Launch of industrial parks sees Ethiopia bid to become regional manufacturing hub but challenges remain

Author: Mathias Muindi, Analyst, East Africa

A year after violent protests that threatened to tarnish Ethiopia’s reputation as one of Africa’s most prospective investment destinations, the government has inaugurated three of 15 industrial parks that Prime Minister Hailemariam Desalegn claims will turn the country into a hub of light manufacturing in Africa by 2025.

First to be commissioned on 20 June was the Hawassa Industrial Park, south of the capital Addis Ababa. Two more parks in the northern towns of Kombolcha and Mekelle followed on 8 and 9 July respectively, while two further parks are due to be inaugurated in September in Adama (central) and Dire Dawa (east). Government officials claim that 18 ‘leading’ foreign companies from the US, China and India have already expressed interest in investing in the Hawassa park.

Strategic step forward for government

The launch of the parks marks a major step in the restructuring of Ethiopia’s agriculture-based economy. The initiative aims to target development of the textile and apparel sector and exploit the country’s production of leather and cotton in particular. It is also in line with the government’s increased focus on manufacturing under the GTP-II development blueprint. The manufacturing sector currently contributes 5% of GDP, half the sub-Saharan average of 10%.

In seeking to develop its textiles industry, the government is also looking to take advantage of rising labour costs in East Asia, which has dominated the textile and apparel market over the past 40 years. Wages in Ethiopia are 25% of those in China and 50% those in Vietnam. A number of foreign investors operate in the country, with Chinese investors already having a presence in the textile and leather market. The launch of the parks positions Ethiopia ahead of regional competitors such as Kenya.

Investor advantages

The labour-intensive nature of the textile and apparel industries means that they will benefit from Ethiopia’s expanding labour force amid demographic changes. The cost of setting up textile facilities is likely to be relatively low, given the limited skills base required and easy availability of raw materials. According to FAO, Ethiopia has one of the largest populations of cattle in the world. Local competition from synthetics is also limited.

The overall regulatory environment remains broadly stable, with significant policy changes unlikely. Key economic policies are firmly anchored in the GTP II, minimising the chances of any fundamental changes to government policies once implementation starts. Nevertheless, the government has offered various incentives to investors in the parks, including subsidised rents, duty exemptions for imported capital goods and raw materials, and five-year tax holidays on profits.

Investors will also benefit from Ethiopia’s close geographical proximity to markets in Europe, the opening of a key railway to the port in neighbouring Djibouti, continued investment in new roads and the Grand Ethiopian Renaissance Dam (GERD) – a major hydro-dam in the north-west. The railway is one of the most modern in Africa. Together with customs reforms announced in April, it will help to cut transport costs between Ethiopia and Djibouti. Meanwhile, as the largest hydro-dam in Africa, the GERD should improve the reliability of power supplies in the coming years.

Still a challenging environment

Nonetheless, despite the government’s manufacturing ambitions, Ethiopia remains a challenging environment for private investors. As well as the structural challenges faced by many sub-Saharan economies, such as low levels of education, political interference and corruption will remain key risks for foreign firms wishing to enter the Ethiopian market. Leading domestic non-state business entities remain tied to parties or officials from the ruling Ethiopian People’s Revolutionary Democratic Front (EPRDF) coalition, posing integrity risks to those partnering with them. Most leading local companies are linked to officials associated with the government. Foreign operators often partner with such firms.

Foreign investors also face reputational threats from association with a government often accused of human rights abuses. The government remains politically repressive and decision-making often opaque. Despite launching a ‘National Dialogue’ with the opposition in January in an apparent attempt to address the underlying drivers of the 2015-16 protests, genuine political reform is unlikely. The EPRDF is unlikely to agree to any overhaul of a political system that has worked greatly to its benefit.

From an operational perspective, ICT infrastructure remains under tight government control. Communication shutdowns are frequent. Meanwhile, the banking sector is underdeveloped.

In addition, although security challenges have declined since the peak of the violent protests in 2015-16, during which a number of foreign-owned assets were targeted, the parks in Kombolcha and Adama are located in the Oromia and Amhara regions respectively, two areas at the centre of the protest movement. Nonetheless, improved security around foreign assets means that the parks are unlikely to come under attack from militant elements in Oromia and Amhara, despite persistent local resentment towards the federal government.

General levels of crime remain low, though petty crime is increasing in urban areas. Meanwhile, Ethiopia’s strained relations with some of its neighbours, particularly Eritrea and Somalia, drive a persistent terrorism threat. The government regularly blames attempted terrorist attacks on Eritrea or Somali Islamist extremist group al-Shabab, while porous borders with Somalia and Kenya exacerbate the threat. Nonetheless, such groups are unlikely to target investors, with government installations and officials their main focus.

Risk vs reward

Ethiopia’s strategic location, large workforce and stable regulatory regime offer significant opportunities for investors in the textiles and apparel sector. However, careful management of political, operational and security challenges will be required to fully exploit emerging opportunities in the country.

 

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