From Reliance to Resilience

Ethiopia’s Import Substitution Strategy Fuels Economic Growth

Ethiopia has long grappled with a reliance on imported construction materials, stifling the growth of its domestic industries. However, a renewed push towards local production is poised to transform the country’s construction and telecom landscapes. The government’s import substitution strategy has identified over 90 products, including telecom equipment and construction materials, to be produced domestically within the next decade. Companies like Woda Metal Industry have established local manufacturing facilities, providing network operators with telecom towers and other critical infrastructure. This shift towards domestic production is a significant catalyst for Ethiopia’s industrialization and economic development, unlocking cost savings, job creation, and export opportunities. By reducing reliance on imported materials, Ethiopia aims to build a more self-reliant, globally competitive economy bolstered by technological innovation and a thriving ecosystem of local suppliers and manufacturers, writes EBR’s Eden Teshome.

For years, Ethiopia has struggled with a reliance on imported construction materials, which has stifled the growth of its domestic industries and added costs to significant infrastructure projects. However, a renewed push towards local production is poised to transform the country’s construction landscape.

The telecom sector has been a prime example of this shift. Sisay Zerihun, Head of External Affairs at Safaricom Ethiopia, explains the challenges of sourcing critical equipment like telecom towers abroad. “When importing these items from overseas, there are lots of challenges, such as delays in delivery and shortages of foreign currency,” he told EBR.

But the tide is turning, thanks to a concerted government effort to promote import substitution and bolster Ethiopia’s industrial capabilities. The Ministry of Industry has identified around 96 products, including telecom equipment and a range of construction materials, to be substituted with domestic alternatives within the next decade.

“The Import substitution strategy promotes local production and consumption,” explains Tarekegn Bululta, State Minister of Industry. “This strategy is playing a great role for industries in creating a market and local economic linkage in the country.”

One of the key players driving this transformation is Woda Metal Industry, a Chinese-owned manufacturer that established a telecom tower production facility in Ethiopia in 2016. The company’s decision to set up shop in the country was driven by its vast market potential and the government’s supportive policies.

“We have been in this tower manufacturing almost the past twenty years in China, then we found out the market here is [also attractive],” said Steven Cui, Woda’s General Manager. “The country has a big potential with a big population and a big market size. We came here in 2016, we built up this project, substation and galvanization from the farmland. And now we are getting this market as our plan.”

But Woda Metal’s journey has been challenging. The company faced hurdles such as lower logistics efficiency, foreign currency shortages for raw material imports, and the disruptions caused by the COVID-19 pandemic.

“The challenges we were facing were the lower efficiency of the logistics, hard currency shortages for the raw material importation and during establishing this project, we faced the COVID-19 and it was difficult for engineers to move and also to bring equipment and raw materials from overseas,” Steven recounted.

Despite these obstacles, Woda Metal has become a significant supplier of telecom towers to both Ethio Telecom and Safaricom Ethiopia. In 2022 alone, the company provided around 200 towers to Ethio Telecom, a milestone that underscores the growing importance of domestic manufacturing.

“The big impact we think we are providing is that, when customers started purchasing a locally produced tower, they will save a big amount of foreign currencies for both the country and the Ethio Telecom and Safaricom,” Steven noted. “Once we stabilize our capacity, we will start exporting, and from there, we will generate dollars.”

But the government’s ambitions extend far beyond the telecom sector. Tarekegn Bululta emphasized that Ethiopia is now “hundred percent capable of producing telecom and electricity utilities like telecom towers and various cables locally, which was being imported from foreign countries.”

The Ministry’s efforts to spur domestic manufacturing have also targeted the broader construction industry. Cement, reinforcing steel bars, and other essential building materials have been identified as critical targets for import substitution.

This shift towards self-sufficiency in telecom tower production aligns with Ethiopia’s broader industrialization and economic development goals. Tarekegn Bululta emphasized the government’s strategic focus on promoting local manufacturing and reducing reliance on imports.

“The new initiative ‘Ethiopian Tamirt’ loosely translated as “Let Ethiopia Produces” is also playing its own role in encouraging local production,” Tarekegn said. “The Import substitution strategy promotes local production and consumption. This strategy is playing a great role for industries in creating a market and local economic linkage in the country.”

The rise of domestic manufacturers like Woda Metal is seen as a significant catalyst for Ethiopia’s industrialization and economic development. Tarekegn emphasized the broader impact: “Indirectly the rise of Woda Metal manufacturer will affect the job creation.”

Beyond the telecom and construction sectors, the Ministry’s initiatives aim to cultivate a thriving ecosystem of local suppliers and manufacturers across various industries. “The Ethiopian government gave attention to technology and research,” Tarekegn said. Industries and government bodies are directed to have their research institutes increase their productivity using technologies, and the government is incentivizing those companies using technologies.”

This focus on technological innovation and research and development (R&D) is crucial for Ethiopia as it seeks to build a robust and self-sustaining industrial base. The government aims to create a more diversified and globally competitive economy by fostering a supportive environment for domestic manufacturing and technological advancement.

“Ethiopian government is also working on digitalizing industries and creating a market linkage with input suppliers,” Tarekegn added, underscoring the comprehensive approach to strengthening Ethiopia’s industrial foundations.

Integrating locally produced construction materials into the country’s infrastructure projects represents a pivotal milestone in this journey. As construction companies optimize their operations and expand their reach, they can unlock new opportunities for job creation, cost savings, and accelerated project delivery.

The evolution of Ethiopia’s construction industry, driven by the rise of domestic manufacturing, represents a significant step towards a more self-reliant economy. By reducing dependence on imported materials and harnessing the capabilities of local producers, the country is charting a path towards greater economic resilience and technological autonomy.

The cost and considerations for building construction projects in Africa can vary significantly compared to other regions. According to industry experts, the average cost to build a typical residential or commercial structure in Africa is around 30-40% lower than in developed markets like the United States or Europe. This is mainly due to lower labour and material costs and less stringent permitting and regulatory requirements in many African countries.

However, the industry’s reliance on imported construction materials has dragged growth and profitability. Delays in material deliveries, currency fluctuations, and logistical hurdles have all contributed to project delays and cost overruns.

By transitioning towards locally produced materials, construction companies in Ethiopia can unlock significant cost savings and operational efficiencies. Tapping into a more reliable and cost-effective supply chain can provide a critical competitive edge, enabling them to bid more competitively on infrastructure projects and deliver projects on time and within budget.

Moreover, the rise of domestic manufacturing capabilities opens up the possibility of exporting construction materials to neighbouring countries, further bolstering Ethiopia’s economic position. Woda Metal’s General Manager, Steven Cui, outlined the company’s aspirations to expand its market beyond Ethiopia’s borders.

“Once the logistics problem gets stable, we will start exporting from here to surrounding countries, and we have the plan to also export to European countries,” Steven told EBR.

This export potential generates foreign currency for Ethiopia and contributes to the country’s broader industrialization and economic diversification efforts. As Tarekegn noted, “The production of towers, cables, and other utilities locally is a big opportunity to accelerate the industrialization process in Ethiopia.”

The shift towards domestic construction material production holds the potential to unlock new efficiencies and opportunities for the broader construction industry in Ethiopia. By reducing reliance on imported materials, companies can realize cost savings, streamline operations, and accelerate project delivery.

This, in turn, can drive job creation, infrastructure development, and broader economic growth, benefiting both consumers and the Ethiopian economy. As the country continues to invest in its industrial capabilities and technological advancement, the construction sector is poised to play a pivotal role in shaping Ethiopia’s economic future.

Integrating locally produced telecom towers into the country’s network infrastructure represents a pivotal milestone in this journey. As network operators optimize their operations and expand their reach, they can unlock new opportunities for digital inclusion and economic growth.

The evolution of Ethiopia’s telecom landscape, driven by the rise of domestic tower manufacturing, represents a significant step towards a more self-reliant and globally competitive tech ecosystem. By reducing dependence on imported infrastructure and harnessing the capabilities of local producers, the country is charting a path towards greater economic resilience and technological autonomy.

As network operators like Safaricom Ethiopia and Ethio Telecom integrate locally produced towers into their infrastructure, they can unlock new efficiencies, streamline operations, and accelerate network expansion. This, in turn, can drive greater digital inclusion and economic growth, benefiting consumers and the broader Ethiopian economy.

The cost and considerations for building cell towers vary significantly across global markets. The average cost to build a cell tower in Africa is around USD 90,000, less than half the USD 250,000 average in the United States. This is mainly due to lower labour and material costs and less stringent permitting and regulatory requirements in many African countries.

However, building cell towers in Africa’s rural or remote areas presents challenges. Securing suitable land parcels, constructing access roads, and establishing reliable power sources can all add significant time and expense to a project. Additionally, the harsh environmental conditions, such as extreme heat, strong winds, and frequent storms, require more durable and specialized tower designs.

Despite these obstacles, expanding cellular coverage across Africa remains critical for economic and social development. As 5G technology continues to roll out globally, the cost and complexity of building next-generation cell towers will only increase. Innovative approaches, strategic partnerships, and a keen understanding of local market dynamics will be essential for tower companies looking to bridge the digital divide in Africa and other emerging regions.

Import substitution industrialization (ISI) has been a popular strategy for developing countries to jumpstart their economies. It focuses on replacing imported manufactured goods with domestically produced ones, fostering local industries, and reducing dependence on foreign markets. This approach is significant because it creates jobs, promotes technological advancement, and fosters a sense of economic self-reliance.

However, ISI has its challenges. Protectionist policies, often employed to shield nascent industries, can create inefficiencies. Domestic producers, lacking the pressure of international competition, may prioritize profits over innovation and quality. Additionally, a narrow focus on import substitution can neglect the importance of exports, hindering access to foreign exchange needed for crucial imports like machinery and technology.

Ethiopia can learn from the experiences of other developing countries. South Korea, for instance, initially adopted ISI but later transitioned to an export-oriented model once it achieved a promising local capacity. This helped the country achieve achieving remarkable economic growth. This highlights the importance of using import substitution as a springboard, not a permanent solution.

Ethiopia should consider a multi-pronged approach to build a faster and more sustainable industrial base. Fostering competition within the domestic market, even during the initial stages of ISI, is essential to encourage efficiency and innovation. Prioritizing industries with strong potential for future exports is an excellent potential promise to generate foreign exchange to fuel further development. Finally, investing in education and infrastructure will create a skilled workforce that a competitive industrial sector needs. It should also invest in infrastructure development projects such as power, roads and railways to improve logistic efficiency and competitiveness. Only then can the country lay a robust foundation for long-term industrial competitiveness.

Import substitution can be a valuable tool. However, policy experts warn that its limitations should also be considered relatively. By combining strategic import substitution with a focus on exports and domestic competition, Ethiopia can build a more robust and sustainable path to industrialization. EBR

12th Year • July 2024 • No. 131