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Ethiopia is bidding to become Africa’s lead manufacturing hub, repositioning itself as an outsourcing alternative to countries such as China, where rising labour costs are driving margin conscious multinationals to look elsewhere.

The east African nation, the continent’s second most populous, has already attracted several global companies to light manufacturing and assembly– notably Swedish retailer H&M and consumer goods companies, such as Tesco.

This development comes as the narrative around Africa’s well publicised economic boom of the past 10 years enters a new phase. Growth over the past decade has been driven by a commodities boom. Now the question is: can African economies continue to grow without a manufacturing base to create sustainable jobs and incomes?

A growing chorus of economists think not. Princeton’s Dani Rodrik, has warned Africa’s economic gains may be too consumption and commodities driven, without the proper structural transformation toward industrialisation.

The UN Conference on Trade and Development (UNCTAD)’s 2014 Africa Economic Report also cautioned on fragile growth and the need for public and private investment to boost Africa’s manufacturing capacity.

“One of the sad things about Africa’s recent growth process is that it is not creating enough employment in these economies for the large youth populations moving to the labour market,” said UNCTAD Africa director Taffere Tesfachew.

According to Mr Tesfachew, in Ethiopia alone 1.4 million new people are joining the labour force every year. “The only way African countries with that number of people entering the job market every year can generate decent employment is moving into manufacturing,” he argues.

National Commitment to Manufacturing

Public officials in Ethiopia concur with the advice of the economists, and see the urgency of widening the country’s industrial base in order to support a swelling working population.

“Creating this national manufacturing base toward sustainable employment is exactly what we are aiming for,” says Ethiopia’s minister of Trade and Industry, Tadesse Haile. He underscored Ethiopia’s determination to see the record GDP growth of 8.5 percent in 2014  go towards generating high value jobs for its population of 90 million.

According to Mr Haile, the country’s initial success in attracting light assembly production for the garments, footwear, and leather goods stems from earlier agricultural policies.

“We started with agriculture development, moving toward an agri-based strategy of industrialisation. That is why we first encouraged areas close to agriculture, like textiles, garments and leather-based tannery, leading to manufacturing of shoes and leather articles.”

Ethiopia has some comparative advantage in leather and textiles. Its 90 million cattle, sheep, and goat population is one of the world’s largest. This has lent itself well to supporting the country’s current 27 export-oriented tanneries, 60 garment factories, and 15 textile mills.

But the Ethiopian government has grander plans. It is currently embarking on a multi-point national campaign to create the commercial infrastructure to support more manufacturing. Part of the programme entails adding the educational programs needed to mobilise its population toward its industrial goals.

“Working on human resources is another part of building our comparative advantage,” says Mr Haile, noting the country’s expansion of universities, as well as technical and vocational colleges.

Ethiopia also has plans to improve and extend thousands of kilometres of roads and railways and triple the country’s power output, lowering electricity unit costs through a series hydropower projects. Minister Haile expects the country to become a net exporter of power to places like Kenya, Sudan, and even Europe when it adds seven new hydroelectric power stations to its current 17.

Among the plants under construction is the 6000 megawatt Grand Ethiopian Renaissance Dam facility, expected to become Africa’s biggest operational power plant sometime in 2015. However, the dam has raised tensions with neighbouring Egypt, who worry that damming the Nile river upstream in Ethiopia will reduce the country’s essential water supply. These disputes have disrupted the project in the past.

The country is also building and expanding a number of export-focused industrial areas, for example its 156 hectare Bole Lemi Industrial Zone on the outskirts of capital Addis Ababa. Slated for companies sourcing value added manufacturing, textiles, and pharmaceuticals, Bole Lemi is already operational, with a number of commitments from companies to locate there. In May, the World Bank approved $250m in financing for construction of additional industrial zones for light manufacturing.

Multinationals try Ethiopia

Multinationals are already taking the bait. A number of notable firms are sourcing goods from Ethiopia, attracted by incentives the government is offering in the industrial zones and lower labour costs compared to many parts of Asia. Currently, the going low-skilled monthly factory salary in Ethiopia ($40 – $70) is roughly 25 percent of that in China.

Ethiopia also has duty and quota free access to the US under the Africa Growth and Opportunity Act (AGOA), and to the European Union through the Everything But Arms (EBA) initiative. These agreements facilitate export of products to high value markets.

One of the world’s largest retailers, Tesco, is placing garment orders with Ethiopian manufacturers. So too is Swedish global clothing chain H&M.

“We see great potential in Ethiopia and have started to source on a small scale,” said H&M spokesperson Hacan Andersson, who confirmed the company started its first orders from Ethiopia in late 2013.

The world’s largest consumer goods company, Unilever, announced plans  to open a plant in Ethiopia’s Eastern Dukem industrial zone in March 2014. The London and Rotterdam based conglomerate will use the manufacturing facility to create consumer goods to sell locally as well as abroad, according to statements by Unilever’s head of corporate affairs in Africa, Dougie Brew.

Several 2014 news stories indicated that Swedish homewares giant Ikea could begin manufacturing in Ethiopia. However, when asked, company spokesperson Jouel Tiu stated that: “Ikea Sweden has no immediate plans to start Ikea operations in Ethiopia.” However, he did note that the company is consistently reviewing expansion opportunities worldwide – including in Ethiopia.

Ethiopia is also seeing an influx of industrial activity from established export sourcing destinations with rising labour costs. Products destined for Turkey, India, South Korea, Taiwan, and China are all beginning to be manufactured there. Many business interests in these countries are leasing or have made commitments to lease space in Ethiopia’s new industrial zones, according to Mr Haile, the minister of industry.

Taiwan’s George Shoe Factory and Korea’s garment maker Myungsung Textile Company, for example, now manufacture goods in the country’s Bole Lemi industrial park. Turkey has already set up multiple textile operations in country, including Ayka Textiles’ Akya Addis Group subsidiary.

As well, UK leather specialist Pittards now operates leather and garment production facilities in Addis Ababa employing 1200 people to make designer gloves. And Ethiopia’s new leather-based manufacturing culture is also creating some local success stories, such as CEO Bethlehem Alamu, who founded soleRebels and The Republic of Leather ventures. Ms Alamu’s soleRebels company has become one of the world’s fastest growing footwear brands, garnering her multiple global business awards. Her “made in Ethiopia” products employ thousands through a global retail chain with stores in Taiwan, Spain, and California.

Getting the balance

As Ethiopia progresses in its export-led national industrialisation strategy, it will take time to fully realise goals of substantially increasing employment and becoming a globally competitive manufacturing hub. The country maintains a significant trade deficit, and its latest unemployment figures remains at about 25 percent for 2012, according to the IMF.

Additionally, Ethiopia ranked 129 out of 189 countries on the World Bank’s 2014 Ease of Doing Business list, which tracks the impacts of national regulatory environments on businesses. High on the list of hurdles for foreign investment is poor connectivity and telecoms infrastructure.

Still, the country has set some high markers for itself, and appears to be achieving a number of the steps needed to moveforward. Each additional commitment to manufacturing and assembly in the country brings new capital, employment, skills transfer, and income. Additional benefits are diversification of the country’s economy, and a stronger tax base.

Ethiopia is also working to avoid a “race to the bottom” scenario in its industrial zones, according to minister for Industry and Trade Tadesse Haile. The government is requiring environmental assessments of all new operations and supporting public and private employee unions. He claims there are currently up to 100 in the country to date.

More importantly, Ethiopia’s success in becoming a global manufacturing hub can serve as an example for other African countries looking to transform their economies. If Ethiopia’s model can be modified and replicated, it could usher in the next phase of the region’s economic evolution.

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