Lithuania's garment and textile industry has triumphed over adversity during the last decade, according to a new report published in Textile Outlook International. Threatened with the loss of nearly all its foreign customers following the collapse of the Soviet Union just over 10 years ago, the sector has managed to find solid and growing markets in other countries.

With a local population of 3.5mn, exports are the life-blood of Lithuania's garment and textile companies. Its textile industry exported 86% of its output in 2001, while its apparel industry exported 93%. In some Lithuanian textile and clothing companies export-orientation is almost 100%. For example, Drobe, one of Lithuania's largest wool textile producers, ships 97% of its output abroad.

Between 1995 and 2000 foreign sales of textiles and clothing rose by an average of 14.5% a year. Exports to the EU, which is by far the biggest market for Lithuanian textile and clothing companies, grew by almost 23% a year during 1995-2000. Clothing exports grew over the period by an average of 26.7% a year - faster than exports from any other sector.

Companies are mostly profitable, despite the upheavals of the last decade. Of the ten leading companies, all but three made a net profit in 2001. Of those that suffered net losses, all but one managed to reduce them year-on-year.

A crucial factor behind the industry's transformation and market reorientation has been the speed with which the Lithuanian government acted in the early 1990s to transform the economy, implement a programme of privatisation, and create a favourable investment climate. Lithuanian industry has now been functioning within a market economy for ten years. Privatisation has opened it up to foreign investment and provided much needed capital for modernisation.

In some cases foreign investors have also been able to offer captive markets. For example, when Marzotto announced plans to invest in Lietlinen, it said that it would ship all production to Italy.

The main attraction for inward investors is Lithuania's low labour costs. According to figures compiled by the Kaunus Free Enterprise Zone in 2000, the gross cost of employing a skilled worker - including social and other indirect costs - can be as low as US$260 a month. This equates to an hourly rate of US$1.68. An unskilled worker can cost an employer as little as US$195 a month, or US$1.25 an hour.

But Lithuania is more than just a low cost offshore manufacturing site. Foreign investors have also been attracted by its well-developed transport infrastructure, its proximity to the EU, and the prospect of easy access to wider markets in the region. As well as the other Baltic states, these markets include neighbouring Poland and former Soviet republics.

The potentially huge Russian market is a special attraction. Firms investing in Lithuania are well placed to take advantage of Russia's long-term economic recovery. 8% of Lithuania's population are native Russian speakers while a further 7% have Polish as their first language.

Foreign investment has served the industry well since the break-up of the Soviet empire. But maintaining annual investment inflows at their current level in the future may prove more difficult.

Privatisations continue to bolster government revenues and provide the industry with much needed capital for modernisation. But potential privatisation and investment targets could be starting to dry up. State ownership in the textile industry is down to 20% and in the clothing sector it is a mere 10%. Thus the scope for foreign investment via the privatisation route is shrinking. It is also likely that many of the best companies have already been picked off.

Growth could also be dampened by the government's fiscal austerity programme in preparation for EU membership.

Lithuania has made good progress in meeting EU membership criteria and is set to join the first wave of EU enlargement in 2004 or 2005. Membership offers the prospect of a vast single market for Lithuanian textile and clothing exporters. But it also obliges them to comply with EU laws in areas of competition policy and environmental compliance.

Perhaps more importantly, EU membership will expose Lithuanian textile and clothing exporters to the chill wind of competition in an international trading regime which is set to become considerably more liberal when quotas are eliminated on December 31, 2004. After 2004, mass markets will become increasingly swamped by giants such as China and India - countries that have vast pools of untapped resources, low costs and growing productivity. Exporters will then have to find ways of competing other than on price.

For companies in Lithuania and similar, smaller economies, specialisation may be the only way forward.