Future outlook for transformative M&A strategies in Uzbekistan

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, he has offered exceptional tax incentives to foreign-affiliated companies, including a 12% corporate tax rate reduction for manufacturing companies and a three-year corporate tax exemption for IT companies. Furthermore, a significant relaxation of foreign exchange restrictions has increased profit remittances by foreign companies 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 drawn up 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 sector.

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)

One successful example in Uzbekistan's M&A market is a joint venture between Korean IT company C (pseudonym) and Uzbek software development company D. The project launched in January 2023 with a $3 million investment. C held a 70% stake, while D, a highly skilled mobile app developer, held the remaining 30%. Leveraging its extensive system development experience in Korea, C won a contract to develop a mobile banking app for National Bank, Uzbekistan's largest bank. The development was completed in just six months, generating massive revenue of $12 million. Additionally, through participation in a government digitalization project, the company secured an $8 million contract to develop a tax reporting system. The joint venture has grown rapidly, employing 120 people and achieving annual sales of $45 million. This rapid growth was supported by the combination of Company D's technological capabilities and Company C's international business development experience, establishing a first-mover advantage in the IT field in the Uzbek market. Furthermore, German agricultural technology company Company E acquired Company F, an Uzbek agricultural machinery manufacturer, in June 2023. The acquisition price was $1.8 million, allowing the company to smoothly acquire Company F's existing factory facilities and sales network. Company E has introduced the latest precision agriculture technology, particularly the local production of automated tractors and drone-based pesticide spraying systems using GPS control technology, which have improved agricultural work efficiency by 2.3 times compared to conventional systems and significantly reduced pesticide use by 40%. Company E's entry into the Uzbek market is a prime example of applying its own technology to meet market needs and achieving significant results.

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

Investing in Uzbekistan involves a variety of risk factors, but these can be effectively avoided with the right strategy. First, regarding legal risks, labor laws are extremely strict, particularly regarding dismissals. Specifically, dismissals require at least 60 days' notice, and dismissals without a valid reason are subject to six months' salary. To avoid this, it is important to clearly state performance evaluation criteria in employment contracts and implement a regular appraisal system. In terms of tax, while the corporate tax rate is low at 12%, the value-added tax (VAT) is high at 15%, so it is important to comply with tax planning. Cultural risks also cannot be overlooked. Uzbekistan is a Muslim-majority country, and the reduction in working hours during Ramadan (one month per year) may affect annual productivity plans. Therefore, it is necessary to formulate annual production plans that take Ramadan into account. Furthermore, factories typically halt operations during Friday prayer times (1:00-2:00 PM), and this must be addressed. Since Uzbek and Russian are widely spoken languages, it is important to secure an interpreter to facilitate communication with local staff. Furthermore, there is an economic risk of exchange rate fluctuations in the soum. Over the past three years, the soum has fallen by an average of 8% per year against the dollar, making it necessary to implement a hedging strategy to protect against this.

Decisive points for selecting a local partner

One of the key factors in determining success in the Uzbekistan market is finding the right local partner. To ensure a successful partnership, you need to select a local company that meets several key criteria. First, financial soundness is crucial. Carefully analyze financial statements for the past three years and examine sales growth rates, operating profit margins, and equity ratios. Ideally, companies should have an average sales growth rate of 10% or more, an operating profit margin of 8% or more, and an equity ratio of 30% or more. Another important factor is government connections. In Uzbekistan, a track record of government projects is a sign of credibility. Companies that have won at least three government projects in the past five years should be included in your selection. Industry reputation should also be considered as an evaluation criterion. Obtain at least three references from peers and past clients, and evaluate the company's quality, on-time delivery, and communication skills. Contracts must clearly define key terms such as profit sharing, decision-making rights, and withdrawal clauses. In particular, the exit clause should include specific provisions regarding investment recovery, asset disposal, and employee treatment, which can help prevent future problems. The contract should also clearly state that a periodic audit system will be implemented, including quarterly financial audits and end-of-year operational audits.

Summary: Why you should start now

2024 is a prime time to invest in Uzbekistan's M&A market. The government's current preferential foreign investment policy is expected to continue until 2027, so entering early will maximize profits. The current corporate tax rate of 12% is scheduled to be gradually increased from 2026 onward, creating a favorable investment environment. Furthermore, China's progress in infrastructure investment under the Belt and Road Initiative is significantly contributing to reducing logistics costs. The planned opening of a high-speed railway in 2025 will significantly reduce transportation times to neighboring Kazakhstan, significantly improving market access. Entering the Uzbekistan market early will allow you to secure excellent local partners and build close relationships with the government. There are currently excellent opportunities in this market to realize annual returns of over 30%. We strongly recommend that you begin discussions with experts as soon as possible and begin developing a concrete investment plan.