128.

PROFILE ON PRODUCTION OF DISK BREAK LINING

128-2 TABLE OF CONTENTS

PAGE

I.

SUMMARY

128-3

II.

PRODUCT DESCRIPTION & APPLICATION

128-3

III.

MARKET STUDY AND PLANT CAPACITY A. MARKET STUDY B. PLANT CAPACITY & PRODUCTION PROGRAMME

128-4 128-4 128-6

IV.

RAW MATERIALS AND INPUTS A. RAW & AUXILIARY MATERIALS B. UTILITIES

128-7 128-7 128-8

V.

TECHNOLOGY & ENGINEERING A. TECHNOLOGY B. ENGINEERING

128-8 128-8 128-9

VI.

MANPOWER & TRAINING REQUIREMENT A. MANPOWER REQUIREMENT B. TRAINING REQUIREMENT

128-10 128-10 128-11

VII.

FINANCIAL ANALYSIS A. TOTAL INITIAL INVESTMENT COST B. PRODUCTION COST C. FINANCIAL EVALUATION D. ECONOMIC BENEFITS

128-12 128-12 128-13 128-14 128-15

128-3 I. SUMMARY

This profile envisages the establishment of a plant for the production of disk break lining with a capacity of 2,500 tonnes per annum.

The present demand for the proposed product is estimated at 455 tonnes per annum. The demand is expected to reach 6,273 tonnes by the year 2025.

The plant will create employment opportunities for 29 persons.

The total investment requirement is estimated at about Birr 8.72 million, out of which Birr 3.58 million is required for plant and machinery.

The project is financially viable with an internal rate of return (IRR) of 32 % and a net present value (NPV) of Birr 10.68 million discounted at 8.5%.

II.

PRODUCT DESCRIPTION AND APPLICATION

Brake linings are friction materials in vehicles, designed to generate maximum friction between two surfaces and to withstand the heat and wear of which the friction generates.

The brake lining is largely divided in to the resin mold type and roll and flexible type is used only for small cars, it selected the resin mold type brake lining as it has a wide range of users ranging from small cars to large vehicles.

128-4 III. MARKET STUDY AND PLANT CAPACITY

A.

MARKET STUDY

1.

Past Supply and Present Demand

Disk break lining is the interface between the disk brake unit and the disc. Different compositions are currently available for lining material depending on the desired braking rate, including custom lining materials designed to meet a variety of vehicle conditions such as weight, speed and operating environment.

Although break linings can be found just about everywhere there are braking systems from elevator safety brakes to spindle breaks inside a VCR. Disc break linings are used extensively in the automotive industry as a spare part to vehicles, where the lining wears out and has to be replaced.

The supply of disc break lining is met through import. Imported disc break lining in the last ten years was 616 tons annually. However the first two years of 1997-98 show as low as 48 tons while in 1999 the recorded import figure was 369 tons. The estimation of the current effective demand is therefore made excluding these three years and 20002006 average import is considered.

Applying 30% annual growth rate realized in 2005/6 on the average annual import of 350 tons the current effective demand for disc break lining is estimated at 455 tons.

128-5 Table 3.1 IMPORTED DISC BRAKE LINING

Year 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Tons 56.7 48.4 3608.7 196.9 194.2 200.8 234.7 717.8 392.8 512.6

Source: Customs Authority

2.

Demand Projection

The demand for disc break lining is a function of the vehicle population in the country. Since the low level of vehicle population increasingly will further grow, the demand for disc break lining is also estimated to have an annual growth rate of 30%. Thus the demand for disc break lining is estimated to attain 6,273 tons in 2017. Projected demand is presented in Table 3.2.

128-6 Table 3.2 PROJECTED DEMAND FOR DISC BRAKE LINING

Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Tons 592 769 1,000 1,300 1,689 2,196 2,855 3,712 4,825 6,273

3.

Pricing and Distribution

The CIF value of imported Indian lining in rolls of size 90 X 9m is Birr 0.90/m. The recommended factory get price for the same type of product understudy is one Birr per meter.

The product will find out its outlet through spare part shops.

B.

PLANT CAPACITY AND PRODUCTION PROGRAMME

1.

Plant Capacity

According to the market study presented above, the envisaged brake lining plant will have a production capacity of 2,500 tones of brake linings per year working 300 days, single shift of eight hours a day. It is assumed that the specification for the brake lining is

128-7 on the basis that 45x5.6x240-110R (width x thickness x length, inside of lining x radius) and taking the average weight of brake lining is 150 gm per piece.

2.

Production Programme

The plant is assumed to start production at 70% of its capacity in the first year, 85% in the second year, and at 100% in the third year and thereafter.

IV.

MATERIALS AND INPUT

A.

RAW MATERIALS

The main raw materials of disc brake lining are asbestos, resin, friction particle, inorganic filler and organic filler. The major raw materials and related inputs required by the envisaged plant are imported. The annual raw materials costs at full capacity operation are estimated at Birr 11.18 million.

The detail annual raw and auxiliary materials at full capacity production are presented in Table 4.1. TABLE 4.1 RAW MATERIALS REQUIREMENT AT FULL CAPACITY OPERATIONS

Sr. No. 1 2 3 4 5

Description

Qty. (tones) 861 442 221 370 123

Unit cost ('000 Birr)

Total cost ('000 Birr) FC LC 322.88 259.68 355.81 950.90 346.25 Total 1,614.38 1,298.38 1,779.05 4,754.50 1,731.23 11,177.54

Asbestos Resin Friction Particle Inorganic filler Organic filler TOTAL

1.50 1,291.50 2.35 1,038.70 6.44 1,423.24 10.28 3,803.60 11.26 1,384.98

8,942.02 2,235.52

128-8 B. UTILITIES

The major utilities required by the plant are electricity and water. The estimated annual requirement of utilities of the plant at 100% capacity utilization rate and their estimated costs are given in Table 4.2.

Table 4.2 UTILITIES REQUIREMENT

Cost 000 Birr Description Electricity , kwh Water, m3 Qty 120,000 2,500 F.C L.C 56.832 25.00 Total 56.832 25.00

Total

81.832

81.832

V.

TECHNOLOGY AND ENGINEERING

A.

TECHNOLOGY

1.

Production Process

The production process of resin mould type brake lining comprises heating, pressing and molding following the mixing asbestos, resin and other fillers in the form of powder.

After preliminarily molding the blended raw materials with hydraulic press, the mixture is molded by heating with the hydraulic press. The molded product is subject to heat treatment for 4-8 hours to be followed by internal and external grinding prior to inspection and delivery.

128-9 2. Source of Technology

The technology for the manufacture of disc brake lining plant can be obtained from the following companies.

HAJUNG Korea Heavy Industries Construction Changwon shi, Keyongnam Tel 0551-278-6114 Fax 0551-278-5551

B.

ENGINEERING

1.

Machinery and Equipment

Plant machinery and equipment required for brake lining plant is presented in table 5.1. The total cost of plant machinery and equipment is estimated at about Birr 3.59 million. Out of which Birr 2.76 million will be required in foreign currency. Table 5.1 LIST OF MACHINERY AND EQUIPMENT Sr. No. 1 2 3 4 5 6.

Description V type mixing machine Mixing Machine Hydraulic Press Oven Inside grinding machine Outside grinding machine

Qty. 2 2 1 1 2 2

128-10 2. Land, Building and Civil Works

The envisaged plant will require a total land area of 2,500m2. The total land lease value for 80 years at the rate of Birr 0.4967 per m2 is therefore Birr 99,340. The floor space required for the building of and other facilities will be about 750m2. The total estimated cost of building and civil works at the rate of Birr 2,500 per m2 is about Birr 1,875,000.

Therefore, the total cost of land, building and civil works is estimated at Birr 1,974,340.

3.

Proposed Location

It is suggested to locate the disc brake lining manufacturing plant at Kebena wereda in Butajira on the basis that availability of infrastructures like electricity, water; transportation and communication are well developed.

VI.

MANPOWER & TRAINING REQUIREMENT

A.

MANPOWER REQUIREMENT

The disc brake lining plant will require manpower both for administration and production activities. The total number of manpower is 38, of which 9 are administration staff and 29 are involved in production activities.

The total number of labor cost is Birr 504,750.-. The detail manpower requirement and estimated annual salaries are presented in Table 6.1.

128-11 Table 6.1 MANPOWER REQUIREMENT AND ANNUAL LABOR COST

Sr. No.

Monthly Job Title No. Salary (Birr) A. Administration

Annual Salary (Birr)

1 2 3 4 5 6 7

General Manager Executive Secretary Finance and Administration Head Accountant Store Man Clerk General Service SUB-TOTAL B. Production

1 1 1 1 1 1 3 9

3,000 1,000 2,250 1,500 800 500 350

36,000 12,000 27,000 18,000 9,600 6,000 12,600 121,200

8 9 10 11 12 14

Engineer (Production & Technique) Supervisor(Engineer) Quality Control Staff Laboratory Staff Machine Operators Assistant Operators SUB TOTAL WORKER'S BENEFIT (25%) GRAND TOTAL

1 2 1 2 15 8 29 38

2,500 1,800 1,200 900 750 400

30,000 43,200 14,400 21,600 135,000 38,400 282,600 100,950 504,750

B.

TRAINING REQUIREMENT

The Engineer, supervisor, skilled workers and quality control worker need at least four weeks training on the technology, maintenance and quality control. For the rest, on-the-

128-12 job training will be sufficient on the start up period by the specialists. Total training cost is estimated at about 75,000 Birr.

VII.

FINANCIAL ANALYSIS

The financial analysis of the disk break lining project is based on the data presented in the previous chapters and the following assumptions:-

Construction period Source of finance

1 year 30 % equity 70 % loan

Tax holidays Bank interest Discount cash flow Accounts receivable Raw material local Raw material, import Work in progress Finished products Cash in hand Accounts payable

3 years 8% 8.5% 30 days 30 days 90 days 1 days 30 days 5 days 30 days

A.

TOTAL INITIAL INVESTMENT COST

The total investment cost of the project including working capital is estimated at Birr 8.72 million, of which 41 per cent will be required in foreign currency.

The major breakdown of the total initial investment cost is shown in Table 7.1.

128-13 Table 7.1 INITIAL INVESTMENT COST

Sr. No. 1 2 3 4 5 6 7 Cost Items Land lease value Building and Civil Work Plant Machinery and Equipment Office Furniture and Equipment Vehicle Pre-production Expenditure* Working Capital Total Investment cost Foreign Share

Total Cost (000 Birr) 99.3 1,875.0 3,588.0 100.0 250.0 440.9 2,374.7 8,728.0 41

* N.B Pre-production expenditure includes interest during construction ( Birr 290.91 thousand ) training (Birr 75 thousand ) and Birr 75 thousand costs of registration, licensing and formation of the company including legal fees, commissioning expenses, etc.

B.

PRODUCTION COST

The annual production cost at full operation capacity is estimated at Birr 12.51 million (see Table 7.2). The material and utility cost accounts for 89.98 per cent, while repair and maintenance take 0.91 per cent of the production cost.

128-14 Table 7.2 ANNUAL PRODUCTION COST AT FULL CAPACITY ('000 BIRR)

Items Raw Material and Inputs Utilities Maintenance and repair Labour direct Factory overheads Administration Costs Total Operating Costs Depreciation Cost of Finance Total Production Cost

Cost 11,177.54 81.83 113.65 169.56 56.52 113.04 11,712.14 547.52 254.09 12,513.75

% 89.32 0.65 0.91 1.35 0.45 0.90 93.59 4.38 2.03 100

C.

FINANCIAL EVALUATION

1.

Profitability

According to the projected income statement, the project will start generating profit in the first year of operation. Important ratios such as profit to total sales, net profit to equity (Return on equity) and net profit plus interest on total investment (return on total investment) show an increasing trend during the life-time of the project.

The income statement and the other indicators of profitability show that the project is viable.

128-15 2. Break-even Analysis

The break-even point of the project including cost of finance when it starts to operate at full capacity ( year 3) is estimated by using income statement projection.

BE =

Fixed Cost Sales Variable Cost

26 %

3.

Pay Back Period

The investment cost and income statement projection are used to project the pay-back period. The projects initial investment will be fully recovered within 4 years.

4.

Internal Rate of Return and Net Present Value

Based on the cash flow statement, the calculated IRR of the project is 32 % and the net present value at 8.5% discount rate is Birr 10.68 million.

D.

ECONOMIC BENEFITS

The project can create employment for 29 persons. In addition to supply of the domestic needs, the project will generate Birr 5.64 million in terms of tax revenue. The

establishment of such factory will have a foreign exchange saving effect to the country by substituting the current imports.