Cashmere war sweeps the steppes

SEVEN centuries after Genghis Khan swept across the grasslands on his steed, another Mongol, Jargalsaikhan, has switched to German horsepower in the battle against the Chinese. Two big Mercedes vans, fitted with beds for the drivers and TV to help pass those long evenings on the steppes, are parked outside his Buyan cashmere factory in Ulan Bator. They are his secret weapon in what might be called the "cashmere wars".

The ultra-soft fibre is one of Mongolia's few viable industries, and Jargalsaikhan, 39, is that rare breed in Ulan Bator, a successful private businessman, In the early 1990s he claimed to be the richest man in Mongolia. He bought Buyan when it was privatised in 1993, and has just doubled the company's production capacity to 50,000 items a year. But to feed his factory's machines, Jargalsaikhan (who like most Mongolians uses one name) must buy a great deal of raw cashmere from the herders who tend Mongolia's 10 million goats. And that means getting to the nomads before the Chinese traders do.

Hence the Mercedes vans. The Buyan buyers tour the vast expanses of Mongolia for weeks, purchasing raw fibre from the herders and loading it into the vans. In competition are Chinese traders who come over the border and persuade the herders to sell, often at knock-down prices or for bartered Chinese goods. The fine raw fibres - just 14 to 17 microns in diameter - are then whisked across the border for processing in China's factories, leaving the Mongolian industry short of raw material. Big Chinese factories also benefit from economies of scale, processing Mongolian cashmere and selling it at prices which undercut Mongolia's output.

Cashmere is Mongolia's second biggest export earner, and much more money could be made by selling processed product abroad rather than letting raw material slip into China. In 1994 the Mongolian government banned raw exports, but had to lift the edict when the country joined the World Trade Organisation the following year. In 1996, an export tax was introduced, but the long border with China has always made smuggling easy.

Mongolia accounts for about 30 per cent of world cashmere production, compared with China's 60 per cent. Mongolian raw cashmere output in 1997 was around 2,400 tonnes, all of which could be initially processed inside the country. Its factories have the capacity to make up about a quarter of the raw material into finished items.

One goat produces just 200 to 380 grammes of cashmere a year, which explains the high price of a cashmere cardigan once it gets to the West. But cashmere prices have been falling, thanks to the Asian financial crisis, which has reduced demand in Japan. The resulting surplus has made Mongolia even more vulnerable to Chinese competition.

Cashmere is just one of the flashpoints in Mongolia's wary relationship with its huge southern neighbour. For nearly 200 years under the Qing dynasty, China dominated much of Mongolia. Peking's control ended in 1911, but 10 years later the Soviet Union grabbed Mongolia as a satellite state, a relationship which lasted until 1990. The newly-democratic Mongolians now dread becoming an economic colony of Peking - since Mongolia swapped socialism for free-market capitalism, China has become its biggest foreign investor and second largest trading partner after Russia. Most consumer goods on sale are from China, and the land-locked nation's only rail link to the sea is through northern China to Tianjin.

The hostility most ordinary Mongolians express towards the Chinese is blunt. Jargalsaikhan, founder of the pro-business Bourgeois Party, is a forthright former physicist who since 1990 has had two spells in jail after falling out with political rivals. "The Chinese want to make Mongolia part of China," he says. "[They] put so much money in here for control of the economic situation in Mongolia. And after that they will control the government. That is the problem."

A big test of public opinion will be the privatisation of Gobi Cashmere, one of Mongolia's biggest companies. The Democratic Coalition government, elected in 1996, has a sweeping privatisation programme in which key corporations are for sale - including to foreign bidders. Among the few attractive offerings is the government's controlling 76 per cent stake in Gobi Cashmere. In an open auction, the most likely purchaser would be the Chinese cashmere industry, an idea that appalls Mongolians.

Jargalsaikhan says: "If the Chinese buy these factories, they are buying Mongolia. So it is easy to make Mongols into Chinese. The men will have to serve in the army, and the women will have to marry Chinese. Anyone who criticises will be shot."

Many ordinary Mongolians view the future of Gobi Cashmere as a test case of how far the free marketeers are willing to go. But Enkhsaikhan, the Democratic Union Prime Minister from 1996 to 1998, who launched the latest privatisation wave, dismisses such sentiments. "If they can pay the price," he says, "it does not seem any problem to me."