Thursday, June 26, 2008

Doing Business in Mongolia

Market Overview:
  • Prospects for 2005-2006: Surging to 10% in 2004, growth was led by higher commodity prices for gold, copper, etc. spurred by demand from Mongolia’s chief trading partner, China. Government estimates predict 8% growth in 2005. However, 8% may be too optimistic as the impact of the end of the Multi-Fiber Agreement on Mongolia’s 2nd biggest export earner—apparel—will lower overall growth. Economic tightening coupled with a high rate of public indebtedness promise to make 2005 and 2006 leaner years for Mongolia.
  • Political Situation: Mongolia has held eight presidential and parliamentary elections in the past 12 years, during which power changed political hands peacefully. In 2004, the Democratic opposition won 34 seats, leaving the former communists (MPRP) with 36, with 3 seats going to independents and two still in dispute (seven months after the election). There was some initial worry that the even split between rivals would render Mongolia ungovernable; however both parties formed a Grand Coalition government that has held together and governed so far. Changes have yet to disrupt the local business environment or the administrative apparatus.
  • Mongolian-U.S. Relations: Good Mongolian-US relations have developed rapidly over the last 15 years to include humanitarian and technical assistance, military to military relations, business development, and a host of smaller programs. Mongolia calls the US its “third neighbor” to balance relations with China and Russia. Mongolia has contributed peacekeeping forces to both Iraq and Afghanistan. Over the past decade, we record no incidents of anti-American sentiment or politically motivated damage to American projects or installations.
  • Russo-Sino-Mongolian Relations: Relations with Russia and China are critical because Mongolia depends on both for power, petroleum and transportation. Sour relations among these neighbors invariably affects Mongolia’s business environment. When the Dalai Lama visited in spring 2003, the Chinese temporarily halted all commercial rail shipments for “technical reasons.”

Market Challenges:

  • Weak rule of law
  • Corruption in the bureaucracy
  • Ignorance of best commercial practices in the government and private sectors
  • Lack of transparency in regulatory and legislative processes
  • Some abuse of phyto-sanitary and licensing regimes in both the pharmaceutical and food production industries to protect existing state and private interests

Market Opportunities:

  • Mining: Over 6000 deposits of approximately 80 minerals exist in Mongolia, among them coal, copper, uranium, iron ore, oil, tungsten, molybdenum and phosphate. Of particular note are Mongolia’s excellent metallurgic coal deposits. Currently, 160 are being exploited. Mongolia’s location next to resource needy Chinese provides a ready market for Mongolia’s mineral wealth. As with all industrial sectors in Mongolia, the developing infrastructure is a concern.

  • Construction: The population of the Mongolian capital Ulaanbaatar has more than doubled in 7 years from 450,000 to over a million. Quality commercial and residential stock is in short supply and demand shows no signs of slacking. By 2010, Ulaanbaatar’s population is expected to grow by over 60%, bringing a demand of 700,000 additional family units as well increased need for expanding municipal facilities.
  • Tourism: Mongolia is an attractive venue for adventure and cultural tourism. In 2004, the government estimates that over 200,000 visitors saw famed fossil discoveries, a legendary history, religious sites, and a vibrant, living nomad culture. However, long, cold winters limit the length of the tourist season. Inadequate tourism infrastructure requires upgrading.
  • Meat Processing: Mongolia has vast herds of sheep and cattle, and hungry neighbors. Satisfying demand in Russia, China, Korea, and Japan offers an opportunity to American ranchers and meat processing and marketing technologies. However quotas and restrictive health regulations inhibit the meat trade among Mongolian and her neighbors. Existing Mongolian processing facilities require upgrading to increase production capacity, quality, and sanitation. For this and for other opportunities to export American agricultural products and technologies into Mongolia, contact the USDA supported Mongolia-based AGPROMO at

Market Entry Strategies:

  • Personal Relations are key: Mongolians like to deal with old friends. Investors must establish and maintain close relationships with their Mongolian counterparts and relevant government agencies. Family and school ties are still very strong in Mongolia. Learn who is related to whom when establishing business connections.

  • Use of Agents: Find a Mongolian advisor to guide through the ins and outs of local customs and business practices.
  • Structure of ownership: The Foreign Investment Law of Mongolia does not require foreign investors to have a Mongolian partner. All investment may be 100% foreign-owned and operated (with the exception of land ownership).

  • Product Pricing: Sensitive to price, Mongolian consumers will choose the less expensive product–unless they can be swayed by after-sales service or clear product superiority. They perceive American- branded goods as superior to all others, and will more often than not pay a premium to avoid purchasing lower cost, lower quality items

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