As world demand for area rugs recovers, hand tufted rugs are taking an ever growing share of the market—over 50%. That’s up from about 25% five years ago.  These data are in dollars, and since tufted rugs have a 3-4:1 cost per unit relationship to hand knotted rugs, the unit growth is amazing.  This is proof, though, that new consumers are entering the U.S. rug market.

Afghanistan: Room for Growth

According to official U.S. import data, hand knotted rug shipments have leveled off at about $225 million annually.   Of that $225 million, $54 million was shipped to the U.S. from Pakistan, and only $8 million coming directly from Afghanistan.  The demand rates show that Afghanistan’s exports to the U.S. has the potential to be $40 million—5 times the volume that the country generates in direct sales today.

Will weavers in countries that compete with Pakistan let Afghanistan take this or any amount of market share?  The answer to that question is the crux of the matter. The diagram below demonstrates the opportunity for growth in the carpet trade of Afghanistan.

The diagram was developed from a discussion with the consultants hired by the Defense Department’s Task Force for Business and Stability. It looks at the cost advantage versus the ability to produce innovative products compared to other countries, or product differentiation. It reveals sourcing trends in the hand knotted rug business and places Afghanistan in a very fortunate position.

India, the world’s largest producer of rugs, has increased weaver’s wages 30% by government decree, and new industries located in carpet making districts have been attracting workers away from established rug companies.  These pressures lead to higher prices and a wave of product development by Indian rug suppliers.  You can see how the arrow for India moves up in differentiation and slightly left, marginally reducing the country’s former price advantages.

The movements depicted by the arrows are relative to each other. China’s weaving companies, being directed by a central government, have ceased all new development and raised prices on existing hand knotted and hand woven products by as much as 100%.  This has effectively taken China out of the market for hand-made rugs and redirecting workers to machine-assisted, hand tufted rugs.

Iran had been the third largest shipper to the United States until 2011. Now under embargo for rug shipments, legal exports have dropped to zero.  They continue shipments to the Middle East, Turkey, some European countries and Russia, but because of sanctions and shortages within Iran, inflation is high, diminishing any cost advantages that had existed.  Soon, Iran will be in the most unfavorable cost situation relative to other countries.  Banned from the most viable markets, there is little incentive to create new styles or methods and differentiation is diminishing as well.  Iran’s position stays highest, though, because of the historical diversity of the products made there.

Turkey and China are being affected by almost identical forces, but Turkey is not a centrally planned economy and changes there are a result of the market demands by nearby European countries. A combination of weavers retiring from the field and other job opportunities for the remaining workers has decimated the rug weaving business in Turkey.

Even with a significant decline in shipments, Pakistan remains the world’s second largest shipper of hand knotted carpets.  It’s not certain how much of Pakistan’s shipments are native or of Afghan origin.  Consequently, these countries are linked and the relationship will continue for many years into the future.  Regrettably for Pakistan, unlike India and China, they are not able to move into machine assisted and machine made carpets. A considerable lack of power within the country prevents this beneficial evolution.

Instead, Pakistani carpet companies have become more innovative and concentrated on higher value products. Still, these are being sourced in Afghanistan.  This moves the arrow for Pakistan well up the differentiation scale, but also reduces its cost advantage.  Compliant Afghan weavers have given Pakistan a meaningful cost advantage over India, but this is being eroded and will eventually disappear.

This leaves only Afghanistan to discuss.  Because of Pakistan’s need to innovate, Afghanistan will have expanded options in product differentiation as Pakistan teaches the Afghan traders new skills and methods. Sophistication and efficiency over time should add cost advantages, even compared to Pakistan, and put the Afghans in a very favorable position near the optimal center point of the chart.

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