The crisis of the light industry in Ukraine: how unstable demand and lack of resources affect the industry

During the full-scale invasion of Ukraine, some sectors of the domestic economy underwent significant changes. While the defence industry, information technology and agriculture have become more powerful, tourism, construction and light industry have lost ground for obvious reasons.

Here is a look at the dynamics of changes in the light industry based on the results of the study.

It highlights the data of the Special Survey of Enterprises ‘Exports in Times of War’ conducted by the Institute for Economic Research and Policy Consulting in August this year. The survey covered key indicators of business activity, such as production, sales, exports, raw material stocks, new orders and business expectations for the next 3-6 months. The survey involved 458 enterprises of various sizes from all over Ukraine, most of which represented the food, light industry and machine building sectors.

How the domestic light industry has adapted to the realities of war

At the start of the full-scale war, the light industry companies that took part in the survey experienced a greater decline in production compared to other industries. However, they quickly adapted, in particular due to the opportunity to refocus on military orders. As a result, in some months, the share of light industry companies reporting production growth was higher than the average for Ukraine.

It is likely that smaller companies were more adaptive and dynamic. According to the Ukrstat, light industry reduced production during the war, which may be explained by the fact that large companies were unable to provide logistics or to maintain demand and enter new markets.

The main obstacles to the operation of light industry companies remain problems with access to electricity, which causes volatility in performance. Another reason is unstable demand and a lack of long-term orders. Most companies that exported their products before February 2022 continue to do so.

Lack of labour is also an important obstacle. However, despite the high level of uncertainty, most companies are optimistic about future development. The SkillsAlliance programme, launched by the government together with international partners, aims to address the problem of staff shortages by providing training and retraining for the adult population. The programme aims to provide access to modern learning resources and support the professional development of people to help them adapt to changes in the labour market and the growing demands of the modern world.

Production performance of the light industry

According to the survey, the situation in the light industry deteriorated faster than in other industries in the second quarter of this year. In August, production declined, as only 10% of companies reported an increase in production (previously 34%). Meanwhile, the number of companies that reduced production increased to 33% (previously 18%). This shows that more and more companies are having difficulties in this area.

The main reasons for the deterioration, as already mentioned, are problems with electricity, labour shortages and unstable demand. Nevertheless, expectations for the future remain relatively positive, albeit lower than the Ukrainian average.

Demand and sales

Demand for light industry products dropped. In August, 36% of companies reported a decline in sales (11% in July). This led to the lowest level of sales since January 2023. Only 23% of companies reported an increase in sales (previously 38%). Most companies are having problems with sales. Although sales have fallen, businesses are optimistic about the future.

In August, 41% of businesses expected sales to grow, while only 5% predicted a decline. Many businesses hope that the situation will improve. \ 8% of companies are operating at full capacity, 31% – at 75-99% of the pre-war level. But in August, 21% of companies were operating at 25% of capacity due to power outages and unstable orders.

Exports of the sector

In August 2024, slightly more than half of light industry enterprises were exporters (61.7% in Ukraine). The majority of them continued their export activities, with 76% exporting before the war and continuing to do so over the past 12 months (81% nationally). None of the companies started exporting during the war, and one in four stopped exporting due to loss of markets or logistical problems, or due to a shift to orders for the Armed Forces.

The index of changes in exports in light industry was negative in August, reflecting a downward trend in sales and production. This was due to an increase in the share of companies reporting a decline in exports (18%) and a decrease in the share of those whose exports increased (23%). The share of companies with unchanged exports remained stable. The index of export changes is volatile due to problems with electricity, difficult logistics, and unstable demand.

Expectations for export growth in the third quarter of 2024 have deteriorated compared to the second quarter. The light industry now has worse forecasts than the average for Ukraine. This is because more companies reported a decline in exports in August. However, 30% of companies still hope for export growth.

Light industry companies mainly export their goods to the EU due to changes in logistics routes. Almost 94% of goods are exported to the euro area, while for all surveyed companies this figure is 86%. Significantly fewer goods are exported to Moldova.

Non-tariff barriers to exports

The survey showed that most light industry exporters consider non-tariff barriers to be moderate. The main problems are queues at the border and lengthy paperwork. Two-thirds of companies have problems with customs control. Other obstacles include a lack of labour due to mobilisation and departure of employees, problems with electricity, and rising prices for raw materials. Corruption was cited as an obstacle by 20% of light industry companies, compared to 6.1% in Ukraine.

Expectations and uncertainty

In August, the average term of new orders for light industry companies was 7 months, which is almost the same as the average for Ukraine. Most companies have orders for short periods, and one third have no orders for even one month.

The financial situation in the light industry remains unstable due to a lack of power generation. In August 2024, many companies assessed the situation as satisfactory, but were less optimistic than in the second quarter.

37% of companies expect the financial situation to improve in the next six months, while 59% believe that the situation will remain unchanged. The level of uncertainty remains high, and many businesses are unable to predict their activities for the next two years.

Two-thirds of companies plan to remain at the current level, and one in four expects to expand their operations, which is more optimistic than the overall situation in the country.

In summary, the domestic light industry is currently going through a difficult time, facing numerous challenges, including a shortage of electricity, labour and rising raw material prices. Sales and exports are down, and many businesses are experiencing instability. However, despite the difficulties, some businesses remain optimistic about the future, hoping for improvement in the next six months. The industry has the potential to recover and grow, but needs to address current challenges and support.

Tetyana Morarash