Textiles FDI Booming But not Without a Challenge



With many graduates spending months if not years trawling around town in search of job opportunities, the graduate employment offered by Turkish textile factories is most welcome. Bahir Dar University students are the current beneficiaries, with the only course specific to the sector in the country. There are, however, a number of obstacles for the industry to overcome before reaching anywhere near its full potential, reports BEWKET ABEBE, FORTUNE STAFF WRITER


Aware that ever-increasing numbers of graduates must pound the streets for months on end before finally finding employment, Gadissa Regassa and his friends could not believe their luck when a potential employer came direct to their school, Bahir Dar University’s Department of Textile Engineering, to recruit them as they graduated.

“I was surprised,” said Gadissa. “My seniors in different fields of study have been knocking on each door they can find to get a job.”

Not only did they not have to look far to get employed, but the compensation was beyond what they had expected. In addition to a 2,900 Br monthly salary, housing and food expenses were to be covered by their employer. The allowances were particularly irresistible for Gadissa, who did not waste time in accepting the offer.

He was one of 42 new graduates from the school who showed up for their first day of work on September 1, 2013, at Angel’s Cotton and Textile Production Plc – a new Turkish textile factory located in Legetafo, 25 km from Addis Abeba.

Soon after starting work, however, Gadissa and his friends realised that demand for graduates in textile engineering is not as low as they had thought.

“When compared to the demand, we could be paid even more,” he said.

The demand that he is referring to was created mainly after 2010, when a number of foreign textile companies began arriving in Ethiopia.

Though the country’s textile history began in 1939, following the establishment of the first textile company during the Italian occupation, it is only recently that it has started growing and taking a more prominent place in the country’s economy.

With a per capita fibre consumption of roughly one kilogramme, which is far below the world average level of 8.7 kg and the Africa average of 3.2 kg, the country has great potential, which needs to be used properly, according to a research conducted three years ago in the African Growth & Opportunity Act (AGOA).

The figure has increased at an annual rate of five percent and the large and continuously increasing domestic market will fuel the development of the textile sub-sector in the near future, according to another research conducted recently.

This is the type of potential that the government hopes to use to change the country’s economy, transforming it from the current agrarian model to an industrial one. In fact, the government has such grand plans for the sector that it targets no less than one billion dollars in export revenue from textiles alone by the end of the Growth & Transformation Plan (GTP) in 2015.

Achieving this target requires Foreign Direct Investment (FDI), leading to a strong push by the government to attract foreign companies. Indeed, lobbying by the late Prime Minister Meles Zenawi and current President Mulatu  Teshome (PhD) – who was an Ethiopian ambassador to Turkey until  recently – is thought to have played a major part in bringing Turkish manufacturers to the country.

The textile sector in Turkey plays a key role in that country’s economy, accounting for up to seven percent of its GDP, according to data from the Turkish Ministry of Economy. The country is the second largest supplier of textile products to the European Union, and is in the top five exporting countries in the world.

This strong global presence is built on the back of its 40,000 textile and clothing manufacturers, some of whom the Ethiopian government hoped to attract in order to kick-start the country’s textile exports.

Ayka Addis Textile Group was the first such company to enter the country with an 140 million-dollar investment, ushering in an influx of Turkish manufacturers.

Since then, some 400 Turkish companies have eyed entering the Ethiopian manufacturing industry – about 55 of them specifically looking at the textile sector.

To date, 16 Turkish companies have obtained licenses for textile production and are currently at varyious stages of implementation – while some are still building factories, others have already started production.

Overall, there are about 40 large textile companies already in production in Ethiopia, in addition to a few dozen smaller ones. Only Bahir Dar University provides specialised education for the sector, however.

Taking this fact into account, Gadissa claims that the incentive he is provided with is not enough.

“Of course, it is better when compared to the local scenario. But what you are given and what you are expected to do is incomparable,” he says, adding that the graduate engineers work for eight to 10 hours a day, including Saturday.

However, this cheap labour is one of the factors that attracted the investors to Ethiopia in the first place.

“I know that I cannot hire at such a monthly salary in Turkey,” said Aron Ancel, president of Angel’s. “But it is advantageous to the graduates as well, since I provide them with a better salary than the local market.”

Indeed, Turkey has enjoyed a period of strong growth over the past dozen or so years, almost tripling its income per capita, from 4,220 dollars in 2000 to 10,700 in 2012, according to World Bank data.

In addition, Ethiopia, unlike Turkey, is a beneficiary of the US government’s AGOA programme. This allows quota and tariff-free imports into the US from select countries and sectors, such as textile and apparel.

This made the prospect of moving to Ethiopia attractive to Turkish companies, who were also given incentives by the government. It promised the Turkish companies to provide them with free industrial space among other enticements.

In return, the companies agreed they would export at least 80pc of their production, in line with the government’s aim to enhance foreign currency earnings.

However, the road has been bumpy for the investors once they decided to move to Ethiopia.

First, the government revised its proposal that it would build an industry zone specifically for foreign companies and provide it for free if they exported their production. Rather, it is giving land in different areas and letting the investors build their own factories or rent already built ones.

“The first proposal was not benefiting the country,” said Tadesse Haile, state minister of Industry.

Most foreign textile companies have thus settled in Addis Abeba and its outskirts, paying land lease prices that range from 1.50 dollars to 13.25 dollars a square metre. This is as the lack of adequate infrastructure in other regions discourages them from venturing out.

In addition to the lease issue, the Turkish companies seem to be attracted by the local market and see the 80pc production export target as a hindrance.

“I came here to access the Ethiopia market, as well as the African market, which is easily accessible from here,” said one company owner who talked to Fortune on the condition of anonymity. “I have no reason to go through the long customs process, while there is a situation where I can sell in the local market.”

The government, whose GTP deadline is looming larger by the day, does not intend to change the export benchmark it set for them, however.

“We know there are things that should be improved,” Tadesse told Fortune. “We encourage them to export instead of providing their products to the local market.”

Unreliable electric power distribution, a customs bureaucratic maze and limited access to credit are some of the other issues confronting the investors.

The last two have been particularly difficult to handle and must be addressed soon, explained Umit Erdogan, owner of Bultaks Textile.

“How can I do my job as a company if I have to wait months to get a letter of credit and other related documents from the banks?” He asked.

His view is echoed by other businessmen who talked to Fortune, who stated that the private banks are just as bureaucratic as the state, and take too long to even deny credit applications, let alone approve them.

The slow pace of improvement, particularly when it comes to access to finance and customs issues, has been so cumbersome that a group of Turkish investors will meet Prime Minister Haile Mariam Desalegn in the coming week. Here, they will discuss these problems, according to Tarik Bozabey, chairperson of the assembly of Turkish exporters in Africa.

Even though the approach of the higher levels of government is not problematic, the lower level is a whole different story, according to him.

“Bureaucracy at the lower level is tight and suspicious,” said Bozabey. “For instance, to limit your visa to three months means ‘do not come’.”

Some of these issues have not remained unnoticed by the government, which aims to create 40,000 job opportunities in the textile sector by 2014/15 and close the gap between actual revenue and its ambitious targets. Indeed, although the 29 million dollars earned in the first quarter of 2013/14 is more than a 50pc improvement over the same quarter last year, it is still far short of the half a billion dollar target for the end of this fiscal year.

The Ministry of Industry’s (MoI) quarterly report released a month ago notes that most of the factories use no more than 40pc of their capacity, for instance. This is due to lack of sufficient power. This is in spite of the Ministry aiming to boost their production to 80pc of capacity.

The MoI, together with the Ethiopian Electric Power Corporation (EEPCo), has enabled the factories to access independent lines, according to the state minister, though the problem shows no sign of being resolved.

“There are still factories that don’t start production for over eight months due to the absence of electric power,” said Tasew Negewo, coordinator of leather & textile facilitation team at the Ethiopian Investment Agency (EIA).

In order to address the bureaucracy problem, the EIA intends to put in to place a “one window service’, which aims at providing all services – power, customs and banking – from one desk. This will consist of the offices from all of the concerned sectors.

According to the EIA, different institutions are to put their desks at the Agency’s office and provide the service there, so that investors will not have to trek across town to visit different offices. When this will be applied, however, is still unknown.

In spite of these issues, however, the investors that Fortune talked to are satisfied with their decision to move to Ethiopia. According to Bozabey, if the three main concerns are resolved – electricity, bureaucracy and access to credit – the country could easily get more investment in the sector.

This would be welcome development for the new batch of graduates who hope to follow in Gadissa’s footsteps, and join the 23,000 others who work in the textile sector.



By BEWKET ABEBE
FORTUNE STAFF WRITER

Published on November 24, 2013 [ Vol 14 ,No 708]


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