ETHIOPIA: The Next Hub For Apparel Sourcing?

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Country Overview

Ethiopia is a country with a diverse mixture of many ethnicities and linguistic backgrounds. It is the second most populated country in the Sub-Saharan Africa region and one of the fastest growing economies globally. Despite the global economic crisis, Ethiopian economy recorded an annual economic growth of around 10% over the past few years, owing to their infrastructure and mining projects.

The value of exports and imports together form 37% of the country’s GDP. The Ethiopian economy is a transitioning economy dominated by a large public sector. The Ethiopian government is taking steps to move towards a market economy by privatizing many state-owned businesses.

The Ethiopia’s history of textiles dates back to 1939 when the first garment industry in the country was established. In the past decade, the textile and apparel industry has grown at a whooping rate of 51%. In the past 5 to 6 years, more than 65 international investment projects in the industry have been approved for the foreign investors and brands. The Ethiopian government has also set up an industrial development strategy that gives another boost to the country’s apparel and textile production. The total manufacturing sector in the country equals around 4% of the country’s GDP, with textiles and leather dominating the exports.

Ethiopian Textile and Apparel Industry

At present, the Ethiopian textile and apparel industry consists of approximately 130 medium and large-scale factories out of which 37 are foreign owned. In 2014, the total exports of the textile and apparel sector accounted for around USD 113 million and employed 37,000 workers.

Skill-Set of workers

According to a research done by students of Nagoya University, following points could be figured out:

  • Top level management feels that obedience, discipline, and punctuality, are the most valuable skills for new workers in the garment factory whereas TVET (Technical and Vocational Education and Training) trainers appreciated garment production skills.
  • The skills of garment factory workers largely consist of sewing, ironing, and finishing the products. Workers do not have the skills to make patterns or compare garment dimensions.
  • There is a large variation of workers’ sewing skills. These differences tend to be related to the characteristics of the factory where they work rather than the pre-service training in TVET (Technical and Vocational Education and Training).
Investment Environment

Swift Economic Growth: Ethiopia is attracting a lot of global attention due to its low manpower, raw material and energy costs. It has experienced an average 11% p.a. GDP growth since 2004 and this rapid growth is expected to continue. In recent past, many European brands like Primark, Tesco and H&M have started sourcing garments from Ethiopia. Also since 2013, the whole East African region has become a lucrative sourcing destination for apparel.

Political stability: The country has a stable political environment and the government is also actively incentivizing private sector investments.

Under the “Growth and Transformation Plan”, the government is offering attractive tax holidays and duty-free packages for investments.

Labor Cost and Availability: 40% of the country’s huge population (around 85 million) is below the age of 15, which offers a rich labor market. Moreover, Ethiopia has one of the lowest minimum wages in Africa.  Also, the standards of spoken and written English are good in the country.

Ethiopian wages for garment workers is below $60 monthly. The work-permit costs for foreign workers are also 1/10th of what its neighbour Kenya offers.

Large market size: Ethiopia’s domestic market is huge, it being the second most populous Sub-Saharan country.  Ethiopia also enjoys the geographic advantage to being located on the crossroads between Africa, Middle East and Asia which gives it a preferred access to many big international markets.

Infrastructure Investments: Ethiopia has a projected national investment of $73 billion in soft and hard infrastructure development projects. Low cost electricity access is also improving, owing to its investment in hydroelectric power projects.

Favorable Investment Laws: The Constitution & Investment Law, MIGA & BITs of Ethiopia offers guarantee against nationalization to investors. Also, they get full repatriation of profits, payments (principal and interest) and dividends out of the country in convertible currency. Investors have the right to use expatriate employees.

The country also has bilateral investment promotion and protection treaties signed with 27 countries. And, double taxation avoidance treaties with 18 countries making it further investment friendly.

An exemption from income tax is available for 2 to 9 years, and the incentive policies of the government do not discriminate between their domestic and foreign investors.

 African Growth and Opportunity Act (AGOA): Ethiopia is eligible for preferential access to the U.S market under the African Growth and Opportunity Act (AGOA). In 2015, Ethiopia was approved for AGOA privilege extension for the coming 10 years until 2025. It provides duty-free access and trade preferences for quota into the US.

Ethiopia is a signatory to the following trade agreements:

  • Treaty Establishing the Common Market for Eastern and Southern Africa (COMESA) (Kampala, 5 November 1993)
  • Agreement Establishing Intergovernmental Authority on Development (IGAD) (Nairobi, March 1996)
  • African, Caribbean, and Pacific Group States (ACP)-European Union (EU) Economic Partnership Agreement (Cotonou, 23 June 2000)
  • At the continental level, Ethiopia has signed and ratified the Abuja Treaty that aims to establish an Africa Economic Community among the continents 54 countries.
Challenges faced by the Ethiopian Garment Industry

Low production Efficiency: The efficiency of garment manufacturers in the country is as low as 40-45%. Underdeveloped processes, and low skill and education level of workers result in this.

Longer Lead Times: The lead time of the country’s manufacturers can even go up to 150 days due to unavailability of raw materials. Only 40% of the total need of the country’s garment industry is manufactured domestically. Rest 60% need is fulfilled through imports, making the industry susceptible to international cost and availability fluctuations. When compared with its competitors, Ethiopia takes 45 to 60 days more in delivering the orders.

Lack of Marketing: Many Ethiopian facilities with state-of –art equipment and machinery are sitting idle in the country due to lack of marketing efforts.

Technological Restrictions:  Underdeveloped basic digital transaction processing technologies and over-reliance manual order management hampering Ethiopia’s growth prospects.

Other potential sub-Saharan African Countries as Apparel Sourcing Hub

As per UN projections, the sub-Saharan African region will see the highest growth in the working-population over the next 20 years. So, by 2035, the regions working population is expected to be as big as 900 million, which is around what China has today.

Within the Sub-Saharan African countries Ethiopia, Kenya, Uganda and Tanzania has garnered the highest interest of apparel buyers. Governments in these countries are taking vigorous steps towards the development of their domestic textile and apparel countries. Amongst these, where on one side, Ethiopia offers cost advantages, whereas, Kenya boasts its higher productivity.

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