Smart Gain for Electronics, Despite Government Being on Flight Mode

The electronic sub sector is a vital element of the global manufacturing industry. One of the components of the sub sector is the thriving mobile phone production. Despite having a short presence, the sub sector in Ethiopia is performing better, in terms of foreign currency generation, than other manufacturing sub sectors that receive significant government support such as textile and leather. EBR’s Ashenafi Endale spoke with stakeholders about the promise and challenges facing the sector.

Several years well into a vicious cycle of falling export earnings, Ethiopia’s nascent electronics industry is making waves generating better foreign currency earnings in recent years. The irony of the industry’s better than expected performance is more glaring when analyzed in terms of the lukewarm policy support it gets from the government. The government seems to be betting all its cards on manufacturing industries with the goal of transforming the country from an agrarian economy into a hub of light manufacturing by 2025.
Latest figures from the Ministry of Trade indicate that there are 30 registered electronics assembly plants in Ethiopia. However, only 10 of these companies currently operate in the country. These include TECNO, SMADL, Simi, Oking, Ken Xen Da, Tana, G- Tide, HDASE, and Brillion. While TECNO, Hidase and Simi are engaged in exports and collectively earned a total of USD44.2 million, which is 73.7Pct of the plan, in 2016/17, the rest produce for local market. This achievement is very encouraging in light of the fact that the electronic assembly was almost non-existent in Ethiopia’s export sector before it made its debut in 2013/14. The export earnings of the sector have been on the rise since then. In 2014/15 USD15 million was generated. Still restricted to the export of mobile phones, there are emerging companies engaged in assembling TV sets, refrigerators, satellite receivers and other electronic products in Ethiopia.
The export of assembled electronics is on better footing when compared with the much anticipated and prioritized textile and leather industries, which only matched 33Pct and 42.3Pct of their targets, respectively, in the same year, though the two sub sectors enjoy a significant deal of government support.
Similarly, the export of metal and engineering products such as jewelries, rebars, nails and roof tiles, which commenced in 2013/14 to neighboring countries generated USD3.7 million in 2016/17 missing its goal by 75Pct.
The performance of the electronics assembly industry is largely positive, in sharp contrast to the gloomy picture of the country’s overall export performance in 2016/17, which despite a very modest rise of USD0.05 billion from the previous year, continues to falter. The export earnings stood at USD2.91 billion in the year.
Though it is stacked against all the odds, the electronics assembly industry has made impressive gains. But its relative success does not begin to cover the paralyzing challenges the industry faces. Ethiopia’s current foreign currency earnings from assembled electronics are almost entirely drawn from one company — TECNO – which takes 95Pct of export revenues.
This result is achieved without much incentive packages and recognition from the government. In fact the government has yet to realize the export potential of the sector. “Rather than a full-fledged foreign currency generating export sector, the government still considers electronics assembly as an import substitution scheme,” says Mesay Wubshet, special advisor to the director general at Metal Industry Development Institute (MIDI).
Even then, the sub sector has made impressive gains and distinctively showed its tremendous potential by becoming the third highest foreign currency generator in manufacturing following textile and leather. Purely driven by market’s demand so far, insiders say, government support would significantly transform the performance of the industry.
Electronics assembly companies in Ethiopia face chronic problems that at times leave them entirely shut down and suspend production indefinitely. Shortage of foreign currency, proliferation of contraband merchandize and lack of a meaningful policy support are dragging the industry from realizing its potential.
The problem of shortage of foreign currency is particularly harsh for assemblers since most of the components are imported from abroad. For instance, when EBR visited the plant of TECNO on August 18, 2017, which aims to generate as much as USD300 million in the next five years and currently has the capacity to assemble a million tablets and smart phones per month, the company had halted production, as it did not have the raw materials necessary to process production, which was caused by a foreign currency shortage.
“We have not received any hard currency since March 2017. We were forced to stop production for five months in 2016,” lamented Shuang Shuang Chen, platform manager at TECNO. The company which employs 1800 staff mainly graduates from technical and vocational training institutions was forced to cut production for the domestic market to singularly focus on exports and cover its import bill.
Chen is keen to show there is no market problem especially in Africa, but is visibly depressed with lack of foreign currency to import inputs. “We approached several banks, but they are unable to allocate what we need.” If the company’s foreign currency woes were dully addressed, it would at current capacity generate as much as USD7.3 million per month.
Seife Michael, general manager of Cell Tell, a mobile phone assembly, echoes the same concern. “It is difficult to access foreign currency even to produce for the domestic market, let alone exporting,” Seife’s company has the capacity to assemble 200,000 mobile phones each month, if it could get its hands on a USD100,000 to import inputs.
SMADL Terminal Communication Factory Plc., another Chinese owned mobile phone assembly, is not immune to the crippling forex crunch. “Since I joined the company in Ethiopia in 2014, the plant has never operated uninterrupted for consecutive months, mainly due to lack of inputs which are imported,” an official at the company who opted to speak on conditions of anonymity said. The company’s foreign currency requirements reach USD1.5 million every month.
SMADL has a production capacity of 1.2 million units per month and operates with 100 workers. It currently has 40 phone models, ranging in price from ETB300 to ETB4,000.
Industry insiders unanimously agree that the government’s reluctance to fully appreciate the potential of the industry and afford it due attention is to blame for the deepening problem.
There has been a series of discussions about foreign currency shortages and crisis in Ethiopia. As a result, many industries and core economic activities are being affected. However, the problem has been hitting the private sector the most since commercial banks allocate the scarce foreign currency to importers based on priority list with government mega projects receiving priority.
“The industry has never been recognized as an export sector. That’s why we are not equally treated with other manufacturing industries that frequently access foreign currency with relative ease, while we wait in long queues for months,” Seife exclaimed.
The National Bank of Ethiopia (NBE) had written a letter to the Ministry of Industries (MoI) requesting it to address the assemblers’ forex demands if they provide their import and production schedules and monthly foreign currency demands. “But the companies failed to present the documents,” Shibeshi Seyoum, director of Metal Engineering Industry Study, Follow-up and Support Directorate at MoI told EBR.
To rub salt to their wound, contrabandists command the lion’s share of the domestic mobile phone market in Ethiopia. With close to 62Pct of the mobile and smart phone market supplied by illicit imports, a considerable chunk of potential for the local assemblers is lost to contraband. The industry has the potential to generate as much as ETB150 million in tax revenue if illegally smuggled in mobile phone devices were stopped, studies indicate.
The industry also suffers from inadequate policy support from the government. Currently, companies and the government are locked in a debate centered on three fundamental points: value addition, input-output coefficient dilemmas and Electronic Inspection & Registration (EIR) implementation.
The assembly companies have been engaged in dialogues with the MoI, the NBE, Ministry of Communication and Information Technology and ethio telecom on providing the overall
The government argues that for the industry to enjoy priority status it needs to adopt certain value addition schemes mainly relating to its input-output coefficient calculations. As such, the companies are required to gradually move from semi knock down (SKD) to complete knock down (CKD) assembly.
“We want some of the products to be locally produced,” Shibeshi said. “But the companies are afraid of the costs with the additional investment and employment that come with the move and are resisting this demand,” he added. The director is adamant about the government’s commitment to support the companies if they fulfill this condition.
However, the assemblers argue that the value addition formula is incorrect; the input-output coefficient is also unfair and completely misunderstood.
“Assembly involves integrating the circuit board using robotic machines and combining it with other components. Four companies are needed to manufacture parts of a circuit board. A gadget containing several tens of components requires 30 to 40 independent companies in the supply chain. CKD in an assembly is combining all the components,” Abiy Minwuyelet, independent consultant in the electronics sub sector said.
He argues “according to the international definition, which is very different from the one in Ethiopia, assemblers are not expected to produce the components. Their job is to receive the components from different manufacturers and assemble them.”
Mesay contends that the government did not demand assemblers to abandon SKD. “We asked them to import every set-component separately and assemble it here. In CKD, even the circuit board has to be locally assembled.”
The assemblers also cry out that duty free privileges enjoyed by other manufacturing industries should be available for them. But Shibeshi is bent on pressing the companies for more value addition wondering “why should we support them if they do not adopt CKD?”
The senior manager at SMADL explains how the government’s stance is unfair. “Most of the value locally added is the labour. Higher value addition needs high tech inputs before we shift to CKD. The government also does not put into consideration defective rate, which rises significantly in volume in CKD.”
Abiy argues “MoI’s value addition formula does not calculate the actual value added at the factories. The formula only computes the value using total cost and profit of the company. It is a formula the tax authority introduced to boost its revenues.”
“Significant investment and a fast-tracked capacity building are needed to move to CKD,” the manager at SMADL underscored.
The other hotly contested point of disagreement between the assemblers and the government is the implementation of EIR. In essence, the registration programme would substantially boost the assemblers’ chances to be the leaders in the domestic market for mobile devices. “The only way to access the domestic market is if the government implements the EIR,” argues Seife.
The EIR originally slated to be implemented three years ago, still remains in the pipelines. Ethio Telecom is said to have complemented negotiations with four mobile device assemblers to replace widely used illegally imported phones.
Chen has put his hope on the full implementation of the EIR as a critical policy incentive for his company to play its role in the domestic market and concretely move to CKD.
Despite the ongoing negotiations, some companies have deeply rooted suspicions that the government is holding secret talks with major global players in mobile device assembly to set up shop in Ethiopia, insiders told EBR.
Amidst the heated debate between the government and assemblers, the MoI plans to generate USD113.6 million in the current fiscal year from the export of assembled electronic products. The figure will grow to USD182.4 million in 2019/20.
Despite the enormous challenges facing the assemblers, their belief in the potential of the industry is undeterred. TECNO is investing on a USD27 million expansion project, while SMADL has set aside a USD100 million for expansion which will bring its monthly production capacity to four million units per year.
Shibeshi also wants assemblers to put some of their efforts in R&D to increase their capacity.
“Exploiting Ethiopia’s raw materials is a critical solution for the metals and electronics industries,” Birhanu Gizaw, associate professor of industrial engineering at Addis Ababa Institute of Technology said.
Abdi Yayu (PhD), an assistant professor of industrial innovation at Adama Science & Technology University argues the same. “By utilizing our natural resources and talents, we can leapfrog in electronics.”
Experts also advise the government to increase its effort and diversify its support to high-end and low risk industries like electronics assembly. EBR