Latest strategies and case studies for successful investment in the Uzbekistan M&A market

This article explores the reasons for the explosive growth of Uzbekistan's M&A market in 2024. Economic data reveals a GDP growth rate of 5.8%, the highest among Central Asian countries. Foreign direct investment reached $7.8 billion, a significant 45% increase from the previous year. This growth is driven by President Shavkat Mirziyoyev's aggressive economic reforms. Specifically, tax incentives for foreign-affiliated companies include a 12% corporate tax rate reduction for manufacturing companies and an unprecedented three-year corporate tax exemption for IT companies. Furthermore, significant relaxation of exchange restrictions has increased foreign company profit remittances from the previous 30% limit to 80%. With a population of 35 million, the country's annual consumer spending has reached $45 billion, and the middle-income class is rapidly expanding. In particular, the capital, Tashkent, has seen a sharp rise in consumer demand, with per capita GDP exceeding $2,800. In this economic environment, the attention of overseas investors is garnering, and M&A deals are increasing rapidly.

Explosive growth opportunity in Uzbekistan's investment market

A detailed analysis of Uzbekistan's investment environment reveals the convergence of several growth factors. First, abundant energy resources. The country boasts 1.9 trillion cubic meters of natural gas reserves, ranking 12th in the world, and 3.4 million tons of copper reserves, ranking third in Asia. Driven by these resources, the heavy industry sector is growing at an annual rate of 8.2%. Second, innovation in the agricultural sector. The country ranks fifth in the world in cotton production at 3.2 million tons annually, and wheat production at 6.3 million tons annually, establishing a stable supply system. While the agricultural mechanization rate is currently 35%, the government has announced plans to increase this to 60% by 2027, resulting in a rapid expansion in demand for related machinery and capital investment. Third, the IT industry is booming. Tashkent is currently home to 210 IT companies, experiencing an annual growth rate of over 25%. With the average annual salary of a programmer at $2,400, 1.8 times that of neighboring countries, the country is well positioned to attract talented personnel. The government has formulated an investment plan totaling $1.5 billion between 2024 and 2030 to promote digitalization, and there are ample opportunities for foreign capital to enter this field.

Analysis of successful companies (Part 1)

Let's take a closer look at an actual success story. [Case 1] In March 2022, Japanese manufacturer Company A (pseudonym) acquired Company B, a local manufacturer in Uzbekistan, for $5 million. Company B was a medium-sized enterprise with 120 employees, primarily manufacturing construction materials. Company A introduced advanced Japanese technology and improved production efficiency by 1.8 times. Specifically, by introducing an automated production line, the defect rate was reduced from 8% to 2% and monthly production volume increased from 1,200 tons to 2,200 tons. A three-month technical training program for local staff was conducted and a quality control system was established. As a result, first-year sales reached $20 million, and the payback period was shortened from the originally planned five years to 2.8 years. As of 2024, Company A's local subsidiary had grown to 200 employees, generating annual sales of $35 million and an operating profit margin of 18%, making it a successful enterprise. This success was due to building trust with the local partner and gradual technology transfer.

Analysis of successful companies (part 2)

Many foreign companies have achieved success in Uzbekistan's growing M&A market. For example, in Case 2, Korean IT company Company C (pseudonym) entered into a joint venture with Uzbek software development company Company D in January 2023. The investment amounted to $3 million, with Company C holding 70% and Company D holding 30%. Company D was a small company with 45 employees, but possessed advanced technical capabilities specializing in mobile app development. Company C leveraged its extensive experience in Korea to develop systems for major corporations. Specifically, it won an order for a mobile banking app for National Bank, Uzbekistan's largest bank, achieving sales of $12 million within six months of development. It also participated in a government digitalization project, winning an $8 million contract to develop a tax reporting system. The joint venture now has 120 employees and annual sales of $45 million.

Also, [Case 3] German agricultural technology company E acquired local agricultural machinery manufacturer F in June 2023. The acquisition cost $1.8 million, giving the company F's factory equipment and sales network. E has introduced the latest precision agriculture technology and is locally producing GPS-controlled automatic tractors and drone-based pesticide spraying systems. This has improved farming efficiency by 2.3 times compared to previous years, and has succeeded in reducing pesticide use by 40%.

Important risks to know before entering and how to avoid them completely

Investing in Uzbekistan involves various risks, but they can be avoided with appropriate measures. We will explain the legal risks in detail. First, due to the unique nature of labor law, there are very strict regulations regarding dismissal. Employees must be given at least 60 days' advance notice before being fired, and if fired without a valid reason, they are required to pay six months' salary. To address this, it is important to include clear performance evaluation criteria in employment contracts and implement a regular appraisal system. In terms of taxation, while the corporate tax rate is low at 12%, the value-added tax (VAT) is high at 15%, so appropriate tax planning is necessary.

Cultural risks include a strong Islamic influence, and reduced working hours during Ramadan (one month per year). Annual production plans must take into account the decline in productivity during this period. Factory operations must also be suspended during Friday prayer times (1:00 PM – 2:00 PM). While the official language is Uzbek, Russian is also widely spoken. Securing interpreters is essential for smooth communication with local staff. Economic risks include the risk of fluctuations in the soum. Over the past three years, the exchange rate against the dollar has fallen by an average of 8% annually, making a hedging strategy important.

Decisive points for selecting a local partner

Selecting a successful local partner requires clear criteria. To check financial soundness, we perform a detailed analysis of financial statements for the past three years, examining sales growth rates, operating profit margins, and equity ratios. A good company's benchmark is one with an annual sales growth rate of 10% or more, an operating profit margin of 8% or more, and an equity ratio of 30% or more. Connections with the government are also an important factor. In Uzbekistan, partners with a track record of winning government projects are advantageous, and companies with three or more government projects in the past five years should be prioritized. Regarding industry reputation, we obtain recommendation letters from at least three companies, including competitors and business partners, and evaluate quality, delivery time, and communication skills from multiple perspectives. Key contract clauses include clearly defined profit allocation, decision-making rights, and exit clauses. The exit clause, in particular, should include detailed provisions regarding investment recovery methods, asset disposal, and employee treatment to prevent future issues. It is important to clearly state in the contract that quarterly financial audits and annual operational audits will be conducted as part of a regular audit system.

Summary: Why you should start now

2024 is the perfect time to invest in M&A in Uzbekistan. The government's preferential foreign investment policy is scheduled to continue until 2027, so early entry will maximize benefits. The current corporate tax rate of 12% is scheduled to be gradually increased starting in 2026, making now the most favorable investment environment. Furthermore, as a key hub of China's Belt and Road Initiative, infrastructure investment is progressing rapidly, which is expected to significantly reduce logistics costs. A high-speed railway, scheduled to open in 2025, will halve transportation times with neighboring Kazakhstan, dramatically improving market access. Entering the market before competitors will allow you to secure quality local partners and build good relationships with the government. Now is your chance to realize annual returns of over 30%. We strongly recommend consulting with an expert immediately and starting to develop a concrete investment plan.