Weaving the Yarn Around GTP II




Konoria Chemicals & Industries, an Indian company established by foreign direct investment in Ethiopia two years ago, owns a plant in Bishoftu, Oromia, where it produces cotton yarn for the local market and for export.

The company has leased 150,000sqm of land and the factory building rests on 25,000sqm. It took four months for it to get land in Bishoftu, more quickly than the year it took a local company, Bekas Chemicals Plc, to get 12,000sqm in Adama, Oromia. While the Indian company is undertaking expansion ambitiously, the Ethiopian investor is already considering export market in Kenya. Their stories reflect unique challenges faced by local and international manufacturers in a fast growing economy.

“We are now expanding our plant to be able to produce fabrics and incorporate dyeing and finishing works,” says Sandeep Dahiya, general manager of the Indian yarn maker.

Konoria has been in business in India for 22 years before answering to the call to invest in Ethiopia. Dahiya gives four reasons why his business will prosper in Ethiopia, despite challenges: Africa is the centre of future investment; Ethiopia is politically stable; secure manpower is abundant, and the cost of energy is lower in Ethiopia.

His company’s challenges include the shortage and high cost of cotton. This and other problems are central to the poor growth of manufacturing in Ethiopia.

The industry sector, particularly manufacturing, is not growing at the pace the government needs it to, in order to achieve middle income status by 2025. Increasing the share of industry to GDP is one of several measures aimed at accelerating this pace.

“We want to promote the manufacturing industry as it accounts for 70pc of the global trade, and many manufacturing industries enjoy significant degrees of increasing returns,” says Ahmed Nuru, Policy, Programme Monitoring & Evaluation Director for the Ministry of Industry (MoI).

One of the biggest flops of GTP I was the manufacturing sector. The government had planned to collect export revenue of 1.3 billion dollars in 2014/15, but it only managed 398 million dollars. Presenting his Ministry’s six month’s report for the fiscal year 2014/15 to the Parliament, Industry Minister Ahmed Abitew had blamed the problem on manufacturers’ deliberate shunning of the export market in favour of the domestic market. The price of yarn in Ethiopia, he said, was higher than that of the international market.

“The cost of a kilogram of cotton in Ethiopia is at least 15pc higher than the cost in India,” Dahiya counters, a problem commonly shared by the textile sector.

He buys a kilogram of cotton in India for 32Br and in Ethiopia for 37 Br.

“The effect of the quality problem is also considerable.”

Cotton has three quality standards – deteriorated, medium and high quality, with the last one preferred to the export market sometimes blended with the medium one. The first one is mostly used for the local market.

Manufacturers who had a commitment to export 80pc of their products are actually selling their products in Ethiopia, the Ministry of Industry accuses. Among those named by the Ministry are: Else Addis Textile, Etour Textile, Sigen Dima Textile, Bahir Dar Textile, Angels Cotton & Textile, Kombolcha Textile, Huaksu Textile, Dongfang Spinning, Printing & Dyeing, Noya Textile and Adama Spinning.

Still the government continues with hope.

Ahmed Nuru says that the country has different opportunities in textiles because of the cheap labour; in leather and leather products because of the livestock population; and in agro–processing, because of the raw materials available.

The Ministry has been encouraging the involvement of local investors in the manufacturing sector but their initiatives do not seem to be bearing fruit.

Of the total 3,013 domestic investors licensed between 2005 and 2015, 58pc are in the service sector, 29.1pc in the agricultural sector and only 12.9pc are engaged in the manufacturing sector.

And from the total 3.4 billion Br these investors deployed, 54.6pc was in the service sector, 22.8pc in agriculture and 22.6pc in manufacturing.

“Manufacturing is the last choice in both investment preference and capital deployment,” Ahmed complained.

Compared to the 1, 767 foreign direct investments the country received during the same period of time, 750 were in the manufacturing sector representing 42pc of the FDI in the country, while the 10pc was in the agricultural business and 48pc in the service.

One of these local investors is Bekas Chemicals Plc which was established by seven family members in 1994 and became operational in 1997. It manufactures soaps, synthetic detergents, cosmetics products, packing materials production and industrial surfactants, with plants in Adama and Mekele, Tigray, where it employs 350 people.

Behind its disappointments is actually a success story of growing from a small scale manufacturer to one with capital of three million dollars and an annual turnover of five million dollars, according to its website.

“The market for the soap and detergent is very wide and there is cheap labour with which productivity becomes effective,” said Bekele Tsegaye, the general manager of Bekas and the president of Ethiopian Chemical Products Producers Association.

His major challenges are shortage of finance and electricity. And he is also not without challenges to expand his company, he said.

“Getting foreign currency is bureaucratic and time consuming,” he stated. “It might take up to three months to get foreign currency from banks.”

Banks require investors to have savings of 30pc of the total investment so that the investors can get 70pc of their investment as loans. The requirement for the investors who are already operational is to have 40pc of the deposit and they will get the 60pc of their investment from banks in loans.

“This needs policy consideration,” he argued.

The second GTP estimates the financial demand for the sector will reach 1.13 trillion Br. However, working in a country that has an annual generation of 2,300MW of electricity, these factories face frequent power cuts and they have a long wait in order to get the amount of power they have requested. This is true both for Konoria and Bekas.

Bekele had waited for a year after applying for a 500kw electricity line. While waiting for the power upgrade, he has to operate his machines in a shift system.

The inconsistency of electricity is also one of the challenges of these manufacturers. In this fiscal year, electricity cuts in textile factories totalled 945 hours with Ayka Addis suffering 253 hours of power cut. Bedesta Industries follows with 140 hours, Adama Spinning Factory with 106 hours, Village Industries 70 hours and Bahir Dar Textile 32 hours.

“The power inconsistency hugely affects the quality of the products that we produce,” Dahiya said.

The Ministry also recognises these energy sector challenges admitting that there are consistent power cuts and poor connectivity. It hangs its hope on the plan of the second GTP, to produce 17,347MW of electricity by 2020, more than seven times the current level.

The plan also includes increasing transmission lines from the current 12,825Km, to 21,728Km. The ambitious plan in GTP I was 10,000MW; nevertheless a month into the second GTP, Ethiopia’s power supply stands at 2,300MW.

The other hindrance to the growth of the manufacturing sector, particularly by domestic investors, is getting land for investment, as the government avails industry zones for international companies alone as foreign direct investment. This is a serious challenge for Bekas’ future growth, according to its general manager, who is looking forward to tapping into the neighbouring Kenyan market.

The solution to part of his problem might come in the second GTP, which aims to avail seven million square metres of land for the manufacturing sector. It also aspires to have the industry contribute 5.5pc, 7.5pc, nine percent, 10pc, and 11pc of the GDP in the five consecutive years. Export earnings are planned to be 544 million dollars in the first year, 1.07 billion dollars, 1.7 billion dollars, 2.4 billion dollars, 3.3 billion dollars and 4.6 billion dollars in the following four years.



By BROOK ABDU
FORTUNE STAFF WRITER

Published on Aug 03,2015 [ Vol 16 ,No 796]


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