Treading a new path: Growing Ethiopia’s factory floors

What is in it for Ethiopia? While the Chinese are taking advantage of Ethiopia’s cheap labour, “they bring technology, know-how and training”, Hai says. “This will help the country create jobs and bring exports. That is truly the root of industrialisation.”

Chinese investment activity

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, International Monetary Fund 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 its 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 have a good relationship and we think that this is a very important point too.”

High costs of doing business

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 in conveniences 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.

Elissa Jobson is a freelance journalist based in Ethiopia. She is the Addis Ababa correspondent for The Africa Report and Business Day and also writes for The Guardian.

This article was first published by Good Governance Africa