Feasibility Study of Garment

Competitive Africa: The Value Chain and Feasibility Analysis Module – Draft 4

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VIII. Feasibility Study of the Domestic

Production of Garments (Men’s Boxer Briefs) in

Ethiopia, Tanzania and Zambia


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VIII.1. Background and Objective

The purpose of this analysis is to determine the potential for competitive production of

apparel in Ethiopia, Tanzania and Zambia, particularly for the purpose of import

substitution. This section conducts an outline feasibility study using boxer briefs

production as a representative example of a product in the apparel industry that currently

is not being produced domestically. The analysis is concerned with assessing the

possibilities of apparel production as an economic proposition, taking one product as a

model.

VIII.2. Product Selection Method

Following a review of the first product screening in which 40 products were selected for

consideration for the value chain analysis and feasibility study, the World Bank (WB)

and Global Development Solutions (GDS)/HQ teams immediately agreed on seven out of

the ten products needed for the analysis. The seven products selected by the teams were

as follows:

1. Apparel:

a. Polo shirt; and

b. Underwear

2. Agribusiness:

a. Milk; and

b. Wheat milling

3. Leather:

a. High-end sheepskin loafers

4. Wood:

a. Windows/French windows and frames

5. Metal:

a. Padlocks.

To finalize the selection of the remaining products from the wood, metal and leather

sectors, based on the Africa Competitiveness: Phase 1.1 - Preliminary Product Screening

in Ethiopia report (July 2010), the WB and GDS/HQ teams chose six products as

potential candidates to be included in the list of the final ten products to be the target

products for the value chain analysis and feasibility study. The six products included the

following:

1. Wood products:

a. Wooden doors; and

b. Wooden chairs (not upholstered).

2. Leather products:


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a. Leather golf gloves; and

b. Sports footwear of leather.

3. Metal products:

a. Metal doors, window-frame (security window frame); and

b. Aluminum doors and windows.

In order to screen the final six products, a product screening survey was developed which

revolved around six factors:

1. Whether these products are currently produced by companies with less than

50 employees;

2. If companies identified in #1 above can be set up with less than US$100,000

in investment capital;

3. The minimum level of skills and know-how required to produce the products;

4. Whether the products produced by the companies in #1 are being exported;

5. Whether products produced by companies in #1 are consolidated by brokers

or other intermediaries for exports; and

6. Whether companies identified in #1 can readily access raw material inputs in

the market to produce the products.

These questions were posed to the wood, metal and leather sector associations in both

China and Vietnam. Following interviews with sector associations, additional interviews

were conducted at the firm level to identify specifically the level of investments and

minimum level of technical skills required for an entrepreneur or existing SMEs to set up

a production operation. These questions were posed to existing operators in China and

Vietnam to identify whether:

Barriers to market entry, particularly from a financial and skills

requirement, were sufficiently low to allow entrepreneurs and SMEs in

Ethiopia to easily establish operations; and

These products are currently being produced by SMEs in China and

Vietnam, and are effectively being sold in local and export markets.

The product screening survey identified the following products as viable candidates to be

targeted for the value chain and feasibility analysis.

1. Wood product:

a. Wooden chairs (soft wood); and

b. Wooden door (semi-solid).

Although French windows and their frames made of wood had originally been

preselected for analysis, a decision was made to opt to analyze both wooden

chairs and wooden doors. This decision stemmed from the fact that French


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windows require glass thus introducing an outside factor that could influence

the manufacturing of the final product. Wooden doors (without glass) and

wooden chairs (without upholstery) are more representative of wood

processing exclusively.

2. Leather products: Leather golf gloves or sports glove of comparable structure

and weight.

3. Metal products: Both the pre-selected products (security window frame; and

aluminum doors and windows) were screened out of the selection due to

various factors including high initial investment requirements. As a result,

further analyses of products identified during the preliminary product

screening were conducted. Interviews with metal sector associations and

enterprises currently operating in China and Vietnam, as well as interviews

with existing operators in the fabricated metal products sector in Ethiopia

identified crown corks (bottle caps) as a viable candidate to be targeted for

value chain analysis. Crown corks currently are produced in four of the

countries (excluding Tanzania), but Ethiopia continues to import substantial

volumes of this product, including imports from China. As a result, crown

corks have been chosen as the final fabricated metal product to be the focus of

a value chain analysis in the target countries.

VIII.2.1. Respective Government Definitions of Small, Medium and

Large Enterprises in Ethiopia, Tanzania, Zambia, China and

Vietnam

Ethiopia: For Ethiopia, the classification of enterprises into small, medium and large

scale depends on a number of variables such as level of employment, turnover, capital

investment, production capacity, level of technology and subsector. Accordingly, the

following scales are referred to the classification of enterprises in the Ethiopian context

(Table 196).


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Table 196: Company Size Classification Structure for Ethiopia

Small Scale Medium Scale Large Scale

Textile and Apparel 5-9 10 – 49 above 50

According to the Central

Statistics Agency (CSA)

Leather 2-10 21 – 50 above 51

Diary 2-10 21 – 50 above 51

Wheat 2-10 21 – 50 above 51

Wood Processing 2-10 21 – 50 above 51

Metal 2-10 21 – 50 above 51

According to Federal

Medium and Small

Enterprise Development

Agency (FeMSEDA)

Sub-sector Remark

Number of Employees

Source: Ethiopia CSA and FeMSEDA

Tanzania: For Tanzania, the classification of enterprises into small, medium and large

scale depends on a number of variables such as level of employment and capital

investment in machinery. The classification cuts across sectors and subsectors of the

economy. Accordingly, the following scales refer to the classification of enterprises in

the Tanzanian context (Table 197). Note that the small enterprise type is most

appropriate for all sectors studied in this analysis.

Table 197: Company Size Classification Structure for Tanzania

Category Employees

Capital Investment in Machinery

(TZS million) Remarks

Micro enterprise 1 - 4 Up to 5 Majority in the informal sector

Small enterprise 5 - 49 5 - 200 Most in the informal sector

Medium enterprise 50 - 99 200 - 800 Most in the formal sector

Large enterprise 100+ 800+ All in the formal sector Source: Tanzania Chamber of Commerce, Industry and Agriculture (TCCIA)

Zambia: Zambia classifies enterprises as micro, small, medium and large based on

several factors including number of employees, annual revenue and capital investment.

The capital investment category is further delineated by whether the firm is engaged in

manufacturing or if it is a trading/services firm. For microenterprises, the minimum

revenue and investment requirements are kept intentionally low in order to encourage

registration, although few microenterprises actually register.

Table 198: Company Size Classification Structure for Zambia

Classification Employees

Annual Revenue

(ZMK million)

Capital Investment for Manufacturing

Firms (ZMK million)

Capital Investment for Trading/ Services

Firms (ZMK million)

Micro < 10 < 20 < 10 < 10

Small 10 - 50 150 - 250 80 – 200 150

Medium 51-100 300 - 800 200 – 500 151 - 300

Large > 100 > 800 > 500 > 300

Source: Zambia Development Agency


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China: The China government is challenged in defining sizes of firms. Temporary

definitions have been used for the past several years, and the government promised to

revise the standard in 2010. The definition from the National Bureau of Statistics of

China is complex. The definition was published in 2002 jointly by the Ministry of

Finance, National Bureau of Statistics of China, State Economic and Trade Commission

(no longer exists), and China Planning Commission, which has since split and exists as

the State Development and Planning Commission (SDPC) and the National Development

and Reform Commission (NDRC). A simplified presentation of the company size

classification is shown in Table 199. Note that the Industrial type is most appropriate for

all sectors studied in this analysis.

Table 199: Company Size Classification Structure for China

Type Index Unit Small Medium Large

Employee person Less than 300 300-2000 More than 2000

Revenue million RMB Less than 30 30-300 More than 300

Asset million RMB Less than 40 40-400 More than 400














Lodging and

Catering services

Industrial

Construction

Wholesale

Retail

Transportation

Post services

Source: National Bureau of Statistics of China

Vietnam: A small firm has less than 50 laborers, while a medium-size firm has 51-200

laborers. Within the small and medium-size classifications, there are some detailed

categories depending on the purpose of research and management. For instance, a firm

with less than 10 laborers is called a super small-size firm. Such a regulation is in line

with Social Insurance Law.158

VIII.2.2. Product Technical Specifications

Following the identification of products to be targeted for the value chain and feasibility

analysis, a detailed technical profile of each product with an accompanying diagram or

photograph was complied and sent to the field teams to help ensure that product data

158

Information garnered from

http://laws.dongnai.gov.vn/1991_to_2000/2000/200004/200004280005_en/lawdocum



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collection in the field focused on products with similar - if not identical - technical

specifications. Table 200 below provides the product technical specifications for all ten

products for which product data are being collected.

Table 200: Product Technical Specifications

Material

Product WeightUnit of

measureUnit of measure

1 Golf gloves 85 - 141 grams Men's medium Sheepskin

Loafer 780 grams Heel Width Insole

Size US = 8 EU = 7 2.5 10 30

3 Padlock* 760 grams 7 7 NA* cm Brass

Thickness Diameter Height

0.24 31.9 6.6

Width Depth Height

45 45 75

Width Depth Height

80 4 210

Protein Lactose Ash Vitamins Fat content

3.5% 4.7% 0.8% B1, B2, C and D Full

Type (German) Type (French) Ash Protein Moisture

550 55 <0.65%approx.

11%<14.5%

9 Polo shirt 250 - 270 grams 100% cotton

10 Underwear 80 - 100 grams80% cotton/

20% spandex

* Overall height is 14 cm with a 2 cm shackle diameter

** The weight of the cover (plastic sole made from PVC) in the internal surface of the cap is 290 mg

Source: Global Development Solutions, LLC

Pine

Wheat or rice

Dimension

All purpose flour

cm

Refer to diagram

Weight

cm

mm

cm

tin free steel

(tfs)

Sheepskin

Pine

mg

kg

kg

liters

Refer to picture

Crown cork

(metal bottle

cap)**

Wooden chair

Wooden door

Milk

Milling

290

6.5

12

0.5

2

4

5

6

7

8

VIII.3. International Competitiveness of the Garments Sector in Ethiopia,

Tanzania and Zambia

VIII.3.1. Sector Profile - Ethiopia

China dominates the global apparel trade by commanding over one-third of global

exports. In China and Vietnam, medium and large firms dominate the sector (85 percent

and 75 percent respectively). In Ethiopia, over 90 percent of all firms in the sector are

small. Of the roughly 10,000 people employed in the apparel sector in Ethiopia, male

and female workers are equally represented in the workforce. By contrast, the majority

(80 percent) of the sectors‘ workforces in China and Vietnam is female – refer to Table

201 below.


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Table 201: A Snapshot of the Apparel Sector in China, Vietnam and Ethiopia

Key Comparative Indicators China Vietnam Ethiopia

Total Imports (Value) 1,651,745,000$ 604,373,333$ 72,546,928$

Total Exports (Value) 100,479,288,000$ 8,244,000,000$ 10,405,248$

Companies Operating in the Sector 52,828 3,174 436

Small 13.2% 26.8% 91.1%

Medium 54.0% 55.0% 1.6%

Large 32.8% 18.2% 7.3%

Est. no. of works in the sector 4,587,000 1,194,310 9,746

Male 20.0% 17.0% 58.0%

Female 80.0% 82.8% 42.0% Global Development Solutions

The Ethiopian apparel sector accounted for 7.1 percent of the country‘s industrial

production in 2009/10 and 0.72 percent of the country‘s total exports.159

Key products

were polo shirts, T-shirts, sportswear, work clothes and uniforms. Ethiopia is a net

importer of garments, with imports being some seven times exports. Imports (primarily

from China) also outweigh domestic production by approximately 7:1 (see Table 202

below), nearly equivalent to domestic demand. Export figures suggest that the price per

piece is much higher for exported products than for products sold in the domestic market,

including the imported products. This suggests higher quality items are being exported

from Ethiopia.

Table 202: Ethiopia Apparel Production and Trade Statistics, 2009

Domestic Production Domestic Demand Total Imports Total Exports

Volume (pieces) 17,543,075 132,467,738 117,734,080 2,809,417

Value (USD) 10,937,533 73,079,213 72,546,928 10,405,248 Source: Global Development Solutions, LLC; Ethiopian Customs Authority; Ministry of Trade and Industry

During the years 1974 – 1991, the government heavily promoted state cotton textile

production. However, lack of investment led to decline, low capacity utilization and low

productivity. Since the 1990s, factories have been privatized to foreign investors mainly

from United States, Italy and Turkey, and exports have grown steadily while remaining

small in volume.

The employment structure of the apparel sector is shown in Table 203 below. Small

companies employ about 91 percent of the labor force.

159

Ministry of Trade and Industry


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Table 203: Employment Statistics for Ethiopia Apparel Sector

Company Size Estimated Number of Companies % of Companies by Size

Number of

Employees Ave Number of Employees

Small 397 91.1% 1,961 5

Medium 7 1.6% 343 49

Large 32 7.3% 7,442 233

Total 436 100.0% 9,746 Source: Central Statistical Authority

Principal advantages for the apparel sector in Ethiopia are low wages and preferential

access for imports from Ethiopia to the United States under the African Growth and

Opportunity Act (AGOA) until 2015. A major drawback for exporting is that Ethiopia is

landlocked with poor transport and communication links, thus adding costs to exports.

Further, local raw material (cotton) is available but local fabric production is

monopolized by one state factory and textile production is inefficient.

Multiple problems persist along the cotton-to-garment processing chain in Ethiopia.

From the farm level and all the way up through garment assembly, productivity and

capacity utilization are not optimal, technology is generally obsolete, and dependence on

imported inputs is high (Figure 64).


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Figure 64: Ethiopia Cotton-to-Garment Processing Road Map


VIII.3.2. Sector Profile - Tanzania

As noted in the apparel sector profile, The Tanzanian apparel sector is very limited in

scale. Up to date information on employment, production levels and income generated

specifically from the garment industry is not available. According to the latest surveys to

Ethiopia ’s Cotton - to - Garment Processing Road Map

Ethiopian Cotton Farm s /cotton (118,000 ha / Output: 227,000 tons)

) Cotton Farm ’s Issues - L ow productivities - Low quality and poor varieties - P oor irrigation management - Low far ming, harvesting, and

handling technology - Insufficient incentives for farmers

Ginning & Spinning Mfs ( Cotton Ginning 11 & Spinning 11)

Ginning output 84 ,000 tons/year

Textile & Garment Manufacturers ( Textile Mfs 13, Garment Mfs : Medium 7 and

large 32 ) Textile Production Capacity: 25,858 ton/year Installed Capacity: 37,625 ton/year Garment Production Capacity:

Woven - 1 0.9 million pcs /year Knitwear - 16.6 million pcs/year

Installed Capacity: Woven – 37. 4 million pcs/year Knitwear – 18.2 million pcs/year

Upstream

Principal pr oblems of textile & garment industry - Obsol e t e technology - Low quali ty products - Low added value - High dependent on imported inputs - Low domestic market shares - Lack of domestic designers, brand names,

distributors - Shortage of skilled labor - Lack of marketing and management skills

Downstream


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be published in 2011, the country had 47 establishments manufacturing textiles, apparel

and leather products in 2008.160

According to the survey, these firms collectively

employed 13,430 people (Table 204).

Table 204: Tanzania Textiles, Apparel and Leather Products Sector Profile Textiles, Apparel and Leather Products, Tanzania, 2008

Employment size/firm 10-19 20-49 50-99 100-499 >=500 Total

Number of firms 18 4 7 9 9 47

Total employees (private firms %)

Firm ownership (National, Foreign, JV)

Employees by gender (Male, Female)

Compiled by Global Development Solutions, LLC from Ministry of Industry, Trade and Marketing, Tanzania

Manufacturers of textiles, wearing apparel and leather products

13,430 (95%)

44%;35%;21%

59%;41%

In Tanzania, apparel products in recent years (except for 2008) have faced a trade deficit

with importers and are thus classified as importables at the margin. The country

imported roughly US$90 million worth of apparel in 2009, almost twice as much as in

2005. Clothing apparel, including second hand clothing (US$40 million in 2009)

constitutes almost 80 percent of all apparel imports. This is in contrast to exports, where

only 12 percent of exports are articles of apparel (knit and not knit); 88 percent of

Tanzanian apparel exports are in the form of printed fabrics or other processed textiles

such as those used in furnishings, rugs, blankets, etc. (Table 205).

Table 205: Apparel Trade Statistics, Tanzania, 2009

Apparel Trade, Tanzania (US$ Thousand) 2005 2006 2007 2008 2009

Apparel Imports $ 49,538 $ 56,605 $ 65,666 $ 89,087 $ 88,788

Other made textile articles, sets, worn clothing etc $ 36,146 $ 39,230 $ 47,358 $ 56,772 $ 57,942

Articles of apparel, accessories, not knit or crochet $ 7,512 $ 11,598 $ 14,123 $ 23,466 $ 22,989

Articles of apparel, accessories, knit or crochet $ 5,880 $ 5,777 $ 4,185 $ 8,849 $ 7,857

Apparel Exports $ 23,308 $ 29,181 $ 69,128 $ 76,678 $ 70,205

Other made textile articles, sets, worn clothing etc $ 17,209 $ 25,556 $ 59,474 $ 65,182 $ 61,906

Articles of apparel, accessories, knit or crochet $ 4,802 $ 2,219 $ 4,855 $ 5,899 $ 7,151

Articles of apparel, accessories, not knit or crochet $ 1,297 $ 1,406 $ 4,799 $ 5,597 $ 1,148 Compiled by Global Development Solutions, LLC from Intrance/UN Comtrade

In the upstream part of the apparel cotton-to-garment supply chain, Tanzania is a major

producer of cotton and has textile milling capacity, but the chain is disconnected. Mills

produce fabrics for their own integrated fabric/garment production, and domestically-

produced knit and woven fabric is not readily available to the garment industry. In the

cases when local knit fabric mills make their fabric available to garment firms, the fabric

is generally of poor quality and is not used for export oriented garments.

160

Annual Survey of Industrial Production undertaken by UNIDO and the Ministry of Industry, Trade and

Marketing


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While the industry has declined and is very small with only 13,500 workers and 47

enterprises, it remains considerably larger than that of Zambia, which has been severely

damaged by competition.

VIII.3.3. Sector Profile - Zambia

As stated in the apparel sector profile, the Zambian apparel sector is very limited in scale

and scope. Annual production of all clothing apparel has declined rapidly, by as much as

40 percent from 2007 to 2009 (14.1 million kg in 2007 to 8.6 million kg in 2009) and a

highly marginal export sector of only 0.03 million kg.

Ninety percent of Zambian cotton is grown on small-scale farms and the remainder on

commercial farms mainly for seed multiplication. Five ginneries are operating, but no

spinning capacity exists, so all of the lint cotton is exported to countries including China,

Congo, Germany, Britain, Italy, Lesotho, Malawi, South Africa, Spain, Switzerland,

Tanzania and Zimbabwe. Prior to liberalization of the Zambian economy in 1991, local

weaving and knitting industries operated under high protective barriers. However, since

the removal of protection, low-priced new and second-hand imports have flooded into the

country (both legal and illegal). By the mid-1990s, the number of apparel manufacturers

had fallen from 140 to 50, and by 2010 only 12 manufacturers remained, with 1500

employees producing niche products such as ethnic clothing, school uniforms, protective

wear for mining and other professional uniforms where the manufacturers are able to

compete on service and delivery.161

The most recent decline of the sector may be due to

the appreciation of the real exchange rate as a result of rising copper prices. In these

circumstances, profitable domestic production of apparel is put under additional pressure.

Thus while cotton is exported, both fabric and finished products are largely imported into

Zambia at the margin. Table 206 provides approximate numbers of firms operating

specifically in textiles and garments (excluding leather products).

161

The Textiles Producers Association of Zambia is now defunct and sector representation for issues

related to the apparel sector falls under the Manufacturers Association of Zambia.


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Table 206: Firm Statistics, Apparel Manufacturing, Zambia

Company Size

Estimated Number

of Companies

% of Companies

by Size

Estimated Number

of Employees

Ave Employees/

Firm

Small 0 0 - -

Medium 6 50% 600 100

Large 6 50% 900 150

Total 12 100% 1500

Registration

Formal 12

Informal 0

State-owned enterprises 0

Gender

% Male 74%

% Female 26% Source: Central Statistical Office, Zambia

VIII.4. International Competition – China and Vietnam

China is the dominant producer and exporter in the apparel sector. Its annual apparel

exports of over US$100 billion constitute a third of the yearly global trade in apparel and

are roughly ten to fifteen times higher than the other top exporters in the sector (Turkey,

Bangladesh, India and Vietnam).162

The apparel sector in China is based mainly on the east coast (Guangdong, Zheijang and

Jiangtsu Provinces) in the Special Economic Zones. They predominantly are privately

owned and foreign investment is common. In Guangdong Province, over 60 percent of

garment factories are owned by Hong Kong and Taiwanese companies.

Table 207: Export Volume and Number of Enterprises, Chinese Apparel Sector, 2009

Total Exports 2007 2008 2009

Volume (million pieces) 30 30 26

Value (CNY, billion) 783 815 728

Value (USD, billion) 115 120 107

Main countries/regions of destination

Estimated number of companies operating in the sector% of Total

Avg no. of

employees/firm

Small 6,976 14% 150

Medium 28,526 56% 350

Large 17,326 34% 500

Subtotal 51,370 100% 337

US, Japan, Hong Kong, Germany, UK

Source: China Statistical Yearbook Network

162

Excluding the European Union (EU) and its intra-EU trade.


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Despite success to date, Chinese competitiveness is eroding because of labor shortage.

Garment workers - most of whom are migrants - move between industries in order to

improve their wages and working conditions, causing high labor turnover and increasing

labor costs (US$200 - US$300 monthly wages for unskilled labor in 2010, up 10 percent

- 20 percent from 2009).

In Vietnam, garments are the leading export and are expanding rapidly. Currently,

Vietnam‘s apparel products account for roughly 2.7 percent of the world‘s total market

share. The main importers of Vietnam‘s apparel are the US (55 percent), the EU (20

percent) and Japan (10 percent). In the domestic market, during the first half of 2010,

garment and textile producers achieved a growth rate of 15 percent – 18 percent, and

export prices are rising amid the global economic recovery. The sector employs about

1.2 million workers across 3,174 small, medium and large enterprises (officially

registered). Of the 3,174 enterprises, 18.5 percent are partially or wholly foreign owned

enterprises, 80 percent are Vietnamese owned, non-state enterprises and 1.5 percent are

state-owned enterprises.

Table 208: Enterprises in the Apparel Sector in Vietnam (2010)

Size Classification No. of Enterprises % of Total No. of Employees

Small 851 26.80% < 10

Medium 1,745 55.00% 10 – 200

Large 578 18.20% >300

Total 3,174 100% Source: Vinatex, Interview, August 2010

Vietnamese producers are much larger than those of China, probably because a ‗single

producer‘ consists of multiple linked suppliers organized on a CMT (cut, make and trim)

basis. Vietnam faces some challenges to its competitiveness due to a dependence on

imported inputs which potentially raises the price of export products. It is estimated that

80 percent to 95 percent of Vietnamese garment production relies on imported material,

primarily from China, Taiwan and Korea. The sector also is transforming rather slowly

from CMT to ODM (original design manufacturing). To move to a more domestically

integrated value chain, investment and technical know-how still are required. The sector

also faces a shortage of skilled and semi-skilled labor, which limits the apparel sector to

low value-added production. Nevertheless Vietnam constitutes one of the world‘s largest

apparel producers.

VIII.5. Feasibility Analysis of Boxer Briefs Production in Ethiopia

VIII.5.1. Production Assumptions Based on the VCA


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Currently, Ethiopia does not produce boxer briefs, and they are importing them from a

number of countries including China. In this context, the objective of the feasibility

study is to determine the probable economic and financial profitability by simulating the

production of boxer briefs in Ethiopia given the current level of labor productivity and

production costs associated with polo shirts. As input material for the production of

boxer briefs is currently not available in Ethiopia, the VCA uses actual cost of input

material from China. The cost of transporting the material from Guangzhou, China to

Addis Ababa, via Djibouti Port if factored into the calculus based on the prevailing

transport costs (shipping, trucking, handling, customs clearance, freight forwarding

services and any other charges associated with importing fabric and other inputs required

for the production of boxer briefs).

A number of assumptions were made in order to develop a profile of a hypothetical

factory to simulate the production of boxer briefs in Ethiopia. The following provides a

brief description of how figures were adjusted.

Size of operation: The size of the operation was adjusted according to the labor

productivity ratio between a factory producing polo shirts in China and Ethiopia.

Specifically, the average labor productivity in China was approximately 25

shirts/person/day, as opposed to 11 shirts/person/day in Ethiopia. Given the differential

production of 56 percent, the size of the operation was scaled down accordingly.

Number of employees: The total number of employees was kept the same as the factory

in China, but the number of skilled, unskilled and casual employees was adjusted

according to the proportion of these categories of workers in the representative factory in

Ethiopia.

Labor turnover and absenteeism rate: The same turnover and absenteeism rate as the

representative factory in Ethiopia was used.

Shifts, average capacity utilization and output: Figures from the representative factory

in Ethiopia were used, starting at 65 percent utilization for one shift operation. Output

and revenue figures were adjusted to reflect the revised operations figure for the

hypothetical factory.

Major production equipment: The F/S assumes that the same equipment currently used

by the boxer brief factory in China is available to the manufacturer in Ethiopia at a price

to include import costs and local distribution of 15 percent of FOB China.


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Markets and price: The F/S assumes that this is an import substitution industry at least

over the period of the study, with the future prospect of exports only if cost/productivity

changes occur. Factory gate, wholesale and FOB prices used for the F/S reflect those for

the factory in China, adjusted for transport, handing and distribution cost to the Ethiopian

market (Addis Ababa).

Average spoilage, reject, waste and loss rates: These figures were revised to reflect the

figures in the representative factory in Ethiopia.

Raw material input: The amount and cost of raw material input, including packing and

packaging material, was adjusted to reflect the revised number of boxer briefs produced

per day at the hypothetical factory. The cost of transport and handling was incorporated

into the total cost.

Salary and wages: Total annual salary and wages were adjusted to reflect the revised

distribution of skilled and unskilled workers, and used the current wage rates for these

skill levels in Ethiopia.

Electricity: The cost of electricity was adjusted to reflect the revised number of boxer

briefs produced per day multiplied by the actual unit cost of electricity in Ethiopia today.

percentage of time off the grid per month is the same figure as the representative factory

in Ethiopia.

Water and fuel: The cost of water and fuel was adjusted to reflect the revised number of

boxer briefs produced per day multiplied by the actual unit cost of water in Ethiopia

today.

Administrative overhead: The cost of administrative overhead costs was adjusted to

reflect the revised number of boxer briefs produced per day.

License and certification fees, taxes, VAT: These fees were adjusted to reflect payment

rates made by the representative firm in Ethiopia, and adjusted to reflect the revised units

of boxer briefs produced on a daily basis.

Freight and handling: The cost of freight from Guangzhou, China to Addis Ababa,

Ethiopia via Djibouti port was calculated based on actual cost of shipping a 20-foot

container of fabric (Table 209 below).


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Table 209: Freight Cost from Guangzhou to Addis Ababa via Djibouti Port (2010) Freight Costs from China to Ethiopia (Nov. 2010)

Guangzhou to Djibouti Shipping/handling 1,880$

Djibouti port to Addis 2,012$

Total freight cost (20') 3,892$

Weight/container (tons) 10

Freight cost ($/ton) 389.20$

Freight cost (ETB/ton) 5,254

Global Development Solutions, LLC

The cost of transporting raw material input from factory gate-to-factory gate (China to

Ethiopia) is based on US$389.20/ton which includes all handling charges. In this context,

all imported raw material (including packing and packaging material) was converted into

kilograms and then multiplied by the freight and handling charges.

Can the Cost of Transporting Input Material to Ethiopia be Reduced?

As cost of freight from Guangzhou to Addis Ababa indicates, nearly 52 percent of the freight cost is

incurred between Djibouti Port and Addis Ababa. Of this amount, 49 percent is transport cost.

Further breakdown of this cost indicates that up to 25 percent of the transport cost is accounted for

by fuel. Ethiopia imports petroleum fuels as it has no local production. At present, all petrol (NGF

X Sudan and NGR E5) is imported from the Sudan and other products are imported through

Djibouti. Kerosene is currently the major petroleum fuel in quantity imported for domestic cooking

purpose. In 2009, imported kerosene surpassed 300,000 tons. Automotive diesel oil (ADO) is the

next most significant following kerosene. Can taxes on fuels be reduced to help enhance

competitiveness?

There are three types of taxes on fuels for transportation: excise tax, value added tax (VAT) and

municipality tax. However, there is no excise tax on ADO and no VAT on jet fuel. There also is a

road-fund charge on fuels used for transportation. The stabilization fund charged per liter of fuel

fluctuates based on the import price of fuel and is meant to collect funds that would serve as a buffer

against frequent price fluctuations. For November 2010, the stabilization fund was rather negative

except for light and heavy fuel oils (see table).

Breakdown of Tax on Imported Fuels (November, 2010) Description Unit NGR X Sudan NGR E5 Kerosene ADO Light fuel oil Heavy fuel oil Jet fuel

CIF value US$/liter 0.59 0.59 0.65 0.63 0.58 0.56 0.65

Excise tax 30% 0.18 0.18 - - - - 0.19

VAT 15% 0.12 0.12 - 0.09 0.09 0.08 -

Municipality tax US$/liter 0.001 0.001 - 0.001 - - -

Road fund US$/liter 0.006 0.006 - 0.005 - - -

Stabilization fund US$/liter (0.0001) (0.0001) (0.0001) (0.0003) 0.0001 0.0002 (0.0001)

Sum US$/liter 0.89 0.89 0.65 0.73 0.67 0.65 0.84 Source: Global Development Solutions, LLC

Given these taxes, if fuel taxes were reduced for importing strategic input material, the possibility of

enhancing the competitiveness of strategic sectors can be improved.


Not for Circulation

351

VIII.5.2. Value Chains Analysis for Boxer Briefs

In order to assess the potential competitiveness of producing boxer briefs in Ethiopia, a

value chain analysis for the production of boxer briefs was first conducted in both China

and Vietnam. The average cost of producing boxer briefs in China ranged from US$1.05

to US$1.19 per piece at a labor productivity level between 28 and 40 pieces/person/day.

As with polo shirts, manufacturers in Vietnam were generally focused on CMT rather

than establishing their own supply chain for accessing all of the necessary input material.

The cost of assembling boxer briefs in Vietnam ranged between US$0.11 and U$0.28 per

piece with a labor productivity ranging from 5.8 to 22.9/pieces/person/day.

Based on the assumptions and methodologies presented above, the estimated cost of

producing boxer briefs in Ethiopia of average quality using imported fabric and input

materials is approximately US$1.02 per piece. As with the production of polo shirts, the

low cost of labor in Ethiopia provides the competitive advantage to compensate for the

higher cost of imported raw material. As the value chain diagram below indicates, the

total labor portion of the Ethiopian value chain for boxer briefs is only 8.5 percent as

compared to 16.6 percent in China. Here again, however, the major challenge for

manufacturers in Ethiopia is whether they are able to produce a quality product with

consistent stitching and finishing, while at the same time control in-line production losses,

waste and reject rates (Table 210).

Table 210: Benchmarking Data for the Production of Boxer Briefs in Ethiopia

Benchmarking Data Sheet: Boxer Briefs China Viet Nam Ethiopia 1.0 FACTORY Simulated 1.1 Capacity utilization 90% 70% - 90% 65% 1.2 Installed capacity (piece/day) 1,500 - 4,000 6,000 - 15,000 1,056

1.3 Labor absenteeism rate (%) 1% - 2% 0% - 2% 11% 1.4 Average salary/wage/month 1.5 Skilled $265 - $340 $114 - $130 185 $

1.6 Unskilled $177 - $222 $78 - $93 46 $

1.7 Days of operation/month 26 - 30 25 - 26 25

1.8 Average age of major equipment 2 - 6 2.5 - 10 6.0

2.0 Exported Output (finished primary product) 2.1 Direct Export without consolidator/broker 0% 100% 100% 2.2 Indirect Export Through Local Consolidator 0% - 100% 0% 0% 2.3 Indirect Export Through Overseas Consolidator 0% 0% 0% 3.0 Domestically Sold Output (finished primary product) 3.1 Direct Sales to Wholesalers/Retailers without consolidator 0% 0% 0% 3.2 Direct Sales Through Own Outlets/Shops/Showrooms 0% - 100% 0% 0% 3.3 Indirect Sales Through Local Consolidator/Trader 0% 0% 0% 4.0 Unit production cost ($/piece) $1.05 - $1.19 $0.11 - $0.28 1.02 $


Competitive production costs using imported input material

Competitive labor costs


Not for Circulation

352

Figure 65: Simulated Value Chain Diagram for Boxer Briefs in Ethiopia

Figure 66: Value Chain Diagram for Boxer Briefs in China163

163

Value chain diagram reflects actual data from export oriented best practice firm.

Boxer briefs, Mens Guangdong China Unit production cost 1.05 $

Raw material Cutting/Layering Sewing/Assembly Finishing Packing/Loading Admin/OH 39.3% 3.1% 44.7% 1.8% 7.7% 3.4%

Fabric 100% Raw material inputs 84.6% Packing material 66.1% Labor 14.5% Labor 32.3%

Raw material 0.81 $ 77.1% Electricity 0.5% R&M 1.4% Labor 0.17 $ 16.6% R & M 0.2% Other 0.2%

Packing material 0.05 $ 5.1% Global Development Solutions, LLC

Boxer briefs, Mens Simulated Cost Addis Ababa Ethiopia Unit production cost 1.02 $


Fabric 100.0% Raw material inputs 89.8% Packing material 88.4% Labor 9.2% Labor 11.3%

Raw material 0.87 $ 85.2% Electricity 0.1% R&M 0.2% Labor 0.09 $ 8.5% R & M 0.9% Other 0.0% Packing Mat 0.05 $ 5.3% Global Development Solutions, LLC


Not for Circulation

353

Figure 67: Value Chain Diagram for Boxer Briefs in Vietnam164

164

Ibid

Polo Shirt Value Chain: Hai Duong City Viet Nam Unit production cost 0.28 $


Labor 0.22 $ 79.1% Electricity 0.01 $ 2.7% Labor 94.3% Labor 78.6% Labor 43.3%

Packing material 0.01 $ 2.5% Fuel/oil/ water 1.0% Fuel/oil/ water 6.6% Electricity 0.6% Admin OH 0.03 $ 9.4% Electricity 4.3% Electricity 1.4% Financing charges 16.5% Global Development Solutions, LLC R & M 0.4% Packing material 13.1% Admin OH 39.6%

354

Table 211: Benchmarking Data for the Production of Boxer Briefs in Ethiopia (Part 2)

VIII.5.3. Assumptions for Estimating Economic Feasibility of

Producing Boxer Briefs

The feasibility of producing boxer briefs is part of the overall feasibility of the cotton or

mixed fabric garment sector in the face of imports. While boxer briefs are the product

under study, in practice no factory would be set up exclusively to produce this one item.

Thus this product is taken as representative of the range of cotton garments that would be

produced within one production unit.

This analysis uses the standard Economic Rate of Return (ERR) approach rather than the

DRC approach used in the case of the group of existing products made in Ethiopia. In

principle, and assuming the same treatment of all costs and revenues (foreign and local

content assumptions, and adjustment to account for time phasing of costs and benefits),

an ERR of above the opportunity cost of capital (say 10 percent) is identical to a DRC of

below 1.0. The ERR approach models more clearly the effects of projecting changes in

productivity over time as the new product enters the market.

The major factors affecting the feasibility of producing boxer briefs would be:

Greenfield project: The entity is treated as a ‗greenfield‘ unit. In practice it

may well be set up as a new product line in an existing apparel plant, in which

case the costs would be incremental and the return would be enhanced

Benchmarking Data Sheet: Boxer Briefs China Viet Nam Ethiopia Simulated

4.1 VAT Rebate ($/piece)* $0.17 - $0.24 - $

5.0 Avg Selling Price (US$) 5.1 Factory gate $1.11 - $1.47 1.15 $

5.2 Wholesale $1.18 - $1.62 $0.57 - $0.62 1.26 $

5.3 FOB price $1.25 - $1.77 1.34 $

6.0 Avg Spoilage & Reject rate: List different types (3) 6.1 In-factory product rejection 4% - 5% 0% - 1% 4% 6.2 Product rejection by client <1% 0% - 2% 2% 7.0 Avg Waste & losses: List different types (% of total ) 7.1 Production waste - scrap (fabric-to-polo, weight) 3% - 8% 10% 7.2 Losses (theft) <1% 8.0 Electricity 8.1 On grid (Cost/kWh) $0.12 - $0.13 $0.06 - $0.08 0.05 $

8.2 Off grid (Cost/kWh) - self generated $0.13 - $

8.3 % of time off grid/month 0% - 10% 0% - 1% 17% 9.0 Water (m ³ ) $0.63 $0.26 - $0.31 0.11 $

10.0 Fuel & Oil (liter) $0.92 $0.83 - $0.84 1.76 $

11.0 PRODUCTIVITY & EFFICIENCY 11.1 Labor productivity (factory level) : Pieces/employee/day 28 - 40 5.8 - 22.9 17 11.2 Electricity usage: On-grid (kWh/1,000 pieces) 34 - 89 133 - 298 70.59

11.3 Electricity usage ($/1,000 pieces) $4.54 - $11.17 $7.56 - 21.09 3.53 $

11.4 Water usage (m ³ /1,000 pieces) 0.89 - 3.83 5.63 - 10.80 3.50

11.5 Water usage ($/1,000 pieces) $0.57 - $2.22 $1.46 - $3.36 0.38 $

11.6 Fuel & oil usage (liters/1,000 pieces) 0.8 - 4.6 5.21 - 8.89 0.80

11.7 Fuel & oil usage ($/1,000 pieces) $0.74 - $4.75 $4.32 - $9.33 1.41 $

11.8 Transport ($/km-ton) $0.16 - $0.24 $0.07 - $0.52 0.16 $


Need to control reject and loss rates

355

because of the presence of sunk costs. The reason for treating it as a

greenfield field unit is in order to capture the total capital costs and more fully

reflect the overall potential competitiveness of the industry.

The size of the market: Total demand per annum for boxer briefs in Ethiopia

is estimated to be in excess of 5 million pieces a year.165 The production units

under study would be small to medium scale by the definition used in Ethiopia

(about 125 employees producing about 300,000 pieces a year in year 3, rising

according to the rate of productivity increase). The assumed market share of

the unit would be less than 10 percent of the low estimate of demand and is

not therefore considered to be a constraint.

Capital Costs: The analysis assumes imported equipment based on Chinese

origin prices plus transport and handling from China via Djibouti to Addis

Ababa of 15 percent of FOB price, as stated in the VCA.

The price of domestically produced fabric and whether it is competitive with

imports: While some fabric might be domestically produced, it is mainly

imported and is effectively an import substitute in the short to medium term.

Thus it is treated in this analysis as an importable. Its economic valuation is

therefore based on an estimate of its CIF price plus the value of transport and

handling costs for imports to the main market (Addis Ababa), from the most

likely supplier (China) through Djibouti.

The effective cost of fabrics and other materials (imported and local) taking

account of wastage: Based on the above VCA (using the polo shirts model)

the net cost of fabric takes into account production wastage rates of 10 percent

for products plus 4 percent in-factory rejection and 2 percent client rejection.

The Impact of power shortages: Electricity downtime has averaged about 17

percent in Ethiopia. However, large scale investments in new power capacity

in Ethiopia are expected to alleviate this early in the unit‘s life. The likely

decline in power outages is assumed to be incorporated within a measurement

of the general rate of increase in productivity (total output per unit of input).

Output and productivity: The level of output per unit of input is a very

sensitive parameter in terms of the competitiveness of domestically produced

165

This based on a male population of 40 million. As a lower bound estimate, at least 10 percent of this

population would buy this type of briefs, at a frequency of more than one per year. Thus demand would be

in the range 5 million up to probably as much as 20 million pieces.

356

boxer briefs. Productivity is reduced by absenteeism (estimated at 11 percent

based on the polo shirt example) and low labor efficiency. Capacity

utilization is only 65 percent on one shift, based on the VCA and polo shirts

experience. Output in terms of pieces per unit labor time is currently only

about 44 percent of Chinese. As such, there is clearly scope and need for

significant productivity increases reflected in total output per unit of input.

The main assumption made is for a 2 percent annual increase in output at the

same level of input. The actual rate could reasonably exceed this. A 3

percent rate over a ten-year period could see the productivity gap with China

and Vietnam closing to a significant extent.

The extent of the natural protection accorded to domestic production:

Transport and handling costs from overseas suppliers to the port of Djibouti

and the inland costs from Djibouti to Addis Ababa, which is the largest local

market, assist to some degree local firms to remain competitive. From China,

total transport related costs are about 7 percent of FOB price to Djibouti port

and about a further 10 percent to Addis Ababa.

The effective CIF price including transport and handling costs in the Addis

Ababa market: Apparel products are imported at the margin into Ethiopia.

Therefore, the CIF price plus transport and handling is the effective price of

the competitive product. The valuation of the product including costs to

market is a very sensitive parameter from the point of competitiveness. The

FOB price of the main supplier, China, is increased by expected international

and inland transport and handling costs (on the example of polo shirts) to get

an approximate internal valuation for the market. This would increase the

effective price from US$1.34 per piece (FOB China port) to US$1.58 per

piece in Addis Ababa (wholesale) in the base case.

Projections in the real exchange rate: In I.1 Introduction: Factors Affecting

the Relative International Competitiveness of Ethiopia, Tanzania and Zambia,

an analysis is provided of the scenario for the likely appreciation in the RER

for the Chinese Yuan in relation to both the US Dollar and the Ethiopian Birr.

The projection assumption is 3 percent per annum over the first five years

(with a subsequent levelling out) resulting in a 16 percent overall increase as

of year 5. This increase is at the top end of the projections made by the World

Bank, to reflect both productivity growth differentials and a catch-up effect.

The effect of the Yuan appreciation would be to raise the economic return

because of the rise in the value of the net foreign exchange earned or saved in

production. However because this projection assumption is subject to

357

uncertainty it is only used here as an indicator of the possible increase in

competitiveness.

VIII.5.4. Results of the Feasibility Analysis

The feasibility calculations give the following results (Table 212) for the base case using

the above assumptions.

Table 212: Economic Returns to Boxer Briefs Production in Ethiopia – Base Case Estimate*

Item US$ or Units

Output (year 3) 440,000 pieces

Employment (year 3) 125

Asset Life 10 years

Capital Costs $499,800

Operating Costs (year 3) $610,000

Cost per Piece (operating plus capital cost) $1.51

Revenue/ Benefit (year 3) $694,000

Wholesale Price (Addis Ababa) per Piece $1.58

Economic Rate of Return 9%

* Assumptions - No change in productivity or real exchange rates. Source: Global Development Solutions, LLC

The above results show a slightly sub-marginal rate of return in relation to the regular

assumption about the opportunity cost of capital (discount rate) of 10 percent. This

would be equivalent to a DRC ratio of slightly below 1.0. Clearly there are many

assumptions behind these results and it cannot be known at this stage what the true costs

would be ‗on the ground.‘ The result is consistent with what might be expected in the

current conditions.

In the medium term, as has been assumed for other products in this study, certain changes

are possible in a) real effective exchange rates in main competitor countries (e.g., China)

which will increase Chinese FOB prices relative to Ethiopian prices, b) productivity

within Ethiopian factories which will lower Ethiopian costs and c) infrastructure

improvements such as improve roads and uninterrupted power supply which may lower

Ethiopian costs relative to some competitor and customer countries.

The analysis shows that at with an overall productivity increase alone of 2 percent per

annum (total output per unit of input), over a ten year period the ERR would increase to a

comfortable 21 percent while the total cost per unit (operating plus capital) would

decrease to about US$1.28 per piece by the tenth year from US$1.51 in the starting year

(Table 213Table 213). The unit cost level would be about on a par with Chinese FOB

export cost by this time.

358

With a real appreciation of 3 percent per annum (over the first five years) in the Yuan in

relation to the Birr, the ERR improves further to about 30 percent. If the productivity

increase were to apply only to labor costs (e.g., through better labor efficiency) and not to

materials (so that materials volume increased with output) then the resulting ERR would

be around 25 percent.

Table 213: Economic Returns for 2 percent Annual Increase in Productivity*

Item US$ or Units

Output per Annum 440,000 pieces rising at 2% p.a.


Asset Life 10 years

Capital Costs $499,800

Operating Costs (year 3) $610,000

Cost per Piece (operating plus capital) $1.51 falling to $1.28 (productivity

Revenue/ Benefit (year 3) $829,000

Wholesale Price (Addis Ababa) per Piece $1.58 (CIF plus)


*1) Zero Yuan RER increase is assumed. (i.e. zero increase in forex value of foreign

inputs and outputs in relation to domestic resources). 2) Output per unit of input

(productivity) increases by 2% p.a. Source: Global Development Solutions, LLC

VIII.6. Feasibility Analysis of Boxer Briefs Production in Tanzania


Currently, Tanzania‘s apparel industry produces almost no boxer briefs and imports them

from a number of countries including China. This feasibility study determines the

probable economic and financial profitability of local production by simulating the

production of boxer briefs based on Chinese technology and labor productivity and on

production costs associated with polo shirts in East Africa which use similar technology.

Imported material is based on cost of input material from China. The cost of transporting

the material from Guangzhou, China to Dar es Salaam is based on the prevailing

transport costs (shipping, trucking, handling, customs clearance, freight forwarding

services and other charges).


DRC approach used in the case of the group of existing products made in Tanzania. In


content assumptions and adjustment to account for time phasing of costs and benefits), an

ERR of above the opportunity cost of capital (say 12 percent) is identical to a DRC of

359

below 1.0. The ERR approach models more clearly the effects of projecting changes in


In this approach, all major inputs and outputs are valued at tariff-free levels. Thus

finished goods are valued at CIF import price plus transport and handling, without

including any taxes. Purchased materials (intermediates) are valued at purchased cost

(from the VCA) less the imputed import duty of 20 percent in Tanzania. Capital

equipment carries an import duty of 10 percent. Annualized capital costs are based on

economic depreciation over 10 years at 12 percent per annum opportunity cost of capital.

Economic wage costs are explained below.




mixed fabric knitted garment sector in the face of imports. While boxer briefs are the

product under study, in practice no factory would be set up exclusively to produce this

one item. Thus this product is taken as representative of the range of cotton garments

that would be produced within one production unit.






greenfield unit is in order to capture the total capital costs and more fully


The size of the market: Total demand per annum for boxer briefs in Tanzania

is estimated to be in excess of 3 million pieces a year.166

The production units

under study would be small to medium scale by the definition used in

Tanzania (150 employees producing about 400,000 pieces per year by year 3).

Current production of briefs in Tanzania is very small and the industry is

concentrating on supplying other products, in particular cotton fabrics, so the

assumed market share of the unit probably would be less than 10 percent of

166


population would buy this type of briefs, at a frequency of more than one per year. Thus demand would

likely be in the range 3 million up to as much as 6 million pieces.

360

total uncovered demand. Therefore the market is not considered to be a

constraint.

Capital costs: The analysis assumes imported equipment for a typical plant of

150 workers based on Chinese origin prices plus transport and handling from

China to Dar es Salaam of 10 percent of FOB China price. Landed prices

would be slightly lower than for Zambia because of lower internal transport

costs. The same equipment currently used by the boxer brief factory in China

would be available to the manufacturer in Tanzania.

Absenteeism, spoilage and rejects: The costs from the VCA which have been

used here take into account the representative factory. In general these rates

are of a similar order to those of other countries under study. However, labor

absenteeism in Tanzania is generally relatively high. In the garment sector

(15 to 21 percent in polo shirts) it is particularly high compared to other

countries.

Capacity and productivity: The level of output per unit of input is a very


boxer briefs. Assumed capacity utilization is 65 percent based on the VCA

and general experience in Tanzania (50 to 75 percent in polo shirts). Output

in terms of pieces per unit labor time is about 50 percent of the Chinese level.

Based on a representative Chinese plant and discounted to reflect lower

average capacity utilization in Tanzania, the estimated base case output is

410,000 pieces per annum. The total number of employees is 150,

approximately the same as an average factory in China.

The price of main material – fabric: Fabric is produced in Tanzania, but it is

exported and generally not available to local apparel producers except at low

quality. Thus, at least for the short to medium term, fabric effectively is an

importable for competitive quality products. Its economic valuation therefore

is based on an estimate of its CIF price in Dar es Salaam from the most likely

supplier (China).167

Since the apparel industry is concentrated near Dar es

Salaam, inland transport costs for all imported inputs are lower than in

Zambia. Based on the VCA (using the polo shirts model), the effective cost of

fabric also takes into account production wastage rates and in-factory and

client rejection. These are on a par with the other countries studied.

167

China fabric production cost FOB is in the range US$6.4 to US$6.6 per kg.

361

Wage costs: General wage rates in Tanzania are in the middle of the range:

lower than China and Zambia, on a par with Vietnam and higher than

Ethiopian rates. However, with high absenteeism, unit labor costs probably

are relatively high and uncompetitive. Local apparel wages are however close

to those of Zambia. Producers pay some US$107 to US$200 a month for

skilled workers and US$90 to US$170 for unskilled workers, ranges which

have lower averages but which equate with Zambia at the upper end. In some

economic analyses, a shadow wage is used if market wages are significantly

different from the opportunity cost of labor. However, since wages are on

average equal to or below those of Zambia, we do not adjust for this here,

implying also that the opportunity cost is approximately equal to the

Tanzanian market wage.

The effective CIF price of output including transport and handling costs: The

CIF price plus transport and handling is the effective price of the competitive

product. The valuation of the product including costs to market is a very

sensitive parameter from the point of competitiveness. The FOB price of the

main supplier, China, is increased by international transport and handling

costs to get an approximate internal valuation for CIF. Transport and

handling costs from the port to the main market which is in the Dar es Salaam

area are minor. These would increase the effective competing price from

US$1.34 per piece (FOB China port) to around US$1.52 per piece landed,

somewhat lower than Zambian prices and reflecting the lack of natural

protection in a coastal market.

Table 214: Effective CIF Price (US$), Tanzania

China Cost China to Dar

Transport margin

8 percent

Factory price 1.15

Wholesale price 1.25

FOB price 1.34 1.45


The CIF prices reflect quality and style differences as well as cost differences.

Residual local production probably has a niche style market which has

survived the penetration of imports. In case of price uncertainty we estimate

at two prices, US$1.52 and US$1.80 per piece.



an analysis is provided of the scenario for the Yuan RER. Unlike Zambia,

362

Tanzania does not face general upward pressure on wages and prices due to a

dominant exportable resource. Thus there is a likelihood of a relative decline

in the RER of the TZS vis-à-vis the RMB. However, we are not aware of

specific evidence to suggest divergence in unit labor costs that would alter the

relative RER.


The feasibility calculations give the following results for the base case using the above

assumptions.

Table 215: Economic Returns to Boxer Briefs Production in Tanzania*

Item US$ or units US$ or units

Base Case High Price Case

Output (year 3) 410,000 pieces 410,000 pieces

Employment (year 3) 150 150

Asset Life 10 years 10 years

Capital Costs $403,000 $403,000

Operating Costs (year 3) $566,000 $566,000

Total operating plus capital cost/pc (year 3) $ 1.44 $ 1.44

Total Benefit (year 3) $622,000 $737,000

Wholesale Price per piece $ 1.52 $1.80

Economic Rate of Return 4.2 percent 36.1 percent

*Assumptions - No change in productivity or relative exchange rates


The above base case results show a ‗best estimate‘ sub-marginal rate of return in relation

to the assumed opportunity cost of capital (discount rate) of 12 percent. This would be

equivalent to a DRC ratio of somewhat above 1.0. Clearly there are many assumptions

behind these results since this is a model, and it cannot be known at this stage what the

true costs would be ‗on the ground‘. The base case result is consistent with what might

be expected under current conditions.

One modified assumption is a delivered price of US$1.80 per piece, which we test on the

grounds that CIF prices for output are uncertain and underestimated. The results are

highly sensitive to this parameter and on the basis of the costings would yield a healthy

rate of return of 36 percent.


are possible in productivity within Tanzanian factories, which will lower costs. Thus a 1

percent improvement per annum in gross output per unit of input over 10 years at the

base case border price of US$1.52 per piece would raise the ERR to 13 percent.

363

VIII.7. Feasibility Analysis of Boxer Briefs Production in Zambia


Currently, Zambia does not produce boxer briefs and imports them from various

countries including China. This feasibility study determines the probable economic and

financial profitability of local production by simulating the production of boxer briefs

based on Chinese technology and labor productivity and on production costs associated

with polo shirts in East Africa which use similar technology.

Imported material is based on the cost of input material from China. The cost of

transporting the material from Guangzhou, China to Zambia via Durban or Dar es Salaam

is based on the prevailing transport costs: shipping, trucking, handling, customs clearance,

freight forwarding services and other charges.


DRC approach used in the case of the group of existing products made in Zambia. In


content assumptions, and adjustment to account for time phasing of costs and benefits),

an ERR of above the opportunity cost of capital (say 12 percent) is identical to a DRC of

below

1.0. The ERR approach models more clearly the effects of projecting changes in


In this approach, all major inputs and outputs are valued at tariff-free levels. Thus

finished goods are valued at CIF import price plus transport and handling, without

including any taxes. Materials are valued at purchase price less the imputed import duty.

Annualized capital costs are based on economic depreciation over 10 years at 12 percent

per annum opportunity cost of capital. Economic wage costs are explained below.




mixed fabric knitted garment sector in the face of imports. While boxer briefs are the

product under study, in practice no factory would be set up exclusively to produce this

one item. Thus this product is taken as representative of the range of cotton garments

that would be produced within one production unit.


364







The size of the market: Total demand per annum for boxer briefs in Zambia is

estimated to be in excess of 1 million pieces a year.168

The production units

under study would be small to medium scale by the definition used in Zambia

(150 employees producing about 400,000 pieces per year by year three).

Current production in Zambia is residual only, all plants having switched to

other products so the assumed market share of the unit would probably be less

than 25 percent of total uncovered demand. Therefore, the market is not

considered to be a constraint for a plant at this scale.

Capital Costs: The analysis assumes imported equipment for a typical plant

of 150 workers based on Chinese origin prices plus transport and handling

from China via Durban or Dar es Salaam to Lusaka of 20 percent of FOB

China price. The same equipment currently used by the boxer brief factory in

China would be available to the manufacturer in Zambia.

Absenteeism, Spoilage and rejects: The costs from the VCA which have been

used here take into account the representative factory in Zambia. In general

these rates are of a similar order to those of Ethiopia and other countries.

However, labor absenteeism in Zambia is generally somewhat lower than

Ethiopia and Tanzania.

Capacity and productivity: The level of output per unit of input is a very


boxer briefs. Assumed capacity utilization is 65 percent based on the VCA

and general experience in Zambia. Output in terms of pieces per unit labor

time is about 50 percent of the Chinese level. Based on a representative

Chinese plant and discounted to reflect lower average capacity utilization in

Zambia, the estimated base case output is 410,000 pieces per annum. The

total number of employees is 150, approximately the same as an average

factory in China.

168


population would buy this type of briefs, at a frequency of more than one per year. Thus demand would

likely be in the range 1 million up to as much as 3 million pieces.

365

The price of main material – fabric: Fabric is imported at least in the short to

medium term. Thus it is treated in this analysis as an importable. Its

economic valuation is therefore based on an estimate of its CIF price plus the

value of transport and handling costs for imports to the main producing area

(copperbelt towns), from the most likely supplier (China) through Dar es

Salaam or Durban. This amounts to about 2 percent (Durban) to 6 percent

(Dar) of CIF cost (approx. US$7 per kg ex-China).169

Based on the VCA

(using the Ethiopian polo shirts model), the effective cost of fabric also takes

into account production wastage rates and in-factory and client rejection.

Wage costs: General wage rates in Zambia are relatively high compared to

other African economies, and also compared to Vietnam. However, because

of severe competitive pressure, the apparel subsector in Zambia is not highly

paid by local standards. Local apparel producers pay US$150 to US$170 a

month for skilled workers and US$100 to US$120 for unskilled workers.

However, these rates are significantly higher than Ethiopia, averaging about

50 percent higher for skilled workers, and 200 percent higher for unskilled

workers. In some economic analyses, a shadow wage is used if market wages

are significantly different from the opportunity cost of labor. Because apparel

wages are relatively low compared to the market levels, they are not adjusted

for this here.

The effective CIF price including transport and handling cost: The CIF price

plus transport and handling is the effective price of the competitive product.

The valuation of the product, including costs to market, is a very sensitive

parameter from the point of competitiveness. The FOB price of the main

supplier, China, is increased by international and inland transport and

handling costs to get an approximate internal valuation for the market.

Transport and handling costs from the port to Lusaka range from US$1,200

(via Durban) to US$3,500 (via Dar es Salaam) per 20-foot container. On the

example of polo shirts (18,000 polo shirts per 20-foot container, inland costs

of boxer briefs would be US$0.07 per piece (Durban) or US$0.20 per piece

(Dar), which is about 5 percent to 14 percent of CIF (US$1.45). This would

increase the effective competing price from US$1.34 per piece (FOB China

port) to US$1.65 per piece in Lusaka (wholesale) depending on port of entry,

with an average of US$1.59 (Table 216).

169

10,000 kg fabric per 20-foot container = US$0.12 per kg (Durban) or US$0.35 per kg (Dar). China

internal fabric cost = US$6.4 to US$6.6 per kg.

366

Table 216: Effective CIF Price (US$), Zambia

China Cost China to Dar/Dur Dar/Dur to Lusaka

Transport margin 8% Average 10%

Factory price 1.15

Wholesale price 1.25

FOB price 1.34 1.45 1.59 Source: Global Development Solutions, LLC

Some prices quoted in Lusaka were higher than these levels. A CIF price of

US$2.50 was quoted which would translate to US$2.64 delivered. If import

tariffs and taxes are excluded in this quote, then this would translate to about

US$2.10. The quoted prices reflect quality and style differences as well as

cost differences. In view of the discrepancies, there are two prices for boxer

shorts, US$1.59 and US$1.80 per piece.



an analysis is provided of the scenario for the likely Kwacha/Yuan

relationship. Because of the general upward pressure on wages and prices in

Zambia caused by rising copper prices and the wage pressure from labor

shortage in China, the relative RER of the Chinese Yuan to the Kwacha is not

necessarily likely to change.


The feasibility calculations give the following results for the base case using the above

assumptions.

Table 217: Economic Returns to Boxer Briefs Production in Zambia*

Item US$ or Units US$ or Units

Base Case High Price Case

Output (year 3) 410,000 pieces 410,000 pieces

Employment (year 3) 150 150

Asset Life 10 years 10 years

Capital Costs $456,000 $456,000

Operating Costs (year 3) $590,000 $590,000

Total operating plus capital cost/pc $1.51 $1.51

Total Benefit (year 3) $651,000 $737,000

Wholesale Price per piece $1.59 $1.80

Economic Rate of Return 3.30% 26.30%

*Assumptions - No change in productivity or relative exchange rates. Source: Global Development Solutions, LLC

The above base case results show a ‗best estimate‘ sub-marginal rate of return in relation

to the opportunity cost of capital (discount rate) of 12 percent. This would be equivalent

367

to a DRC ratio of somewhat above 1.0. Clearly there are many assumptions behind these

results and it cannot be known at this stage what the true costs would be ‗on the ground.‘

The base case result is consistent with what might be expected in the current conditions.

One modified assumption is a delivered price of US$1.80 per piece. The results are

highly sensitive to this parameter and on the basis of the costings would yield a healthy

rate of return of 26 percent.


are possible in productivity within Zambian factories, which will lower costs. Thus a 1

percent improvement per annum in gross output per unit of input over 10 years would

raise the ERR to 12 percent.

VIII.8. Conclusions and Recommendations

VIII.8.1. Ethiopia

While currently Ethiopian production of boxer briefs is shown as marginally inefficient

(at 9 percent ERR), factoring in plausible productivity increases over a ten-year period,

the domestic production of boxer briefs as representative of the apparel industry is

economically viable and also financially profitable. It has to be stressed that these are

‗synthetic‘ calculations based on a greenfield investment and using the data on actual

performance of polo shirts. It may be that the 21 percent economic rate of return is

optimistic even with fairly strong but plausible assumptions about changes in

productivity over ten years. One reason for this could well be the quality of local

products. If it were not possible to produce the equivalent quality of imports either

initially or over the ten year period (even though absenteeism, wastage and reject rates

are substantially reduced) then a discount on the assumed value of output (i.e., the CIF

price of Chinese origin products) would apply. This would reduce the ERR below 9

percent.

Two reasons for affirming that competitive potential exists are a) the relatively very low

cost of Ethiopian labor by Asian and even by African standards, and b) the natural

protection afforded local production by high transport costs to the main market of Addis

Ababa.

If Yuan RER appreciation is factored in, resulting in increased CIF prices for imported

products, the potential for competitiveness would be improved further. With the above

assumptions and a 3 percent Yuan appreciation over the first five years, the ERR cold rise

to 30 percent.

368

These results, subject to the appropriate reality checks, do suggest that there is scope for

investment over the next few years and that the Ethiopian Government should promote

private local and foreign investment in this sector.

VIII.8.2. Tanzania

Tanzania faces severe competition in the apparel sector, but it is not facing the upward

pressure on wages that Zambia faces. It has scope for both retaining real wages at current

levels and reducing absenteeism, thereby raising labor productivity. As reflected in total

output per unit of input, there is also scope and need for significant productivity increases

from improved capacity utilization and labor efficiency. A 1 percent increase over a ten-

year period would be feasible with reduced absenteeism and some improvement in

capacity utilization, and this would see the productivity gap with China and Vietnam

closing.

While currently the best estimate of production of boxer briefs shows a low return of 4.2

percent, by factoring in a plausible productivity increase over a ten-year period, the

domestic production of boxer briefs as representative of the apparel industry could

become economically viable. It has to be stressed however that these are ‗synthetic‘

calculations based on a greenfield investment. It may be that the enhanced economic rate

of return with productivity increase is optimistic and that the main barriers are in terms of

the quality of local products.

These results suggest that opportunities for renewed investment in Tanzanian apparel

production over the next few years are possible, certainly in niche products, but the

overall outlook is not good without productivity improvements.

VIII.8.3. Zambia

Zambia appears to be in a particularly difficult position at the moment competitively.

This is because of a combination of a rising RER and production costs caused probably

by the knock on effects of rising copper prices, which leads to reduced demand and in

turn increased excess capacity, which exacerbates rising costs.

There is scope and need for significant productivity increases from capacity utilization

and labor efficiency, reflected in total output per unit of input. A 1 percent increase over

a ten-year period could see the productivity gap with China and Vietnam closing.

While currently best estimate of production of boxer briefs shows a low return, by

factoring in a plausible productivity increase over a ten-year period, the domestic

production of boxer briefs as representative of the apparel industry could become

369

economically viable. It has to be stressed however that these are ‗synthetic‘ calculations

based on a greenfield investment and using the data on actual performance from China.

It may be that the enhanced economic rate of return with productivity increase is

optimistic and that the main barriers are in terms of the quality of local products. As

stated, Zambian manufacturing also faces particular problems from an appreciating real

exchange rate due to copper price increases, which will continue to squeeze

manufacturing.

These results do not suggest major opportunities for investment over the next few years

except in niche products which hold a differential advantage. Aside from locally

produced work clothes and school uniforms for the local market, there is not an apparent

competitive advantage to the local apparel sector with the exception of possible niche

opportunities as recognized by an investor.

370

Feasibility Study of the Domestic Production of

Golf Gloves in Ethiopia

371

VIII.9. Background and Objective

The purpose of this analysis is to determine the potential for competitive production of

leather golf gloves in Ethiopia. This analysis conducts an outline feasibility study using

apparel production as a representative example of a product in the industry that is not

currently being produced domestically.170

VIII.10. Product Selection Method

Following a review of the first product screening in which 40 products were selected for

consideration for the value chain analysis and feasibility study, the World Bank (WB)

and Global Development Solutions (GDS)/HQ teams immediately agreed on seven out of

the ten products needed for the analysis. The seven products selected by the teams were

as follows:

1. Apparel:

a. Polo shirt; and

b. Underwear

2. Agribusiness:

a. Milk; and

b. Wheat milling

3. Leather:

a. High-end sheepskin loafers

4. Wood:

a. Windows/French windows and frames

5. Metal:

a. Padlocks.

To finalize the selection of the remaining products from the wood, metal and leather

sectors, based on the Africa Competitiveness: Phase 1.1 - Preliminary Product Screening

in Ethiopia report (July 2010), the WB and GDS/HQ teams chose six products as

potential candidates to be included in the list of the final ten products to be the target

products for the value chain analysis and feasibility study. The six products included the

following:

1. Wood products:

a. Wooden doors; and

b. Wooden chairs (not upholstered).

2. Leather products:

a. Leather golf gloves; and

170

Apparel is by and large defined as anything that one puts on one‘s body. Clothing, shoes, hats, gloves,

and scarves are all examples of apparel items.

372

b. Sports footwear of leather.

3. Metal products:

a. Metal doors, window-frame (security window frame); and

b. Aluminum doors and windows.

In order to screen the final six products, a product screening survey was developed which

revolved around six factors:

1. Whether these products are currently produced by companies with less than

50 employees;

2. If companies identified in #1 above can be set up with less than US$100,000

in investment capital;

3. The minimum level of skills and know-how required to produce the products;

4. Whether the products produced by the companies in #1 are being exported;

5. Whether products produced by companies in #1 are consolidated by brokers

or other intermediaries for exports; and

6. Whether companies identified in #1 can readily access raw material inputs in

the market to produce the products.

These questions were posed to the wood, metal and leather sector associations in both

China and Vietnam. Following interviews with sector associations, additional interviews

were conducted at the firm level to identify specifically the level of investments and

minimum level of technical skills required for an entrepreneur or existing SMEs to set up

a production operation. These questions were posed to existing operators in China and

Vietnam to identify whether:

Barriers to market entry, particularly from a financial and skills

requirement, were sufficiently low to allow entrepreneurs and SMEs in

Ethiopia to easily establish operations; and

These products are currently being produced by SMEs in China and

Vietnam, and are effectively being sold in local and export markets.

The product screening survey identified the following products as viable candidates to be

targeted for the value chain and feasibility analysis.

1. Wood product:

a. Wooden chairs (soft wood); and

b. Wooden door (semi-solid).

Although French windows and their frames made of wood had originally been

preselected for analysis, a decision was made to opt to analyze both wooden

chairs and wooden doors. This decision stemmed from the fact that French

windows require glass thus introducing an outside factor that could influence

373

the manufacturing of the final product. Wooden doors (without glass) and

wooden chairs (without upholstery) are more representative of wood

processing exclusively.

2. Leather products: Leather golf gloves or sports glove of comparable structure

and weight.

3. Metal products: Both the pre-selected products (security window frame; and

aluminum doors and windows) were screened out of the selection due to

various factors including high initial investment requirements. As a result,

further analyses of products identified during the preliminary product

screening were conducted. Interviews with metal sector associations and

enterprises currently operating in China and Vietnam, as well as interviews

with existing operators in the fabricated metal products sector in Ethiopia

identified crown corks (bottle caps) as a viable candidate to be targeted for

value chain analysis. Crown corks currently are produced in four of the five

countries (excluding Tanzania), but Ethiopia continues to import substantial

volumes of this product, including imports from China. As a result, crown

corks have been chosen as the final fabricated metal product to be the focus of

a value chain analysis in the target countries.

VIII.10.1. Respective Government Definitions of Small, Medium and

Large Enterprises in Ethiopia, Tanzania, Zambia, China and

Vietnam

Ethiopia: For Ethiopia, the classification of enterprises into small, medium and large

scale depends on a number of variables such as level of employment, turnover, capital

investment, production capacity, level of technology and subsector. Accordingly, the

following scales are referred to the classification of enterprises in the Ethiopian context

(Table 218).

Table 218: Company Size Classification Structure for Ethiopia

Small Scale Medium Scale Large Scale

Textile and Apparel 5-9 10 – 49 above 50

According to the Central

Statistics Agency (CSA)

Leather 2-10 21 – 50 above 51

Diary 2-10 21 – 50 above 51

Wheat 2-10 21 – 50 above 51

Wood Processing 2-10 21 – 50 above 51

Metal 2-10 21 – 50 above 51

According to Federal

Medium and Small

Enterprise Development

Agency (FeMSEDA)

Sub-sector Remark

Number of Employees

Source: Ethiopia CSA and FeMSEDA

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Tanzania: For Tanzania, the classification of enterprises into small, medium and large

scale depends on a number of variables such as level of employment and capital

investment in machinery. The classification cuts across sectors and subsectors of the

economy. Accordingly, the following scales refer to the classification of enterprises in

the Tanzanian context (Table 219). Note that the small enterprise type is most

appropriate for all sectors studied in this analysis.

Table 219: Company Size Classification Structure for Tanzania

Category Employees

Capital Investment in Machinery

(TZS million) Remarks

Micro enterprise 1 - 4 Up to 5 Majority in the informal sector

Small enterprise 5 - 49 5 - 200 Most in the informal sector

Medium enterprise 50 - 99 200 - 800 Most in the formal sector

Large enterprise 100+ 800+ All in the formal sector Source: Tanzania Chamber of Commerce, Industry and Agriculture (TCCIA)

Zambia: Zambia classifies enterprises as micro, small, medium and large based on

several factors including number of employees, annual revenue and capital investment.

The capital investment category is further delineated by whether the firm is engaged in

manufacturing or if it is a trading/services firm. For microenterprises, the minimum

revenue and investment requirements are kept intentionally low in order to encourage

registration, although few microenterprises actually register.

Table 220: Company Size Classification Structure for Zambia

Classification Employees

Annual Revenue

(ZMK million)

Capital Investment for Manufacturing

Firms (ZMK million)

Capital Investment for Trading/ Services

Firms (ZMK million)

Micro < 10 < 20 < 10 < 10

Small 10 - 50 150 - 250 80 – 200 150

Medium 51-100 300 - 800 200 – 500 151 - 300

Large > 100 > 800 > 500 > 300

Source: Zambia Development Agency

China: The China government is challenged in defining sizes of firms. Temporary

definitions have been used for the past several years, and the government promised to

revise the standard in 2010. The definition from the National Bureau of Statistics of

China is complex. The definition was published in 2002 jointly by the Ministry of

Finance, National Bureau of Statistics of China, State Economic and Trade Commission

(no longer exists), and China Planning Commission, which has since split and exists as

the State Development and Planning Commission (SDPC) and the National Development

and Reform Commission (NDRC). A simplified presentation of the company size

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classification is shown in Table 221. Note that the Industrial type is most appropriate for

all sectors studied in this analysis.

Table 221: Company Size Classification Structure for China

Type Index Unit Small Medium Large

















Lodging and

Catering services

Industrial

Construction

Wholesale

Retail

Transportation

Post services

Source: National Bureau of Statistics of China

Vietnam: A small firm has less than 50 laborers, while a medium-size firm has 51-200

laborers. Within the small and medium-size classifications, there are some detailed

categories depending on the purpose of research and management. For instance, a firm

with less than 10 laborers is called a super small-size firm. Such a regulation is in line

with Social Insurance Law.171

VIII.10.2. Product Technical Specifications

Following the identification of products to be targeted for the value chain and feasibility

analysis, a detailed technical profile of each product with an accompanying diagram or

photograph was complied and sent to the field teams to help ensure that product data

collection in the field focused on products with similar - if not identical - technical

specifications. Table 222 below provides the product technical specifications for all ten

products for which product data are being collected.

171

Information garnered from



376

Table 222: Product Technical Specifications

Material

Product WeightUnit of

measureUnit of measure

1 Golf gloves 85 - 141 grams Men's medium Sheepskin

Loafer 780 grams Heel Width Insole

Size US = 8 EU = 7 2.5 10 30

3 Padlock* 760 grams 7 7 NA* cm Brass

Thickness Diameter Height

0.24 31.9 6.6

Width Depth Height

45 45 75

Width Depth Height

80 4 210

Protein Lactose Ash Vitamins Fat content

3.5% 4.7% 0.8% B1, B2, C and D Full

Type (German) Type (French) Ash Protein Moisture

550 55 <0.65%approx.

11%<14.5%

9 Polo shirt 250 - 270 grams 100% cotton

10 Underwear 80 - 100 grams80% cotton/

20% spandex

* Overall height is 14 cm with a 2 cm shackle diameter

** The weight of the cover (plastic sole made from PVC) in the internal surface of the cap is 290 mg


Pine

Wheat or rice

Dimension

All purpose flour

cm

Refer to diagram

Weight

cm

mm

cm

tin free steel

(tfs)

Sheepskin

Pine

mg

kg

kg

liters

Refer to picture

Crown cork

(metal bottle

cap)**

Wooden chair

Wooden door

Milk

Milling

290

6.5

12

0.5

2

4

5

6

7

8

VIII.11. International Competition – China and Vietnam

The leather and leather products industry in China is based mainly in Zhejiang and

Guangdong provinces. The total industrial output of leather, fur, feather and related

products in China in 2009 was US$34 billion (excluding leather footwear).172

According

to China Leather Industry Association, the country‘s total production value in the leather

sector in 2010 surged 25.4 percent in the first half compared to the previous year; up by

18.2 percent year-on-year. In terms of exports, the 7 percent year-on-year decline in

industry exports in 2009 was more than compensated in 2010 when only in the first half

of the year the exports of articles of leather posted a growth of 25 percent to US$22.8

billion. Of these, exports of leather apparel and accessories from China - including sports

gloves - were worth US$1.8 billion in 2009, or 26 percent of the world trade in leather

apparel and accessories.

Vietnam‘s exports of articles of leather apparel and accessories are minimal and very low

compared to country‘s total apparel exports: in 2009, Vietnam exported US$59 million

worth of these articles, or less than 1 percent (0.8 percent) of world trade (Table 223

172

Data according to China Statistical Yearbook, which does not include firms with annual turnover of less

than RMB5 million.

377

below). In terms of leather gloves for sports, however, Vietnam exports are significant.

The country exported roughly US$35 million of sports leather gloves in 2009, which is

almost 10 percent of the total sports leather gloves traded annually. China, however,

dominates one-quarter of the sports leather gloves international trade, which was worth

US$420 million in 2009.

Table 223: Exports of Sports Leather Gloves and other Apparel/Accessories of Leather, China and

Vietnam, 2006-2009

VIII.12. Feasibility Analysis of Leather Golf Gloves Production in Ethiopia


Currently, Ethiopia does not produce leather golf gloves. The objective of the feasibility

study is to determine the probable economic and financial profitability by simulating the

production of leather golf gloves given the current level of labor productivity, and

production costs associated with polo shirts.173

The input material for the production of

leather golf gloves is sheepskin leather, which is abundantly available in Ethiopia. The

VCA uses actual cost of sheepskin leather in Ethiopia and input utilization rates from

China to arrive at raw material costs.

A number of assumptions were made in order to develop a profile of a hypothetical

factory to simulate the production of golf gloves in Ethiopia. The following provides a

brief description of how figures were adjusted.

Size of operation: The size of the operation was adjusted according to the labor

productivity ratio between a factory producing polo shirts in China and Ethiopia.

173

Golf gloves are apparel items whose assembly is more similar to clothing items than leather footwear

items. Productivity figures from clothing apparel production will therefore be used to estimate golf glove

assembly productivities in Ethiopia.

Value in 2006 Value in 2007 Value in 2008 Value in 2009 Articles of apparel of leather or of composition leather $ 1,643,757 $ 1,292,117 $ 992,580 $ 780,834 23% Gloves, mittens & mitts, for sports, of leather or of composition leather $ 110,402 $ 116,923 $ 106,121 $ 98,306 23% Gloves, mittens & mitts, other than for sport, of leather or of composition leather $ 760,857 $ 723,824 $ 726,526 $ 581,378 42% Belts and bandoliers of leather or of composition leather $ 361,782 $ 420,556 $ 396,461 $ 358,860 19% Clothing accessories nes, of leather or of composition leather $ 16,101 $ 15,661 $ 15,644 $ 11,916 12% Total, Articles of Apparel and Clothing Accessories, of Leather or Composition

Leather $ 2,892,899 $ 2,569,081 $ 2,237,332 $ 1,831,294 26% Product label

Value in 2006 Value in 2007 Value in 2008 Value in 2009 Articles of apparel of leather or of composition leather $ 157 $ 2,177 $ 2,572 $ 13,113 0.4% Gloves, mittens & mitts, for sports, of leather or of composition leather $ 27,389 $ 36,578 $ 40,497 $ 34,980 8% Gloves, mittens & mitts, other than for sport, of leather o of composition leather $ 4,151 $ 6,361 $ 6,773 $ 9,252 1% Belts and bandoliers of leather or of composition leather $ 1,358 $ 2,907 $ 2,130 $ 1,775 0.1% Clothing accessories nes, of leather or of composition leather $ 3 $ 30 $ 36 $ 83 0.1% Total, Articles of Apparel and Clothing Accessories, of Leather or Composition

Leather $ 33,058 $ 48,053 $ 52,008 $ 59,203 1% Global Development Solutions LLC from ITC/UN Comtrade

Viet Nam's Exports to World (US$ thousand) % of World (2009)

China's Exports to World (US$ thousand) % of World (2009) Product label

378

Specifically, the average labor productivity in China was approximately 25 shirts per

person per day, as opposed to 11 shirts per person per day in Ethiopia. Given the

differential production of 56 percent, the size of the operation was scaled down

accordingly.

Number of employees: The total number of employees was kept the same as the factory

in China, but the number of skilled, unskilled and casual employees was adjusted

according to the proportion of these categories of workers in the representative factory in

Ethiopia.

Labor turnover and absenteeism rate: The same turnover and absenteeism rate as the

representative factory in Ethiopia was used.

Output: shifts, average capacity utilization and output: Figures from the representative

factory in Ethiopia were used, starting at 65 percent utilization for one shift operation.

Output and revenue figures were adjusted to reflect the revised operations figure for the

hypothetical factory.

Major production equipment: The F/S assumes that the same equipment currently used

by the leather golf gloves factories in China is available to the manufacturer in Ethiopia

at a price to include import costs and local distribution of 15 percent of FOB China.

Average spoilage, reject, waste and loss rates: These figures were revised to reflect the

figures in the representative factory in Ethiopia.

Raw material input: The amount and cost of raw material input, including packing and

packaging material, was adjusted to reflect the revised number of leather golf gloves

produced per day at the hypothetical factory. The cost of transport and handling was

incorporated into the total cost.

Salary and wages: Total annual salary and wages were adjusted to reflect the revised

distribution of skilled and unskilled workers, and used the current wage rates for these

skill levels in Ethiopia.

Electricity: The cost of electricity was adjusted to reflect the revised number of leather

golf gloves produced per day multiplied by the actual unit cost of electricity in Ethiopia

today. percentage of time off the grid per month is the same figure as the representative

factory in Ethiopia.

379

Water and fuel: The cost of water and fuel was adjusted to reflect the revised number of

leather golf gloves produced per day multiplied by the actual unit cost of water in

Ethiopia today.

Administrative overhead: The cost of administrative overhead costs was adjusted to

reflect the revised number of leather golf gloves produced per day.

License and certification fees, taxes, VAT: These fees were adjusted to reflect payment

rates made by the representative firm in Ethiopia, and adjusted to reflect the revised units

of leather golf gloves on a daily basis.

VIII.12.2. Value Chains Analysis for Leather Golf Gloves

In order to assess the potential competitiveness of producing leather golf gloves in

Ethiopia, a value chain analysis for the production of leather golf gloves was first

conducted in both China and Vietnam. The average cost of producing leather golf gloves

in China ranged from US$2.4 to US$2.5 per piece at a labor productivity level between

10 and 20 pieces per person per day. As with most apparel items, manufacturers in

Vietnam were generally focused on CMT rather than establishing their own supply chain

for accessing all of the necessary input material. The cost of assembling leather golf

gloves in Vietnam was US$0.47 per piece with labor productivity of roughly 11 pieces

per person per day.

Based on the assumptions and methodologies presented above, the estimated cost of

producing leather golf gloves in Ethiopia using local sheepskin leather is approximately

US$1.95 per piece. As with the production of other apparel items, the relatively low cost

of labor in Ethiopia could provide a competitive advantage to prospective golf glove

producers.174

As the value chain diagram below indicates, this advantage could be

accentuated by the abundance of relatively well-priced sheepskin leather in Ethiopia,

which could contain the raw material costs of Ethiopian producers on par with levels

prevailing in China (approximately 80 percent of the cost of producing gloves or roughly

US$1.6-US$1.9 per piece).

174

The average wage rate for all apparel firms interviewed has been taken for this feasibility simulation.

380

Table 224: Benchmarking Data for the Production of Golf Gloves

Benchmarking Data Sheet: Leather Golf Gloves China Viet Nam Ethiopia 1.0 FACTORY CMT Simulated 1.1 Capacity utilization 85% - 100% 80% 70% 1.2 Installed capacity (piece/day) 1000 - 2,500 4,600

1,300

1.3 Labor absenteeism rate (%) 1% - 3% 5% 11% 1.4 Average salary/wage/month 1.5 Skilled $339 - $413 93 $

114 $

1.6 Unskilled $177 - $251 73 $ 39 $

1.7 Days of operation/month 26 - 28 27

25

1.8 Average age of major equipment 4 - 9 10 4.0

2.0 Exported Output (finished primary product) 2.1 Direct Export without consolidator/broker % 100% 100% 2.2 Indirect Export Through Local Consolidator 20% - 70% % % 2.3 Indirect Export Through Overseas Consolidator % % % 3.0 Domestically Sold Output (finished primary product) 3.1 Direct Sales to Wholesalers/Retailers without consolidator % % % 3.2 Direct Sales Through Own Outlets/Shops/Showrooms 30% - 80% % % 3.3 Indirect Sales Through Local Consolidator/Trader % % % 4.0 Unit production cost ($/piece) $2.4 - $2.5 0.47 $

1.95 $


Relatively low labor costs could make golf glove production using local leather competitive

381

Figure 68: Simulated Value Chain Diagram for Leather Golf Gloves in Ethiopia

Figure 69: Value Chain Diagram for Leather Golf Gloves in China

Leather Golf Gloves China Unit production cost 2.39 $

Raw material Cutting Decorating Sewing Finishing Packing Admin OH 57.7% 4.2% 7.4% 14.8% 11.6% 3.3% 1.0%

Leather 100.0% Labor 44.9% Labor 14.4% Raw Materials 47.7% Raw Materials 85.6%

Raw Materials 1.9 $ 79% Fuel/oil/ water 4.3% Other 0.0% Labor 0.4 $ 17% Other 3.1% Global Development Solutions, LLC

Leather Golf Gloves Ethiopia Simulated Unit production cost 1.95 $


Leather 100.0% Labor 36.3% Labor 10.3% Raw Material 56.7% Raw Material 89.7%

Raw Materials 1.6 $ 82% Fuel/oil/ water 5.1% Labor 0.1 $ 7% Other 1.9% Global Development Solutions, LLC

382

Figure 70: Value Chain Diagram for Leather Golf Gloves in Vietnam

Leather Golf Gloves Viet Nam Unit production cost 0.47 $


Labor 0.4 $ 81% Raw Materials 0.03 $ 3% Labor 100.0% Labor 91.6% Labor 95.6%

Electricity 4.9% Fuel/oil/ water 0.0% Fuel/oil/ water 3.6% Electricity 4.4% Global Development Solutions, LLC

383

The major challenge for manufacturers in Ethiopia, however, is whether they are able to

control key problems that prevail across apparel value chains in the country:

Problems with consistent quality of stitching, finishing and other assembly

processes;

Low labor productivities;

High absenteeism rates; etc.

Without some interventions to address these and other inefficiencies within the firm, golf

glove producers are unlikely to be able to overcome already significant disadvantages

that come from operating in Ethiopia. These factors include weak supply chains and a

relatively weak business environment not conducive to growth, as well as the fact that

Ethiopia as a landlocked country in Africa and that it is relatively unknown to foreign

buyers as a source of apparel.

Table 225: Benchmarking Data for the Production Golf Gloves

Benchmarking Data Sheet: Leather Golf Gloves China Viet Nam Ethiopia CMT Simulated

4.1 Export Rebate* $0.4 - $0.9 - $ - $ 5.0 Avg Selling Price (US$) 5.1 Factory gate $2.5 - $5.1 - $ - 5.2 Wholesale $2.8 - $5.5 - $ - 5.3 FOB price $3.1 - $5.8 0.87 $ - 6.0 Avg Spoilage & Reject rate: List different types (3) 6.1 In-factory product rejection 2% - 5% 0% 3% 6.2 Product rejection by client 1% - 6% n.a 2% 7.0 Avg Waste & losses: List different types (% of total ) 7.1 Production waste (leather-to-glove) 2% - 4% n.a 2% 7.2 Losses (theft) 3% n.a 3% 8.0 Electricity 8.1 On grid (Cost/kWh) 0.15 $ 0.08 $ 0.12 $ 8.2 Off grid (Cost/kWh) - self generated na n.a na 8.3 % of time off grid/month 0% - 4% % 3% 9.0 Water ($/m³ ) $0.44 - $0.66 0.37 $ 0.12 $

10.0 Fuel & Oil ($/liter) $0.88 - $1.00 0.37 $ 1.92 $ 11.0 PRODUCTIVITY & EFFICIENCY 11.1 Labor productivity (leather golf gloves) : Pieces/person/day 10 - 20 10.6 5.9 11.2 Electricity usage: On-grid (kWh/1,000 pieces) 98 - 198 237.34 119.05 11.3 Electricity usage ($/1,000 pieces) $14 - $29 18.45 $ 14.22 $ 11.4 Water usage (m³/1,000 pieces) 8 - 16 7.84 11.90 11.5 Water usage ($/1,000 pieces) $3 - $9 2.90 $ 1.42 $ 11.6 Fuel & oil usage (liters/1,000 pieces) 11 - 24 29.18 14.88 11.7 Fuel & oil usage ($/1,000 pieces) $10 - $21 10.72 $ 28.53 $ 11.8 Transport ($/km-ton) $0.22 n.a na

* Rebate is collected by the exporting firm. In cases when the manufacturer exports via an exporter/trading company, the rebate may or may not be passed from exporter to manufacturer depending on terms of contract between manufacturer and its exporter. Manufacturers collect entire rebate when exporting on their own (most small firms don't export directly) Global Development Solutions, LLC

384


Producing Leather Golf Gloves

The major factors affecting the feasibility analysis of producing leather gloves are as

follows:


may well be set up as a new product line in an existing leather products plant,

in which case the costs would be incremental and the return would be

enhanced because of the presence of sunk costs. The reason for treating it as a


reflect the overall competitiveness of the industry.

Importable or exportable product: Given the extent of livestock production in

Ethiopia and the net direction of current trade, leather products, including

leather gloves, are exportables. This is the case even if there is a good

domestic market because the opportunity cost is in terms of exports.

The size of the market: Total demand per annum for leather gloves is

considered to be large assuming adequate quality. Ethiopia would be a

relatively small producer and would therefore be a ‗price-taker‘ in the world

market, in effect facing unlimited demand.

Capital Costs: The analysis assumes imported equipment based on Chinese

origin prices plus transport and handling from China via Djibouti to Addis

Ababa of 15 percent of FOB price. Capital costs are about US$0.3 million

including buildings, equipment, ancillaries, vehicles and installation.

Wastage rates: Based on footwear as an example of a leather garment,

wastage rates may be as much as 40 percent from in-factory rejection,

delivery rejection, inline defects and cutting waste compared to 3 percent

production waste and 3 percent reject rate in China. In addition, labor

absenteeism in Ethiopia is as much as 12 percent (compared to 3 percent in

China). Finally, based on the footwear experience, labor output per hour is

about 44 percent of that achieved in China. In sum, the assumption made is

material costs allowing for wastage at 30 percent above those of China. As

such, there is clearly scope and need for significant productivity increases

reflected in total output per unit of input. The main assumption made is for a

2 percent annual increase in output at the same level of input as wastage falls.

385

The Impact of Power shortages: Electricity downtime has averaged about 17

percent in Ethiopia. However, large scale investments in new power capacity

in Ethiopia are expected to alleviate this early in the unit‘s life. The likely

decline in power outages is assumed to be incorporated within a measurement

of the general rate of increase in productivity (total output per unit of input).

Capacity, output and productivity: Initial maximum output will be 300,000

pieces per annum by year 3 at current Ethiopian productivity levels

(approximately 44 percent of that of China). A discount on Chinese factory

wages is incorporated to allow for lower Ethiopian real wages. The

employment per unit is 150 workers, which would be a small/medium scale

enterprise in Ethiopia. Capacity utilization would be about 70 percent on one

shift. Taking account of the assumed 2 percent annual productivity increase,

maximum output will increase for the same inputs.

Negative natural protection: In the case of a domestic material based

exportable product, high transport and handling costs create a disadvantage

(unlike the case of an importable). Based on the case of boxer briefs, total

transport related costs for gloves are assumed at about 10 percent of ex-

factory cost up to the port of Djibouti. (This is a low estimate for closely

packed garments.)

Effective price including transport and handling costs: The FOB price at

Djibouti less transport and handling to the port is the effective price obtainable

by the Ethiopian producers. The valuation of the product is a very sensitive

parameter from the point of competitiveness. The VCA shows the low end

ex-factory price of leather golf gloves in China at about US$2.50 per piece,

with a range up to US$5.00. For the purposes of this analysis the lower end is

applied (US$2.95) in order to reflect current Ethiopian quality levels and

transport/handling costs to the port.

Changes in the real exchange rate: In a separate analysis we project an

appreciation in the RER for the Chinese Yuan in relation to both the US

Dollar and the Ethiopian Birr at as much as 3 percent per annum over five

years, leading to a 16 percent overall increase as of year 5. This increase is

based on the high case projection made by the World Bank to reflect both the

productivity growth differentials and a catch-up effect. However, in view of

the uncertainty over RERs this is used as a residual adjustment only and the

focus is first on possible productivity increases within the Ethiopian factory.

386

VIII.12.4. Results of the Analysis

The feasibility calculations give the following results for key changes in assumptions

(Table 226).

Table 226: Economic Returns to Leather Gloves Production – Base Case Estimate*

Item US$ or Units

Output (year 3) 300,000


Asset Life 10 years

Capital Costs $320,187.50

Operating Costs (year 3) $826,336.46

Total Production and Capital Costs per Piece $2.82

Revenue/ Benefit (year 3) $885,000.00

Initial FOB Based Price $2.95


*Assumptions - No change in productivity or real exchange rates. Source: Global Development Solutions, LLC

The above results show a satisfactory return on production of gloves in current

conditions. This would be equivalent to a DRC ratio of somewhat above 1.0. Total

production cost per piece including capital costs in year 3 is about US$2.82 with product

ex-factory price of US$2.95. The rate of return is not exceptional mainly because of high

material costs only partially offset by savings in labor costs. In addition, Ethiopia faces a

transport cost disadvantage on exports.

The relatively low cost of labor in Ethiopia combined with considerable reduced material

wastage could provide a competitive advantage to future golf glove producers

complemented by the abundance of relatively well priced sheepskin leather in Ethiopia,

which could contain the raw material costs of Ethiopia compared to competitors.


are possible in a) productivity increase within Ethiopian factories that will lower

Ethiopian costs, b) infrastructure improvements such as roads and power supply that may

lower Ethiopian costs relative to some competitor countries and c) real effective

exchange rates in main competitor countries (e.g., China) that would increase Chinese

prices relative to Ethiopian. The analysis allows for a) and b) through an overall

productivity increase in terms of output per given level of input.

387

Table 227: Economic Returns with Productivity Improvement*

Item US$ or Units

Output (year 3) 312,120


Asset Life 10 years

Capital Costs $320,187.50

Operating Costs (year 3) $826,336.46

Total Production and Capital Costs per Piece $2.71

Revenue/ Benefit (year 3) $920,754.00

Initial FOB Based Price $2.95


*Productivity improves at 2% per annum Source: Global Development Solutions, LLC

With a modest productivity increase of 2 percent per annum in terms of output per unit of

input, costs per piece fall from US$2.77 in year 3 to $2.36 in year 10, and the ERR would

rise to 29 percent. With a 3 percent annual productivity increase (which would

significantly narrow the productivity gap by year 10) total production cost would fall to

about US$2.16 per piece by year 10, closer to current Chinese ex-factory costs. In this

case the ERR would rise to 35 percent. In addition, the probable relative movements in

the RER of China and Vietnam (discussed in a separate study) would raise their supply

prices on the international market and create more competitive headroom for Ethiopia,

resulting in highly competitive production in the medium term.

VIII.13. Conclusions and Recommendations

Ethiopia has an indigenous source of excellent sheepskin for leather golf gloves.

Factoring in plausible productivity increases combined with low real wages, over a ten-

year period the domestic production of leather gloves as representative of the leather

products industry is economically viable and also financially profitable. Productivity

improvements (including reduced absenteeism, reduced wastage and increased labor

output per hour) could result in strong profitability down the road. If Ethiopia‘s internal

transport and handling costs are reduced then this result is reinforced, and RER

movements complement these changes. There clearly is scope for major additional

investment in the leather products industry provided productivity and quality

improvements occur.

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