2014
Frontier Market Series
FOOTWEAR MANUFACTURING IN ETHIOPIA Standard Version
ETHIOPIA Labour force: 45 Million Median Age: 17 years Population under 15: 45% ~ 40 Million Population: 96 Million (2014 estimate), 14th
GDP (2013): US$ 47 billion GDP per capita (PPP, 2013): US$ 1300 Currency: Birr (1 US$ ~ 19.8 Birr)
This report contains intellectual property protected information and images. Failure not to observe such laws and use of an attributed text, and imagery is prohibited. Š Fer Research & Consultancy - 2014 London, United Kingdom Images Coverpage: George Shoe Factory, Addis Ababa, Ethiopia (VOA) Backpage: Leather Boots Produced in Ethiopia
2
About the Report Fer Research and Consultancy, having conducted a 9 month study on the footwear manufacturing sector in Ethiopia, is pleased to release this report. This particular version is meant for a wider readership, while a complete version of the report that outlines the various findings of the study in detail is made available for purchase. Fer would like to extend its gratitude for all the footwear manufacturers and industry stakeholders that participated in the survey it conducted from February to May 2014. We would also like to thank the individuals that assisted our work greatly through providing valuable insight and helping to direct the research in the most optimal route. This report is primarily based on a field survey in which the leading footwear manufacturers in the country participated in. The study was further enriched with integrated analysis of information and data separately highlighted by policy makers, trade associations, academic researchers and other stakeholders. In addition, the research analysed trade and industry data of footwear, footwear components and accessories used in the sector. Interviews with industry insiders such as exporters, wholesalers, manufactures and trade associations also contributed greatly to the depth of the study. As this version is meant for a wider audience and to be distributed on a public platform, not all aspects of the findings of the study research are included in this publication. A premium version, complete with our detailed findings, insights and recommendations for businesses and industry alike is available for purchase on our website -www.frc-insights.com. Clients interested in commissioning reports or arrange bespoke consultancy services are welcome to contact us by email – research@frc-insights.com.
Sincerely,
Bruck Teshome Director
3
Footwear Manufacturing in Ethiopia Introduction The leather and leather products industry, of which the footwear sector forms apart of, is one of the 8 sectors that are prioritised under the government’s 5 year growth plan—the Growth and Transformation Plan (GTP). The government has set an ambitious target of gaining 496 Mln US $ of foreign exchange through the export from the leather sector by 2015. A combination of plentiful raw materials in the form of abundant livestock, one of the most competitive labour costs per unit, the correct set of investment policies and incentives make the footwear sector an attractive proposition. While, the sector has witnessed unprecedented growth of exports since 2008/09, the ambitious targets set by the GTP seem unlikely to be met by 2015. However, the sector would have come a long way by then, and well positioned to tackle some of the major hurdles that stand in its way. Ethiopia’s political stability and security is also proving as a strong advantage in attracting attention to labour intensive industries such as footwear. The potential of the sector in a country where manufacturing accounts for less than 12% of national output is of utmost significance. The government’s dedication to growing labour intensive industries has also attracted investment from China, where leading Chinese businesses value the attention the government gives to the sector. It is increasingly becoming clear that the footwear sector will be one of the centres of industrial growth in the country. This report will examine the make up of the sector, current and future trends, while shedding strong light on the opportunities and challenges for businesses in the sector. The report is of great use for those that are looking for entry points to the Ethiopian footwear sector and would like to have a practical understanding of the sector.
Background There is a long history of modern footwear production in Ethiopia dating back to the 1930s, with the founding of two shoe factories by Armenian Merchants (Sonobe & Akoten, 2009). These factories were an impetus to the growth of a modern shoe industry in Ethiopia. Workers from these two factories would go on to set up their own workshops and factories. However, the growth of the industry stalled with the nationalisation of privately held shoe factories in 1970s under the communist government. The reintroduction of a 4
market economy in the early 1990s saw the revival of the shoe sector. However, the resurgence of the footwear industry was threatened by Chinese manufactured footwear that flooded most African markets in the early 2000s. Many local producers found it difficult to survive as they could not compete with less expensive imports made with synthetic materials. Those that managed to survive did only by changing their production methods and imported modern machinery and adopting modern production methods (Sonobe & Akoten, 2009).
The Footwear Sector Today The lessons learned by the industry in the early 2000s are discernible in the products they manufacture today, where there is an emphasis on durability and use of local quality leather. there is an apparent distinction in the specialisation between local and foreign manufacturers that export footwear. Chinese and other foreign footwear manufacturers mostly produce women’s shoes, while local manufacturers predominantly specialize in the production of men’s shoes. Traditionally, the Ethiopian footwear sector has been dominated by the production of leather footwear for both the local as well as the export market. Although, the majority of the local consumers, especially in rural areas, tend to purchase cheap footwear made from rubber or man made fibers, the local manufacturing of footwear from synthetic materials is not well developed. The main reason being the lack of a domestic synthetic materials industry that can supply the sector. Production by foreign owned firms, which is aimed for the export market, tends to focus on products made from PU and other synthetic materials. The majority of exported footwear from Ethiopia still consists of leather footwear. However, with the increasing trend of FDI from established manufacturers from China, production of athletic and fully synthetic footwear is likely to dominate the export market as the main product in the coming few years.
5
The Ethiopian footwear sector forms a small fraction of global production. Global production of footwear is dominated by China, which produces close to 2/3 of all shoes in the world. India, Brazil, Vietnam, and Thailand are the other major producers globally. The Ethiopian footwear sector has a sizeable internal market domestically, where there is a large population that could consume cheap footwear. Ethiopia’s low labour costs and large population mean that the sector can grow domestically as well as compete in the global export market.
Over the past few years, most local manufacturers, have demonstrated their capacity to produce quality footwear that is globally competitive. They routinely manufacture footwear for leading global brands, or export their own brand to both developed and developing markets. Foreign owned factories that were set up in recent years, export most of their production using the established market links they had prior to their relocation to Ethiopia. Most of them supply global brands, such as Gucci and Tommy Hilfiger.
Capacity of the Footwear Sector The bulk of the footwear market in Ethiopia comprises of over 1000 small and micro enterprises that produce footwear and footwear components for the local market. There are over 118 factories that produce variety of footwear for the local and export market. Of these 18 are medium to large size manufacturers, which contribute close to 90% of the country’s footwear production.
The supply of footwear components is one of the major constraints that is central to the sector’s capacity. Foreign companies that already have a well established supply chain or produce components abroad, suffer less from this issue but are similarly affected by logistical constraints and associated costs. The study has put a lot of focus on this issue, and the next sections deal with the topic of footwear components and the logistics of exporting from Ethiopia.
The potential opportunity for foreign buyers of footwear, suppliers of footwear components, technology and production equipment is among the medium to large sized footwear manufacturers. The factories are found mostly in Addis Ababa or in the surrounding towns, and have easy access to the highway and the railway line to the port of Djibouti. Investment in these large manufacturers is also likely to increase worker productivity, improve quality and increase global competitiveness.
Foreign companies are relatively more focused on increasing worker productivity as part of increasing their capacity. This is central to their business model as they seek to capitalize on their management experience and ability to improve higher factory floor productivity. Smooth employee-employer relationship, providing accommodation for workers near factories and overcoming issues that arise out of linguistic and cultural differences are mentioned as being crucial to these foreign manufacturers.
Footwear Components Manufacturing footwear involves the production and assembly of about 60 components. Most of these components are often produced separately or semi produced elsewhere. The footwear manufacturer is often the last producer in a long value chain composed of leather tanneries, fabric and other component producers. The major footwear component in the production of footwear in Ethiopia is the material that makes up the upper part of the footwear, which is often leather. The outer sole, which is made up of rubber, synthetic materials such as PU or PVC is the other most significant component. These two components constitute the largest share of the value of the footwear. However, there are a number of other components that go into the making of footwear. Depending on the type of footwear, the number of the components used might extend up to 60 . The footwear sector in Ethiopia traditionally relied on domestic production for the leather component of the footwear. For the sole and the other components, imports from Italy and Germany were the preferred choice. Yet, as export trade volume increase and new key players from East Asia enter the sector, manufacturers are increasingly diversifying the source of footwear components and importing components from Thailand and Vietnam. The changes in the sourcing of footwear components is likely to become more pronounced as established East Asian manufacturers move into the sector. The footwear component sector in Ethiopia is at a nascent stage and can benefit from foreign and local investment. It is undoubtedly an area where new entrants to the Ethiopian market should look into closely.
Leather components Leather is one of the most important components in footwear production. Ethiopia has one of the world’s largest livestock population, and leather is considered one of the strong comparative advantages of the footwear sector. However, the leather value chain is not as developed when compared to the large livestock population. Some local footwear manufacturers have established their own tanneries so as to have their own supply of finished leather. After a tax on the export of unprocessed leather were introduced in 2008, finished leather production has increased. Foreign buyers of Ethiopian hides and skins have also recently set up tanneries in Ethiopia in order to supply their factories abroad, while some have gone to set up factories in Ethiopia. The footwear sector has been self sufficient with regards to supply of leather components. The export of leather based footwear components such as uppers and vamps to Europe and Asia is a growing export sector. A limited amount of leather is imported by some manufacturers who have specific orders for footwear made from a particular type of leather. This trend will likely continue as the footwear sector becomes integrated with the global market.
Other Footwear components There are over 50 components other than leather that are used in footwear production. These components include materials to shape, reinforce, attach, sew and glue the different constituents that make up the footwear, form of a sole, which consists of an inner sole, mid-sole and outer-sole. Reinforcing components that are located in various parts of the footwear such as the sole, the heel, the back and the front are also used; while components that give the footwear the required aesthetic look and feel are also used at different stages of production. In addition, footwear destined for the local as well as export market requires additional components to meet standards such as labelling and packaging. These requirements may differ from country to country based on different standards and trade regulations, and exporting manufacturers also need to employ a complex system to correctly identify and label their products.
6
Supply Chain A range of footwear components are not produced in sufficient quantities to satisfy the local demand, while other components have to be imported from countries such as China, India and EU countries such as Spain, Germany and Italy. Import of footwear components is often directly carried out by the manufacturers themselves and in case of materials, which have a wider functionality across other sectors, by specialised importers. Our study has revealed that one of the major challenges for the footwear sector in Ethiopia is the supply chain of the components. A protracted and inefficient supply chain reduces the benefit that can be gained from having one of the lowest per unit cost of labour. It must be highlighted that a lot of successful footwear producing countries also rely on the use of imported components. For example, Vietnam imports a lot of leather and non-leather footwear components from China, India and Thailand, while maintaining a competitive footwear sector. Countries such as Brazil, Indonesia and China on the other hand continue to produce almost all footwear components they require domestically, and resort to importing different types of leather to augment local supply. As is the case in most countries, the multinational production of goods relies on the use of inputs originating from different countries, and with highly competitive labour costs the production of footwear in Ethiopia is likely to follow a similar model for the foreseeable future. Efforts by the government as well as industry associations are being made to increase the local production of components through clustering of footwear manufacturers and setting up cooperatives that can supply components to the big manufacturers. Government and some development agencies have also encouraged investment in the footwear components manufacturing sector to enable the sector to increase its global competitiveness through reliable and cheaper local supply. The reliance on imported footwear components means that the manufacturers incur additional costs to meet production orders from abroad on time and compete on price and prompt delivery. The reliable supply of footwear components is one of the key prerequisites for manufacturers to be globally competitive. One of the solutions for some of the manufacturers has been to engage in the production of some of the components themselves. This has meant, to some extent, that some manufacturers may import what another manufacturer produces locally—as our survey’s has revealed. This is an early indicator as to 7
the benefit that industrial clustering can have for the sector. Yet it is also possible, there might still be some manufacturers that would prefer to continue importing from foreign suppliers as they are familiar with them and rely on their products.
The Footwear Components Subsector The footwear components sub-sector plays a crucial role in the future of the footwear manufacturing in Ethiopia. How the country’s footwear components’ market evolves over the next few years would determine, the structure of the footwear sector as a whole, and its contribution to the economy. One important aspect of Fer’s study was to have a deeper understanding of the footwear component’s sector. Determining the size of the footwear components’ market was one of the undertaking of the study. Our analysis of Ethiopia’s customs data from 20072013 identified the total value of materials imported that could be used to produce footwear components. However, It is extremely difficult to ascertain the amount of footwear components imported into the country specifically for the production of footwear for a number of reasons. The primary reason for this is some of the goods used in footwear production such as adhesives, threads, zippers, buckles, rivets, compounds used in synthetic leather production are not exclusively used by the footwear manufacturing sector. Therefore, using the Harmonized Schedule code (HS code) system and the national custom’s data cannot be relied on to identify total amount of footwear components used by the sector. Fer has developed an innovative approach to estimate the size of footwear components market in Ethiopia. This approach allows us to calculate the size of the market of the different components used in the sector. This is beneficial to businesses as well as policy makers alike as it enables a better forecast of future trends in the footwear sector. A description of this approach and the model, as well as the findings are discussed in greater depth in the premium version of the report.
Frequency of Use and Sourcing Preference The study included a survey of the major footwear manufacturers in Ethiopia and their consumption, and sourcing preferences of 57 footwear components. The footwear components listed in the survey were selected based on our research on the historical use of footwear components in Ethiopia. Most footwear manufacturers import up to 60-65% of the components required for production, while up to 35-40% of the components are sourced locally. A Chinese footwear manufacturer, for example, imports 8 containers worth of footwear components to be able to export 12 containers of footwear. However, as the most valuable components and inputs for production, such as leather and labour are relatively inexpensive and available locally, manufacturers still maintain attractive profit margins. Most local footwear manufacturers that export leather footwear also import the majority of their components, but the value of local components they use exceeds those of imported inputs—when they use local finished leather.
In order to understand the use of footwear components in the industry, the survey asked manufacturers to indicate how frequently they used the listed components. This helps to identify the components that are used most frequently and that are in much demand in the industry. This was also weighted against the manufacturer’s specialisation to determine the demands for the components were not overestimated. The survey also enquired whether the manufacturer’s preference was to source the footwear components from a local supplier, from abroad, produce the components locally or if it already produces the component. These set of questions were designed to assess the intensity of the demand for the local production of footwear components, and also to identify the footwear components that were being produced locally, from those that were being imported and those which manufacturers would prefer to produce locally at some point. By comparing the findings of the survey with the model that determines the national consumption of different footwear components, the study is able to identify the gaps in the sector that could be best served by foreign investment.
Frequency of Use of Footwear Components among leading manufacturers (Names of footwear components are coded, and not visible in this version) Heat maps of footwear components by value, sourcing preference and frequency of use, and cost per total value of materials are available on the premium version of the report, along with a detailed analysis of the findings. 8
Exporting from Ethiopia
Djibouti has recently upgraded the port of Djibouti, and is currently building a second port at Tadjourah
The recent dramatic growth of its footwear sector is
in the northern part of the country. When its
driven through the right set of Ethiopian investment
construction concludes in 2015, the port of Tadjoura
policies, which employed FDI to increase the export
will serves as an additional outlet to exports from
of processed and value added goods such as leather
Ethiopia.
footwear. Duty free access to a large global market has played a huge role to the growth of the footwear
Ethiopia is also upgrading its railway link from
sector.
Addis Ababa to Djibouti – by building a new
Ethiopian footwear exports has preferential market access to over 3 Billion consumers worldwide. This includes the United States of America, the largest single footwear market, and the European Union, which together account to close to 40% of global consumption and import 70% of global footwear trade. Duty free access to emerging markets such as China through the Zero Tariff initiative and to India through the DFTPI-LDC initiative also offers access
electrified standard gauge railway line. It is also building two new highways to access the port of Djibouti from the south and Tadjoura from the north. A highway that runs from the south-eastern city of Dire Dawa to the port of Djibouti will reduce the load on the existing central highway that currently serves as the main export outlet. A new highway in the north will connect the northern regions of Afar and Tigray with the port of Tadjoura.
to a sizeable export market. In addition to market
Despite being a landlocked country and the fact that
access based on multilateral agreements, bilateral
exports are currently trucked to port, the cost of
trade agreements also contribute towards Ethiopia’s
exporting from Ethiopia (US$2180) is near to the
considerable duty free market access.
Sub Saharan Africa average ($2108) and cheaper
The main export destination of Ethiopian footwear is
than in Kenya (at US$2255). Ethiopia fares much
the United States of America, which assigns zero-
better compared in its sub region in terms of cost of
tariff privileges to Ethiopian products under the
exporting, but lags behind in terms of the time to
Africa Growth Opportunity Act (AGOA). Footwear
export. This is mostly because exports are trucked to
export to the US has shown explosive growth over
the port as the old railway line has become defunct.
the past 5 years, from a very low export figure of
Time to export expected to drop dramatically with
30,000 US$ in 2008 to 20Million US$ in 2013.
the completion of the new railway line in mid-2015. The cost of transportation will also decrease by up to
This trend is expected to continue in the next 5 years, as new factories and those under construction commence production for export. In 2013, Ethiopia exported more footwear by value than Poland or Australia. Based on current growth rates and projects in the pipeline, by 2015 our estimates are, it will export more footwear by value than the UK, France or Bangladesh. It is also important to highlight that not only large and medium sized manufacturers, but smaller manufacturers are also managing to tap into the global footwear market.
Export Infrastructure Ethiopia is a landlocked country, and its chief access to sea is the port of Djibouti. Ethiopia enjoys excellent relationship with the Republic of Djibouti, and the two countries are currently upgrading the export infrastructure capacity of the country. 9
a fifth, bringing the cost of export well below the SSA average.
Conclusion Ethiopia’s footwear manufacturing sector has come a long way since the liberalisation of the economy in the early 90s, and the advent of cheap Chinese footwear in the 2000s. The influx of footwear manufacturers that are looking to offset rising labour costs in China is offering a great opportunity for the sector. As the wave of cheap Chinese footwear led local producers to modernize their production system in order to stay competitive, the current influx of FDI will also contribute to the growth and advancement of the sector. The challenges facing the footwear sector extend beyond the limits of the sector. They include challenges coming from the cumbersome bureaucracy, slow import-export systems and processes, and a national infrastructural deficit in terms of faster access to and from port. The good news is that most of these challenges are being tackled through a concerted effort of industry, government and international partners. The railway and highway links to the port of Djibouti, establishment of multiple industry zones with dedicated power supply and increase of power generation capacity, attractive investment incentives and the government’s success and readiness to draw global key players to the sector are strong indicators of a luminous future.
10
A mix of increased local production of key components and the development of an effective and rapid import and export system can come a long way in making the sector globally competitive and one of the leading industries in the country. Combined with improvements in the livestock and leather value chain, the potential for Ethiopia to become one of the global centres of footwear production is not only possible, but achievable. Foreign direct investment, entrepreneurs and local businesses can play a crucial role in filling gaps in the sector and benefiting from a fast growing sector. Fer research and consultancy ltd sees itself as an enabler of businesses to enter new and upcoming markets in frontier markets such as Ethiopia. It believes, that through well informed analysis and closer inspection of the different players in industry, it can offer a balanced and specialised service to those that are looking to engage upcoming sectors such as the footwear sector in Ethiopia. The findings of the research, the research strategy and tools employed in writing the report are also tools that can help businesses benefit from trends and gain insights into frontier and emerging markets , so they could make the right decisions to drive them forward.
ETHIOPIA: FOOTWEAR FACTS Footwear Factories : 200
171 Small & Medium (up to 700 pairs/day)
19 Large (700 to 4500 pairs/day)
Sector’s output per annum : 160 million US$ Footwear Produced by consumer type Men’s footwear: 68% Women’s Footwear: 28% Children’s Footwear: 4%
Footwear Produced by material type Leather Shoes and Boots : 8.81% Canvas and Rubber Shoes :
4.70%
Plastic Footwear : 86.49%
Percentage of Total Production Exported 2010 - 2011:- 2.95% 2011 - 2012:- 3.25% 2012 - 2013:- 5.69% (SOURCE –ELIDI, CSA)
11
3 Billion
Duty Free Access to 3 Billion consumers through preferential trade agreements
THE PREMIUM VERSION What does the premium version of the report offer? The premium version is a complete report of the findings of Fer’s study of the footwear sector. The complete report is a 36 pages of comprehensive and detailed analysis of the footwear sector in Ethiopia. It comes complete with appraisal of factor costs including labour, factory space, electricity, salary and administrative costs. It also has additional insights on the footwear sector that emanate from findings of this original study, including
Survey findings and analysis on the footwear component market Analysis on the current trends of the footwear and footwear components sector Analysis and tends of data on import and export of footwear components Profile of leading manufacturing companies
In addition, Fer Research and Consultancy offers bespoke consultancy services and field support to investors and businesses that are interested in closely exploring opportunities in the Horn of Africa.
For additional information regarding the report or other requests please write to us research@frc-insights.com www.frc-insights.com
12