Ethiopia : an emerging market economy

1. ETHIOPIA: AN EMERGING
MARKET OPPORTUNITY ?
Presented By
Teenu Martin
PGDM 14-16
DC Business School,
Vagamon

2. SUMMARY
 Focuses on the possibility and challenges of
entering an emerging marketplace
 Brief overview of the Ethiopian marketplace,
market reforms and policies, and also the
business environment faced by foreign
companies.
 Three multinational companies, ShoeCo, CareCo,
and MedCo must choose how and whether to
enter the Ethiopian market.

3. INTRODUCTION
Three conversations in Three companies
 CareCo : the purchasing power of Ethiopian
Consumers will grow
 ShoeCo : labour costs in Ethiopia are low
 MedCo : Demand in Ethiopia will grow
quickly for the next 15 or 20 years.

4. HISTORICAL BACKGROUND
 Landlocked country
 1974 – 1991 – ruled by a Soviet backed military junta
 1991 – overthrew the standing government by Ethiopian
Peoples’ Revolutionary Dramatic Front (EPRDF)
 EPRDF was victorious in 1995
 More than 300 state-owned enterprises had been
privatised
 Revised the tax code

5. INDUSTRIAL POLICY AND MARKET
OPPORTUNITIES
 State-led development model
 Area of state monopoly – telecommunications, power,
financial services, air transport and shipping.
 Complaint about Unfair competition
 New rail and roads to modern seaports in Djibouti
 Attempt to protect local companies and encourage import
substitution
 Media, retail, and transportation industries
 Financial sector
 Domestic pharmaceutical manufacturing

7.  Income tax exception – up to 5 years – manufacturing, agro-
processing, & production of agricultural products
 Customs exemption for capital goods
 2013 - 2014, the GDP growth was about 10.6 per cent, double digits.
 Increased production in sugar, textiles, leather products and cement.
 While 38.7% of Ethiopians lived in extreme poverty in 2004-2005, five
years later this was 29.6%, which is a decrease of 9.1 percentage
points as measured by the national poverty line, of less than $0.6 per
day.
INDUSTRIAL POLICY AND MARKET
OPPORTUNITIES (CONT…)

8. GDP GROWTH
Source :
http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG/countries/ET?disp
lay=graph

9. FOREIGN DIRECT INVESTMENT
Source :
http://data.worldbank.org/indicator/BX.KLT.DINV.CD.WD/countries/ET?d
isplay=graph

11. INVESTING IN ETHIOPIA
 Infrastructure
 Human resources
 Limited competition
 Fragmented distribution Channels
 Cross-cultural adaptation and customer relations
 Intellectual Property
 Corruption

12. MARKET ENTRY OPTIONS
 Local Agents or importer
 Licensing arrangements
 Joint venture
 Subsidiary

13. OPPORTUNITIES FOR THREE
POTENTIAL ENTRANTS

14. CARECO
 Founded in 1961
 Personal care products
 UK based company

15. FINANCIAL ANALYSIS
CareCo Year
Addressable
market
$125M 1 2 3 4 5 6 7
Market
growth
15-20% over 10 years
(0.5%year)
- 15.00 15.50 16.00 16.50 17.00 17.50
Projected
market
share
year 1: 5% year 7: 25% 5.00 8.33 11.67 15.00 18.33 21.67 25.00
Projected
gross
margins
year 1: 60% year 7: 70% 60.00 61.67 63.33 65.00 66.67 68.33 70.00
Projected
fixed costs
Year 1: $12 year 7: $15 12.00 12.50 13.00 13.50 14.00 14.50 15.00
CAPEX $55M -

16.  Total EBIT(7 years): $6.57M
-10
-5
0
5
10
15
Total EBIT
CareCo
FINANCIAL ANALYSIS

17. Strengths
• High brand awareness
• Global brand
recognition
Opportunities
• Market growth
• Increasing purchasing
power of Ethiopians
• Low labor cost
• Possible higher margins
• Tax incentives
Threats
• Competition has
established
manufacturing
• IP infringement
• Underdeveloped
infrastructure
Weaknesses
• Struggling in key
markets
• Low margins and high
custom duties when
working with local
distributors
S W
TO
SWOT ANALYSIS

18. AVAILABLE OPTIONS
Local Agent Licensing

19. AVAILABLE OPTIONS
Subsidiary Joint Venture
Pros Cons Pros Cons

20. ACTION PLAN
 Find a partner with excellent access to the market
and distribution channels..
 Attempt to secure credit lines with local as well as
international banks.

21. SHOECO
 Footwear manufacturer
 Founded in China in 1991
 Wide range of casual and formal leather footwear
 2003 – its own brands
 In Ethiopia – imported through a local distributer

22. FINANCIAL ANALYSIS
Income statement (in $ millions)
Year 1 2 3 4 5 6 7
Sales 2.70 4.05 5.20 6.36 7.53 8.71 9.90
COGS 1.08 1.59 1.99 2.39 2.76 3.12 3.47
Gross profit 1.62 2.46 3.21 3.98 4.77 5.59 6.44
Fixed costs 10.00 10.33 10.67 11.00 11.33 11.67 12.00
EBIT -8.38 -7.87 -7.46 -7.02 -6.56 -6.08 -5.57
ShoeCo Year
Addressable
market
$90M 1 2 3 4 5 6 7
Market growth
8-12% over 10 years (0.4%
year)
- 8.00 8.40 8.80 9.20 9.60 10.00
Projected market
share
year1: 3% year7:10% 3.00 4.17 5.33 6.50 7.67 8.83 10.00
Projected gross
margins
year 1: 60% year 7: 65% 60.00 60.83 61.67 62.50 63.33 64.17 65.00
Projected fixed
costs
year 1: $10 year7: $12 10.00 10.33 10.67 11.00 11.33 11.67 12.00
CAPEX $35M -

23. FINANCIAL ANALYSIS
 Total EBIT (7 years): $-48.93M
-9.00
-8.00
-7.00
-6.00
-5.00
-4.00
-3.00
-2.00
-1.00
0.00
Total EBIT
ShoeCo

24. Strengths
• Proven track record in
local market
• Similar sociological
mentality as Ethiopia
Opportunities
• Market growth
• Increasing purchasing
power of Ethiopians
• Low labor cost
• Possible higher margins
• Tax incentives
Threats
• Government labor
regulations
• Unfair competition
• Taxation policies
Weaknesses
• Projected
financials show
negative revenues
S W
TO
SWOT ANALYSIS

25. AVAILABLE OPTIONS
Licensing Joint Venture
Pros Cons Pros Cons

26. AVAILABLE OPTIONS
Subsidiary Local Agent
Pros Cons Pros Cons

27. ACTION PLAN
 Continue with current local agent strategy
 Research export market more in-depth to
explore other possibilities
 Based on conducted research and revised
financial projections, reconsider joint venture

28. MEDCO
 Founded in 1983 in UAE
 Pharmaceuticals and over-the-counter medications
 Offers its own generic brands or private label goods
with localised packaging
 Customers – Ministry of Health, health clinics, and
private pharmacies

29. FINANCIAL ANALYSIS
Income statement (in $ millions)
Year 1 2 3 4 5 6 7
Sales 10.00 19.17 26.83 34.50 42.17 49.83 57.50
COGS 3.00 5.59 7.60 9.49 11.24 12.87 14.38
Gross profit 7.00 13.58 19.23 25.01 30.92 36.96 43.13
Fixed costs 10.00 10.50 11.00 11.50 12.00 12.50 13.00
EBIT -3.00 3.08 8.23 13.51 18.92 24.46 30.13

30.  Total EBIT (7 years): $95.33M
FINANCIAL ANALYSIS
-5
0
5
10
15
20
25
30
35
Total EBIT
MedCo

31. Strengths
• Lean and agile
manufacturing
• Operational Know-how
• Great efficiency
Opportunities
• Market growth
• Increasing purchasing power
of Ethiopians
• Low labor cost
• Possible higher margins
• Tax incentives
• High government
prioritization
Threats
• Counterfeiting
• Delays in production
• Poor infrastructure
• IP theft
• High competition
• Fragmentation of
distribution channels
Weaknesses
• Cultural difference
• Resistance to
organizational
change
S W
TO
SWOT ANALYSIS

32. AVAILABLE OPTIONS
Local Agent Licensing
Pros Cons Pros Cons

33. AVAILABLE OPTIONS
Subsidiary Joint Venture
Pros Cons
Unfair
treatment
Fragmentation
of distribution
channel
Protection of
Know-how
High control
level
Pros Cons

34. ACTION PLAN
 Build strong relationship with the government.
 Ensure government participation as silent
partner.
 The alternative is creating a Joint Venture with a
local silent partner.

35. CONCLUSION
 The main challenge for Ethiopia is to continue and
accelerate the progress made in recent years
toward the MDGs.
 Infrastructural facilities
 CareCo – Joint Venture
 ShoeCo – Local Agent
 MedCo – Joint Venture
 An emerging market opportunity

36. REFERENCES
 http://data.worldbank.org
 Wikipedia