Ethiopian Business Review

The Textile Industry: A Showcase of Manufacturing Inefficiency Featured

With the introduction of the Growth and Transformation Plan (GTP) in 2010, special focus has been given to Ethiopia’s textile and garment industry. The country’s potential and distinct advantages in this field have made many excited about the prospects of growth. However, its performance in the past three-and-a-half years has been disappointing. The nation earned 244.2 million dollars from exports in three years while the target goal was 730 million dollars. As EBR staff writer Yoseph Mekonnen reports, lack of skill and work ethic, an absence of adequate infrastructure and raw materials,  and poor managerial know-how among industrialists are keeping the sector from reaching its full potential. 

A photograph of the late Prime Minister Meles Zenawi, groomed in a black suit hangs in one of the white painted offices of the Ministry of Industry, located in the Kazanchis business district of Addis Ababa. Written at the bottom of the photograph is hope for the future and a nod to one of Meles’s wishes: “We will realize your dream of creating a competitive industry sector.”

But the country’s industry sector seems far from being competitive at either the local or global levels. Take, for example, the textile industry in Ethiopia. One can find higher-quality imported textile products – such as bed sheets – at more competitive prices than those that are locally-produced.

As of May 1, 2014, a bed sheet made in Pakistan was being sold for 300 birr at a store inside Tana Mall around Merkato, whereas an equivalent sheet produced in Ethiopia sold for 530 birr. While the foreign bed sheet looks attractive in design and is larger, the local one has several finishing defects. One major difference between the two was that the locally-produced sheet was 100Pct cotton while the imported piece was 50Pct polyester, 50Pct cotton.  

But this disparity – both in cost and quality — extends to other products and consumer goods as well. This means that products from abroad, even after costly transportation and logistics expenses coupled with custom duty, have less production costs and are much more competitive than those produced locally. 

One may wonder why imported items are cheaper than locally-produced goods that enjoy huge comparative advantages, such as cheap and abundant labour, a wide range of government incentives like tax holidays, cheap land leases, and supply of local inputs.

Fassil Tadesse, President of the Ethiopian Textile and Garment Manufacturers’ Association (ETGMA) says the answer is pretty clear: “It is the inefficiency of our manufacturing industries though several other factors contribute for this incompetence.” 

Despite the fact that the country is becoming an investment destination for big international textile companies, notes Fassil, it does not seem ready to grab the opportunity by scaling up its efficiency. The main reason, he adds, is that the Ethiopian industry sector has enormous technical, human and information capacity constraints.

The GTP hopes to transform the country into an industrial-based economy. With a budget of more than USD75 billion, the Plan is especially focused on the manufacturing sector. It has envisioned making the share of the industry sector to the economy 18.7Pct in 2014/15 from the 13Pct in 2010/11. 

To this end, the country has planned to earn one billion dollars by the end of the GTP. However, attaining this goal seems unlikely, given the performance of the manufacturing sector to date. The performance in the past two years is less than 50Pct of the planned target in foreign currency earning.

Low labour productivity

Much of textiles and garment industry rely on South East Asian countries for manufacturing, largely due to cheap labour and inputs available in the region. Though China, Bangladesh, and the Philippines still dominate the global textile market,  the economic development of these nations has increased the total cost of production, especially that of labour. 

This situation is pushing factories to relocate their manufacturing to Africa.  According to the Ethiopian Textile Industry and Development Institute (ETIDI), Ethiopia is perhaps the best location for such companies. A statement on their website highlights Ethiopia’s distinct advantages: “The urge for giving much emphasis to the textile sector stemmed from the country’s potential for cotton plantation, dependable power supply and easily trainable labour forces, political stability, proximity to major markets and favourable climate...makes Ethiopia the number one choice for investors aspiring to be successful in the textile industry.”

In September 2013, more than 20 Turkish textile companies expressed interest in relocating their factories to Ethiopia. They were aided by Ayka Addis Textile and Investment Group Plc, a Turkish textile giant, which started operation in Ethiopia three years ago.   

The huge potential for the major input of the industries (i.e. cotton, cheap and abundant labour, vast local market of more than 90 millions, the government’s incentives, etc.) explain the advantages that could benefit investors in Ethiopia.

However, there are reports that labour in Ethiopia, no matter how cheap and abundant, has low productivity. “Labour productivity and skill is a main challenge of the sector,” says Kassaye Mekuria, former president of the ETGMA. He says that lack of skilled labour, high staff turnover, poor working culture and the county’s labour dispute-solving mechanisms exacerbate the low productivity of the labour force.

Export plan and performance of the textile and garment sub-sectors in millions of USD in the past three yearsIndustrial leadership, which is one of the key components for success in the sector, is also another, obstruction. According to Fassil, “the textile sector is not something that you can do with a slow motion; it needs dynamic leadership...and it seems that most countries, including Ethiopia, do not understand this.” 

According to the World Bank, emerging countries need capital and a productive work force to develop their industrial base. Skilled labour makes an important contribution to the industrial efficiency and competitiveness of a country. The absence of such labour puts Ethiopia at a comparative disadvantage. As it stands, the labour in the country, with its poor work culture and discipline, are best suited for middle- and small-level manufacturing, not big companies with global market reaches. 

The effects of low labour productivity are being felt by industrialists and the government and development agencies are helping to remedy the situation. The World Bank and other donors support factories that have significant export commitments by bringing industry experts to these factories for on-the-job training of locals. However, this isn’t enough to change the course of production inefficiency in these industries. 

Even with such support, there are some factories, such as Arba Minch Textile SC, that uses 30Pct of their capacity. 

Infrastructure challenges 

The disorganized supply of basic infrastructure — like electricity, telecom services and water supply — is another major roadblock that is challenging the manufacturing sector. Frequent power interruption has a more damaging effect on the textile sector than it does others, according to sources who are knowledgeable of the industry. 

Whenever there is power interruption, it damages the yarn and thread in the machines. The power outage leads to lost time, as well as other costs, which add to the cost of production. The government admits that power interruptions are a big headache both for the investors and the government itself.

“We started registering the time and frequency of power interruptions, so that we can make improvements by discussing the issue with the electric supplier, the same for water,” says Melaku Taye, corporate communications director for the Ministry of Industry. The government also accuses industrialists for improper use of electricity in some cases. 

Industry zones, where necessary infrastructure and utilities are provided, were thought to be a solution to common complaints by the industrialists. Yet, it’s become clear that these problems aren’t solved in some industry zones. One of the challenges facing the Chinese shoe maker, Huajian, one of the manufacturing industries in the Eastern Industry zone in Addis Ababa, is the erratic interruption of electricity.

However, it appears that efforts are being made to continue developing the use of industry zones. The government started its own industrial zone, which is called the Bole-Lemi Industrial Zone in Addis Ababa. Bole-Lemi is located on 156 hectares of land and cost over three billion birr to build. According to the Ethiopia Investment Agency’s website, several South Korean textile companies are expected to start operations in this industrial zone. Recently, foreign developers, such as the Turkish investors in the suburb of Taffo, east of Addis Ababa, have started developing industrial zones. 

Transport and logistics deficits

Transportation challenges and logistics deficits have been major challenges to the Ethiopian economy, especially when it comes to international trade. Manufacturing industries import inputs and raw materials from abroad and export their products. According to some manufacturers, it is easier and cheaper to transport an item from China to Djibouti than from Djibouti to Addis Ababa. 

Ethiopian ships do not go directly to Europe; rather, they go to Dubai and then to Europe. This detour makes using marine transport, which is the cheapest means of transport, sluggish. For example, it takes 31 days to transport an item from Ethiopia to America. It seems that little can be done to make things better. The involvement of other shipping companies in the transportation of the country’s trade items is not well developed and is mainly dominated by the sole government-owned shipping company.  

It can take months to complete transportation of products from abroad. Many textile manufacturers don’t have stable market destinations, so in order to meet their sudden orders from foreign buyers; they rush to import inputs by air, which is costly.

These challenges push the cost of production up and contribute to the diminishing competitiveness of industries.

Unsustainable input supply 

The manufacturing sector’s dependence on imported inputs also exacerbates the weak competitiveness of the sector. 

According to economist Belayneh Begajo, “most of the raw materials and technology required for the manufacturing sector are imported. [The] decision to import requires information on the creditability of suppliers, quality and prices of the goods. In general, the processes...and resources required to realize a manufacturing investment takes [a] much longer time...and larger resources.” 

Some researches put input problems at the forefront of the issues that choke industrial growth. Even if Ethiopia is an agrarian country, it imports raw materials for the textiles industry. The linkage of manufacturers with local input producers is also backward, according to a United Nations report. A backward agricultural sector and unskilled methods of gathering agricultural products causes a loss of precious inputs. 

With regard to the textile industry, lack of high-quality cotton contributes for the weak sector performance. 

Lack of Experience

“Several factors are playing for the poor performance and un-competitiveness of Ethiopian manufacturing industry,” says Belayneh. “One major factor is that Ethiopia’s development has begun from a low level of development as compared to other African countries. For example, the GDP share of Ethiopian’s manufacturing sector has been less than five percent over 20 years, which is comparable to Kenya, Sudan, Nigeria and Ghana. A low level beginning has put the country [at a disadvantage] in terms of competitiveness in the international market because others have [many] years of cumulative capacities in the sector.”

Due to intertwined problems and challenges, the sector is currently operating below 50Pct production capacity. 

The Ministry of Industry acknowledges most of the problems in the sector and is intervening for support. “We are working to overcome the problems in three ways: inviting internationally-competitive companies, searching [for] new market territories and building technical capacities of the factories,” says Taye, the Ministry’s spokesman. 

The manufacturing sector’s contribution to the GDP has been increasing steadily from 15Pct in 2010/11 to 18Pct last fiscal year.  This year, it is projected to increase anywhere from 21 to 23pct. 

But there are many who believe the government should do more. They advise that different government stakeholders need to harmonize their efforts. “Since [there] are too many [stakeholders], it is difficult to deal with. In order to ease the problem, a national council, led by the Prime Minster, was established; however, it is not functional yet,” says Fassil. 

It has been almost 11 years since Ethiopia began its efforts to join the World Trade Organisation (WTO). A WTO member country is expected to open its doors to international competition. Yet, many textile manufacturers also have fears that Ethiopia might not be able to keep up with these demands. 

Belayneh argues that the government should take a leading role to address the capacity constraints that the manufacturing sector faces. He says this can be done by strengthening public institutions that provide sustained support and services to local investors. Similarly, the industry owners must work systematically to improve their leadership capacity and take fresh initiatives to build the skills, as well as the discipline, of their employees. They have to invest in their human resources as much they invest on technologies. Perhaps, if the nation is able to do so, the textile sector may cease to be the poster child of industrial inefficiency in the country.

2nd Year . June 2014 . No.15

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