Liyu Dender, is a Logistics and Supply Chain Manager at Nazret Garment, now owned by Bagir Group, an Israeli company specialized in developing, manufacturing, and marketing tailored garments. The company has the capacity to produce 4,000 trouser suits daily. In 2019, Nazret Garment shipped products worth USD5.4 million. However, branded international retailers have canceled their orders after the breakout of the coronavirus pandemic last year. EBR sat down with Liyu to learn how Nazret Garment is coping with this situation and its future prospects.
How many orders were on hand when COVID-19 broke out?
There were many orders for 2020. However, most of them were canceled.
How long does it take to export once a foreign buyer places an order?
Importing raw material takes at least a month. Processing bank permits and customs documentations at Djibouti Port takes additional time. Then after transporting the raw material to our warehouse and unpacking, processing proceeds. After the production is finalized, packaging and readying the final product for export also takes time. All these tasks need at least four to six months. Therefore, our foreign clients must place orders at least four months in advance of the delivery date.
Did you get support when your operations were affected by the pandemic?
Commercial banks and our creditors supported us significantly. They did not force us to repay loans during the initial period of the pandemic.
What about the government?
We did not expect much because the government itself was not capable enough to provide the needed support. None of the governments in the world were ready for this.
But other governments were more flexible in responding to the situation. Foreign governments changed their systems faster and responded to the shock quickly. Our system and institutions are not flexible enough to maneuver fast and provide the necessary support for manufacturing industries. Our system is traditional and rigid. The government waited until for a state of emergency to be declared to bailout businesses.
What is the current status of the company?
Currently, we are preparing for new orders as the impact of the pandemic is diminishing.
Did you shift to other products to cope with the cancelation of orders?
We were allowed to sell our export-standard products in the local market for a few months. So, we started producing masks, uniforms, and other products that could be consumed by the domestic market. But this was not financially feasible because we are not entitled to duty-free privileges on the import of raw materials if the finished product is sold locally. So, selling locally means paying customs tax. We import raw material worth USD30 million, annually. If we had to pay customs tax, the overall production cost will rise, making the business unprofitable. However, the small sale to the local market helped the company keep the cash flowing.
Which countries are the top destinations for your exports?
The United States is the top destination for garments produced in Ethiopia. The African Growth and Opportunity Act (AGOA) trade program is the deal maker here. When we export from Ethiopia, the price is relatively cheaper for consumers in the USA because of the duty free privileges under AGOA. That is why many foreign investments are relocating their factories to Ethiopia.
Other than COVID-19, what challenges are you currently facing?
The first is instability. Many industries were damaged during the political unrest, although we were spared except for minor damage.
Access to land is another obstacle. We could not expand our factory due to land-related problems. The regional land administration gave land given to us to other investors. So, we have been unable to expand.
The inefficient bureaucracy and logistics system are hazards for meeting export deadlines. In this regard, factories inside industrial parks are more secured and have better incentives and performance compared to firms operating outside. They have a one-stop service program. Either the government should allow us to relocate inside industrial parks, or must provide similar one-stop services for factories like us.
That is why many international buyers are preferring to source from Kenya and other African countries instead of Ethiopia. Kenya has ports and less logistical difficulties than Ethiopia.
Do you face shortages of foreign currency?
We have no challenge in accessing letter of credits from banks to import raw materials. We have no foreign currency problem because Nazret Garment is an export-oriented company. We bring in foreign currency.
Do you outsource components of your products to local factories?
Outsourcing is difficult for us. Our foreign buyers have the final say regarding from which companies we source raw materials and inputs. They state their specifications and standards as well as determine the input supplier before placing their order. Usually, we import the raw materials. Our customers do not only dictate from which supplier we have to buy the raw materials, but also give us the specifications of our products. Especially big brands in USA are strict on such specifications, because they do not want to lose their consumers.
Therefore, it is difficult to outsource to local companies engaged in the manufacturing of components like buttons and zippers. Even if this was not the case, there are no domestic factories which fit the bill.
Our foreign buyers have no confidence in the cotton growing in Ethiopia. Therefore, we import. Once Ethiopia’s cotton production improves and meets their quality specifications, we might start sourcing from domestic sources.
If Nazret Garment, and other similar companies, import their whole raw material requirement and export their total production, what is the benefit for Ethiopia?
The main benefit is job creation. Plus, those foreign investors are bringing capital. The textile and garment industry in Ethiopia is hiring a lot of women, who were previously not generating income. They are now feeding their families, and also attending school. Light industries are significantly cutting unemployment. You can see the difference in unemployment before and after industrial parks opened in Ethiopia.
Still, the garment industry is in its infancy in Ethiopia. Many things are being done by foreigners. Wages in Ethiopia are very small. If technology is transferred successfully, and local productivity improves, the country can benefit a lot more. But government must work hard.
Why don’t you consider selling your products in the local market?
Local prices are not tempting. In Ethiopia, the cost of production is higher because of the difficulty in accessing quality raw materials and other obstacles. For instance, we import cotton because our buyers have no confidence in the cotton harvested locally.
Our products are made from the best raw materials in the world. The sewing quality is checked on each production line. The quality is audited. Most of the imported goods in Ethiopia are produced for low-income countries. We produce for high-income nations. So, we cannot sell our products in the local market at a cheaper price. That is why we prefer to export than sell locally.
Do you think Ethiopia should curb the import of manufactured goods to encourage local producers?
Rather, the government should link importers with local producers. Such integration and networks are critical. Importers, distributers, and wholesalers are important for both industry and the consumer.
So, you think import substitution is possible in Ethiopia?
Substituting imported items cannot be done at once, but step by step. First, the government must select which imported products can be substituted locally. Then the government must support companies that can sufficiently produce and supply the selected items to the local market. Ethiopia satisfies the majority of its demand for textile products with imports. This can and must change.
Ethiopia is a member of African Continental Free Trade Area (AfCFTA). What will be the opportunities for the country?
This will create more market linkages. AfCFTA will make the outsourcing of components from nearby African countries feasible. A component produced in a neighboring country can be input for a factory in Ethiopia. This will be great for Ethiopia and Africa, in addition to the expanded market access.
Some African countries have a better mining sector, while others perform well in manufacturing and agro-industry. AfCFTA will help African economies specialize in their given potential, instead of working to develop all sectors at once. Since Ethiopia is a landlocked country AfCFTA can help the country capitalize on its competitive edges.
What is the highest attracting factor for foreign investors to Ethiopia?
I think it is the availability of cheap labor. The price of labor in Ethiopia is low, but it is better than having no job at all. The factories in Ethiopia face higher costs because they are investing additional resources in training the labor force—mostly having no relevant working experience outside of the home and farm. It is better to hire many people and pay less, than attract few investors who pay high salaries. In this case, at least people can eat. EBR
9th Year • Jan 16 – Feb 15 2021 • No. 94