Written by Brian Burrell - Horizon Ethiopia Staff Writer
Sunday, 21 September 2008
Despite the commendable growth in exports that Ethiopia has shown in the past 5 years or so, there is certainly much more to be done yet. What’s more, Ethiopia is capable of growing exports at a much faster rate than currently and the impediments to doing so are eminently surmountable in the not too distant timeframe. Certainly there are the standard culprits like the lack of sophisticated packaging, dearth of funding for trade finance or capital investments to help producers increase capacity and quality as well as the difficulty of establishing strong business linkages to their market targets amongst others. But there are also some obstacles that have little to do with buyers, financiers or anything else for that matter external to a given producer.
It’s All About Margins
One of the biggest challenges facing Ethiopia’s export sector may actually be the one that is least talked about. And that is the seemingly inexplicable reluctance of a good many producers to export their products abroad. Why you say? It is certainly a curious question but one for which there is not only an answer but a fairly compelling one to boot that will have to be resolved in order to really get many of Ethiopia’s top producers to embrace exports. Rumor has it that Ikea (a company which has attempted on multiple occasions to source a variety of products from Ethiopia and does purchase textiles and apparel from at least one exporter) once approached a candle manufacturer in Ethiopia to propose a sourcing arrangement that would have the manufacturer exporting a quantity of candles to the Swedish retail giant that would be several times its existing capacity.
After some heartache, the manufacturer eventually refused. Upon being asked to explain the inexplicable, the manufacturer explained that in order to fulfill Ikea’s request, it would have had to raise several million dollars in debt to finance the requisite capacity expansion and that the margins on such a deal (about 3-4%) would be dramatically lower than what the local market pays for its products (margins as high as 40-60%). Further, the length of the Ikea contract would not necessarily allow the manufacturer to make enough money off of the sizable expansion in order to justify the risk. Not a bad argument. And once again, more of a problem in Ethiopia than most realize. The critical flaw in it however, is that it does not take a bigger picture into account that considers the attendant impacts of globalization. In other cases, some producers have again looked into the prospects of exporting to Western markets in particular and have similarly declined to do so saying they could not compete with exporters from countries such as China, Indonesia and other countries where it seems like exports have been made into an art form.
The Global Marketplace Begins Here
The free market system in today’s Ethiopia is an imperfect one at best. It does not exhibit some of the most important functions that a ‘free market’ should embody particularly in regards to market transparency without which the major determinants of supply and demand have effects that are much reduced than what they should be. Indeed, in some cases producers or retailers can simply hike up the price on a particular product and gain at least a short term benefit since buyers will not perceive a better alternative given that information is a good that is in scarce supply in Ethiopia. Witness over the past year or so the dramatic and inexplicable price escalations observed first for berbere and more recently for salt. Lack of information and more fundamentally, an underdeveloped market system is what enables such aberrations to take place intentional or otherwise. It is precisely this that allows some domestic producers to extract exorbitant margins from their products. And given how generous these margins can be, small wonder they are reluctant to export their goods at much lower prices exacted due to the much more efficient and transparent markets, global competition occurs on. But the problem with this line of thinking is that they are fooling themselves if they think the domestic market itself will forever remain their sole domain. Apparel and footwear are perfect examples of this as the domestic market for both is currently flooded with products from China at price points Ethiopian producers were not prepared to meet at least initially and in fact a number went out of business because of this.
The moral of this story is that all Ethiopian producers must understand that the global market won’t necessarily wait for them to approach it – it may in fact approach them and if they are not ready to compete with the very best competitors in the world, then they will suffer the consequences. Being competitive enough to export then, is not simply about a growth strategy, it may also be about survival in a world which is increasingly without boundaries when it comes to business.
