Chinese economic cooperation with Ethiopia has expanded rapidly over the past decade. In 2011, China was both the largest import and export trading partner of Ethiopia. However, investment relations between these two countries is far from the plan envisioned by the Ethiopian government. At the request of the Ethiopian government, the World Bank surveyed 71 Chinese companies operating in Ethiopia in order to better understand their experience and to draw lessons for future investments. The survey found that Chinese foreign direct investment (FDI) into Africa is on the rise and Ethiopia is at the forefront of this end, reports ELLENI ARAYA, FORTUNE STAFF WRITER.
Ownership Type of Chinese Firm
It has not been hard to spot red spherical lanterns with yellow tassels around Addis Abeba in the last two weeks. These decorations have been put up in areas where Chinese businesses are located, to mark the nation’s New Year.
The abundance of such lanterns in Ethiopia’s capital is perhaps a testament to the increasing Chinese presence in Ethiopia, especially in the business sector.
There are 415 Chinese companies that have taken out licences between August 27, 1998 and October 16, 2012, according to data from the Ethiopian Investment Agency (EIA). However, this figure includes companies who have packed up and left.
China is the topmost export and import trading partner of Ethiopia, and its foreign direct investment (FDI)to the country has grown to 58.5million dollars in 2010, according to a World Bank survey published in November 2012.
Direct Investment from China to Ethiopia
The stock of FDI from China to Ethiopia was 58.5 million dollars while the total Chinese FDI stock reached 403 million dollars in 2010. Out of the 413 Chinese companies operating in Ethiopia, 69pc are owned privately.
Currently, South Africa, Nigeria and Zambia are the highest receivers of Chinese FDI in Africa, which totaled 12 billion dollars in 2011. A survey was conducted by the World Bank in May 2012 at the request of the Ethiopian government, who wants to actively compete for the inflow of FDI from China.
Heeding the request, the World Bank conducted a 95 question survey on 71 Chinese companies investing in Ethiopia and used the data of all but two to make recommendations.
Most of these companies first heard of the investment climate in Ethiopia through the Chinese social network already established here. Families; relatives and friends which are already established in Ethiopia, provide information and bring in additional FDI. As a result nearly all of the Chinese companies surveyed are from three provinces, Zhejiang, Liaoning and Fujian.
Data collected from these companies, of which 45 are in the manufacturing sector; 13 in the construction and transportation sectors and 11 in the service sector, reveals that the political stability of Ethiopia and the growing economy are major attractions for Chinese firms.
In Ethiopia, there is room for the market to develop, so there is low production and labour cost. The market is not competitive as of yet and this attracts Chinese investors since these things are no longer present in their home country, the surveyed companies revealed.
It did not take very long for Li Yue, a 55 year old teacher and businessman from China, to notice Ethiopia’s advantages, when he came to teach at Addis Abeba University (AAU), in November 2005.
“When I was teaching, I attended a lot of seminars in the country and learnt about the construction sector,” Li told Fortune. “I especially learnt a lot when I visited Tabor Steel Mill factory in Hawassa.”
Five months into his teaching job Li left and started a brick production factory in Sidama with a capital of one million Br.
“In Ethiopia labour cost, and the price of wood was very cheap, whereas the price of bricks was high in the market,” Li told Fortune. “Other brick factories in the country used oil or coal to make the brick which was costlier, so I was able to compete at a cheaper price.”
However the 320Km distance from Sidama to Addis Abeba, increased his transportation costs, which he had to reflect in his prices. Li then moved to Holetta, 44Km from the capital, but the raw materials in the area could not be used to make quality bricks.
“It took me four years to figure out a way to use the raw materials and I am now getting back into the business,” he told Fortune.
Aside from his relocation, Li finds it difficult to handle his employess, even though labour is cheap.
Indeed, in the World Bank study, most of the companies surveyed mention that despite the low labour costs, low productivity and skill levels end up costing the company more money. The average education of Ethiopian workers in Chinese companies is sixth to seventh grade, whereas Chinese workers that are brought in are high school graduates.
In the end labour makes up for 33pc of the total cost a project in Ethiopia, in contrast to 22pc of total cost in China, according to the survey which sites Hujian Group, which has a large investment in a shoe factory, as a case study.
Furthermore, Chinese companies do not view the labour regulation in Ethiopia as impartial.
Li for example is of the opinion that the current labour law does not work in a developing country like Ethiopia. “We do not have much right to fire and hire people despite their mediocre skills,” he told Fortune.
He recalls a time where his entire work force went on strike just because he had shared a stern word with one of his employees.
“That’s another thing about Ethiopian labour,” he complained to Fortune. “In China, if a labourer does not agree with the terms and conditions of employment he simply leaves. In Ethiopia however they agree, then fail to perform to the required standard and then go on strike when the management talks to them. ”
Li attributes this to the high unemployment rate in Ethiopia. He currently pays labourers two Birr an hour, but adds a bonus if they perform well to motivate them to work harder.
More than labour costs however, it is trade regulations and customs clearance efficiency; perceived foreign exchange rate risks and tax administration inconsistency and inefficiency that are considered to be the major obstacles impeding FDI in Ethiopia.
All three obstacles are something Chinese car assembler Lifan Motors has faced since it started operations in Ethiopia. Lifan opened an assembly plant on 8,464 sqm of land in Akaki Kaliti district in 2009 through a subsidiary company, Yangfan Motors. It was not new to the market, having previously supplied spare-parts to Holland Cars before their exclusive agency agreement came to a halt after disagreement; at which going Lifan opted to come to Ethiopia and sell seven of its models without point through an intermediary.
The company was enjoying some success, when last July, it was asked by the Ethiopian Revenues & Customs Authority (ERCA) to pay 79 million Br in tax arrears. Claiming that it is an assembler and not a producer, Lifan lodged a complaint with the Tax Review Committee. This argument was not accepted by the ERCA, which stated that excise tax was levied on cars whether produced, assembled or imported.
Lifan regarded this incident as a failure of not being kept abreast of tax regulations within Ethiopia.
“The rules change regulary, and you do not get the same answer from different authority officials when you visit their offices,” Mark Ma, deputy general manager at Lifan told Fortune.
A lot of companies included in the survey are of the same opinion, ranking tax administration as the second largest obstacle Chinese companies face. Laws that were being applied retroactively; administrative limitations of the complaint hearing system; lack of access to legal receipts and the unpredictable timetable of government auditing were all causes for complaint by the Chinese companies surveyed.
“Every move we made, we had somebody knowledgeable about taxes look it over,” Mark told Fortune. “We even went to the Chinese embassy to ask for advice.”
After the excise tax case, Lifan has now hired two full time lawyers to handle issues related to tax matters in order to avoid another hassle.
“Since we are foreigners and the rules seem to be complicated, maybe the ERCA should hold a special awareness seminar for us,” Mark suggested. “We are likelier to make fewer mistakes then.”
The number one obstacle that the companies face is customs regulation according to the survey. Of those who had filled out the questionnaire 32.2 pc of the companies surveyed stated that customs clearance is an impediment to the businesses, who mostly import their items from abroad due to lack of local supply network, according to the survey.
Receiving customs clearance takes almost 47 days in Ethiopia, which is twice as long when compared to China and Kenya, according to the survey.
“The problem got worse when the multimodal system of transporation was introduced and the government insisted that its own transporters must pick up goods.” Says Mark.
“Since late supply of raw material means late delivery, this is very detrimental for our business,” he said.
However, Mark admits that the situation has gotten better, once an alternative port was provided in Addis Abeba and businesses were given the option of picking up their goods themselves, even though this means handling demurrage cost expenses.
Foreign exchange rate risks also rank high up on the obstacle list. Restrictions on transaction and conversion of foreign exchange, in addition to uncertainty about the exchange rates, make it an obstacle for importers.
“Currently it has been tough to open a line of credit” said Mark. ‘Our Bank has told us to wait for six months, even though we need to place orders immediately.”
Despite these risks however, Ethiopia still remains attractive for Chinese investors, the World Bank survey concluded. Of the total number of companies surveyed 49pc stated that they will stay for 10 years or more, whereas 36pc are undecided. A lot of the companies, 48pc, are also eyeing an increase in investment, while 19pc remain undecided.
Lifan for its part, is building an additional plant in Dukem, 37Km from Addis Abeba, and is planning to spend 3.5 million moving its assembly plant to Dukem Indusrial Zone. The company also plans to manufacture cars, and export them throughout the African market.
“Ethiopia is a very stable country when compared to North and West African countries where we have a presence,” managers at Lifan told Fortune.
Recent draft laws that will partially restrict import of second hand cars will also create a better market for Lifan.
“We believe Ethiopia is now at a stage where China was 30 years ago, just when the economy took off” said Mark. “We plan to expand our business and are in it for the long run as we believe the country is on the right track.”
Despite such positive feedback, Ethiopia must actively work on the mentioned obstacles in order to be able to transform the economy from a ‘low productivity agriculture-based economy towards a higher productivity manufacturing and export based economy. Foreign investment is crucial for such structural change, as seen in East Asian countries, according to the survey.
Therefore, streamlining procedures for customs clearance, consistent tax explanations and less frequent amendments; an impartial labour law and increased transparency of the exchange rate policy, and currency convertibility are all essential, the recommendation states.
“All the recommendations made are salient points, which the Ethiopian government must implement not only for the Chinese but for local and other international traders as well.” Robel Debebe, an economist who has been involved in the Airlines Industry for 15 years, and has been managing a finance and business consultancy for the past five years told Fortune.
China is the biggest trade partner to Ethiopia and most of the problems they mention are universal, said Robel.
However, focusing on China alone may bring in bias as China is not a capitalist country and the problems they focus on may be different from other Western countries, according to Robel.
Though Chinese businesses should play a large part in surveys about FDI as they are the biggest trade partner; other large investors from western countries and India should also be included in future surveys, he recommended.
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