Heavy Industry Development in Ethiopia Can it wait?

Ethiopia has vigorously embarked on the expansion of light manufacturing industries. For that reason, it has been building industrial parks throughout the country. This is expected to boost export of manufactured goods, thereby reducing the long standing shortage of foreign currency problem. However, some experts are skeptic about this one sided attention of the government to industrialise the country. They argue that unless export promotion is complemented with import substitution, the effort is like clapping with one hand. That’s why expansion of heavy industries needs to be part of the long term strategy to reduce the stress the country has been through for lack of foreign currency. In fact, close to 50Pct of the USD18 billion import bills last year went to purchase metal and engineering products, which are produced by heavy industries. EBR examines the need for developing heavy industries in Ethiopia and how that can boost the country’s ever depleting foreign currency situation

Just like any developing country, Ethiopia’s quest for achieving economic development depends on the rate of industrialization that can bring structural changes in the economy. That’s why the government has been devising different strategies to achieve structural changes mainly by prioritising light manufacturing industries. However, this has left a small room for the few thriving heavy industries in the country.
Since the introduction of the Agricultural Development Led Industrialization in the early 1990s, the government’s main focus has been on light manufacturing industries, particularly on agro processing, textile and leather sub sectors. Even with that focus, the contribution of the industry sector in general and that of manufacturing in particular has not grown as planned.
By definition, heavy industries are companies that require higher investment and produce large and heavy equipment and facilities such as machines and tools through complex processes by employing high and sophisticated technologies. Steelmaking, cement, automotive, chemical as well as electrical industries are grouped in to heavy industries. Construction and transportation along with their upstream manufacturing supply businesses also belong to heavy industries.
Although the government plans to focus on heavy industries after 2025, the last three five-year economic plans, i.e., the Plan for Accelerated and Sustained Development to End Poverty, the first as well as second phases of the Growth and Transformation Plans (GTP I and II), call for the mobilization of resources and shock interventions to fast track the growth rate of manufacturing through attracting investment in light as well as heavy industries.
This helps to create job opportunities and promote export revenues that policy makers often overemphasise for prioritizing light manufacturing. Indeed there is an advantage in investing in light manufacturing as it is more labour intensive. For Ethiopia whose population is fast growing and its agriculture is releasing labour due to a modest growth of productivity, expanding the industry base and increasing export earnings is critical. “We prioritize light and labour intensive industries,” said Arkebe Okubay (PhD), special advisor to the Prime Minister and board chairman of Industrial Parks Development Corporation during the inauguration of Hawassa Industrial Park. This statement implies that the issue at hand is not only industrialization, but also mitigating the rising unemployment in the country.
Still, unemployment as one of the socio-economic problems remained a major source of concern to scholars, policy makers and social commentators in Ethiopia. Especially the unemployment rate of the youth, age group 20-24, which mostly includes graduates from higher education institutions stood at 44.9Pct in 2015, according to Urban Employment ,Unemployment Survey published by the Central Statistical Agency (CSA). Although data is meagrely available, surveys conducted on the issue indicate that there is a significant level of youth unemployment in rural areas too, due to scarcity of land and poor off farm job creations.
The overall export earnings and particularly the export of light industries could not show substantial growth too. In fact, the entire sector could not fetch more than USD3 billion for the last five years. On the other line of trade, the import bill of last year was over USD18 billion. This means, the export revenue couldn’t generate resources to cover more than the import of petroleum and port fees in that year. This indicates that the growth prospect of the country is likely to continue to suffer from the trade imbalance, unless flexible policy is introduced to support the infant heavy industries in the country, which can make tangible contribution in import substitution.
One area such flexibility in policy could be instrumental is to push the already existing local medium and large industries to expand into heavy industries, by providing them multifaceted support. This is especially important for Ethiopia where industries started to emerge ever since the 1950s but so many of them stayed producing light manufactured products for many years.
“There are no clearly [defined] support and incentive mechanisms that particularly target heavy industries,” explains Girma Balcha, Sectoral Supports Director at the Ministry of Industry (MoI). “Since the capacity of the private sector to involve in heavy industry is [limited], government intervention is keenly expected. However, the priority will be making the country the light manufacturing hub of Africa.”Girma concludes.
According to some stakeholders, this policy direction fails to consider the high demand of heavy industry outputs in the country, which is being covered by import. In fact, due to the lack of attention and support, private industries have for long remained producing light manufactured goods. “The demand for locally assembled trucks is particularly huge and untapped,” Mathewos Assale, CEO of Kaliti Metal Products Factory told EBR. “We are overloaded and could not meet the demand and there are many orders currently.”
Before starting assembling trucks in its workshop, Kality has been producing basic metals for construction. However, since it started assembling the heavy duty trucks last year, it managed to assemble 250 trucks.
The company is currently installing three new production lines for body production and assembly, at a cost of ETB110 million. Established 50 years ago, the company was privatized in 2001, and currently owned by Tsehay Industries, a company that has emerged from the aborted effort of setting up a commercial bank. Kaliti’s capital currently stood at ETB800 million and has 500 employees.
Mathewos says the engineers at the factory make the entire body of heavy duty trucks. “The only things imported are the engine, the cabin and the axles. The company assembles five trucks per week, by adding 30Pct value at [our] workshop.” He confirmed.
Kality envisions diversifying the production of assembled products to different truck types and assembling automobiles through semi-knocked-down process. It aims at becoming one of the top ten heavy industries in Ethiopia by 2030.
The company sells a truck at ETB973,000, which according to Kassahun Birilie, Quality Assurance and System Improvement Executive at the factory is 30Pct less than a similar imported truck. The price is less because the company imports inputs duty free. They also take shorter time to assemble and deliver the trucks to clients compared to the time it takes to import.
“This is a highly interesting job that can showcase Ethiopia’s potential in the automotive and auto-engineering sub sector,” says Kassahun, who has been working as instructor at various higher education institutions and at a number of light industries for over 20 years before joining Kality.
Yet, Kassahun’s excitement goes only half of the way because the factory is far from reaching the capacity to manufacture an engine. He, however, hopes that his team will produce the axles in a few years. “There are two ways to start producing engines locally, he explains. “The first option is accessing the patent from the original manufacturers, which is a bit difficult. The other option is through [reverse engineering] and research and development, which needs huge investment.”
Zedaemu Hige Egziabher, Deputy General Manager at Belayab Motors stresses that the government still needs to analyze well and [guide] where investors should channel their resources. “Light manufacturing still can have big contribution for the future, as a source of capital accumulation and also to create value chain linkages with heavy industries. However, enough attention should also be given to heavy industries.”
Belayab has been engaged in automobile assembling for the last five years. It recently entered into agreement with Kia Motor Corporation, South Korea’s second-largest automobile manufacturer. Belayab started with a capacity of assembling six automobiles per day. Five years later, the company has built and grown its capacity threefold.
“Starting from assembly is the right track for factories to grow and engage in heavy industrial production.” argues Zedaemu. “Even though the investment policy is good, land incentives and tax holidays are provided by the government, companies involving in heavy automotive industries need more supports.” he ascertained.
In Zedaemu’s opinion, the toughest job regarding supporting heavy industries lies on the activities carried out to boost research and development. “The government needs to explore the reasons why research and innovation is not coming from the universities to industries.” He says industries cannot survive alone. This is to highlight the importance of university industry linkages.
In fact, it was following the launching of automotive engineering programmes at Adama Science and Technology University’s (ASTU) that Belayab decided to install its assembly plant in Adama town. Belayab Motors, which started as machinery importer ten years ago, has signed a Memorandum of Understanding with ASTU and Addis Ababa Institute of Technology to cooperate on research and development. “However, the cooperation so far is characterised by facilitation of internship programmes.” complains Zedaemu. “The university industry linkage is not going as much as expected. All in all, the government’s support is not satisfactory.” Zedaemu affirmed.
Zedaemu is convinced that the limited attention and support the sector is getting could partly be for reasons that have to do with the failure of actors in the industry. He says, there is a missing need for pushing the government to provide more support. In fact, stakeholders stress the fact that the heavy industries under the ownership of the government also appear to be at crossroads. The limited capacity in the sector compared with the multiple roles required in supporting, facilitating and regulating has reduced the level of commitment, and resource for the sector.
Failure to establish the much awaited Industrial Research, Development and Technology Transfer Institute as outlined in the government’s five-year plan has exacerbated the problem. Even though there are more than five institutions established under the Ministry of Industry, their effort is more visible in facilitating market linkages than supporting technology transfer.
For instance, the Metals Industry Development Institute (MIDI), which was established in 2010 to assist the development of metals and engineering industries facilitated market linkages between Belayab Motors and public institutions, so the latter procure vehicles worth ETB32 million in 2016/17 fiscal year, according to Tilahun Abay, director of Planning and Communication at MIDI.
The Institute provides support for companies engaged in the production of basic metal, automotive and engineering as well as electrical and electronic sub sections. Yet, only companies engaged in basic metal sub section manage to produce enough to substitute imported products in the last two years. For instance, the import of rebar and billet fell from 316,000 tonnes in 2015/16 to less than 300,000 tonnes in 2016/17, while the local production jumped from 464,000 tonnes to 536,000 tons, according to MIDI. “Currently the basic metal supply in local market is saturated and industries are looking for export to neighbouring markets” Tilaun added.
Next to metal, the chemical sub sector is where heavy industries are emerging in Ethiopia. Particularly the cement industry is a success story. Out of the 14 industries, eight are already using the latest high-tech. Their current annual production is 16.4 million tonnes and planned to reach 27 million in three years, according to Hadushom Tuem, Cement and Construction Inputs Sector Deputy Director General at the Chemical and Construction Inputs Industry Development Institute (CCIIDI). The institute started licensing the expansion of projects this year, since it banned new licensing five years ago.
Nevertheless, even though there are over 27 types of cement, only three types are produced in Ethiopia. To resolve this problem the MoI has reached an agreement with the Ministry of Education, to introduce cement technology courses at technical and vocational education and training institutes and universities.
“We also facilitate technical advisory, loan, duty free incentives and machinery leasing supports,” added Hadushom. The sector has fully substituted import and the direction now is addressing the demand for diversified cement products. Only industries which have acquired the latest high-tech can involve in product diversification. Industries which did not invest in high-tech and still depend on old technologies are currently limited at producing gypsum,” added Hadushom.
In addition to cement factories, the Chemical & Construction Inputs Industrial Development Institute (CCIIDI) supports companies engaged in eight major chemical clusters, which need their own institute. Unlike other institutes like Textile Industry Development Institute and Leather Industry Development Institute, which are export oriented government support institutions, CCIIDI was established three years ago, focusing on import substitution.
“Even though the chemical sector is the major basic input for various industries, there is no significant investment so far. [In fact,] the heavy industries in the sub-sector are yet to come, especially after the end of GTP II period,” said Yonas Abate, Plastic & Rubber Industry Development Director at CCIIDI.
Lack of financial institutions that exclusively focus on industries is also a major challenge in financial perspectives. One project that has been a victim of such is an assembly project in Dire Dawa town. A company named Redwa has been importing TVS Bajaj, from TVS Motor Company, the third largest two-wheeler manufacturer in India. TVS also produces three wheeler vehicles. After several months of negotiations, Redwa finally got the deal to establish an assembling plant for three wheelers. However, the project was delayed for some time due to delays in project financing.
“The main reason local industries could not access adequate loan from banks is partly attributed to poor business proposals,” argues Tilahun Abay, Director of Planning and Communication at MIDI. “Even though Development Bank of Ethiopia (DBE) is there to provide loans for such industries, the bank often loses confidence to disburse the portion of its loan mainly because companies could not present well prepared documents.”
Tilahun stresses the failure of local companies to engage in heavy industries is not only due to lack of financial support; there are internal limitations within the companies. “Poor leadership, management, technology absorption, marketing and technical expertise are [fundamental] limitations. Most of the local companies are family owned and are closed for change and professional practices.”
For Birhanu Gizaw (PhD), Associate Professor of Industrial Engineering at Addis Ababa University, the reason for the limited growth of heavy industries in Ethiopia is mainly due to the lack of capacity in strategic planning. “Japan introduced a 50 years strategic plan, with detailed short term strategies in it. However, we could not even design five and ten years integrated and well defined national strategic plan. Institutions, facilities, laboratories and services are not designed based on strategies. Strategies need holistic approach and scientific designs.” Birhanu has over 20 years experience in European industries, particularly in Germany. “There are at least 100 new innovations in chemical industry alone, each day, in Germany.” he underscores.
He affirms that currently there are no heavy industry in Ethiopia. For him, the cement industries and assemblies are also not heavy industries. “First, heavy industry does not mean only in metal and chemical subsectors. The basic criterion for setting up heavy industries requires guaranteeing local raw material supply and must add value among others.”
Experts also argue that there are many potential economic sectors that can grow and become heavy industries if the sectors are developed. “When this happens, heavy industries can also be labour intensive and change the existing urbanization problem in Ethiopia,” confirms Birhanu. EBR