INVESTMENT OPPORTUNITIES IN AFGHAN CARPET SECTOR

Afghanistan Small and Medium Enterprise Development

ASMED

September 2007

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DISCUSSION OUTLINE

• ASMED BACKGROUND• PROGRAM SUPPORT TO CARPET INDUSTY• VALUE CHAIN ANALYSIS• INVESTMENT OPPORTUNITIES• GDA POSSIBILITY• OPIC/ASMED GDA

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ASMED GEOGRAPHIC FOCUS

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ACTIVITY OVERVIEW TO DATE

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ASMED SUPPORT TO CARPET INDUSTRY

• Training and capacity building• Export Readiness Program• Product quality improvement• Assisting associations in advocacy• Re-establishing market linkages• Support in creation of collateral material for marketing

– Website, brochures, banners• Establishment of a business information center

– Overseas importers directory– Carpet trade data base and design bank

• Participation in international trade fairs• Organizing in-country carpet fairs• Potential grant and GDA (PPP) support

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• 1st International Carpet Fair• $4 million sales (orders)• Co-sponsors

– EPAA– Afghan Carpet Guild– Kabul Carpet Association

• Participation– DoC Delegation

• Facilitated by ASMED• 11 buyers• $1.6 million sales (orders)

– Secretary of Commerce– 110 exhibitors– 50 international buyers

MARKET LINKAGES - EXAMPLE

Sec. Gutierrez inaugurates the Afghanistan International Carpet Fair, August 26, 2007

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CARPET VALUE CHAIN

$0

$2,500

$5,000

$7,500

$10,000

$12,500

$15,000

Wool Cleaning Spinning Dying Weaving Finishing FinishingLahore

Cap-X Op. Costs Net Revenue

Adequate operating capital (LoC) needed.

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SHEEP STOCK AND WOOL PRODUCTION – PHASE 1

• Afghanistan produces 20% of the wool needed for carpet production

• To produce 100,000 m2 of carpet:– 1,400 MT of raw wool needed– 280,000 new sheep required

• Cost of $28 million

• Low investment priority

• Iraq potential source

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IDENTIFIED GDA OPPORTUNITY: IRAQ AND AFG

• Vertically-integrated firm with both Afghan and Iraqi investors who are also American passport holders

• High-quality Iraqi wool would be cleaned by a defunct state-owned enterprise undergoing privatization– Indications are that this will be a low-cost supplier

• Export of cleaned wool to Afghanistan where it moves through the manufacturing process

• Sales of finished carpets occur in high-value markets where these investors have existing relationships

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SHEERING AND CLEANING OF WOOL – PHASE 2

• Without a large stock of sheep improvements in this stage are precluded

• Margins are thin in any case

• Occurs typically only over 4 weeks per year (late April through late May)

• Not an investment opportunity

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SPINNING OF WOOL – PHASE 3

• Machine spinning represents a significant immediate investment opportunity– No known machine spinning occurs in Afghanistan

• Mostly in India, Pakistan and Iran– Demand is strong and consistent – Requires a total capital outlay of only $700,000

• $820,000 net revenue in YR-1• $1.3 million/yr from YR-2 onward

– Strong consistent demand and modest capital investment is a low-risk combination

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DYING OF WOOL – PHASE 4

• Margins are thin• Little value added in this stage• Lack of affordable gas fuel a constraint

– Fire wood used ($140,000 value)– Not environmentally friendly

• Alternative means to be explored

• Not an investment opportunity

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WEAVING OF UNIFINISHED CARPETS – PHASE 5

• Adds the most critical contents for saleable product:– Unique designs– Esteemed history of weaving

• 10,000 weavers (100,000 m2)

– Management of labor force difficult– Existing networks and relationships already exist– Third most profitable stage

• Refer to Exhibits 2 and 3

• Second highest value addition• High input costs• Low investment opportunity

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CARPET FINISHING – PHASE 6

• Greatest investment opportunity• Nearly all finishing and export occurs in Pakistan

– Accounts for 60% of value addition– 85% of annual net revenue in the value chain

• Investment for cut & wash facilities in AFG is modest– $200,000 to $500,000 for 100,000 m2 of finished carpets– Adequate credit needed

• $10.5 million for unfinished carpet• $3.5 million for transport

• Net revenue $11 million in YR-1

• Customs/export challenge