Will Foreign Furniture Companies Prove Detrimental For Local Producers?

Local demand for furniture is increasing rapidly. According to the Ethiopian Revenues and Customs Authority, 584,538 units of furniture were imported in 2011; that figure grew to 20,415,495 in 2015. This growth, however, is largely benefiting foreign companies – not local furniture producers. The latter identify a number of bottlenecks in accessing the market to meet this increased demand. EBR’s Bantayehu Demlie spoke with foreign companies, local producers and government officials to learn more about these bottlenecks and what can be done to overcome them to improve domestic firms’ performance and profitability.

Finfine Furniture Factory (3F), a locally-owned firm, was established in 1967. Once a small business, it now employs more than 540 workers on a permanent basis. Although it has managed to stay in the business for more than half a century, changes in furniture market dynamics have compromised its competitiveness.
The growing volume of imported items and foreign furniture firms assembling and producing furniture locally is one such change affecting market dynamics.
For instance, between March and April 2016, the Olympia area in Bole witnessed the opening of two Chinese furniture showrooms within a kilometre of each other along Africa Avenue: Legend Furniture in the Mega Complex and KIVK in front of Dembel City Centre.
Berhanu Woldegiorgis, 3F’s Commercial Manager, explains how foreign firms and imported furniture are threatening the competitiveness of the local ones. “They are dominating the market by applying less labour force, because they are using machines and lower pay than we do,” he told EBR.
One relative newcomer is Chinese firm NH Bay, which started operation in 2008. It has a workshop in the Kality District and two sales offices in Addis Ababa: on CMC Boulevard and in Piassa. The company says its entry into the local market creates motivation rather than threatens local producers.
“NH Bay created a furniture revolution by starting operation at the time when the [age-old] furniture firms were giving up local production and began importing,” says Tadios Nigatu, the company’s Marketing Manager. “It proved that local production is profitable. It also came with new designs. This motivated existing firms to re-consider producing rather than importing.”
Furniture distributors and customers explain the reasons for the shift in preference towards furniture produced by foreign companies and imported furniture.
Aynalem Mesfin, whom EBR spoke to while she was collecting pro forma to purchase furniture from Deluxe’s Olympia branch on May 3, 2016, instantly identifies two reasons: “First, the locally produced have problems in their finishing – they do not look attractive,” she says. “Second, they are not suitable to easily move from place to place. Their parts will disintegrate if you move them.”
Kidist Gebretsadik, Olympia branch head of Deluxe – a furniture importer – agrees with Aynalem’s reasons. “Deluxe imports luxury furniture. Our customers put heavy considerations on finishing and quality,” she contends. “As of now it is difficult to meet these demands by purchasing furniture from the local market. That is why Deluxe prefers to import.” Deluxe imports furniture from Malaysia, China, Italy and Turkey.
Kidist adds that some of the items Deluxe imports are not even produced locally. She mentions, as an example, cabinets (fire and security safe boxes), which Deluxe currently imports from Italy. Deluxe also assembles furniture in its Kality plant by importing spare parts from abroad.
Data obtained from the Ethiopian Revenues and Customs Authority shows a sharp rise in furniture imports in the past five years. In 2011, Ethiopia imported 584,538 units of furniture, which increased to 20,415,495 in 2015 – representing a 3,392.5Pct increase. These imports had a total value of ETB 1.75 billion in 2011 and ETB 4.3 billion in 2015, an increase of roughly 146Pct.
Local furniture firms identify bottlenecks that hamper their products from competing with those imported by firms such as Deluxe or locally produced by foreign companies such as NH Bay.
One of the major setbacks is the unavailability of raw materials in the local market. Those available are said to be very expensive. “We import 60 to 70Pct of our raw materials, such as textile, wood and accessories, while most of these can be drawn locally,” says Berhanu.
Local raw material supply shortages do not only force firms to import but also subject them to other import-related troubles such as a lack of foreign currency. Delays induced by transportation problems and customs formalities also hinder productivity.
Micro and small furniture producing enterprises, which the government hopes will gradually take over the manufacturing sub-sector, face an additional set of bottlenecks that hamper them from competing with the foreign-owned firms such as NH Bay.
Tariku Kibret, manager of Teimer Wood Work – a small-scale furniture enterprise in the Gulele District – identifies market access as the biggest challenge, exacerbated by other factors. “Bigger firms have the financial capacity to access machinery that allows them do better finishing, and to hire more labour force,” he told EBR.
He also says the negative public perception towards MSEs impedes market access: “The society gives low value to [MSEs] and their products. All these discourage us from being competitive and have made furniture less profitable than other micro and small manufacturing sub-sectors.”
The government also prefers bigger firms to MSEs in large furniture procurements, according to Tariku.
Girma Deriba, Director of the Metal and Engineering Directorate at the Federal Micro and Small Enterprises Development Agency (FeMSEDA) admits the insufficiency of government attention towards the furniture manufacturing sub-sector as a key barrier for competitiveness of MSEs such as Teimer and other local firms like 3F.
“We do not have an institution committed to training furniture experts. The Department of Wood Technology at Adama University was closed when the University transitioned to a science and technology university [even though] we aired our concerns at the time,” he told EBR.
Other relevant institutions are not satisfactorily addressing the dearth of human resources in the sector, according to Girma. The Chemical and Construction Inputs Industry Development Institute, established in 2015 within the Ministry of Industry, is not yet effectively operational, compared to other institutes such as the Textile Industry Development Institute. “Our Technical and Vocational Education and Training graduates are not [skilled] to the extent today’s competitiveness requires,” he adds.
This lack of expertise, in addition to limited access to modern machines, forces MSEs and locally-owned firms to do the work on a trial-and-error basis. “[It] disables [the] firms from doing fine finishing, on which foreign-owned firms are more competitive,” explains Girma.
Abiy Woldehanna, Manager of Solina Sofa, located in the Gotera area of Addis Ababa, says the government is giving less attention to MSEs as they grow bigger, which is the main reason that holds them back from competing with existing furniture market giants. “The government leaves us when we need its support the most,” he told EBR.
Solina began producing sofas in 2010 with an initial capital of only ETB8,000. After six years now its capital amounts ETB2 million, which enabled the firm to graduate from an MSE to a mid-level enterprise and readily become an investor. It employs 100 workers, and produces 12 sofas a day on 200 square metres of land.
“Our current operations need at least 10,000 square metres of land. The government promised to avail more land when we graduate. Now we are not able to access land even with a lease arrangement.” Abiy told EBR.
The government hopes to enhance the competitiveness of local furniture firms by undertaking different measures. One such measure is the provision of capital lease financing, which allows enterprises to access machines upon paying a 15 to 20Pct down payment. Unlike bank loans, there is no need to provide collateral in this arrangement, and MSEs are also allowed to import machines and accessories customs duty-free, according to Girma, who also hopes that the recent involvement of the Development Bank of Ethiopia in supporting MSEs through training and financing will add to the efforts.
Further, the structural re-organisation of the FeMSEDA to re-align its focus more on quality manufacturing than job creation shows the attention given to competitiveness, according to Girma. The Agency was previously under the former Ministry of Construction and Urban Development, and its focus was mainly on creating job opportunities. “As a result, there had been an asymmetrical focus in engaging in trade and service sectors rather than manufacturing,” Girma told EBR.
In 2015, the Agency’s mandates on job creation and ensuring urban food security were transferred to the then Ministry of Construction, Housing and Urban Development, while the FeMSEDA was re-organised under the Ministry of Industry. “With this new arrangement the Agency will focus on the manufacturing sector,” Girma hopes.
However, he reiterates that the government’s role is merely supportive, saying the ultimate competitive ability lies in businesses themselves.
Tadios from the Chinese firm NH Bay argues businesses can be competitive if they are ready to adapt to changes based on customer preferences. “In this age of the Internet, templates of different designs are available online. Besides, participating in international trade fairs provides another opportunity to learn,” he suggests. “With more and more people residing in apartments, the demand for furniture that saves home space, such as L-shaped sofas ,increases. And furniture firms should respond to such changing demands.”
Studies confirm that the track record of Ethiopian firms in producing what are called ready-to-assemble (RTA) furniture is way behind the demand, and that almost all these products are imported from East Asia. A study by Birhan Getaneh entitled “Competitiveness Analysis of Ethiopian Furniture Industry”, reveals that Ethiopian firms still operate with traditional modes of production, making their products bulky to ship and difficult to assemble. These were the very concerns that made Aynalem opt for imported furniture from Deluxe instead of those produced by local firms. This, in turn, hinders the ability of local firms to compete in local and international markets.
Birhan’s study, which was published by the Addis Ababa Institute of Technology in 2014, shows that the main factor for local firms’ inability to produce RTA furniture is the unavailability of what are known as engineered wood products. These are manufactured through the adhesion of wood fibres, flakes or veneer materials. Such products include high-density fibreboard (HDF), medium-density fibreboard (MDF), particleboard, hardboard, and plywood. NH Bay imports these items from China.
Tadios further underlines the importance of a firm’s competitiveness strategy. “[NH Bay’s] competition strategy is to focus on a few product lines and supply those in quantity and quality with the latest designs and enhance the accessibility of our products,” he says.
NH Bay currently produces sofas, beds and dining table sets. “The demand for these items is very high. Formerly, we were producing kitchen sets. We found specialising in fewer product lines and producing them in varying designs more efficient and profitable. Diversifying also limits [firms] from supplying in bulk quantity,” says Tadios.
3F, on the other hand, adopts a strategy of mass and diverse production. It produces sofa, dining table and chairs, kitchen cabinets, office equipment, doors, and windows. “Our productivity lies on economies of scale production coupled with our age-old reputation among our broad customer base,” says Berhanu.
Looking forward, Berhanu recommends more government intervention by encouraging Ethiopian-owned firms through standardisation and quality control in addition to technical support. “There is a gap in finishing – yet it is not a big issue as it is not as sophisticated as we may imagine. There is a promising ability among locals to adopt new technology. While we can do so, it is not fair to allow imported furniture to dominate the market,” he says.
Furthermore, Berhanu argues local furniture companies can offer something foreign ones can’t: authenticity and uniqueness. “In locally produced furniture you can see designs reflecting the architecture of Axum or Lalibela. We are no longer seeing this with the dominance of foreign products or those produced locally by foreign firms.” EBR