Ethiopia: Import substitution likely to be a growing theme

Addis Ababa's Bole International Airport

Addis Ababa’s Bole International Airport

The Ethiopian government is pushing hard to boost the country’s domestic manufacturing sector, and import substitution is likely to be a growing theme over the coming years.

Earlier this year, UK-based private equity firm 54 Capital announced a $42m investment into Ethiopia’s Addis Pharmaceutical Factory, a domestic producer of more than 70 types of medicines. “In terms of imported products, local manufacturers actually have an advantage over imports,” notes Nathalie Bennett, investment associate at 54 Capital. “The Ethiopian government is keen on reducing import bills and therefore prioritises and protects local manufacturers, with a target to increase their market share in tenders from about 20% to 50% by 2020 and 60% by 2025. This will take the form of a significant growth (30%-plus) of the tender market opened in priority to local manufacturers.”

Another locally-owned pharma company Medtech – established in 1998 as an importer and distributor – diversified into manufacturing in 2013 through a joint venture with the UAE’s pharmaceutical giant Julphar. Together they set up a $7.8m production plant. In a 2015 interview, Dr Mohammed Nuri, founder and CEO of Medtech Ethiopia said, “There is big opportunity for pharmaceutical manufacturing [because] nearly 85% of the Ethiopian demand is covered by imports.”

Other consumer-focused companies are also establishing manufacturing facilities for products currently being imported. For example, Unilever recently opened a factory in an industrial zone outside the capital Addis Ababa.

A few years ago, an executive from investment company Silk Invest explained how up to 70% of biscuits consumed in Ethiopia are imported, and that one small company based in the UAE has quadrupled its earnings within three years by exclusively exporting biscuits to Ethiopia. Through one of its private equity funds, Silk Invest has bought a stake in Ethiopian confectionery-maker NAS Foods.

Investors are also seeing opportunities in glass bottle manufacturing to supply the brewery industry, which has been growing at a CAGR of 14.3% over the past 14 years. In recent years, the government has divested from state-owned breweries, which have been snapped up by the likes of Diageo and Heineken. Companies such as Juniper Glass Industries and Atlas Development & Support Services are both establishing bottle-manufacturing plants, looking to make a dent in expensive imports.

In the consumer durables space, Ethiopia has also attracted Chinese vehicle assembly companies Lifan Motors and Geely Automobile Holdings. In addition, electronics manufacturers such as Chinese mobile-phone maker Tecno and South Korea’s Samsung have launched factories in the country.

Attracting investment

The Ethiopian government has introduced a number of fiscal and non-fiscal incentives to stimulate investment in the manufacturing sector – for instance, by assembling vehicles locally, Lifan avoids having to pay a 35% import tax. In addition, the administration is promoting industrial parks throughout the country – some of which are already in operation. Another positive for Ethiopia’s manufacturing sector is that it has relatively cheap electricity owing to significant state investment. The 6,000 MW Grand Renaissance dam hydropower project – currently under construction – will add to Ethiopia’s power capacity and make it a major electricity exporter in the region.

The government is also investing to upgrade transport infrastructure. For example, a new railway between Addis Ababa and the port of Djibouti is expected to reduce import and export costs.

Investment hurdles

Despite strong political will to develop industry, investors should expect to encounter a plethora of risks such as excessive bureaucracy, high taxes and logistical hurdles. Another key challenge is the chronic shortage of foreign exchange. “Finding dollars can be a really big issue, which can be challenging when you need capital to buy equipment, or dollars to pay dividends. I have heard stories of companies not meeting targets because their distributor didn’t have dollars in good time to pay for goods – even though they had local currency in their accounts,” one executive was quoted in a recent PwC report written in co-operation with Maritz Africa Intelligence.

While the growth of coffee shops and the building of new apartments in the capital Addis Ababa is proof of rising purchasing power, Ethiopia is still a predominantly poor country, with a GDP per capita of around $750. Despite significant progress, the country remains in the early stages of economic development. “In countries where you have an almost similar population size, like Turkey and Egypt, the market is virtually saturated,” NAS Foods CEO Saleh Nasreddin says of the size of the biscuit market in Ethiopia. “Even Kenya with a smaller population is way ahead in the biscuit business. But in Ethiopia we still have a lot of ground to cover.”

Notwithstanding the above-mentioned challenges, we believe Ethiopia’s rapid economic growth and large population of over 90 million make it a potentially lucrative destination for companies throughout the consumer goods value chain. It is certainly a country on the move. During a recent layover at Addis Ababa’s Bole International Airport, our team was again amazed by the government and Ethiopian Airlines’ success in establishing Addis Ababa as a transit hub. There literally seems to be a plane departing to all corners of the world every few minutes. However, the state of some of the airport lounges and the fact that rainwater was seeping through the roof shows that significant work remains. It should be stressed that Ethiopia is a long-term play and not for those seeking quick rewards.

The article is an extract from Maritz Africa Intelligence’s recent East Africa Consumer Industries Quarterly™ report.