D-Day for Ethiopia’s Textiles Industry

Fistum Hagos seems well aware of the risks involved with investing into the textile sector. With his familiarity of the nitty-gritty of the sector for so long as a supplier of accessories to the manufacturers and later managing one of the leading local textile companies, he is confident of himself and the new setting, inside the Hawassa Industrial Park (HIP), he has chosen to kick start his venture.

Selina Trading Plc is one of the six local companies that made it into the first of its kind specialised, apparel and textile industry setting in Ethiopia.

“Though the setting differs, some fundamental challenges will be the same,” said Fistum, general manager of Selina. “We believe that we can be competitive given the hard journey we have had and the dynamics ahead of us.”

One of the problems now solved for Selina was land.

The company submitted a request to the Addis Abeba City Administration for investment land two years ago; a request that got no response to date.

Deciding to curb the problem of land, it has persistently applied to be among the local industrialists that passed through the selection process and scrutinising eyes of Arkebe Oqubay (PhD), who is in command of the industrial park wave, focused on foreign direct investment (FDI) and exports.

After the scrutiny, not only do the local industrialists enjoy free land, but also a range of attractive incentives.

“The package is fair and necessary,” Arkebe asserts. “The incentives come with responsibilities; everybody has to live up to the set productivity and export earnings goals.”

With 100 pc of products dedicated to high quality exports, the HIP is expected to generate an annual gain of one billion dollars.

During the early years of the GTP I, the government planned to export a billion dollars’ worth of products, but managed only half of this target. It also targeted 2.5 billion dollars in the gross value of products (GVP), but achieved only 1.2 billion dollars.

Additionally, textile was considered as one of the labour intensive sectors capable of creating more new jobs during this period. In this respect, the creation of 40,000 new jobs was said to be the target, with 27,806 jobs achieved.

Now, the sector has been able to absorb a little over 53,000 people. In addition, as of the completed fiscal year, the sector has collected 78 million dollars from the export market, while its plan was to collect 165 million dollars.

Out of the total sum of gained revenue of 455 million dollars in GTP I, 20pc of it was contributed by companies like Adama Spinning Factory, Bahir Dar Textile SC, Bay Kebire Enterprise, ELESE Addis Industrial Development Plc, Kombolcha Textile SC, MNS Manufacturing Plc and Selendawa Textile SC.

However, one of these companies, Selendwa, has just been entered into the foreclosure process by the CBE, because it failed to pay back its loans.

Not only had it scored a disappointing export earnings, but too it failed to meet the high hopes of government policy makers that it would absorb a huge number of skilled and unskilled workers.

The Former Prime Minister, Melese Zenawi, is remembered as a champion of the textile and leather industries.

International giants, Pittards Leather, Ayka Addis Plc and others, particularly from Turkey, now have a presence in the industry and are the fruits of his personal engagement with the CEO’s.

The leading Turkish companies, which set the pace of FDI-led textile industry, include MNS and Saygin Dima.

The government, back then, even went to the extent of creating a joint venture with the foreign companies to help out in the beginning and ease the business processes.

Saygin Dima is a case in point.

Then, the privatisation agency facilitated Saygin to acquire 60pc of a textile plant in the Oromia region, Dima Wereda.

The joint venture, Saygin-Dima, was originally a 60-40 share between the foreign company and Ethiopian government.

It was a buzz model to attract others too.

However, from the start this company could not meet expectations. Over the past eight years, the company could only meet less than half of its productivity potential.

This year, the giant Saygin has managed to export only twice and manages to earn just 105,000 dollars. These issues have now resulted in the company being put under a foreclosure by the Commercial Bank of Ethiopia in a bid to return more than half of the billion-birr loan it gave to Saygin.

It is not just Saygin that is found to be in a state of sickness. The whole industry is marred by symptoms.

Challenges of input, incapacity to compete in the international market, capital intensity and workforce are among the formal factors repeatedly mentioned by investors who are in the business, as well as those local businesses that shy away from delving in to the industry.

The promoters of the textile industry at the Hawassa Industrial Park claim to have learned from the past, and made it right.

“Previously, we focused on facilitation and infrastructure for investment and accepted whoever came,” Fistum Arega, commissioner of the Ethiopian Investment Commission (EIC) argued during a consultative meeting on industrialisation with Japan’s delegation, two weeks ago. “Now, we are proactively targeting quality and efficacy from the existing international players.”

This is besides the many other facilitations the Hawassa package includes.

Among these, the crucial ones include a one-stop government service: customs, immigration and banking. A police station, fire brigade, clinic and training facilities are also all hosted in there.

The revamp in the way the country has tried to attract FDI into the manufacturing sector seems to bear fruit.

The Anchor investor to the park, PVH Corp, has more than a century of experience.

Over the years, the company has accumulated a rich heritage, owning the iconic Calvin Klein, Tommy Hilfiger, Van Heusen and others.

It’s standing as the second buyer in the international market is hoped to translate into a single buyer at the Hawassa industrial park.

Besides this, there are 14 other companies from all over the world: Raymond and Arvind from India; Hydramani from Sri Lanka; two from Europe, Chargeurs and Ontex; Hong Kong’s three TAL, EPIC and MUST, and Busana from Indonesia.

It is only fair to be optimistic about the future and assume that it will have a huge impact on employment, knowledge transfer and export earnings.

Not so many, however, connected this leap with the existing wounded industry, marred by foreclosure at the worst and underperformance at the best.

The impact of the new phenomena – specialised apparel and textile Industrial Parks – on the scattered and already struggling companies is yet to unfold.

“The Industrial Parks now and in the future should not be considered as islands from the existing system in any industrial or manufacturing endeavour,” Abebe Abebayehu, deputy commissioner at the EIC, told Fortune.

Doors are open for the standalone industrialists outside of the Park to fit into the chains.

“If they meet the standards of PVH, the anchor buyer in the Industry, they are welcome to do so.” said Abebe.

He has also indicated that there are studies launched by the Ministry of Industry to see the integration of the existing industries

In the meantime, players cry out their worries.

“The sector is suffering,” said a banking expert at one of the state owned bank’s recovery departments.

His department mainly works on rehabilitating sick client companies or sending them to auction. Issues, like the inefficiency of the companies due to a shortage of raw materials, management gaps and inability to compete at the export market are some of the major questions mentioned by the factories.

In addition to the CBE, the Development Bank of Ethiopia has also put the Dire Dawa Textile Factory under foreclosure.

In the 2014/15 fiscal year, the Bank planned a loan portfolio of 14.56 billion Br, but achieved only 9.69 billion Br – five billion birr less than it planned. The disbursement of loans only reached halfway through the plan. At the same time, the Bank incurred an increase in its non-performing loan (NPL) portfolio by 100pc to 3.4 billion Br. In 2014, out of 432 loans disbursed, 69 of them went to the textile companies, while the next year out of 472 loans, 63 went to the sector.

The fact that there was a thrust for foreign investment back then, they were simply allowed to enter the sector with little preparation, argues Fistum.

Cotton, as a raw material, has always been a challenge for the sector. The sector is being led by farmers with no specialisation in cotton development and conducted in a scattered manner. This led to its failure not to fulfil the demands of the textile sector both in terms of quality and quantity. In this respect, Ethiopia is yet to develop its own strategy.

Just this week, a local company called Enterprise Partners (EP) have signed an agreement with the Ministry of Industry to prepare the study.

Even if the masterminds behind the development of industrial parks express their intention of solving the problem using biologically modified cottons, experts in the field advice that this is something that should be treated carefully.

“Its usage needs a clear implementation mechanism and we don’t have that now,” said Tewodros Yilma, intervention manager on cotton & textiles at EP. “So, bringing this to the table at this context will have a disastrous impact.”

It was almost two years ago that Ethiopia amended its law – “a proclamation to amend the biosafety” on the use of BT cotton and the law. At the moment, the cotton is still at the experimentation stage.

“We have to learn first from other countries before getting into it,” said Tewodros.

A scoping study made to develop the cotton strategy indicates that Ethiopia’s average cotton productivity is still at a low level in comparison with other countries. The national average annual yield is 17qt a hectare. The domestic production has a gap, with close to 70,000tn of lint being imported annually.

A further study by EP will include, among other things, production and productivity, policy and regulatory frameworks. The study will also see support service systems for the sector and institutional frameworks.

In terms of financial support, those who will be involved in industrial sectors are said to have been offered loans of up to 75pc of the investment cost from the DBE, pay for up to 85pc of the cost to train employees overseas, a tax waiver for 10 years to those companies fully exporting their products and the slashing of fees in opening letters of credit (from 3.5pc average down to 0.5pc).

Moreover, other banks will also take the responsibility to lend working capital.

“If other banks are involved, we can focus on other loans,” said Esayas Berhea, president of the DBE. “Once we give loans for base working capital, the rest could be covered by other banks.”

The bank usually gives a holding capital enough for three months. This loan is in principle supposed to translate into investment within the given months.

However, given the inefficiency in logistics, ports and customs, the investors could not translate the loans, said Esayas.

The latest audit reports by the auditors’ general office show that the Bank has taken the risks of giving loans against directives by the National Bank and its own loan policy. The DBE violates the single borrower’s limit, which stated that loans disbursed to private customers of business organisations must not be more than 25pc of the bank’s paid capital. However, the Bank has disbursed loans to 17 projects above the single borrower limit – most of them are projects by textile factories, such as Ayka, MNS, ELSE, Almeda Textile, Etur and Akper Textile plc.

“Back then, our paid capital was not sufficient; we could not keep up with the required standards,” said Esayas.

It was just three months ago that the DBE increased its paid up capital from five billion birr to 7.5 billion Br.

“I believe with the coming of industrial parks, the efficiency of the investors will increase,” said Esayas. “On the other hand, it will reduce the risks of the NPL.”

In the first six months of the 2015/16 fiscal year, the DBE reported that 60pc of its 3.4 billion Br non-performing loans comes from just the textile sector.

Yet, in another dimension of support schemes, the Institute of Textile Industry Development is mandated to provide investment promotion, consultancy, training, study and research, laboratory and marketing support, and services. Written in bold on its official website, it states that making the Ethiopian textile industry competent in the global market by 2024 is its major vision.

Left with eight years with its target vision, the Institute is a source of dissatisfaction among industry players.

“It could not even save these textile companies who are in a trouble,” said Fistum. “It was supposed to produce a number of research studies that could be an input to the investors and other players in the sector.

“The sector, especially given the coming of this new demand, is supposes to be integrated,” he further commented.

However, for him, the challenge of cotton development seems an overarching gap in a short period of time – at least in the coming five years. His company sees other raw materials, such as polyesters, as an input for its garment fabrics.

The foreign companies who havd now entered the Hawassa Industrial Park, are well known companies and they are a market led investment. They have their own market and will import everything from outside.

Ethiopia has a plan to earn one billion dollars from this park alone and another one billion dollars each from the remaining four.

“Along the way, Ethiopia has to work on substituting the imported items for this textile. Otherwise, it will definitely affect the net export revenue, even if we manage to increase the export value,” commented Fistum.






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