Ethiopia: new workshop of the world?

A giant Chinese shoe manufacturer is lacing up for the long run. Will others follow in its footsteps?

 

Treading a new path

By Elissa Jobson

At 6.45am the first bus halts outside the main gates of the Eastern Industry Zone. The doors clang open. Bleary-eyed young men and women begin to emerge and  brace against the chill morning air.

A second, then a third and fourth bus arrives from the nearby dormitories, disgorging more and more workers dressed in the turquoise polo shirts that employees are required to wear on the shop floor at Huajian, one of China’s largest footwear manufacturers. Each member of staff pauses briefly at the factory door and presses an identity tag against the electronic sensor that records their clocking-in time.

Minutes later small groups of employees begin to assemble inside and outside the main buildings. Lines are formed, calisthenic drills executed and chants recited before workers march briskly to their stations and begin their duties.

hese scenes, played out in thousands of factories across China each day, seem more than a little incongruous here in Dukem, about 40km south of Addis Ababa, Ethiopia’s capital. But they could become an increasingly familiar sight if, as the Ethiopian government hopes, Chinese companies move more light manufacturing operations to this booming east African country.


“With the fast growth of its economy, Ethiopia will become a promising land full of trade and investment opportunities,” wrote Ethiopian Prime Minister Hailemariam Desalegn at the first Africa-China Commodities, Technology and Service Expo, held in Addis Ababa in December 2013. “More Chinese enterprises will be attracted to Ethiopia with technology and investment, which will achieve win-win cooperation.”

Chinese manufacturers, facing rising costs at home, are well aware of Ethiopia’s advantages: cheap labour and land leases; low-cost and reliable electricity in Addis Ababa, where most manufacturing is sited (with more to come soon as a series of hydroelectric dams turns the country into an exporter of electricity); easy access to cotton, leather, and other agricultural products; and proximity to key markets in Europe and America.

This explains why Addis Ababa was chosen as the location for this fair, the first of its kind to be held on the continent to showcase Chinese companies and generate business. “We selected Ethiopia as the destination of this expo because we think Ethiopia is a place many Chinese industries would like to relocate to,” said Gao Hucheng, China’s minister of commerce. Huajian, which produces shoes for Guess, Tommy Hilfiger, Naturalizer, and other Western brands at its Dukem factory, is keen to take full advantage of the opportunities Ethiopia affords.

“We are not coming all the way here just to reduce by 10%-20% our costs,” insists Helen Hai, former vice-president of Huajian Group, who is now advising the Ethiopian government on how to attract Chinese investors. “Huajian’s aim here is in ten years’ time to have a new cluster of shoemaking. We want to build a whole supply chain,” she adds.

The company’s vision is bold. Huajian began producing shoes in Ethiopia in January 2012 and the company now employs 2,500 people in the country, 90% of whom are local. Huajian currently exports more than $1m worth of shoes from Ethiopia to Europe and the US each month.

But within a decade, Huajian hopes Ethiopia will become a global footwear industry hub, providing jobs to more than 100,000 local workers, 30,000 of whom will be directly employed by Huajian.

Together with the China-Africa Development Fund, a private-equity facility, Huajian has committed to invest $2 billion over the next ten years to create a “shoe city” that will provide accommodation for as many as 200,000 people, as well as factory space for other footwear, handbags, accessories and components producers. Ms Hai is convinced Ethiopia will become “the future manufacturing floor of the world”.

She believes it should follow China’s path and begin with labour-intensive industries such as footwear and garment production. “The labour cost in shoemaking in China is about 22% of the overall cost portfolio,” she explains. “In China today the cost of each labourer is $500 [a month]. In Ethiopia it is only $50. So the question comes down to the efficiency.”

If one Ethiopian worker can produce the same number of shoes as one Chinese worker then labour costs could be reduced from 22% to 2.7% of the new total cost. People argue that African efficiency is low, Ms Hai says, but she maintains that with one year’s training Ethiopian workers could achieve “70% of the efficiency” of workers in China.

 The profit motive for relocation to Ethiopia is clear. But other factors—excise breaks, tax holidays and cheap land rental offered to investors in certain preferred sectors—make Ethiopia attractive too, Ms Hai claims.

For example, Ethiopia is eligible for schemes like the US’s African Growth and Opportunity Act (AGOA) and the EU’s Everything but Arms (EBA) treaty, which allows exporters from many African countries duty- and quotafree access to America and Europe. 

What is in it for Ethiopia? While the Chinese are taking advantage of Ethiopia’s cheap labour, “they bring technology, know-how and training”, Ms Hai says. “This will help the country create jobs and bring exports. That is truly the root of industrialisation.”

 Grand plans like Huajian’s, however, are few and far between. Annual levels of Chinese investment in Ethiopia are low, totalling about $200m in 2013, according to the Chinese Chamber of Commerce in Addis Ababa. This marks a substantial increase from virtually nothing in 2004 and $58.5m in 2010.

But just $50m of the current investments are in manufacturing, mainly in small and medium enterprises producing steel, cement, glass, PVC, paper, furniture, mattresses, blankets, shoes and other products. Instead, Chinese economic activity in Ethiopia tends to be focused on major infrastructure programmes—roads, railways, telecommunications and electricity transmission—which the Ethiopian government pays for with financial backing from Chinese institutions.

 “This is substantial activity, at least in terms of the value of these projects,” explains Jan Mikkelsen, IMF resident representative in Ethiopia. Last December’s ChinaAfrica Expo reflected this pattern with few of the more than 130 Chinese companies exhibiting looking to open factories in Ethiopia or elsewhere on the continent.

Instead, many, like China Machinery Engineering Corporation (CMEC), with their large, prominent stand, were hoping to secure lucrative government contracts.

“Ethiopia is a very big potential market,” says Jin Chunsheng, CMEC vice president. “There is the five year [Growth and] Transformation Plan and we expect to see a lot of power and infrastructure business which is related to the work of our company.” CMEC is currently negotiating to build fertiliser plants with Metals and Engineering Corporation, a major state-owned Ethiopian enterprise, Mr Jin adds.

Although manufacturing in Ethiopia is beginning to rise, it accounted for only 12% of GDP in 2012-13, compared to 43% for agriculture and 45% for services, according to government figures. The sector’s annual growth, however, was 18.5%, as opposed to 7.1% and 9.9% respectively for agriculture and services. Yangfan Motors, a subsidiary of Chinese automobile manufacturer Lifan, was one of a small number of exhibitors currently operating in Ethiopia.

The company opened a car assembly plant in Addis Ababa in 2009. “We chose Ethiopia because it is secure and stable,” says Liu Jiang, Yangfan’s general manager. “Furthermore the two governments [Ethiopia’s and China’s] have a good relationship and we think that this is a very important point too.” Unlike many Western countries, China has a policy of non-interference in domestic affairs, which has been appealing to African countries.

Ethiopia’s adherence to China’s developmental state model shows that the two countries share a strong affinity. Not surprisingly, business has been difficult for Yangfan. More than 83% of Ethiopia’s population live off subsistence farming in rural areas, according to the World Bank, and 90% of all car sales are used models.

The company currently manufactures around 3,000 vehicles annually but only manages to sell one-third to the local market. Lifan had hoped to use its Ethiopian base as a regional hub, but so far has been unable to distribute abroad because Ethiopia is a landlocked country with high taxes and transport costs, Mr Liu says. “To transport one container from China to Ethiopia is almost triple the cost of sending a container from China to Brazil,” Mr Liu adds.

A container from Shanghai, China, travels 12,400km to the port of Djibouti, at a cost of about $4,000, and is then transported overland 865km to Addis Ababa, for another $4,000, Ms Hai says. A 2012 World Bank study on Chinese foreign direct investment showed that investors cited customs and trade regulations and tax administration as major constraints on their business.

An underdeveloped financial sector and a dysfunctional foreign exchange market are other business impediments, Mr Mikkelsen says. In the bank’s 2014 “Doing Business” report, Ethiopia slipped down one place to 125th and dropped from 162nd to 166th in terms of ease of starting a business. Companies seeking short-term profits may not take the risk or feel that the inconveniences are worth staying the distance, says Lars Moller, lead economist at the World Bank’s Addis Ababa office.

Yangfan, however, is committed to the long haul, Mr Liu says. Later this year, the company will move to a bigger factory in the same industrial complex as Huajian. Government environmental policies will begin to favour newer, less-polluting vehicles and the ongoing road and railway construction will significantly reduce transportation costs, he adds. “In 2014 we are planning to bring two new models, one of which is especially designed for the Ethiopian market.”

Ethiopia clearly has a long way to go on its path to an industrial economy that offers jobs to its people and sensible opportunities to foreign and regional investors. Much shoe leather will be worn out before that destination is reached. Ventures such as Huajian’s and Yangfan’s offer tentative hope.

Elissa Jobson is a freelance journalist based in Ethiopia. She is the Addis Ababa correspondent for The Africa Report and Business Day and also writes for the Guardian. Ms Jobson was previously the editor of Global: The International Briefing

 

 

Africa’s industrialisation

Why manufacturing is key to creating jobs and building diversified economies

 

Can the continent make it?

By Ronak Gopaldas

 

Côte d’Ivoire and Ghana produce 53% of the world’s cocoa. But the supermarket shelves in Abidjan and Accra, their respective capitals, are stacked with chocolates imported from Switzerland and the UK, countries that do not farm cocoa. This scenario is repeated throughout the continent in different contexts.

For example Nigeria, the world’s sixth-largest producer of crude oil, exports more than 80% of its oil but cannot refine enough for local consumption. In 2013 it spent about $6 billion subsidising fuel imports, estimated Finance Minister Ngozi Okonjo-Iweala late last year. In such apparently baffling scenarios lies one of Africa’s greatest challenges— and opportunities.

The continent possesses 12% of the world’s oil reserves, 40% of its gold and between 80% and 90% of its chromium and platinum, according to a 2013 report from the UN Conference on Trade and Development (UNCTAD). It is also home to 60% of the world’s underutilised arable land and has vast timber resources. Yet together, African countries account for just 1% of global manufacturing, according to the report.

This dismal state of affairs creates a cycle of perpetual dependency, leaving African countries reliant on the export of raw products and exposed to exogenous shocks, such as falling European demand. Without strong industries in Africa to add value to raw materials, foreign buyers can dictate and manipulate the prices of these materials to the great disadvantage of Africa’s economies and people. “Industrialisation cannot be considered a luxury, but a necessity for the continent’s development,” said South Africa’s Nkosazana Dlamini-Zuma shortly after she became chair of the African Union in 2013. This economic transformation can happen by addressing certain priority areas across the continent.

First, African governments, individually and collectively, must develop supportive policy and investment guidelines. Clearly-defined rules and regulations in the legal and tax domains, contract transparency, sound communication, predictable policy environments, and currency and macroeconomic stability are essential to attract long-term investors.

Moreover, incentives—such as tax rebates to multinational companies that provide skills training alongside their commercial investments—will help local economies grow and diversify. In addition, each industrial policy should be tailored to maximise a country’s comparative sector-specific advantages.

Mauritius, one of Africa’s most prosperous and stable countries, provides  important lessons for other African countries. In 1961 this Indian Ocean island nation was reliant on a single crop, sugar, which was subject to weather and price fluctuations. Few job opportunities and yawning income inequality divided the nation.

This led to conflict between the Creole and Indian communities, which clashed often at election time, when the rising fortunes of the latter became most apparent. Then from 1979 on the Mauritian government took practical steps to invest in its people. Realising that it was not blessed with a diversity of natural resources, it prioritised education. Schooling became the critical factor in raising skills and smoothing the lingering religious, ethnic and political fractures remaining since independence from Britain in 1968.

Strong governance, a sound legal system, low levels of bureaucracy and regulation, and investor-friendly policies reinforced the country’s institutions. Under a series of coalition governments, the nation moved from agriculture to manufacturing. It implemented trade policies that boosted exports. When outside shocks hit—such as loss of trade preferences in 2005, and overwhelming competition from Chinese textiles in the last 15 years—it was able to adapt with business-friendly policies. From being a mono-economy reliant on sugar, the island nation is now diversified through tourism, textiles, financial services and high-end technology, averaging growth rates in excess of 5% per year for three decades.

Its per capita income also rose from $1,920 to $6,496 between 1976 and 2012, according to the World Bank. While much responsibility lies with African governments, the continent’s private sectors must play their part in improving co-ordination between farmers, growers, processors and exporters to increase competitiveness in the value chain and ensure the price, quality and standards that world markets demand.

Tony Elumelu, chairman of Nigerian-based investment company Heirs Holdings, and Carlos Lopes, the executive secretary of the United Nations Economic Commission for Africa, advocate what they call “Africapitalism”, a private sector-led partnership focused on the continent’s development. “Private-sector business leaders must also do more to tackle poverty and drive social progress by ensuring that long-term value addition—as well as short-term gain—is built into their business model,” they wrote in a joint article for CNN in November 2013. Next, African countries must pursue beneficial economic strategies with their neighbours.

Regional integration would help reduce the regulatory burden facing African industries by harmonising policies and restraining unfavourable domestic programmes. It would boost inter- and intra-African trade and accelerate industrialisation. The right recipe for regional integration requires countries to concentrate on commodities in which they have a competitive advantage. For example, Benin and Egypt could concentrate on cotton, Togo on cocoa, Zambia on sugar—each country trading in bigger regional markets.

Agriculture, which employs over 65% of the continent’s population, according to the World Bank, could become a springboard towards industrialisation. It can provide raw materials for other industries, as well as promote what economists call backward integration, in which a company connects with a supplier further back in the process, such as a food manufacturer merging with a farm.

This is already under way in Nigeria. The diversified BUA Group “will process 10m tonnes of cane to produce 1m tonnes of refined sugar annually”,  according to Chimaobi Madukwe, the company’s chief operating officer. Sustained investment and improvements in infrastructure are also needed throughout the continent. Countries everywhere, not just in Africa, cannot establish competitive industrial sectors and promote stronger trade ties if saddled with substandard, damaged or non-existent infrastructure.

“Developing industries require sustained electricity supply, smooth transportation and other very basic infrastructure facilities, which at present are still not enough to ensure operations,” said Xue Xiaoming, vice-chairman of the Nigerian Chinese Chamber of Commerce and Industry. Africa’s poor roads, railways and other transport networks, faulty communications, and unreliable and insufficient energy result in high production and transaction costs.

It takes 28 days to move a 40-foot container from the port of Shanghai, China to Mombasa, Kenya at a cost of $600, while it takes 40 days for the same container to reach Bujumbura, Burundi, from Mombasa at a cost of $8,000, explained Rosemary Mburu, a consultant at the Institute of Trade Development in Nairobi. “This represents double the time at 13 times the cost,” she said. Public-private partnerships (PPPs) should be developed to stimulate massive investments in infrastructure, which could have a multiplier effect on economic growth. Finally, without education the continent cannot succeed in its drive towards industrialisation. PPPs should be pursued in this arena too, because governments often lack the skills and finances to carry out technical training.

Private sector companies would benefit from a skilled and competent workforce. The country would benefit from a stronger economy blessed with less unemployment and higher incomes. Historically, countries have succeeded by focusing on education in science and technology and promoting research. For example, in the 1960s and 1970s South Korea —like Singapore, Taiwan and Hong Kong—reformed its education system and made elementary and high school compulsory.

From an adult literacy rate of less than 30% in the late 1930s, South Korea now boasts a literacy rate of nearly 100% and has one of the highest levels of education anywhere in the world, according to UNESCO, the UN’s education agency. Its highly skilled population has helped South Korea to become one of the world’s foremost exporters of high-tech goods. Africa, the world’s youngest continent, is currently undergoing a powerful demographic transition. Its working-age population, which is currently 54% of the continent’s total, will climb to 62% by 2050.

In contrast, Europe’s 15-64 year-olds will shrink from 63% in 2010 to 58%. During this time, Africa’s labour force will surpass China’s and will potentially play a huge role in global consumption and production. Unlike other regions, Africa will neither face a shortage in domestic labour nor worry about the economic burden of an increasingly ageing population for most of the 21st century.

This “demographic dividend” can be cashed in to stimulate industrial production. An influx of new workers from rural areas into the cities, if harnessed correctly and complemented with the appropriate educational and institutional structures and reforms, could lead to a major productivity boom.

This would then increase savings and investment rates, spike per capita GDP, and prompt skills transfers. Reduced dependency levels would then free up resources for economic development and investment.


Without effective policies, however, African countries risk high youth unemployment, which may spark rising crime rates, riots and political instability. Rather than stimulating a virtuous cycle of growth, the continent could remain trapped in a vicious circle of violence and poverty. The continent’s youth represent a huge potential comparative advantage and a chance to enjoy sustained catch-up growth. Or they could remain shackled in joblessness and become a major liability. Africa is ripe for industrialisation.

A strong and positive growth trajectory, rapid urbanisation, stable and improving economic and political environments have opened a window of opportunity for Africa to achieve economic transformation.

Ronak Gopaldas works as a sovereign risk analyst at Rand Merchant Bank in Johannesburg. He has written for Business Day, Business Report, Forbes Africa, Africa Asset Management and other publications.