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
RUEPADJ/CJTF HOA
RUEAIIA/CIA WASHINGTON DC
RUEKDIA/DIA WASHINGTON DC
RUEWMFD/HQ USAFRICOM STUTTGART GE
RUEKJCS/JOINT STAFF WASHINGTON DC
RUEHLMC/MILLENNIUM CHALLENGE CORP
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
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. 
 
--------------------------------------------- -- 
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. 
 
------------------------ 
CAPACITY CHALLENGES LOOM 
------------------------ 
 
¶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. 
 
--------------------- 
GOVERNMENT COMMITMENT 
--------------------- 
 
¶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. 
 
--------------------------- 
A SECTOR WOVEN INTO HISTORY 
--------------------------- 
 
¶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. 
 
----------------------------------------- 
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