Infrastructure is unlocking new manufacturing sector opportunities in Ethiopia

Hawassa Industrial Park, built by Chinese contractors, is already attracting global manufacturing firms. Source: Author's photograph

Hawassa Industrial Park, built by Chinese contractors, is already attracting global manufacturing firms. Source: Author's photograph

From the moment you touch down at Addis Ababa Bole International Airport, you’re struck by the volume of construction work ongoing. It’s a world away from the country that had a tumultuous latter half of the 20th century; featuring the nationalization and destruction of all industry under the communist Derg regime, one of the world’s worst famines in the 1980s, and a war with its neighbor Eritrea that only came to an end in 2000. At that time, Ethiopia was the world’s third poorest nation, and in effect, entered the 21st century with a blank slate.

Ethiopia’s growth since then has been startling; only China and Myanmar saw higher GDP per capita growth rates between 2000 and 2016. Ethiopia’s development focused government prioritized infrastructure build-up; in airports, rail, dams, power-stations, refineries and special economic zones.

The flagship Addis-Ababa to Djibouti railway now reduces journey times from 3 days to 9 hours; giving Ethiopian goods access to a well-located port with routes into Europe. Ethiopia’s electricity prices are low by African standards; and 86% comes from renewable sources. The Grand Renaissance Dam remains under construction, but once finalized will be the biggest dam in Africa. Ethiopian Airlines has made large investments in modern aircraft and cooling facilities and now flies to around 100 destinations worldwide. Hawassa Special Economic Zone is state-of-the-art, and is attracting global manufacturing firms to relocate their production to Ethiopia.

All these are clear examples of Ethiopia’s infrastructure push. In many cases, this infrastructure is being constructed by Chinese contractors, and hence falls under Beijing’s Belt and Road Initiative. However, as we’ve argued before, for infrastructure to yield worthwhile returns, it needs to spur the development of industry.

In this regard, Ethiopia is making progress, and has put special emphasis on developing its manufacturing sector. Ethiopia has a vision to become a light manufacturing hub in Africa over the next 10 years and the government is aiming for annual manufacturing growth of over 20%. Manufacturing jobs, standing at 380,000 in 2015 are expected by the government to increase to 758,000 by 2020 and 1.5 million by 2025. Most of the manufacturing sector’s growth is expected to come from light manufacturing and agro-processing industries, with an emphasis being put on those industries which will produce for export.

This is ambitious; but despite recent political transition, the government remains steadfast and is playing a key facilitating role in driving the growth of the manufacturing sector. Crucially, new infrastructure has lowered the cost of inputs into the manufacturing process (e.g. electricity) and also lowered transport and logistics costs. The combination presents an interesting commercial opportunity for firms seeking to enter the manufacturing space in Ethiopia.

Ethiopia’s manufacturing wages are around $50 a month, compared to around $300 in Vietnam and $500 in China. Yet, historically, firms did not move to Ethiopia given an unreliable power supply and high logistics costs in the landlocked country. That is beginning to change. Ethiopia’s special economic zones (SEZs) go further in helping foreign firms lower their cost base; they provide long-term rental contracts, import tariff exemptions as well as remove restrictions on capital repatriation. Importantly, the zones are more functional in comparison to SEZs in other African countries.

New infrastructure is also permitting linkages through the Ethiopian economy. For example, when infrastructure was lacking, a textile firm would be reluctant to set up in Ethiopia if there was an unreliable supply of cotton inputs. New infrastructure improves access to these inputs, and thereby lowers time to market in an increasingly competitive global apparel industry. Some manufacturing operations we spoke with in Ethiopia had reduced their lead time down to 21 days.

Ethiopia also benefits from preferential access into the US market through the African Growth and Opportunity Act (AGOA). For companies based in countries subject to US import quotas on textiles, such as China, moving production to Ethiopia in order to reach the US market would save additional costs and free them from burdensome US restrictions.

Of course, there are still challenges. Cultural gaps between managerial styles has resulted in high labor turnover in factories, productivity remains low (albeit on the rise) versus international standards, and a forex crisis has made it harder to take money out of the country.

Yet, there can be little doubt, that with new infrastructure and a committed government, the manufacturing sector in Ethiopia has become a more compelling proposition for foreign firms, and has unlocked a whole new commercial opportunity. This is vindicated by firms including Philip Van Heusen (PVH), H&M, Tesco, Gap, Belk, and Walmart basing their production in Ethiopia. The government has worked closely with these first mover firms, listening to their advice and feedback. These close collaborative partnerships are highlighted by remarks made by Mark Green, executive vice president of global supply chain at PVH, who said “I don’t know of any other sourcing country where there’s been such an alignment between the government’s vision and industry’s vision.”

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