Ethiopia Industrializing Bit-by-Bit

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Ethiopia China photo

Africa is expected to take millions of jobs from Asia

Ethiopia is taking advantage of rising wages in Asia, and its own natural advantages in agriculture and cattle-raising, to build a light-industry base that is being kickstarted by foreign investment.

Saygin Dima Textile Share Company, a joint venture between Turkish company Saygin and Ethiopia’s Privatisation and Public Enterprises Supervising Agency, began operations at its new fibre and fabric plant in Oromia in March. It serves as confirmation that the Ethiopian government sees the textile industry as a major part of the structural transformation from an agrarian to an industrial society.

The bottom rung of low-skilled work has long been the preserve of razor-margined Chinese manufacturers, but rapid wage inflation in Asia has raised the possibility of Africa finding a foot on the manufacturing ladder. Ethiopia’s leaders are among the continent’s most fleet-footed at attracting investment to the sector, and they are banking on ­foreign know-how and capital. Premier Meles Zenawi travelled to Istanbul in 2005 to promote Ethiopia as a land of opportunity to Turkish textile companies, which is bearing fruit today.

The model for the textile industry had already proved successful with the flower sector. By providing cheap land and credit from the Ethiopian Development Bank (EDB) to Golden Rose in 2000, the Ethiopian government helped to kickstart the country’s floriculture sector. The demonstration effect has tempted others in, to create a sector worth more than $200m in 2010.

Likewise, Turkey’s Ayka Textile has enjoyed special treatment as a role model to attract others in an effort coordinated by the Ethiopian Investment Agency, EDB and Oromia regional government. Ayka has invested $95m in the country’s largest factory, which was built on 15,000m³ some 18km west of the capital and began full-scale production in 2010.

Resounding Success

Ayka Addis finance manager Amare Teklehimanot explains that the five-year tax break and help finding land and credit helped to attract the Turkish company. Results have been encouraging, with regular exports of woven products and garments to Germany, Italy, Greece and Cameroon. The three processing departments – spinning, knitting and weaving – have a combined capacity to process 43,000tn of cotton per year. Turnover in the first year was $3.6m, 70% of the target. By the 2010/2011 season, it had risen to $36m, outstripping predictions by 135%.

The government hopes to build on this success, and it has targeted an additional 46 textile projects worth $2.5bn through the Growth and Transformation Plan, of which the Saygin Dima plant is one. They include cotton ginneries, and spinning, knitting, weaving and finished garment factories.

Linkages in the textile industry are critical to keep costs down. One constraint has been the lack of cotton. Indian textile giant Spintex has invested $70m in its factory at Kombolcha and 2,500ha of cotton growing areas. It has used fast-maturing ­hybrid varieties and hopes to export two containers of cotton each day. It will also supply 1,200tn of lint to local companies – including Ayka Addis, with which it has signed a memorandum of understanding.

The hand of developmental state is never far away from the industry. When high cotton prices threatened to leave local mills without raw materials in 2011, the government placed a cap on exports. This situation is a problem faced by many African countries that plan to add value when commodity prices are high. In Nigeria, for instance, the Petroleum Investment Bill is needed to guarantee a gas supply for local users like power stations and fertiliser factories when gas producers can sell more profitably abroad.

But market interventions are not always a success. Berhane Gedey, owner of Bazel Agricultural Plc, a local cotton producer, told reporters “The relationship between growers and textile manufacturers has gone sour since the export ban was imposed.” The cap has since been lifted as international prices fell in late 2011.

There are also plans to take advantage of Ethiopia’s cattle herd, one of Africa’s largest at some 49.2m animals. Chinese investors have been active in the leather sector for several years now, but fears that local manufacturers would be forced out of business have proved unfounded according to Deborah Brautigam, author of The Dragon’s Gift. Instead they have improved and modernised their processes and equipment.

In a clear example of how Ethiopia is plugged into the global economic tilt towards Asia, China’s Huajian International Shoe opened a shoe factory in January with financing from the China-Africa Development Fund. Employing 600 people in a light manufacturing zone, it became Ethiopia’s largest manufacturer of ­women’s shoes in one stroke.

Local tanner and leather wholesaler Dire Industries is also producing shoes at its Peacock factory in Dire Dawa. Speaking at the All-African Leather Fair in March, Dire Industries’s general manager Biniam Bedada outlined the challenges to the sector: the lack of raw materials, power outages and delays to imports.

Textile manufacturers face similar issues even as the cotton sector looks to be heading for a sharp expansion. Before the sector can take off, there will need to be “the ecosystem of suppliers, those who make the buttons or the zips”, as well as the integrated supply chain from field to fibre to fashion, according to Ernst & Young Ethiopia head Zemedeneh Negatu. “The other challenge is that even if the factory cost is competitive, once it leaves the gate the transaction costs are high,” Negatu explains. The Ethiopian government’s focus on infrastructure bodes well for the medium term, but this means investors have to have longer horizons.

As Hinh T. Dinh, lead author of a World Bank report on Africa and light manufacturing released in March, says, “Africans do not have to wait for perfect investment climates to create millions of productive jobs in light manufacturing.”