Investments in Ethiopia: Threat or opportunity for Bangladesh RMG?

Everybody falls curiously silent whenever the topic comes up in private discussions in any happenchance, because it is never raised as a structured topic – what Bangladeshi garment manufacturers are doing in Africa.

Answers are often vague and elusive although a handful of entrepreneurs have been trying their luck for over a decade in that continent, mainly in Ethiopia and Kenya.

But from their titbits of information, it can be gathered that they are not really doing anything worth mentioning and for various reasons. But then, why are they sticking to those faraway places?

The Bangladeshi investors were allured to Africa for two reasons – grabbing the opportunity of duty-free access to the US market under the African Growth and Opportunity Act (AGOA) and secondly, many buyers such as H&M wanted diversification of their sourcing because they thought overwhelming dependence on China and Bangladesh is not wise for business.

Under the AGOA policy, African cotton apparel products get a 20 percent duty waiver while non-cotton products get 30 percent. Besides the US, they are also getting the same kind of preferences in the European Union market under the policy known as "Anything but Arms".

Moreover, Ethiopia's bold social reformation under the leadership of Nobel laureate Abiy Ahmed has opened a new chapter for the economic growth in the country.

Ethiopia is attracting foreign direct investments (FDIs) for setting up units in their new industrial park and is offering a range of financial incentives to the manufacturers for the world's popular apparel brands such as H&M, PVH (Calvin Klein, Izod and Tommy Hilfiger) etc.

And yet, that ambition of turning Ethiopia into another garment hub of $30 billion by 2030 remains a pipedream with the country fetching a piffling $145 million from the apparel sector currently.

One entrepreneur who has invested in Ethiopia told The Business Standard that his venture has not been promising as yet.

"But we are trying. Maybe 10 years from now, Ethiopia's garment sector will stand up," he said.

Their main problem is the workers who are very rigid in their jobs.

"No matter whether we have to rush to meet a deadline, the workers will not do any extra time in the factory," he said. "It is difficult to communicate with them. We are trying to overcome this by taking workers from Bangladesh."

Rubana Huq, president of the Bangladesh Garment Manufacturers and Exporters Association, said, "According to the official data available on the International Trade Center  website (based on UN Comtrade calculation), Ethiopia's garment export in 2017 was $68 million.

"Now, having a vision of reaching $30 billion means that they have to grow their export by 60 percent a year for 13 years (counting from 2017), but in reality their annual average export growth during 2012-2017 was 13.5 percent.

"Ethiopia's garment export was 0.23 percent of Bangladesh's in 2017. These figures substantiate the fact that Ethiopia is nowhere near Bangladesh as of today. However, we should not be complacent by these facts because global sourcing pattern is changing, customers are going for near-shoring and the emergence of online sales is creating more opportunities for smaller factories."

Bangladesh's graduation from the Least Development Country (LDC) category may also lead to some sourcing shift and Ethiopia having the privileges of duty-free market access to the EU and the US could be a preferred sourcing market for many of the customers.

"So, while Ethiopia is not an imminent threat to Bangladesh's garment industry, the market will find its own direction down the stream if we cannot retain our own competitiveness," Rubana said.

With an average annual per capita income of $783, Ethiopia offers its workers the lowest wage. They pay only $26 a month. Because of rising labour costs at home and as the international quota system ended in China, Turkey, India, Sri Lanka, and Bangladesh, the strategic retailers are requesting the manufacturers of these countries to grab the opportunity to get access to the duty-free and low-interest financing market in Ethiopia.

Sharif Zahir, managing director of Ananta Group, thinks investing in Ethiopia is an opportunity and every manufacturer needs to look at sourcing for growth.

"A manufacturer can save 30 percent duty on export to the US from Ethiopia. In 2019, Bangladesh saw negative export growth in the RMG sector – the dominating contributor to the economy. And 86 percent export earnings come from this sector but if it sees negative growth, we need to look at alternative options as well," he said.

"Like other countries, Bangladesh also needs diversification. Devaluation [of taka] is another issue. Other countries have depreciated their currency but Bangladesh has no plan to do so," he added.

About opportunity in Africa, Sharif said, "Kenya has grown more mature now. Ethiopia is new. Their efficiency is low, and so is the gain. But the nature of their work is similar to ours. The workers' physical and work capability is more like us. But they are doing good in certain products – polyester knitwear, suit, PVH lead items, blouse, suits, lingerie etc.

"Bangladesh will make profit there and the profit will be coming to our country. Also, we can create employment. We can recruit our skilled workforce in higher management there."

Sharif further said the government should approve exploring the market, of course, with transparency and accountability.

"The Bangladesh Bank needs to relax regulations for offshore banking for the economic expansion of the country. Global competitors such as China, India, and Sri Lanka are investing there. It is time we caught the opportunity before losing it," the businessman added.

On the other hand, Dr Selim Raihan, one of the lead economists and executive director of the South Asian Network on Economic Modelling, thinks investment in Ethiopia is not a good sign for Bangladesh.

He said, "Ethiopian garment industry is growing up. They are improving their regulations. This is not a good sign for a country like Bangladesh. If you achieve a certain degree of development, you can let your investors invest outside and bring the return back home. But Bangladesh is still at the lower end of the lower middle income country.

"Not many days back, it met the criteria to graduate from LDC in 2024. To sustain the economy, we need investments from the private sector. At this stage, if the investment goes out of the country, it will not be good for us."

Also, some people concerned think the investment will open a path for money laundering, Selim added.

Infrastructural development

Ethiopia turned to China to finance their infrastructural development – road construction, airport expansion, and railway connection from Ethiopia's capital Addis Ababa to the closest seaport in Djibouti.

Demographic dividend

Albeit Ethiopia does not have any legal mandate for minimum wages, they have minimum job requirements for the workers in the Hawassa Industrial Park. The workers must have completed eighth grade and be minimum 18 years old.

Sixty percent of the country's population are under the age of 25 at present.

Challenges

The labourers often fail to meet the deadline and it results in longer lead time. For low wages, often they go on strikes and stop coming to work which also hampers the efficiency and quality of work.

The workers, mostly from agriculture background, do not understand the industrial code of conduct. They are provided with training but only a five-day training cannot change one's behaviour, says a report by the Business and Human Rights Resource Centre.

Ethiopia – an East African country known for poverty, ethnic unrest, drought and famine – ranked nine notches ahead of Bangladesh on the Doing Business Index 2020. It ranked 159th while Bangladesh was in the 168th position.

Ethiopia may not be a threat to Bangladesh's garment industry now, but what will happen after a decade remains the major concern.