Case Study: Ethiopia's garment industry, between high potential and low yield

Ethiopia's government has recognised the strategic potential of garment manufacturing and has offered a range of incentives to foreign investors. However, many challenges remain, posing major reputational risks to international firms. Ethiopian farmers have been growing cotton for centuries, but until now, it has never played a major economic role. Agriculture dominates the Ethiopian economy, representing 39 per cent of GDP, 80 per cent of employment and 85 per cent of exports. The textile manufacturing industry, in contrast, is just 5 per cent of GDP. The government is planning to increase its share in the national economy to between 20 and 25 per cent in the next ten years, and is pouring money into cotton production and infrastructure to develop the industry. Industrial zones, cheap electricity and low taxes are additional draws for foreign investors, and international interest is growing rapidly. Foreign investment in the textile industry has risen from USD166.5 million to USD36.8 billion in three years. Why Ethiopia? As costs rise in the traditional textile centres of Asia, African countries are becoming more attractive to the global garment industry. Across large swathes of the continent, the climate is conducive to growing cotton, lowering supply-chain costs and production times. The working population of Sub-Saharan Africa is also booming, and will probably grow to 900 million people by 2035. Ethiopia is the second-most-populous country in the region, with approximately 102 million people. Additionally, many Sub-Saharan African countries, including Ethiopia, enjoy duty-free access to the U.S. and the E.U., thanks to Washington’s African Growth and Opportunity Act (Agoa) and Brussels’ Generalised System of Preferences. Ethiopia is particularly attractive to foreign investors for two main reasons: firstly, the government offers major incentives through its Growth and Transformation Plan. This is a scheme to transform the country from a primarily agricultural economy to one based on manufacturing, with the hope that Ethiopia can reach middle-income status in 2025. Incentives for foreign manufacturers include the ability to hire expatriates free of income tax if they are contracted to stay for two years or less; on-site customs inspections, reducing waiting times; and VAT reconciliation for locally purchased materials. The costs of electricity, water and rent are also negligible. Additionally, transport infrastructure in the landlocked country is still lacking, but the opening of the Ethiopia-Djibouti railway means that Ethiopian goods can reach the port of Djibouti in ten hours. The government will continue to invest heavily in infrastructure projects that promote manufacturing. Secondly, wages are also low, even by industry standards. While in Bangladesh, the world’s second-largest garment exporter, the minimum wage is USD64, there is no base salary in Ethiopia’s textile industry. Since 2004, the Ethiopian government has particularly targeted businesses in Turkey, India and China, but companies in other countries have started to take notice. The American retailer Gap sources production locally, as does the Swedish clothing giant H&M. The U.S. conglomerate PVH, which owns Calvin Klein and Tommy Hilfiger, has begun manufacturing in the Hawassa industrial park, south of the capital Addis Ababa. Suppliers such as Jiangsu Sunshine Group, a Chinese company supplying upscale European brands like Hugo Boss, invested nearly USD1 billion this year in Ethiopia. The Dubai-based Velocity Apparelz Companies, which sells to high-street brands like Zara, established a factory in Mekele, in northern Ethiopia. Turkish Ayka Textile employs 10,000 workers in Ethiopia making garments for Tchibo in Germany. Of around 130 medium- or large-scale factories in the country, 37 are foreign-owned. While most of the cotton industry is currently concentrated around the capital Addis Ababa, in the centre of the country, areas in the north-west, north-east and south have the potential to become cotton-producing regions. Clothing manufacturing centres are spread across the north, west, centre and east. Infrastructure deficit Despite the promise of its textile manufacturing industry, Ethiopia currently accounts for just 0.01 per cent of the world’s total apparel exports. Significant challenges stand in the path of further expansion, not least because of the lack of direct access to the sea. The road link to the Port of Djibouti is in desperate need of repair and frequently congested in many sections, although the government has made a concerted effort to improve transport infrastructure. This contributes to the surprisingly long time it takes a textiles consignment to reach its target European market from an Ethiopian factory: up to 44 days compared to an average of 21 days from China and 28 days from Bangladesh. The newly-completed electric railway between Ethiopia and Djibouti, its coastal neighbour, will make a major difference, but the infrastructure deficit is a major cause of the slow growth of manufacturing exports. Cotton quality Ethiopian farmers are already growing cotton, albeit on a small scale, insufficient to match the government’s ambitions for the sector. Around 1,300sq km are currently cultivated of a potential 26,000-32,000. The quality is also low, particularly for the export market. For example, the staple length – which influences the evenness of the yarn and the spinning limit –  of Ethiopian cotton varies greatly. The Dutch government, when investigating the potential of the Ethiopian textile industry, noted that the staple length of some cotton observed was just 23mm, far less than the average 26mm. The cotton is generally carded, a process of cleaning and disentangling fibres, rather than combing, a more expensive procedure that produces higher quality yarn. As a result, Ethiopia generally imports cotton for manufacture, driving up costs and production time. Chemical pesticides are also extensively used on cotton farms, particularly amongst smallholders, who account for the vast majority of cultivated land. A lack of education, combined with weak enforcement of pesticide usage regulation, encourages bad practice. Many farmers use agrochemicals such as endosulfan, banned under the Stockholm Convention on Persistent Organic Pollutants, an international environmental treaty to which Ethiopia is a signatory. This is not only hazardous to workers and plants but also raises the reputational and compliance risks for companies using local cotton, preventing them from exporting. Land grabs Even foreign companies using organic cotton have faced reputational damage as a result of their forays into Ethiopia. This is largely due to Ethiopia’s complex land rights issues. The government claims that all land belongs to the state. Farmers and pastoralists have a ‘holding right’ allowing them to lease and use the land; families can inherit this holding right, but they cannot buy or sell land. The government is responsible for land allocation. In 2016, land disputes sparked mass protests when the government proposed the allocation of farmland for development, potentially displacing communities of farmers from the Oromo ethnic group, the largest in the country. Though the proposal was dropped, it provoked mass protests and a brutal state response. Hundreds of demonstrators were killed and detained. Foreign investors have been accused of complicity in landgrabs, most notoriously the Swedish giant H&M. In 2014, shortly after the company began to source cotton from the country, reporters discovered that some of the cotton, including material that had been certified organic, had come from Lower Omo, possibly from appropriated land. The Lower Omo Valley is an ecologically and demographically diverse region where the traditional way of life has been jeopardised by the government’s decision to build dams in the Omo river. It is also an area vulnerable to landgrabs. Though the civil unrest has been temporarily subdued by the authoritarian government, further land disputes will almost certainly contribute to flare-ups, and local communities will target foreign businesses that they suspect of expropriating land. This is a major long-term risk for foreign investors considering forays into the Ethiopian garment sector, particularly if sourcing local cotton.