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

The least developed country on market economy

Date: October 10th, 2014

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.

Tailoring workshop in Ethiopia benefiting from cheap labor cost (Photo: ABP)

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 Wages of factory workers (Surveyed by Africa Business Partners, at October, 2014)

Wages (monthly)

Ethiopia US$40-60

Kenya US$140-160

Bangladesh US$70-90

Vietnam US$150-170

China US$400-550

Turkey US$400-800

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
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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.

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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”,

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 The first mobile assembly factory in Ethiopia (Photo: ABP)

“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

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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.

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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.

Food processing factory in Ethiopia (Photo: ABP)

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

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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.

Coffee chain store in Addis Ababa (Photo: ABP)

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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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