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Products of H&M, GE and even Samsung are "Made in Ethiopia"

The least developed country on market economy turns into a "world factory"

November 10, 2014

Category : ABP's insight

Author: Yukari Umemoto


Recently, I have been intensively visiting factories in Ethiopia: they are food/ beverage factories and chemical factories with large equipment, and labor-intensive factories like tailoring and assembling. All activities in the factories are done by Ethiopians from sewing clothes by machines to managing the labors.

Ethiopia, like other African nations, is in the midst of economic development. However, there is a unique feature to be highlighted which is quite different from other African nations: the labor cost is low. 

Wages of factory workers
(Surveyed by Africa Business Partners, at October, 2014)
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African nations are hardly considered to be a potential relocation site for production base like Asian countries because not only the infrastructure is poor but the labor cost is high. For instance, in Kenya, a monthly wage for a factory worker is about US$150. This cannot pay off if we consider Kenyan productivity and distribution cost as the domestic market in Kenya is full of imported goods and faced with international competition. Purchasing goods from abroad is cheaper than producing goods domestically in Kenya.

However, in Ethiopia, a monthly wage is about US$ 50. This is lower than a newly introduced legal minimum monthly wage in Bangladesh (gathering center of light industry in the South Asia), which is US$68. By utilizing preferential duties applied to exportation of products to USA and Europe, Ethiopian products can earn more cost competitiveness

In Ethiopia, there are many state-owned manufacturers, which are remnants of the socialist regime lasted from 1970s to the beginning of 1990s. At that time, the nation tried to be able to manufacture all products without relying on the importation from abroad. As the country has a population of 90 million, which is among the largest in African countries, we see old but large-scale and well-arranged facilities in those state-owned factories.


H&M and GE's manufacturing bases are also in Ethiopia 

Currently, these companies are under privatization. Among foreign capitals, Heineken bought out a state-owned beer factory and French Castel bought out a state-owned winery. We also see that investments from private equity funds are coming into factories such as a cement factory and a meat processing factory.

70% of stocks of a truck assembling factory operating from 1970s are owned by Italian IVECO and Fiat. The government has a policy of rapid industrialization and has set up an assembling factory of mobile phones in 2010. The factory started to produce a "feature phone" of Chinese ZTE and dispatched some personnel to a ZTE factory in China for letting them learn its assembling and quality control skills. 

Four years later, the factory has entered the stage to enable manufacturing smart phones; the first domestically produced smart phone in Ethiopia. Furthermore, this factory has made a contract with Korean Samsung Electronics and begun to produce 50 printers per day this year. Although high-skilled workers of the factory are allocated in the Samsung production line, their total wages are US$ 75 per month including their social services.

Mobile phones and smart phones produced in this factory are currently only sold in Ethiopia. However, what the government is looking for is to bring the products manufactured in Ethiopia to the global supply chain. 

H&M is going to bring their clothes made in Ethiopia to H&M's global supply chain from this year. It has entrusted three tailoring factories in Ethiopia to manufacture its products. When I visited the three factories, there were piles of T-shirts with familiar H&M tags and price tags in Euro or US Dollar. The factories are lively so that they can establish the production system satisfying the required global standard.
 
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Tailoring factory that H&M has entrusted its production (Photo: ABP)

The American General Electric (GE) seeks to make Ethiopia a production base in Africa of medical equipment. The company aims to deliver its medical equipment to all around Africa by the Ethiopian Airlines whose engines are also supplied by GE. Samsung that I mentioned before has announced to expand assembling items starting from printers to refrigerators, televisions, and laptop computers. The sales target should not be limited to the domestic market in Ethiopia. 

There is a case like floriculture, which has been nurtured as a new exportation industry from scratch. The national government of Ethiopia initiated to invite Dutch firms by leasing lands at reasonable prices in order to support rose cultivation perhaps by mimicking neighboring Kenya, which is among the top five countries of rose exporters in the world.

The production caught up with the advance countries very rapidly and the volume of export to Europe in 2012 recorded the third position after Kenya and the Netherlands. Ethiopian roses are distributed to the world through the flower market in the Netherlands.

Wine production by French Castel has been also initiated under the sponsorship of the Ethiopian government. Surprisingly, Ethiopians drink wine a lot. Currently the products are supplied mainly to the domestic market but the company agrees with the government to gradually increase the exportation up to a half of the production. On another note, Ethiopian wine is not well-known, but has high quality and unexpectedly tasty. 

There is a potential for the Ethiopian wine to get a new status in the global market like Chilean and South African wines.
When I stay in Ethiopia, I come across the case that not only Western global companies but enterprises from China and Bangladesh, which undertake manufacturing for the Western companies, are also taking into consideration of shifting the production base to Ethiopia. 

The labor-intensive manufacturing sector, which moved from China to the Southeast Asia and the South Asia for seeking cheap and young labor force, is now looking for another place in order to avoid increased labor costs and political country risks in the Southeast and South Asian countries. Physical collapse of a factory in Bangladesh last year was a turning point and some enterprises ended up in Ethiopia as an alternative destination for shifting their production bases.

Turkey is also one of the countries which are enthusiastic about Ethiopia. If you look at a world map, Ethiopia is obviously located in the straight south from Turkey. As monthly wages in Turkey, which was once considered as the "European manufacturing base" full of young and cheap labor, have now increased up to nearly US$1,000, Turkish companies are shifting their production bases to Ethiopia. Currently, 115 Turkish companies including manufacturers of sewing, chemical products, and electronics have entered into Ethiopia.

On the occasion where people cast concerns on conventional "world factories", Ethiopia, which is politically stable and with low commodity prices and which is geographically close to Europe, is coming into the spotlight as a potential alternative destination of " China-plus-one" or " Turkey-plus-one" that plays a part of the global supply chain.


 "Ethiopia is similar to China thirty years ago"

The reason why Ethiopia is cheaper in labor cost than other African countries is because the timing of opening the market and receiving structural adjustment delayed from other countries and because the conservative policy by the national government is effectively controlling the cost. In other words, economic liberalization has just started. International trade is regulated and restricted, and the domestic market is not yet affected by international competition. There are still many state-run companies and the state yet controls telecommunication, finance, and aviation industries.

Perhaps due to this situation, the internet connection is poor in Ethiopia, which is rare in African countries. It is said that the government conducts censorship and regulates transmission of SMS. Even once a law was passed that offering a criminal penalty to Skype users (later, the government announced that Skype usage between individuals were exempted from this regulation). From my experience, it is true that the Facebook is accessible but crowd-oriented services are often hard to access.

In Ethiopian cities, we find photographs of the former Prime Minister Meles Zenawi, who deceased suddenly in 2012, put up here and there as if they are poplar singer's bromide photographs. Although formally Ethiopia is a democratic society, in reality, it is under one-party dictatorship. The population is organized to the end through agricultural cooperatives. 

The national government has a lot of large infrastructure investment cases and is very eager to invite foreign investments because the government desperately needs foreign currencies. However, the investors need to invest in the way the government desires in order to get incentives prepared by the government. Free economy and socialism are mixed in patches in the present Ethiopia.

The former Prime Minister late Meles Zenawi overthrew the socialist government and came into power in Ethiopia as a fighter of reform. Since his appearance, free economy was promoted and privatization of state-run companies was put in place. He managed to secure funds for large infrastructure development in order to set up the Ethiopian industrial base such as large hydro power plant construction and development of railways which extend to harbors.  

In the late 1980s when China began to play a role as a part of global supply chain by shifting from the planned economy to the open economy, the wage level was about 5,000 Japanese Yen per month. This is exactly the same level as that in Ethiopia now. At that time, infrastructure in China was underdeveloped and shipping between Shenzhen and Guangzhou took 12 hours.

CEO of Huajian, a Chinese company which receives contracts of OEM for foreign name-brand shoes, says that the current Ethiopia is similar to China 30 years ago.

She continues, "Infrastructure is not well developed and the country is full of people looking for job opportunities. Productivity of factories is low and the level is about one third of that in China before the workers receive training. However, Ethiopia has a great potential. We have chosen Ethiopia not just as a low-cost production base but by considering possible changes of the global supply chain for coming 10 years." Huajian already operates a factory in Ethiopia but has a plan to hire up to 30,000 workers in Ethiopia by 2022, which will exceed 25,000 workers hired in the factory in China.

At present, productivity of Huajian factory in Ethiopia has reached about 70% of that in China. At the factory producing smart phones mentioned before, a Chinese system to increase productivity is introduced. It is the system like the one at a factory in China that measures individual worker's output and raises his/her salary based on the achievement. At this moment, easy-going Ethiopians do not seem to have a competitive mind to beat others and acquire higher wages. But this should be also changed gradually.
 

Now is the best timing to consider the investment

If you look down from an airplane in the air, you can see innumerable apartment complexes in the capital Addis Ababa and its vicinity. They are lined up in the same shape and the same color. They are residences for low-income people constructed by the national government in order to avoid turning those people inflowing to the capital into slum dwellers. 

As those residences were built by a Chinese company, the layout looks like a city somewhere in China. A lot of parabolic antennas are installed at windows of those residences in a messy manner.

Addis Ababa has become a totally different city during the recent five years. It is obvious that foreign investments are flown into the country as the economic grows. While Russian shabby taxies are hanging around, we see also Toyota Vitzs and Land Cruisers. Along the road where we see people carrying goats and sheep, there are locally capitalized fancy coffee chain stores and hamburger shops just like Starbucks Coffee. 

Smart phones are getting popular, the government has announced to introduce 4G, and we see apple logos posted at many places while the Apple computers are not yet sold. Construction works are all over but we also find many buildings' constructions are suspended in the middle due to financial shortage. Bypass roads are opened and short-distance trains run for commuting. Business persons from different countries have business meetings at the gorgeous Sheraton hotel.
 
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Coffee chain store in Addis Ababa (Photo: ABP)

The reason why I have intensively visited Ethiopian factories these days is because Ethiopia has a potential to be a place to realize 'overseas development through a shift of the production base', which Japanese companies are good at. The number of Japanese firms in Ethiopia is still limited. 

Ethiopia is not yet well prepared as Asian countries to receive the production base shift. The productivity is low and the defect rate is high; it would take several years to improve them to an acceptable level. Ethiopia is not the destination that we can choose just by following the trend. However, unless we decide to invest now, Japanese firms will be lagging behind as we experienced in other Asian countries.

This year, an American private equity fund, KKR, invested US$ 200 million to a floriculture company in Ethiopia. The apparel company PVH, which produces and sells Calvin Klein and Tommy Hilfiger, is also expected to launch the production in Ethiopia. A couple of Japanese manufacturing firms are also under preparation of setting up the production base in Ethiopia. Direct flights of the Ethiopian Airlines to Japan will also enter into the service from this December. Now is the best timing to consider the investment.


Source: http://business.nikkeibp.co.jp/article/report/20141008/272291/
(The article was published at Nikkei Business Online in Japanese on October 10th, 2014)

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Japanese companies' list doing business in Africa, edited by ABP[Detail]

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