Leading transformation—the buck starts here
From Chapter 2 of the African Transformation Report
In August 2011 late Prime Minister Meles Zenawi went to Beijing, advised by Justin Lin, then chief economist at the World Bank, about the rising wages and pending relocation of the Chinese shoe industry to low-income countries. Zenawi’s mission? Bring a factory back to Ethiopia.
Meeting with Chinese investors on this trip, Zenawi emphasized that Ethiopia’s transformation plan was targeting industrial development to grow its economy. In that spirit, he invited the investors to visit Ethiopia, which they did two months later, to consider prospects for investing in the country in areas that would provide jobs and boost exports.
The investors were enticed by Ethiopia’s low wages, social stability, and double-digit GDP growth over the previous 10 years. They were also impressed by the government’s proactivity to make FDI attractive, manifested in this visit by the Prime Minister and the appointment of deputy trade minister as the project’s champion.
In January 2012, five months after the Prime Minister’s visit, the Huijan Group opened a shoe factory outside Addis Ababa, Ethiopia’s capital, hiring 550 Ethiopians. With plans for expansion into a multibillion dollar industrial park and projected to create 30,000 jobs by 2016, this factory has become one of Ethiopia’s largest exporters, earning worldwide praise as a promising model for transforming African economies.
The Huijan Group, a large-scale Chinese shoe manufacturer, had seen a win-win formula in the making. Like most African countries, Ethiopia boasts young, abundant, and eager labor at low wages. Besides, Ethiopia’s established cattle industry provided consistent raw material, which, with Huijan’s capital and expertise, promised a winning formula.
The success of the partnership is due in large part to the government’s focused efforts. In addition to attracting Chinese investors, the government offered four-year tax breaks, cheap land for factory development, and low-price electricity to investors who set up in the industrial zone.
Contrary to popular perceptions of Chinese attitudes toward Africa, Huijan’s Vice President and General Manager for overseas investment, Helen Hai explains, “One thing in my strategy is very clear: I don’t want to compete with locals,” she says. “The sheepskin and goatskin processing by Ethiopian artisans is good, but local people don’t know how to manage cowskin. I want to offer my skills to help the locals. I don’t want to have my own tannery because I don’t want to create problems,” she says. “I want to help them grow because when local producers grow, the whole market is growing. If it is just myself growing here in five years’ time, I will leave.”
Zemedeneh Negatu, managing partner at Ernst & Young Ethiopia, applauds Hai’s efforts to transfer skills and build a complete supply chain for the shoe industry. He says, “That should be the goal. You create clusters around one or two major foreign or Ethiopian investors, throughout the country, based on competitiveness and comparative advantages. It should be made clear to investors that they need to help build local capacity.”
Other African countries can learn from this project, above all the need for leadership at the highest levels to make projects happen. Two other key lessons are to target sectors in the economy’s comparative advantage and to integrate various elements of a transformation strategy. Taxation, power generation, and skills training had to come together to make the project work.
Investors can also learn—that producing and exporting profitably in Africa are possible and that, with government support and citizen motivation, the traditional barriers to business on the continent can be overcome.
Source: ACET research.