Feasibility Study of Garment

Competitive Africa: The Value Chain and Feasibility Analysis Module – Draft Draft 4 Not for Circulation Circulation

VIII. Feasibility Study 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 section conducts an outline feasibility study using 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 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 Competitivene Competitiveness: ss: Phase Phase 1.1 - Preliminary Preliminary Product Screening 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: 335


VIII.1.


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 section conducts an outline feasibility study using 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 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 Competitivene Competitiveness: ss: Phase Phase 1.1 - Preliminary Preliminary Product Screening 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: 335


3.

a. Leather golf gloves; and b. Sports footwear of leather. 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, 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 stemmed from the the fact that French 336


windows require glass thus introducing an outside factor that could influence the manufacturing of the final product. Wooden doors (without (without glass) 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, result, further analyses of products identified during the preliminary product screening were conducted. Interviews with metal metal sector sector associations 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 including imports from China. As a result, 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

: For Ethiopia, the classification of enterprises into small, medium and large large Ethiopia scale depends on a number of variables such as level of employment, turnover, capital investment, production production capacity, level of technology and subsector. Accordingly, the following scales are referred to the classification of enterprises in the Ethiopian context (Table 196). 196).

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Competitive Africa: The Value Chain and Feasibility Analysis Module – Draft Draft 4 Not for Circulation Circulation Table 196: Company Size Classification Structure for Ethiopia

Sub-se ctor

Number of Employees Small mall Scale ale Medi edium Sc Scale ale Larg arge Sc Scale ale

Textile and Apparel 5-9 Leather 2-10 Diary 2-10 Wheat 2-10 Wood Processing Process ing 2-10 Metal 2-10 Source: Ethiopia CSA and FeMSEDA

10 – 49 21 – 50 21 – 50 21 – 50 21 – 50 21 – 50

above 50 above 51 above 51 above 51 above 51 above 51

Re ma rk

According to the Centra Centrall Statistics Agency (CSA) According to Feder Federal al Medium and Small Enterprise Development Agency Agency (FeMSEDA) (FeMSEDA)

: For Tanzania, the classification classification of enterprises into small, medium and large large Tanzania scale depends on a number of variables such as level of employment and capital investment in machinery. The classification classification cuts across across sectors and subsectors of the economy. Accordingly, the following scales refer to the classification classification of enterprises enterprises in the Tanzanian context (Table 197). 197). Note that that the small enterprise type is most appropriate for all sectors studied in this analysis. Table 197: Company Size Classification Structure for Tanzania

Ca te gory Mic ro enterprise Small enterpris e Medium enterprise Large enterprise

Capital Investment in Machinery Employe e s (TZS million) Re ma rks 1-4 Up to 5 Majority in the informal s ec tor 5 - 49 5 - 200 Most in the informal s ec tor 50 - 99 200 - 800 Mos t in the formal sector 100+ 800+ All in the formal s ector

Source: Tanzania Chamber of Commerce, Industry and Agriculture (TCCIA)

: Zambia classifies classifies enterprises enterprises as micro, small, medium and large based on Zambia 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. firm. For microenterprises, the 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 Capital Investment Investment Annual for Manufacturing Manufacturing Revenue Firms Classification Employees (ZMK million) (ZMK million) Micro < 10 < 20 < 10 Small 10 - 50 150 - 250 80 – 200 Medium 51-100 300 - 800 200 – 500 Large > 100 > 800 > 500

Source: Zambia Development Agency

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Capital Investment for Trading/ Services Firms (ZMK million) < 10 150 151 - 300 > 300

Competitive Africa: The Value Chain and Feasibility Analysis Module – Draft 4 Not for Circulation

: The China government is challenged in defining sizes of firms. Temporary China 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 Em ployee Industrial Revenue Asset Em ployee Construction Revenue Asset Employee Wholesale Revenue Employee Retail Revenue Em ployee Transportation Revenue Em ployee Post s ervices Revenue Lodging and Employee Catering s ervices Revenue

Unit pers on m illion RMB million RMB pers on m illion RMB million RMB pers on m illion RMB pers on m illion RMB pers on m illion RMB pers on m illion RMB pers on m illion RMB

Small Les s than 300 Les s than 30 Les s than 40 Les s than 600 Les s than 30 Les s than 40 Les s than 100 Les s than 30 Les s than 100 Les s than 10 Les s than 500 Les s than 30 Les s than 400 Les s than 30 Les s than 400 Les s than 30

Medium 300-2000 30-300 40-40 0 600-3000 30-300 40-40 0 100-200 30-300 100-500 10-150 500-3000 30-300 400-1000 30-300 400-800 30-150

Large More than 2000 More than 300 More than 400 More than 3000 More than 300 More than 400 More than 200 More than 300 More than 500 More than 150 More than 3000 More than 300 More than 1000 More than 300 More than 800 More than 150

Source: National Bureau of Statistics of China

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

Weight

1 Golf gloves

85 - 141

2

Loafer Size

3 Padlock*

Dimension

Unit of measure grams

780

grams

Heel

Width

Insole

EU = 7

2.5

10

30

760

grams

7

7

NA*

Thickness Diameter 290

mg

5 Wooden chair

6.5

kg

6 Wooden door

12

kg

7 Milk

0.5

liters

Type (German) Type (French) 8 Milling

Unit of measure

US = 8

Crown cork 4 (metal bottle cap)**

550

55

9 Polo shirt

250 - 270

grams

10 Underwear

80 - 100

grams

Material

Men's medium

Sheepskin

cm

Sheepskin

cm

Brass

mm

tin free steel (tfs)

cm

Pine

cm

Pine

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

Ash <0.65%

Protein Moisture All purpose flour Wheat or rice approx. <14.5% 11% Refer to diagram 100% cotton 80% cotton/ Refer to picture 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

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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Competitive Africa: The Value Chain and Feasibility Analysis Module – Draft 4 Not for Circulation Table 201: A Snapshot of the Apparel Sector in China, Vietnam and Ethiopia

Key Comparative Indicators Total Imports (Value) Total Exports (Value) Companies Operating in the Se ctor Small Medium Large Est. no. of works in the sector Male Female

China Vietnam Ethiopia $ 1,651,745,000 $ 604,373,333 $ 72,546,928 $ 100,479,288,000 $ 8,244,000,000 $ 10,405,248 52,828 3,174 436 13.2% 26.8% 91.1% 54.0% 55.0% 1.6% 32.8% 18.2% 7.3% 4,587,000 1,194,310 9,746 20.0% 17.0% 58.0% 80.0% 82.8% 42.0%

Global Development Solu tion s

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

Volume (pieces) Value (USD)

Domestic Production Domestic Demand Total Imports Total Exports 17,543,075 132,467,738 117,734,080 2,809,417 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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Competitive Africa: The Value Chain and Feasibility Analysis Module – Draft 4 Not for Circulation Table 203: Employment Statistics for Ethiopia Apparel Sector Number of Company Size Estimated Number of Companies % of Companies by Size Employees Ave Number of Employees Small 397 91.1% 1,961 5 Medium 7 1.6% 343 49 Large 32 7.3% 7,442 233 436 100.0% 9,746 Total

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 Ethiopia’s Cotton-to-Garment Processing Road Map Ethiopian Cotton Farms/cotton (118,000 ha/Output: 227,000tons) ) Cotton Farm’s Issues - Low productivities - Low quality and poor varieties - Poor irrigation management - Low far ming, harvesting,and handling technology - Insufficient incentives for farmers

Upstream

Ginning & Spinning Mfs (Cotton Ginning 11 & Spinning 11) Ginning output 84,000 tons/year

Textile & Garment Manufacturers (Textile Mfs13, GarmentMfs: Medium 7 and large 32) Textile Production Capacity: 25,858 ton/year Installed Capacity: 37,625 ton/year Garment Production Capacity: Woven - 10.9 million pcs/year Knitwear - 16.6 million pcs/year Installed Capacity: Woven – 37.4 million pcs/year Knitwear – 18.2 million pcs/year  

Downstream

 

Principal problems of textile & garment industry - Obsolete technology - Low quality 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

Source: Global Development Solutions, LLC

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 343


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 Manufacturers of textiles , wearing apparel and leather products 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 %) 13,430 (95%) Firm ownership (National, Foreign, JV) 44%;35%;21% Employees by ge nder (Male, Female) 59%;41% Compiled by Global Development Sol utions, LLC from Ministry of Industry, Trade and Mark eting, Tanzania

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) Apparel Imports Other made textile articles, sets, worn clothing etc Articles of apparel, accessories, not knit or crochet Articles of apparel, accessories, knit or crochet Apparel Exports Other made textile articles, sets, worn clothing etc Articles of apparel, accessories, knit or crochet Articles of apparel, accessories, not knit or crochet

$ $ $ $ $ $ $ $

2005 49,538 36,146 7,512 5,880 23,308 17,209 4,802 1,297

$ $ $ $ $ $ $ $

2006 56,605 39,230 11,598 5,777 29,181 25,556 2,219 1,406

$ $ $ $ $ $ $ $

2007 2008 2009 65,666 $ 89,087 $ 88,788 47,358 $ 56,772 $ 57,942 14,123 $ 23,466 $ 22,989 4,185 $ 8,849 $ 7,857 69,128 $ 76,678 $ 70,205 59,474 $ 65,182 $ 61,906 4,855 $ 5,899 $ 7,151 4,799 $ 5,597 $ 1,148

Compiled by Global Development Solution s, 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 UNI DO and the Ministry of Industry, T rade and Marketing

344


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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Competitive Africa: The Value Chain and Feasibility Analysis Module – Draft 4 Not for Circulation Table 206: Firm Statistics, Apparel Manufacturing, Zambia

Company Size Small Medium Large

Estimated Number % of Companies Estimated Number Ave Employees/ of Companies by Size of Employees Firm 0 0 6 50% 600 100 6 50% 900 150 12

Total

Registration Formal Informal State-owned enterprises Gender % Male % Female

100%

1500

12 0 0 74% 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 Volume (million pieces) Value (CNY, billion) Value (USD, billion) Main countries/regions of destination

2007

2008

2009

30 30 783 815 115 120 US, Japan, Hong Kong, Germany, UK

Estimated numbe r of compani es operating in the sec % of Total Small 6,976 14% Medium 28,526 56% Large 17,326 34% Subtotal 51,370 100% Source: China Statistical Yearbook Network

162

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

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26 728 107

Avg no. of employees/firm 150 350 500 337


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 10 – 200 1,745 55.00% 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. : The total number of employees was kept the same as the factory Nu mber of employees 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. L abor tu rn over and absenteeism r ate : The same turnover and absenteeism rate as the

representative factory in Ethiopia was used. Shi f ts, aver age capacity uti li zation and outpu t : 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. : The F/S assumes that the same equipment currently used M ajor production equipment 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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: The F/S assumes that this is an import substitution industry at least M arkets and pr ice 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). : These figures were revised to reflect the Average spoi lage, r eject, waste and loss r ates figures in the representative factory in Ethiopia. Raw materi al i nput : 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. : Total annual salary and wages were adjusted to reflect the revised Salary and wages distribution of skilled and unskilled workers, and used the current wage rates for these skill levels in Ethiopia. : The cost of electricity was adjusted to reflect the revised number of boxer Electricity 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. : The cost of water and fuel was adjusted to reflect the revised number of Water and fu el boxer briefs produced per day multiplied by the actual unit cost of water in Ethiopia today. Admi ni str ative over head : The cost of administrative overhead costs was adjusted to

reflect the revised number of boxer briefs produced per day. L icense and certi fication f ees, 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. : The cost of freight from Guangzhou, China to Addis Ababa, F reight and handlin g 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)

Guangzhou to Djibouti Shipping/handling Djibouti port to Addis Total freight cost (20') Weight/container (tons) Freight cost ($/ton) Freight cost (ETB/ton)

$ $ $

1,880 2,012 3,892 10 $ 389.20 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 i mported 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 CIF value Excise tax VAT Municipality tax Road fund Sta bil iza tion f und Sum

Unit US$/liter 30% 15% US$/liter US$/liter US$/l ite r US$/liter

NGR X Sudan NGR E5 0.59 0.59 0.18 0.18 0.12 0.12 0.001 0.001 0.006 0.006 (0.00 01) (0.0001) 0.89 0.89

Kerosene 0.65 (0.0001) 0.65

ADO 0.63 0.09 0.001 0.005 (0.0003) 0.73

Light fuel oil 0.58 0.09 0.0001 0.67

Heavy fuel oil 0.56 0.08 0.0002 0.65

Jet fuel 0.65 0.19 (0.0001) 0.84


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

350


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$1.02 per piece. As with the production of polo shirts, the low cost of labor in Ethiopia provides the competitive advantage to compensate for the higher cost of imported raw material. As the value chain diagram below indicates, the total labor portion of the Ethiopian value chain for boxer briefs is only 8.5 percent as compared to 16.6 percent in China. Here again, however, the major challenge for manufacturers in Ethiopia is whether they are able to produce a quality product with consistent stitching and finishing, while at the same time control in-line production losses, waste and reject rates (Table 210). Table 210: Benchmarking Data for the Production of Boxer Briefs in Ethiopia Benchmarking Data Sheet: Boxer Briefs 1.0 FACTORY 1.1 Capacity utilization 1.2 Installed capacity (piece/day) 1.3 Labor absenteeism rate (%) 1.4 Average salary/wage/month 1.5 Skilled 1.6 Unskilled 1.7 Days of operation/month 1.8 Average age of major equipment 2.0 Exported Output (finished primary product) 2.1 Direct Export without consolidator/broker 2.2 Indirect Export Through Local Consolidator 2.3 Indirect Export Through Overseas Consolidator 3.0 Domestically Sold Output (finished primary product) 3.1 Direct Sales to Wholesalers/Retailers without consolidator 3.2 Direct Sales Through Own Outlets/Shops/Showrooms 3.3 Indirect Sales Through Local Consolidator/Trader 4.0 Unit production cost ($/piece)

China

Viet Nam

90% 1,500 - 4,000 1% - 2%

70% - 90% 6,000 - 15,000 0% - 2%

$265 - $340 $177 - $222 26 - 30 2-6

$114 - $130 $78 - $93 25 - 26 2.5 - 10

0% 0% - 100% 0%

100% 0% 0%

0% 0% - 100% 0% $1.05 - $1.19

0% 0% 0% $0.11 - $0.28


351

Ethiopia Simulated

65% 1,056 11% $ $

185 46 25 6.0

Competitive labor costs

100% 0% 0%

$

0% 0% 0% 1.02

Competitive production costs using imported input material


Figure 65: Simulated Value Chain Diagram for Boxer Briefs in Ethiopia Boxer briefs, Mens Unit production cost

Simul ated Cost

$

Addis Ababa

Cutting/Layering 0.4%

Raw material 43.5%

Fabric

Ethiopia

1.02

100.0%

Finishing 2.1%

Sewing/Assembly 46.4%

Raw material inputs

Raw material Labor

$ $

0.87 0.09

85.2 8.5

Packing Mat

$

0.05

5.3

89.8%

Labor Electricity R&M

9.2% 0.1% 0.9%

Admin/OH 1.5%

Packing/Loading 6.0%

Packing material

88.4%

Labor R&M Other

11.3% 0.2% 0.0%


Figure 66: Value Chain Diagram for Boxer Briefs in China163 Boxer briefs, Mens Unit production cost

Guangdong China $ 1.05 Cutting/Layering 3.1%

Raw material 39.3%

Fabric Raw material Labor Packing material

100%

Raw material inputs Labor Electricity R&M

$ 0.81 77.1% $ 0.17 16.6% $ 0.05 5.1%

Finishing 1.8%


84.6% 14.5% 0.5% 0.2%

Admin/OH 3.4%


Packing material Labor R&M Other

66.1% 32.3% 1.4% 0.2%


163

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

352


Figure 67: Value Chain Diagram for Boxer Briefs in Vietnam164 Polo Shirt Value Chain: Unit production cost

Raw material 0.0% Labor Electricity Packing material dmin OH

Hai Duong City $ 0.28

Cutting/Layering 7.3% $ 0.22

79.1%

$ 0.01 $ 0.01 $ 0.03

2.7% 2.5% 9.4%


Viet Nam

Finishing 18.0%


Labor Fuel/oil/ water Electricity R&M

94.3% 1.0% 4.3% 0.4%


Labor Fuel/oil/ water Electricity Packing material

Admin/OH 23.8%

78.6% Labor 6.6% Electricity 1.4% Financing charges 13.1% Admin OH

43.3% 0.6% 16.5% 39.6%


Figure 67: Value Chain Diagram for Boxer Briefs in Vietnam164 Polo Shirt Value Chain: Unit production cost

Hai Duong City $ 0.28

Raw material 0.0% Labor Electricity Packing material dmin OH

Cutting/Layering 7.3% $ 0.22

79.1%

$ 0.01 $ 0.01 $ 0.03

2.7% 2.5% 9.4%


Viet Nam

Finishing 18.0%


Labor Fuel/oil/ water Electricity R&M

94.3% 1.0% 4.3% 0.4%


Labor Fuel/oil/ water Electricity Packing material

Admin/OH 23.8%

78.6% Labor 6.6% Electricity 1.4% Financing charges 13.1% Admin OH

43.3% 0.6% 16.5% 39.6%

164

Ibid

353

Table 211: Benchmarking Data for the Production of Boxer Briefs in Ethiopia (Part 2) Benchmarking Data Sheet: Boxer Briefs 4.1 5.0 5.1 5.2 5.3 6.0 6.1 6.2 7.0 7.1 7.2 8.0 8.1 8.2 8.3 9.0 10.0 11.0 11.1 11.2 11.3 11.4 11.5

VAT Rebate ($/piece)* Avg Selling Price (US$) Factory gate Wholesale FOB price Avg Spoilage & Reject rate: List different types (3) In-factory product rejection Product rejection by client Avg Waste & losses: List different types (% of total ) Production waste - scrap (fabric-to-polo, weight) Losses (theft) Electricity On grid (Cost/kWh) Off grid (Cost/kWh) - self generated % of time off grid/month ater (m

³

)

Fuel & Oil (liter) PRODUCTIVITY & EFFICIENCY Labor productivity (factory level) : Pieces/employee/day Electricity usage: On-grid (kWh/1,000 pieces) Electricity usage ($/1,000 pieces) Water usage (m ³/1,000 pieces) Water usage ($/1,000 pieces)

China

Viet Nam

$0.17 - $0.24

Ethiopia Simulated $

$1.11 - $1.47 $1.18 - $1.62 $1.25 - $1.77

$0.57 - $0.62

4% - 5% <1%

0% - 1% 0% - 2%

$ $ $

1.15 1.26 1.34 4% 2%

3% - 8% <1% $0.12 - $0.13

-

10%

$ $

0% - 10%

$0.06 - $0.08 $0.13 0% - 1%

0.05 17%

$0.63 $0.92

$0.26 - $0.31 $0.83 - $0.84

$ $

0.11 1.76

28 - 40 34 - 89 $4.54 - $11.17 0.89 - 3.83 $0.57 $2.22

5.8 - 22.9 133 - 298 $7.56 - 21.09 5.63 - 10.80 $1.46 - $3.36

$

17 70.59 3.53 3.50 0.38

$

Need to control reject and l oss rates

Table 211: Benchmarking Data for the Production of Boxer Briefs in Ethiopia (Part 2) Benchmarking Data Sheet: Boxer Briefs 4.1 5.0 5.1 5.2 5.3 6.0 6.1 6.2 7.0 7.1 7.2 8.0 8.1 8.2 8.3 9.0 10.0 11.0 11.1 11.2 11.3 11.4 11.5 11.6 11.7 11.8

VAT Rebate ($/piece)* Avg Selling Price (US$) Factory gate Wholesale FOB price Avg Spoilage & Reject rate: List different types (3) In-factory product rejection Product rejection by client Avg Waste & losses: List different types (% of total ) Production waste - scrap (fabric-to-polo, weight) Losses (theft) Electricity On grid (Cost/kWh) Off grid (Cost/kWh) - self generated % of time off grid/month ater (m

³

China

$0.17 - $0.24

Ethiopia Simulated $

$1.11 - $1.47 $1.18 - $1.62 $1.25 - $1.77

$0.57 - $0.62

4% - 5% <1%

0% - 1% 0% - 2%

$ $ $

$0.12 - $0.13

-

1.15 1.26 1.34

Need to control reject and l oss rates

4% 2%

3% - 8% <1%

10%

$ $

0% - 10%

$0.06 - $0.08 $0.13 0% - 1%

0.05 17%

$0.63 $0.92

$0.26 - $0.31 $0.83 - $0.84

$ $

0.11 1.76

28 - 40 34 - 89 $4.54 - $11.17 0.89 - 3.83 $0.57 - $2.22 0.8 - 4.6 $0.74 - $4.75 $0.16 - $0.24

5.8 - 22.9 133 - 298 $7.56 - 21.09 5.63 - 10.80 $1.46 - $3.36 5.21 - 8.89 $4.32 - $9.33 $0.07 - $0.52

)

Fuel & Oil (liter) PRODUCTIVITY & EFFICIENCY Labor productivity (factory level) : Pieces/employee/day Electricity usage: On-grid (kWh/1,000 pieces) Electricity usage ($/1,000 pieces) Water usage (m ³/1,000 pieces) Water usage ($/1,000 pieces) Fuel & oil usage (liters/1,000 pieces) Fuel & oil usage ($/1,000 pieces) Transport ($/km-ton)

Viet Nam

$ $ $ $

17 70.59 3.53 3.50 0.38 0.80 1.41 0.16


VIII.5.3. Assumptions for Producing Boxer Briefs

Estimating

Economic

Feasibility

of

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

354

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.

355

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

356

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% * As sumptions - No change in produ ctivity or real exchange rates .


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.

357

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. Employment (year 3) 125 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) Economic Rate of Return 21% *1) Zero Yuan RER increase is as sumed. (i.e. zero increas e 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.


VIII.6.

Feasibility Analysis of Boxer Briefs Production in Tanzania VIII.6.1. Production Assumptions Based on the VCA

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). 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 Tanzania. 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 12 percent) is identical to a DRC of

358

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. 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.

VIII.6.2. Assumptions for Producing Boxer Briefs

Estimating

Economic

Feasibility

of

The feasibility of producing boxer briefs is part of the overall feasibility of the cotton or 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. 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 because of the presence of sunk costs. The reason for treating it as a greenfield 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 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

This based on a male population of 22 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 likely be in the range 3 million up to as much as 6 million pieces.

359

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 sensitive parameter in terms of the competitiveness of domestically produced 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.

360





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

Transport margin

China to Dar

8 percent

Factory price

1.15

Wholesale price

1.25

FOB price 1.34 1.45 Source: Global Development Solutions, LLC

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. 

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 Yuan RER. Unlike Zambia,

361

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. VIII.6.3. Results of the Feasibility Analysis

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 Source: Global Development Solutions, LLC

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. In the medium term, as has been assumed for other products in this study, certain changes 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. 362

VIII.7.

Feasibility Analysis of Boxer Briefs Production in Zambia VIII.7.1. Production Assumptions Based on the VCA

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. 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 Zambia. 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 12 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. 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. VIII.7.2. Assumptions for Producing Boxer Briefs

Estimating

Economic

Feasibility

of

The feasibility of producing boxer briefs is part of the overall feasibility of the cotton or 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. The major factors affecting the feasibility of producing boxer briefs would be:

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









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 because of the presence of sunk costs. The reason for treating it as a greenfield 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 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 sensitive parameter in terms of the competitiveness of domestically produced 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

This based on a male population of 7 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 likely be in the range 1 million up to as much as 3 million pieces.

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





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.

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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. 

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 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. VIII.7.3. Results of the Feasibility Analysis

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 366

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

367

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 tenyear 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 368

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.

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Feasibility Study of the Domestic Production of Golf Gloves in Ethiopia

370

VIII.9.


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.

371

3.

b. Sports footwear of leather. 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 372

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

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

Sub-sector

Number of Employees Small Scale Medium Scale Large Scale

Textile and Apparel 5-9 Leather 2-10 Diary 2-10 Wheat 2-10 Wood Processing 2-10 Metal 2-10 Source: Ethiopia CSA and FeMSEDA

10 – 49 21 – 50 21 – 50 21 – 50 21 – 50 21 – 50

373

above 50 above 51 above 51 above 51 above 51 above 51

Remark

According to the Central Statistics Agency (CSA) According to Federal Medium and Small Enterprise Development Agency (FeMSEDA)

: For Tanzania, the classification of enterprises into small, medium and large Tanzania 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 Micro enterprise Small enterprise Medium enterprise Large enterprise

Capital Investment in Machinery Employees (TZS million) Remarks 1-4 Up to 5 Majority in the informal sector 5 - 49 5 - 200 Most in the informal sector 50 - 99 200 - 800 Most in the formal sector 100+ 800+ All in the formal sector

Source: Tanzania Chamber of Commerce, Industry and Agriculture (TCCIA)

: Zambia classifies enterprises as micro, small, medium and large based on Zambia 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 Capital Investment Annual for Manufacturing Revenue Firms Classification Employees (ZMK million) (ZMK million) Micro < 10 < 20 < 10 Small 10 - 50 150 - 250 80 – 200 Medium 51-100 300 - 800 200 – 500 Large > 100 > 800 > 500

Capital Investment for Trading/ Services Firms (ZMK million) < 10 150 151 - 300 > 300

Source: Zambia Development Agency

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

374

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 Em ployee Industrial Revenue Asset Em ployee Construction Revenue Asset Employee Wholesale Revenue Employee Retail Revenue Em ployee Transportation Revenue Em ployee Post s ervices Revenue Lodging and Employee Catering s ervices Revenue

Unit pers on m illion RMB million RMB pers on m illion RMB million RMB pers on m illion RMB pers on m illion RMB pers on m illion RMB pers on m illion RMB pers on m illion RMB

Small Les s than 300 Les s than 30 Les s than 40 Les s than 600 Les s than 30 Les s than 40 Les s than 100 Les s than 30 Les s than 100 Les s than 10 Les s than 500 Les s than 30 Les s than 400 Les s than 30 Les s than 400 Les s than 30

Medium 300-2000 30-300 40-40 0 600-3000 30-300 40-40 0 100-200 30-300 100-500 10-150 500-3000 30-300 400-1000 30-300 400-800 30-150

Large More than 2000 More than 300 More than 400 More than 3000 More than 300 More than 400 More than 200 More than 300 More than 500 More than 150 More than 3000 More than 300 More than 1000 More than 300 More than 800 More than 150

Source: National Bureau of Statistics of China

: A small firm has less than 50 laborers, while a medium-size firm has 51-200 Vietnam 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 http://laws.dongnai.gov.vn/1991_to_2000/2000/200004/200004280005_en/lawdocum

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Table 222: Product Technical Specifications Weight

Dimension

Product

Weight

1 Golf gloves

85 - 141

Unit of measure grams

780

grams

Heel

Width

Insole

US = 8

EU = 7

2.5

10

30

760

grams

7

7

2

Loafer Size

3 Padlock*

290

mg

5 Wooden chair

6.5

kg

6 Wooden door

12

kg

7 Milk

0.5

liters

Type (German) Type (French) 8 Milling

Unit of measure

Thickness Diameter

Crown cork 4 (metal bottle cap)**

550

55

9 Polo shirt

250 - 270

grams

10 Underwear

80 - 100

grams

Material

NA*

Men's medium

Sheepskin

cm

Sheepskin

cm

Brass

mm

tin free steel (tfs)

cm

Pine

cm

Pine

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

Ash <0.65%

Protein Moisture All purpose flour Wheat or rice approx. <14.5% 11% Refer to diagram 100% cotton 80% cotton/ Refer to picture 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

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.

376

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$420 million in 2009. Table 223: Exports of Sports Leather Gloves and other Apparel/Accessories of Leather, China and Vietnam, 2006-2009 China's Exports to World (US$ thousand)

Product label

alue in 2006

alue in 2007

alue in 2008

alue in 2009

Articles of apparel of leather or of co mposition leather Gloves, mittens & mitts, for sports, of leather or of composition leather

$ $

1,643,757 110,402

$ $

1,292,117 116,923

$ $

992,580 106,121

$ $

780,834 98,306

Gloves, mittens & mitts, ot her than for sport, of leather or o f composition leather Belts and bandoliers of leather or o f composition leather Clothing accessories nes, of leather or o f composition leather

$ $ $

760,857 361,782 16,101

$ $ $

723,824 420,556 15,661

$ $ $

726,526 396,461 15,644

$ $ $

581,378 358,860 11,916

$

2,892,899

$

2,569,081

$

2,237,332

$

1,831,294

% of World (2009)

23% 23% 42% 19% 12%

Total, Articles of Apparel and Clothing Accessories, of Leather or Composition Leather Product label

iet Nam's Exports to World (US$ thousand)

Articles of apparel of leather or of co mposition leather

alue in 2006 $ 157

alue in 2007 $ 2,177

alue in 2008 $ 2,572

alue in 2009 $ 13,113

Gloves, mittens & mitts, for sports, of leather or of composition leather Gloves, mittens & mitts, ot her than for sport, of leather o o f composition leather Belts and bandoliers of leather or o f composition leather Clothing accessories nes, of leather or o f composition leather

$ $ $ $

27,389 4,151 1,358 3

$ $ $ $

36,578 6,361 2,907 30

$ $ $ $

40,497 6,773 2,130 36

$ $ $ $

34,980 9,252 1,775 83

$

33,058

$

48,053

$

52,008

$

59,203

Total, Articles of Apparel and Clothing Accessories, of Leather or Composition Leather

26% % of World (2009)

0.4% 8% 1% 0.1% 0.1% 1%

Global Development Solutions LLC from ITC/UN Comtrade

VIII.12. Feasibility Analysis of Leather Golf Gloves Production in Ethiopia VIII.12.1.Production Assumptions Based on the VCA

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.

377

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. : The total number of employees was kept the same as the factory Nu mber of employees 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. : The same turnover and absenteeism rate as the L abor tu rn over and absenteeism r ate representative factory in Ethiopia was used. Output : shi f ts, average capacity uti li zation 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. : The F/S assumes that the same equipment currently used M ajor production equipment 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. : These figures were revised to reflect the Average spoi lage, r eject, waste and loss r ates figures in the representative factory in Ethiopia. : The amount and cost of raw material input, including packing and Raw materi al i nput 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. : The cost of electricity was adjusted to reflect the revised number of leather Electricity 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.

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: The cost of water and fuel was adjusted to reflect the revised number of Water and fu el leather golf gloves produced per day multiplied by the actual unit cost of water in Ethiopia today. : The cost of administrative overhead costs was adjusted to Admi ni str ative over head reflect the revised number of leather golf gloves produced per day. : These fees were adjusted to reflect payment L icense and certi fication f ees, taxes, VAT 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.

379

Table 224: Benchmarking Data for the Production of Golf Gloves Benchmarking Data Sheet: Leather Golf Gloves

China

1.0 FACTORY 1.1 Capacity utilization 1.2 Installed capacity (piece/day)

Viet Nam

Ethiopia Simulated 70% 1,300 5% 11%

CMT 80% 4,600

85% - 100% 1000 - 2,500 1% - 3%

1.3 Labor absenteeism rate (%) 1.4 Average salary/wage/month 1.5 Skilled 1.6 Unskilled 1.7 Days of operation/month 1.8 Average age of major equipment 2.0 Exported Output (finished primary product) 2.1 Direct Export without consolidator/broker 2.2 Indirect Export Through Local Consolidator 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 3.3 Indirect Sales Through Local Consolidator/Trader 4.0 Unit production cost ($/piece) Global Development Solutions, LLC

$339 - $413 $177 - $251 26 - 28 4-9

380

$ $

93 73 27 10

$ $

114 39 25 4.0

% 20% - 70% %

100% % %

100% % %

% 30% - 80% % $2.4 - $2.5

% % % 0.47 $

% % % 1.95

$

Relatively low labor costs could make golf glove production sing local leather competitive

Figure 68: Simulated Value Chain Diagram for Leather Golf Gloves in Ethiopia Leather Golf Gloves Unit production cost

Ethiopia $ 1.95

Cutting 3.4%

Raw material 56.3%

Leather Raw Materials Labor

Simulated

Decorating 7.8%

100.0% $ $

1.6 0.1

Sewing 15.0%

Labor Raw Material Fuel/oil/ water Other

82 7

Packing 3.7%

Finishing 13.3%

36.3% 56.7% 5.1% 1.9%

Labor Raw Material

Admin OH 0.5%

10.3% 89.7% Global Development Solutions, LLC

Figure 69: Value Chain Diagram for Leather Golf Gloves in China Leather Golf Gloves Unit production cost

China $ 2.39

Cutting 4.2%

Raw material 57.7%

Leather

100.0%

Raw Materials

$

1.9

79

Labor

$

0.4

17

Decorating 7.4%

Sewing 14.8%

Labor 44.9% Raw Materials 47.7% Fuel/oil/ water 4.3% Other 3.1%

Finishing 11.6%

Packing 3.3%

Admin OH 1.0%

Labor 14.4% Raw Materials 85.6% Other 0.0% Global Development Solutions, LLC

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Figure 70: Value Chain Diagram for Leather Golf Gloves in Vietnam Leather Golf Gloves Unit production cost Raw material 0.0%

Labor Raw Materials

Viet Nam $ 0.47

Decorating 6.0%

Cutting 9.0%

$ 0.4 81% $ 0.03 3% Labor

100.0%

Sewing 34.3%

Finishing 37.5%

Packing 8.1%

Admin OH 5.1%

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

Figure 70: Value Chain Diagram for Leather Golf Gloves in Vietnam Leather Golf Gloves Unit production cost Raw material 0.0%

Labor Raw Materials

Viet Nam $ 0.47

Decorating 6.0%

Cutting 9.0%

$ 0.4 81% $ 0.03 3% Labor

100.0%

Sewing 34.3%

Finishing 37.5%

Packing 8.1%

Admin OH 5.1%

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

382

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

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 Simulated CMT $ $ -

$0.4 - $0.9 4.1 Export Rebate* 5.0 Avg Selling Price (US$) 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% 6.2 Product rejection by client 1% - 6% n.a 7.0 Avg Waste & losses: List different types (% of total ) 7.1 Production waste (leather-to-glove) 2% - 4% n.a 7.2 Losses (theft) 3% n.a 8.0 Electricity 8.1 On grid (Cost/kWh) $ 0.15 $ 0.08 8.2 Off grid (Cost/kWh) - self generated na n.a 8.3 % of time off grid/month 0% - 4% % $0.44 - $0.66 $ 0.37 9.0 Water ($/m³ ) $0.88 - $1.00 $ 0.37 10.0 Fuel & Oil ($/liter) 11.0 PRODUCTIVITY & EFFICIENCY 11.1 Labor productivity (leather golf gloves) : Pieces/person/day 10 - 20 10.6 11.2 Electricity usage: On-grid (kWh/1,000 pieces) 98 - 198 237.34 11.3 Electricity usage ($/1,000 pieces) $14 - $29 $ 18.45 11.4 Water usage (m³/1,000 pieces) 8 - 16 7.84 11.5 Water usage ($/1,000 pieces) $3 - $9 $ 2.90 11.6 Fuel & oil usage (liters/1,000 pieces) 11 - 24 29.18 11.7 Fuel & oil usage ($/1,000 pieces) $10 - $21 $ 10.72 11.8 Transport ($/km-ton) $0.22 n.a * 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

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3% 2% 2% 3% $

$ $

0.12 na 3% 0.12 1.92

5.9 119.05 $ 14.22 11.90 $ 1.42 14.88 $ 28.53 na

VIII.12.3.Assumptions for Estimating Producing Leather Golf Gloves

Economic

Feasibility

of

The major factors affecting the feasibility analysis of producing leather gloves are as follows: 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 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 greenfield unit is in order to capture the total capital costs and more fully 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.

384











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 exfactory 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.

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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 Employment (year 3) 150 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 Economic Rate of Return 12% *As su mptions - No chang e in productivity or real exchange rates .


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

386

Feasibility Study of Garment

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