Trip Report Ethiopia 13 16 June 2017 Rudolf Pretorius James Henry Country review The Federal Democratic Republic of Ethiopia is located in the Horn of Africa. With over 100 million inhabitants, Ethiopia is the worlds most populous land locked country and the second most populous in Africa behind Nigeria. It occupies 1.1 million square kilometres and has Addis Ababa as its capital and largest city. It is widely considered as the region were modern humans first set out for the Middle East. Tracing its roots back to the 2 nd millennium BC, Ethiopia has been a monarchy for most of its history. Ethiopia is unique in Africa for many reasons. Ethiopia is home to Ethiopic one of the oldest alphabets still in use. The Ethiopian Calendar was developed in and only used by Ethiopia and Eretria, it runs approximately 7 years and 3 months behind the Gregorian calendar. Time in Ethiopia is counted differently from Western countries. Ethiopia uses a 12-hour clock, with their day starting at 6 AM (when the sun rises) instead of at 12 AM. Ethiopia is the place of origin of the Coffee bean and is the biggest exporter on the continent. It is the only African country to have never been colonized. Ethiopia managed this by defeating Italy to retain its sovereignty in the 19 th centaury Scramble for Africa. As Ethiopia avoided colonization, it has developed in relative isolation with no ties to any modernised western countries. This, along with its long recorded history and strong culture, has created a country that is unique on the African continent. There is a strong sense of pride among the people. This is evident when looking at the neatly ploughed fields of subsistence farmers, the spotless and well maintained homes in rural areas (which are made from rock and timber), the lack of litter across the country, streets which are swept daily and the pride Ethiopians have when describing their history with remarkable accuracy. This is where Ethiopia tends to
differ from other African countries, it appears orderly, structured and planned. The development in Addis Ababa does not seem haphazard, but rather the implementation of a long-term plan to build a world-class environment with infrastructure comparable to western cities. The recent planting of thousands of Jacaranda tree saplings that line the streets of Addis Ababa pay testament to the long term view of uplifting the country. Financial review The African continent is increasingly viewed as having the strongest overall investment potential of all global emerging markets despite continual challenges. The African economic growth story is one that continues to make headlines throughout the business community due to a young and rapidly growing population, improved infrastructure, growing middle class and shifts towards democracy. Opportunities are no longer solely based on Africa s natural resources, but on providing products and services to up and coming businesses and a young and rapidly growing population. Ethiopia is one of Africa s fastest growing economies. According to the World Bank Ethiopia s GDP has expanded at an average of 10.4% per year between 2007 and 2016. Ethiopia is coming off a low base and is playing catch up with more developed African and global economies. Ethiopia is forecast to maintain a GDP growth rate in excess of 8% per year up to 2021. This is the fastest growth predicted on the African continent. Significant contributing factors to this growth are Growth and Transformation Plans (GTP) 1 and 2. GTP 1 was a national 5-year plan created by the Ethiopian government to achieve GDP growth of between 11% and 15% per year for the period 2010-2015. GTP 1 outlined a number of goals including quadrupling power generation, renewing focus on natural resource and raw material industries, seeking investments in renewable energy projects and improving infrastructure in industrial zones. Following the success of GTP 1 the Ethiopian government has begun implementing GTP 2, the objective of GTP 2 is to realize Ethiopia s goal of becoming a lower middle-income country by 2025. In order to achieve this the focus will be on maintaining the growth and development achieved through GTP 1, enhance transformation of the domestic private sector, build capacity for domestic
construction and manage on going urbanization to sustain rapid growth. The Ethiopian government are encouraging large scale foreign investment, particularly into the agricultural and industrial sectors. Chinese capital has flowed heavily into Ethiopia. A number of Chinese construction companies are involved in developments throughout Ethiopia. This is includes the new terminal at the Addis Ababa International Airport. At the time of visit $1 was worth Birr 23.5. The Birr was pegged to the US Dollar prior to 1993. Since the Birr has floated it has depreciated steadily against the US Dollar. However, the Birr has remained relatively stable, especially in comparison to other African currencies, this is due to a conservative monetary policy and considerable foreign exchange reserves. Exchange controls are strict in Ethiopia, however, foreign exchange is easier to obtain than in many other African states. Based on the success of GTP 1 and up skilling of the population, it would appear that the Ethiopia has the potential to continue on its high growth path. Political Review The Ethiopian government, (Ethiopian People s Revolutionary Democratic Front (EPRDF), follows a social and economic model similar to that pioneered by China and Malaysia rather than western Liberal democracy. They place higher importance on capitalism and growth rather than a completely free and democratic society and have been accused of interfering in elections. The government controls the local media and have on occasions shut down social media and Internet connectivity in the country when opposition voices get too loud. This has resulted in Ethiopia being a de facto one party state. However, this model has been extremely successful in creating growth and development and there is sufficient evidence to suggest this model will remain in place for the foreseeable future. The long-term effects of this model are difficult to forecast. The feeling on the ground is that the vast majority of people of are pleased with the current government due to the rapid growth and high level of construction and development taking place. The government own and operate Ethiopian Airlines and the Commercial
Bank of Ethiopia, both are highly successful and well managed and among the most profitable companies in their respective industries in Africa. Based on the success the GTP 1 and 2 Ethiopia appears politically stable for the foreseeable future. Companies Visited Bluebird Holdings (BBH): One of the fastest growing consumer goods companies in Ethiopia. They produce pasta, biscuits, soap, detergent, edible oils and confectionary items (see picture 1). BBH appears well positioned in the market to capitalize on the rapid growth in demand for Fast Moving Consumer Goods (FMCGs) with an addressable market of over 25 million Ethiopians. With a highly fragmented market and no clear market leader there is an opportunity for a well-capitalized player to take the market lead by strengthening management, creating a strong brand, providing expansion capital and a strong corporate culture. The various plants visited have modern, imported processing machinary and a new edible oil plant is being constructed (see pictures 2, 3 and 4). While visiting local stores in Addis Ababa, BBH products were largely absent from the shelves. This presents an opportunity to expand the brands into new areas and stores. Focus needs to be placed on marketing and brand differentiation to create a unique looking local brand that provides both quality and consistency in their products. Etete Dairy Products (EDP): Produces milk, cheese and yogurt. Developing the dairy industry is a priority for the government and is part of GTP 2. Ethiopia has the largest livestock population in Africa, of which approximately 56 million are cattle while 11.6 million are dairy cows. Despite the potential, Ethiopia has one of the lowest milk consumption rates in the world at 23.4 litres per year per capita. Kenya s per capita milk consumption is 120 litres per year. This is partly due to the poor genetic makeup of Ethiopian cattle; indigenous breeds (which make up 97% of the heard) produce on average 1-2 litres per day, while locally crossbred dairy cows manage 6-15 litres per day. Efforts are underway to increase the productivity of the cows through crossbreeding local cattle with exotic, high milk producing cattle. The Etete plant is modern and well maintained (see pictures 5 and 6). It has the capacity to receive and process 60,000l of milk per day. However, due to the
limited supply and bottlenecks in the production process, the plant is currently processing 12,000l per day. Etete has implemented various initiatives with farmers to assist in improving their efficiency in return for off take agreements. These initiatives include subsidies, supplying feed, assisting in animal healthcare and improving the techniques of the local farmers. Etete appears to be the only dairy plant investing in long-term relationships with farmers to ensure a steady and quality supply. Etete are planning to improve their branding to capture market share in a very congested market. Their existing product does not significantly differentiate itself when viewed alongside its competition (see picture 7). Etete are also developing new, high margin products, which include flavoured yoghurt. The yogurt being developed is far superior in taste and texture to other local yogurts. By increasing their supply and reducing bottlenecks Etete has the ability to ramp up production volumes to the level of the bigger plants in Ethiopia. Aqua Safe (AS): Fast growing producer of bottled and sachet water. The high quality, all natural water is drawn from boreholes and packed at the source in the Ethiopian Highlands utilizing a modern, imported plant (see pictures 8, and 9). The bottling plant pumps and bottles 14,000l per hour and the sachet plant, which is on a separate site, processes 12,000l per hour. The sachet plant is not running at full capacity due to the sachets being relatively new to Ethiopia and AS are still testing the market before ramping production. AS also has space to grow as the new sachet line occupies around one third of the space available in the new facility (see picture 10). As with most FMCGs in Ethiopia the bottle water industry is highly congested with over 50 different suppliers. AS is undertaking a major rebranding initiative and fleet expansion to attempt to become the leader in the market through product differentiation and wider distribution. AS does not stand out when viewed alongside its competitors (see picture 11). However, with the rebranding, new sachet offering and new bottle coming online AS is well positioned to exploit the rapidly growing consumer demand. Addis Pharmaceutical Factory (APF): The largest pharmaceutical producer in Ethiopia, with an approx. 40-45% market share. The Ethiopian pharmaceutical sector is expected to grow at a rate of 15% per year over the next few years vs 10%
growth in the African pharmaceutical sector. The Ethiopian government prioritizes and protects local manufactures, this gives APF a distinct advantage over large, established, foreign companies looking to supply the Ethiopian Pharmaceutical market. Due to the large capital outlay and time required to establish a new plant (approx. 3-4 years), there is minimal competition to APF in the short term. The majority of APF s products are sold into the tender market run by the government, this coupled with the demand from the private market, means most of what is produced is sold immediately. APF have limited stock on hand and need to increase production capacity, inventory planning and build an inventory of completed products to supply urgent requests from the government, which they are currently unable to do. APF has begun construction on an additional facility to improve their production capacity and available product lines (see pictures 12). The new facilities will be in production by October 2018. The existing plant is modern and well maintained (see pictures 13 and 14). APF are aiming to become WHO approved within the next two years, to achieve this they need to improve existing processes and quality. Management is confident that they are on course to achieve this goal. Under new, experienced management APF is well positioned to enhance its dominant position in Ethiopia. Summary Africa s growth story looks well set to continue and Ethiopia will be at the heart of this growth. Ethiopia s growth plan is different to its continental neighbours, its orderly, planned and implemented by a government who have a clear vision and end goal of making Ethiopia a lower-middle income country by 2025. Ethiopia s development in relative isolation has created a unique culture and people. Ethiopians are proud of their heritage and their country and are highly motivated to make Ethiopia a successful nation. The booming population, urban migration and growing middle class will drive up the demand for all consumer goods and services. There are opportunities for early movers into the Ethiopian economy to take advantage of the rapid growth and become industry leaders in a highly fragmented market.
Picture 1: BBH Products Picture 2: Imported milling equipment at pasta production plant Picture 3: Existing edible oil processing plant Picture 4: New edible oil production facility
Picture 5: Receiving milk into the production line at Etete Picture 6: Modern dairy production facility at Etete Picture 7: Etete milk sachets next to competition
Picture 8: Aerial view of Aqua Safe plant Picture 9: Modern sachet filling equipment at Aqua Safe Picture 10: New water sachet facility has room for expansion
Picture 11: Bottled water market is highly congested. Aqua Safe needs to rebrand in order to gain market share, as current bottle does not stand out among competitors Picture 12: New factory being built at APF Picture 13: Modern production facility at APF
Picture 14: Rudolf inspecting the finished product at APF