Investors need a strong reason to be attracted to foreign investment. Investors look to grow their business, expand their market, and gain more profits. The main reason for investing in Mongolia’s mining industry is the country’s vast natural resources and its close proximity to the gigantic Chinese market. However, the cost of exploration, mining, and transport needs to be lower than the cost of making sales, and it has to be cost-effective in the long run. Otherwise, investors will look elsewhere. We already know that the cost of doing business here was the exact reason why many investors left Mongolia.
Is there any Mongolian industry other than mining that can be invested in? What are the obstacles and gains? How do outsiders view this possibility? We have recently had the opportunity to learn how Japan assesses the situation. Japan International Cooperation Agency (JICA) conducted a survey among Japanese companies about potential opportunities to invest in Mongolia. The project was supported by the Mongolian Embassy in Japan, Consulate General of Mongolia in Osaka, and carried out with the assistance of associations that support Japanese businesses, such as JETRO.
A total of 150 participants took part in the survey. Approximately 12 percent of the participants were from manufacturing, 7.5 percent from construction, 2.5 percent from mining, 3.5 percent from retail, 12.5 percent from wholesale, 7.5 percent from information technology and communications, 12.5 percent from transportation, and 41 percent were from other industries. Forty percent of the participants were already doing business in Mongolia, whereas another 40 percent were planning to. Let’s now find out how Japan sees Mongolia.
CURRENT ECONOMIC OUTLOOK
Since its recorded 17 percent growth in 2011, Mongolia’s economy has been declining and it yielded no growth in 2016. It is said that the stagnation was caused by a decrease in foreign investment, falling commodity prices, and weaker growth in China’s economy. However, our economy could grow by 2.5 percent in 2017, 5.7 percent in 2018, 7.9 percent in 2019, and 10.5 percent in 2020. Our GDP per capita once exceeded 4,000 USD, and we are projected to return to that figure in 2018. Nevertheless, our economic growth and income vary between provinces, and the largest income in Mongolia is 400 percent higher than the lowest. This clearly shows that development is taking place on uneven ground.
In terms of our economic structure, mining has become the main engine of growth since 2005, accounting for 20 percent of our economy. Mining is followed by commerce (17 percent), agriculture (13 percent), and manufacturing (10 percent). The challenge for Mongolia today is to have an economy based on the wealth we have aboveground, including farming and agriculture, not on the wealth buried underground (copper, coal, and gold).
The foreign investment that has flowed into Mongolia totals 14.2 billion USD, half of which came from offshore zones and a quarter of which came from China. The majority of the investment has gone into mining, whereas 17 percent has gone into commerce and services, and 1.5 percent into transport. Mongolia’s balance of trade was always in deficit until after 2013, when our imports significantly fell and oil prices decreased. Approximately 84 percent of our exports – nearly all of them mining products – go to China. Two-thirds of the goods and services we import come from China and Russia. The fuel we buy from Russia accounts for half of our imports. We spend 20 percent of the international currency we earn on purchasing fuel.
Although our unemployment rate is eight percent, the younger population – many of whom have already acquired an education from domestic and international universities – cannot find good jobs. The labor law offers strong protections for the rights of employees. A manager in Ulaanbaatar earns 1,200 USD on average, which is lower than what a manager would earn in Beijing, but a higher average salary compared to Jakarta, Hanoi, or Yangon.
ADVANTAGES AND DISADVANTAGES OF INVESTING IN MONGOLIA
A 2016 report produced by the World Bank placed Mongolia 64th out of 190 countries in an assessment of the investment environment. The key benefit of investing in Mongolia comes from the vast amount of wealth underground and aboveground. Mongolia leads the world in reserves of copper, gold, coal, and uranium, and has vast molybdenum and spar resources – all contained in 6,000 deposits of 80 minerals. Eighty percent of Mongolia’s territory is suitable for farming and agriculture, with 56 million livestock already being managed. Mongolia currently produces 30 percent of the world’s cashmere and accounts for half of the camel wool market. On top of that, we have solid resources for producing meat.
In addition, Mongolia has strong relations with Japan. We currently have 1,548 students studying Japan, which translates to a ratio higher than that of any other country hosting Mongolian students: 5.3 students per 10,000 people. The people of both countries are growing even friendlier toward each other through sumo.
Mongolia is still an emerging market, which means there is less competition here and more investment opportunities. However, Chinese companies seem to be given more advantages. Another advantage for Mongolia is that the investment environment is less restricted, in the sense that there are lower taxes for small and medium-sized enterprises and greater freedom to transfer money abroad. Another advantage is the fact that the economic partnership agreement between Mongolia and Japan has been seeing successful implementation since last year.
The first disadvantage of investing in Mongolia is the small, widely dispersed population. Second, the cost of logistics is high due to weak transportation infrastructure. For example, it costs 5,400 USD to transport a 40 ft container from Ulaanbaatar to Japan, 1,900 USD from Beijing to Japan, and 3,440 USD from Hanoi to Japan. Third, there is political uncertainty and instability in Mongolia. Also, our economic structure and private sector are not strong. Another disadvantage would be the harsh climate and extremely low temperatures in winter. In addition, the Japanese businesses surveyed noted that it is challenging to compete with Chinese and South Korean companies in Mongolia.
THE DIFFICULTIES OF DOING BUSINESS IN MONGOLIA
The JICA poll unveiled the following difficulties that occur for Japanese companies doing business in Mongolia. Forty-six percent of respondents identified Mongolia’s political and economic instability as a difficulty, 28 percent pointed to the lack of information around the investment environment and structure, 20 percent said that it is difficult to find partners or to get information (such as loan portfolio data) about potential partners, and 2.7 percent said that it is unclear where to get advice.
These assessments can be divided into two categories: political instability and the immaturity of the private sector. When the structure of the government changes every time there is a transition of power in Mongolia, it poses great difficulties for businesses. For example, the government agencies and staff that are involved in permits and tenders are always replaced, and sometimes, it simply takes too long for the transition process to be finalized. It forces companies to start everything from the beginning. The Japanese respondents also pointed out that there are regular changes made to policies and rules.
When it comes to the private sector, Mongolia has many companies with group, holding, and corporation status. However, it is impossible to obtain information about their daughter companies, and the management structure of these companies is often unclear. It is not uncommon to find out that a father is the company’s chief executive officer, his son is the deputy director, and his wife is a member of the board. The Japanese business owners surveyed agree that it is hard to get third party information about Mongolian companies, how many employees they have, and how much debt they have. It makes the job of finding a business partner even more difficult. It is true, because Mongolia has 100,000 registered economic entities, but half of them are not carrying out any business operations. Only 3,700 Mongolian companies have verifiable information about their structure, ownership, and finances, and are members of the Mongolian National Chamber of Commerce and Industry.
This is how Japanese businessmen see Mongolia as an investment destination.
2017.01.25
Trans. by B.Amar