Before mining, cashmere was Mongolia's main export. In the 1990s cashmere accounted for around 15 percent of Mongolia's GDP. The garment and value-added sectors were undeveloped. Factories there at that time produced out-of date clothes in gaudy colors that few fashion-conscious Westerners would dare to be seen in.

Marina Romanov wrote in Mongolia Briefing: “According to the latest available statistics, Mongolia produces 6,700 tons of raw cashmere annually, accounting for about 28 percent of the total world supply. The number of cashmere goats in the country increased almost 300 percent between 1990 and 2009. During the same period, the amount of raw cashmere produced increased by 450 percent. According to the Mongol Cashmere Association, current annual revenues of around US$180 million are dominated by sales of raw cashmere, which make up 80 percent of total exports. If the country had the capacity to refine all of its cashmere before exporting it, profits could rise to between US$480 million and US$520 million. [Source: Marina Romanov, Mongolia Briefing, February 24, 2012 ^|^]

According to USAID: The importance of the cashmere industry to the Mongolian economy is clear: it provides income and employment for over a third of the population and raw cashmere and cashmere products are Mongolia’s third largest export. A vibrant cashmere industry has the potential to contribute to the growth of the economy, of the manufacturing sector, of employment at both the herder and the manufacturing levels, and of exports. The cashmere industry, however, is exposed not only to the changes in international demand and prices for cashmere, but also to severe changes in weather and extreme competition from China for both raw cashmere as an input to the Chinese cashmere processing sector and with Chinese-produced semi-processed and finished cashmere products on world markets. [Source: USAID, May 2005 ]

The structure of the cashmere industry is complex and largely dysfunctional. The herding sector receives substantial subsidies from the government of Mongolia: almost no taxation, free medical care, free water services for their herds, subsidized fodder, and no pension, health or disability contributions. Yet the herding sector may well have surpassed its sustainable herd size and be imposing substantial negative externalities on Mongolia in the form of desertification. Despite the political power of the herders, these subsidies should be removed and the miniscule head tax on goats should be increased substantially.

With annual production of over three thousand tons, Mongolia accounts for about 15 percent of world production of cashmere of 16 thousand tons, with China accounting for about 75 percent.Mongolia’s “official net “exports of cashmere and cashmere products were $57 million in 2004. In other years, imports were in the $7 - $10 million range and were. About 50 percent of Mongolia’s production of raw cashmere is smuggled to China, giving actual total net exports of about $97 million. If all the raw cashmere produced in Mongolia were fully processed into finished knitted and woven products prior to export, exports would be about $206 million and employment in the processing industry would more than double to about seven thousand.

The objectives of the Government of Mongolia (GoM) for the cashmere industry are to develop the cashmere industry so that it makes a significant contribution both to economic growth and to poverty alleviation. To achieve these twin objectives it assists the development of the herders whose goats supply the raw cashmere and the downstream processing industry that adds value to the raw cashmere prior to export. For herders the government of Mongolia offers free education for their children, virtually no taxes (only a small per head tax, which is often partly evaded), free provision of water wells, free veterinarian services, and fodder at subsidized prices.

Mongolian Government Intervention Into the Cashmere Industry

According to USAID: “For the processors, through 1997, the government of Mongolia instituted, and enforced, a ban on the export of raw (greasy) cashmere, thereby reducing the price of raw cashmere and increasing the supply available to processors. As a result, there was extensive investment in the industry by foreign investors, Mongolian investors and in JVs. [Source: USAID, May 2005 ] In 1997, however, when Mongolia joined the WTO, the government of Mongolia replaced the ban on exports of raw cashmere with an export duty of 4,000 tugriks, at the time about 30 percent of the world price of raw cashmere. The government of Mongolia also undertook to remove this export duty by January 1, 2007. Since 1997, however, the tugrik has devalued and the price of cashmere on world markets has increased, such that 4,000 tugriks represents about 12 percent of the price of raw cashmere. Moreover, starting in 2000, there was a change in the customs regime that has allowed (even encouraged) widespread smuggling of raw cashmere to access the higher prices in China.

As a consequence of these developments, the cashmere processing sector in Mongolia has fallen on hard times: many firms have exited the industry, yet capacity utilization rates remain low at all stages of processing, causing losses for many firms in the industry. The expiration of the Multi Fiber Arrangement (MFA) has exacerbated these problems with several Chinese-owned companies either closing entirely or relocating their knitting capacity back to China.

Cashmere Processing Sector in Mongolia

According to USAID: The cashmere processing sector in Mongolia has seen significant exit...after the ban on exports was lifted in 1997 and the coincident fall in the world price of cashmere. More firms will most probably exit the industry or reduce their knitting capacity due to the expiration of the MFA. Yet, despite this reduction in capacity, substantial excess capacity still remains at every stage of processing: scouring (40 percent capacity utilization in 2004), dehairing (52 percent), spinning (42 percent), knitting (77 percent), and weaving (52 percent). This underutilization of existing capacity is indeed ironic, since over 50 percent of Mongolia’s production of raw cashmere is smuggled to China without any processing at all. [Source: USAID, May 2005 ]

There is another characteristic of the structure of the processing sector that influences the performance and future prospects of the sector: foreign ownership. During the mid-1990s, much of the entry in the processing sector was via joint ventures between Mongolian and foreign firms. These foreign firms often have had an agenda that extends beyond Mongolia: to use their processing facilities in Mongolia to produce inputs for further processing in their units located in their home countries, to sell output from their Mongolian units through their channels of distribution to long-term customers, and to “quota hop” over quotas imposed by the governments in the countries in which they market their output on output from their home country. For these firms, capacity utilization, sales, and investment are done in relationship to the needs and internal decisions of the foreign partner, not in relationship to the economic dictates of the market.

According to USAID: The firms in the cashmere processing sector point to two problems: the high cost of the working capital needed to purchase stocks of raw cashmere and the price competition of traders (called changers) who buy raw cashmere in Mongolia, at prices that Mongolian processors say they cannot match and make profits, and smuggle it to China. In addition to these problems, labor costs in Mongolia are somewhat higher than in Inner Mongolia in China and productivity is somewhat lower. In general, but with notable exceptions, labor and management skills are low and machinery is not well maintained and hence product quality is low and falling. This quality problem has been heightened by the falling average quality of Mongolian raw cashmere (as measured by micron diameter).

Value-Added Chain in the Mongolian Cashmere Industry

According to USAID: The value added chain for cashmere in Mongolia has five major stages: raw/greasy cashmere, scouring/dehairing, dieing/spinning, knitting or weaving... Most cashmere is exported with the least value added possible: raw/greasy cashmere. The next largest export is dehaired cashmere, again with low value added. In recent years, a substantial quantity of cashmere yarn has been exported. Production of yarns was also used as an input to further processing into knitted and woven textiles. A substantial percentage of the dehaired cashmere that is exported was spun into yarn in China and then imported back into Mongolia to be used for knitting and weaving. [Source: USAID, May 2005 ]

In 2004, total recorded “net “cashmere exports amounted to about $57 million (exports of $80 million minus imports of yarn worth $23 million). If smuggled exports were included, the net exports would rise to about $97 million. If all the cashmere that entered the processing value chain had been fully processed into high quality knitted garments and then exported, net exports would have been increased from $57 to $103 million. If, instead of being smuggled, all Mongolia’s raw cashmere were fully processed into high quality knitted sweaters in Mongolia and then exported, exports would increase to about $206 million. Employment in the processing sector would also increase from about 2,500 thousand at present to over seven thousand. Given the substantial excess capacity in the industry, most of this additional processing could be accomplished without substantial additional investment in capital plant or equipment except for additional spinning capacity.

This analysis raises the questions of why smuggling is so rampant and why additional value has not been added in the processing sector rather than exporting low value added products, such as dehaired cashmere. A large part of the answer lies in the costs of producing semifinished and finished cashmere products in Mongolia compared to the costs in China.

Compared to production costs in Inner Mongolia in China, labor costs (including fringe benefits) are about 25 percent higher in Mongolia, while labor productivity is 25 percent less than in China. Skilled mechanics are in short supply and, since there are no machinery producers in Mongolia, parts must be shipped from China or Europe causing substantial downtime when equipment breaks. China has been able to develop cashmere clusters of herders, processors, machinery and parts manufacturers, die and other chemical input producers, and traders and service providers (repairs, shipping and transportation, and so on). (Garment designers, however, are relatively plentiful and low cost in Mongolia.) Overall, at each stage of the value added chain, production costs are 30 percent 40 percent higher in Mongolia compared to China.

Examination of the value-added chain for cashmere highlights the difficulties of the industry: there is severe excess capacity in all segments of the chain with the exception of spinning (with 77 percent capacity utilization); most cashmere is exported with only low value added (raw or dehaired/tops cashmere), and product quality, as reflected in price, is highly uneven. A simulation model of the value added chain of processing firms shows that despite these problems, if a firm has access to funds at low international rates, has best practice yields, and produces quality products, it can return an acceptable profit to its investors. If it must pay domestic Mongolian interest rates of about 37 percent, it cannot be profitable. For an integrated producer, at a 37 percent borrowing rate, capital costs are roughly six times labor costs. If this situation is not addressed either through foreign ownership, through access to international lending, or through credits advanced by buyers, then a firm cannot survive in this environment.

The government of Mongolia faces three alternatives: to increase, enforce, and extend the export tax; to subsidize the processing sector directly, or to retain the “status quo. “In 1997, as part of its ascension to the WTO Mongolia undertook to remove its export ban on raw cashmere and to replace it with a specific tax of 4,000 tugriks/kilo (at that time about 30 percent of value). At current prices, this specific tax is about 12 percent, but, since 2000 there has been rampant smuggling that reduces the effective tax rate. This tax is due to expire January 1, 2007. The government of Mongolia could extend this tax for another ten years and enforce it by, for example, giving customs officers a bounty of some percentage of the tax collected or the value of intercepted smuggled cashmere. This action would represent a massive subsidy to the processing sector at the expense of the herding sector. It would further distort markets and prices in both sectors. Mongolia needs to move toward less distorted markets, not toward increasing the level of market distortion.

Problems with the Cashmere Industry in Mongolia

Marina Romanov wrote in Mongolia Briefing: “According to those who work in the Mongolian cashmere industry, throughout the whole production chain, from the care of the goats to the marketing of the final garments, there are a number of important issues which require immediate attention, including: 1) The quality of the raw fiber; 2) Coordination, which makes it difficult for herders to enter formal market arrangements with domestic manufacturers; 3) Inadequate domestic spinning capacity, which leads some garment producers to ship raw cashmere to China for spinning, and to import the yarn for manufacturing back in to Mongolia. [Source: Marina Romanov, Mongolia Briefing, February 24, 2012 ^|^]

According to USAID: “Both sectors of the industry – the herding sector and the processing sector – are in deep trouble. The herding sector may well have surpassed the total herd size that can be sustained by Mongolia’s pasture lands and its herds may already be causing desertification; yet herding is heavily subsidized. Many firms in the processing sector have ceased to operate or have downsized their operations over the past eight years, yet processors still operate on average at less than 50 percent capacity. About half of Mongolia’s raw cashmere, however, is smuggled to China for processing. Both segments of the market are highly distorted: both subsidized and over-taxed either implicitly or explicitly in complex ways. [Source: USAID, May 2005 ]

The quality of Mongolian raw cashmere has declined over time despite many projects to reverse this trend and even more recommendations for the government of Mongolia to intervene to reverse this trend. These studies seem to have ignored one important fact: as cashmere quality (as measured by fiber diameter) increases, the average yield per goat declines. For example, a reduction in 2 microns in fiber diameter from 17.5 microns to 15.5 microns (to raise quality from average to good) will cause a reduction in yield of about 24 percent. Yet the price differential both in Mongolia and on international markets based on quality differentials is on the order of 15 percent. Not surprisingly, herders have not followed programs designed to reduce fiber diameter that perforce would reduce their incomes.

The macroeconomic environment in Mongolia is not conducive to the development of the cashmere industry. The real exchange rate has appreciated against the dollar and the yuan over the past five years while at the same time China’s real exchange rate has devalued against the dollar somewhat.These relative exchange rate movements have widened Mongolia’s cost disadvantage compared to costs in China. The government of Mongolia has set mandatory social payments at relatively high level (in order to subsidize the unemployed, herders, and the retired), such that total wage costs are quite high for a country at this income level. Not coincidently, there is widespread unemployment and underemployment. Despite a reduction in the basic corporate income tax rate to 30 percent (15 percent for SMEs), it is still relatively high, especially when the relatively short tax holidays that are used for investment incentives aimed toward the cashmere sector are taken into account. Government revenues are high and rising, in part to fund a burgeoning bureaucracy and their expenditures. Finally, real interest rates are very high, as are the differentials between the deposit and the borrowing interest rates. These high rates place Mongolian firms at a severe disadvantage compared with firms in China that can access funds at very low rates.

Macroeconomics and the Mongolian Cashmere Industry

According to USAID: Macroeconomic factors have a substantial impact on the cashmere industry: labor costs, tax rates, interest rates, and the exchange rate. Tax revenues as a percent of GDP are very high and rising (25.6 percent in 2000 to 31.8 percent in 2004) in Mongolia. Although at 30 percent, the tax rate for large enterprises has been reduced, itis still relatively high. The Mongolian tax law excludes many expenses from the calculation of taxable income, accelerated depreciation and loss carryforwards are not allowed for tax purposes. The tax holidays available for investors in the cashmere processing sector are of short duration compared to those available to investors in other countries in the region, such as China. For these reasons, the effective tax rate is higher than it appears. Herders, however, pay no income tax; rather they pay a very small head tax on their goats. Social taxes (for health, pension, disability, and unemployment) are also high 10 percent from the employee and 19 percent from the employer. Again, herders do not pay these taxes. When standard company benefits (such as transportation allowance, in-factory meals) plus the social overhead are combined, the total wage bill in Mongolia is about $150/month for a factory worker. This total wage bill is high for a country with GDP/capita of about $600 and significantly above the rates in Inner Mongolia, China. There is significant unemployment and underemployment in Mongolia. This would seem to indicate that the total wage bill is above the market clearing rate at which unemployment would be minimized. [Source: USAID, May 2005 ]

Mongolia has many banks and other financial intermediaries. Interest rates are determined by market forces, not set by government or by an oligopolistic financial sector. Although the financial system’s assets have been growing very rapidly, it has substantial liquidity. Interest rates are high in Mongolia as is the differential between the borrowing and deposits at about 25 percent (37 percent/year (1.2 percent/month) vs.15 percent/year (2.5 percent/month)). Financing costs are crucial to the processing industry for two reasons: they represent “the “major cost of processing and China, the major player in the processing industry, has very low capital costs. The impact of these high capital costs can be seen from the example shown in the adjustment text box.

In addition to the cost of funds, banks in Mongolia typically only make short-term loans, so that loans to finance capital investments are difficult to arrange. The banks also impose stringent requirements for collateral and typically will not lend against inventories, purchase orders or projected cash flows.

The cost wage and funds cost differentials between China and Mongolia are exacerbated by the value of the tugrik. The real value of the tugrik has risen by 10 percent against the dollar and 25 percent against the yuan over the past five years. These exchange rate movements have caused costs in Mongolia to rise relative to those in China by a similar amount.

In summary, the macroeconomic environment is not only unfavorable for the cashmere industry, but it is becoming worse. Mongolia is following the worst of all strategies for a developing country that wants to compete on export markets: high wages, high interest rates, high taxes, and an appreciating currency relative to its major competitor and its major market.

Financial Sector and the Mongolian Cashmere Industry

According to USAID: Financial markets in Mongolia have been extensively liberalized such that interest rates reflect the supply and demand for funds and there is no government of Mongolia intervention in the market. Since much of the processors’ output is exported and paid for in hard currencies, any borrowing in hard currencies is “self hedged.” [Source: USAID, May 2005 ]

Access to low-cost finance is a necessary, but not a sufficient condition for the viability of an investment project. Given the level of development of financial markets in Mongolia, it is unreasonable to expect such low interest rates on loans even in the medium term. Low-cost loans from aid donors are in limited supply as well. This leaves international funding of some sort either via banks, or via foreign investors in the form of equity, loans, or advanced credits against delivery from long term customers. At present the environment for any of these types of credit is not favorable for most companies.

At present the environment for foreign investment is in need of further improvement. Tax rates are relatively high in Mongolia, tax holidays are of short duration. Government regulation, although greatly improved and better than many other countries in the region, is still complex, nontransparent, and pervasive, and the legal system needs further development. As well, the rule of law is not yet firmly established, particularly when it comes to arriving at or enforcing judgments against Mongolians relative to foreign investors or lenders. As one of many examples, when a lender goes to court to obtain a default judgment against a borrower, further interest can not be charged on the loan.

Decline of the Mongolian Cashmere Industry

At one time Mongolia controlled 30 percent of the global cashmere market. But now it market share is dwarfed by that of China. Within a brief period in the 1990s and early 2000s Chinese traders exploited falling wool prices to seize most the Mongolian business.

In 1994, the Mongolian government placed a ban on the export of cashmere as way of helping to develop a cashmere product industry. With the price of cashmere artificially low, foreign investors poured in and more than 50 textile mills were opened up. Economic reformers opposed the ban because it violated basic principles of free trade and market economics. Corrupt officials made a fortune in the illegal cashmere trade.

Pressured by the Work Bank and the International Monetary Fund, the Mongolian government lifted the ban on the export of cashmere. The resulting high prices were a boon for herders and a disaster for textile mills as Chinese buyers moved in and bought practically all of Mongolia's cashmere at prices higher than Mongolian textile mills could afford. Mongolian mills couldn't compete. They didn't have the money to purchase cashmere at the high price, nor factories with enough capacity and productivity to process it.

Chinese mills still purchase nearly all of Mongolia's cashmere. The Mongolia government launched a tax on cashmere exports but for they most part they were never levied because corrupt officials were making so much money selling cashmere to China tax-free.

One Mongolian economist told the Washington Post, “Today, herders face a big dilemma. Sell cashmere to Mongolian companies and lose money or sell it to China and get rich. We don't like the Chinese, but we have no choice."

Ways to Improve the Cashmere Industry in Mongolia

According to USAID: The government of Mongolia should consider ways to reduce interest rates for the processing sector (without itself guaranteeing loans to the sector); lowering social payments over time; adjusting the real exchange rate downward, and lowering taxes once again to the 15 percent range for all firms (and eliminating tax holidays, allowing accelerated depreciation and loss carryforwards for tax purposes at the same time). It should also further improve the foreign investment system, enhance the capacity of FIFTA, and reduce the regulatory burden on investors in order to attract and facilitate foreign investment and foreign funds into the cashmere sector. [Source: USAID, May 2005 ]

Measures for government consideration: 1) The government of Mongolia should consider the following: Reexamine its social contributions policy with a view of decreasing them such that the total labor costs are decreased to be more in line with the income level of the country. 2) Reexamine its policy of having the social contributions of the manufacturing sector subsidize social payments to the herding sector and to current retirees. 3) Explore all ways of reducing the spread between the borrowing and lending rates in Mongolia. In particular, it should consider reducing the interest rate charge levied by the Central Bank on concession loans that are reloaned to the private sector via the commercial banks and also reduce the surcharges these commercial banks can levy when they reloan these funds.

4) Encourage lenders to increase their low interest rate loans to the cashmere processing sector as a matter of priority. 5) Encourage initiatives to increase the transparency of the commercial law system and to develop it more fully to protect the interests of lenders. 6) Guard against the appreciation of the real value of the currency relative to the currencies of its major competitor (China) and its major market (the United States). 7) Reduce the tax rate for large enterprises further to the 15 percent20 percent range. It might consider removing tax holidays (see below under FDI), but also allowing accelerated depreciation and loss carry forwards for tax purposes, and increasing the number and amount of allowable expenses to international levels so as to reduce the effective tax rate.

Measures for consideration by the government of Mongolia to improve the herding sector: 1) Remove the subsidies on the herding sector such that herders contribute fully to the social security and health insurance funds, pay the cost of dormitory and meals when they board at sum and aimag schools, full water well costs, and pay taxes on their incomes. Although quite rough and ready, this tax initiative could be implemented by increasing the head tax on herds. The head tax could also be used to address the negative externality of herding: desertification.

2) Develop wells with user charges based on herd size. 3) Cease subsidizing fodder production and allow the free market to set fodder prices. 4) Disregard any plan for active intervention in the market for raw cashmere, such as state buying, or forced selling to Mongolian processors at prices determined by the government of Mongolia or by the processors. 5) Continue the “Market Watch” program that provides herders with price information, but extend it if possible to include information on prices by grade and color of cashmere.

Challenges Facing the Cashmere Industry in Mongolia

According to USAID: If the government of Mongolia were to assist the cashmere processing sector by, for example, converting the specific export duty of 4,000 tugriks it currently charges to its original tariff equivalent of 30 percent, enforcing the tariff be reducing smuggling, and extending the lifetime of the export tariff for another ten years, the herders would be damaged – and there are many more herders (with many more votes) than there are workers in the cashmere processing sector. Such an action would further distort the Mongolian cashmere sector rather than liberalize it further, another objective of the government of Mongolia. Yet if there is no change in the environment of the cashmere processing sector, it is likely that the sector will continue to decline as more firms will exit the sector, employment declines, value added in the total cashmere industry declines, and total exports of cashmere products decline as well. The government of Mongolia does not have the funds with which to undertake these direct subsidies, however. [Source: USAID, May 2005 ]

Finally, the government of Mongolia could undertake the recommendations outlined above, but not offer other incentives to the processing sector. If it were to do this, however, it would have to be prepared to face the demise of the processing sector in Mongolia as China follows its explicit strategy to becoming the cashmere processor for the world and relegates Mongolia to the role of raw material supplier. If this were to happen, the government of Mongolia would have to expect China to exercise its monopsony buying power to drive down prices for Mongolian raw cashmere. These are the dilemmas facing the government of Mongolia in its policy toward the cashmere sector.

Mongolia’s Cashmere Companies

The Gobi Cashmere Company is the largest cashmere company in Mongolia. It was established in 1981 with investment provided by the Government of Japan. In the mid 2000s, Currently, 74.9 percent of the company was state-owned and the remaining 25.1 percent was traded on the Mongolian Stock Exchange. The company has the capacity to process 1,000 tons of raw cashmere. The Gobi Cashmere company produces garments and fabrics and has the capacity to produce 68 tons of cashmere and camel wool tops, 120 tons of cashmere yarn, over 350 thousand pieces of knitwear and more than 153 thousand meters of woven fabrics. In recent years, Gobi Cashmere has maintained double-digit growth rates in both productivity and export revenues. The company consists of a number interconnected manufacturing processes and employs 1941 people. In recent years, the company made significant investments to upgrade its cashmere technology and equipment by installing Japanese fully automatic knitting machines and cleaning and shrinking equipment for knitted garments. On May 28, 2003 the Government approved a decision to privatize the state owned 70 percent shares in the Gobi company and released a resolution. [Source:]

According to USAID: The second largest and the only other major integrated processor, Buyan, has experienced severe financial difficulties over the past several years, such that in 2004 it was unable to purchase almost any raw cashmere. In 2004 Buyan’s scouring and dehairing processes operated at less than 1 percent of capacity and its spinning operations operated at only 10 percent of capacity. Yet Buyan has first class spinning and knitting machinery and has the potential to become a major force in the industry.

Sun Shiro, the other integrated producer in the mid 2000s, was much smaller than Gobi and Buyan. Its owner and manager was technically expert and his product innovation ideas were excellent. Hence quality was high and costs were low. Nonetheless, Sun Shiro in 2004 had over three years of finished goods inventory and, with the high interest rates prevailing in Mongolia, he was pushed into bankruptcy. [Source: USAID, May 2005 ]

Many of the other firms in the processing sector also face difficulties: low productivity, high labor costs, uneven quality, lack of design capabilities, the high cost of funds, lack of design capabilities and little export sales capabilities. They need on-going technical assistance in production, worker training and skills development, product quality, design, and export marketing.

Gobi: Mongolia’s Largest Cashmere Company

Gobi Cashmere is Mongolia's largest cashmere firm. It was launched in the Soviet era and for many years was the only cashmere company in Mongolia. After Mongolia became independent in 1990, it began facing competition from a bunch of new companies. It has been described as a behemoth with overcapacity and underutilization that has scared away foreign investors from Italy and other high-fashion nations.

Established in 1981 by the joint effort of Mongolian and Japanese government, Gobi is is the first Mongolian luxury knitwear brand to break into European, Japanese and the US market during the last century. Since it started operating Gobi became one of the five biggest vertically integrated manufacturers that are specialized in cashmere, camel wool and yak down products in the world. In July 2007, Gobi’s government owned stocks were sold and the company started manufacturing under private owners. A new campaign was launched to establish Gobi as a brand name. [Source: Gobi company website]

According to USAID: In the mid 2000s when Gobi mostly state-owned it was losing about $2 million per year; its plant and equipment were generally old and not well maintained; its workers were not well trained or managed; efficiency was low; “yield” (input weight converted into output weight) was below best practice; and its product quality was low as reflected in the prices of its garments on international markets. [Source: USAID, May 2005 ]

Gobi Production

Gobi has nine factories that process and manufacture raw fibers into final products. It is one of the only five vertically integrated cashmere manufacturers in the entire world. Raw fibers such as cashmere, camel wool and yak down go through 14 different manufacturing stages in all nine factories. [Source: Gobi company website]

According to USAID: The processing sector is dominated by Gobi, the largest of the three fully-integrated producers and the only state-owned enterprise in the processing sector. In the mid 2000s, the quality of much of its processing equipment had declined due to misuse and inadequate maintenance and repair. Gobi’s labor and machine efficiency, “yield”, output quality are low and had declined when compared with other dehairers. Gobi’s yield from dehaired to spun yarn was way below best practice, normally around 95 percent. [Source: USAID, May 2005 ]

In the mid 2000s, Gobi’s management developed a five-year strategic plan to improve its operations across the board. This plan, however, did not address Gobi’s severe problems in a concrete, operationalized manner. Gobi produced 7.55 tons of cashmere yarn in 2002, 29.3 tons in 2003, and 116.1 tons in 2004. Yet its one-shift capacity was 75 tons and, according to a spinning expert, on a three-shift basis with proper training and maintenance, Gobi could produce 280-300 tons per year. This output would require about 700 tons of raw cashmere as an input, almost a quarter of Mongolia’s total output and 80 percent of industry demand for yarn as input to the knitting and weaving process.

Gobi Production Facilities

1) Sorting Factory: Since its establishment in 1981 the factory has been sorting 500-600 tons of cashmere, 100-150 tons of camel wool and 20-30 tons of yak down annually. Raw fibers such as cashmere and camel wool get sorted into 20 different categories by some of the most skillful employees. Under strict quality standards employees do the sorting by feeling with their hands and scanning by their eyes. Almost 70 percent of the workers have been employed here for 20-30 years, gaining great deal of experience. [Source: Gobi company website ^]

2) Scouring Factory: Sorted raw materials are scoured here in order to be cleaned from dirt, oil and animal dung. Our scouring machines are from Futaba, Japan and can scour 350-450kgs cashmere and camel wool per hour. The machine consists of quivering and milling parts, scouring tank, additional tank and drying section. All the washing liquids in scouring process we use are from UK and Japan; harmless to the environment and to people. ^

3) Dehairing Factory: In the Dehairing Factory scoured cashmere get separated from coarse hair becoming semi-processed cashmere products in the process. This production requires precise level of humidity and temperature. Machinist’s skill, experience, machineries settings and adjustments are very important in manufacturing quality products. Total of 27 Torigoe dehairing machines from Japan operate in the factory and produce 300-350 tons dehaired cashmere and camel wool annually. ^

  1. Dyeing and Blending Factory: There are 7 lines in the Dyeing and Blending Factory: dyeing, bleaching, yarn dying, winding, drying, and carbonizing. The factory dyes over 3.5 tons of yarn, dyes and bleaches over 180-220 tons of cashmere, blends over 220-270 tons of cashmere annually. An Italian drying machine called Stalam, which dries the fibers by radiowaves without damaging them, has been installed in 2008. In 2009, we have installed another Italian fully automatic dyeing machine called Loreris Bellini and blending machine called OMMI. Thus the dyeing capacity has increased by 20 percent and blending capacity twice respectively. The laboratory in the factory develops customer’s requested colors on the Datacolor-600TM machine. There are beyond 1000 colors to choose from which were developed over the last 30 years. Dyestuffs and chemicals used here are all harmless to the environment from the UK and Switzerland. We have increased our capacity in 2014 by adding new equipments including “Hisaka” 100 kg dyeing machine from Japan, “Fadis” spinning and twisting machine from Italy and “Textlink” machine for dying looped thread. ^

Gobi Spinning, Knitting and Finishing Factories

5) Spinning Factory: The Spinning Factory is the heart of all manufacturing processes. Spun yarns are the finished products of the Spinning Factory and the raw materials for the knitting and weaving factories. Knitted and woven products’ quality heavily depends on spun yarns. The Spinning Factory’s annual capacity is 180-200 tons of spun yarns. There are 5 production lines in the spinning factory; Carding, spinning, winding, double winding and twisting. We have installed computerized spinning machines with automatic censors that improved the yarn quality to the world standard. The yarn quality was brought even higher after the installation of the fully automatic and computerized winding and twisting machines from Japanese factory Muratec. [Source: Gobi company website ^]

6) Knitting Factory: Various high quality and fashionable knitwear are produced in this factory’s 20 production lines. Fully automatic and computerized knitting machines from Italy and Japan are utilized for manufacturing. There are two sections in the knitting factory: knitting and sewing. The knitting section consists of 102 Japanese SHIMA SEIKI knitting machines, 20 German STOLL knitting machines and 1 Taiwanese DAHU warp knitting machine. Sewing section has 190 linking machines from Japan and Italy. The annual capacity of the factory is 700,000 pieces of knitwear. By installing 20 Whole Garment machines for seamless knitting in 2014, we have increased our annual capacity to produce knitted products by 100.000 pieces. ^

7) Weaving Factory: The Weaving Factory was established in 1981 and mainly started producing woven blankets, but from 1997 it has expanded to Gobi-2 factory. In worsted spinning we use Sant Andrea, Savio and Gaudino from Italy, and Murata from Japan to produce 45-50 tons of cashmere tops, 16-18 tons of worsted yarns in the counts of 48, 60, 72 and 80 annually. It makes the Gobi-2 the first worsted spinning factory in Mongolia. Recently we have installed Jacquard and Dobby knitting machines from Germany, hand knitting machines from Finland, automatic yarn connecting machines from Stabli, shrinking and steaming machines from Italy to double the production. Woven scarves and shawls in various Jacquard patterns, blankets, thick and thin fabrics are produced in 220,000-250,000 meters annually. We have opened new building for weaving factory in November 2014. Factory ordered and installed “KARL MAYER” base thread wrap machine from Germany and “BE.MA.TEX” machine for transferring and wrapping machine from Italy which are adjusted to Mongolian cashmere. Improvements are resulting in increased warping capacity to 1000 m thread one time compared to previous 300 m ,and increased production to 300.000 m knitted products annually which means capacity has increased double. ^

8) Knitted Finishing Factory: The Knitted Finishing Factory has 3 departments: Knitted product finishing, printing and pilling test laboratory. This is the last line of production, so it takes skill and great concentration from employees. There are total of 23 various washing, drying, quivering and pressing machines in this factory. The annual capacity is to process 700,000 pieces of products. Also in 2010, we introduced the printing technology on cashmere products from Shima Seiki, Japan. We increased our production 2 times by installing Japanese and USA modern technologies in drying and pressing processes of production in 2014.

9) Gobi Salon: Gobi salon, tailoring workshop was founded in 1995. Now it runs with 3 sections; Garment tailoring, blanket tailoring and “dry cleaning and repairing” services. We produce all kinds of tailored products with cashmere and camel wool such as men’s and women’s coats, jackets, suits, skirts, vests and dresses etc. We produce the garments with customers’ desired colors and designs in 2 days. The annual capacity of the salon is 15,000 pieces of finished products. Gobi salon has Japanese Juki, Naomoto, Seiko, Yamaichi and Italian Konti Complett and Chinese Hengtai machineries. ^

10) Quality Standard Assurance: Quality Standard Assurance Section: “Guaranteed satisfaction” is the motto of the Quality Standard Assurance Section. The section’s examining engineers, lab workers, quality inspectors and finished product inspectors double check the entire semi finished and finished products to meet the requirements of the standard. Gobi Corporation has introduced the international ISO-9001 quality standard for the first time in Mongolia and obtained accredited laboratory rights and was reaccredited in 2008 according to the standard ISO / IES 17025. We have received many awards for supplying top quality products. The some of them are: A) “Global Quality Management“ golden trophy from world recognized quality organization in 1994, 1997, 1998. B) “Quality trophy” from Best traders club 3 times. C) “Quality-prestige of business” golden Europe trophy from International quality organization in Geneva in 2003. ^


Buyan is Mongolia’s second largest cashmere processor. It was originally established in 1976 as a state owned cashmere testing factory. In 1992, Buyan was privatized and became the first company in Mongolia to have 100 percen tprivate Mongolian investment. The Buyan factory has stood the test of time in a challenging environment – it has operated successfully and expanded while also providing very attractive work conditions for its employees. [Source: Buyan company website]

The founder of Buyan, Mr. Jargalsaikhan Bazarsad, is an active politician who continuously proved himself to be a leader and pioneer in both business and politics. One of Mongolia's richest men, Jargalsikhan, is a self-made millionaire who began as a cashmere trader in the 1980s and made a fortune producing cashmere items for the Japanese market. During the difficult times of transitioning markets during the 1990s, Bazarsad trusted his insight and ambitions in laying the foundations in building global recognition for Mongolian cashmere with Buyan.

Buyan consists of two factories: (i) the processing factory, and (ii) the knitting factory. The processing factory has an annual capacity of processing 500 tones of raw material and 250 tones of yarn and is equipped with high-technology machines like Nouva C osmatex.for and Bigagli, both from Italy, and Murata from Japan. The knitting factory is fully automated and computerized, operating with machines from Japan (Shima Seiki), Germany (Stoll) and Italy (Exacta). Buyan is one of the largest cashmere factories in Mongolia with an annual production capacity of 600,000 items.

Buyan has been privately owned for some time. According to USAID: In the mid 2000s it was in deep financial trouble and it could not raise funds to buy raw cashmere. [Source: USAID, May 2005 ]

Buyan is a trendsetter that is known for its high quality 100 percent cashmere products that are fashionable and comfortable. The factory releases its 100 percent cashmere products under the “Royal Cashmere” brand and has also been offering its popular cashmere mixed wool products under the “Cashwool” brand since 2007. Royal Cashmere is proud to have become the trusted and popular brand throughout Mongolia and also to have gained international approval through its extensive export to Europe, Asia and the USA.

Image Sources:

Text Sources: New York Times, Washington Post, Los Angeles Times, Times of London, Lonely Planet Guides, Library of Congress, U.S. government, Compton’s Encyclopedia, The Guardian, National Geographic, Smithsonian magazine, The New Yorker, Time, Newsweek, Reuters, AP, AFP, Wall Street Journal, The Atlantic Monthly, The Economist, Foreign Policy, Wikipedia, BBC, CNN, and various books, websites and other publications.

Last updated April 2016

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