Cablegate: Ethiopia's Textile and Garment Sector has yet to Reach Its

VZCZCXRO8532
RR RUEHROV
DE RUEHDS #1389/01 1660733
ZNR UUUUU ZZH
R 150733Z JUN 09
FM AMEMBASSY ADDIS ABABA
TO RUEHC/SECSTATE WASHDC 5115
INFO RUCNIAD/IGAD COLLECTIVE
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RUEAIIA/CIA WASHINGTON DC
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RUEWMFD/HQ USAFRICOM STUTTGART GE
RUEKJCS/JOINT STAFF WASHINGTON DC
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RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 04 ADDIS ABABA 001389

SIPDIS
SENSITIVE

DEPARTMENT FOR EEB/IFD/OMA - JWINKLER AND EEB/CBA - DWINSTEAD
DEPARTMENT PASS TO U.S. PATENT AND TRADEMARK OFFICE - AMY COTTON
USTR FOR PATRICK COLEMAN, CECILIA KLEIN, AND BARBARA GRYNIEWWICZ
DEPT OF COMMERCE WASHDC FOR ITA MARIA RIVERO
DEPT OF TREASURY WASHDC FOR REBECCA KLEIN

E.O. 12958: N/A
TAGS: BEXP ETRD ECON EFIN EINV EAGR ET
SUBJECT: ETHIOPIA'S TEXTILE AND GARMENT SECTOR HAS YET TO REACH ITS
FULL POTENTIAL

ADDIS ABAB 00001389 001.2 OF 004

SENSITIVE BUT UNCLASSIFIED; BUSINESS PROPREITARY INFORMATION; NOT
FOR INTERNET DISTRIBUTION

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SUMMARY
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1. (SBU) From humble beginnings, Ethiopia's textile and apparel
sector has been rapidly expanding in recent years. Sector exports
under the U.S. African Growth and Opportunity Act (AGOA), which more
than doubled from 2007 to 2008 to reach USD 9.4 million, accounted
for most of this growth. The populous country has significant
potential for continued growth because it is a huge source of cheap
unskilled labor and has strong domestic demand for textile and
garment products. Other positive indicators include the
availability of suitable land for cotton growth and the improvement
of critical road transportation corridors. Although Ethiopia has a
good track-record of producing textiles and garments, the sector
faces real challenges to long-term viability and growth. Lack of
capacity on a variety of levels--ranging from production capacity to
marketing expertise--is suffocating producers in an increasingly
competitive global marketplace. Product quality concerns, skilled
human resource voids, reliance on imported inputs, and
infrastructure challenges are driving up operating costs and
squeezing profit margins. Fortunately, the Government of Ethiopia
(GoE) remains committed to the sector's growth--offering a package
of financial and logistical incentives to exporters and development
plans for cotton farms. The GoE is on the right track, but needs to
boost and revamp these efforts to address the specific needs of
producing high-quality cotton, educating the labor force, and
filling the domestic demand. Without additional GoE action in these
areas, short-term growth bursts will fade away and the sector's
long-term potential will be left unrealized. END SUMMARY.

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KEYS TO SUCCESS: AGOA, COTTON, AND LABOR FORCE
--------------------------------------------- --

2. (U) Ethiopia's textile and garment sector experienced significant
growth in the last few years, primarily due to AGOA and the European
Everything But Arms (EBA) duty free import initiatives offered to
Sub-Saharan Africa. The value of Ethiopia's textile and apparel
AGOA exports to the United States more than doubled in 2008 to USD
9.4 million, from USD 4.6 million in 2007. Mr. Endalkachew Sime,
Secretary General of the Ethiopian Textile and Garment
Manufacturers' Association, reported to EconOffs that this growth
was attributed mainly to various U.S. buyers purchasing small
quantities of basic quality goods (e.g., uniforms, t-shirts). Total
sector exports of USD 15.2 million comprised about fourteen percent
of Ethiopia's total USD 106.3 million exports to the United States,
but only one percent of Ethiopia's total USD 1.47 billion exports in
fiscal year 2007/08 (Note: Ethiopia's fiscal year runs from July 8,
2007 through July 7, 2008. End Note.). State Minister of Trade and
Industry Tadesse Haile and various managers of textile and garment
firms told EconOffs that Ethiopia's textile and garment sector is
"just now" ready to benefit fully from AGOA and that they plan to
request further extensions of the 2012 third-country fabrics
importation and the overall 2015 AGOA timelines.

3. (U) Ethiopia is geographically blessed with large swaths of
suitable land for cotton growth and has agreeable climatic
conditions. Sime told EconOffs that much of this land is
underutilized and more research needs to be done so that
high-quality cotton can be produced locally. Additionally, Ethiopia
is the second most populous country in Africa, with around 80
million people, and therefore has vast amounts of cheap unskilled
labor and strong domestic demand for textile and garment products.
The combination of Ethiopia's large population and the increasing
cost of labor in competing Asian economies has provided a potential
comparative advantage for Ethiopia to attract additional foreign
investment in the sector. Nova Star Garment and Knit to Finish
Garments are two successful garment firms that have taken advantage
of this market opportunity. Additionally, two Turkish firms, Ayka
Addis and Elsi have recently entered the market. Ayka Addis
recently started yarn production with an initial investment capital
of USD 150 million, while Elsi is in the process of acquiring land.

ADDIS ABAB 00001389 002.2 OF 004

Finally, while infrastructure remains a challenge in Ethiopia, the
sector has benefited from the recent mass road construction efforts
given the fact that many large-scale factories are located close to
the main road arteries.

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CAPACITY CHALLENGES LOOM
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4. (U) While Ethiopia's textile and garment sector has grown
rapidly, it faces real impediments to reaching its full long-term
potential. The major challenges include the lack of: 1) capacity to
produce the demanded quality and quantity of products; 2) skilled
human resource capacity; 3) an infrastructure conducive for business
operations; and 4) a strong marketing platform to promote Ethiopian
products. Knit manufacturers current produce one million kilograms
(kg) of knitted fabrics, falling well short of the estimated 40
million kg domestic demand. Similarly, weaving mills produce about
43 million meters of woven fabrics annually, supplying just over
half of the estimated 70 million meters of total demand. Sime told
EconOffs that one of the reasons that factories cannot produce to
meet demand is the lack of vertical integration and modern equipment
in most operations. Currently, only three of the over 80 textiles
and garment firms are vertically integrated. (Note: Two more
factories should be vertically integrated in the near future. End
Note.). Furthermore, a recent government assessment found that the
products that firms are producing fall short of international
standards--to include the all-important Worldwide Responsible
Accredited Production (WRAP) certification. This quandary has
exacerbated the already worrisome trade deficit, as many producers
cannot attract foreign buyers and domestic consumers are forced to
import goods from abroad. Ethiopia imported over USD 106 million in
textile goods in fiscal year 2007/08. Garment factories importing
woven fabric accounted for the majority of these sector imports,
since they were unable to source enough suitable fabrics from the
local market. Ethiopia imported an additional USD 166 million in
apparel in fiscal year 2007/08 to supply domestic demand for
clothing.

5. (SBU) Sime informed EconOffs that Ethiopia currently produces
short- and medium-staple cotton which is most suitable for heavier
weight items such as canvas and basic quality t-shirts. Also,
current cotton production processes in Ethiopia generate high
percentages of waste. Sime believes that the sector needs to invest
in more refined cotton-production methods that produce higher
quality long-staple cotton and fewer waste products. Sime told
EconOffs that the GoE is too focused on garment production as a
means to short-term growth, leaving long-term growth possibilities
of improved and increased textile production ignored. For example,
GoE incentives for cotton producers are not as attractive or sector
specific as those incentives offered to the floriculture industry.
Most factories are operating with outdated equipment and spare
machine parts cannot be imported under the current duty-free
incentives offered. Furthermore, it is more difficult to attract
investors to build a textile mill, as they are capital intensive and
require an initial investment of about USD 900,000 to 1.3 million.
On the other hand, an investor could establish a garment factory
with just USD 90,000 to 180,000. Sime finally noted to EconOffs
that cotton production involves complex irrigation systems and
delves into a whole range of complicated socio-political issues
(e.g., land, regional development).

6. (U) Human resource constraints, such as the lack of skilled
manpower and low labor productivity, are also crippling the sector
according to a recent government assessment of the sector. Domestic
textile firms face severe shortages of capable managers with the
entrepreneurial know how to run a business. The assessment stated
that 85% of firms responded that they have severe problems finding
qualified staff. As such, skilled labor has been imported from
Turkey, India, and China, which only increases operational costs and
cuts into profits. Sime noted to EconOffs, however, that some World
Bank program money is being used to hire foreign expertise.
Although there is an abundant local supply of unskilled labor, labor
productivity is extremely low. Sime told EconOffs that labor
productivity is 23 to 25 percent lower than the standard benchmark
for countries similar to Ethiopia. This fact increases direct

ADDIS ABAB 00001389 003.2 OF 004

product costs and indirectly costs factory management hours to
monitor the productivity of its workers.

7. (SBU) Another factor increasing manufacturing costs is the poor
infrastructure in place to support businesses. When compared to
other developing countries, Ethiopia suffers more than its fair
share of power interruptions, has abysmal telecom services, has
difficulty accessing transportation routes, and offers limited
access to finance. Time is money and if a company cannot power its
factory, receive an email attachment, or make a phone call, it is
difficult to remain globally competitive. Profit margins are
already squeezed based on the sector's reliance on imported inputs,
but these margins are further reduced by the high transportation
costs associated with a landlocked country where paved roads are the
exception, not the rule. Sime told EconOffs that most sector
products are transported via truck to Djibouti and the condition of
this route is quite poor. According to a recent U.S. International
Trade Commission report, shipping times and costs from Ethiopia rank
among the worst when compared to its peers. Furthermore, many
non-exporting companies are unable to obtain the financing to expand
their operations due to restricted credit amounts offered by the
underdeveloped financial sector. Finally, a lack of marketing
expertise is hindering growth. While the GoE is making some efforts
to promote this sector, Ethiopia does not have a coordinated
strategy to promote "Made in Ethiopia" products and combat any
negative images of the country as a marketplace. On the other hand,
many manufacturers lack the market information necessary to
understand the demand both domestically and internationally. In
Sime's opinion, the sector needs more private sector involvement to
boost marketing efforts.

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GOVERNMENT COMMITMENT
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8. (U) The GoE ambitiously envisaged in its five-year strategic plan
to generate USD 500 million from the textile and garment sector in
2009, which is 30 times more than what the sector actually generated
in 2008. Despite missing this mark, the GoE remains committed to
the sector and has a development program anchored on two pillars: 1)
cotton farm development; and 2) increasing garment production. Its
cotton farming initiatives include both large scale and small farm
operations. The GoE's program also includes seeking joint venture
partnerships to rehabilitate outdated government-owned factories.
To encourage sector growth, the GoE offers a variety of financial
incentives to investors--especially for garment exporters. The
incentives are focused on exporting entities and include: 1) a loan
guarantee scheme whereby the government guarantees 70 percent for
any new garment sector commercial loan with a favorable long-term
interest rate; 2) relatively easy and affordable access to land; 3)
tax holidays of up to five years; 4) duty-free imports of equipment,
fabrics for export production, and other supplies for investment;
and 5) simplified customs procedures for garment exporters.

9. (U) State Minister Tadesse told EconOffs that the GoE is
particularly committed to increasing the value-added product portion
of the textile and garment sector. Therefore, the GoE has
established a textile and apparel institute in order to undertake
research and development activities. State Minister Tadesse also
said that the GoE plans to open a textile department in all of the
public universities in Ethiopia. The new departments will augment
the existing Department of Textiles at Bahir Dar University, which
is in the process of upgrading its facilities. Sime told EconOffs
this type of investment in education is necessary for the long-term
health of the sector. The GoE has also had some success reaching
out to international investors during high-level visits abroad.
Both Turkish and Indian investment increased in the sector after
Prime Minister Meles Zenawi's visits to their respective countries.

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A SECTOR WOVEN INTO HISTORY
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10. (SBU) Ethiopia has a long tradition of cultivating cotton and
producing textiles and garments based on handloom weaving
techniques. Textile mills date back to the mid-1940s and today 16

ADDIS ABAB 00001389 004.2 OF 004

textile and over 65 garment factories exist. According to Sime, the
sector has only formally established itself in the past ten years,
with the number of companies increasing about 25 percent in the last
five years. Five of the 16 existing textile factories are owned by
the government. Sime remarked to EconOffs that this is an
improvement from the past when nearly all factories were
government-owned and operated inefficiently. The lion's share of
production is dominated by the ruling party affiliated company
Almeda Textile and by billionaire Sheikh Mohammed Al-Amoudi's MAA
Garments, which are both located in the ruling-party's home region
of Tigray. The textile and garment sector is currently comprised of
both woven and knitted garment producers, but also includes yarn
spinning. The knitted garments sub-sector maintains a slight
advantage over the woven sub-sector because the quality of yarns
used meets the standards for basic export items such as t-shirts and
polo shirts. Overall, Ethiopia's manufacturing sector is quite
small, accounting for less than 4% (USD 804 million/9.04 billion
birr using the current exchange rate of 11.24 birr/USD) of total
nominal GDP of USD 21.9 billion (245.6 billion birr) in the fiscal
year 2007/08.

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COMMENT: GOVERNMENT SHOULD LOOK LONG-TERM
-----------------------------------------

11. (SBU) While this sector has tremendous potential for growth, it
is still in the infant stages of development. As the sector only
accounts for 1% of total exports and is working off a relatively
small base, any growth experienced produces large percentage growth
rates. The sector has a long way to go in order to overcome its
reliance on imports and sector-specific trade deficit as Ethiopia is
importing over 18 times more textile and garment goods than it is
exporting. Consistent growth over time is needed in order to take
advantage of economies of scale in such a low-margin business.

12. (SBU) The GoE is taking action in the critical needs area of
cotton production and labor force education, but it needs to do more
in these areas and focus on the long-term benefits of investing in
textile research and education. Any focus on short-term boosts to
volume (e.g., low quality garment exports) will be lost if concerted
efforts are not made in these areas because short-term boosts in
volume are not sustainable if the quality is not there. Cotton
production research would improve upon the current product quality.
Additional investment in education is also critical as qualified
managers are sorely needed to run efficient operations and work on
increasing labor productivity.

13. (SBU) The GoE should look to create sector specific incentives
that would attract more investors to textile production as a
long-term solution to reducing the country's reliance on imports.
Increased private sector investment would also allow factories to
update aging equipment and modernize sector operations overall. On
the domestic side, the market potential is being virtually ignored
as the GoE primarily offers incentives to exporters in efforts to
boost foreign exchange reserves. These incentives could be extended
to those factories producing for the domestic market. Filling
domestic demand with local supply would reduce the trade deficit and
indirectly increase foreign exchange as sector imports would
decrease. In practice, Sime told EconOffs that the GoE may find it
difficult to introduce additional incentives because it does not
fully trust the private sector to apply the incentives in good
faith. All of these long-term commitments will not be easy to
uphold, but are necessary for this sector to reach its ultimate
potential. END COMMENT.

YAMAMOTO

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