Investment: Lower labor costs lure Chinese companies
That accounts for 90 percent of our production,” said Wei Yongquan, general manager at Huajian International Shoe City (Ethiopia) Plc.
One order for high-heeled black sandals, labeled in the US as the fashion brand Guess, had just been completed and was awaiting packaging and shipping.
All of the workers in the busy workshop were local young people.
“We employ 3,300 local people. Their average age is 22,” said Wei.
For Huajian, the major attraction of Ethiopia is its cheap workforce. The average monthly payroll for a worker in Ethiopia is about 300 yuan ($50), compared with 3,000 yuan at its headquarters in Dongguan, Guangdong province.
In addition, because animal husbandry output accounts for 20 percent of Ethiopia’s gross domestic product, Huajian is using 30 percent of the local leather yield every year, which saves 30 percent in the cost of raw materials.
However, being in an inland country lacking transportation networks, the shoemaker has to pay for higher shipping fees.
“In general, we can save 18 percent to 28 percent in costs in Ethiopia compared with China,” Wei said.
“But the Ethiopian factory makes up less than 10 percent of the company’s global production,” he added.
Still, Huajian’s ambition to move all of its manufacturing to Ethiopia will not be that easy. Currently, without skilled workers and high-grade processing methods, local leather can only be used for middle- or low-end products and popular colors and styles.
“Most of our workers have not seen a factory before. It always takes us some time to develop simple skills in them, let alone sophisticated craftsmanship,” Wei said.
Because of a condition banning sales in Ethiopia, Huajian has been granted some support from the local government such as duty-free exports and material imports for five years.
Of course, on the other side, Ethiopia is welcoming such investment because it is in urgent need of more foreign currency earnings and job opportunities.
However, for Lifan and Eastern Steel, which are selling in the Ethiopian market, things are more complicated.
High tariffs and expensive transportation are heavy burdens, and their investments are more cautious.
“The policy is not very favorable in terms of high import tariffs and consumption taxes,” said Yin Tianjun, director of Lifan’s Ethiopian factory.
Lifan is shipping equipment and parts from China, and workers in Ethiopia just do the assembly work.
Lifan can sell 1,000 automobiles in Ethiopia every year. It is hiring 200 local workers who assemble seven cars every day.
Nevertheless, the lower cost of labor is offset by high duties. The price of a Lifan car is almost triple the price in China.
Faced with a squeezed Chinese automobile market dominated by overseas brands, Lifan entered Ethiopia in 2009. It is positioned as a middle-end brand, in order to attract the rising number of local family car buyers.
“We cannot compete with brands such as Toyota in terms of quality and price. But they just export finished vehicles here, while we focus on the Ethiopian market,” said Yin.
Based on Lifan’s current sales in Ethiopia, it is planning to make a trial in shifting several production lines to the country.
If things go well, Yin said they are expected to improve output to 5,000 vehicles annually in five years.
“We hope to expand into neighboring markets with the development of railways and highways,” said Yin.
In a move to combat overcapacity in the domestic market, Jiangsu- based Eastern Steel invested more than 100 million yuan in setting up a factory in the zone, which was launched in October.
“Our productivity is almost five times compared with local makers. Still, we have to pay 5,000 yuan in duties and fees for 1 ton of imported materials,” said Miao Wenwei.
The development of the industrial zone, which recruits 4,000 local people, was expected to be faster.
“We have been talking with the local government for seven years about an exemption in income tax lasting four years. We hope to get formal approval within two months,” said Qian Guoqing, deputy managing director of the Eastern Industry Zone Administrative Committee.
With an investment of $80 million, the first phase of the zone is equipped with basic operating resources, including water, electricity, communications and roads.
Qian said they are planning to start construction of the second phase. “But we are worrying about funding because it is difficult for us to find loans in this country,” he added.
At the root of the issue is a long-running debate about how many more industries the Ethiopian government will open up and how much effort it should make to facilitate transportation to spur the economy and appeal for more investment.
Chen Guangzhe, country director for the Ethiopia Africa Region at the World Bank, said although the labor costs in Ethiopia are very low, labor costs account for only about 30 percent of a Chinese producer’s total costs.
“Despite giving more information to Chinese investors about local business opportunities and policies, Ethiopia should further improve its investment environment and try its best to lower the price of logistics,” said Chen. Contact the writer at yaojing@ chinadaily.com.cn