Despite being a key component of Ethiopia's Growth & Transformation Plan (GTP), the manufacturing sector is showing only a laboured growth. A number of issues have been blamed for the slow progress, including the poor supply and quality of raw materials and the tax laws. The latter has made it difficult for local companies to compete with imports, reports BINYAM ALEMAYEHU, FORTUNE STAFF WRITER.
With only a year and a half to go before reaching the end of Ethiopia’s Growth & Transformation Plan (GTP), the manufacturing sector is showing only a laboured growth in Ethiopia. The industry’s share in total exports has declined from 14pc in 1981 to nine percent in 2012/13. In the same year, agriculture accounted for 71pc of the total exports.
Manufacturing in Ethiopia started in the 1920s with a simple processing technology that produced agriculture-based products. But the sector is still in its infancy, predominantly semi-processing and performing at an average of around 43pc capacity.
“Manufacturing has neither transformed itself into a high tech processing industry, nor is it competitive in the international market,” says a lecturer at the Department of Mechanical Engineering at the Addis Abeba University (AAU).
The industry has persistently faced high production costs, and a severely constrained supply and poor quality of raw materials and technology, both mainly imported. These areas have witnessed little improvement over the years.
The contribution of the industry for gross domestic product (GDP) has been stagnated at less than five per cent for the last 20 years. Existing technology transfer mechanisms are poorly institutionalised.
Under the GTP, the government envisions the creation of a foundation for the industrial sector to take a leading role in the economy. But the manufacturing industry is still struggling with the same challenges that gripped it for decades.
An inadequate and poor quality of imported raw materials and technologies, along with the low level of technical skills, tops the list of the problems facing the industry. A series of surveys conducted by the Central Statistics Agency (CSA) on the manufacturing sector consistently reported that more than 50pc of firms claim that their major reason for low capacity utilisation is the inadequate supply and poor quality of raw materials.
Local engineering companies, part of the manufacturing industry, are complaining of bottlenecks. Such issues include the large pile up of stock, the absence of an automotive policy and a lack of transparency in government auctions, among others. These are deemed to be constraining their competitiveness in the market.
The state-owned Metal & Engineering Corporation (MetEC) is at the forefront of the grumbling about being unable to become competitive in the market. This is despite a huge product inventory worth 13.6 billion Br waiting for potential buyers. Its private counterparts, comprising, among others, of Maru Metal Industry Plc, Mesfin Industrial Engineering (MIE), Belayab Engineering Plc and the Automotive Manufacturing Company of Ethiopia (AMCE), have joined it in complaining of market constraints. These industrial companies also have a production inventory worth 89 million Br. The MIE has an inventory of 12.2 million Br, while Belayab, Amiyo and the AMCE have 55.2 million Br, 928,000 Br and 20, 6339 million Br, respectively.
“We have over 9,000 tractors sitting idle while millions of farmers are in need of them,” Kinfu Dagnew (Brig. Gen.), the MetEC’s director general, says.
The MetEC has manufactured 479 buses of varying sizes, 524 trucks, 772 light vehicles, 197 forklifts and 90 motorbikes between 2011 and 2014.
Born in 2010, emulating the experiences of South Korea and Sweden, the MetEC incorporates close to 70 state-owned enterprises in the engineering sector, alongside seven military hardware manufacturing entities, while commanding over 12,000 employees.
A huge amount of product inventory remains in stock, representatives of the engineering companies complained, due to considerable import at lower prices.
“Many potential and real customers still have proclivity towards importing, rather than purchasing locally made materials,” a representative of one of the companies said.
Several government institutions, the companies said, do not pay on time, thus causing them to wait for a long time without payment.
Combined production from Maru, the MIE, Belayab and the AMCE amounted to 751.6 million Br at the end of the 2012/13 fiscal year, up from just 128.5 million Br in the previous year. Production at the four engineering companies has reached 357.9 million Br during the first quarter of the current budget year. The volume of sales at the four companies registered a whopping increase during the 2012/13 fiscal year, reaching 742.5 million Br, up from 113.9 million Br. During the first quarter of the 2013/14 fiscal year, 425.6 million Br sales were registered.
Mesfin is particularly known for the manufacturing of dry cargo body mounted trucks, three-axle fuel draw bar trailers and three-axle dry cargo semi-trailers, among others. Maru has been penetrating the market by manufacturing van and cargo bodies and factory equipment. Belayab, on the other hand, manufactures station wagons, pickups and sedan automobiles. The AMCE’s specialisation has been in trailers and cargo bodies.
The manufacturers’ other concern was the disparity in excise tax between imported and locally manufactured vehicles. The excise tax paid for the latter is higher than the former, they complained. Excise tax for imported vehicles is only paid once, whereas manufacturers are required to pay excise tax twice for locally manufactured vehicles. The manufacturers also grumble about similar prices in some cases, which they say discourages buyers from going for locally manufactured cars.
“The same amount of excise tax is required to be paid for purchasing vehicles from abroad and buying locally manufactured ones,” says an official at Maru. “This dispirits local manufacturers.”
Other worries from the manufacturers are related to delays in customs clearance. When imported ingredients are delayed, manufacturers are subjected to unplanned costs. This is in addition to delays at ports, according to the manufacturers.
The manufacturers also had issues with customs. They requested a tax reduction for companies engaged in assembly work.
For deputy director general with the Ethiopian Revenues & Customs Authority (ERCA), Kaydaki Gezahegne, a timely customs service will extricate delays in customs clearance. He underlined the urgency of halting accounting errors committed by some staff members and unnecessarily postponing decisions.
Where he disagreed was with the excise tax. The Authority does not regard excise tax as constraining manufacturers. Since withholding tax and VAT are paid by users and not manufacturers, the latter should not complain about multiple taxes.
But for some in the manufacturing industry, the over taxation emanates from deviation on the part of some customs officials from established procedures.
“Although we have to be taxed in accordance with the commercial invoice we submit, a different scenario is taking place,” complains one. “Established procedures are not respected.”
The need to develop appeal and pride in domestic products is of paramount importance, says the official from Maru.
“Preference for imported over locally manufactured cars has contributed to the failure to become competitive,” he complained. “This has to do with prices of imported cars being taxed less than their imported counterparts.”
But the low level of confidence in locally manufactured cars also leaves much to be desired, he says.
Another issue – one on which the engineering giants quickly won the nods and appreciation of the government – was with the need for an automotive policy for the country. A representative from the MIE called for a rethinking of the transport regulation system in the country, calling for the legislation of an automotive law.
“The market is being infested by low-cost, older model cars,” he grumbled. “We need a legislation to protect local industries and ensure safety.”
Data obtained from the Ministry of Transport (Mot) in late 2013 indicates that 58pc of vehicles in the country have been in use for over 16 years.
Some in the government agree that there is a need to draft a policy guiding the automotive market in the country. Representatives of the MoT, who supported the idea, said that their Ministry was in the midst of a study designed to find ways of limiting the importation of used and old model cars into the country. But some among the government circle seemed to find the idea of limiting older models unfeasible.
“We need to consider that millions of people eke out their living from commercial activities by using old vehicles,” protested Teklewold Atnafu, governor of the state-owned National Bank of Ethiopia (NBE). “So the idea of clearing the country of older cars is really not feasible.”
During the current budget year, the Ministry has targeted earning over USD one billion from the manufacturing sector. Even though the current year’s projection is very high compared with the past year’s achievement, it is still below the original GTP target for this year, which is only two thirds. The original plan indicated that the sector has to generate about 1.6 billion dollars in the 2013/14 fiscal year.
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