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Optimizing Ethiopia’s Industrial Revolution

This article was originally published in print in Fortune newspaper on December 25, 2016 under the Viewpoint section titled “Why Foreign Investment is Still Flowing in Ethiopia” by Henok Assefa, Managing Partner of Precise Consult International. The article looks at the major driver of Ethiopia’s FDI surge and its success in taking the crown of competitiveness from China in light manufacturing. Furthermore, this op-ed examines opportunities presented in job creation and linking smallholder farmers and input suppliers to the engine of Ethiopia’s industrialization – its industrial parks.

Turning an “economic” corner

By all accounts, Ethiopia has had a tough year.  The effects of El Nino were deeply felt across the country.  Agriculture was impacted.  So was the life of millions of Ethiopians earning a living from it.  Global mainstream media reported the return of drought to Ethiopia.  These negative stories tested the rapidly improving image of the nation.  Further, governance issues spilled into the streets and the nation went through a turbulent few months.  Normally, these issues should be enough to deter investors from any country.   Nevertheless, the Ethiopian Investment Commission (EIC) announced that more than half a billion dollars in Foreign Direct Investment (FDI) entered the country in the last three months.  Even more interestingly, $3.5 billion worth of foreign direct investment from 124 investors was being processed.  So how do we reconcile these two seemingly irreconcilable events?

The answer lies in Ethiopia’s emerging global competitiveness in light manufacturing industries, particularly garments and leather products.  You don’t have to take my word for it.  McKinsey Global Institute (MGI) recently noted that Ethiopia’s “unit labor costs for the manufacture of polo shirts are $0.14 per unit, less than half the level in China and Vietnam. In the case of leather loafers, its unit labor costs are one-third those in Vietnam and one-fifth those of China.  As a result, the country has become a competitive global exporter of labor-intensive goods. For example, the value of its footwear exports has increased at an annual rate of 38 percent from 2004 to 2014, and the value of apparel exports at 22 percent a year over that period”.  MGI further states, “Ethiopia’s success has been based not simply on low labor costs, but also on unit labor costs that are competitive when productivity is taken into account.”  This is a very big deal!

The nation has been furiously implementing a strategy to become the world’s most competitive country in light manufacturing industries.  As Michael Porter, the renowned Harvard professor puts it, strategy is essentially about choice.  It is about deciding to do one thing and not another thing, and therefore a trade off.  Strategy therefore requires careful thinking, decision, and courage to implement.  Ethiopia’s insistence on an industrial strategy was not popular from the start.  Still Ethiopia implemented courageously.  During the past 20 years, China achieved efficiency in light manufacturing previously unseen in human history.  Unable to compete, many countries in Africa, industrialized during China’s rise.  Regardless, Ethiopia still stuck to its strategy and implemented furiously.   The result of this single-minded implementation, helped by rising production costs in an increasingly wealthy China, is Ethiopia’s emergence as the world’s single lowest cost production country for the migrating industries of light manufacturing.  This is indeed a big deal.  Its impact is much more long term and pervasive than meets the eye.  It puts Ethiopia in a powerful position to utilize its young population and drive fast growth for decades to come.

Globally, the textile and garment sector are one of the biggest markets with a reported $3.03 trillion U.S. dollars value in exports alone between the years 2011-2015.  World trade in leather—one of the most widely traded commodities—is currently growing and is estimated at over $100 billion U.S dollars a year. In 2014, leather footwear and apparel accounted for about 68% of that figure, amounting to U.S. $68 billion.  These two global markets are powerful engines for job creation and a magnificent opportunity to pull millions of people out of poverty through job creation.  Of course, they are both currently dominated by China.  But rising costs in China means that more than 80 million jobs there are set to migrate to other countries.  The vastness of China means that no one single country can by itself absorb all this job opportunity.  Given Ethiopia’s current cost leadership, the nation is a clear candidate to attract many of these jobs.  If the Government’s admittedly ambitious targets for the next 10 years are to be met, this industry will create up to 2 million direct jobs.

With jobs come salaries.  With salaries comes increased consumption of daily needs.  The two million direct jobs even at a very low salary of $100/month on average mean an annual salary income of $2.4 billion.  This doesn’t even include the plethora of ways such investment will increase job opportunities. The so called Fast Moving Consumer Goods (FMCG) industry, supplying everything from food and beverage to cleaning items, is set to grow rapidly on back of this jobs expansion. Another round of FDI is thus attracted to Ethiopia, eyeing a rapidly growing middle class in the 13th largest population of the world. It will remain a magnate for further FDI for years to come.  This is only the beginning.  Believe it!

The major driver of Ethiopia’s FDI surge is thus its success in taking the crown of competitiveness from China in light manufacturing.  So now what?  Do we sit and celebrate this magnificent progress?  Absolutely not!  There is much more remaining to be done compared to what has been done already if Ethiopia is to achieve prosperity.  While the effort in attracting FDI must be kept up, there are a few areas that require similar zeal if Ethiopia is to reap the full benefits of its industrial revolution.

Verticality and the opportunities it creates for Ethiopia’s smallholders

To say that Ethiopia is attracting FDI in light manufacturing due to its cost leadership only is not the full story.  Today’s consumers across the world are more sensitive to the social and environmental impacts of production.  They are increasingly critical of brands whose products are manufactured under appalling conditions.  They are also increasingly hostile to products manufactured under a global system that single mindedly chases low labor costs but with very high carbon foot prints. Consequently, big global players such as Philip Van Heusen (PVH), Hennes & Mauritz AB (H&M), and Vanity Fair (VF) appear determined to get it right with Ethiopia.   H&M by itself owns 4,351 stores worldwide.  The three combined netted more than $85 billion U.S. dollars in sales in 2015 alone.  These mega players are pushing for verticality, a term used to describe the creation of the entire chains of activity in the industry being available in one country.  Sourcing inputs locally instead of importing them from distant places means low fuel consumption and low carbon footprint of the final products – an issue final consumer is increasingly becoming sensitive and one of the factors affecting their purchasing decision.

Of course, Ethiopia is especially well suited for verticality.  It has the largest livestock population in Africa and eighth largest in the world.  Livestock and related activities account for up to a quarter of national earning.  And with more than 80% of Ethiopia’s rural population operating in a mixed crop-livestock agricultural model, livestock can play a crucial role in turning Ethiopia into a middle-income country.  The likes of Hujian and Georges Shoe Company, some of the largest shoemakers in the world, are opting to make shoes from their base in Ethiopia.  These companies will need millions and millions of square meters of hides and skin, processed leather, etc.  In turn, the millions of Ethiopians who earn their living from rearing cattle, growing animal feed, providing services in animal health and reproduction, the whole chain of activities are suddenly linked to a powerful web of forces that link them to magnificent global demand.  The many current initiatives in the livestock sector thus must be lead with this end goal in mind.  They must be treated with the same national zeal that created global competitiveness of light industry.

The time has come for Ethiopian Cotton!

While Ethiopia has a number of high profile initiatives to develop its livestock subsector, less could be said for cotton. Ethiopia has more than 3.2 million hectares of land with suitable climate for cotton cultivation.  A significant portion of this land is found under smallholder farmers.  In Amhara region alone, there are up to 1 million small farmers who own suitable land for cotton production.  Unfortunately, less than 10% of this land is currently producing cotton.  The driving factor for low production is price.  As a global commodity with unstable prices, small farmers see cotton as a risky crop.  Recent ill-conceived Ethiopian policy of cotton export ban and price control did not help matters.  Further, many governments, including the U.S. subsidize their cotton farmers while Ethiopia does not.  The net result is that Ethiopia’s small farmers mainly produce cotton for the purpose of crop rotation. The time has come for Ethiopia to set minimum prices and offer a guaranteed market for cotton produced in country. Any attempts in improved utilization of better seeds, use of BT Cotton, increased irrigation, and good agronomic practices must first consider better and more stable pricing mechanisms.

Domestic production of cotton will also have far higher positive consequences.  Currently, Ethiopia is not globally competitive in the manufacturing of fabrics.  A major reason is that most of its factories are operating far below capacity due to a lack of abundant supply of cotton.  This makes a focus on cotton even more crucial for Ethiopia to sustain its emerging lead in global competitiveness in the apparel business. Creating an attractive domestic cotton market will lead to further industrial value addition and job creation opportunities up the chain.  Investments in ginneries, , spinning, textile making, dying, and a better ground for apparel making in general.  In other words, a focus on smallholder cotton will allow Ethiopia to achieve verticality.

A domestic private sector

Ireland is one of the great economic success stories of our times.  Its approach is loosely similar to that of Ethiopia with its industrial parks development.  Ireland is a small country of a few million inhabitants.  It correctly inferred that its best positioning in the global economy is as a base to serve the gigantic European economy next door.  Given its highly educated workforce, it incentivized and attracted the companies who control the global supply chain in high tech industries.  Ireland’s success is now the stuff of legend.  The only thing that could cap its stellar rise to the upper echelons of prosperity would be strong large domestic enterprises who would stick with it through thick and thin.  While interlinking with the global economy is a source of strength, Ireland also lives in higher risk that changes beyond its control could derail its economic footing at a moment’s notice.

Ethiopia is a large country of almost 100 million people.  It is also located strategically within an emerging Africa, next door to the Middle East, and on the sidelines of the busiest shipping lanes in the world.  It has much better opportunities to create a domestic private sector the likes of which Korea, Taiwan, and China have created.  Much like Ireland, Ethiopia’s uptick in garment and leather industries investment is a direct result of its ability to attract firms like PVH, H&M, and VF with solid positions within the global supply chains of apparel. This brilliant market led strategy can easily be repeated to create opportunities to link thousands of Ethiopian SMEs to global supply chains.  The cardboard box maker gets to supply its much-needed packaging product to manufacturers in industry parks.  Enough demand created here may mean attractive grounds for an investment in paper mills that utilize Ethiopia’s vast eucalyptus and bamboo wealth.  Those producing leather, fabric, buttons, clothing hangers, etc. can all find big markets in their backyard.  Professional services firms as well as banking receives fantastic stimulus to grow and reap the benefits of a global supply chain.  The small investor with a cotton ginnery, who takes his raw material from a small cotton farmer, sees their products sold in the high value markets of Western Europe and America.  This is not a fairy tale.  It can and must happen in today’s Ethiopia.

Business Ecosystem for Local Small Businesses

To gain the full benefits from its breakthrough with FDI, Ethiopia needs to create jobs outside of industrial parks.  With about 50% of citizens under the age of 15, job creation is a matter of urgency.  So, the country will need to ensure that FDI is not kept by the walls of the parks.  Technical and managerial knowhow must be ensured to spill over into the rest of its economy. The chain of activity that leads to the final product of our manufacturing industry is to a high degree produced by local SMEs.  But local SMEs face a business environment among the most difficult in the world.  Ethiopia is ranked 159 in the World Bank’s doing business rankings.  Its position in the all-important “starting a business” category is an appalling 179th in the world.  It also does poorly in other key metrics such as Getting Credit (170th), and trading across borders (167th). The result is that Ethiopia is creating fewer jobs than it should.  It is creating fewer SMEs than it could. Subsequently, large FDI firms coming into the country find it cheaper and faster to import their inputs rather than buy them locally.  This is a great missed opportunity.  By contrast, Rwanda worked to improve its doing business rankings from 143rd to 56th in the world.  Its immediate priority was to provide gainful employment to millions of people. Its efforts led to about 72,000 new ventures, almost entirely consisting of two- and three-person operations, which in a decade tripled exports and reduced poverty by 25%.

Peter Drucker, is widely credited for creating management as a formal modern discipline.   In the middle of the last century, he lamented that American regulators’ mistaken understanding of the role of a business in society was responsible for the difficult environment for business.  He debunks outright that the idea of profit maximization as the purpose of a business “is not only wrong but also irrelevant”.  The business enterprise, as a part of society, serves to solve societal problems and create opportunity.  Far from being a side concept, profits are a validation that the business enterprise is serving the biggest needs in society.  People vote with their wallets.  Unfortunately, Ethiopian society today resembles that which existed during Drucker’s writing in America.  Improving the business ecosystem in Ethiopia is thus not simply an exercise of going through small changes in reform.  Small changes, while very important, must be based on a modern understanding of business as a problem solver for society, not merely a modality to enrich the few.

Ethiopia must charge a full court press to improve its ecosystem for small businesses.  It can and must be done. Ethiopia must ensure that its budding industrial revolution and the corresponding surge in FDI pulls its entire economy into the modern age. President – elect Donald Trump complains that the U.S. is offshoring too many jobs to China and Mexico.  Ethiopia will join the list soon.  Mark my words!

Thoughts on the Ethiopian economy

Fourth Ethiopia CEOs Forum

19 November, 2014

Sheraton Addis

Following is a synopsis of a talk I gave this morning at the opening of the fourth Ethiopia CEOs forum.

Over the past few months, global economic trends seem to generally be more favorable for Ethiopia.  Major Ethiopian import commodities are showing a significant decline in price.  Ethiopia’s export commodities also appear to be doing well in world markets.  Here’s why.

The global picture for the Ethiopian economy

Beginning this past July, the world economy seems to have slowed gradually with the Global Manufacturing and Services Purchasing Managers Index (PMI) declining from 55.5 in July 2014, to 53.6 in October.  Generally the E.U and Brazil have experienced difficulties while China has settled into around 7-7.5% growth pattern, lower than what we have come to expect over the past three decades.  The Japanese economy on the other hand has officially entered recession as of a few days ago.  The good news seems to come from the economies of the U.S, U.K, and Ireland where there is some positive growth.  Given that Ethiopia’s trade with the world is quite diversified with the country trading with many countries, these slow downs may not directly affect the economy negatively.

Almost directly in line with the general global slowdown, the price of commodities have declined starting from the month of June. Herein lies some of the good news for Ethiopia.  The price of refined petroleum which accounts for about a fifth of Ethiopia’s import requirements has tanked by close to 30% in the past five months.  Fertilizers, another important import commodity is tied up with the price of petroleum and hence lower prices.  On the other hand, Ethiopia’s biggest export items; coffee and sesame seem to be doing okay.  After a quick dip in price in May and June, Coffee has rebounded strongly after that.  With economic conditions not improving, the price of gold has also rebounded somewhat in the past few months, which accounted for about 15% of Ethiopia’s export earnings.

Ethiopia’s Macro fundamentals look good, for the most part

With the end of the 2013/14 Ethiopian budget year, the Ministry of Finance and Economic Development (MoFED) has released some impressive numbers on the macro front. GDP growth reached 10.3% for the year and per capita income grew to a record USD $632. This is an impressive average growth of 8% a year for the past 9 years, and inching closer to the middle income country status the nation aspires to reach by 2025.  While industry showed the greatest amount of growth, it appears manufacturing is still lagging far behind the plans set by the Ethiopian government.  National savings reached an impressive 22.5% during the budget year, from a historically consistent low figures of single digit numbers registered up until around 2010.  However, investment rates remain very high by any standards, around 40.3%, and a resource gap of about 17.8%.  This reinforces the importance of foreign direct investment in order to continue to fuel Ethiopia’s development.

Exports are lingering at about 11.7% of GDP, a number far lower than expected and needed.  Imports continue to climb year on year, resulting in an ever-widening trade deficit. On the exports side, oil seeds have grown phenomenally and may have taken the status as Ethiopia’s largest export commodity away from coffee.  Of note also is what seems to be a major boost in earnings and production from pulses such as chickpeas and white pea beans.

Given very large import requirements and an export sector that is stubbornly stagnant, the birr continues to be under pressure to devalue.  Official exchange rates surpassed the 20 birr/dollar mark around September 2014.  The depreciation seems to continue in a managed and consistent way with the birr dropping almost the same amount in value month after month.  Partly due to this policy, but also owing to a number of other factors, inflation has reached its lowest point in recent years, reaching 5.4% in October 2014.

Some thoughts on the potential opportunities that exist in the Fast Moving Consumer Goods business in Africa and Ethiopia

Fast Moving Consumer Goods (FMCG) industry, made up of essential items people buy for everyday use is a multi billion-dollar business in Ethiopia and wider continent.  Some of the world’s biggest FMCG companies have wasted no time in expanding across Africa in recent years.  The trend has also hit Ethiopia where fast per capita income growth and the 14th largest population in the World combine for interesting prospects for operators in the industry.  While Coca cola continues to invest and expand its capacity here, new players such as Unilever and Nestle are entering the Ethiopian market as producers.

The fundamentals for the FMCG business are quite sound.  McKinsey’s 2010 report, “Lions on the Move” projects that African collective GDP could reach $2.6 trillion by 2020.  However, a new report by Deloitte disputes these figures and projects a much larger $3.7 trillion African GDP by 2019, five years from now.  The report attributes an increase of about $1.7 trillion to an emerging middle class and increased household demand.  It further singles out Ethiopia, Uganda, and Mozambique as the fastest movers. What’s for certain is that FMCG will continue to be an industry worth noting across Africa in the years to come.

Part of the interesting picture for FMCG in Ethiopia is the broader potential of the Horn region.  For instance, the 8 nations that make up the regional block Intergovernmental Authority on Development (IGAD), Ethiopia, Djibouti, Kenya, Uganda, Sudan, South Sudan, Eritrea, and Somalia collectively harbor a population of close to a quarter billion (243 million).  In essence one in four Africans resides in these countries.  This number is also expected to rise to 368 million by 2030.  Despite challenges in peace and stability in the region over the past decade, great strides are being taken.  Collective real GDP rose from $141 billion in 2008 to $187 billion in 2013.

The FMCG market in Ethiopia alone is worth a note.  According to Access Capital Research, the formal FMCG market has surpassed $6 billion by 2012 and was growing by about $1 billion a year.  Import figures from the National Bank of Ethiopia indicate that about $4-6 billion worth of FMCG products will be imported into Ethiopia every year, over the coming few years.  The obvious fact is that FMCG today presents immense opportunity in Ethiopia for business and for economic development.

Henok Assefa

Chairman, Precise Investments

Managing Partner, Precise Consult International PLC

Africa’s first manufacturing powerhouse? Ethiopia’s impending tap into global supply chains

The impending and transformative potential of Ethiopia lies in low cost labor-intensive light manufacturing industries, which may allow it to tap into the world’s massive and lucrative consumer products supply chains.  For this, Ethiopia has always harbored latent comparative advantages.  Least understood and appreciated is its location in the middle of the economic world and aside the busiest international shipping lanes on the globe.  About 30% of the World’s containerized cargo passes through the red sea, offering potentially large advantages in transportation efficiency and cost.  In low margin, high volume light manufacturing industries such as garments and perhaps electronics assembly, these advantages can influence location decisions in a major way.  Ethiopia is also roughly equidistant from all the major G7 & BRICS economies, making Addis Ababa an emerging major air transport hub for Africa and the Middle East.  Easy to see these advantages materialized partly in the fast-growing horticulture sector, which is earning more than $200 million a year in exports and likely to surpass a billion in a few years’ time.

Ethiopia’s other clear advantages lie in its almost 90 million population which is also some of the youngest in the world.  Wages are competitive by any standard and foreign investors have always appreciated Ethiopia’s workers’ discipline and thirst for knowledge. Skills and education is expansion rapidly as the nation invests heavily in the youth, with currently more than 20 million students in theoretical and technical training across the country.  On top of all this, strong Government interest also means incentives available for those entering the manufacturing sector, providing low cost long-term bank finance, access to land, and other useful customs and income tax holidays.   Last but not least, the nation also has an interesting domestic resources base, ranging from cotton for garments, to leather for an evolving shoe industry, and to diverse agro-climatology for value added agro-processing.

With all these assets and advantages, the main question is bound to be why has manufacturing in Ethiopia not taken off already?  In our view, there were at least few major external and internal reasons for this.  First was China’s legendary rise in manufacturing prominence with its large cheap labor pool and ability to drive down production costs via economies of scale.  The second reason has been (and continues to be) Ethiopia’s inland transport challenges compounded by an intense customs bureaucracy.  The third major reason has been the general difficulty of doing business and history of low private sector investment, which rendered all ancillary and input services to industry virtually non-existent.  In our view, however, there are reasons to be optimistic.  The situation is starting quickly change, both outside and inside the country.  We have reasons to believe that Ethiopia, if it manages its own industrialization strategy well, can emerge as the continent’s first truly large manufacturing workshop.  Here’s why?

China’s is clearly and rapidly moving out of the low cost manufacturing game.  Its government does not seem too focused on saving the industry either.  It is putting ambitious plans to move up the ladder to more knowledge based and more capital-intensive industries.  In any case, China is already not so advantageous in cost terms.  Given its decades old one-child policy, its huge labor pool has receded and the average age of its workers has risen rapidly.  The resulting tightening labor market, and opportunities elsewhere in the Chinese economy mean higher wage costs for manufacturers.  Land costs are rising fast all over China driven by the needs of a more affluent population and more diversified industrial base.  The RMB on the other hand is facing intense pressure to appreciate, which will have the impact of increasing the cost of production and reducing the benefits of exporting China based manufacturers currently enjoy. This is likely to receive further boost given the Government’s current strategy of developing its internal markets and its focus on quality rather than quantity in everything that nation does.  Already, Vietnam, the Philippines, and Indonesia are seeing the benefit of these changes in China, with jobs moving into their emerging light manufacturing industries. Africa can and will be a location for some of the more than 80 million jobs expected to leave china in the coming few years. Ethiopia, having invested for more than a decade in preparation for this eventual opportunity, is probably the best placed to take advantage of this megatrend.

Within Ethiopia, we have many other reasons to be optimistic also.  Doing business challenges are starting to be addressed, specifically for manufacturing.  Ethiopia is currently building high-speed rail access connecting its internal resources bases to its population centers and onwards to the strategically located Red Sea port of Djibouti.  Internal doing business challenges and customs reforms are also starting to give way.  The nation’s Revenue and Customs Authority is currently working on a new program of Authorized Economic Operators (AEO), which virtually removes all delays, and uncertainly in importing and exporting for manufacturers.  The Ministry of Industry is meanwhile, in conjunction with Asian investors from China, India, and Turkey, building industry parks capable of harboring hundreds of light manufacturing firms.  Already, a Chinese “Eastern Industrial Park” is operational on the outskirts of Addis Ababa with two more large ones under construction.  Statistics show that more than 1000 Chinese firms, many in light manufacturing, have already applied for business licenses in Ethiopia.  The Turkish garment industry has also started to make inroads with several $100 million plus investments, while Indian investment has already passed the $4 billion mark in the country.

More than any other mega trend in Ethiopia, this one has the potential to change the country via the creation of millions of direct and indirect private sector jobs.  It also has the potential of generating billions in foreign exchange possible via the sheer market size of global supply chain.  The resulting domestic input and ancillary services market may further create thousands of small domestic businesses.  In short, this will be a game changing industry for Ethiopia.

Precise Consult International is finalizing a deep analysis of the Ethiopian business landscape.  It will be available online soon. Please stay tuned.

Henok A.

A tourism revival

Ethiopia is a unique destination in that it combines vast natural, historical, and cultural treasures all within one border.  It is the source of the Nile, land of the Queen of Sheba and the Axumite civilization, home of the Ark of the Covenant, the origin of mankind, one of the original centers of plant and animal domestication including coffee and teff, the medieval castles of Gondar, and home to the 8th wonder of the world, the rock hewn churches of Lalibela.  It also has an astonishing variety of landscapes, from rugged mountains to the rift valley lakes and their birds, to the Danakil Depression, which contain live lava lakes and geysers. Unsurprisingly then, Ethiopia has the most number of World Heritage sites in Africa (9).  Yes, that means Ethiopia has more world heritage sites than Egypt and Tunisia.

Unfortunately, all of these potentials remained just that until recently.  The revival of the Tourism sector appears to have started around 2004/05.  Official statistics show that tourist arrivals into Ethiopia increased from 184,078 in 2004 to 560,000 last year, a three-fold increase.  The average length of stay of a typical tourist has increased to reach 7 days with average spending per day of $158.  Total travel and tourism spending reached an impressive $2.38 billion in 2011, out of which a growing domestic travel sector contributed a hefty $844 million.  Precise insights’ forecast is that tourist arrivals will reach 1.2 million in five years’ time (see table for details).

Year business leisure Transit Conference Visiting Relatives Total
2011 62,409 163,294 143,551 31,294 31,852 432,400
2012 67,554 192,682 176,241 39,365 34,312 510,154
2013 73,122 227,358 216,375 49,519 36,961 603,335
2014 79,150 268,275 265,649 62,292 39,815 715,181
2015 85,675 316,556 326,143 78,359 42,889 849,622
2016 92,737 373,525 400,414 98,571 46,201 1,011,448
2017 100,382 440,748 491,597 123,995 49,768 1,206,490

Source:  Precise Consult International, forecast using current Ministry of Culture & Tourism numbers.  Please note dates used here are based on the Gregorian calendar while MoCT reports using Ethiopian calendar.

We believe that we have only scratched the surface and the sector is likely to see further dramatic expansion.  Ethiopian tourism currently suffers from large infrastructure and services capacity limitation.  We expect to see many new investments over the next few years in hotels, lodges, travel agencies, local transport, international transport, food service and training services.  For instance, there is currently only 1 travel agency for every 1,516 tourists in Ethiopia.  Despite being the political capital of Africa, Addis Ababa only has 110 hotels with less than 5,500 rooms available and top tier hotels currently show occupancy rates in excess of 90%.  Even worse, the rest of the nation, where most of Ethiopia’s attractions are located, hosts a grand total of 350 hotels, less than 9000 rooms.

Drivers of demand for this sector will continue to be the still underexplored tourism assets in the country, the growing importance of Addis Ababa as the political capital of Africa, fast growing economy and FDI.  With Africa’s fastest growing airline, Ethiopian airlines, aiming to become the continent’s largest airline by 2025, and a fast improving infrastructure development within the country, the improving connections will also mean expanded opportunities.

Henok A.

Mining sneaking to the front

Unlike the rest of the continent of Africa, Ethiopia was never colonized by a European power.  The consequence for mining is that Ethiopia is also one of the least explored for mineral resources anywhere in Africa, if not the world.  Given Africa’s mineral riches in general then, it is not inconceivable for this rather large nation of 1.2 million square kilometers to have all sort of wealth under its crust.  Ethiopia’s landmass, composed largely of precambrial, mesozoic, and cenozoic rocks hold various precious and non-precious minerals.  Precambrian rocks host gold and the platinum family while the younger cenozoics yield industrial minerals such as potash, coal, marble, etc.  The sedimentary mesozoics hold significant potential for oil and gas.  Despite all the potential, Ethiopia has not been a mining hub until recently.

The last decade has seen intense interest by some of the world’s largest mining companies including Brazil’s Vale, Australia’s PHP Billiton, India’s Stratex, Australia’s Nyota Minerals, Canadian Alana Potash, Norway’s Yara, Saudi-Ethiopian Midroc, Malaysia’s Petronas, and others.  An important driver of growth has been rapidly accelerating investment, which is now 10 times greater than at the beginning of the 2000s.  Half of the country’s landmass is yet to be evaluated for mineral deposits but a new initiative to map the entire country aims to change this soon.  Already, many new discoveries have been made.  These include 550,000kg of gold reserves found by Midroc, 41,000kg of gold by Australia’s Nyota, 33,000kg gold by Midroc in Benishangul and other high grade finds by Stratex in the Afar region.  The Ethiopian Mining Development Share Company, already the fifth largest producer of that product, has earlier this year reported 2.5 million kg of tantalum in Kenticha. Canada’s Allana Potash is currently developing its 1.3 billion tons of high grade potash deposits in the Danakil depression.  These results will turn Ethiopia into one of the world’s largest producers of gold, tantalum, and potash for some time to come.

What started as a flurry of exploration activity around 2000 has now progressed well into production and mining has now become Ethiopia’s fastest growing sector.  In 2011 alone, the mining sector expanded by over 200%.  In the same year, mining contributed $487 million to national output or 1.6% of GDP and became the nation’s second largest export sector after agriculture.  The Government’s 5-year development strategy aims to raise mining’s contribution to an ambitious 10% of GDP.

Finally, a few words on petroleum.  It is well known that the four sedimentary basins of the country hold much potential for oil and gas discovery.  In 1974, Ethiopia made gas discoveries in the Ogaden basin, still considered the most promising in the country. Further, the Gambela region in South Western Ethiopia is an extension of South Sudan’s highly prospective Melut basin.  The Omo valley, where the British Tullow is about to drill is larger and similar to the area in which the company found deposits in Kenya’s Turkana basin.  Ethiopia’s SouthWest Energy has set a clear vision to become to first to strike oil.  Many others are also exploring across the country.  Our view is that it is only a matter of time.

Henok A.

Unparalleled regional trade expansion

Ethiopia’s trade with its neighbors is likely to present a major business and economic opportunity in the coming few years.  This is made possible due to bilateral and multilateral trade negotiations under the auspices of COMESA and IGAD.  However, a more important factor is the many regional interconnection projects, some of which are financed by the World Bank and the African Development Bank.  Ethiopia already has good road linkage with Djibouti, Sudan, Kenya and to parts of Somalia.  New projects are on the way to link the country to the emerging market of South Sudan, which the nation could also reach via river transport on the Baro.  Finally and most interestingly, the Nairobi – Addis Ababa highway, when finished, will represent one of the largest business opportunities in Africa by linking Ethiopia’s near 90 million population with that of the greater East African Community’s 130 million people. In the meantime, the Chinese have recently been talking about building a rail transport infrastructure linking West Africa, perhaps from Senegal to Djibouti.

But business is not even waiting for the infrastructure to be in place.  Ethiopia’s trade with its neighbors is growing fast.  In 2010, Somalia and Sudan were Ethiopia’s fourth and seventh largest export markets registering more than $200 million in value.  Imports from the Sudan and Somalia have also reached significant values at 4.5% and 6.6% of total Ethiopian imports respectively.  Ethiopia has started supplying power to Djibouti and the Sudan and with additional multi-million dollar agreements to supply Kenya and South Sudan.  Kenya in the meantime is developing the port of Lamu, with an eye to supplying Southern Sudan and Ethiopia.  This region is likely to benefit further from a planned railway project connecting Ethiopia and Kenya along with South Sudan. There is already a free movement of people agreement between Kenya and Ethiopia where populations of each country can travel to the other without the requirement of a visa.  Trade between Djibouti and Ethiopia as well as Sudan is also already tariff free.  Any FMCG business with a good foothold in Ethiopia is thus also in a good position to supply these countries.

If Africa were one nation without borders, its GDP would represent a significant market opportunity of $2.6 trillion.  Unfortunately, Africa today represents 54 states with fragmented markets.  Current trends that are starting to create larger economic blocks in East, Southern, and Western Africa will represent steps in the right direction.  It is our belief that the emerging interconnection of the East African and Horn of Africa trading blocks will represent some of the best opportunities for investment and value addition.

Henok A.

Heavy Infrastructure Investments 

In many ways, the economic boom of the last decade in Ethiopia owes itself to a significant degree the rapid development of infrastructure.  High quality economic infrastructure lowers business costs and drives national competitiveness. According to the World Bank Group, improvements in Ethiopia’s infrastructure platform contributed 0.6% percentage points to per capita income during the 2000s.  Economic models further suggest that if Ethiopia can get its infrastructure upto the quality of the continental leader, Mauritius, annual per capita growth could increase by 3.8%.  Taking this to heart, the Government of Ethiopia plans to continue its single-minded expansion of power, road, air, rail, and telecommunications infrastructure which will bid well for investors.

According to its Growth & Transformation Plan (GTP), by 2015, Ethiopia plans to quintiple it power generation capacity (to 10,000 MW), almost triple its road network to 136,000km, build fresh 2000km of railway, and increase mobile from 7 subscribers to 64.4 million.  Further, the state owned Ethiopian Airlines is expected to expand dramatically with a vision to become the largest airline in Africa.  In addition, Ethiopia plans to meet all of the Millennium Development Goals (MDGs) including those that require heavy investments in education and health. Such ambitious programs create rather large opportunities for private enterprise supplying these multi-billion dollar expansion plans.  Already, Ethiopia’s seeing many new cement plants, steel factories, a plethora of road, rail, power dam, and building contractors.  Mobile phone assemblies are currently being set up for the telecom sector while transistors, meters, and cables manufacturing are positioning in the power sector.  The key to untangling all these opportunities lies in understanding all the inputs required to reach the Government’s ambitious development plans.

In any country, it is always the Government that is the single largest purchaser of goods and services.  In Ethiopia’s case, its developmentalist Government is an even more significant market.  The net effect can be transformational via the development of thousands of private sector firms and improvements in national productivity and competitiveness.

Henok A.