PRIORITY SHIFT

Azerbaijan 2012 | INDUSTRY & MINING | REVIEW: INDUSTRY

The industrial sector is developing with a new sense of urgency, as new projects seek to find their competitive niche internationally.

Azerbaijan's industrial sector is beginning to show its potential thanks to dedicated support from the government to boost its development. The main objective of the state's policy for the medium to long term is to ensure steady and rapid production growth, structural improvement, and increased efficiency—all to intensify the development of the non-oil sector and diversify the economy. If Azerbaijan wants to fulfill its potential, however, much investment is needed to create a keen industrial base that will be able to compete in target niche areas.

According to the State Statistical Committee of the Republic of Azerbaijan (Azstat), industrial production in Azerbaijan in 2011 totaled $43.87 billion, of which $8.10 billion was generated by the public sector, and $35.77 billion by the non-state sector. Production in the extracting industry reached $34.16 billion, or 77.9% of entire industrial output. The processing industry generated $7.47 billion or 17% of the total, while the energy and gas sector generated $1.97 billion, 4.5% of the total. The remaining $239.27 million was generated in the water supply, sewage treatment, and hard waste utilization sectors.

Currently, much of the country's industry is related to oil and gas, agriculture, and building materials. However, over the last few years several large industrial projects have become a reality, thanks partly to the flow of local and foreign investment, which has strengthened the country's industrial competitiveness. Despite the sector having newly begun to emerge from its embryonic stages, success stories are not hard to come by. Companies such as Baku Steel Company and Det.Al Holding are slowly revitalizing heavy industry in the country, the former as a provider of infrastructural materials for the oil and gas industry, and the latter exploiting the country's potential in the metallurgical sector. The country's vast energy resources have also afforded it a ready and inexpensive supply of oil, gas, and electricity. Along with the government's commitment to promoting investment, the recipe could be right to tempt more FDI. “This is a very attractive industry for foreign investors at the moment, because the government is creating incentives and favorable conditions for potential companies to develop their activities in the country. Also, Azerbaijan holds huge potential in the mining sector and in the ferrous and non-ferrous metals industry," Sarkhan Babayev, General Director of Det.Al Holding, told TBY.

On the other hand, a relatively small local population means that the light manufacturing industries are seeking to specialize in order to succeed. Positive trade relations with the EU, US, Turkey, and Russia are clearly working to Azerbaijan's advantage in this regard, and exports are on the rise. Also a key stop on the historic Silk Road, Azerbaijan is set to benefit from increasing foreign interest in the area as a base of operations. Likewise, Azerbaijani businessmen are also increasingly looking to the near abroad for opportunities. Growth sectors include automotive, building materials, defense, and FMCG, as firms continue to diversify and boost the country's export mix.

AUTOMOTIVE

Car imports grew in 2011, with 29,718 passenger cars imported in 2011 worth $266.7 million, according to Azstat. The country, however, is the proud owner of a budding automotive industry, especially in the spare parts subsector, which has flourished between the large automotive producing nations of Russia and Iran.

Azerbaijan currently has two assembly facilitates for passenger vehicles: Az Samand, which belongs to Iran Khodro, operates with an annual production capacity of 6,000 units; and Azerbaijan's Nakhchivan Automobile Plant (NAP), which belongs to Chinese Lifan, operates with a capacity of 5,000 cars. Lifan, which currently produces three models at NAP, is set to increase the number of models produced at its Azerbaijani plant up to five. In addition, the company has recently been awarded a contract by the government to produce 604 cars. Ganja Motor Works also produces tractors and trucks.

BUILDING MATERIALS

As part of the government's effort to diversify the economy, the production of building materials is playing a vital role in expanding the country's industrial base. As of the end of 2011, 4% of finished industrial product stock was building materials, and companies involved in the production of building materials produced goods worth $343.79 million in 2011.

Building materials produced locally in Azerbaijan accounted for 53.8% of overall goods on the local market in 2011, according to a report from the Property Market Public Union. Prices for construction materials increased by 15.7% in the same year.

As of today, “there are still many construction materials imported," according to Michael Gerlich, Chairman of the Executive Board and CEO of Synergy Group, an investment company involved in the sector through Autoclaved Aerated Concrete (AAC). However, Gerlich also told TBY that increasing demand for such materials due to growth in the construction sector and rapid economic development in the country along with large investment projects that are currently being implemented, will drive growth and expansion in this industrial sector in the future. Ümit Bashdash, country manager at BASF Caspian, which operates a plant in Sumgait that focuses on the production of construction-related chemicals, also expects important growth in the construction sector that will eventually lead to growth in the building materials industry in Azerbaijan.

DEFENSE

Defense spending has been rapidly growing since a formal Ministry of Defense Industry (MDI) was established back in 2005. In recent years, Azerbaijan has also increased its defense spending, from $1.27 billion in 2007 to $1.38 billion in 2012, and an increase in the production of defense-related products has followed. General production volumes rose 1.9 fold in the first 9 months of 2011 compared to the same period of 2010, and the number of different defense products produced reached 446, according to the MDI.

At the Gulf Defense & Aerospace Exhibition, held in Kuwait in December 2011, the MDI displayed 97 defense products—a testament to the scope of production capabilities in Azerbaijan. Furthermore, the MDI is already planning to expand production to up to 600 types of different defense products, and is set to begin the production of various defense goods in 2012. Products will include 5.45 x 39-mm rounds as well as tank and artillery shells. In addition, the MDI is currently working on the negotiation of a joint partnership with the Czech Republic on the modernization of its L-39 and L-29 fighter/trainer aircraft. Azerbaijan has also already reached agreements on the export of ammunition for small arms, mortar launchers, optical targets for launchers, shells for the AQS-17 and AQS-30 mortar, as well as other arms and ammunition.

FOOD & BEVERAGE

The Azerbaijani consumer goods industry is one of the most attractive and fast-developing sectors, with companies such as Delta Group, Veyseloğlu, Azersun, Atropatena, and Danone leading the way. Over the last few years, the FMCG sector has importantly invested in increasing production facilities and capacities. Delta Group, which operates under the brand BisMak and runs a food production complex producing pasta and confectionaries, is constructing a new pasta factory that will have a production capacity of 200 tons by 2013. Veyseloğlu Holding, which switched from being a wholesaler to production and distribution, is also planning to increase its chocolate production capacity by 60% in 2012, reaching a monthly production of 800 tons.

The common denominator of these companies, as well as many within the food and beverage sector, is increasing international activities, something Aydin Mehdiyev, founder of Delta Group, told TBY, “over the last few years, the FMCG sector has continuously developed and we have seen an expansion of market chains and an increase in local production. In addition, many worldwide brands have entered the Azerbaijani market. All these factors have led to an expansion of Azerbaijani companies abroad."