At 6.45am the first bus halts outside the main gates of the Eastern
Industry Zone. The doors clang open. Bleary-eyed young men and women
begin to emerge and brace against the chill morning air. A second, then a
third and fourth bus arrives from the nearby dormitories, disgorging
more and more workers dressed in the turquoise polo shirts that
employees are required to wear on the shop floor at Huajian, one of
China’s largest footwear manufacturers.
Each member of staff pauses briefly at the factory door and presses
an identity tag against the electronic sensor that records their
clocking-in time. Minutes later small groups of employees begin to
assemble inside and outside the main buildings. Lines are formed,
calisthenic drills executed and chants recited before workers march
briskly to their stations and begin their duties.
These scenes, played out in thousands of factories across China each
day, seem more than a little incongruous here in Dukem, about 40km south
of Addis Ababa, Ethiopia’s capital. But they could become an
increasingly familiar sight if, as the Ethiopian government hopes,
Chinese companies move more light manufacturing operations to this
booming east African country.
“With the fast growth of its economy, Ethiopia will become a
promising land full of trade and investment opportunities,” wrote
Ethiopian Prime Minister Hailemariam Desalegn at the first Africa-China
Commodities, Technology and Service Expo, held in Addis Ababa in
December 2013. “More Chinese enterprises will be attracted to Ethiopia
with technology and investment, which will achieve win-win cooperation.”
Chinese manufacturers, facing rising costs at home, are well aware of
Ethiopia’s advantages: cheap labour and land leases; low-cost and
reliable electricity in Addis Ababa, where most manufacturing is sited
(with more to come soon as a series of hydro-electric dams turns the
country into an exporter of electricity); easy access to cotton,
leather, and other agricultural products; and proximity to key markets
in Europe and America.
This explains why Addis Ababa was chosen as the location for this
fair, the first of its kind to be held on the continent to showcase
Chinese companies and generate business. “We selected Ethiopia as the
destination of this expo because we think Ethiopia is a place many
Chinese industries would like to relocate to,” said Gao Hucheng, China’s
minister of commerce.
Huajian, which produces shoes for Guess, Tommy Hilfiger, Naturalizer,
and other Western brands at its Dukem factory, is keen to take full
advantage of the opportunities Ethiopia affords. “We are not coming all
the way here just to reduce by 10%-20% our costs,” insists Helen Hai,
former vice-president of Huajian Group, who is now advising the
Ethiopian government on how to attract Chinese investors. “Huajian’s aim
here is in ten years’ time to have a new cluster of shoemaking. We want
to build a whole supply chain,” she adds.
The company’s vision is bold. Huajian began producing shoes in
Ethiopia in January 2012 and the company now employs 2,500 people in the
country, 90% of whom are local. Huajian currently exports more than $1m
worth of shoes from Ethiopia to Europe and the US each month. But
within a decade, Huajian hopes Ethiopia will become a global footwear
industry hub, providing jobs to more than 100,000 local workers, 30,000
of whom will be directly employed by Huajian.
Together with the China-Africa Development Fund, a private-equity
facility, Huajian has committed to invest $2 billion over the next ten
years to create a “shoe city” that will provide accommodation for as
many as 200,000 people, as well as factory space for other footwear,
handbags, accessories and components producers.
Ms Hai is convinced Ethiopia will become “the future manufacturing
floor of the world”. She believes it should follow China’s path and
begin with labour-intensive industries such as footwear and garment
production. “The labour cost in shoemaking in China is about 22% of the
overall cost portfolio,” she explains. “In China today the cost of each
labourer is $500 [a month]. In Ethiopia it is only $50. So the question
comes down to the efficiency.” If one Ethiopian worker can produce the
same number of shoes as one Chinese worker then labour costs could be
reduced from 22% to 2.7% of the new total cost.
People argue that African efficiency is low, Ms Hai says, but she
maintains that with one year’s training Ethiopian workers could achieve
“70% of the efficiency” of workers in China.
The profit motive for relocation to Ethiopia is clear. But other
factors—excise breaks, tax holidays and cheap land rental offered to
investors in certain preferred sectors—make Ethiopia attractive too, Ms
Hai claims. For example, Ethiopia is eligible for schemes like the US’s
African Growth and Opportunity Act (AGOA) and the EU’s Everything but
Arms (EBA) treaty, which allows exporters from many African countries
duty- and quota-free access to America and Europe.
What is in it for Ethiopia? While the Chinese are taking advantage of
Ethiopia’s cheap labour, “they bring technology, know-how and
training”, Ms Hai says. “This will help the country create jobs and
bring exports. That is truly the root of industrialisation.”
Grand plans like Huajian’s, however, are few and far between. Annual
levels of Chinese investment in Ethiopia are low, totalling about $200m
in 2013, according to the Chinese Chamber of Commerce in Addis Ababa.
This marks a substantial increase from virtually nothing in 2004 and
$58.5m in 2010. But just $50m of the current investments are in
manufacturing, mainly in small and medium enterprises producing steel,
cement, glass, PVC, paper, furniture, mattresses, blankets, shoes and
other products. Instead, Chinese economic activity in Ethiopia tends to
be focused on major infrastructure programmes—roads, railways,
telecommunications and electricity transmission—which the Ethiopian
government pays for with financial backing from Chinese institutions.
“This is substantial activity, at least in terms of the value of
these projects,” explains Jan Mikkelsen, IMF resident representative in
Ethiopia. Last December’s China-Africa Expo reflected this pattern with
few
of the more than 130 Chinese companies exhibiting looking to open
factories in Ethiopia or elsewhere on the continent. Instead, many, like
China Machinery Engineering Corporation (CMEC), with their large,
prominent stand, were hoping to secure lucrative government contracts.
“Ethiopia is a very big potential market,” says Jin Chunsheng, CMEC
vice president. “There is the five year [Growth and] Transformation Plan
and we expect to see a lot of power and infrastructure business which
is related to the work of our company.” CMEC is currently negotiating to
build fertiliser plants with Metals and Engineering Corporation, a
major state-owned Ethiopian enterprise, Jin adds.
Although manufacturing in Ethiopia is beginning to rise, it accounted
for only 12% of GDP in 2012-13, compared to 43% for agriculture and 45%
for services, according to government figures. The sector’s annual
growth, however, was 18.5%, as opposed to 7.1% and 9.9% respectively for
agriculture and services.
Yangfan Motors, a subsidiary of Chinese automobile manufacturer
Lifan, was one of a small number of exhibitors currently operating in
Ethiopia. The company opened a car assembly plant in Addis Ababa in
2009. “We chose Ethiopia because it is secure and stable,” says Liu
Jiang, Yangfan’s general manager. “Furthermore the two governments
[Ethiopia’s and China’s] have a good relationship and we think that this
is a very important point too.”
Unlike many Western countries, China has a policy of non-interference
in domestic affairs, which has been appealing to African countries.
Ethiopia’s adherence to China’s developmental state model shows that the
two countries share a strong affinity.
Not surprisingly, business has been difficult for Yangfan. More than
83% of Ethiopia’s population live off subsistence farming in rural
areas, according to the World Bank, and 90% of all car sales are used
models. The company currently manufactures around 3,000 vehicles
annually but only manages to sell one-third to the local market. Lifan
had hoped to use its Ethiopian base as a regional hub, but so far has
been unable to distribute abroad because Ethiopia is a landlocked
country with high taxes and transport costs, Liu says. “To transport one
container from China to Ethiopia is almost triple the cost of sending a
container from China to Brazil,” Liu adds.
A container from Shanghai, China, travels 12,400km to the port of
Djibouti, at a cost of about $4,000, and is then transported overland
865km to Addis Ababa, for another $4,000, Hai says.
A 2012 World Bank study on Chinese foreign direct investment showed
that investors cited customs and trade regulations and tax
administration as major constraints on their business. An
under-developed financial sector and a dysfunctional foreign exchange
market are other business impediments, Mikkelsen says. In the bank’s
2014 “Doing Business” report, Ethiopia slipped down one place to 125th
and dropped from 162nd to 166th in terms of ease of starting a business.
Companies seeking short-term profits may not take the risk or feel
that the inconveniences are worth staying the distance, says Lars
Moller, lead economist at the World Bank’s Addis Ababa office.
Yangfan, however, is committed to the long haul, Liu says. Later this
year, the company will move to a bigger factory in the same industrial
complex as Huajian. Government environmental policies will begin to
favour newer, less-polluting vehicles and the ongoing road and railway
construction will significantly reduce transportation costs, he adds.
“In 2014 we are planning to bring two new models, one of which is
especially designed for the Ethiopian market.”
Ethiopia clearly has a long way to go on its path to an industrial
economy that offers jobs to its people and sensible opportunities to
foreign and regional investors. Much shoe leather will be worn out
before that destination is reached. Ventures such as Huajian’s and
Yangfan’s offer tentative hope.
DM
This article was originally published in Africa in Fact,
a monthly magazine published by Good Governance Africa (GGA). GGA is a
research and advocacy organisation that works to improve government
performance on the continent.
Photo: Labourers work at a railway station construction site in
Ethiopia's capital Addis Ababa, September 16, 2013. REUTERS/Tiksa Neger
