Corona Slump

Bouncing Back from Corona Slump

After a year-long Struggle, Manufacturers, Exporters see a Glimpse of Hope

In 2020, the spread of COVID-19 affected the global economy in large magnitude by reducing economic growth and slowing down business activities. Manufacturers and exporters operating in Ethiopia is also hit by the pandemic in a massive scale because of the cancelation of orders by international retailers and apparel. But after a yearlong setback, industry players say that foreign buyers are starting to place orders as the world’s economy is now under recovery. However, they argue to capture the opportunity, difficulties that hinders the performance of export-oriented manufacturers in Ethiopia should be solved quickly. EBR’s Ashenafi Endale explores.

In March 2020, days before the United States became the top country in the world in terms of number of people infected by the coronavirus, Nazret Garment, a producer of light fabric garments, was preparing to ship its products to branded international retailers such as Big Brothers, Buffalo, Edwards, and Walmart. However, as the pandemic continued to take its toll on the world, these retailers canceled their orders, leaving the Adama-located factory in a very difficult position.

“Clients in different countries stopped operating due to the spread of the pandemic,” recalls Liyu Dender, Logistics and Supply Manager of Nazret Garment. “Due to this factor, we could not export our products.”

Established in 1991 and state-owned for almost three decades until 2017, Nazret Garment is now owned by Bagir Group, an Israeli company specializing in developing, manufacturing, and marketing tailored fashion items for both sexes.

Nazret Garment has the capacity to produce 4,000 trouser suits per day. In 2019, Nazret Garment shipped USD5.4 million worth of products. Currently, the company employs 1,500 people including expats, in its 12 production lines. The London Stock Exchange-listed Bagir Group invested ETB190 million in Nazret Garment.
“We invested a lot to turn the factory into a capable export-oriented garment-maker,” says Liyu. “However, the pandemic disturbed almost 90Pct of our export targets.”

Nazret Garment is not alone. The pandemic-induced cancellation of export orders by big retailers and apparel firms affected many industries. Even those well-established international companies operating inside the Hawassa Industrial Park like the Hong Kong-based Epic Apparel and US-based PVH, owner of iconic brands including Calvin Klein, were not immune to the problem.

Rohit Nair, CFO of Epic Apparel says the last eight months were very difficult for Ethiopian based companies that export manufactured products. “A lot of export orders were put on hold or cancelled because our buyers faced setbacks due to the pandemic,” explains Nair. Epic Apparel exports garments mainly to large retailers and apparel firms in the USA, including The Children’s Place (TCP), an American specialty retailer of children’s apparels and accessories,

TCP is one of four leading US apparel brands sourcing goods from Ethiopia, alongside PVH, JC Penney and H&M. At least seven factories in Ethiopia, including Epic, were exporting apparels for TCP. In September 2020, Gregory Poole, Chief Supply Chain Officer of TCP stated the company canceled orders worth millions of dollars from Ethiopia. The largest US children’s wear retailer blamed COVID-19 for the cancellations after it was forced to close its stores.

“There is no sector unaffected by COVID-19,” explains Sandokan Debebe, CEO of the Industrial Park Development Commission (IPDC). “Most of our factories faced setbacks.”
Due to the closing of businesses and the consequent cancelation of orders, Ethiopian companies were forced to face accumulating debts and a loss of market and revenue. Many companies have either slashed employees or their salaries. Especially manufacturers operating inside industrial parks have seen a drastic turnover of employees, close to 70Pct, due to decreasing wages brought on by the pandemic.

This is bad news for Ethiopian factory workers, already paid minimally in the global garment supply chain. According to a report by the New York University’s Stern Center for Business and Human Rights, the minimum monthly wage for factory workers in Ethiopia was USD26, compared to USD95 in Bangladesh and USD326 in China.
“We are shouldering a huge burden,” says Liyu. “This includes paying our loans on time and retaining employees without fully resuming production.”

Besides local industries and their workers, the pandemic overwhelmed most large apparel firms across the world including Bagir Group. In July 2020, according to Apparel Resources, a web portal covering the latest happenings and developments in the apparel, textile, and fashion industry, Bagir Group filed a liquidation application in a district court in Beer-Sheva, Israel. The court then placed Bagir Group, a company operating in Ethiopia, the US, Egypt, England, and the British Virgin Islands, with annual revenue of US $USD51.1 million, into liquidation.

Alongside the burden the pandemic brought upon local factories, their foreign partners, and workers, its impact on the national economy is extremely significant. Majorly owing to the pandemic, Ethiopia’s GDP growth rate for 2019/20 was slashed from 9Pct to 6.1Pct, according to the government. The International Monetary Fund also downgraded Ethiopia’s projected growth rate for the year 2020 from 6.2Pct to 3.2Pct.

Despite its immense adverse impact, Yohannes Dinkayehu, State Minister at the Ministry of Trade and Industry (MoTI) says COVID-19 also brought an opportunity for Ethiopia. “Our export performance for 2019/20 increased by over 10Pct compared to the previous year.”

According to the annual report of the National Bank of Ethiopia (NBE), the total export earnings in the past fiscal year was USD3.034 billion, showing an increment of 13Pct from the previous fiscal year.

“The export performance in the first five months of the current fiscal year also improved significantly,” adds Yohannes. Based on NBE’s report, export earnings increased by 6.5Pct, from USD723 million during the first quarter of 2019/20 to USD769.9 million during the first quarter of 2020/21. However, the increase was mainly a consequence of the rise in gold exports from just USD6.1 million to USD263.3 during the same period.

Teka Gebreyesus, State Minister for MoTI, however, says exporting manufacturers were saved from the devastating impact of the pandemic because the government managed to push factories to manufacture items needed to control the spread of the pandemic. “Some exporting firms shifted to producing masks and other items and export-only companies were allowed to sell their products in the domestic market during the five month-long state of emergency.”

“We were allowed to sell our export-standard products in the local market for a few months,” says Liyu. “Although we started producing masks, uniforms, and other products that could be consumed in the domestic market, it was not financially feasible. However, the small transactions in the local market helped the company keep the cash flowing.”

After months of sluggish performance, stakeholders stress that the tide is now turning. “Currently many foreign buyers are looking for exporters as economies are recovering after the pandemic,” explains Sandokan. “Demand is reviving and orders are coming from abroad. We hope 2021 will bring an improved level of export of manufactured products.”
Liyu agrees with Sandokan. “Currently, we are preparing for new orders as the pandemic’s impact is diminishing.”

But to capture the opportunity, difficulties hindering the performance of export-oriented manufacturers in Ethiopia should be solved quickly, according to a senior manager at PVH. “One of the major difficulties is bureaucracy and a backward logistics system. It is difficult to get imported raw materials on time. This needs immediate action.”

Drawing from her experience, Liyu says importing raw materials takes at least a month. “All the tasks related to transporting the raw material to the warehouse, unpacking, processing, packing, and readying the final product for export needs at least four to six months,” she explains. “Therefore, our foreign clients must place orders considering this.”

Indeed, logistics remains the top problem for manufacturers and exporters in Ethiopia. To export manufactured products in a 20ft container from Ethiopia to Germany costs 247Pct more than from Vietnam and 72Pct more if shipped from Bangladesh, according to the World Bank. On the other hand, on average it costs USD2,660 to import and transport a 20ft container to Ethiopia—one of the most expensive in the world. Furthermore, it takes 20-30 days for the imported item to reach the buyer in Ethiopia from Djiboutian ports.

Rohit stresses that time is a critical element to grasp opportunities presented currently and compete with other countries. “Our buyers in developed countries do not tolerate any of our excuses. If they are not satisfied, they simply shift to other suppliers in other countries able to meet their standards. They have many options,” adds Rohit.

Access to land is another obstacle, according to Liyu. “We could not expand our factory due to land-related problems. The regional land administration gave the land given to us to other investors. So, we were forced to stop any expansion.”

The instability observed in the country is also a main obstacle hindering manufacturing and export, according to industry players. For instance, factories located in the state of Tigrai seized operations after the federal government launched the law enforcement operation in the region in early November. “Exporting companies in Tigrai used to generate USD40 million every month, before the operation. This has currently totally stopped,” says Yohannes.

There are around 3,000 manufacturers in the region. But 50Pct to 90Pct of them were either damaged during the military operation or looted, according to Yohannes. “Even the factories that remained in good condition need at least four months to resume operations. The government will provide compensation to factories damaged during the law enforcement operation in the region.”

“Things are going back to normal. The effect of the pandemic on Ethiopia’s manufacturing export is not simple. But the government is working hard to provide every support required to bring them back on track, resume exporting, and recoup the losses incurred during the pandemic,” promises Teka.

Habtamu Simachew (PhD), Legal Advisor at the Ethiopian Investment Commission, says the government has identified 150 problems investors are facing in Ethiopia during the last eight months. “Out of total number of problems, 80 are already solved while cracking the remaining is underway currently.”

Liyu underscores that the government has been incapable in provisioning needed support in the past. The system and public institutions are not flexible in maneuvering fast and providing necessary support for manufacturers. “This has to change quickly,” Liyu concludes.EBR

9th Year • Jan 16 – Feb 15 2021 • No. 94


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