The Federation of German Industries (BDI) has recommended that the German government throw its weight behind the African Continental Free Trade ... Area (AfCFTA) Agreement, arguing the continent is pivotal in efforts to diversify markets.
Exports dropped to $140m (2020/21 FY) in the first year of the pandemic alongside the start of fighting in the Tigray region in 2020. However, the biggest blow came from US-imposed sanctions in January 2022.
Ending Ethiopia’s preferential market access under the Africa Growth and Opportunity Act (AGOA) has deprived the industry of its biggest client (80% of textile exports). How is the sector faring today, and what alternatives lay ahead?
Industrialisation and free trade
The Ethiopian government heavily invested in transitioning from an agriculture-based economy to an industrialised one to attract the private sector. An example is the creation of industrial parks and legal reforms.
“We initially produced plastic shoes in 1993 but switched to textile in 2008 and expanded to garments in 2012. The plastic industry was saturated, [so] government incentives encouraged investment in horticulture and textile,” Eyob Bekele, Desta Garment’s general manager, tells The Africa Report.
With hopes of becoming a leading manufacturing hub by 2021, Ethiopia also steered “80% – 90% of [its] 13 industrial parks’ activity towards textile and garment manufacturing [for export]”, say representatives from the Ministry of Industry (MoI), a steadily expanding sector whose approach was in sync with the US government’s trade not aid approach to Sub-Saharan economies.
Ethiopia’s garment sector has been the largest AGOA beneficiary
AGOA fits within that framework, offering “6% – 32% tariff tax breaks depending on the composition and complexity of the product [advantaging cotton over polyester for example]” representatives from the Ethiopian Investment Commission (EIC) tell The Africa Report.
As a result, Ethiopia’s garment sector has been the largest AGOA beneficiary (exporting $722m worth of garments to the US from 2000 to 2020).
Added to its preferential US market access (initially extended until 2025), Ethiopia also presented a competitive advantage due to lower wages (minimum $35-$40 a month compared to $68 for Bangladesh and $500 in China for the industry), low electricity prices, and all-inclusive services for businesses.
Big names like PVH (Calvin Klein, Speedo), DBL (selling to H&M, George, Decathlon), Almada, KPR, and Velocity, therefore, saw Ethiopia as “textile’s new frontier”.
Despite the initial hit of Covid-19, global demand surged after lockdown – only to slow down again in 2022 (by 35%) amidst rising energy prices and the war in Ukraine.
However, most companies projected their 2022 production based on last year’s consumption, “orders were [therefore] stable until May”, Hibret Lemma, CEO of the Hawassa Industrial Park Investors Association (HIPIA), tells The Africa Report.
Sanctions and upskilling
The effects of retracting Ethiopia from AGOA in January 2022 (due to conflict in Tigray) are taking effect now. The aftershock was initially delayed due to the nature of the sector itself. “[Garment] orders are given a year in advance,” Lemma says.
For now, manufacturers are trying to find compromises “offering to bear duty taxes in full or sharing 30% to 70% [of tariffs with clients]. However, [with] our maximum profit margin being 10%, it is not sustainable,” Raghavendra Pattar, CEO of Nasa Garment PLC, tells The Africa Report.
At the same time, the textile sector requires heavy material and human investments. “We start with [training in] soft skills and accompany workers coming from semi-rural areas into industrial working structures. The difference is palpable in 3-4 months. Overall, it took us three years to achieve 70% efficiency, versus six years on average in South-East Asian countries,” Saron Afework Gebremedhin, chairman of Nasa Garment PLC, tells The Africa Report.
United threads can tie down a lion
It would be understandable that foreign or local companies, having trained manpower and invested in machinery, would be reluctant to leave the country. On the other hand “multinational companies compare the efficiency of their factories worldwide”, says Lemma.
Beyond consequences on the production itself, whole ecosystems have been affected by the sanctions. “50% of our workers are studying part-time, 85% of them are women from the ages of 20-25” says Lemma.
“There are [also] about 280,000 industry-related job opportunities in catering, transportation etc.,” MoI representatives tell The Africa Report.
New markets and measures
Ethiopia also happens to benefit from other preferential market access agreements with the EU (Everything But Arms framework) as well as “duty-free, quota-free access to Japan, Canada, China, Turkey, Australia and New Zealand”, according to the EIC.
Accompanying a delegation of Ethiopian companies at the Texworld exhibition (held in Paris from 4-6 July), the state minister for industry, Tarekegn Bululta, reiterated the need to find alternative outlet markets for “a manufacturing industry representing 7.8% of the GDP”.
Ethiopia is represented by nine exhibitor companies – local and international showcasing their products. An Eth delegation co-led by State Minister of Industry @TarekegnBululta , D/comm. @danielteress & Ethiopian Ambassador to France @_HenokTeferra participated in the Fair. pic.twitter.com/6gHzdlTo5q
— Ethiopian Investment Commission (EIC) (@EthioInvestment) July 4, 2022
However, as each market has its own characteristics, the EU tends to need “smaller quantities, [with] styles chang[ing] at a higher rate”, says Pattar.
Modes of transportation may also vary, “favouring air freight in the case of the European market is more expensive and has its own delivery time constraints”, says Lemma.
For most companies in industrial parks – such as Nasa ( with a daily output of 40,000 pieces/day pre-Covid-19, now at 20,000), volume is a crucial part of staying profitable and competitive. Thus, the previously US-market-oriented sector may need diversification.
Linking industries and local production
“Though industrial parks are functioning independently, they will eventually have to integrate local companies in[to] the supply chain,” says Bekele. “Foreign Direct Investment [FDI] is not the only plug”. He however adds that “local manufacturers will have to invest to meet global compliance and sustainability norms [such as factory safety and first aid].”
Legal and policy reforms are also ongoing with “a business linkage policy in the works”, according to MoI representatives. The administration is seeking to alleviate transaction constraints, implement incentives, and link local industries with industrial parks, through joint ventures or subcontracting.
Diversification also applies to raw materials. Since Covid-19 added a new perspective on supply chain limits, policies that “ favour cotton production [are being considered].”
EIC representatives say they are currently “producing 55,000 tons [49895.16 tonnes] a year for local consumption. Quality issues were an obstacle, but capacity building initiatives are favouring export potential.”
As Ethiopia moves forward, expanding its textile activities and acquiring better technology, it is also hoping AGOA will be reinstated.
Four of the five preconditions from the United States Trade Representative (USTR) have been met. The remaining pertains to investigating human rights violations in the ongoing conflict is still being processed.
Though the Mekelle industrial park (in Tigray) had previously “accounted for seven per cent of all textile exports” and has ceased its activities, “buyers are engaged [in] Ethiopia”, says Lemma.
Clients, such as Decathlon, seem to agree. “[Decathlon] enters into a relationship with a supplier only if they can foresee working together for at least five years and if there is a willingness to start a journey with a shared mission that can lead to a long-term collaboration,” say Dorothée Baumann-Pauly, Lorenzo Massa, and Natasja Sheriff in their Manufacturing in Ethiopia; Decathlon’s partnership model (2020) report.
Reversing the trend
As of June 2022, direct peace negotiations between the Ethiopian government and TPLF forces could shift the political context. This in turn may reverse sanctions and limit consequences to the country’s industries at large.
Beyond curbing the economic damage, PM Abiy Ahmed’s declaration of “[wanting] peace with everyone” may render a famous Ethiopian proverb true: United threads can tie down a lion.
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