Lessons from Ethiopia: Manufacturing for export

Tuesday October 9 2018

Hawassa industrial park in Addis Ababa,

Hawassa industrial park in Addis Ababa, Ethiopia. Hawassa industrial park by itself could generate 46,000 roles. Courtesy photo 

By Edward Baliddawa

There is a famous African proverb that goes: “Wisdom is like fire, if you don’t have it in your homestead, you fetch it from your neighbour”. The teaching in this proverb is twofold. First, no one who has monopoly over wisdom.
Secondly, it would be acting foolhardy for one to fail to go to a neighbour for fire to have food cooked for one’s household should one find oneself in a situation of need.
Uganda is in a crisis of finding jobs for the ever increasing number of youth. To understand the magnitude of the problem, look at the numbers of educated young men and women graduating every year from both our public and private universities.

According to the National Council for Higher Education, Uganda has nine Public Universities, 42 Private Universities, 53 Public Tertiary Institutions and 132 Private Tertiary Institutions.
A small fraction of these graduates find jobs in the public or private sector.

Although more of the graduating youth don’t find jobs, many more from the secondary schools are joining the institutions of higher learning.
Although Ethiopia which has a population of 100 million people is still grappling with creating jobs for its youth, it has taken some giant steps.
The Ethiopian leadership’s approach to spur manufacturing through organised industrial parks hinges on building business partnerships with the captains in the industry from China and other countries.

Ethiopians’ secret
Correct analysis of a problem is critical to finding the correct solution. So, Ethiopia started off by correctly identifying priority sectors where they had potential comparative advantage.
Footwear, textile and apparel manufacturing were earmarked as priority sectors.
The country has the largest hide stocks in Africa and is the tenth-largest in the world. The abundance of leather gives prospective brands lots of material options to work with.

Secondly, the other important factor that attracts manufacturing to Ethiopia is its low power tariffs. The country’s electricity costs are some of the lowest in the world. These low power costs help to keep the production costs down. That makes the country very attractive.
With the expected completion of the Grand Ethiopian Renaissance Dam at the end of next year, whose installed capacity is expected at 6,000MW, the costs of electricity are expected to fall tremendously.
The country’s investment in infrastructure and factory capabilities has also helped. The strongest evidence that Ethiopia presents enormous potential for footwear manufacturing lies in the investment it has been receiving from Chinese manufacturers to ramp up its production.

Jordan Saliman, Ethiopia and Kenya footwear expert advisor for the East Africa Trade & Investment Hub, a U.S Agency for International Development (USAID) – funded project, says Asian factory investments have helped set a new standard and raised the bar for these factories.
“The factories are developing their own hand and character, building a strong reputation in men’s, women’s and kid’s shoes. Several Chinese manufacturers are now making millions of pairs of shoes annually in Ethiopia and shipping a portion of that to the US under big-name brands,” Saliman adds.


Industrial parks
The model has been for the Ethiopian government to construct well-serviced industrial parks which house these numerous footwear and textile manufacturing partnership factories. The first and biggest such industrial park is called Hawassa in Addis Ababa, commissioned in 2016.
Speaking about the country’s drive with industrial parks, Dr Arkebe Oqubay, board chairperson of Ethiopian Industrial Park Corporation (EIPC), said Ethiopia’s aim in building more industrial parks is to enable the manufacturing sector to contribute to 20 per cent of Ethiopia’s GDP and 50 per cent of the export volume by 2025.
Currently, Ethiopia has seven other operational industrial parks with Mekelle and Kombolcha commissioned in December 2017 which were both built by China Civil Engineering Construction Corporation (CCECC) at a cost of $100 million and $90 million, respectively.

“In January 2018, Kilinto Pharmaceutical and Bole Lemi industrial parks were commissioned. In May 2018, Bahir Dar and Jimma industrial parks were added. In June, Debre Birhan and Arerti industrial parks were brought on board while in September, another two Dire Dawa and Adama constructed by CCECC at a cost of $190 million and $125 million, respectively were commissioned,” said Dr Arkebe.
It is not only the Chinese who have woken up to “Made in Ethiopia.” In the lake side town of Hawassa, in place of a former weekend playground of the Addis elite, a huge industrial park opened in 2016. American clothing giant PVH, whose brands include Calvin Klein, Tommy Hilfiger and H&M, takes up a chunk of the 400,000 square-meter space.

How did it all start?
In 2011, a 60 year old self-made textile tycoon from Jiangxi province, Zhang Huarong became one of the first Chinese entrepreneurs to heed the call of Ethiopia’s then-Prime Minister Meles Zenawi to open a factory in Ethiopia under a company called Huajian International Shoe City, Addis Ababa. Within three months, Huajian was producing footwear for giants such as Nine West, Guess and later, Ivanka Trump’s fashion line, before it closed.

According to CNN’s business report on Ethiopia by Jenni Marsh, businessmen like Zhang are seen as the country’s ticket out of poverty. Huajian employs 7,500 local workers at its two enormous factories in the Addis Ababa region. “As long as they have the right skills and training, Africans are just like Asians and Europeans,” Zhang is reported to have noted.
Meles decided earlier on that China could be useful in two ways. Firstly, in generating manufacturing jobs to mechanise its workforce and encouraging knowledge transfer.

Cutting travel time
Secondly, in building infrastructure, such as the Addis Ababa-Djibouti rail line – 734km, which cut the journey time for whisking goods from landlocked Ethiopia to the sea from days by road to 12 hours.
Getting Chinese companies to invest wasn’t easy at first. Conditions in Ethiopia 10 years ago were so poor and transportation links so bad that I did not think of investing here,” says Zhang. It took Prime Minister Meles Zenawi personally deploying his powers of persuasion to convince Zhang to open a factory in time for the opening ceremony of the African Union headquarters in January 2012, he says.

No loans. Dry Arkeby clarifies that Ethiopia does not take Chinese loans for buildings such as football stadiums, unlike Zimbabwe, Senegal, and Angola.
Over just a few years, Ethiopia’s foreign inflows of Foreign Direct Investment (FDIs) have increased to the current reported $3.6b in 2017, making it the second country in Africa after Egypt in attracting the highest FDIs inflow.
Also Ethiopia’s GDP has over time increased from a mere $8.2b in 2000 to $80.6b by 2015. The Chinese FDI into Ethiopia also rose from $1m in 2002 to $175m in 2015.

Tax holidays in industrial parks
Hawassa is one of 30 industrial parks that will have opened in Ethiopia by 2020. Mostly Chinese-built, these “areas of excellence” echo the Special Economic Zone model that turned Shenzhen of China into a manufacturing powerhouse within one generation.
Ethiopia took note. Hawassa, which cost $300 million to build, is an eco-friendly facility with a reliable power supply, streamlined on-site visa and banking services. As in many other Ethiopian industrial parks, companies enjoy a 10-year tax holiday, expatriate staff pay no income tax for five years and exports are duty free.

The writer is an economist.