Market and Sector Strategies

1. 1

2. Leather and Livestock
Sector Strategy
March 2017
22

3. Table of Contents
1. Sector Overview
2. Opportunities
3. Constraints
4. LAL Vision & Strategy
Annexes
3

4. 1. Sector Overview
2. Opportunities
3. Constraints
4. LAL Vision & Strategy
Annexes
4

5. 1. Sector Overview
Leather and livestock, strategic to the Ethiopian
economy, is the leading manufacturing export sector
Export earnings USD millions
The sector has experienced more than 150% growth
in export earnings in the past 5 years
(from $56 million to $133 million)
Source: ELIDI (July 2016); MoI (July 2016) 5
Leather is the top
manufacturing export product
Government priority
A strategic sector for the Ethiopian economy:
 Export target (GTPII) of USD 800 million by 2020
 Employment targets of 59,580 2020
-
20,000
40,000
60,000
80,000
100,000
120,000
140,000
2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16
Crust Leather Finished Leather Footwear
L. GG L. Glove Total
Leather,
30%
Meat and
milk, 26%
Textile , 21%
Food and
Beverage,
11%
Chemical &
construction
5%
Others, 6%

6. 1. Sector Overview
The US and China are Ethiopia’s main export markets,
while the domestic market is also lucrative
6
China
USA
Hong KongItaly
Djibouti
Thailand
Kenya
India
Somalia
UK
Others
The US is mainly importing leather products,
while China is importing leather
Ethiopia is importing leather products worth
US$180 million, and this is growing
0
50,000
100,000
150,000
200,000
2010 2011 2012 2013 2014
Total Leather Leather GGG Shoe
$0
$20
Price per pair of footware
The domestic market price is
100% more than export market
Source: UN Comtrade Database (2016): http://comtrade.un.org/data/

7. 1. Sector Overview
Ethiopia’s potential as a sourcing hub for leather and
leather products is largely untapped
Source: Mascianà (2015) 7
100%
1.22 %
0.13 %
Total
Africa
Ethiopia
The world market of leather and leather products is
US$86 billion, of which Ethiopia is contributing only
0.13%
-
20
40
60
80
100
120
Livestock RHS
Ethiopia has 3% of the world’s livestock population and
1.5% of raw hides and skins (RHS) supply

8. 1. Sector Overview
Growth in the sector creates jobs for women and
increases income opportunities for farmers and small
traders
Meskerem, a 24 year old mother, is a line supervisor at
New Wing Addis shoe factory.
New Wing Addis is a Chinese company focused on the
export shoes market. Meskerem started working with New
Wing three years ago after she completed high school.
After receiving 15 days of training, she was transferred to
join the stitching line of production. Soon after taking this
role, she was promoted to assistant supervisor and
supervisor. Meskerem’s salary has quadrupled since she
joined the factory and is now making ETB 2,000 / month.
Meskerem plans to learn and build her career
in the shoe making industry.
Employment
for 17,000 people in tanneries and
factories; 51% are women.
Out of this, a cluster of 1,000 small and
medium enterprises (SMEs) employ about
5,000 workers.
Income source
for 10 million livestock holders, an income
source for sales of milk, meat and skin.
Source: LIDI (2014) 8
Income source
for 10,000 small RHS collectors / traders.

9. 1. Sector Overview
2. Opportunities
3. Constraints
4. LAL Vision & Strategy
Annexes
9

10. 2. Opportunities
Foreign Direct Investment is flowing to the
manufacturing and leather sector
Source: BPC (2016)
Manufacturing accounts for
70% of the total Foreign Direct Investment
(FDI) in Ethiopia
10
Large FDI in the leather industry
 Chinese Huajian Group
started producing shoes for the US
market in 2012. The plant is based in
Dukem, 30km southwest of Addis
Ababa. Huajian plans to reach US$4
billion export from Ethiopia within ten
years.
 Hiroki Co. Ltd
recently announced that it is setting up
a manufacturing operation in Ethiopia.
It will produce shoes and other luxury
accessories made from leather.
 George Shoes
is a Taiwanese shoe company that
started operations in 2014. The
company has a production capacity of
4,000 pairs per day.
Total FDI investment in leather from 1992 to 2014
amounts to US$180 million
-
500
1,000
1,500
2,000
2,500
2012/13 2013/14 2014/15
Foreign Direct Investment (net) in Millions of USD
Manufacturing FDI (70% of total FDI)


11. 2. Opportunities
Ethiopia has an abundance of quality raw materials for
leather manufacturing
11
Ethiopian livestock population (million)
56
26.5 25
Cattle Goat Sheep
The livestock population of Ethiopia contributes to
nearly 3% of the global stock
Ethiopia has been moving away from exports of raw hides and skins towards
increased value-added products like finished leather
-
50,000
100,000
150,000
200,000
250,000
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Ethiopia Kenya Egypt Tunisia
Export performance of selected African economies in raw hide and skin.
Total Raw hides and skins exports of selected countries (USD thousands)
Ethiopia is moving away from raw hides and skins (semi-processed export)
• Two types of skins from Ethiopia result in some of the
finest leather in the world: Bati and Selallie.
• The 7.12% off take rate for cattle is below the African
average (12.71%) and world average (20.31%). This
higher off take rate will lead to increased RHS supply.
• The increased value addition in country, with the 150%
export tax (since 2012) on semi-processed leather,
ensures availability of leather for leather products.
Source: ITC; Comtrade data (as cited in BPC (2016))

12. 2. Opportunities
Ethiopia has preferential trade agreements with key
international markets
Access to regional markets through
membership of
Common Market for Eastern and
Southern Africa (COMESA)
The African Growth and
Opportunity Act (AGOA)
offers market access privilege
to the US
Everything but Arms (EBA) of the EU
offer market access privilege
Duty free and quota free (DFQF)
privilege extended by international
markets of China, India, Japan & Korea
12

13. 2. Opportunities
Ethiopia’s competitive advantage includes competitive
wages, factor costs and abundant young labour force
13
Figure 10: Population distribution by age in Ethiopia
Age
Gender 0-14
years
15-24
years
25-54
years
55-64
years
65
years+
Male 21376243 9557462 14023218 1826602 1242171
Female 21308454 9692275 14176263 19191212 1511558
Total 42684697 19249737 28199481 21017814 2753729
Source: CIA Fact book
pia has no predetermined minimum wage, and the minimum wages in practice is much
han other countries, and many folds less than some major textile and apparel
facturing countries. Other cost factors of production like energy cost, water cost, land
g rate, corporate tax etc. are much less than other countries.
Figure 11: Wage rate distribution in global garments industry
Source: Business Opportunity Report Ethiopia – Textile and Apparel Industry, 2014
Figure 12: Energy consumption in global garments industry
Source: Business Opportunity Report Ethiopia – Textile and Apparel Industry, 2014
Table 6: Cost Factors of Production among various RMG exporting countries
Population distribution by age
Energy Costs KW/Hour in USD
Source: Innovision (2016); CIA Factbook (2016)
Abundant young labour force:
96 million people of which 45% are working age
and 40% are below 15 years
Wage rate distribution in global garments
Male Female

14. 2. Opportunities
Ethiopia has conducive industry incentives, and
including industrial parks
14
11 industrial parks (IPs)
are under construction or planned
The Government’s plan for
the leather industry
 Leather tannery village on
100 hectares of plot in Mojo
town
 Livestock and leather
processing IP in Dire Dawa
 Bole Lemi extension for
apparel and leather products
Leather Park
Mojo
Livestock and
Leather IP
Bole Lemi
extension

15. 1. Sector Overview
2. Opportunities
3. Constraints
4. LAL Vision & Strategy
Annexes
15

16. 3. Constraints
In-spite of such opportunities, growth is not optimal,
due to differing and low capacity utilization of firms
16
0%
20%
40%
60%
80%
100%
120%
RHS Prodn. RHS Supply Tanning
Inputs
Wet end Crust Semi
Finsishing
Proper
Finishing
Accessaries DD by LP SS to LP
Capacity utilization at different stages of leather processing
Source: Enterprise Partners (2015) – Input Market Study

17. 3. Constraints
Underutilization is a symptom, with constraints across
different markets
Please see Annex for LAL Sector Profile and Core Market Constraints and Opportunities
Livestock
Market
Raw Hides and Skins
Market
Tanning
Market
 High incidence of diseases and death from illness, leading to poor
supply of quality hides and skins to the value chain
 Poor quality of formal slaughtering services, leading to poor
supply of quality raw hides and skins to tanneries
 Low finishing capacity, leading to low supply of finished leather
to leather products factories
Leather Product
Market
 Lack of technical/marketing capacity to respond to international
buyers’ requirements
17

18. 1. Sector Overview
2. Opportunities
3. Constraints
4. LAL Vision & Strategy
Annexes
18

19.  Generate 60 million GBP new
investments
 Create decent job opportunities for
12,000 Ethiopians (75% women)
4. Vision & Strategy
Increased leather products exports resulting in decent
jobs and income opportunities
Please see Annex for Theory of Change
High-value leather products exports from quality FDI and Ethiopian manufacturing firms who are
globally competitive, with a high-level of in-country value addition, resulting in decent factory job
creation and income opportunities for farmers and traders
Increased quality FDI Increased local investment
Increased supply of quality
finished leather and RHS
Increased efficiency &
optimization in manufacturing
Technology transfer and skills
Business linkages
 US$1.2 billion new
investment financing
 US$800 million export by
2020
 58,089 job opportunities
by the end of 2020
19

20. 4. Vision & Strategy
To achieve this vision, EP has a complimentary strategy
for key markets
Livestock
Market
RHS
Market
Tanning
Market
Leather Product
Market
Increase health of livestock
Improved formal slaughtering
Increase finishing capacity of tanneries
Increase exports by improving factory capacity
utilization and finding new markets with
increased FDI
Quality RHS supply
Quality RHS supply
to tanners
Suitable quality and
quantity of finished
leather supply
More value addition
in Ethiopia and
increased exports
MARKET STRATEGY OUTCOME
20

21. 4. Vision & Strategy
To stimulate growth in leather products and RHS
markets, the tanning market will be addressed first
Tanning
Leather
Product
RHS
.Key linkages and considerations:
 Improving formal slaughter
houses to bring more RHS to
tanneries  However
tanneries do not have capacity
to process it.
 Factories have unused capacity
 Improving capacity is
subject to supply of finished
leather from tanneries.
 Improve finishing capacity of
tanneries  Enable factory
capacity utilization.
Improved tanners will
incentivize formal slaughtering
services to excel.
21

22. Cotton
Labour
Apparel
13K Jobs; 10K Income
28K Jobs
Calculated with Apparel
Market
Low labour
supply
Pre-employment
skills pilot
Low labour
supply
Labour system in
industrial parks
Poor gender
support
Social
sustainability
Poor HR
Better HR system in
factory
Poor mgt by
supervisors
Supervisor training
service
Low
accessory
supply
SME cluster
Lack of
Ethiopian
design
Fashion incubator
programme
Lack of eco
industrial
strategy
Green
industrialisation
Low
investment
Don’t get left
behind
Low
investment
Buyer-led
investment
P
Poor sector
coordination
and strategy
Industry
coordination forum
CTA 02 CTA 08 CTA 17 CTA 07 CTA TBD
CTA 10 CTA 12 CTA 13 CTA 16 CTA 11 CTA 14
Poor quality
seed
Seed multiplication
pilot
Poor quality
seed
Seed multiplication
scale-up
No national
policy
National cotton
strategy
Low lint
cotton
production
Contract farming
with textile
industry
Lack of
finance
Finance system for
cotton producers &
textile industry
Low seed
variety
ARC capacity
building
CTA 01 CTA 04 CTA 03 CTA 09 CTA TBD CTA TBD
Livestock
March 2017
PORTFOLIO SUMMARY
Processing
Inputs
Export
Constraints Intervention
Leather
Products
Financial
Capability
Private
Capital
SME
Projected
Results
10K Jobs
TBD
TBD
60K Income
3K Jobs
TBD
GBP 89M Investment
GBP 72M Investment
TBD
Tanning
4K Jobs
Digital
Finance
TBD
Active: scale up
Active: Pilot
Active: wind down
Closed
Pipeline
High post-
harvest loss
Tomato
processing:
Meki Union
High post-
harvest loss
Tomato
processing:
Mulualem Farm
Poor
business
services
Advisory service
Poor
business
services
Private Capital
Advisory Finance
Services (PCAF)
Low
awareness
PCAF: Workshops
Lack of
linkage
Investment linkage
platform
Poor
marketing &
supply chain
Export promotion
& supply chain
Low
investment
Investment
facilitation services
Low
technical
know-how
Footwear
manufacturing:
high-end market
Poor vet
service
Improving
veterinary services
Poor quality
seedlings
Seedlings business
pilot
Poor quality
inputs
Seedlings business
scale-up
Poor quality
seed
OPV seed
promotion
Poor int.
market
linkage
Export facilitation
service for farms
Poor
financial
literacy
Financial education
& capability
Poor
financial
literacy
Financial education
via public agency
Lack of
credit
SME finance
project (SMEFP),
WEDP
Low fin for
climate
smart agro
Greening rural
finance
Lack of
collateral
SME guarantee
fund
Lack of
credit
Farmer union
advisory service
EIC’s low HR
capacity
Young professional
development
Low FDI in
priority
sectors
FIN TBD
Poor
finishing of
leather
Improve finishing
through chemical
companies
Poor green
practice
Green leather
production &
marketing
Lack of
finance
RHS credit line
Poor green
practice
Waterless chrome
tanning
Poor quality
raw hides &
skins
TBD
Poor
finishing of
leather
Intra-tannery
partnerships
Limited
outreach
Mobile bill
payments
Limited
outreach
SAACO agency
banking
Low DFS
knowledge
Transaction pool
Low DFS
knowledge
Community of
practice
Lack of
automation
in MFIs
Core banking
system
Unfavourable
policy &
regulations
Roadmap for DFS
FAV 01-A FAV 01-B
FIN 03 FIN 07 FIN 07 FIN 19
LAL 06 LAL 07 LAL 09
LAL 08
FAV 02 FAV 06 FAV TBD
FAV 03
FIN 02 FIN 10
FIN 06 FIN 12 FIN 08
FIN 15 FIN TBD
LAL 05 LAL 10 LAL 11 LAL TBD LAL 04 LAL TBD
FIN 01-B FIN 01-A FIN 16 FIN 17 FIN 14 FIN 18
Cotton,Apparel,TextileInvestmentFruitsandVegetableBaseofPyramid
Investment
Promotion
FIN 05
Code | Status
LeatherandLivestock
Poor sector
coordination
and strategy
National Apparel
Investment Plan
8K Jobs
CTA 15
Low linkage
amid SME’S
and Buyers
All Africa Leather
Fair
LAL 03
Poor
marketing
system
FAV Produce
Marketing
FAV TBD
Low domestic
FIN mgt
capacity
CFO Training
FIN 20
Stringent
KYC system
Tiered KYC
system
FIN 21
Limited
deposit
mobilization
MFI Marketing
FIN 22
Other BOP Interventions
Low labour
supply
E-labour market
place
CTA TBD

23. 1. Sector Overview
2. Opportunities
3. Constraints
4. CTA Vision & Strategy
Annexes
23

24. Type Investment
source
Company
number
Jobs
created
Tanneries Local, 3 VI 33 8000
Small and medium footwear
producer
Local
company
1,000 5,000
Medium to large-sized
footwear producer
Local
company
40 2,000
Large footwear producer Seven local
Three FDI
10 4500
Glove manufacturing
facilities
Two FDI
One local
3 1,000
Small-scale accessories
producer
Local 150 2500
Medium and large scale
manufacturers produce for the
export market
Smaller manufacturers
mainly produce for the
local market
24
Annex
Employment breakdown

25. LIVESTOCK
RHS PRODUCTION
SLAUGHTERING
RHS SUPPLY
(TRADE)
LEATHER TANNING
/ FINISHING
PROCESSING
LEATHER GOODS
MANUFACTURERS
MARKET Domestic Consumer
$115 mil leather goods
Handicrafts and others
Export
$35 mil leather goods
$ 100 mil finished leather
Shoe factories
Domestic: 113 mil $
Export: 30 mil $
Glove factories
Domestic: 1 mil $
Export: 4.5 mil $
Other goods
Domestic: 1 mil
Export: 0.5 mil
Traditional / informal market (171 mil sqf)
100% of backyard hide = 142 mil
20% of backyard skin = 16 mil
20% of formal hide = 12 mil
10% of formal skin = 1 mil
Backyard: Hide
142 mil sqf
Cattle 16%; 9 mil
Hides: 203 mil sqf
Sheep 40%; 11 mil
Sheep skin: 45 mil sqf
Goat, 40%; 11 mil
Goat Skin: 47 mil sqf
Cattle
56 million
Sheep
29 million
Goat
29 million
Backyard: Skin
3 mil sqf
Formal: Hide
61 mil sqf
Formal: Skin
9 mil sqf
Tannery (122 mil sqf)
0% of backyard hide = 0 mil
20% of backyard skin = 66 mil
80% of formal hide = 48 mil
90% of formal skin = 8 mil
Tannery processing
50 mil sqt of finished and crust leather for export = 100 mil $
25 mil sqt of crust and finished leather for factories = 50 mil $
SMEs
Domestic (shoes,
goods, handicrafts)
Traditional
tanning
Domestic
25
Annex
Livestock leather value chain (the bigger picture)

26. Constraints Opportunities
• Cultural and religious preference for
backyard slaughtering (high volumes).
• Formal slaughterhouses have weak
capacity and are inefficient.
• Lack of good flaying techniques.
• Lack of innovative techniques and business
orientation.
• Underdeveloped private services.
• Lack of techniques in preservation and
handling of RHS.
• Lack of working capital by traders.
• Weak and disconnected RHS supply line.
• Production/supply seasonality.
• Unaccounted RHS trade.
• No price incentives from tanneries, as well
as speculative and erratic prices.
• No understanding of value of quality RHS.
LIVESTOCK
RHS
SUPPLY
& TRADING
• Lack of good public veterinary services
and access to private veterinary services.
• Poor animal husbandry techniques.
• High incidence of diseases and death.
• Lack of commercial livestock rearing.
• Government committed to ensuring quality
increase in RHS supply, and tackling working
capital constraints of RHS traders.
• Growing interest from international leather
goods manufacturers to establish operations
in Ethiopia, increasing demand for quality
RHS supply.
• GoE interested in privatization of vet
services.
• Increasing number of veterinary graduates.
• Awareness of RHS value growing amongst
smallholders.
• New commercial livestock ranching law
passed.
• With population growth and income
increases, meat consumption is increasing
and, therefore, demand for slaughtering
services is rising.
26
Annex
Constraints and opportunities

27. TANNING
LEATHER
PRODUCTS
Constraints Opportunities
• Poor supply of finished leather from tanneries.
• Lack of financial instruments for growth and
access to investment and working capital.
• Poor logistics and procurement services.
• Weak inter-firm cooperation.
• Subpar compliance to international standards of
products, tanning firms and shoe factories.
• Lack of green practice / treatment plants.
• Prohibitive policy, banning semi-processed
exports.
• Unbalanced capacity in different tanning stages.
• Problematic access to varied and adequate inputs.
• Lack of flexibility and market responsiveness.
• Limited international experience of middle and top
level management.
• Low skilled labour.
• Lack of proactive marketing.
• Low utilization of incentives for export.
• Marketing and product development not integrated.
• Unable to meet short time delivery and product
volume requests.
• High rejection rates of final products by buyers.
• Poor understanding of quality and design
requirements.
• High dependency on import of accessories.
• Machinery maintenance and operations inadequate.
• Increased interest from US buyers for product
development, and large volume / low value
footwear production in Ethiopia.
• Increasing interest from various producers and
buyers to shift production orders to Ethiopia
through sub-contracting.
• Increasing labour, and other factor costs in other
developing countries, are raising the comparative
advantage of Ethiopia in production of leather and
leather goods.
• There is a growing number of investors, especially
from Asia, interested in shifting their operations to
Ethiopia because of access to leather, low labour
costs and low factor costs.
• There is a sizeable market with higher price value
for leather conforming to environmental standards.
• There is an increasing demand from domestic goods
manufacturers for quality finished leather.
• With more FDIs entering Ethiopia, there is space for
increasing profitability through increased
specialization.
27
Annex
Constraints and opportunities

28. Reduced lead time
on production
JOB CREATIONINCREASED HOUSEHOLD INCOMEIMPACT
Systemleveloutcome
INTERVENTIONS
Lack of
adequately
skilled labour
High
Dependence on
imported
accessories
Low export
product
orientation /
responsiveness
Slow
custom/logistic
process
Limited foreign
currency for
import
Improved Health of
Livestock
Improved quality
and quantity of RHS
supply
Improved slaughter
practices
Increased
marketing efforts
Improved quality
and quantity of
finished Leather
Increased sales and
export by tanneries
Improved
environmental
standards
compliance
Increased
volume orders
by buyers
Increased
specialisation of
tanneries
Better timely supply
of accessories
Quality Footwear
production / Higher
factory productivity
Increased sales and
exports by factories
Increased skilled
labour in leather
sector
Easier procurement
procedures
Investment
generated
Low efficiency /
productivity of
footwear
factories
More FDI
CONSTRAINTS
Lack of reliable
veterinary
services
Poor animal
husbandry
practices
High incidence
of diseases and
death from
illness
Limited
coordination in
RHS supply line
Weak capacity
of formal
warehouses
High volume of
backyard
slaughtering
Poor handling
and
preservation of
RHS
Lack of working
capital of RHS
traders
Outdated
tanning
machinery
Low technical
know-how in
finishing
Low quality and
quantity of
inputs for
tanneries
Poor resource
allocation and
investment flow
Poor tannery-
factory
cooperation
Poor
understanding
of demand
needs
Inadequate
international
marketing
strategies
Annex
Theory of Change

29. Acronyms and abbreviations
AGOA Africa Growth and Opportunity Act
CSA Central Statistics Agency of Ethiopia
FDI Foreign Direct Investment
GoE Government of Ethiopia
GTP Growth and Transformation Plan
IP Industrial park
LIDI Leather Industry Development Institute
Mil Million
MoI Ministry of Industry
NBE National Bank of Ethiopia
RHS Raw hides and skins
sqf Square feet
Annex
Acronyms and abbreviations
29

30. References
BPC Limited, Ethiopia Leather Industry Investment Strategy (2016)
CIA Factbook (2016)
Enterprise Partners. (2015). Input market study. Addis Ababa: Enterprise Partners.
Government of Ethiopia, Growth and Transformation Plan II (2016)
Innovision, (2016)
Leather Industry Development Institute (LIDI)-(2016)
Mascianà, P. (2015). World statistical compendium for raw hides and skins, leather
and leather footwear 1998-2014. Rome: Food and Agriculture Organization of the United Nations.
UN Comtrade Database. (2016). Retrieved September 14, 2016, from
https://comtrade.un.org/data/
Annex
References
30

31. Thank you
ENTERPRISE PARTNERS
Bole, adjacent to Millennium Hall, behind Reliance
Hotel; Bel Amour Building, 2nd - 5th floors
Phone: +251-116-186-601
Fax: +251-116-672-588
P. O. Box 27374/1000
Addis Ababa, Ethiopia
E-mail: info@enterprisepartners.org
Web www.enterprisepartners.org
Follow us on:
@EP_Ethiopia
Enterprisepartners1
www.enterprisepartners.org
31