score of Labor 0
3-day prior written notice and 2 months' salary.
freedom index calculated Termination by Compensation within 30 calendar days of the
employer contract termination
by the Heritage foundation Source: Georgian Labor Code
for the year 2018 is 77.3
points out of 100, which is
defined as mostly free
Note: USD/GEL Average Exchange rate of year 2016 - 2.367
Industry comprise of manufacturing; mining and quarrying; electricity, gas and water
supply and processing of products by households
Overview of trainings
Overview of training courses in Georgia Some of the centers provide courses based on modules and
 Training courses are students are able to take them partially. In such cases timeframe to
available both in eastern We have performed research of training centers (“centers”) in
receive the certificate increases accordingly
Georgia for the specialist in footwear, bags and accessories sector
and western parts of and identified 14 training centers from different cities of Georgia: In addition, 11 out of 14 training centers mentioned that in case of
Georgia Tbilisi, Kutaisi, Batumi, Mestia, Akhaltsikhe, Mtskheta, Telavi, Gori, request, they can develop special short-term training programs
Ozurgeti, Tsalenjixa, Poti. See Appendix 2 for the details. according to the customer’s requirements. The terms and cost of
 Some of training centers special short-term trainings vary upon the requirements.
Based on the interviews we identified that:
already have experience of Three training centers mentioned that they have already provided
 Footwear production training courses is provided by 3
providing special short special training courses for Turkish investor, who wanted to retrain
centers in Tbilisi and Kutaisi with average length of the
the staff
term courses as per course of 16 months
investors requirements  Bags and accessories (textile production) training courses
is provided by all 14 training centers in different cities of
Georgia (Tbilisi, Kutaisi, Batumi, Gori, Mestia, etc) with the
average length of the course of 20 months
Timeframe of trainings vary per training center and methodology of
the courses. Program courses are fixed and students need to finish
it fully to receive a certificate. The programs are mainly financed by
the Government and special exams have to be passed by a
candidate to become eligible for the program. The standard annual
fee for the programs is GEL2,250 per annum
Overview of costs
Overview of costs
Water and Gas Costs (including 18% VAT) Overview of company set-up costs
— Electricity costs range
USD Unit Average Rate Maximum Rate — The state registration in Georgia is performed by National
between USD 0.0598 to
Water m3 1.61 1.97 Agency of Public Registry (NAPR)
USD0.0858 per kWh to be agreed between company and supplier of free
Gas — The registration should be carried out within one working day
choice, average rate of 0.3 per cubic meter
— Cost of water ranges Note: Exchange Rate Used – 2.49 (Average for 1Q 2018) after submitting all required documentation to the NAPR and
Source: Georgian national Energy and Water Supply Regulatory Commission paying a state due in the amount of GEL 100 (approximately
between USD1.61 to
Electricity Costs per kWh (including 18% VAT) USD 40)
USD1.97 per m3
Telasi (tariff Energo-Pro Georgia — A representative office/LLC can be registered on the same day
— Average cost of gas per USD cents for Tbilisi) (Tariff for regions) of submission of documentation and the state due payable is
35-110 kv 6.48 5.98 GEL 200 (approximately USD 80)
cubic meter amount to
6-10 kv 6.79 6.54
USD0.3 cent — All copies of documentation provided from the country of
220/380 Volt 8.58 8.48 incorporation of the Company are to be notarized and
Note: Exchange Rate Used – 2.485 (Average for I/IV 2018)
Source: Georgian national Energy and Water Supply Regulatory Commission
apostilled/legalized in that country (where possible), if any.
Afterwards the documents are to be translated into Georgian
Overview of utility costs
and notarized in Georgia
— Maximum rates of electricity and water are regulated by the
— Normally the translation costs amount of GEL 15-20
GoG, but rates differ depending on the region (and voltage, in
(approximately USD 6-10) per each translated standard page
case of electricity)
— According to the special Decree issued by the Ministry of
Energy of Georgia, a company has an option to register as a Overview of industrial land plot costs
direct consumer of electricity if its annual consumption is no less
Average industrial land plot costs for the Government of Georgia
than 1kW and negotiate the electricity price directly with the
land plots auction results for 2016 and 2017 are as follows:
producer
- Samegrelo and High Svaneti: Poti-USD29; Senaki-USD5
— Natural gas rates are deregulated for industrial use and
companies have the freedom to choose any of the suppliers - Guria: Ozurgeti- USD2; Lanchkhuti- USD7
operating in Georgia and negotiate rates with them
- Kartli (Gardabani): USD3
— We have not been provided with cost of utilities in amount terms
by companies operating in the sector. Most of them indicating See appendix 3 for the details
that the cost of utility is not material and amount up to 2% of
total costs
Overview of access to
finance and support
mechanisms
Overview of access to finance and support mechanisms
Access to finance
The Government of Georgia proposes the following incentives in
— Companies investing in order to encourage business initiatives and export:
Georgia benefit from
— Produce in Georgia
support with access to
The state program “Produce in Georgia” is being implemented by
finance, both equity and
the initiative of the GoG. The program aims to develop and support
debt the entrepreneurship, as well as creation of new enterprises and
increasing the export potential of the country. In addition, the
program aims to encourage manufacturing and agriculture
industries in Georgia, and it offers two main incentives: financial
resources and infrastructure (land, building, etc.):
• Support with financial resources: If a company gets GEL
denominated loan from a bank (GEL150,000-GEL5,000,000),
the GoG will provide interest expense financing up to 10% for 2
years, including partial collateral guarantee (up to 50% but not
exceeding GEL2,500,000). In addition, GoG provides co-
financing of the annual interest rate for leases between
GEL100,000-GEL5,000,000 up to 12% and for the first 2 years
— JSC Partnership Fund
JSC Partnership Fund (PF) is a state owned investment fund
incorporated in 2011, with the main objective to promote
investment in Georgia by providing co-financing (equity,
convertible/non-covertible loans) in projects at their initial stage of
development with the following criterias:
 A potential investor should possess financial resources in form
of equity to co-fund proposed investment project
 PF participation should not exceed 50% of the total investment
 Exit period of 3-7 years, as per proposed investment projection
Infrastructural support
In addition to the loan financing, described in previous slide, state For the approval of the state property transfer to a business
— Free of charge transfer of program “Produce in Georgia” provides infrastructural support as entity requirements listed below should be met:
immovable property is follows.
 Enterprise should be registered and start operation within 2
one of the support — Support with infrastructure: GoG provides state owned years after the issuance of the relevant Act of the Government
mechanisms for the immovable property free of charge to companies with of Georgia
investment obligations for new projects (new factory or  Total investment should equal the market price of the
companies investing in
enlargement of existing one). Investment obligation states that transferred property multiplied by 6, if the property is located in
Georgia the enterprise should invest at least 6 times more than the Tbilisi or multiplied by 4, if the property is located in other
market price of the property in Tbilisi and 4 times more than regions of Georgia
the market price of the property in regions  Minimum 25% of the total investment calculated using the
method described above should be made in the first year, the
Under the program of the Government of Georgia -Enterprise
rest of the investment till the end of second year
Georgia, land plots listed on the webpage of the National Agency
 No changes are allowed in the production profile during the first
of State Property can be purchased at the symbolic price of
two years
GEL1
 During the first year output of the enterprise should be no less
The beneficiary of the program should be a non-government legal than 25% of the projected annual output and 50% during the
entity registered in compliance with the “Law of Georgia on second year
Entrepreneurs” and the end product of the enterprise should be  Upon submission of the documentation to the National Agency
listed on the program priority list approved by the GoG. of the State property, an irrevocable bank guarantee equivalent
Manufacturing of Footwear and Bags and accessories is included to 10% of the investment with validity period of 30 months has
in the priority list to be presented
Overview of Free Industrial Zones in Georgia

Free Industrial Zones in Georgia  If a company imports products from FIZ to other territory of
— Four Free industrial Georgia, it has to pay VAT and 4% of revenue from national
Zones in capital of the As mentioned earlier in this report, there are 4 FIZs in Georgia
sales
located in:
country as well as in Tax Benefits for FIZ
 Tbilisi – the capital of Georgia (with an access to international
regions providing General rate in
airport, railway and main road),
companies registered in Rate for FIZ Georgia
 Poti (with an access to port and main road) and Profit Tax 0% 15%*
FIZ the following benefits:
 2 FIZs at Kutaisi – connecting hub between Tbilisi and black VAT 0% 18%
 Tax Free Environment sea ports (with an access to international airport, railway and Property Tax 0% up to 1%
main road). Import Tax 0% up to 12%
 Simplified Procedures Dividend Tax 0% 5%
Companies operating in FIZs are exempt from all taxes except
Personal Income Tax (paid from employee's salaries) Personal Income Tax 20% 20%
 Transactions in any
currency Benefits for Free Industrial Zones Note: After 1st January 2017 the moment of taxation for profit tax is shifted from when profits are
earned to when they are distributed
 A FIZ enterprise may be an enterprise of any legal structure Source: Tax Code of Georgia, Law of Georgia on Free Industrial Zones
and any form of ownership registered within a FIZ according

to enterprise registration norms defined by the legislation of
Georgia
 Production and processing of any goods are permitted
(exceptions: arms and ammunition, nuclear and radioactive
substances, narcotic and psychotropic substances, tobacco
products and/or tobacco raw materials)
 Accounts within a FIZ are permitted to be settled in any
currency
 For goods produced within the FIZ appropriate certificate of
Georgian origin of goods is granted
 Exemption from majority of licenses/permits
Appendices
Appendix 1
List of countries with double taxation treaties

List of countries with double taxation treaties
Austria Ireland The Netherlands
Belgium Italy Poland
Bulgaria Latvia Rumania
United Kingdom Lithuania Greece
Germany Luxemburg France
Denmark Malta Finland
Estonia Czech republic Spain
Azerbaijan Singapore Ukraine
Turkey Armenia China
Turkmenistan Uzbekistan Kazakhstan
Iran Qatar The United Arab emirates
Sweden Switzerland The State of Israel
India Hungary Slovakia
Bahrain Norway Egypt
Serbia San Marino Slovenia
Kuwait Croatia Portugal
Japan Belarus Iceland
Cyprus Korea Liechtenstein
Source: Ministry of Finance
Appendix 2
List of training centers in Georgia

Training Centers in Georgia
Name Course Location Website
Footwear and Leather accessories Specialist; Textile Specialist, Clothes Design www.mermisicollege.edu.ge
LEPL Community College Mermisi specialist Tbilisi
LEPL Georgian Technical University Footwear and Leather accessories Specialist; Textile Specialist Tbilisi www.gtu.ge
Footwear and Leather accessories Specialist; Textile Specialist, Clothes Design
LEPL Akaki Tsereteli State University specialist Kutaisi www.atsu.edu.ge
LEPL Community college Gldani Vocational Training
Center Textile Specialist, Clothes Design specialist Tbilisi www.profgldani.ge
LEPL Iakob Gogebashvili Telavi State University Textile Specialist, Clothes Design specialist Telavi www.tesau.edu.ge
LEPL Vocational College Black Sea Textile Specialist Batumi www.batumiprof.ge/
LEPL Community College Opizari Textile Specialist Akhaltsikhe www.profkoleji-opizari.ge/
LEPL Vocational College Tetnuldi Textile Specialist Mestia www.tetnuldi.edu.ge
www.collegehorizonti.wordpress.co
NNLE Vocational College Horizont Textile Specialist Ozurgeti m/
LEPL Community College Iberia Textile Specialist Kutaisi www.iberias.ge
NNLE Vocational College Gantiadi Textile Specialist Gori www.gantiadi.ge
LEPL Vocational College Lakada Textile Specialist Tsalenjixa www.lakada.edu.ge
LEPL Community College Phazisi Textile Specialist Poti www.phazis.edu.ge
LEPL Ilia Tsinamdzgvrishvili Community College Textile Specialist Mtskheta www.tmk.edu.ge
Appendix 3
Industrial land cost per the Government of Georgia tender information

Land plots prices per auctions announced by the Government of Georgia
Price per sq. m,
Cadaster code Region Location City / village Type CCY Price Sq. m USD
04.01.19.010 Samegrelo & High Svaneti Poti City Land GEL 348,000 4,934 29
44.01.29.265 Samegrelo & High Svaneti Senaki City Land and Buildings GEL 438,000 22,705 8
44.02.27.085 Samegrelo & High Svaneti Senaki village Land and Buildings GEL 100,000 13,558 3
26.26.45.071 Guria Ozurgeti City Land and Buildings GEL 69,000 11,478 2
27.06.48.177 Guria Lanchkhuti City Land and Buildings GEL 713,000 40,657 7
27.06.48.178 Guria Lanchkhuti City Land and Buildings GEL 468,000 25,387 8
81.10.22.334 Kartli Gardabani village Land and Buildings GEL 28,500 4,177 3
81.10.28.626 Kartli Gardabani City Land GEL 47,000 5,676 3
81.10.28.633 Kartli Gardabani village Land GEL 55,000 5,396 4
81.10.29.477 Kartli Gardabani village Land GEL 40,500 16,524 1
83.20.02.722;
81.04.10.352;
81.04.10.350;81.04.10.
351 Kartli Gardabani village Land and Buildings GEL 226,000 70,000 1
Note: price per used calculated using FX rate of 2.45
Source: Information from Government of Georgia Tender results
Stage I I: Benchmarking
of Georgia with
competitor countries
Benchmark analysis of Georgia with competitor countries
Abbreviations and Glossary of Terms

Abbreviations Glossary of terms
DIFC Dubai International Financial Centre KPMG, we, our KPMG Georgia LLC
EUR Euro Median The value in the middle of a set of data;
GEL Georgia Lari that is, half the values are greater than
kWh kilowatt hour the median, and half values are less
LLC Limited Liability Company

Average inflation rates, 2017
PLN Polish zloty
Poland 2.0%
RON Romanian Leu Ukraine 14.4%
sq. m. square meter Source: Economic Intelligence Unit
TRY Turkish Lira

UAE United Arab Emirates
Average exchange rates
2016 2017
UAH Ukrainian Hryvnia
USD/PLN 3.95 3.78
USA United States of America USD/RON 4.06 4.05
USD United States Dollars USD/UAH 25.55 26.60
VND Vietnamese dong
USD/VND 22,354.58 22,705.25
USD/TRY 3.02 3.65
WWS Water and Wastewater Services
USD/GEL 2.37 2.51
USD/EUR 0.90 0.89
Source: Economic Intelligence Unit
Executive Summary (1/3)

For the purpose of benchmark analysis we selected comparative countries to Georgia, namely Poland, Romania, Ukraine, Vietnam and
Turkey, by taking into account the following factors;
 Geographical position – geographically close countries, such as Turkey, can be serious competitors for Georgia;
 GDP per capita – countries with comparable GDP per capita in EU and CIS are selected, in order to be able to compare economies that
have close development levels to that of Georgia, such as Ukraine, Poland and Romania;
 Manufacturing level of branded products – countries which have low labor costs and are preferable destinations for global brands to
expand their operations, such as Vietnam
The list of countries included in the benchmark analysis have been agreed with the client. The results of the analysis show Georgia’s position
among the selected countries and their median for each indicator.
The table below illustrates the indicators which have been analyzed.
Indicators used in the benchmark analysis
Working regime Remuneration Utility costs Other costs
Average per square meter
Working hours per month Minimum wage Electricity tariff
price of industrial lands
Country average salary in
Available Working days per month Water tariff Construction cost per sq. m.
manufacturing sector
information
Number of holidays
Number of vacation days
Paid maternity leave duration
Unpaid maternity leave duration

Based on the results of the conducted benchmark analysis Georgia has the following competitive advantages;
Low labor costs, Georgia’s average salary in manufacturing sector is 51% lower than the median of the benchmark analysis
Flexible regulations in terms of overtime salary and leave compensation in Georgia
Low electricity tariff, Georgia’s industrial tariff of electricity is 5.5% lower than the median of the benchmark analysis
Low water tariff, despite the fact that Georgia’s water tariff exceeds the median of benchmark analysis by 41.4%, the indicator in
Poland and Turkey exceeds Georgia’s water tariff by 83.4% and 29.2% correspondingly
Low prices of industrial lands, Georgia’s average per square meter price of industrial lands is 16 times lower than the median of the
benchmark analysis
Low construction costs, Georgia’s construction costs per sq.m. of industrial lands is 25% lower than the median of the benchmark
analysis
Despite a thorough on-desk research was conducted to collect the data needed for the benchmark analysis, due to the unavailability of the
required information in the public sources, some of the indicators are not included in the benchmark analysis. The indicators are as follows:
Indicators not included in the analysis

Utility costs Other costs
Averaged indicator of utility expenses-electricity
Cost of creating one workplace in shoemaking
Unavailable per sq. m.
information Averaged indicator of utility expenses-water per Cost of creating one workplace in bags &
sq. m. accessories manufacturing

Summary of the benchmark analysis results is as follows:
Working regime Working regime Remuneration Utility costs Other costs
Number of working hours Number of vacation days Minimum wage, USD** Electricity tariffs, USD, 2017 Average per square meter
per month per year price of industrial lands,
USD, 2017
Median Median Georgia Median Georgia Median Georgia Median
160 Georgia 20 24 469 0.07 0.08 5.6 90
160 192 12 376
120 556 0.1
Min Max Min Max Min Max Min Max Min Max
Number of working days Paid maternity leave Average salary in Water tariffs, USD, 2017 Construction costs per
per month* duration, months*** manufacturing sector, USD, sq.m., USD, 2017
2017
Median Georgia Median Median Georgia Georgia Median
Median 361 736 319 426
20 1.24 1.76
6
24 4 12 235 1,864 0.53 3.23 443
Min Max Min Max Min Max Min Max Min Max
Number of public Unpaid maternity leave Average salary in the sub-

holidays per year duration, months sector of garment and
footwear, 2017
Georgia Median
Median Georgia Median Georgia 230 556
10 15 15 18
8 6 34 214 860
Min Max Min Max Min Max
* Number of working days per month in Georgia is agreed between the employer and the employee. Rest time of minimum 12 hours between working days/shifts
** In Georgia no minimum wage is set by the Government
*** According to the Labor code of Georgia the private companies are not obliged to pay for the maternity leave
Working hours, vacations and public holidays

According to the Labor codes of the selected countries the working hours per month equal to 160 hours in Poland, Romania, Ukraine and
Georgia. In contrast, Vietnam and Turkey have more working hours per month equaling to 192 hours and 180 hours correspondingly. The
indicator “working days per month” equals to 20* for the countries Poland, Romania and Ukraine, while the same indicator equals to 24 for
Vietnam. The legislation of Turkey does not fix working days in a month, while in case of Georgia the number of working days per month
should be agreed between the employer and employee given that rest time of minimum 12 hours is provided between working days/shifts.
Vietnam has the fewest number of vacation days equaling to 12 working days, while the indicator is the highest in Georgia and Ukraine
equaling to 24 working days. Poland and Romania have 20 vacation days, while in case of Turkey the number of vacation days is based on
the years of experience;
 1-5 years of experience - 14 vacation days,
 5-15 years of experience - 20 vacation days,
 15 years inclusively or more years of experience - 26 vacation days
Number of public holidays per year Georgia, 15

The number of holidays in the analyzed countries ranges from 8 to
15 15
13
15 days per year.
12 Median, 10 Georgia has the highest number of holidays (15 days) compared to
10 the analyzed countries. Georgia’s position is 50% higher than the
10
8 8 median and 87.5% higher than the minimum value.
days
0
Georgia Poland Romania Ukraine Vietnam Turkey
Source: Labour code of each country
*Note: The number of working days per month is based on the assumption that there are 4 working weeks per month
Minimum wage and average salary in the manufacturing sector

Minimum wages Average gross salary in the sub-sector of garment and footwear, 2017
600 900 860
556 556 Median, 469
Median, 556
800
500 469
700
568 556
400 600
500
USD
USD
300
400 Georgia, 230
200 147 300 230 214 228
120
200
100
100
-
0 0
Georgia Poland Romania Ukraine Vietnam Turkey Georgia Poland Romania Ukraine Vietnam Turkey
Source: (1) Labour code of each country (2) Trading Economics (www.tradingeconomics.com) Source: (1) polsha.com, (2) mybusiness.md, (3) State Statistics Service of Ukraine
(3) countryeconomy.com (4) Asia-Pacific Garment and Footwear Sector Research Note 8, (5) zarplatyinfo.ru
(6) KPMG Analysis
Average gross salary in manufacturing sector, 2017 The minimum wage in the analyzed countries ranges from USD 120 to
USD 556 per month. In Georgia, no minimum wage is set. The median
2,000 1,864
value is USD 469.
1,800
1,600
The average salary in the manufacturing sector in the analyzed
1,400 Median, 736
countries ranges from USD 235 to USD 1,864. Georgia’s average
1,200
1,138 salary in the manufacturing sector is USD 361, which is 51% lower
than the median value. Georgia’s average salary in the manufacturing
USD
1,000
800
736
Georgia, 361
sector is about 81% lower than the maximum value and 53.8% higher
600
than the minimum value.
361
400 274 235
The average salary in the sub-sector of garment and footwear in the
200 analyzed countries ranges from USD 214 to USD 860. Georgia’s
0 average salary in the sub-sector of garment and footwear sector is
Georgia Poland Romania Ukraine Vietnam Turkey USD 230, which is 58.7% lower than the median value. Georgia’s
Source: (1) Trading Economics (www.tradingeconomics.com)
(2) State Statistics Service of Ukraine (www.ukrstat.org)
average salary in the manufacturing sector is about 73.3% lower than
(3) Salary Explorer (www.salaryexplorer.com) the maximum value and 7.3% higher than the minimum value.
Paid and unpaid maternity leave duration

Paid maternity leave duration The duration of the paid maternity leave in the analyzed countries
15 ranges from 4 to 12 months. The median equals to 6 months.
12
According to the Labor code of Georgia the private companies are
10
not obliged to pay for the maternity leave.
months
Median, 6
6 6
5 4 4
-
0
Source: (1) Labour code of each country
(2) Maternity and paternity leave in the EU, European Parlament
Unpaid maternity leave duration The duration of unpaid maternity leave in the analyzed countries
50 ranges from 6 to 34 months.
40 Georgia provides 18 months of unpaid maternity leave, which is
34
20% higher than the median value. Georgia’s unpaid maternity
30
Georgia, 18
leave duration is about 47% lower than the maximum value and 3
months
24
Median, 15 times higher than the minimum value.
20 18
10 6 6
-
0
Source: (1) Labour code of each country
(2) Maternity and paternity leave in the EU, European Parlament
Note: (1) According to the Labor code of Vietnam the duration of unpaid maternity leave may be agreed by
the employee and the employer and no limit is set by the legislation
Average price and construction costs of one square meter industrial land
Average per square meter price of industrial lands, 2017 The average price for one square meter of industrial land in the
400 376
analyzed countries ranges from USD 5.6 per square meter to USD
339
376 per square meter.
300
Georgia has the lowest per square meter price of industrial lands,
which is 16 times lower than the median value and 67 times lower
USD
200 than the maximum value.

Median, 90
90
It is worth noting that the Government of Georgia provides state
100 owned immovable property free of charge to companies with
51
Georgia, 5.60 investment obligations in new projects (new factory construction or
5.6 8
0 enlargement of an existing one).
Source: (1) Polands's industrial market report, 2016 (2) Romania Market Overview, Knight Frank, 2017
(3) Laeza, Industrial Park in Vietnam (4) Turkey – Real Estate Review, Colliers International, 2018
(5) Enterprise Georgia (www.nasp.gov.ge) (6) KPMG calculations
Note: The latest data on the average per sq.m. prices of industrial lands in Poland and Ukraine was available for
the year of 2016, which was adjusted by inflation rate.
Construction costs per square meter, 2017 The average construction costs of one square meter industrial
500 Median, 426
439 443 space in the analyzed countries range from USD 319 per square
414
meter to USD 443 per square meter.
400
Georgia, 319
319 328 Georgia has the lowest construction costs that are 25% lower than
300 the median value and 28% lower than the maximum value.
USD
200
100
-
0
Source: (1) International Construction Market Survey, 2016,2017, Turner and Townsen
(2) www.casebinefacute.ro, (3) Vietnam report, Construction market update, June 2017
Note: (1) The latest data on construction costs for Poland was available for the year of 2016, which was adjusted by
the inflation rate to arrive to 2017., (2) Only construction costs in the city of HO CHI MINH was available for Vietnam
(2) The data on Ukraine was not available
Average electricity and water tariffs

Electricity tariffs, 2017 The average electricity tariff for industrial customers in the analyzed
0.2 countries ranges from USD 0.07 per kWh to USD 0.1 per kWh.
Georgia’s electricity tariff for industrial customers is equal to USD
Median, 0.08 0.07 per kWh, which is 5.5% lower than the median value.
USD per kWh
0.10
Georgia’s electricity tariff for industrial customers is 28% lower than
0.1 0.09 the maximum value and 2.2% higher than the minimum value.
0.07 0.07 0.08 0.07
Georgia, 0.07
0.0
Source: (1) Eurostat (www.ec.europa.eu/Eurostat) (2) Kievenergo (www. dtek-kem.com.ua)
(3) Vietnam Electricity (www.en.evn.com.vn) (5) Energo-Pro Georgia (www.energo-pro.ge)
Water tariffs, 2017 The average water tariff for industrial customers in the analyzed
4.0 countries ranges from USD 0.53 per cubic meter to USD 3.23 per
3.23 cubic meter.
3.0 Georgia, 1.76 Georgia’s water tariff for industrial customers is equal to USD 1.76
USD per sq.m.
2.27
Median, 1.24 per cubic meter, which is 41% higher than the median value.
2.0 1.76 Georgia’s water tariff for industrial customers is 46% lower than the
1.24 maximum value and about 3 times higher than the minimum value.
1.0 It is worth mentioning that in Romania there are 1,077 Water and
0.53 0.55
Wastewater Services (WWS) operators, covering 100% of the
0.0
market. The WWS market is therefore liberalized. For the purpose
Georgia Poland Romania Ukraine Vietnam Turkey of the benchmark analysis, the average water tariff for Romania is
Source: (1) Miejskie Przedsiębiorstwo Gospodarki Komunalnej Sp. z o. o. (2) ПрАТ "АК "Київводоканал"
(3) National Romanian Regulator for Public Services - ANRSC (Romania)
calculated based on tariffs of two key private Operators (Apa Nova
(4) Sai Gon Water Supply Corporation, Ho Chi Minh City(Vietnam) (5) Invest in Turkey (www.invest.gov.tr) Bucuresti and Apa Nova Ploiesti).
(6) Georgian Water and Power
General Analysis of the Labor Code of the Selected Countries – Georgia

and Poland
The table below summarizes the key points of the labor codes of the selected countries and benchmarks the data with that of Georgia.
Labor code regulations in Georgia and comparative countries
Country/ Regulations of hiring Regulations of hiring temporary
Remuneration of overtime Regulations of hiring and firing employees
Regulations foreign-citizen employees employees
In case of hiring a hard copy of contract is necessary if the

The remuneration of overtime should be duration of employment is more than 3 months.
In case of temporary employment in
more than for the standard hours, but the In case of firing 1 month prior written notice and 1 month's No restrictions exist for the
Georgia Georgia up to 3 month verbal contract is
exact rate should be agreed between the salary or 3-day prior written notice and 2 months' salary foreign-citizen employees.
allowed to made.
employer and employee. should be provided. Compensation should be given within
30 calendar days of the contract termination
An employment contract can be signed for a trial period, for According to Polish law, temporary work
a non-fixed term, as well as for a fixed term (including to shall be understood as seasonal,
replace an employee - in the event of his or her justified periodic, or casual work; or work that the
For overtime hours worked, the employee
absence from work; the employer can hire another worker employees of the user-undertaking
is entitled, in addition to his normal salary,
under a fixed term employment contract for the period of would not be able to perform on time;
to a supplement of:
absence). or work that falls within the scope of
- 100% of pay for working nights, Sundays
An employment contract for a trial period can be entered duties of an employee of the user-
and bank holidays, which are not, under
into force for no more than three months in order to check undertaking who is absent.
his work schedule, the employee’s working
the employee’s qualifications and whether he/she can be In accordance with the The legal scheme of temporary
days, or days off given to the employee in
employed to carry out a specific type of work. provisions of Article 87 par. employment is the following:
lieu of Sundays or bank holidays worked in
An employment contract is concluded in writing and should 1 of the Law, a foreigner is - A temporary work agency conducts a
accordance with his work schedule
Poland be signed no later than on the day the employee starts entitled to perform work in contract with a user-undertaking setting
- 50% of his salary for working overtime on
working. If no contract is signed, then the employee shouldthe Republic of Poland if at forth the rules of leasing of the
any day other than those mentioned above
be provided with written confirmation of the contract least one of 13 criteria listed temporary employee;
- 100% of his salary for every overtime
conditions before he/she is allowed to start work. Any in the law is met. - The temporary work agency employs a
hour worked above the average weekly
changes in employment contract conditions should also be temporary employee;
norm in the reference period, unless the
made in writing. - The temporary work agency assigns
norm was exceeded as a result of overtime
the temporary employee to perform
for which the employee is entitled to
In case of firing an employee, the length of the notice temporary work for the user-undertaking.
receive the supplements mentioned in the
period (2 weeks to 3 months) depends on the type of It shall be noted that the user-
points above
contract and the position held by the employee. During the undertaking instructs the temporary
notice period, the employee is entitled to receive his/her employee and subsequently supervises
normal salary. his performance.
Source: Labor Codes of Georgia and Poland
General Analysis of the Labor Code of the Selected Countries - Romania

Country/ Regulations of hiring foreign- Regulations of hiring
Regulations citizen employees temporary employees
1. Overtime compensation
There are 2 types of employment agreements in
- Free time clearing - Free paid hours are granted to the
Romania, no matter if the individuals are residents or
employee in the following 60 calendar days after
non-residents;
accumulating overtime hours, or
- Employment agreement for indefinite period;
- Extra pay - Overtime hours are paid with a minimum of
- Employment agreement for definite period The non-residents that come from
75% increase to the salary. The increase can be
As a rule, the employment contract has to be concluded countries out of the EU are usually
negotiated within the company, through its collective
for an unlimited duration. The unlimited duration is a employed with agreements
labor agreement or through the individual labor
measure of protection for the Employee. concluded for indefinite period,
agreement and cannot be less than 75% from the
As an exception for project based work, the individual because they need to prove stability
employee normal salary.
employment contract may also be concluded for a limited and the fact that they will be able to
2. Compensation of worked time during public holiday
duration, under the terms expressly provided by the law, support themselves during the term A temporary position
- Free time clearing - One free paid day granting within
maximum number of defined employment agreement is 3 they live in Romania. A medical must not surpass an
the following 30 days, or
successive ones, and the maximum period is 36 months. check before concluding the initial duration of 24
- Extra pay - The day will be paid by adding a minimum
Romania employment contract is mandatory. months and can be
of 100% increase of the daily salary.
The Labour Code requires that an employment contract If this obligation is not met, the renewed such that the
3. Weekend hours
must be terminated in written form and in Romanian agreement will not come into force. total duration does not
For the hours worked during the weekend, the company
language. The trial/probationary period surpass 36 months.
is obliged to grant its employees other free days (a
The employment contract can be terminated by notice depends on the type of employment
mandatory resting time of 48 free consecutive hours).
given by each party. In general, the employer shall issue agreement:
Moreover, the employer, will also grant a “weekend
the dismissal decision within 30 calendar days from the - 90 calendar days for execution
increase”. The "weekend increase” does not have a
establishment of the cause of dismissal. When the position
minimum or maximum limit and can be negotiated
employee has committed a serious or repeated - 120 calendar days for
within the company through your collective labor
disciplinary offence related to the labour discipline rules management position
agreement or through the individual labor agreement of
or the rules laid down in the individual employment
your employees. This type of increase can be
contract, applicable collective labour agreement or rules
determined as a percentage or as a fixed amount
of procedure, as a disciplinary sanction, special rules are
granted regardless of the number of weekend worked
applied defined by the labor code.
hours.
Source: Labor Code of Romania
General Analysis of the Labor Code of the Selected Countries - Ukraine

Country/ Regulations of hiring foreign-citizen Regulations of hiring
Regulations employees temporary employees
Non-residents have the same rights to
work in Ukraine as any Ukrainian has.
In Ukraine, a company can hire people either under labor Under the temporary work,
However, non-residents have to provide
agreement (i.e. as a salaried employee) or under civil fixed-term labor agreement
certain documentation before starting to
services agreement (i.e. as freelancers). The following and seasonal works are
work in Ukraine. The first one is the
types of regular employment contracts are used: labor assumed.
work permit. Because Ukraine does not
agreement for indefinite term, fixed-term labor agreement Under the fixed-term labor
belong to the EU, the work permit is
(for a specific period of time) and seasonal work. agreement the Parties limit
mandatory for both EU and Non-EU
The employee may terminate labor agreement, concluded their collaboration on a
An employee is entitled to receive overtime citizens. After obtaining a work permit,
for indefinite period, at any time at his own discretion with specific period of time, based
payments in the amount of double equal to the non-resident can apply for a
prior 2 weeks written notification of the employer (there are on the type of activity
employee’s hourly rate for each hour worked residence permit, which is the second
though some exceptions when an employee can terminate performed.
overtime. (Overtime work shall not be usually mandatory document required for
Ukraine the agreement at once). Employer can terminate labor The seasonal work refers to
allowed, only in exceptional cases. Overtime employment. Certain categories of
agreement (both concluded for indefinite period of time or the activity that, due to
work shall not exceed four hours during two foreign citizens (such as permanent
fix-term) only based on grounds, defined by law, including: climate or season conditions,
successive days and 120 hours per year for residents of Ukraine, employees of
- Staff reduction may be performed only
every employee.) representative offices and permanent
- Liquidation of the company during special periods of
establishments of foreign companies,
- Professional or medical noncompliance of employee time. Temporary work is also
representatives of foreign mass media,
- In case a sick leave of the employee exceeds 4 month considered the work
professional sportsmen, artists and
term performed for the substitution
some others) do not need to apply for
- Violation of labor agreement, labor law or internal rules by of an Employee who is
work permit when working in Ukraine.
the employee temporarily unavailable (ex:
However, in most other cases, a valid
- Call-up for military service or mobilization of employee due to illness).
work permit is required before
commencing work.
Source: Labor Code of Ukraine
General Analysis of the Labor Code of the Selected Countries - Vietnam

Country/ Regulations of hiring foreign-citizen Regulations of hiring
Regulations employees temporary employees
An employee who performs overtime work
shall be paid a wage An employment contract shall be concluded in one of the
calculated based on wage unit for piece following types:
work or piece rate, or the wage of his/her - Indefinite term employment contract. An indefinite term
Employing foreign citizens is only
current work as follows: employment contract is a contract in which the two parties
allowed in the positions of managers,
a) On regular days, at least equal to 150%; do not determine the term and the time at which the
executive directors, specialists and
b) On the weekly day off, at least equal to contract terminates;
technical workers, for which the
200%; - Definite term employment contract. A definite term
Vietnamese employees cannot meet
c) On public holidays and paid leave days, employment contract is a contract in which the two parties
the demands of production and trade.
at least 300%, excluding the wage agree to fix the term of the contract for a duration of from 12
Moreover, providing an explanation of The two parties may
for public holidays and paid leave days if months to 36
demand to employ foreign workers and conclude a verbal
the employee receives a daily wage. months;
obtaining a written approval from the employment contract in
Vietnam - An employment contract for seasonal work or a specific
competent state authority is required respect of temporary work for
An employee who performs night work task which has a term of less than 12 months.
before employing foreign citizens. a duration of less than 3
shall be paid an additional
Foreign employees working in Vietnam months.
amount of at least 30% of the wage In case of job termination the employer should give notice
should comply with the labor law of
calculated according to the wage unit for to the employee as follows;
Vietnam, international conventions and
piece work or piece rate or the wage for - At least 45 days in the case of an indefinite term
treaties, to which Vietnam is a
the work on a regular working day. employment contract;
signatory and provide differently.
Furthermore, an employee who performs - At least 30 days in the case of a definite term employment
Foreign workers in Vietnam should be
overtime work at night shall be paid an contract;
protected by Vietnamese law.
additional amount of 20% of the wage - At least 3 working days in the case of an employment
calculated according to the wage unit for contract for seasonal
piece work or piece rate or the wage for work or for a specific task of less than 12 months’ duration.
the work on a regular working day.
Source: Labor Code of Vietnam
General Analysis of the Labor Codes of the Selected Countries – Georgia

and Turkey
Regulations of hiring
Country/ Regulations of hiring
Remuneration of overtime Regulations of hiring and firing employees foreign-citizen
Regulations temporary employees
employees
Pursuant to the Labor Law, there are various types of employment
contracts:
The overtime rates for Turkey are as - Employment contracts for “temporary” and “permanent” work;
follows; - Employment contracts for a “definite period” or an “indefinite period”;
- Overtime hours worked above - Employment contracts for “part-time” and “full-time” work;
standard 45 hours on standard days - - Employment contracts for “work-upon-call” - employment relationship
150% of payment or 1.5 hours free which foresees the performance of work by the employee upon the
hours granted per overtime hour. emergence of the need for his services;
Temporary employment
- Overtime hours worked during - Employment contracts with a trial period;
relationship may be
weekends and public holidays are to be - Employment contacts constituted with a team contract No restrictions are
established for a period not to
Turkey paid as wage for one-day holiday and Employment contracts are exempt from stamp tax and any type of duties available for the foreign-
exceed six months, and it may
overtime wage. and fees. citizen employees.
be renewed maximum twice, if
These rates may be increased on the
required.
basis of a collective or personal According to the relevant provisions of the Labor Law no. 4857,
employment contracts between the employers and employees are required to give specified notification
employees and employers. periods prior to the termination of an employment contract based on the
The total number of overtime hours duration of service:
worked per year may not exceed 270 - 0-6 month of service - 2 weeks
hours. - 6-18 month of service - 4 weeks
- 18-36 month of service - 6 weeks
- more than 36 month of service - 8 weeks
Source: Labor Code of Turkey
Analysis of personal taxes, social and insurance contributions

Country Personal Income Tax and Other Taxes Social Contributions Insurance Contributions Contributions to Other Funds
The Parliament of Georgia is currently considering a draft law on
"Defined Contribution Pensions”, which will introduce mandatory
contribution scheme from July 1 2018. According to the scheme the
employee will be obliged to direct 2% of his earnings and the
Georgia Personal income tax - 20% (paid at the cost employer will add the same amount. The state also will be obliged n/a n/a
of the employee) to contribute by 2% of employees earnings that are less than GEL
24,000 (around USD 9,730) per year, and 1% for the amount
between GEL 24,000 and GEL 60,000 (around USD 24,000). The
participation to this scheme is mandatory for all hired employees
younger than 40 years (the scheme is voluntary for self-employed).
Personal income tax - 18% for up to USD 1. Disability pension insurance - 1.5% (paid at the cost of the 1. Retirement insurance - 9.79% (paid 1. Labor fund - 2.45% (paid at
24,580 monthly income, 32% for USD 24,580 employee), 6.5% (paid at the cost of the employer); at the cost of the employee), 9.79% the cost of the employer);
and more (paid at the cost of the employee) 2. Bridging pension fund - 1.5% (paid at the cost of the employer); (paid at the cost of the employer); 2. Employee benefit fund -
2. Health insurance and illness 0.1% (paid at the cost of the
Poland insurance - 9% and 2.45% employer)
respectively (paid at the cost of the
employee);
3. Accident insurance - 0.4% to 3.6%
(paid at the cost of the employer)
Personal income tax - 10% (paid at the cost Social (pension) insurance contribution - 25% (paid at the cost of 1. Health insurance contribution - n/a
Romania of employee) employee); 10% (paid at the cost of employee);
2. Work insurance contribution -
2.25% (paid at the cost of employer)
1. Personal income tax - 18 % (paid at the Social security tax - 22 %, (paid at the cost of the employer). n/a n/a
cost of the employee); The above mentioned rate of the social security tax is applied to
Ukraine 2. Military tax - 1.5 % (paid at the cost of the
salaries which are less than 25 subsistence minimums for able-
employee); bodied persons. If the salary is higher, then only the amount up to
25 subsistence minimums for able-bodied persons is taxable, while
the rest is non-taxable.
1. Personal income tax - the rate in Vietnam Social insurance - 8% (paid at the cost of the employee) and 17.5% 1. Health insurance - 1.5% (paid at n/a
is progressive and ranges between 5%-35% (paid at the cost of the employer), the cost of the employee), 3% (paid
depending on average monthly income (paid at the cost of the employer);
Vietnam at the cost of the employee); 2. Unemployment insurance - 1%
2. Tax for non-residents of Vietnam - a flat each (paid at the cost of the
tax rate of 20% is applicable to Vietnam- employee and employer)
sourced employment income (paid at the
cost of the employee)
1. Income tax rate ranges 15%-35%: Social Security Premiums 37.5%: n/a n/a
Up to 14,800 TRY (USD 3,926) - 15%; Short-term risks - 2% (paid at the cost of employer);
14,800 to 34,000 TRY (USD 9,019) - 20%; Long term risks - 11% (paid at the cost of employer) and 9% (paid
Turkey 34,000 to 120,000 TRY (USD 31,830) - 27%; at the cost of employee);
120,000 TRY (USD 31,830) and over - 35%. General health insurance - 7.5% (paid at the cost of employer) and
The tax is paid at the cost of the employee. 5% (paid at the cost of employee);
Contribution to unemployment insurance - 2% (paid at the cost of
employer) and 1% (paid at the cost of employee).
Source: (1) Labor Code of each country, (2) Transparency International, Georgia
Note: n/a stands for “not applicable”
Stage IV: Investment
Proposals footwear, bag &
accessories manufacturing
in Georgia
Investment proposal
for leather footwear
manufacturing
Georgia’s competitive advantage in manufacturing leather footwear (1/3)
 Strategic location – Georgia’s strategic location is an asset to  Training Centers – Trainings for the footwear specialists are
 Given Georgia’s location, any investor. As a bridge between Europe and Asia, Georgia available in Tbilisi and Kutaisi (total of 3 centers). The average
infrastructure and its offers direct access to European, Gulf Cooperation Countries length of courses is 16 months. In addition, there are training
favorable economic and and CIS markets. Additionally, Georgia is the part of trans- centers for textile specialists in different cities of Georgia with
Caspian corridor and is able to provide railway transportation average length of course of 20 months. As a result of interviews
political position in the to the Republic of China by the shortest route. Its three major we identified that most training centers can provide special
region, the country is a oil and gas pipelines, Black Sea ports, well-developed railway short-term training courses per investors request and some of
favorable location for systems, together with its international airports are playing an them already have such experience. The terms and cost of
increasingly important role in linking the East and West training vary upon the requirements. The majority of long term
investment trainings provided by the training centers are financed by the
 Labor cost in footwear manufacturing – Average gross salary
Government with the standard annual fee of GEL2,250 per
per month for footwear manufacturing specialists ranges
annum.
between USD155 – USD420, according to the inquiry of local
companies in the industry
 Low electricity cost – Electricity costs for industrial consumers
range between USD 0.0598 to USD0.0858 per kWh
 Raw Materials – Georgia itself may not be the producer of
some of the key raw materials in sufficient volume terms,
however advantageous location of Georgia gives ability to
import materials from abroad easily. We identified 5 leather
manufacturer companies operating in Georgia. The raw
materials for leather production are purchased locally, while
end product is mainly exported to Turkey and Italy.
 Access to finance - Companies investing in Georgia benefit  Low tax rates and transparent tax system
 Companies investing in from support with access to finance, both equity and debt: Tax rates in Georgia
1. The state program “Produce in Georgia” aims to develop and Personal Income Tax 20%
support with access to support the entrepreneurship, as well as creation of new Corporate profit tax 15%
finance, both equity and enterprises and increasing the export potential of the country. VAT 18%
In addition, the program aims to encourage manufacturing Customs/Import tax 0%, 5% or 12%
debt
industry in Georgia, and it offers support with financial
1. Land tax: GEL 0.24 per square meter
 Free of charge transfer of resources via interest expense financing for loans received non-agricultural land plot, that can be
from local banks adjusted by a territorial coefficient not
immovable property is one Property tax
exceeding 1.5, determined by the local
2. JSC Partnership Fund (PF) is a state owned investment fund,
of the support municipality
main objective of which is to promote investment in Georgia by 2. Other property tax: Up to 1%
mechanisms for the providing co-financing (equity, convertible/non-convertible
Excise tax Per type of good
companies investing in loans) in projects at their initial stage of development
Georgia  Infrastructural support – In addition to the support mentioned
above, Produce in Georgia also offers the following  VAT on Export/Re-export – The export/re-export of goods is
 New profit tax rule is infrastructure support: Government of Georgia provides state exempt from VAT with a right to credit input VAT (i.e. like a
owned immovable property free of charge to companies with zero-rated transaction)
effective from 1 January
investment obligations for new projects (new factory or  Inward Processing Customs Regime – If the goods of foreign
2017 according to which enlargement of existing one). Investment obligation states that origin undergoes processing in Georgia and the product
Profit taxation shifts from the enterprise should invest at least 6 times more than the obtained as a result of the processing is exported, no taxes are
the moment of earning the market price of the property in Tbilisi and 4 times more than the levied on this operation
market price of the property in region, see appendix 1 for the
profits to the moment of potential state owned properties to be used for footwear  Foreign-source income of individuals is fully exempted
their distribution manufacturing factory construction  Double taxation treaties - Georgia has approximately 54
 Free Industrial Zones – Georgia has four industrial zones, in effective Double Taxation Treaties (DTTs). The rules and
 Double taxation treaties
which businesses are exempted from all tax charges, except procedures for the application of tax concessions set by the
with 54 countries personal income tax. If a company imports products from FIZ to provisions of DTT is determined by the Minister of Finance of
other territory of Georgia, it has to pay VAT and 4% of revenue Georgia. According to the DTTs, the income is subject to
 Special customs regime from national sales. Besides tax payments, companies exemption or lower rate withholding tax
for exporters registered in FIZ also benefit from: simplified procedures and
transactions in any currency, exemption from majority of
licenses/permits , etc
 Georgia’s preferential trade regimes — CIS
— Georgia benefits from
zero import tax to EU for Georgia has signed deep and comprehensive free trade area According to the requirements for the Certificate of Origin for CIS in
(DCFTA) which apart from other areas considers removing case materials used in footwear manufacturing are not entirely
footwear which otherwise customs duties on imports and exports of certain goods. originated in Georgia, then such materials should have undergone
amount up to 17% sufficient working or processing in Georgia, that means:
In addition, Georgia has signed Free Trade Agreements with
China, Turkey and CIS, resulting in beneficial customs tax rates for 1.The final product commodity sub code should be different from
export of goods that of the imported materials; and
zero import tax to Turkey
Standard import tax rates for footwear product that are fully 2. Total value of imported materials used in manufacturing of the
and CIS for footwear
eliminated vary by product and represent up to 17% for EU and product should not exceed 51% of the ex-works price of the
which otherwise amount Turkey and up to 30% for CIS countries. product
up to 30% To benefit from this regime, the Rule of Origin must be fulfilled,
criteria of which vary per country.
 Criteria for Certificate of Origin
— EU and Turkey
The criteria of Certificate of Origin is nearly the same for EU and
Turkey and states that in case materials used in footwear
manufacturing are not entirely originated in Georgia, then such
materials should have undergone sufficient working or processing
in Georgia meaning that the final product commodity sub code
should be different from the code of used materials.
Despite the above, there is one exemption that footwear (group 64)
should be manufactured from materials of any heading, except
from assemblies of uppers affixed to inner soles or to other sole
components of heading 6406 (parts of footwear).
Overview of raw materials for leather footwear
Key raw materials used in manufacturing leather footwear
 Leather The raw materials used in footwear production can be split into two main categories such as, materials and energy
commodities. The materials largely include natural materials such as cotton and leather.
 Cotton
Three leading producers are China, Brazil, and Italy, which have earned reputations as countries that supply key
 Canvas quantities of leather. Cotton production is dominated by India, China and USA, nevertheless Pakistan and Brazil also
have notable production volumes. The majority of farming is performed by small-scale farmers with individual holdings,
 Nylon although they are sometimes supported by larger organizations. Cotton is then turned into textile (e.g. canvas) used in the
 Polyester production of footwear.
 Rubber The energy commodities category mainly consists of oil for use in the production of synthetic polymers such as nylon
and polyester.
 Plastic Rubber is a key constituent of footwear and is produced both by natural means, i.e. from rubber trees, and also
 Oil synthetically by chemicals companies.
Plastic is widely used for manufacturing the different types of footwear. Main manufacturers of Plastic are China, USA and
Germany.
Production inputs
Purchases of raw materials account for significant portion of the production costs of the firms operating in the industry.
Main raw material inputs used in the footwear sector include production materials (e.g. leather, rubber, plastic compounds, foam, leather, and canvas, accessory materials
(e.g. precious metals and stones) and packing materials.
We have identified 5 leather manufacturer companies operating in Georgia. The raw materials for leather production are purchased locally, while end product is mainly
exported to Turkey and Italy. However, the production may not be sufficient in volume terms
Dealers/merchants are the key suppliers of materials. Main raw material supply countries are located in Asia and Europe.
Optimal industry capacity
In order to understand the optimal capacity of production of footwear in Georgia, we analyzed potential consumption of the Georgian production by following countries of the
region (EU, CIS, Middle East, China, Turkey), assuming that significant part of the products will be exported to these countries. We calculated the gap between import and
export in these countries, as well as the selling price for the imported leather footwear, and identified the countries which can potentially become export markets for Georgia.
Based on the analysis of the above factors, we calculated approximate share of the potential import of leather footwear by Georgia to these countries. As per conservative view
point we only used around 1% of total EU share, however there is potential of a bigger share of the EU import market to be taken by Georgia in case of higher investment.
Potential production volume of leather footwear (HS codes 640399)

Estimated total import
Import in Import/export Total import in tons volume (thousand units, Estimated price per unit, Potential share of import Potential volume
USD'000 gap in USD'000 (2016) 2016) USD from Georgia (thousand units)
EU 12,188,942 890,335 379,136 636,840 19 1.2% 6,687
Russian Federation 588,850 557,625 19,698 33,087 18 5.0% 1,448
Kyrgyzstan 5,286 5,256 1,273 2,138 2 - -
Kazakhstan 35,325 24,731 4,037 6,781 5 - -
Belarus 53,244 40,870 1,800 3,023 18 5.0% 132
Azerbaijan 7,964 7,926 213 358 22 5.0% 16
Armenia 5,508 5,141 155 260 21 5.0% 11
Moldova 4,613 (3,598) 224 376 12 - -
Tajikistan 1,197 1,195 187 314 4 - -
Uzbekistan 2,474 2,357 22 37 67 5.0% 2
Saudi Arabia 60,897 59,789 2,049 3,442 18 5.0% 151
Iran 357 (29) - - - - -
China 869,633 (4,775,092) 19,686 33,067 26 - -
Turkey 162,195 39,422 4,694 7,885 21 - -
433,174 727,608 8,446
Note: Information for import and export presented in tons were transferred in number of units using 0.68 kilogram
Source: ICT, KPMG Analysis
Optimal industry capacity and estimated investment
The analysis shows, there is a gap between the import and export in most of the selected countries, except for China, Iran and Moldova. The gap in these countries is negative,
which shows that the export exceeds import. We considered that the possibility to access these market is low, therefore didn’t consider China, Iran and Moldova as a potential
consumers of the Georgian production. In addition, we analyzed the selling price of imported products and considered that the benefits from entering the following markets is
low: Kyrgyzstan, Kazakhstan and Tajikistan. Further, we assumed that since most of raw materials are expected to come from China and Turkey we think that the potential for
export to these countries is low.
As for other countries/regions, the import/export gap is significant. Notwithstanding the existence of the production facilities in the most of the countries/regions, the demand
exceeds supply and there is a potential for other supplier to enter these markets. As an example, the gap between the import/export in Russian is USD557.6 million. Considering
the distance factor, as well as ease of access of Georgia to Russia, i.e. common border, we assumed that Georgia might potentially take up some share of the imports. We
analyzed import to EU counties in total, as considering the signed DCFTA and the significant import/export gap within EU market, as well the Georgia’s location, we believe that
Georgia has a good potential to access EU market.
As Georgia’s consumption compared to the selected market is not significant, we didn’t add any additional quantity to the potential volume. We estimated that potential share of
import from Georgia in EU, Turkey and selected countries of CIS and Middle East will be 1% to 5% of the total imports as shown on previous slide. Because the amount of
import/export of leather footwear is mostly measured in tons and the data wasn’t available in units, we estimated average weight of one pair of sports and textile upper footwear
and calculated amounts in pairs. Thus, based on the calculations of import/export data, the optimal capacity of the production in Georgia would be around 8,446,000 pairs per
year.
In order to estimate the approximate investment for a manufacturing facility with the capacity of 8,446,000 pairs per year, we searched for similar projects. We have identified
the following investments:
— one planned project for textile manufacturing with investment amount of USD15 million, except land cost for 3,000 employees. The investment amount was adjusted for land
costs to arrive at total investment amount for the calculation.
— Nike has opened USD60 million factory for 5,500 employees in Indonesia
Based on the information on the investment amount, cost of land, number of workers and amount of pairs produced by one worker per year, we calculated the estimated
investment at USD33.7 million. This is an approximate amount, as in Georgia are not many similar investment projects to be compared to. This is an approximate amount, as
factors specific to Georgia and availability of technologies have not been specifically considered.
Financial
projections
Key assumptions
• Construction period was forecast to last one year Construction project details
Based on the data gathered
Investment, USD'000 33,743
and analyzed, we have • Capacity utilization was forecast to reach 50% in the second Capacity, units'000 8,446
performed high level financial projection period and further increase by 25% YoY reaching
Number of employee 3,723
100% in the 4th projection period
calculations for the potential Investment per employee, USD 9,063
project on producing different Construction timeline 1
• The delay in the launch of the production is due to the
kinds of leather footwear in forecasted plant construction period. The delay in reaching full Annual maintenance CAPEX, USD'000 1,687
forecasted capacity of the production is due to the estimated Domestic sales, % -
Georgia. The more detailed
time needed for marketing the product and building brand Export sales, % 100
description of the recognition, as well as considering learning curve effect. Source: KPMG Analysis
assumptions and relevant
• Based on the data provided by Damodaran, industry average
calculations are provided • During the forecasted period the maximum capacity has been
capital structure of the industry comprises of 10%-25% of debt
estimated as the nominal capacity determined based on the
further on and 75%-90% of equity. The capital structure of the project was
analysis of the data obtained during the research, i.e. potential
assumed to be the same as industry average
debottlenecking of production has not been considered.
• Maintenance capital expenditures were forecast based on initial

investment and estimated useful life of the plant of 20 years. As
a result, maintenance CAPEX amounted to USD1,687
thousand, further adjusted for the expected USD inflation.
• Maintenance CAPEX was assumed to be incurred starting from

the 3rd projection year
• As per the Georgian tax code, the amount of taxation for profit
tax is shifted from when profits are earned to when they are
distributed. Therefor we calculated taxes from free cash flow
• WACC is estimated to be 12.8%. WACC was calculated using

data from Damoaran and Duff&Phelps.
Financial performance
We have assumed projection period of 10 years, followed by terminal period. The construction of factory is expected to be finished by the end of the first projection period, after
which the plant will be commenced.
Gross and EBITDA margins were forecast to amount to 39.7% and 7.5%, respectively throughout the forecast and terminal periods. EBT margin was projected to vary between
5.6% and 6.6%. The COGS and the SG&A expenses have been calculated based on the industry average margins published in CapitalIQ.
Projected statement of Profit and Loss

Terminal
USD'000 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 period
Revenue - 93,203 141,622 192,228 195,880 198,818 201,999 205,231 208,515 211,851 215,241
Growth 52.0% 35.7% 1.9% 1.5% 1.6% 1.6% 1.6% 1.6% 1.6%
COGS - (56,248) (85,469) (116,009) (118,214) (119,987) (121,907) (123,857) (125,839) (127,852) (129,898)
Gross profit - 36,955 56,153 76,218 77,666 78,831 80,093 81,374 82,676 83,999 85,343
Gross profit margin 39.7% 39.7% 39.7% 39.7% 39.7% 39.7% 39.7% 39.7% 39.7% 39.7%
SG&A - (29,965) (45,531) (61,801) (62,975) (63,920) (64,943) (65,982) (67,038) (68,110) (69,200)
EBITDA - 6,990 10,622 14,417 14,691 14,911 15,150 15,392 15,639 15,889 16,143
EBITDA margin 7.5% 7.5% 7.5% 7.5% 7.5% 7.5% 7.5% 7.5% 7.5% 7.5%
Financial Depreciation (1,764) (1,787) (1,819) (1,854) (1,881) (1,911) (1,942) (1,973) (2,005) (2,037)
EBT - 5,226 8,835 12,598 12,837 13,030 13,238 13,450 13,665 13,884 14,106
EBT margin 5.6% 6.2% 6.6% 6.6% 6.6% 6.6% 6.6% 6.6% 6.6% 6.6%
Corporate Income tax - - - - (1,636) (1,695) (1,716) (1,746) (1,776) (1,806) (1,972)
Net Income - 4,781 8,425 12,227 10,872 11,051 11,287 11,521 11,763 12,012 12,134
NI margin 5.1% 5.9% 6.4% 5.6% 5.6% 5.6% 5.6% 5.6% 5.7% 5.6%
Source: CapIQ, KPMG Analysis
Sales projection
Sales volume
Production of footwear was projected to start in Year 2 at the level of 4,223,000 units further increasing to 8,446,000 units in Year 4. The 100% of sales volume is expected to be
sold on export.
Sales price
Average price for the export was estimated to be USD22 per unit based on averages of the import countries, provided by International trade Center (ICT).
Sale volume of plant

Selling prices, USD per unit
9,000,000 120% 30
8,000,000 25
100%
7,000,000
20
6,000,000 80%
5,000,000
15
Unit
60%
4,000,000 10
3,000,000 40% 5
2,000,000
20% -
1,000,000
0 0%
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year
10
Domestic sales Export sales Capacity utilization
Price per countery Average price

Source: ITC, KPMG Analysis Source: ITC, KPMG Analysis
NPV analysis
Discounted cash flow results
The NPV of the project is
Terminal
positive, amounting to 8.1 USD'000 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 period
million Total revenue - 93,203 141,622 192,228 195,880 198,818 201,999 205,231 208,515 211,851 215,241
% of growth - 51.95% 35.73% 1.90% 1.50% 1.60% 1.60% 1.60% 1.60% 1.60%
EBITDA - 6,990 10,622 14,417 14,691 14,911 15,150 15,392 15,639 15,889 16,143
EBITDA margin 7.50% 7.50% 7.50% 7.50% 7.50% 7.50% 7.50% 7.50% 7.50% 7.50%
EBT - 5,226 8,835 12,598 12,837 13,030 13,238 13,450 13,665 13,884 14,106
Income tax (adjusted) - - - - (1,636) (1,695) (1,716) (1,746) (1,776) (1,806) (1,972)
NOPAT - 5,226 8,835 12,598 11,202 11,335 11,522 11,705 11,890 12,078 12,134
Cash flow adjustments
Depreciation - 1,764 1,787 1,819 1,854 1,881 1,911 1,942 1,973 2,005 2,037
CAPEX (33,743) - - (1,819) (1,854) (1,881) (1,911) (1,942) (1,973) (2,005) (2,037)
Change in working capital - (26,423) (13,727) (14,347) (1,035) (833) (902) (916) (931) (946) (961)
FCFF (33,743) (19,433) -3,105 -1,749 10,166 10,502 10,621 10,788 10,959 11,132 11,174
WACC 12.84%
Terminal growth
1.60%
rate
Terminal value 16,891
Discount period 0.5 1.5 2.5 3.5 4.5 5.5 6.5 7.5 8.5 9.5 10
Discount factor 0.941 0.834 0.739 0.655 0.581 0.515 0.456 0.404 0.358 0.318 0.318
Discounted FCFF (31,766) (16,213) (2,296) (1,146) 5,904 5,405 4,845 4,361 3,926 3,535 31,579
Sum of
discounted cash (23,444)
flows
NPV 8,135
Key profitability factors of the project
As a result of high level
Terminal
calculations, the project is USD'000 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 period
feasible Revenue - 93,203 141,622 192,228 195,880 198,818 201,999 205,231 208,515 211,851 215,241
EBITDA - 6,990 10,622 14,417 14,691 14,911 15,150 15,392 15,639 15,889 16,143
Net Income - 4,781 8,425 12,227 10,872 11,051 11,287 11,521 11,763 12,012 12,134
EBITDA margin - 7.5% 7.5% 7.5% 7.5% 7.5% 7.5% 7.5% 7.5% 7.5% 7.5%
Net income margin - 5.1% 5.9% 6.4% 5.6% 5.6% 5.6% 5.6% 5.6% 5.7% 5.6%
NPV of the Project 8,135
IRR of project 15.2%
Project payback
period 9
— Our assumptions and analysis has been performed based on the general economic and sector indicators. The detailed calculations
for Georgia, including construction costs, labor costs, specific legal and environmental costs etc have not been considered. However,
the country specific taxation has been considered, as well as the CPI and the pricing data.
— In addition, our assumptions and analysis do not incorporate support mechanisms, such as free of charge transfer of immovable
property for companies investing in Georgia, that will result in decreased initial investment, increased NPV and shortened payback
period.
— Per the general analysis, the results show that the project is feasible for the calculated optimal capacity and the relevant investment,
as well as given costs assumptions. The NPV of the project is positive amounting to USD8.1 million, the IRR is high amounting to
15.2%. The payback period is estimated to be 9 years.
— Considering average debt to equity ratio per industry, current market interest rates for debt and no grace period, equity IRR for
investment in leather footwear is similar to project IRR. However equity IRR is sensitive to the terms and size of debt. As an example,
increasing portion of debt to 40% and assuming 2 years of grace period, equity IRR increases to 16%.
Investment proposal for
manufacturing sports
footwear and footwear
with uppers of textile
Georgia’s competitive advantage in manufacturing sports footwear and
footwear with uppers of textile (1/3)
 Strategic location – Georgia’s strategic location is an asset to
 Given Georgia’s location, any investor. As a bridge between Europe and Asia, Georgia
infrastructure and its offers direct access to European, Gulf Cooperation Countries
favorable economic and and CIS markets. Additionally, Georgia is the part of trans-
Caspian corridor and is able to provide railway transportation
political position in the to the Republic of China by the shortest route. Its three major
region, the country is a oil and gas pipelines, Black Sea ports, well-developed railway
favorable location for systems, together with its international airports are playing an
increasingly important role in linking the East and West.
investment
 Labor cost in footwear manufacturing – Average salary per
month for footwear manufacturing specialist ranges between
USD125 – USD335, according to the inquiry of local companies
in the industry.
range between USD 0.0598 to USD0.0858 per kWh.
 Raw Materials – Georgia itself may not be the producer of
some of the key raw materials in sufficient volume terms,
however advantageous location of Georgia gives ability to
import materials from abroad easily.
 Training Centers – Trainings for the footwear specialists are
available in Tbilisi and Kutaisi (total of 3 centers). The average
length of courses is 16 months. In addition, there are training
centers for textile specialists in different cities of Georgia with
average length of course of 20 months. As a result of interviews
we identified that most training centers can provide special
short-term training courses per investors request and some of
them already have such experience. The terms and cost of
training vary upon the requirements. The majority of long term
trainings provided by the training centers are financed by the
Government with the standard annual fee of GEL2,250 per
annum.
debt
Georgia  Infrastructural support – In addition to the support mentioned
above, Produce in Georgia also offers the following  VAT on Export/Re-export – The export/re-export of goods is
 New profit tax rule is infrastructure support: Government of Georgia provides state exempt from VAT with a right to credit input VAT (i.e. like a
owned immovable property free of charge to companies with zero-rated transaction)
effective from 1 January
profits to the moment of potential state owned properties to be used for footwear  Foreign-source income of individuals is fully exempted
 Double taxation treaties  Free Industrial Zones – Georgia has four industrial zones, in effective Double Taxation Treaties (DTTs). The rules and
which businesses are exempted from all tax charges, except procedures for the application of tax concessions set by the
with 54 countries personal income tax. If a company imports products from FIZ to provisions of DTT is determined by the Minister of Finance of
other territory of Georgia, it has to pay VAT and 4% of revenue Georgia. According to the DTTs, the income is subject to
 Special customs regime from national sales. Besides tax payments, companies exemption or lower rate withholding tax
Georgia’s preferential trade regimes — CIS
zero import tax to EU for Georgia has signed deep and comprehensive free trade area According to the requirements for the Certificate of Origin for CIS in
(DCFTA) which apart from other areas considers removing case materials used in footwear manufacturing are not entirely
footwear which otherwise customs duties on imports and exports of certain goods. originated in Georgia, then such materials should have undergone
amounts up to 17% sufficient working or processing in Georgia, that means:
In addition, Georgia has signed Free Trade Agreements with
China, Turkey and CIS, resulting in beneficial customs tax rates for 1.The final product commodity sub code should be different from
export of goods that of the imported materials; and
Standard import tax rates for footwear product that are fully 2. Total value of imported materials used in manufacturing of the
and CIS for footwear
eliminated vary by product and represent up to 17% for EU and product should not exceed 51% of the ex-works price of the
which otherwise amounts Turkey and up to 30% for CIS countries. product
up to 30% To benefit from this regime, the Rule of Origin must be fulfilled,
criteria of which vary per country.
 Criteria for Certificate of Origin
— EU and Turkey
The criteria of Certificate of Origin is nearly the same for EU and
Turkey and states that in case materials used in footwear
manufacturing are not entirely originated in Georgia, then such
materials should have undergone sufficient working or processing
in Georgia meaning that the final product commodity sub code
should be different from the code of used materials.
Despite the above, there is one exemption that footwear (group 64)
should be manufactured from materials of any heading, except
from assemblies of uppers affixed to inner soles or to other sole
components of heading 6406 (parts of footwear).
Overview of raw materials for sports footwear and footwear with
uppers of textile
Key raw materials used in manufacturing sports footwear and footwear with uppers of textile
 Cotton The raw materials used in sports footwear production can be split into two main categories such as materials and energy
commodities. The materials largely include textile, rubber and plastic.
 Canvas
The textile largely includes natural material such as cotton. Cotton production is dominated by India, China and USA,
 Nylon nevertheless Pakistan and Brazil also have notable production volumes. The majority of farming is performed by small-
scale farmers with individual holdings, although they are sometimes supported by larger organizations. Cotton is then
 Polyester turned into textile (e.g. canvas) used in the production sports footwear.
 Rubber and polyester.
Rubber is a key constituent of footwear and is produced both by natural means, i.e. from rubber trees, and also
 Oil synthetically by chemicals companies.
Plastic is widely used for manufacturing the different types of footwear. Main manufacturers of Plastic are China, USA and
Germany.
Production inputs
Main raw material inputs used in production of sports footwear and footwear with uppers of textile are: (e.g. rubber, plastic compounds, foam, and canvas, accessory
materials (e.g. precious metals and stones) and packing materials.
Dealers/merchants are the key suppliers of raw materials. Main raw material supply countries are located in Asia and Europe.
In order to understand the optimal capacity of production of footwear in Georgia, we analyzed potential consumption of the Georgian production by following countries of the
region (EU, CIS, Middle East, China, Turkey), assuming that significant part of the products will be exported to these countries. We calculated the gap between import and
export in these countries, as well as the selling price for the imported sports footwear and footwear with uppers of textile, and identified the countries which can potentially
become export markets for Georgia.
Based on the analysis of the above factors, we calculated approximate share of the potential import of footwear by Georgia to these countries. However, sports footwear is in
general more expensive, thus we suggest to concentrate more on sports footwear (around 64% of total production) rather than footwear with uppers of textile. As per
conservative view point we only used around 0.5% of total EU share, however there is potential of a bigger share of the EU import market to be taken by Georgia in case of
higher investment.
Potential production volume of sports footwear and footwear with uppers of textile (HS codes 640411, 640419)
Import in Import/export Total import in tons volume (thousand units, Estimated price per unit, Potential share of Potential volume
USD’000 gap in USD’000 (2016) 2016) USD import from Georgia (thousand units)
EU 13,843,594 4,615,072 663,127 1,559,409 10 0.5% 7,411
Russian Federation 492,851 455,132 30,034 70,628 9 1.1% 693
Kyrgyzstan 4,978 4,950 1,251 2,942 2 4.4% 117
Kazakhstan 23,819 (4,112) 1,570 3,692 6 - -
Belarus 22,921 18,615 1,523 3,581 10 5.0% 160
Azerbaijan 13,724 13,596 553 1,300 12 5.0% 58
Armenia 6,978 6,708 803 1,888 4 - -
Moldova 4,318 2,822 711 1,672 3 - -
Tajikistan 2,005 2,005 434 1,021 2 - -
Uzbekistan 1,520 (709) 98 230 7 - -
Saudi Arabia 253,724 251,170 17,313 40,713 10 0.6% 225
Iran 3,345 (12,518) - - - - -
China 1,045,429 (11,364,799) 34,686 81,568 12 - -
Turkey 269,917 145,502 11,321 26,622 13 - -
763,424 1,795,267 8,665
Note: Information for import and export presented in tons were transferred in number of units using 0,475 kilogram
The analysis shows, there is a gap between the import and export in most of the selected countries, except for China, Iran, Uzbekistan and Kazakhstan. The gap in these
countries is negative, which shows that the export exceeds import. Main suppling markets of Saudi Arabia are China, Vietnam and Indonesia. We considered that the possibility
to access these market is low, therefore didn’t consider China, Iran, Uzbekistan, Kazakhstan and Saudi Arabia as a potential consumers of the Georgian production. In addition,
we analyzed the selling price of imported products and considered that the benefits from entering the following markets is low: Armenia, Moldova, Tajikistan and Uzbekistan.
Further, we assumed that since most of raw materials are expected to come from China and Turkey we think that the potential for export to these countries is low.
exceeds supply and there is a potential for other supplier to enter these markets. As an example, the gap between the import/export in Russia is USD 455.1 million. Considering
analyzed import to EU counties in total, as considering the signed DCFTA and the significant import/export gap within EU market, as well the Georgia’s location, we believe that
import from Georgia in EU and selected countries of CIS and Middle East will be 0.5% to 5% of the total imports as shown on previous slide. Because the amount of
import/export of footwear is mostly measured in tons and the data wasn’t available in units, we estimated average weight of one pair of sports footwear and footwear with uppers
of textile and calculated amounts in pairs. Thus, based on the calculations of import/export data, the optimal capacity of the production in Georgia would be around 8,665,000
pairs per year.
In order to estimate the approximate investment for a manufacturing facility with the capacity of 8,665,000 pairs per year, we searched for similar projects. We have identified
the following investments:
— one planned project for textile manufacturing with investment amount of USD15 million, except land cost, for 3,000 employees. The investment amount was adjusted for
land costs to arrive at total investment amount for the calculation.
— Nike has opened USD60 million factory for 5,500 employees in Indonesia.
Based on the information on the investment amount, cost of land, number of workers and average amount of pairs produced by one worker per year, we calculated the
estimated investment at USD34.6 million. This is an approximate amount, as factors specific to Georgia and availability of technologies have not been specifically considered.
Financial
projections
Key assumptions
performed high level financial projection period and further increase by 25% YoY reaching
Number of employee 3,820
kinds of sports footwear and forecasted plant construction period. The delay in reaching full Annual maintenance CAPEX, USD'000 1,154
footwear with uppers of
textile in Georgia. The more recognition, as well as considering learning curve effect. Source: KPMG Analysis
detailed description of the • Based on the data provided by Damodaran, industry average
assumptions and relevant • During the forecasted period the maximum capacity has been capital structure of the industry comprises of 10%-25% of debt
estimated as the nominal capacity determined based on the and 75%-90% of equity. The capital structure of the project was
calculations are provided
analysis of the data obtained during the research, i.e. potential assumed to be the same as industry average
further on debottlenecking of production has not been considered.


the 3rd projection year.
distributed. Therefor we calculated taxes from free cash flows.

which the plant will be commenced.
Gross and EBITDA margins were forecast to amount to 39.7% and 8.7%, respectively throughout the forecast and terminal periods. EBT margin was projected to vary between

Terminal
Revenue - 56,394 85,691 116,311 118,521 120,299 122,223 124,179 126,166 128,185 130,236
Growth 52.0% 35.7% 1.9% 1.5% 1.6% 1.6% 1.6% 1.6% 1.6%
COGS - (34,006) (51,672) (70,136) (71,468) (72,540) (73,701) (74,880) (76,078) (77,295) (78,532)
Gross profit - 22,388 34,019 46,175 47,053 47,759 48,523 49,299 50,088 50,889 51,704
SG&A - (17,482) (26,564) (36,056) (36,741) (37,293) (37,889) (38,496) (39,111) (39,737) (40,373)
EBITDA - 4,906 7,455 10,119 10,311 10,466 10,633 10,804 10,976 11,152 11,330
EBITDA margin 8.7% 8.7% 8.7% 8.7% 8.7% 8.7% 8.7% 8.7% 8.7% 8.7%
EBT - 3,700 6,233 8,875 9,044 9,179 9,326 9,475 9,627 9,781 9,937
EBT margin 6.6% 7.3% 7.6% 7.6% 7.6% 7.6% 7.6% 7.6% 7.6% 7.6%
Corporate Income tax - - (101) (275) (1,152) (1,186) (1,203) (1,225) (1,247) (1,269) (1,429)
Net Income - 3,243 5,711 8,220 7,553 7,702 7,881 8,062 8,250 8,445 8,508
NI margin 5.8% 6.7% 7.1% 6.4% 6.4% 6.4% 6.5% 6.5% 6.6% 6.5%
Sales projection
Sales volume
Production of footwear was projected to start in Year 2 at the level of 4,333,000 units further increasing to 8,665,000 unit in Year 4. The 100% of sales volume is expected to be
sold on export.
Sales price
Average price for the export was estimated to be USD 13 per unit based on averages of the import countries, provided by International trade Center (ITC).
Selling prices, USD per unit

Sale volume of plant
10,000,000 120% 16
9,000,000 14
8,000,000 100% 12
7,000,000 10
80%
Unit
8
6,000,000
6
5,000,000 60%
4
4,000,000 2
3,000,000 40%
0
2,000,000 20%
1,000,000
- 0%
Year Year Year Year Year Year Year Year Year Year
1 2 3 4 5 6 7 8 9 10
Price per country Average price
Domestic sales Export sales Capacity utilization
Source: ITC, KPMG Analysis Source: ITC, KPMG Analysis
NPV analysis
Terminal
positive, amounting to USD'000 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 period
USD8.1 million Total revenue - 56,394 85,691 116,311 118,521 120,299 122,223 124,179 126,166 128,185 130,236
% of growth - 51.95% 35.73% 1.90% 1.50% 1.60% 1.60% 1.60% 1.60% 1.60%
EBITDA - 4,906 7,455 10,119 10,311 10,466 10,633 10,804 10,976 11,152 11,330
EBITDA margin 8.70% 8.70% 8.70% 8.70% 8.70% 8.70% 8.70% 8.70% 8.70% 8.70%
EBT - 3,700 6,233 8,875 9,044 9,179 9,326 9,475 9,627 9,781 9,937
Income tax (adjusted) - - (101) (275) (1,152) (1,186) (1,203) (1,225) (1,247) (1,269) (1,429)
NOPAT - 3,700 6,132 8,600 7,891 7,994 8,123 8,251 8,380 8,512 8,508
Depreciation - 1,206 1,222 1,244 1,268 1,287 1,307 1,328 1,350 1,371 1,393
CAPEX (34,618) - - (1,244) (1,268) (1,287) (1,307) (1,328) (1,350) (1,371) (1,393)
Change in working capital - (11,279) (5,859) (6,124) (442) (356) (385) (391) (397) (404) (410)
FCFF (34,618) (6,373) 1,494 2,476 7,449 7,638 7,738 7,859 7,983 8,109 8,098
WACC 12.84%
Terminal growth
1.60%
rate
Discount period 0.5 1.5 2.5 3.5 4.5 5.5 6.5 7.5 8.5 9.5 10
Discount factor 0.941 0.834 0.739 0.655 0.581 0.515 0.456 0.404 0.358 0.318 0.318
Discounted FCFF (32,590) (5,317) 1,105 1,623 4,326 3,931 3,530 3,177 2,860 2,575 22,887
Sum of
flows
NPV 8,107
Terminal
feasible Revenues - 56,394 85,691 116,311 118,521 120,299 122,223 124,179 126,166 128,185 130,236
EBITDA - 4,906 7,455 10,119 10,311 10,466 10,633 10,804 10,976 11,152 11,330
Net Income - 3,243 5,711 8,220 7,553 7,702 7,881 8,062 8,250 8,445 8,508
EBITDA margin - 8.7% 8.7% 8.7% 8.7% 8.7% 8.7% 8.7% 8.7% 8.7% 8.7%
Project payback
period 8.8
period.
as well as given costs assumptions. The NPV of the project is positive amounting to USD8.1 million, the IRR is high amounting to
15.9%. The payback period is estimated to be 8.8 years.
investment in manufacturing sports footwear and footwear with uppers of textile is similar to project IRR. However equity IRR is very
sensitive to the terms and size of debt. As an example, increasing portion of debt to 40% and assuming 2 years of grace period,
equity IRR increases to 17.8%.
Investment proposal
for travelling bags
manufacturing
Georgia’s competitive advantage in travelling bags manufacturing (1/2)
 Strategic location – Georgia’s strategic location is an asset to  Georgia’s preferential trade regimes
 Given Georgia’s location, any investor. As a bridge between Europe and Asia, Georgia
infrastructure and its Georgia has signed deep and comprehensive free trade area
offers direct access to European, Gulf Cooperation Countries
(DCFTA) which apart from other areas considers removing
favorable economic and and CIS markets. Additionally, Georgia is the part of trans-
customs duties on imports and exports of certain goods.
Caspian corridor and is able to provide railway transportation
political position in the to the Republic of China by the shortest route. Its three major In addition, Georgia has signed Free Trade Agreements with
region, the country is a oil and gas pipelines, Black Sea ports, well-developed railway China, Turkey and CIS, resulting in beneficial customs tax rates for
favorable location for systems, together with its international airports are playing an export of goods
increasingly important role in linking the East and West
investment Standard import tax rates for bags product that are fully eliminated
 Labor cost in bags manufacturing – Average gross salary per vary by product and represent up to 9.7% for EU and Turkey and
— Georgia benefits from month for bags manufacturing specialist ranges between up to 20% for CIS countries.
zero import tax to EU for USD265 – USD625, according to the inquire of local companies
in the industry To benefit from this regime, the Rule of Origin must be fulfilled,
bags which otherwise criteria of which vary per country.
amount up to 9.7% — Criteria for Certificate of Origin for EU and Turkey
range between USD 0.0598 to USD0.0858 per kWh
— Georgia benefits from  Raw Materials – Georgia itself may not be the producer of The criteria of Certificate of Origin is nearly the same for EU and
some of the key raw materials in sufficient volume terms, Turkey and states that in case materials used in bags
however advantageous location of Georgia gives ability to manufacturing are not entirely originated in Georgia, then such
and CIS for bags which import materials from abroad easily. materials should have undergone sufficient working or processing
otherwise amount up to in Georgia meaning that the final product commodity sub code
 Training Centers – Trainings for textile specialist are available should be different from the code of used materials.
20% in different cities of Georgia: Tbilisi, Kutaisi, Batumi, Mestia,
Akhaltsikhe, Mtskheta, Telavi, Gori, Ozurgeti, Tsalenjixa, Poti. — Criteria for Certificate of Origin for CIS
The average length of courses is 20 month. As a result of According the requirements for the Certificate of Origin for CIS in
interviews we identified that most training centers can provide case materials used in bags manufacturing are not entirely
special short-term training courses per investors request and originated in Georgia, then such materials should have undergone
some of them already have such experience. The terms and sufficient working or processing in Georgia, that means
cost of training vary upon the requirements. The majority of
long term trainings provided by the training centers are financed 1.The final product commodity sub code should be different from
by the Government with the standard annual fee of GEL2,250 that of the imported materials; and
per annum 2. Total value of imported materials used in manufacturing of the
product should not exceed 51% of the ex-works price of the
product
Georgia’s competitive advantage in travelling bags manufacturing (2/2)
debt
Georgia  Infrastructural support – In addition to the support mentioned  VAT on Export/Re-export – The export/re-export of goods is
above, Produce in Georgia also offers the following exempt from VAT with a right to credit input VAT (i.e. like a
 New profit tax rule is infrastructure support: Government of Georgia provides state zero-rated transaction)
effective from 1 January owned immovable property free of charge to companies with
profits to the moment of  Foreign-source income of individuals is fully exempted
potential state owned properties to be used for bags
effective Double Taxation Treaties (DTTs). The rules and
 Double taxation treaties  Free Industrial Zones – Georgia has four industrial zones, in
procedures for the application of tax concessions set by the
which businesses are exempted from all tax charges, except
with 54 countries provisions of DTT is determined by the Minister of Finance of
personal income tax. If a company imports products from FIZ to
Georgia. According to the DTTs, the income is subject to
other territory of Georgia, it has to pay VAT and 4% of revenue
 Special customs regime from national sales. Besides tax payments, companies
exemption or lower rate withholding tax
Overview of raw materials for travelling bags manufacturing
Key raw materials used in manufacturing travelling bags
 Cotton The raw materials used in bags production can be split into two main categories such as, materials and energy
commodities. The materials largely include Textile and Plastic.
 Canvas
The textile largely includes natural material such as cotton. Cotton production is dominated by India, China and USA,
 Nylon nevertheless Pakistan and Brazil also have notable production volumes. The majority of farming is performed by small-
scale farmers with individual holdings, although they are sometimes supported by larger organizations. Cotton is then
 Polyester turned into textile (e.g. canvas) used in the production of bags and accessories.
 Oil and polyester.
Plastic is widely used for manufacturing the different types of bags (carrier, traveling cases, etc.). Main manufacturers of
Plastic are China, USA and Germany.
Sources: (1) Marketline, March 2018, (2) KPMG Analysis
Production inputs
Main raw material inputs used in production of bags are: plastic, nylon and polyester, silk, seashell, rattan, bamboo, water hyacinth, seagrass.
Dealers/merchants are the key suppliers of materials. Main raw material supply countries are located in Asia and Europe.
Sources: (1) Marketline, March 2018, (2) KPMG Analysis
In order to understand the optimal capacity of production of travelling bags in Georgia, we analyzed potential consumption of the Georgian production by following countries of
the region (EU, CIS, Middle East, China, Turkey), assuming that significant part of the products will be exported to these countries. We calculated the gap between import and
export in these countries, as well as the selling price for the imported travelling bags, and identified the countries which can potentially become export markets for Georgia.
Based on the analysis of the above factors, we calculated approximate share of the potential import of travelling bags by Georgia to these countries. The proportion used for
both type of bags is around 50%-50%. As per conservative view point we only used around 1% of total EU share, however there is potential of a bigger share of the EU import
market to be taken by Georgia in case of higher investment.
Potential production volume of travelling bags (HS codes 420212, 420292)

Import in Import/export Total import in tons volume (thousand units, Estimated price per unit, Potential share of import Potential volume
USD'000 gap in USD'000 (2016) 2016) USD from Georgia (thousand units)
EU 7,967,070 3,426,876 758,600 417,454 19 1.0% 4,175
Russian Federation 210,191 200,592 18,231 10,032 20 5.0% 502
Kyrgyzstan 6,766 6,751 1,928 1,061 6 - -
Kazakhstan 18,617 18,005 2,729 1,502 12 5.0% 75
Belarus 9,328 7,665 1,272 700 13 5.0% 35
Azerbaijan 3,558 3,535 225 124 29 5.0% 6
Armenia 2,645 2,223 449 247 14 5.0% 12
Moldova 2,212 1,188 600 330 8 5.0% 17
Tajikistan 104 102 16 9 12 5.0% 0
Saudi Arabia 191,358 190,114 42,344 23,302 16 5.0% 1,165
Iran 1,970 1,777 - - - - -
China 323,305 (13,213,576) 11,750 6,466 50 - -
Turkey 86,167 57,957 5,327 2,931 32 - -
843,471 464,159 5,987
Note: Information for import and export presented in tons were transferred in number of units using 1,8 kilogram
The analysis shows, there is a gap between the import and export in all of the selected countries, except for China. The gap in China is negative, which shows that the export
exceeds import. Considering that China can not only support its own demand but is one of the main exporters of travelling bags, we considered that the possibility to access this
market is low, therefore didn’t consider China as a potential consumer of the Georgian production. In addition, we analyzed the selling price of imported products and considered
that the benefits from entering Kyrgyzstan is low. Further, we assumed that since most of raw materials are expected to come from China and Turkey we think that the potential
for export to these countries is low.
exceeds supply and there is a potential for other supplier to enter these markets. As an example, the gap between the import/export in Russian is USD200.6 million. Considering
analyzed import to EU counties in total, as considering the signed DCFTA and the significant import/export gap within EU market, as well Georgia’s location, we believe that
import from Georgia in EU and selected countries of CIS and Middle East will be 1% to 5% of the total imports. Because the amount of import/export of travelling bags is mostly
measured in tons and the data wasn’t available in units, we estimated average weight of one travelling bag and calculated amounts in units. Thus, based on the calculations of
import/export data, the optimal capacity of the production in Georgia would be around 5,987,000 units per year.
In order to estimate the approximate investment for a manufacturing facility with the capacity of 5,987,000 units per year, we searched for similar projects. We have identified the
following investments:
- one planned project for textile manufacturing with investment amount of USD15 million, except land cost for 3,000 employees. The investment amount was adjusted for land
costs to arrive at total investment amount for the calculation.
- Nike has opened USD60 million factory for 5,500 employees in Indonesia
Based on the information on the investment amount, cost of land, number of workers and units produced by one worker per year, we calculated the estimated investment at
USD23.9 million. This is an approximate amount, as factors specific to Georgia and availability of technologies have not been specifically considered.
Financial
projections
Key assumptions
performed high level financial projection period and further increase by 25% YoY reaching Number of employee 2,639
kinds of travelling bags in forecasted plant construction period. The delay in reaching full Annual maintenance CAPEX, USD'000 1,196
Georgia. The more detailed
description of the recognition, as well as considering learning curve effect. Source: KPMG Analysis
assumptions and relevant • Based on the data provided by Damodaran, industry average
calculations are provided • During the forecasted period the maximum capacity has been capital structure of the industry comprises of 10%-25% of debt
estimated as the nominal capacity determined based on the and 75%-90% of equity. The capital structure of the project was
further on assumed to be the same as industry average
analysis of the data obtained during the research, i.e. potential
debottlenecking of production has not been considered.


the 3rd projection year
distributed. Therefor we calculated taxes from free cash flow

which the plant will be commenced
Gross and EBITDA margins were forecast to amount to 49% and 8%, respectively throughout the forecast and terminal periods. EBT margin was projected to vary between

Terminal
Revenue - 51,954 78,944 107,154 109,190 110,827 112,601 114,402 116,233 118,092 119,982
Growth 52.0% 35.7% 1.9% 1.5% 1.6% 1.6% 1.6% 1.6% 1.6%
COGS - (26,497) (40,262) (54,648) (55,687) (56,522) (57,426) (58,345) (59,279) (60,227) (61,191)
Gross profit - 25,457 38,683 52,505 53,503 54,305 55,174 56,057 56,954 57,865 58,791
SG&A - (21,301) (32,367) (43,933) (44,768) (45,439) (46,166) (46,905) (47,655) (48,418) (49,193)
EBITDA - 4,156 6,316 8,572 8,735 8,866 9,008 9,152 9,299 9,447 9,599
EBITDA margin 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0%
EBT - 2,906 5,049 7,283 7,421 7,533 7,653 7,776 7,900 8,026 8,155
EBT margin 5.6% 6.4% 6.8% 6.8% 6.8% 6.8% 6.8% 6.8% 6.8% 6.8%
Corporate Income tax - - (18) (125) (955) (984) (998) (1,015) (1,033) (1,051) (1,165)
Net Income - 2,590 4,741 6,895 6,233 6,347 6,488 6,630 6,777 6,928 6,990
NI margin 5.0% 6.0% 6.4% 5.7% 5.7% 5.8% 5.8% 5.8% 5.9% 5.8%
Sales projection
Sales volume
Production of travelling bags was projected to start in Year 2 at the level of 2,993,000 units further increasing to 5,987,000 units in Year 4. The 100% of sales volume is
expected to be sold on export.
Sales price
Average price for the export was estimated to be USD 17 per unit based on averages of the import countries, provided by International trade Center (ITC).
Sale volume of plant Selling prices, USD per unit

7,000,000 120% 60
50
6,000,000 100%
40
5,000,000
80% 30
Unit
4,000,000 20
60%
3,000,000 10
40% -
2,000,000
1,000,000 20%
- 0%
Year Year Year Year Year Year Year Year Year Year
1 2 3 4 5 6 7 8 9 10
Domestic sales Export sales Capacity utilization Price per countery Average price
Source: ITC, KPMG Analysis
Source: ITC, KPMG Analysis
NPV analysis
Terminal
positive, amounting to 8.7 USD'000 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 period
million Total revenue - 51,954 78,944 107,154 109,190 110,827 112,601 114,402 116,233 118,092 119,982
% of growth - 51.95% 35.73% 1.90% 1.50% 1.60% 1.60% 1.60% 1.60% 1.60%
EBITDA - 4,156 6,316 8,572 8,735 8,866 9,008 9,152 9,299 9,447 9,599
EBITDA margin 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00%
EBT - 2,906 5,049 7,283 7,421 7,533 7,653 7,776 7,900 8,026 8,155
Income tax (adjusted) - - (18) (125) (955) (984) (998) (1,015) (1,033) (1,051) (1,165)
NOPAT - 2,906 5,031 7,157 6,466 6,549 6,655 6,760 6,867 6,975 6,990
Depreciation - 1,250 1,267 1,289 1,314 1,334 1,355 1,377 1,399 1,421 1,444
CAPEX (23,918) - - (1,289) (1,314) (1,334) (1,355) (1,377) (1,399) (1,421) (1,444)
Change in working capital - (10,703) (5,560) (5,811) (419) (337) (365) (371) (377) (383) (389)
FCFF (23,918) (6,546) 738 1,346 6,047 6,211 6,290 6,389 6,490 6,592 6,601
WACC 12.84%
Terminal growth
1.60%
rate
Discount period 0.5 1.5 2.5 3.5 4.5 5.5 6.5 7.5 8.5 9.5 10
Discount factor 0.941 0.834 0.739 0.655 0.581 0.515 0.456 0.404 0.358 0.318 0.318
Discounted
(22,517) (5,462) 545 882 3,512 3,197 2,869 2,583 2,325 2,093 18,655
FCFF
Sum of
flows
NPV 8,683
Terminal
feasible Revenue - 51,954 78,944 107,154 109,190 110,827 112,601 114,402 116,233 118,092 119,982
EBITDA - 4,156 6,316 8,572 8,735 8,866 9,008 9,152 9,299 9,447 9,599
Net Income - 2,590 4,741 6,895 6,233 6,347 6,488 6,630 6,777 6,928 6,990
EBITDA margin - 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0%
Project payback
period 8.5
period.
as well as given costs assumptions. The NPV of the project is positive amounting to USD8.7 million, the project IRR is high
amounting to 17%. The payback period is estimated to be 8.5 years.
investment in Bags is similar to project IRR. However equity IRR is very sensitive to the terms and size of debt. As an example,
increasing portion of debt to 40% and assuming 2 years of grace period, equity IRR increases to 19%.
Appendices
Appendix 1
Location of potential land plots and building available for free of charge
transfer to an investor
We have been provided with list of pre selected land plots and buildings suitable for a manufacturing factory construction in Georgia, that are available for free of charge transfer
to interested investors. We have been informed by Enterprise Georgia LEPL that the list is not exhaustive and more options can be provided to interested investors as per their
request. See next slide for the details of potential land plots and buildings available for free of charge transfer to an investor
2 locations of
around 28,000 sq.m.
3 locations of
around 24,000 sq.m.
2 locations of
around 30,000 sq.m.
Note: International Airport Tbilisi
Port Kutaisi
Batumi, Poti, Anaklia
Appendix 1
Details of potential land plots and building available for free of charge
transfer to an investor
Potential state owned properties for free of charge transfer to an investor for construction of manufacturing factory
Region Imereti Guria Kvemo Kartli
Major cities/towns in region Kutaisi, Zestaponi, Samtredia Lanchkhuti, Ozurgeti Rustavi, Gardabani
Land and ruins of Land and ruins of Land and
Property type Land and buildings Land and buildings Land Land and buildings
buildings building buildings
Sulkhan-Saba Av. Griboedovi St. 55A; Kostava St. 15; Muskhishvili St. 15A; Gamarjveba;
Address Lanchkhuti Gardabani
10; Kutaisi Samtredia Samtredia Lanchkhuti Gardabani
27.06.52.541;
27.06.57.190;
Property code 03.05.24.891 34.08.47.065 34.08.58.214 27.06.52.429; 81.07.16.738 81.15.03.218
27.06.57.020
27.06.52.459
Size of Land (square meter) 15,632 5,254 6,755 14,949 8,987 5,851 23,672
Population (Thousand persons, 2017) 530 113 427
Labor force (Thousand persons, 2016) 377* 70** 210
Unemployed (Thousand persons, 2016) 41* 3*** 18
Population outside labor force (Thousand
155* n/a 91
persons, 2016)
Average monthly salary in business sector (USD,
286 294 352
2017)
Average monthly salary in industry (USD, 2016) 289 326 434
Production value in industry (USD'000, 2016) 351 73 723
Value added in industry (USD'000, 2016) 113 23 233
Center of Georgia; Close to Poti and Batumi ports; Close Close to Azerbaijan and Armenian border;
Regional advantages Close to Kutaisi airport; Main road crossing all major towns to Batumi airport; Close to Turkish Close to the capital - Tbilisi and Tbilisi
of region; Easy access to railway, Free Industrial Zones border airport
Note: *Information about labor force and unemployment in the Imereti region is presented together with Racha-Lechkhumi, Kvemo Svaneti data;
**No public information is available for labor force specifically for Guria. The region is grouped with Samtskhe-javakheti and Mtskheta-Mtianeti and total labor force for the three regions represent 229 thousand. However, as per not formal information the
labor force in Guria represents 70,000 individuals;
***As no data was available for labor force specifically for Guria, we estimated number of unemployed people based on average unemployment rate of 4.1% for the region
kpmg.ge kpmg.com/app
© 2018 KPMG Georgia LLC, a company incorporated under the Laws of Georgia, a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
The KPMG name and logo are registered trademarks or trademarks of KPMG International Cooperative (“KPMG International”).

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Georgia's potential for

footwear, bags &

Irina Gevorgyan — Stage II: Evaluate the potential of Georgia 93

Tel: +995 (32) 293 57 13

Tel: +995 (32) 293 57 13

Overview of the structure of footwear, bags and accessories industry

Footwear brands Bags and accessories brands

Value chain analysis of footwear, bags and accessories industry (1/3)

Value chain analysis of footwear, bags and accessories industry (2/3)

Value chain analysis of footwear, bags and accessories industry (3/3)

Market Trends of Footwear

Market Trends of Bags and Accessories

20.0 Duffel Bags

Import Analysis of Footwear, Bags and Accessories

Export Analysis of Footwear, Bags and Accessories

Other EU countries 4,846

Trade Analysis of Footwear

Trade Analysis of Bags and Accessories

Analysis of Main Competitive Advantages

Production Analysis of Footwear, Bags and Accessories by countries

Other EU countries 1,874 Other EU countries 1,323

Austria 325 United Kingdom 133

France 351 Croatia 157

Poland 465 Germany 290

Germany 736 Romania 379

Romania 1,447 Hungary 572

Portugal 2,231 Spain 704

Spain 2,635 France 1,663

Italy 10,594 Italy 5,696

Source: Eurostat Source: Eurostat

Production and Consumption Analysis of Footwear

EU footwear production and consumption, USD million, 20161

Production and Consumption Analysis of Bags and Accessories

Government Support Mechanism and Incentives in Italy (1/2)

Government Support Mechanism and Incentives in Italy (2/2)

Market Trends of Footwear

Market Trends of Bags and Accessories

1,000 (18%) (12%) 40 Other Bags

Import Analysis of Footwear, Bags and Accessories

Viet Nam 1% 8% Italy

Export Analysis of Footwear, Bags and Accessories

Other CIS countries 23 Other CIS countries 13

Russian Federation 183 Ukraine 47

- 50 100 150 200 - 10 20 30 40 50

Trade Analysis of Footwear

Trade Analysis of Bags and Accessories

Production and Consumption Analysis of Footwear, Bags and Accessories

Government Support Mechanism and Incentives in Russia (1/2)

Government Support Mechanism and Incentives in Russia (2/2)

Market Trends of Footwear in Middle East

Market Trends of Bags and Accessories in Middle East

Import Analysis of Footwear, Bags and Accessories in Middle East

4% Hong Kong, China

Export Analysis of Footwear, Bags and Accessories in Asia1

Other Asian countries 4,701 Other Asian countries 4,028

China 48,438 China 29,118

Trade Analysis of Footwear in Middle East

Trade Analysis of Bags and Accessories in Middle East

Bags and Accessories trade breakdown by product, USD million