Success Story of Turkish Investors
Interview with AMARE TEKLEMARIAM, Ayka Addis Textiles and Business Group
WIC: What motivated Ayka to invest in Ethiopia?
Amare Teklemariam: The investors had some information about Ethiopia owing to the economic diplomacy promoted by the Ethiopian government. They then travelled to Ethiopia and were able to get first-hand understanding about the investment and business environment in the country as well as the opportunities and the potentials. Comparing those with other countries, they concluded that Ethiopia offered better opportunities and incentives. So the Turkish investors decided to invest in Ethiopia.
WIC: Ayka is reportedly a renowned company in Turkey. How do you rate its investment and international acceptance?
Amare: Ayka Istanbul is a big company and has been in business since 1988. By the time it came to Ethiopia, it had already stood on firm grounds in Turkey. So, it came here as a company with well-cemented experience. It brought with it the kind of expertise, capital and technology it had already managed to acquire in Turkey. It came to Ethiopia with a capability of producing garments for the European market where it proved competitive.
WIC: When and with how much capital did the company start operating in Ethiopia?
Amare: Ayka came to Ethiopia in 2006. It launched physical work right after it acquired land. Its initial capital amounted to 100 million Birr. The amount was not however invested all at once. It was spent phase by phase. Today, the capital of Ayka Addis has reached one billion Birr. There has been an upward trend and this will continue. The prospects of Ayka Addis for growth and prosperity are very high.
WIC: Did the Ethiopian government extend support to your company as it professes to provide incentives to those which engage in producing export goods? If so what form of support did Ayka get during the early days of its formation?
Amare: Manifold were the government support. Capital is among the very basic. In this connection, the government facilitated loan for Ayka at a reasonable interest. Equally important for investment is the availability of land at the desirable location. Similarly the government provided land for Ayka at fair lease price. Yet another consideration is human power. In this regard too, the company was given land at a location easily accessible to the local work force. Beyond these, the government has been supporting the company in the form of tax-related incentives. For instance, Ayka was allowed to import capital goods duty free. Not only this. There is a government scheme introduced to assist investors which manufacture goods for export. The Export Trade Incentive Package offers such incentive as Boarded Warehouse Voucher System, Duty Drawbacks and the like. The package is largely instrumental in enabling the company to export value added products by importing and adding value on them. This indeed encourages foreign companies operating in Ethiopia. Ayka for its part has greatly benefited from this scheme. The company also enjoys the support of the Ethiopian Federal Revenues and Customs Authority. It enjoys a five-year income tax grace period. The government also offers a unique privilege of cost sharing with respect to expatriate employees’ income tax. In this regard, Ayka is yet to make use of the privilege in the future. Being a factory that makes use new technologies, Ayka has to hire expatriate professionals and this will remain the case until such time in the future when the transfer of knowledge and technology will have been realized. Normally, expatriate workers have the obligation to pay tax from their income. In the absence of the cost sharing arrangement, the burden of paying the income tax indirectly falls on the company. Paying such a tax would however negatively affect the company’s international competitiveness because that substantially increases its expenses. The government thus put in place this cost sharing arrangement to support the likes of Ayka.
Another area of government support relates to facilitating the availability of skilled human power. Skilled human resource that can eventually take over from the expatriates is being produced at institutions of higher learning, and vocational and technical training institutes across the county. Such are the fundamental measures aimed at ultimately realizing the knowledge and technology transfer. The transfer will spare the company from spending considerable sums in salaries for the expatriate workers. Such incentives will therefore enable the company to stay in the international market as a competent player by minimizing its costs. So these are the major incentives being provided by the Ethiopian government. Take for example the credit facility, which is an arrangement in which the investor brings in 30 percent of the total investment whereas the remaining 70 per cent is financed in the form of loan to be repaid at a low rate of interest. This, I think, is a huge support!
WIC: Does this mean Ayka brought with it 30 percent of the 100 million Birr you said was its initial capital and obtained the balance on credit from the Development Bank of Ethiopia?
Amare: Not at all. The one hundred million Birr I mentioned accounts for the shares of two Turkish investors and Ayka Istanbul, which they established. That is the shares of these three. Coming to assets, there is 1.6 billion in assets under this company. Of this, one billion is the permitted amount, out of which the paid-up capital amounts to 340 million Birr, whereas the balance is to be raised soon. Currently, a spinning factory is under construction as an expansion project. The same owners I just mentioned own this expansion project. The factory as a whole is owned by them. In such manner, the investors will have reached at the one billion Birr threshold as their paid-up capital.
WIC: The Company entered Ethiopia in 2006. When did it become operational?
Amare: It started work sometime in 2009. The spinning part of the factory was the first to go operational after construction began in 2006. Thus the company was able to commence exporting yarn while the other parts of the factory were still under construction. This continued for some time. The construction and machinery installation of the entire factory was completed in 2009. It was inaugurated in April 2010 by Prime Minister Meles Zenawi. The company then became fully operational.
WIC: What are the export items produced by Ayka Addis?
Amare: Ayka Addis is a vertically integrated factory where production begins at the spinning section, goes on to add value at the knitting, and on to the dyeing, which by the way employs a sophisticated technology that is the first of its kind in sub-Saharan Africa. The dyed fabric then gets tailored at the garments factory. Bed sheets, T-shirts and bodies for men and women are produced. These are more or less the final outputs.
WIC: What inputs do you use for production?
Amare: At the spinning stage we have cotton. It is produced locally. But sometimes customers ask for items made of organic cotton. In the face of such orders, you would be forced to import organic cotton from certified farms. Beyond this, we had another challenge to surmount. The existing spinning section of the factory does not produce the desired amount of yarn for knitting. We were therefore forced to import yarn to make up for the shortfall. This explains why we are establishing additional spinning factory through the ongoing expansion project. Coming to the dyeing stage, the main input is chemical. This causes the country to incur considerable cost as all the chemicals are imported. (I will tell you what this company is planning to do about this problem later.) At the garment section also there are accessories used as inputs. These are buttons and other finishers. But they are not produced locally. And this should be of great concern as it challenges the competitiveness of the textiles sub-sector. Finally, we need packaging materials, most of which are obtain from the local market.
WIC: Would you please elaborate the marketing aspect of this business?
Amare: In investment, erecting factories by itself does not mean anything. Market is the challenge. Fortunately for Ayka, market has not been that challenging. This is because the investors had established market link before they came to Ethiopia. They came here with that market access. This is why Ayka
Addis did not face the kind of market challenge the other industries in Ethiopia face. Ayka Addis exports its products to its long-time customers abroad, and through these it approaches others. Of course, you will be compelled to raise the issue of market when you upgrade and expand and boost your production. The owners have this plan of expanding the garment manufacturing work in the years to come. Ayka then will have to look at the market as an issue. For now, it has maintained the goodwill of its existing customers. About the market destinations, our exports to the Middle East are unfinished products. We supply fabrics to our Middle East customers. Finished garments in various forms and sizes are being exported largely to Europe.
WIC: Now, tell us about the demand side. To what extent are textile products made in Ethiopia in demand in the international market?
Amare: As I tried to point out earlier, the products we are manufacturing here are of same standard as the ones produced in Turkey. Therefore, it is a matter of meeting the standards put forth by customers. This company is meeting that standard. And I don’t think that it will face problem in the future as long as it meets the standards. We are faring well Knowledge and technology transfer are key benefits of foreign direct investments in Ethiopia. Even at this juncture when consumers in Europe is tightening their purses due to the austerity measures, financial crisis and all that. Ayka Addis is planning to export more products this year than last year. Let me give you some figures. The sales of export of Ayka in 2009 amounted to 80 million Birr. This jumped to 286 million Birr in the following year. We did not, of course, produce garments in 2009. Also in 2010, the figure doesn’t show the year-on-year performance because the garment factory began operations in the month of April. In 2011 the export revenue of Ayka stood at more than 850 million Birr. This momentum will continue. The export revenue plan for the year 2012 is 75 million US Dollars.
WIC: How many Ethiopians have you employed? How many expatriates? How effectively is knowledge transfer realized?
Amare: We have about 6,073 employees. There was a point when the figure reached 6,500 due to construction work. As the construction of the additional spinning section of the factory is however nearing completion, the figure has gone down. Of the currently employed, women constitute 74 percent and men about 25.6 percent. There are about 260 expatriates with diverse skills and expertise. To address the last question, we need to have a clearer understanding of the reasons for the government to push for foreign direct investment. In attracting foreign direct investment the country anticipates gains in many ways. If we take those foreign companies manufacturing for export, one of the expected gains is that they help the country secure more foreign currency. The second consideration is knowledge and technology transfer as offshoots from foreign direct investments. The third and most important of all is the creation of employment opportunities for citizens. While the gains are many, these three I think are the major ones. As to the employment aspect, the figure tells it all. There would be no arguing over this. But, the way the knowledge and technology transfer manifests itself is one question to digest. The machinery and equipment Ayka brought in are the most advanced. Though expatriates initially operate these sophisticated machines,
Ethiopians trained in various skills and vocations are assigned to work with these experts, learn the skills and ultimately take over. There are several Ethiopians already promoted to supervisory posts at various departments. The knowledge transfer is thus becoming more concrete, pointing clearly to what the future would look like. I can confidently assert that Ayka Addis, besides manufacturing goods, is producing citizens equipped in new skills. It is supplying skilled citizens to other industries; some leave to be self-employed and others to work for other manufacturers. Many former employees of Ayka Addis are now employed by small or cottage textiles and garments manufacturing factories. This proves how the knowledge transfer in Ayka is benefiting the other companies in the country. Replacing expatriate workers with Ethiopians is also in the plan of action of the owners. Ayka Addis is not established to provide the investors with a ticket to heaven. It is founded for profit making. Therefore, they expect the company to make good use of all the comparative advantages that attracted them in the first place. Cheap labor is one of the comparative advantages in the country. With so many expatriate workers in your payroll, you can’t be competitive. You may be compelled to do so when your company is at its infant stage. But you will need to replace those with the local workforce eventually. In this regard, one of the assignments we in management have been given relates to ensuring the eventual takeover of all works currently left to expatriate experts by Ethiopians. To achieve this, we’ll be keeping keen eyes on fresh graduates from the relevant institutions of learning, employ those who excel and make them work with the expatriates to learn the tricks. That would be a sure way to bring about the desired results in terms of knowledge and technology transfer. And we are working on it.
WIC: How much profit has Ayka Addis managed to secure?
Amare: Profit is unthinkable within such a period. This is a huge investment. Considerable sums go into service deductions. It is indeed off the mark to think of profits within such a short period of time. The good news is the company has managed to operate at least at break-even point as anticipated. This is a great result for such a young company. The big challenge is the investment. It is a huge investment. Nobody anticipates any substantial gain by way of profit within such a short span of time since the factory became operational. But in the long run, it is a big, big business!
WIC: Does this point to the strategic thinking of the investors?
Amare: Of course! The textile industry is undergoing a shift. And they saw that. At this time in Europe you can’t employ workers trained in textile production and compete with your Asian counterparts. Their land is expensive. Labor is expensive. Utilities are expensive. These things you know influence profitability. They have adverse impact. This is why foreign companies are flocking to developing countries. In our country, we are managing the challenges that relate to productivity; we are managing this in such a short time. It will not be long before this company begins to reap what it sowed. And it sowed on fertile grounds.
WIC: As you well know Ethiopia is in the list of beneficiary countries of AGOA. It can therefore send textile products to the U.S and benefit. The year 2015 will mark the end of the second phase of AGOA. Meanwhile, in 2013 Ethiopia is going to host the AGOA Forum. The government of Ethiopia has been pushing for the extension of AGOA beyond 2013. This is expected to be high on the agenda. Textile manufacturers in Ethiopia, including Ayka Addis, do not however seem to have made use of the preferential treatment. Why?
Amare: We believe that Ayka is a big textiles manufacturer. This is our opinion. But from the point of view of our customers, there are many more things Ayka should do to satisfy them. So before going after other markets, we need to fully satisfy the existing customers. At present, we cannot take orders other than those from our existing customers. Furthermore, the company does not want to incur additional cost searching for new markets. Market is not an issue for this company altogether. Besides, this factory caters for a niche market, i.e. for high to middle-class Europeans. This should also be taken into consideration. For now our main concern is meeting the demands and needs of our existing customers. With us it is about maintaining our standard and our quality. Market is not a problem.
WIC: Does such a market environment point to the prospects of the textiles industry in Ethiopia? Does it mean all these textiles manufacturers, including Ayka, are too few to satisfy even part of the global demand for textiles products?
Amare: I think so. It would only be a matter of creating trust among the potential customers. The country should win a good will among foreign markets. They should maintain good will for our products. But this will comes about only through our efforts. We need to deliver quality products as per the orders. We need to deliver on the appointed date. So our work culture should be challenged. Any Ethiopian who works side by side an expatriate would have many things to learn. He would be able to see how they outpace us. He would learn the work culture. I happened to interview some of our workers on this issue, and most of them responded by saying that they envy the dexterities, discipline and diligence of the expatriate workers. There were some young Ethiopians who already began to wonder as to how they could share the work ethic of the expatriates with colleagues. These youngsters will not however stick here for a lifetime.
They may want to establish their own firms. They may want to get employed somewhere else. The operators of today will be managers tomorrow. These are the ones who can really bring about change. In Turkey, they tell us, they faced these challenges some 20 or 30 years ago. They surmounted the challenges through time. In our case, the knowledge and technology transfer has just begun. We need to maintain the momentum.
WIC: What opportunities are there for the expansion of the textiles industry in Ethiopia?
Amare: Initially, the challenge was shortage of cotton that had to be imported. And many began to ask the question: “How can we be importers of cotton in the midst of all these agriculture resources?” Cotton farms expanded as a result. This was followed by the establishment of several ginneries across the country. This was again met by more and more textiles and garments factories. Moreover, the investor should look at the domestic demand. The purchasing power of the people is growing. Thus it would be a business of putting clothes on 80 million people. In both regards, the prospect for the Ethiopian textiles industry to grow is very, very immense. I think the government is right in prioritizing the textiles and leather industries as strategic both for earning export revenues and creating employment. It is a labor intensive trade. This is an auspicious trade because you can retain 6,000 to 7,000 employees with two or so billion Birr capital. It is hugely beneficial.
WIC: What do you think are the advantages and challenges for foreign direct investment in Ethiopia?
Amare: There is no challenge that can come in the way of foreign direct investment in Ethiopia as such. One can raise the issue of logistics, though. Inefficiency in logistics makes it expensive to invest. That is for a fact. Even so, I see a bright future assuming that the now planned government projects would be realized. This is the big challenge so far. Beyond this, there have been many changes and several more are in the pipeline. For example, the government has come up with a draft legislation aimed at overhauling the end-to-end investment procedures. The draft provides for an investment procedure that begins and ends at one spot. It is like a one-stop shopping. You can process all your papers at the investment agency. This would be a great change. It would mean that you can process your land request at the investment agency, the bank process is addressed there, and your issues with the customs authority gets processed there; and also your license and work permit are issued at the same spot. After the endorsement of this amendment proclamation what would remain would be launching a vigorous promotional work. As I see it, the enforcement of the draft proclamation together with promotional work can do magic. But its success hinges on the success of the required promotional work.
WIC: What do you mean by promotional work?
Amare: Word should be spread across the board. There may be investors who came and returned without investing. They are investors considering doing business in Ethiopia. These changes and privileges should therefore be well promoted. A move from fragmented service to a one-stop-shopping is not an easy matter. It would attract the investor. So, potential investors should be informed about the latest development. If only the draft law I just mentioned sees the light of day!
WIC: Why did Ayka begin expansion work within a period of three or so years after its establishment?
Amare: In terms of economy of scale, you can expand the scope of your operations by making use of certain support units. Another issue is maintaining the value adding chain. This expansion work was aunched to put an end to yarn imports. It would keep the other factories from going idle. The investors decided on the expansion work because they put their trust in this country’s investment environment. They made this decision immediately after the inauguration in April, 2010 of the industry. It did not take three or even two years for them to reach the decision. I think the close support of the government and consultations thereof motivated them. The expansion work is nearing completion now. It is a huge one. Top in the company’s plans is taking this expansion project to its final phase in the shortest time possible. Secondly, a request for two manufacturing sites around Addis Ababa has been made by the company. It is planning to establish two more garments factories around Addis Ababa. We plan to launch physical work as soon as we get those sites. On its part, the government is putting in place some incentives aimed at curbing the challenges textiles and leather manufacturing industries are facing in terms of supply of chemicals and dye stuff. There is what is called a Boarded Warehouse Input Scheme. Under this scheme, imported chemicals and dye stuff will be stored at a central warehouse. This warehouse would be managed jointly by the customs authority and the relevant industries. From this warehouse, the industries can easily access the stored inputs in real time. This scheme is meant to support those which engage in textiles and leather manufacturing. If you want to understand how the absence of such a scheme affects the industries, consider our case. Our dye factory alone is expected to have a more than 100 million Birr worth stock at a time. To import such inputs you need to order in bulk; and ordering in bulk means allotting considerable capital. Meanwhile, your customers can’t wait on their orders. You must deliver on the appointed date. On the other hand, chemical import takes up to three months. For some time to come, hence, Ayka Addis will be importing the chemicals from one foreign supplier and store them at its warehouse. Then the relevant industries can come and access the input when they need it. This I think is additional support for the sub-sector. It would save money and time as well as a lot more inconveniences. This, however, is a medium-term plan. The joint venture would not last. Because for the long run Ayka Addis is obliged to establish chemicals and dye stuff manufacturing for supply to industries in the country. The investors have also plans to form a construction company here in Ethiopia. This may not be considered that important and is not related to the main area of investment. It is a practical plan all the same. The factory was constructed entirely with our own capacity. This means the investors imported all the machines employed on the construction. Currently more construction machines and equipment are being imported. This should fulfill the material requirement of the future construction company.
WIC: Anything you want to add?
Amare: As I indicated, the coming of Ayka to Ethiopia has set the example. There may be others who want to come and invest in this country. Yet few foreign investors might have already concluded that Ethiopia was not a place to invest in. The promotional work can go a long way to attracting increased foreign investors to engage in various sectors in Ethiopia. It can reverse the misconception some hold about Ethiopia as an investment destination. What I want to say is such promotional work should focus on tangible things. Seeing is believing. Profiles of the foreign investments in Ethiopia that are succeeding for example could provide a good ground to convince others. In this regard the economic diplomacy should continue with more vigor.
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