25 October 2016

Ethiopia: Untangling Ethiopia's Export Mixed Bag

column

Ethiopia has around 128 destinations for its exports, which can be classified into three major categories:

Agriculture constitutes 74.5pc of the total export earnings, with 2.2 Billion dollars earned in the 2014/15 budget year; Manufacturing, which is dominated by leather and leather products, comes next, followed by the textile sector, earning 263 and 97 million dollars, respectively, in 2014/15; next is the mining industry, with 362 million dollars earned in the same year, primarily from gold (338.2 million dollars) and tantalum (10 million dollars).

The country has implemented several export promotion tools, such as tax exemption on raw materials used for export products, duty exemption, duty drawback schemes, a voucher scheme and a bonded manufacturing warehouse scheme. But still performance lags behind the government's plans. What are the missing links in the chain?

Most of Ethiopia's export commodities have increasing world demand. But reliance on these commodities, which in return are highly reliant on rain-dependent agriculture, bears its own risks. Agricultural product exporters are vulnerable to price volatility in the international market. For instance, Chinese demand for the Humera type sesame seeds has shown a decline. The same kind of variety showed a 60pc price decline also. Most of the exporters are trying to make sure that they at least break even.

Despite global commodity price falls, the exporters face a lot of other obstacles too. From getting an export license to arbitrating with a defaulting buyer, the challenges are countless.

Firstly, the export landscape favours the already established businesses. This can be illustrated by the following figures: sixty-one exporters, or just three percent, are active exporters (which have exported at least once a year), making 54pc (1.6 Billion dollars) of the country's export earnings. These exporters are well established and are in fact the darlings of financial institutions, as well as other incumbent government offices.

It is difficult for a newcomer to enter the export sector. For instance, an exporter with a confirmed Irrevocable Letter of Credit (LC) from its buyer can't access a pre-shipment loan unless he has previous experience of over 300,000 dollars in successful exports or a collateralised property as a guarantee. It also takes on average of six months to secure export finance. Sometimes, the LC expires before the banks avail the pre-shipment loan.

Apart from accessing markets and finance, quality is also the missing link in the overall value chain. For instance, pulses exporters complain about farmers' carelessness to do the utmost post-harvest care.

Harvesting care is limited, which makes their sorting and grading costs higher, as it is important to do the sorting repeatedly. Due to the mishandling by farmers, infestation is also prominent. Additionally, meeting buyers' requirements is sometimes hardly possible. For instance, the chickpea buyers from India and Pakistan are mostly looking for 7mm Kabuli variety, but Ethiopia produces lower sized chickpeas that fetch a lower price.

Another important issue is quality certification. Quality inspection is made by local firms and exporters complain about the long process to acquire the appropriate certificates. It takes an average of 10 days to secure quality inspection certificates.

Although exporters are playing the blame game on farmers, the former and its allies also exploits the latter, both directly and indirectly. Smallholder farmers are exploited by middlemen and other cartels. For obvious reasons, brokers don't have an interest in the long term development of the market and yet they dominate the marketing channels.

Their exploitative role can be characterised by unreliability, poor prices and disorganised local marketing structures, with a strategy pertinently affecting the livelihoods of smallholder farmers. With this regard, cooperatives can enable farmers to avoid the exploitation from unsolicited value chains and unbalanced payment structures. The ECX might have structured the market of some of the crops, but the unlisted crops still benefit the mightiest.

Local transport is reasonable, but transport from anywhere to Djibouti is expensive. This is partly because of the long queue a the Djibouti Port, which takes more time for the transporters to unload and issue bills of lading and related documents - hence the higher price. Most likely, the new railway network to Djibouti, coupled with the expansion of the Modjo dry port, and the multi-modal system will alleviate the problem.

Ethiopian export products need value addition, and exporters need to understand the importance of branding, processing and strategic thinking. Government, on its part, needs to make sure that the ease of doing business and access to finance, coupled with trade facility, are in place.

The buzzword, which is not buzzing in the sector, is the value addition myth. It is believed that agriculture can be the foremost input supplier to the nascent manufacturing sector. Ethiopia's nascent manufacturing industry has instantly shown growth. Leather and footwear industries have also attracted a significant amount of Foreign Direct Investment (FDI). Companies, such as the Huajian, the Chinese shoe company, and George Shoes from Taiwan are such examples.

Despite the abundant agricultural resources, which are undifferentiated, unbranded and unprocessed, they require diversification and value addition in return. Yet, some value addition efforts don't seem viable.

For instance, coffee constitutes 35pc of the export sector, earning a total of 2.23 billion dollars. Most European buyers prefer to buy the washed and/or sundried green beans, rather than the processed coffee, which makes value addition barely possible. A lot of well-established European coffee makers blend different varieties and develop their own brand. For instance, blending Brazilian Robusta Coffee with Ethiopian Arabica coffee is common.

In the blending process, the coffee makers offset the high priced Arabica coffee with the lower priced Robusta coffee. They use Ethiopian coffee as a spice. The consumers in this area are used to these branded coffees, which makes entry for Ethiopian blenders (if any) difficult.

The absence of the art and science of blending different varieties of coffee, coupled with the buyers' intention of avoiding import duty on processed Ethiopian coffee, makes value addition unviable. Buyers prefer to buy green beans because the import duty on processed coffee is higher.

Additionally, the roasting of the coffee has to be done near the consumption area, which makes exporting roasted and ground coffee unviable. But value addition is viable for spice exporters. For instance, the Volvo and Delvo type of Indian ginger, which are also grown in Ethiopia, can enable one to get more oil than the Nigerian fresh ginger. Other than this, sesame value addition also presents an opportunity. Ambasel Trading House does the hauling, roasting and sorting. Oil extraction is also another interesting and lucrative business.

But still, branding has its way of grabbing a buyer's attention. This requires exporters to understand and invest in telling their story smartly. For instance, Sole Rebels and Little Gabis have a good understanding of what branding does for their business. These companies managed to find a way to tell their buyers how their products are produced in a non-polluting production environment, without exploiting children or adult labour, using appropriate resources that have little or no impact on the environment, changing the lives of many through the provision of decent jobs.

Some exporters don't even own a website. Ethiopian exporters lack the understanding of the benefit of branding their products. They don't know or care how to fit into the international market. In fact, the government also needs to invest a lot in terms of building the good image of exportable products.

In conclusion, the ease of doing business favours the established big companies - hence the need to take measures to ease doing business for new and local entrants. Ethiopia lags behind other countries in terms of starting a business, protecting investors and trading across borders.

New entrants are mostly encouraged by confirmed orders, which can easily mature i to successful sales given that the opportunity to finance their exports or availing easy trade facilitation can change the export figures positively. Branding, value addition, certification, and diversification are the only way Ethiopian exporters can disrupt the markets.

For smaller firms, it is advisable to start small, use trial and error, and increase the export volume over time. Thus, losses from potentially uncompetitive products can be avoided. Exporting single varieties and insignificant volumes allows a firm to test the credibility of foreign partners or the suitability of their products in the export market, and the volume of exports can grow over time.

Ethiopian exporters lack strategic thinking, while export performance and strategy are highly related. Managerial experience, such as the owner or manager, as well as marketing strategy, organisational structure, product and market diversification, and resources, knowing where to export, how to export, and how to enter the foreign market require a sound understanding of the particular market and its requirements.

Wondwossen W. Mebrathe Is an Mba Student At the Netherlands Business School

Ethiopia

Political Uncertainty As Protests Spread in Ethiopia

At least 15 people were killed on December 11, 2017, when members of the Ethiopian Defense Force fired on peaceful… Read more »

Copyright © 2016 Addis Fortune. All rights reserved. Distributed by AllAfrica Global Media (allAfrica.com). To contact the copyright holder directly for corrections — or for permission to republish or make other authorized use of this material, click here.

AllAfrica publishes around 900 reports a day from more than 140 news organizations and over 500 other institutions and individuals, representing a diversity of positions on every topic. We publish news and views ranging from vigorous opponents of governments to government publications and spokespersons. Publishers named above each report are responsible for their own content, which AllAfrica does not have the legal right to edit or correct.

Articles and commentaries that identify allAfrica.com as the publisher are produced or commissioned by AllAfrica. To address comments or complaints, please Contact us.