Feasibility Study of Garment PDF

Competitive Africa: The Value Chain and Feasibility Analysis Module – Draft 4
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VIII. Feasibility Study of the Domestic

Production of Garments (Men’s Boxer Briefs) in
Ethiopia, Tanzania and Zambia
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VIII.1. Background and Objective
The purpose of this analysis is to determine the potential for competitive production of
apparel in Ethiopia, Tanzania and Zambia, particularly for the purpose of import
substitution. This section conducts an outline feasibility study using boxer briefs
production as a representative example of a product in the apparel industry that currently
is not being produced domestically. The analysis is concerned with assessing the
possibilities of apparel production as an economic proposition, taking one product as a
model.
VIII.2. Product Selection Method
Following a review of the first product screening in which 40 products were selected for
consideration for the value chain analysis and feasibility study, the World Bank (WB)
and Global Development Solutions (GDS)/HQ teams immediately agreed on seven out of
the ten products needed for the analysis. The seven products selected by the teams were
as follows:
1. Apparel:
a. Polo shirt; and
b. Underwear
2. Agribusiness:
a. Milk; and
b. Wheat milling
3. Leather:
a. High-end sheepskin loafers
4. Wood:
a. Windows/French windows and frames
5. Metal:
a. Padlocks.
To finalize the selection of the remaining products from the wood, metal and leather
sectors, based on the Africa Competitiveness: Phase 1.1 - Preliminary Product Screening
in Ethiopia report (July 2010), the WB and GDS/HQ teams chose six products as
potential candidates to be included in the list of the final ten products to be the target
products for the value chain analysis and feasibility study. The six products included the
following:
1. Wood products:
a. Wooden doors; and
b. Wooden chairs (not upholstered).
2. Leather products:
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a. Leather golf gloves; and

b. Sports footwear of leather.
3. Metal products:
a. Metal doors, window-frame (security window frame); and
b. Aluminum doors and windows.
In order to screen the final six products, a product screening survey was developed which
revolved around six factors:
1. Whether these products are currently produced by companies with less than
50 employees;
2. If companies identified in #1 above can be set up with less than US$100,000
in investment capital;
3. The minimum level of skills and know-how required to produce the products;
4. Whether the products produced by the companies in #1 are being exported;
5. Whether products produced by companies in #1 are consolidated by brokers
or other intermediaries for exports; and
6. Whether companies identified in #1 can readily access raw material inputs in
the market to produce the products.
These questions were posed to the wood, metal and leather sector associations in both
China and Vietnam. Following interviews with sector associations, additional interviews
were conducted at the firm level to identify specifically the level of investments and
minimum level of technical skills required for an entrepreneur or existing SMEs to set up
a production operation. These questions were posed to existing operators in China and
Vietnam to identify whether:
 Barriers to market entry, particularly from a financial and skills
requirement, were sufficiently low to allow entrepreneurs and SMEs in
Ethiopia to easily establish operations; and
 These products are currently being produced by SMEs in China and
Vietnam, and are effectively being sold in local and export markets.
The product screening survey identified the following products as viable candidates to be
targeted for the value chain and feasibility analysis.
1. Wood product:
a. Wooden chairs (soft wood); and
b. Wooden door (semi-solid).
Although French windows and their frames made of wood had originally been
preselected for analysis, a decision was made to opt to analyze both wooden
chairs and wooden doors. This decision stemmed from the fact that French
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windows require glass thus introducing an outside factor that could influence
the manufacturing of the final product. Wooden doors (without glass) and
wooden chairs (without upholstery) are more representative of wood
processing exclusively.
2. Leather products: Leather golf gloves or sports glove of comparable structure

and weight.
3. Metal products: Both the pre-selected products (security window frame; and
aluminum doors and windows) were screened out of the selection due to
various factors including high initial investment requirements. As a result,
further analyses of products identified during the preliminary product
screening were conducted. Interviews with metal sector associations and
enterprises currently operating in China and Vietnam, as well as interviews
with existing operators in the fabricated metal products sector in Ethiopia
identified crown corks (bottle caps) as a viable candidate to be targeted for
value chain analysis. Crown corks currently are produced in four of the
countries (excluding Tanzania), but Ethiopia continues to import substantial
volumes of this product, including imports from China. As a result, crown
corks have been chosen as the final fabricated metal product to be the focus of
a value chain analysis in the target countries.
VIII.2.1. Respective Government Definitions of Small, Medium and

Large Enterprises in Ethiopia, Tanzania, Zambia, China and
Vietnam
Ethiopia: For Ethiopia, the classification of enterprises into small, medium and large
scale depends on a number of variables such as level of employment, turnover, capital
investment, production capacity, level of technology and subsector. Accordingly, the
following scales are referred to the classification of enterprises in the Ethiopian context
(Table 196).
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Table 196: Company Size Classification Structure for Ethiopia

Number of Employees
Sub-sector Small Scale Medium Scale Large Scale Remark
According to the Central
Statistics Agency (CSA)
Textile and Apparel 5-9 10 – 49 above 50
Leather 2-10 21 – 50 above 51
According to Federal
Diary 2-10 21 – 50 above 51
Medium and Small
Wheat 2-10 21 – 50 above 51
Enterprise Development
Wood Processing 2-10 21 – 50 above 51
Agency (FeMSEDA)
Metal 2-10 21 – 50 above 51
Source: Ethiopia CSA and FeMSEDA
Tanzania: For Tanzania, the classification of enterprises into small, medium and large
scale depends on a number of variables such as level of employment and capital
investment in machinery. The classification cuts across sectors and subsectors of the
economy. Accordingly, the following scales refer to the classification of enterprises in
the Tanzanian context (Table 197). Note that the small enterprise type is most
appropriate for all sectors studied in this analysis.
Table 197: Company Size Classification Structure for Tanzania

Capital Investment in Machinery
Category Employees (TZS million) Remarks
Micro enterprise 1-4 Up to 5 Majority in the informal sector
Small enterprise 5 - 49 5 - 200 Most in the informal sector
Medium enterprise 50 - 99 200 - 800 Most in the formal sector
Large enterprise 100+ 800+ All in the formal sector
Source: Tanzania Chamber of Commerce, Industry and Agriculture (TCCIA)
Zambia: Zambia classifies enterprises as micro, small, medium and large based on
several factors including number of employees, annual revenue and capital investment.
The capital investment category is further delineated by whether the firm is engaged in
manufacturing or if it is a trading/services firm. For microenterprises, the minimum
revenue and investment requirements are kept intentionally low in order to encourage
registration, although few microenterprises actually register.
Table 198: Company Size Classification Structure for Zambia

Capital Investment Capital Investment for
Annual for Manufacturing Trading/ Services
Revenue Firms Firms
Classification Employees (ZMK million) (ZMK million) (ZMK million)
Micro < 10 < 20 < 10 < 10
Small 10 - 50 150 - 250 80 – 200 150
Medium 51-100 300 - 800 200 – 500 151 - 300
Large > 100 > 800 > 500 > 300
Source: Zambia Development Agency
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China: The China government is challenged in defining sizes of firms. Temporary

definitions have been used for the past several years, and the government promised to
revise the standard in 2010. The definition from the National Bureau of Statistics of
China is complex. The definition was published in 2002 jointly by the Ministry of
Finance, National Bureau of Statistics of China, State Economic and Trade Commission
(no longer exists), and China Planning Commission, which has since split and exists as
the State Development and Planning Commission (SDPC) and the National Development
and Reform Commission (NDRC). A simplified presentation of the company size
classification is shown in Table 199. Note that the Industrial type is most appropriate for
all sectors studied in this analysis.
Table 199: Company Size Classification Structure for China

Type Index Unit Small Medium Large
Employee person Less than 300 300-2000 More than 2000
Industrial Revenue million RMB Less than 30 30-300 More than 300
Asset million RMB Less than 40 40-400 More than 400
Construction Revenue million RMB Less than 30 30-300 More than 300
Wholesale
Revenue million RMB Less than 30 30-300 More than 300
Retail
Transportation
Post services
Lodging and Employee person Less than 400 400-800 More than 800
Catering services Revenue million RMB Less than 30 30-150 More than 150
Source: National Bureau of Statistics of China
Vietnam: A small firm has less than 50 laborers, while a medium-size firm has 51-200
laborers. Within the small and medium-size classifications, there are some detailed
categories depending on the purpose of research and management. For instance, a firm
with less than 10 laborers is called a super small-size firm. Such a regulation is in line
with Social Insurance Law.158
VIII.2.2. Product Technical Specifications
Following the identification of products to be targeted for the value chain and feasibility
analysis, a detailed technical profile of each product with an accompanying diagram or
photograph was complied and sent to the field teams to help ensure that product data
158
Information garnered from
http://laws.dongnai.gov.vn/1991_to_2000/2000/200004/200004280005_en/lawdocum
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collection in the field focused on products with similar - if not identical - technical
specifications. Table 200 below provides the product technical specifications for all ten
products for which product data are being collected.
Table 200: Product Technical Specifications

Weight Dimension Material
Unit of
Product Weight Unit of measure
measure
1 Golf gloves 85 - 141 grams Men's medium Sheepskin
Loafer 780 grams Heel Width Insole
2 cm Sheepskin
Size US = 8 EU = 7 2.5 10 30
3 Padlock* 760 grams 7 7 NA* cm Brass
Crown cork Thickness Diameter Height
tin free steel
4 (metal bottle 290 mg mm
0.24 31.9 6.6 (tfs)
cap)**
Width Depth Height
5 Wooden chair 6.5 kg cm Pine
45 45 75
Width Depth Height
6 Wooden door 12 kg cm Pine
80 4 210
Protein Lactose Ash Vitamins Fat content
7 Milk 0.5 liters
3.5% 4.7% 0.8% B1, B2, C and D Full
Type (German) Type (French) Ash Protein Moisture
8 Milling approx. All purpose flour Wheat or rice
550 55 <0.65% <14.5%
11%
9 Polo shirt 250 - 270 grams Refer to diagram 100% cotton
80% cotton/
10 Underwear 80 - 100 grams Refer to picture
20% spandex
* Overall height is 14 cm with a 2 cm shackle diameter
** The weight of the cover (plastic sole made from PVC) in the internal surface of the cap is 290 mg
Source: Global Development Solutions, LLC
VIII.3. International Competitiveness of the Garments Sector in Ethiopia,

Tanzania and Zambia
VIII.3.1. Sector Profile - Ethiopia
China dominates the global apparel trade by commanding over one-third of global
exports. In China and Vietnam, medium and large firms dominate the sector (85 percent
and 75 percent respectively). In Ethiopia, over 90 percent of all firms in the sector are
small. Of the roughly 10,000 people employed in the apparel sector in Ethiopia, male
and female workers are equally represented in the workforce. By contrast, the majority
(80 percent) of the sectors‘ workforces in China and Vietnam is female – refer to Table
201 below.
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Table 201: A Snapshot of the Apparel Sector in China, Vietnam and Ethiopia
Key Comparative Indicators China Vietnam Ethiopia
Total Imports (Value) $ 1,651,745,000 $ 604,373,333 $ 72,546,928
Total Exports (Value) $ 100,479,288,000 $ 8,244,000,000 $ 10,405,248
Companies Operating in the Sector 52,828 3,174 436
Small 13.2% 26.8% 91.1%
Medium 54.0% 55.0% 1.6%
Large 32.8% 18.2% 7.3%
Est. no. of works in the sector 4,587,000 1,194,310 9,746
Male 20.0% 17.0% 58.0%
Female 80.0% 82.8% 42.0%
Global Development Solutions
The Ethiopian apparel sector accounted for 7.1 percent of the country‘s industrial
production in 2009/10 and 0.72 percent of the country‘s total exports.159 Key products
were polo shirts, T-shirts, sportswear, work clothes and uniforms. Ethiopia is a net
importer of garments, with imports being some seven times exports. Imports (primarily
from China) also outweigh domestic production by approximately 7:1 (see Table 202
below), nearly equivalent to domestic demand. Export figures suggest that the price per
piece is much higher for exported products than for products sold in the domestic market,
including the imported products. This suggests higher quality items are being exported
from Ethiopia.
Table 202: Ethiopia Apparel Production and Trade Statistics, 2009

Domestic Production Domestic Demand Total Imports Total Exports
Volume (pieces) 17,543,075 132,467,738 117,734,080 2,809,417
Value (USD) 10,937,533 73,079,213 72,546,928 10,405,248
Source: Global Development Solutions, LLC; Ethiopian Customs Authority; Ministry of Trade and Industry
During the years 1974 – 1991, the government heavily promoted state cotton textile
production. However, lack of investment led to decline, low capacity utilization and low
productivity. Since the 1990s, factories have been privatized to foreign investors mainly
from United States, Italy and Turkey, and exports have grown steadily while remaining
small in volume.
The employment structure of the apparel sector is shown in Table 203 below. Small
companies employ about 91 percent of the labor force.
159
Ministry of Trade and Industry
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Table 203: Employment Statistics for Ethiopia Apparel Sector

Number of
Company Size Estimated Number of Companies % of Companies by Size Employees Ave Number of Employees
Small 397 91.1% 1,961 5
Medium 7 1.6% 343 49
Large 32 7.3% 7,442 233
Total 436 100.0% 9,746
Source: Central Statistical Authority
Principal advantages for the apparel sector in Ethiopia are low wages and preferential
access for imports from Ethiopia to the United States under the African Growth and
Opportunity Act (AGOA) until 2015. A major drawback for exporting is that Ethiopia is
landlocked with poor transport and communication links, thus adding costs to exports.
Further, local raw material (cotton) is available but local fabric production is
monopolized by one state factory and textile production is inefficient.
Multiple problems persist along the cotton-to-garment processing chain in Ethiopia.

From the farm level and all the way up through garment assembly, productivity and
capacity utilization are not optimal, technology is generally obsolete, and dependence on
imported inputs is high (Figure 64).
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Figure 64: Ethiopia Cotton-to-Garment Processing Road Map

Ethiopia’s Cotton-to-Garment Processing Road Map
Ethiopian Cotton Farms/cotton

(118,000 ha/Output: 227,000tons)
)
Cotton Farm’s Issues
- Low productivities
- Low quality and poor varieties
- Poor irrigation management
Upstream - Low farming, harvesting,and
handling technology
- Insufficient incentives for farmers
Ginning & Spinning Mfs

(Cotton Ginning 11 & Spinning 11)
Ginning output 84,000 tons/year
Textile & Garment Manufacturers

(Textile Mfs13, Garment Mfs: Medium 7 and
large 32)
Textile Production Capacity: 25,858 ton/year
Installed Capacity: 37,625 ton/year
Garment Production Capacity:
 Woven - 10.9 million pcs/year
 Knitwear - 16.6 million pcs/year
Installed Capacity:
Downstream  Woven – 37.4 million pcs/year
 Knitwear – 18.2 million pcs/year
Principal problems of textile & garment industry

- Obsolete technology
- Low quality products
- Low added value
- High dependent on imported inputs
- Low domestic market shares
- Lack of domestic designers, brand names,
distributors
- Shortage of skilled labor
- Lack of marketing and management skills
VIII.3.2. Sector Profile - Tanzania
As noted in the apparel sector profile, The Tanzanian apparel sector is very limited in
scale. Up to date information on employment, production levels and income generated
specifically from the garment industry is not available. According to the latest surveys to
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be published in 2011, the country had 47 establishments manufacturing textiles, apparel

and leather products in 2008. 160 According to the survey, these firms collectively
employed 13,430 people (Table 204).
Table 204: Tanzania Textiles, Apparel and Leather Products Sector Profile
Textiles, Apparel and Leather Products, Tanzania, 2008 Manufacturers of textiles, wearing apparel and leather products
Employment size/firm 10-19 20-49 50-99 100-499 >=500 Total
Number of firms 18 4 7 9 9 47
Total employees (private firms %) 13,430 (95%)
Firm ownership (National, Foreign, JV) 44%;35%;21%
Employees by gender (Male, Female) 59%;41%
Compiled by Global Development Solutions, LLC from Ministry of Industry, Trade and Marketing, Tanzania
In Tanzania, apparel products in recent years (except for 2008) have faced a trade deficit
with importers and are thus classified as importables at the margin. The country
imported roughly US$90 million worth of apparel in 2009, almost twice as much as in
2005. Clothing apparel, including second hand clothing (US$40 million in 2009)
constitutes almost 80 percent of all apparel imports. This is in contrast to exports, where
only 12 percent of exports are articles of apparel (knit and not knit); 88 percent of
Tanzanian apparel exports are in the form of printed fabrics or other processed textiles
such as those used in furnishings, rugs, blankets, etc. (Table 205).
Table 205: Apparel Trade Statistics, Tanzania, 2009

Apparel Trade, Tanzania (US$ Thousand) 2005 2006 2007 2008 2009
Apparel Imports $ 49,538 $ 56,605 $ 65,666 $ 89,087 $ 88,788
Other made textile articles, sets, worn clothing etc $ 36,146 $ 39,230 $ 47,358 $ 56,772 $ 57,942
Articles of apparel, accessories, not knit or crochet $ 7,512 $ 11,598 $ 14,123 $ 23,466 $ 22,989
Articles of apparel, accessories, knit or crochet $ 5,880 $ 5,777 $ 4,185 $ 8,849 $ 7,857
Apparel Exports $ 23,308 $ 29,181 $ 69,128 $ 76,678 $ 70,205
Other made textile articles, sets, worn clothing etc $ 17,209 $ 25,556 $ 59,474 $ 65,182 $ 61,906
Articles of apparel, accessories, knit or crochet $ 4,802 $ 2,219 $ 4,855 $ 5,899 $ 7,151
Articles of apparel, accessories, not knit or crochet $ 1,297 $ 1,406 $ 4,799 $ 5,597 $ 1,148
Compiled by Global Development Solutions, LLC from Intrance/UN Comtrade
In the upstream part of the apparel cotton-to-garment supply chain, Tanzania is a major
producer of cotton and has textile milling capacity, but the chain is disconnected. Mills
produce fabrics for their own integrated fabric/garment production, and domestically-
produced knit and woven fabric is not readily available to the garment industry. In the
cases when local knit fabric mills make their fabric available to garment firms, the fabric
is generally of poor quality and is not used for export oriented garments.
160
Annual Survey of Industrial Production undertaken by UNIDO and the Ministry of Industry, Trade and
Marketing
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While the industry has declined and is very small with only 13,500 workers and 47
enterprises, it remains considerably larger than that of Zambia, which has been severely
damaged by competition.
VIII.3.3. Sector Profile - Zambia
As stated in the apparel sector profile, the Zambian apparel sector is very limited in scale
and scope. Annual production of all clothing apparel has declined rapidly, by as much as
40 percent from 2007 to 2009 (14.1 million kg in 2007 to 8.6 million kg in 2009) and a
highly marginal export sector of only 0.03 million kg.
Ninety percent of Zambian cotton is grown on small-scale farms and the remainder on
commercial farms mainly for seed multiplication. Five ginneries are operating, but no
spinning capacity exists, so all of the lint cotton is exported to countries including China,
Congo, Germany, Britain, Italy, Lesotho, Malawi, South Africa, Spain, Switzerland,
Tanzania and Zimbabwe. Prior to liberalization of the Zambian economy in 1991, local
weaving and knitting industries operated under high protective barriers. However, since
the removal of protection, low-priced new and second-hand imports have flooded into the
country (both legal and illegal). By the mid-1990s, the number of apparel manufacturers
had fallen from 140 to 50, and by 2010 only 12 manufacturers remained, with 1500
employees producing niche products such as ethnic clothing, school uniforms, protective
wear for mining and other professional uniforms where the manufacturers are able to
compete on service and delivery.161 The most recent decline of the sector may be due to
the appreciation of the real exchange rate as a result of rising copper prices. In these
circumstances, profitable domestic production of apparel is put under additional pressure.
Thus while cotton is exported, both fabric and finished products are largely imported into
Zambia at the margin. Table 206 provides approximate numbers of firms operating
specifically in textiles and garments (excluding leather products).
161
The Textiles Producers Association of Zambia is now defunct and sector representation for issues
related to the apparel sector falls under the Manufacturers Association of Zambia.
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Table 206: Firm Statistics, Apparel Manufacturing, Zambia

Estimated Number % of Companies Estimated Number Ave Employees/
Company Size of Companies by Size of Employees Firm
Small 0 0 - -
Medium 6 50% 600 100
Large 6 50% 900 150
Total 12 100% 1500
Registration
Formal 12
Informal 0
State-owned enterprises 0
Gender
% Male 74%
% Female 26%
Source: Central Statistical Office, Zambia
VIII.4. International Competition – China and Vietnam
China is the dominant producer and exporter in the apparel sector. Its annual apparel
exports of over US$100 billion constitute a third of the yearly global trade in apparel and
are roughly ten to fifteen times higher than the other top exporters in the sector (Turkey,
Bangladesh, India and Vietnam).162
The apparel sector in China is based mainly on the east coast (Guangdong, Zheijang and
Jiangtsu Provinces) in the Special Economic Zones. They predominantly are privately
owned and foreign investment is common. In Guangdong Province, over 60 percent of
garment factories are owned by Hong Kong and Taiwanese companies.
Table 207: Export Volume and Number of Enterprises, Chinese Apparel Sector, 2009
Total Exports 2007 2008 2009
Volume (million pieces) 30 30 26
Value (CNY, billion) 783 815 728
Value (USD, billion) 115 120 107
Main countries/regions of destination US, Japan, Hong Kong, Germany, UK
Avg no. of
Estimated number of companies operating in the sector
% of Total employees/firm
Small 6,976 14% 150
Medium 28,526 56% 350
Large 17,326 34% 500
Subtotal 51,370 100% 337
Source: China Statistical Yearbook Network
162
Excluding the European Union (EU) and its intra-EU trade.
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Despite success to date, Chinese competitiveness is eroding because of labor shortage.

Garment workers - most of whom are migrants - move between industries in order to
improve their wages and working conditions, causing high labor turnover and increasing
labor costs (US$200 - US$300 monthly wages for unskilled labor in 2010, up 10 percent
- 20 percent from 2009).
In Vietnam, garments are the leading export and are expanding rapidly. Currently,
Vietnam‘s apparel products account for roughly 2.7 percent of the world‘s total market
share. The main importers of Vietnam‘s apparel are the US (55 percent), the EU (20
percent) and Japan (10 percent). In the domestic market, during the first half of 2010,
garment and textile producers achieved a growth rate of 15 percent – 18 percent, and
export prices are rising amid the global economic recovery. The sector employs about
1.2 million workers across 3,174 small, medium and large enterprises (officially
registered). Of the 3,174 enterprises, 18.5 percent are partially or wholly foreign owned
enterprises, 80 percent are Vietnamese owned, non-state enterprises and 1.5 percent are
state-owned enterprises.
Table 208: Enterprises in the Apparel Sector in Vietnam (2010)
Size Classification No. of Enterprises % of Total No. of Employees

Small 851 26.80% < 10
Medium 1,745 55.00% 10 – 200
Large 578 18.20% >300
Total 3,174 100%
Source: Vinatex, Interview, August 2010
Vietnamese producers are much larger than those of China, probably because a ‗single
producer‘ consists of multiple linked suppliers organized on a CMT (cut, make and trim)
basis. Vietnam faces some challenges to its competitiveness due to a dependence on
imported inputs which potentially raises the price of export products. It is estimated that
80 percent to 95 percent of Vietnamese garment production relies on imported material,
primarily from China, Taiwan and Korea. The sector also is transforming rather slowly
from CMT to ODM (original design manufacturing). To move to a more domestically
integrated value chain, investment and technical know-how still are required. The sector
also faces a shortage of skilled and semi-skilled labor, which limits the apparel sector to
low value-added production. Nevertheless Vietnam constitutes one of the world‘s largest
apparel producers.
VIII.5. Feasibility Analysis of Boxer Briefs Production in Ethiopia
VIII.5.1. Production Assumptions Based on the VCA
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Currently, Ethiopia does not produce boxer briefs, and they are importing them from a
number of countries including China. In this context, the objective of the feasibility
study is to determine the probable economic and financial profitability by simulating the
production of boxer briefs in Ethiopia given the current level of labor productivity and
production costs associated with polo shirts. As input material for the production of
boxer briefs is currently not available in Ethiopia, the VCA uses actual cost of input
material from China. The cost of transporting the material from Guangzhou, China to
Addis Ababa, via Djibouti Port if factored into the calculus based on the prevailing
transport costs (shipping, trucking, handling, customs clearance, freight forwarding
services and any other charges associated with importing fabric and other inputs required
for the production of boxer briefs).
A number of assumptions were made in order to develop a profile of a hypothetical

factory to simulate the production of boxer briefs in Ethiopia. The following provides a
brief description of how figures were adjusted.
Size of operation: The size of the operation was adjusted according to the labor
productivity ratio between a factory producing polo shirts in China and Ethiopia.
Specifically, the average labor productivity in China was approximately 25
shirts/person/day, as opposed to 11 shirts/person/day in Ethiopia. Given the differential
production of 56 percent, the size of the operation was scaled down accordingly.
Number of employees: The total number of employees was kept the same as the factory
in China, but the number of skilled, unskilled and casual employees was adjusted
according to the proportion of these categories of workers in the representative factory in
Ethiopia.
Labor turnover and absenteeism rate: The same turnover and absenteeism rate as the
representative factory in Ethiopia was used.
Shifts, average capacity utilization and output: Figures from the representative factory
in Ethiopia were used, starting at 65 percent utilization for one shift operation. Output
and revenue figures were adjusted to reflect the revised operations figure for the
hypothetical factory.
Major production equipment: The F/S assumes that the same equipment currently used
by the boxer brief factory in China is available to the manufacturer in Ethiopia at a price
to include import costs and local distribution of 15 percent of FOB China.
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Markets and price: The F/S assumes that this is an import substitution industry at least
over the period of the study, with the future prospect of exports only if cost/productivity
changes occur. Factory gate, wholesale and FOB prices used for the F/S reflect those for
the factory in China, adjusted for transport, handing and distribution cost to the Ethiopian
market (Addis Ababa).
Average spoilage, reject, waste and loss rates: These figures were revised to reflect the
figures in the representative factory in Ethiopia.
Raw material input: The amount and cost of raw material input, including packing and
packaging material, was adjusted to reflect the revised number of boxer briefs produced
per day at the hypothetical factory. The cost of transport and handling was incorporated
into the total cost.
Salary and wages: Total annual salary and wages were adjusted to reflect the revised
distribution of skilled and unskilled workers, and used the current wage rates for these
skill levels in Ethiopia.
Electricity: The cost of electricity was adjusted to reflect the revised number of boxer
briefs produced per day multiplied by the actual unit cost of electricity in Ethiopia today.
percentage of time off the grid per month is the same figure as the representative factory
in Ethiopia.
Water and fuel: The cost of water and fuel was adjusted to reflect the revised number of
boxer briefs produced per day multiplied by the actual unit cost of water in Ethiopia
today.
Administrative overhead: The cost of administrative overhead costs was adjusted to

reflect the revised number of boxer briefs produced per day.
License and certification fees, taxes, VAT: These fees were adjusted to reflect payment
rates made by the representative firm in Ethiopia, and adjusted to reflect the revised units
of boxer briefs produced on a daily basis.
Freight and handling: The cost of freight from Guangzhou, China to Addis Ababa,
Ethiopia via Djibouti port was calculated based on actual cost of shipping a 20-foot
container of fabric (Table 209 below).
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Table 209:
Freight Freight
Costs fromCost from
China Guangzhou
to Ethiopia to 2010)
(Nov. Addis Ababa via Djibouti Port (2010)
Guangzhou to Djibouti Shipping/handling $ 1,880
Djibouti port to Addis $ 2,012
Total freight cost (20') $ 3,892
Weight/container (tons) 10
Freight cost ($/ton) $ 389.20
Freight cost (ETB/ton) 5,254
Global Development Solutions, LLC
The cost of transporting raw material input from factory gate-to-factory gate (China to
Ethiopia) is based on US$389.20/ton which includes all handling charges. In this context,
all imported raw material (including packing and packaging material) was converted into
kilograms and then multiplied by the freight and handling charges.
Can the Cost of Transporting Input Material to Ethiopia be Reduced?
As cost of freight from Guangzhou to Addis Ababa indicates, nearly 52 percent of the freight cost is
incurred between Djibouti Port and Addis Ababa. Of this amount, 49 percent is transport cost.
Further breakdown of this cost indicates that up to 25 percent of the transport cost is accounted for
by fuel. Ethiopia imports petroleum fuels as it has no local production. At present, all petrol (NGF
X Sudan and NGR E5) is imported from the Sudan and other products are imported through
Djibouti. Kerosene is currently the major petroleum fuel in quantity imported for domestic cooking
purpose. In 2009, imported kerosene surpassed 300,000 tons. Automotive diesel oil (ADO) is the
next most significant following kerosene. Can taxes on fuels be reduced to help enhance
competitiveness?
There are three types of taxes on fuels for transportation: excise tax, value added tax (VAT) and
municipality tax. However, there is no excise tax on ADO and no VAT on jet fuel. There also is a
road-fund charge on fuels used for transportation. The stabilization fund charged per liter of fuel
fluctuates based on the import price of fuel and is meant to collect funds that would serve as a buffer
against frequent price fluctuations. For November 2010, the stabilization fund was rather negative
except for light and heavy fuel oils (see table).
Breakdown of Tax on Imported Fuels (November, 2010)

Description Unit NGR X Sudan NGR E5 Kerosene ADO Light fuel oil Heavy fuel oil Jet fuel
CIF value US$/liter 0.59 0.59 0.65 0.63 0.58 0.56 0.65
Excise tax 30% 0.18 0.18 - - - - 0.19
VAT 15% 0.12 0.12 - 0.09 0.09 0.08 -
Municipality tax US$/liter 0.001 0.001 - 0.001 - - -
Road fund US$/liter 0.006 0.006 - 0.005 - - -
Stabilization fund US$/liter (0.0001) (0.0001) (0.0001) (0.0003) 0.0001 0.0002 (0.0001)
Sum US$/liter 0.89 0.89 0.65 0.73 0.67 0.65 0.84
Given these taxes, if fuel taxes were reduced for importing strategic input material, the possibility of
enhancing the competitiveness of strategic sectors can be improved.
350
Not for Circulation
VIII.5.2. Value Chains Analysis for Boxer Briefs
In order to assess the potential competitiveness of producing boxer briefs in Ethiopia, a

value chain analysis for the production of boxer briefs was first conducted in both China
and Vietnam. The average cost of producing boxer briefs in China ranged from US$1.05
to US$1.19 per piece at a labor productivity level between 28 and 40 pieces/person/day.
As with polo shirts, manufacturers in Vietnam were generally focused on CMT rather
than establishing their own supply chain for accessing all of the necessary input material.
The cost of assembling boxer briefs in Vietnam ranged between US$0.11 and U$0.28 per
piece with a labor productivity ranging from 5.8 to 22.9/pieces/person/day.
Based on the assumptions and methodologies presented above, the estimated cost of
producing boxer briefs in Ethiopia of average quality using imported fabric and input
materials is approximately US$1.02 per piece. As with the production of polo shirts, the
low cost of labor in Ethiopia provides the competitive advantage to compensate for the
higher cost of imported raw material. As the value chain diagram below indicates, the
total labor portion of the Ethiopian value chain for boxer briefs is only 8.5 percent as
compared to 16.6 percent in China. Here again, however, the major challenge for
manufacturers in Ethiopia is whether they are able to produce a quality product with
consistent stitching and finishing, while at the same time control in-line production losses,
waste and reject rates (Table 210).
Table 210: Benchmarking Data for the Production of Boxer Briefs in Ethiopia
Benchmarking Data Sheet: Boxer Briefs China Viet Nam Ethiopia
1.0 FACTORY Simulated
1.1 Capacity utilization 90% 70% - 90% 65%
1.2 Installed capacity (piece/day) 1,500 - 4,000 6,000 - 15,000 1,056
1.3 Labor absenteeism rate (%) 1% - 2% 0% - 2% 11%
1.4 Average salary/wage/month Competitive
1.5 Skilled $265 - $340 $114 - $130 $ 185 labor costs
1.6 Unskilled $177 - $222 $78 - $93 $ 46
1.7 Days of operation/month 26 - 30 25 - 26 25
1.8 Average age of major equipment 2-6 2.5 - 10 6.0
2.0 Exported Output (finished primary product)
2.1 Direct Export without consolidator/broker 0% 100% 100%
2.2 Indirect Export Through Local Consolidator 0% - 100% 0% 0%
2.3 Indirect Export Through Overseas Consolidator 0% 0% 0%
3.0 Domestically Sold Output (finished primary product)
3.1 Direct Sales to Wholesalers/Retailers without consolidator 0% 0% 0% Competitive production
3.2 Direct Sales Through Own Outlets/Shops/Showrooms 0% - 100% 0% 0% costs using imported
3.3 Indirect Sales Through Local Consolidator/Trader 0% 0% 0% input material
4.0 Unit production cost ($/piece) $1.05 - $1.19 $0.11 - $0.28 $ 1.02
351
Not for Circulation
Figure 65: Simulated Value Chain Diagram for Boxer Briefs in Ethiopia
Boxer briefs, Mens Simulated Cost Addis Ababa Ethiopia
Unit production cost $ 1.02
Raw material Cutting/Layering Sewing/Assembly Finishing Packing/Loading Admin/OH
43.5% 0.4% 46.4% 2.1% 6.0% 1.5%
Fabric 100.0% Raw material inputs 89.8% Packing material 88.4%

Labor 9.2% Labor 11.3%
Raw material $ 0.87 85.2% Electricity 0.1% R&M 0.2%
Labor $ 0.09 8.5% R&M 0.9% Other 0.0%
Packing Mat $ 0.05 5.3% Global Development Solutions, LLC
Figure 66: Value Chain Diagram for Boxer Briefs in China163

Boxer briefs, Mens Guangdong China
39.3% 3.1% 44.7% 1.8% 7.7% 3.4%
Fabric 100% Raw material inputs 84.6% Packing material 66.1%

Labor 14.5% Labor 32.3%
Raw material $ 0.81 77.1% Electricity 0.5% R&M 1.4%
Labor $ 0.17 16.6% R&M 0.2% Other 0.2%
Packing material $ 0.05 5.1% Global Development Solutions, LLC
163
Value chain diagram reflects actual data from export oriented best practice firm.
352
Not for Circulation
Figure 67: Value Chain Diagram for Boxer Briefs in Vietnam164

Polo Shirt Value Chain: Hai Duong City Viet Nam
0.0% 7.3% 31.9% 18.0% 19.1% 23.8%
Labor $ 0.22 79.1%

Electricity $ 0.01 2.7% Labor 94.3% Labor 78.6% Labor 43.3%
Packing material $ 0.01 2.5% Fuel/oil/ water 1.0% Fuel/oil/ water 6.6% Electricity 0.6%
Admin OH $ 0.03 9.4% Electricity 4.3% Electricity 1.4% Financing charges 16.5%
Global Development Solutions, LLC R&M 0.4% Packing material 13.1% Admin OH 39.6%
164
Ibid
353
Table 211: Benchmarking Data for the Production of Boxer Briefs in Ethiopia (Part 2)
Benchmarking Data Sheet: Boxer Briefs China Viet Nam Ethiopia
Simulated
4.1 VAT Rebate ($/piece)* $0.17 - $0.24 $ -
5.0 Avg Selling Price (US$)
5.1 Factory gate $1.11 - $1.47 $ 1.15
5.2 Wholesale $1.18 - $1.62 $0.57 - $0.62 $ 1.26
5.3 FOB price $1.25 - $1.77 $ 1.34 Need to control
6.0 Avg Spoilage & Reject rate: List different types (3) reject and loss rates
6.1 In-factory product rejection 4% - 5% 0% - 1% 4%
6.2 Product rejection by client <1% 0% - 2% 2%
7.0 Avg Waste & losses: List different types (% of total )
7.1 Production waste - scrap (fabric-to-polo, weight) 3% - 8% 10%
7.2 Losses (theft) <1%
8.0 Electricity
8.1 On grid (Cost/kWh) $0.12 - $0.13 $0.06 - $0.08 $ 0.05
8.2 Off grid (Cost/kWh) - self generated $0.13 $ -
8.3 % of time off grid/month 0% - 10% 0% - 1% 17%
9.0 Water (m ³) $0.63 $0.26 - $0.31 $ 0.11
10.0 Fuel & Oil (liter) $0.92 $0.83 - $0.84 $ 1.76
11.0 PRODUCTIVITY & EFFICIENCY
11.1 Labor productivity (factory level) : Pieces/employee/day 28 - 40 5.8 - 22.9 17
11.2 Electricity usage: On-grid (kWh/1,000 pieces) 34 - 89 133 - 298 70.59
11.3 Electricity usage ($/1,000 pieces) $4.54 - $11.17 $7.56 - 21.09 $ 3.53
11.4 Water usage (m ³/1,000 pieces) 0.89 - 3.83 5.63 - 10.80 3.50
11.5 Water usage ($/1,000 pieces) $0.57 - $2.22 $1.46 - $3.36 $ 0.38
11.6 Fuel & oil usage (liters/1,000 pieces) 0.8 - 4.6 5.21 - 8.89 0.80
11.7 Fuel & oil usage ($/1,000 pieces) $0.74 - $4.75 $4.32 - $9.33 $ 1.41
11.8 Transport ($/km-ton) $0.16 - $0.24 $0.07 - $0.52 $ 0.16
VIII.5.3. Assumptions for Estimating Economic Feasibility of

Producing Boxer Briefs
The feasibility of producing boxer briefs is part of the overall feasibility of the cotton or
mixed fabric garment sector in the face of imports. While boxer briefs are the product
under study, in practice no factory would be set up exclusively to produce this one item.
Thus this product is taken as representative of the range of cotton garments that would be
produced within one production unit.
This analysis uses the standard Economic Rate of Return (ERR) approach rather than the
DRC approach used in the case of the group of existing products made in Ethiopia. In
principle, and assuming the same treatment of all costs and revenues (foreign and local
content assumptions, and adjustment to account for time phasing of costs and benefits),
an ERR of above the opportunity cost of capital (say 10 percent) is identical to a DRC of
below 1.0. The ERR approach models more clearly the effects of projecting changes in
productivity over time as the new product enters the market.
The major factors affecting the feasibility of producing boxer briefs would be:
 Greenfield project: The entity is treated as a ‗greenfield‘ unit. In practice it

may well be set up as a new product line in an existing apparel plant, in which
case the costs would be incremental and the return would be enhanced
354
because of the presence of sunk costs. The reason for treating it as a
greenfield field unit is in order to capture the total capital costs and more fully
reflect the overall potential competitiveness of the industry.
 The size of the market: Total demand per annum for boxer briefs in Ethiopia
is estimated to be in excess of 5 million pieces a year.165 The production units
under study would be small to medium scale by the definition used in Ethiopia
(about 125 employees producing about 300,000 pieces a year in year 3, rising
according to the rate of productivity increase). The assumed market share of
the unit would be less than 10 percent of the low estimate of demand and is
not therefore considered to be a constraint.
 Capital Costs: The analysis assumes imported equipment based on Chinese

origin prices plus transport and handling from China via Djibouti to Addis
Ababa of 15 percent of FOB price, as stated in the VCA.
 The price of domestically produced fabric and whether it is competitive with

imports: While some fabric might be domestically produced, it is mainly
imported and is effectively an import substitute in the short to medium term.
Thus it is treated in this analysis as an importable. Its economic valuation is
therefore based on an estimate of its CIF price plus the value of transport and
handling costs for imports to the main market (Addis Ababa), from the most
likely supplier (China) through Djibouti.
 The effective cost of fabrics and other materials (imported and local) taking
account of wastage: Based on the above VCA (using the polo shirts model)
the net cost of fabric takes into account production wastage rates of 10 percent
for products plus 4 percent in-factory rejection and 2 percent client rejection.
 The Impact of power shortages: Electricity downtime has averaged about 17

percent in Ethiopia. However, large scale investments in new power capacity
in Ethiopia are expected to alleviate this early in the unit‘s life. The likely
decline in power outages is assumed to be incorporated within a measurement
of the general rate of increase in productivity (total output per unit of input).
 Output and productivity: The level of output per unit of input is a very
sensitive parameter in terms of the competitiveness of domestically produced
165
This based on a male population of 40 million. As a lower bound estimate, at least 10 percent of this
population would buy this type of briefs, at a frequency of more than one per year. Thus demand would be
in the range 5 million up to probably as much as 20 million pieces.
355
boxer briefs. Productivity is reduced by absenteeism (estimated at 11 percent
based on the polo shirt example) and low labor efficiency. Capacity
utilization is only 65 percent on one shift, based on the VCA and polo shirts
experience. Output in terms of pieces per unit labor time is currently only
about 44 percent of Chinese. As such, there is clearly scope and need for
significant productivity increases reflected in total output per unit of input.
The main assumption made is for a 2 percent annual increase in output at the
same level of input. The actual rate could reasonably exceed this. A 3
percent rate over a ten-year period could see the productivity gap with China
and Vietnam closing to a significant extent.
 The extent of the natural protection accorded to domestic production:

Transport and handling costs from overseas suppliers to the port of Djibouti
and the inland costs from Djibouti to Addis Ababa, which is the largest local
market, assist to some degree local firms to remain competitive. From China,
total transport related costs are about 7 percent of FOB price to Djibouti port
and about a further 10 percent to Addis Ababa.
 The effective CIF price including transport and handling costs in the Addis
Ababa market: Apparel products are imported at the margin into Ethiopia.
Therefore, the CIF price plus transport and handling is the effective price of
the competitive product. The valuation of the product including costs to
market is a very sensitive parameter from the point of competitiveness. The
FOB price of the main supplier, China, is increased by expected international
and inland transport and handling costs (on the example of polo shirts) to get
an approximate internal valuation for the market. This would increase the
effective price from US$1.34 per piece (FOB China port) to US$1.58 per
piece in Addis Ababa (wholesale) in the base case.
 Projections in the real exchange rate: In I.1 Introduction: Factors Affecting

the Relative International Competitiveness of Ethiopia, Tanzania and Zambia,
an analysis is provided of the scenario for the likely appreciation in the RER
for the Chinese Yuan in relation to both the US Dollar and the Ethiopian Birr.
The projection assumption is 3 percent per annum over the first five years
(with a subsequent levelling out) resulting in a 16 percent overall increase as
of year 5. This increase is at the top end of the projections made by the World
Bank, to reflect both productivity growth differentials and a catch-up effect.
The effect of the Yuan appreciation would be to raise the economic return
because of the rise in the value of the net foreign exchange earned or saved in
production. However because this projection assumption is subject to
356
uncertainty it is only used here as an indicator of the possible increase in
competitiveness.
VIII.5.4. Results of the Feasibility Analysis
The feasibility calculations give the following results (Table 212) for the base case using
the above assumptions.
Table 212: Economic Returns to Boxer Briefs Production in Ethiopia – Base Case Estimate*
Item US$ or Units
Output (year 3) 440,000 pieces
Employment (year 3) 125
Asset Life 10 years
Capital Costs $499,800
Operating Costs (year 3) $610,000
Cost per Piece (operating plus capital cost) $1.51
Revenue/ Benefit (year 3) $694,000
Wholesale Price (Addis Ababa) per Piece $1.58
Economic Rate of Return 9%
* Assumptions - No change in productivity or real exchange rates.
The above results show a slightly sub-marginal rate of return in relation to the regular
assumption about the opportunity cost of capital (discount rate) of 10 percent. This
would be equivalent to a DRC ratio of slightly below 1.0. Clearly there are many
assumptions behind these results and it cannot be known at this stage what the true costs
would be ‗on the ground.‘ The result is consistent with what might be expected in the
current conditions.
In the medium term, as has been assumed for other products in this study, certain changes
are possible in a) real effective exchange rates in main competitor countries (e.g., China)
which will increase Chinese FOB prices relative to Ethiopian prices, b) productivity
within Ethiopian factories which will lower Ethiopian costs and c) infrastructure
improvements such as improve roads and uninterrupted power supply which may lower
Ethiopian costs relative to some competitor and customer countries.
The analysis shows that at with an overall productivity increase alone of 2 percent per
annum (total output per unit of input), over a ten year period the ERR would increase to a
comfortable 21 percent while the total cost per unit (operating plus capital) would
decrease to about US$1.28 per piece by the tenth year from US$1.51 in the starting year
(Table 213Table 213). The unit cost level would be about on a par with Chinese FOB
export cost by this time.
357
With a real appreciation of 3 percent per annum (over the first five years) in the Yuan in
relation to the Birr, the ERR improves further to about 30 percent. If the productivity
increase were to apply only to labor costs (e.g., through better labor efficiency) and not to
materials (so that materials volume increased with output) then the resulting ERR would
be around 25 percent.
Table 213: Economic Returns for 2 percent Annual Increase in Productivity*

Item US$ or Units
Output per Annum 440,000 pieces rising at 2% p.a.
Asset Life 10 years
Capital Costs $499,800
Operating Costs (year 3) $610,000
Cost per Piece (operating plus capital) $1.51 falling to $1.28 (productivity
Revenue/ Benefit (year 3) $829,000
Wholesale Price (Addis Ababa) per Piece $1.58 (CIF plus)
*1) Zero Yuan RER increase is assumed. (i.e. zero increase in forex value of foreign
inputs and outputs in relation to domestic resources). 2) Output per unit of input
(productivity) increases by 2% p.a.
VIII.6. Feasibility Analysis of Boxer Briefs Production in Tanzania
Currently, Tanzania‘s apparel industry produces almost no boxer briefs and imports them
from a number of countries including China. This feasibility study determines the
probable economic and financial profitability of local production by simulating the
production of boxer briefs based on Chinese technology and labor productivity and on
production costs associated with polo shirts in East Africa which use similar technology.
Imported material is based on cost of input material from China. The cost of transporting
the material from Guangzhou, China to Dar es Salaam is based on the prevailing
transport costs (shipping, trucking, handling, customs clearance, freight forwarding
services and other charges).
DRC approach used in the case of the group of existing products made in Tanzania. In
content assumptions and adjustment to account for time phasing of costs and benefits), an
ERR of above the opportunity cost of capital (say 12 percent) is identical to a DRC of
358
below 1.0. The ERR approach models more clearly the effects of projecting changes in
In this approach, all major inputs and outputs are valued at tariff-free levels. Thus
finished goods are valued at CIF import price plus transport and handling, without
including any taxes. Purchased materials (intermediates) are valued at purchased cost
(from the VCA) less the imputed import duty of 20 percent in Tanzania. Capital
equipment carries an import duty of 10 percent. Annualized capital costs are based on
economic depreciation over 10 years at 12 percent per annum opportunity cost of capital.
Economic wage costs are explained below.

mixed fabric knitted garment sector in the face of imports. While boxer briefs are the
product under study, in practice no factory would be set up exclusively to produce this
one item. Thus this product is taken as representative of the range of cotton garments
that would be produced within one production unit.

greenfield unit is in order to capture the total capital costs and more fully
 The size of the market: Total demand per annum for boxer briefs in Tanzania
is estimated to be in excess of 3 million pieces a year.166 The production units
under study would be small to medium scale by the definition used in
Tanzania (150 employees producing about 400,000 pieces per year by year 3).
Current production of briefs in Tanzania is very small and the industry is
concentrating on supplying other products, in particular cotton fabrics, so the
assumed market share of the unit probably would be less than 10 percent of
166
population would buy this type of briefs, at a frequency of more than one per year. Thus demand would
likely be in the range 3 million up to as much as 6 million pieces.
359
total uncovered demand. Therefore the market is not considered to be a
constraint.
 Capital costs: The analysis assumes imported equipment for a typical plant of
150 workers based on Chinese origin prices plus transport and handling from
China to Dar es Salaam of 10 percent of FOB China price. Landed prices
would be slightly lower than for Zambia because of lower internal transport
costs. The same equipment currently used by the boxer brief factory in China
would be available to the manufacturer in Tanzania.
 Absenteeism, spoilage and rejects: The costs from the VCA which have been
used here take into account the representative factory. In general these rates
are of a similar order to those of other countries under study. However, labor
absenteeism in Tanzania is generally relatively high. In the garment sector
(15 to 21 percent in polo shirts) it is particularly high compared to other
countries.
 Capacity and productivity: The level of output per unit of input is a very
boxer briefs. Assumed capacity utilization is 65 percent based on the VCA
and general experience in Tanzania (50 to 75 percent in polo shirts). Output
in terms of pieces per unit labor time is about 50 percent of the Chinese level.
Based on a representative Chinese plant and discounted to reflect lower
average capacity utilization in Tanzania, the estimated base case output is
410,000 pieces per annum. The total number of employees is 150,
approximately the same as an average factory in China.
 The price of main material – fabric: Fabric is produced in Tanzania, but it is

exported and generally not available to local apparel producers except at low
quality. Thus, at least for the short to medium term, fabric effectively is an
importable for competitive quality products. Its economic valuation therefore
is based on an estimate of its CIF price in Dar es Salaam from the most likely
supplier (China). 167 Since the apparel industry is concentrated near Dar es
Salaam, inland transport costs for all imported inputs are lower than in
Zambia. Based on the VCA (using the polo shirts model), the effective cost of
fabric also takes into account production wastage rates and in-factory and
client rejection. These are on a par with the other countries studied.
167
China fabric production cost FOB is in the range US$6.4 to US$6.6 per kg.
360
 Wage costs: General wage rates in Tanzania are in the middle of the range:
lower than China and Zambia, on a par with Vietnam and higher than
Ethiopian rates. However, with high absenteeism, unit labor costs probably
are relatively high and uncompetitive. Local apparel wages are however close
to those of Zambia. Producers pay some US$107 to US$200 a month for
skilled workers and US$90 to US$170 for unskilled workers, ranges which
have lower averages but which equate with Zambia at the upper end. In some
economic analyses, a shadow wage is used if market wages are significantly
different from the opportunity cost of labor. However, since wages are on
average equal to or below those of Zambia, we do not adjust for this here,
implying also that the opportunity cost is approximately equal to the
Tanzanian market wage.
 The effective CIF price of output including transport and handling costs: The
CIF price plus transport and handling is the effective price of the competitive
product. The valuation of the product including costs to market is a very
sensitive parameter from the point of competitiveness. The FOB price of the
main supplier, China, is increased by international transport and handling
costs to get an approximate internal valuation for CIF. Transport and
handling costs from the port to the main market which is in the Dar es Salaam
area are minor. These would increase the effective competing price from
US$1.34 per piece (FOB China port) to around US$1.52 per piece landed,
somewhat lower than Zambian prices and reflecting the lack of natural
protection in a coastal market.
Table 214: Effective CIF Price (US$), Tanzania

China Cost China to Dar
Transport margin 8 percent
Factory price 1.15
Wholesale price 1.25
FOB price 1.34 1.45
The CIF prices reflect quality and style differences as well as cost differences.
Residual local production probably has a niche style market which has
survived the penetration of imports. In case of price uncertainty we estimate
at two prices, US$1.52 and US$1.80 per piece.

an analysis is provided of the scenario for the Yuan RER. Unlike Zambia,
361
Tanzania does not face general upward pressure on wages and prices due to a
dominant exportable resource. Thus there is a likelihood of a relative decline
in the RER of the TZS vis-à-vis the RMB. However, we are not aware of
specific evidence to suggest divergence in unit labor costs that would alter the
relative RER.
The feasibility calculations give the following results for the base case using the above
assumptions.
Table 215: Economic Returns to Boxer Briefs Production in Tanzania*

Item US$ or units US$ or units
Base Case High Price Case
Output (year 3) 410,000 pieces 410,000 pieces
Employment (year 3) 150 150
Asset Life 10 years 10 years
Capital Costs $403,000 $403,000
Operating Costs (year 3) $566,000 $566,000
Total operating plus capital cost/pc (year 3) $ 1.44 $ 1.44
Total Benefit (year 3) $622,000 $737,000
Wholesale Price per piece $ 1.52 $1.80
Economic Rate of Return 4.2 percent 36.1 percent
*Assumptions - No change in productivity or relative exchange rates
The above base case results show a ‗best estimate‘ sub-marginal rate of return in relation
to the assumed opportunity cost of capital (discount rate) of 12 percent. This would be
equivalent to a DRC ratio of somewhat above 1.0. Clearly there are many assumptions
behind these results since this is a model, and it cannot be known at this stage what the
true costs would be ‗on the ground‘. The base case result is consistent with what might
be expected under current conditions.
One modified assumption is a delivered price of US$1.80 per piece, which we test on the
grounds that CIF prices for output are uncertain and underestimated. The results are
highly sensitive to this parameter and on the basis of the costings would yield a healthy
rate of return of 36 percent.
are possible in productivity within Tanzanian factories, which will lower costs. Thus a 1
percent improvement per annum in gross output per unit of input over 10 years at the
base case border price of US$1.52 per piece would raise the ERR to 13 percent.
362
VIII.7. Feasibility Analysis of Boxer Briefs Production in Zambia
Currently, Zambia does not produce boxer briefs and imports them from various
countries including China. This feasibility study determines the probable economic and
financial profitability of local production by simulating the production of boxer briefs
based on Chinese technology and labor productivity and on production costs associated
with polo shirts in East Africa which use similar technology.
Imported material is based on the cost of input material from China. The cost of
transporting the material from Guangzhou, China to Zambia via Durban or Dar es Salaam
is based on the prevailing transport costs: shipping, trucking, handling, customs clearance,
freight forwarding services and other charges.
DRC approach used in the case of the group of existing products made in Zambia. In
content assumptions, and adjustment to account for time phasing of costs and benefits),
an ERR of above the opportunity cost of capital (say 12 percent) is identical to a DRC of
below
1.0. The ERR approach models more clearly the effects of projecting changes in
In this approach, all major inputs and outputs are valued at tariff-free levels. Thus
finished goods are valued at CIF import price plus transport and handling, without
including any taxes. Materials are valued at purchase price less the imputed import duty.
Annualized capital costs are based on economic depreciation over 10 years at 12 percent
per annum opportunity cost of capital. Economic wage costs are explained below.

mixed fabric knitted garment sector in the face of imports. While boxer briefs are the
product under study, in practice no factory would be set up exclusively to produce this
one item. Thus this product is taken as representative of the range of cotton garments
that would be produced within one production unit.
363
 The size of the market: Total demand per annum for boxer briefs in Zambia is
estimated to be in excess of 1 million pieces a year.168 The production units
under study would be small to medium scale by the definition used in Zambia
(150 employees producing about 400,000 pieces per year by year three).
Current production in Zambia is residual only, all plants having switched to
other products so the assumed market share of the unit would probably be less
than 25 percent of total uncovered demand. Therefore, the market is not
considered to be a constraint for a plant at this scale.
 Capital Costs: The analysis assumes imported equipment for a typical plant
of 150 workers based on Chinese origin prices plus transport and handling
from China via Durban or Dar es Salaam to Lusaka of 20 percent of FOB
China price. The same equipment currently used by the boxer brief factory in
China would be available to the manufacturer in Zambia.
 Absenteeism, Spoilage and rejects: The costs from the VCA which have been
used here take into account the representative factory in Zambia. In general
these rates are of a similar order to those of Ethiopia and other countries.
However, labor absenteeism in Zambia is generally somewhat lower than
Ethiopia and Tanzania.
 Capacity and productivity: The level of output per unit of input is a very
boxer briefs. Assumed capacity utilization is 65 percent based on the VCA
and general experience in Zambia. Output in terms of pieces per unit labor
time is about 50 percent of the Chinese level. Based on a representative
Chinese plant and discounted to reflect lower average capacity utilization in
Zambia, the estimated base case output is 410,000 pieces per annum. The
total number of employees is 150, approximately the same as an average
factory in China.
168
population would buy this type of briefs, at a frequency of more than one per year. Thus demand would
likely be in the range 1 million up to as much as 3 million pieces.
364
 The price of main material – fabric: Fabric is imported at least in the short to
medium term. Thus it is treated in this analysis as an importable. Its
economic valuation is therefore based on an estimate of its CIF price plus the
value of transport and handling costs for imports to the main producing area
(copperbelt towns), from the most likely supplier (China) through Dar es
Salaam or Durban. This amounts to about 2 percent (Durban) to 6 percent
(Dar) of CIF cost (approx. US$7 per kg ex-China). 169 Based on the VCA
(using the Ethiopian polo shirts model), the effective cost of fabric also takes
into account production wastage rates and in-factory and client rejection.
 Wage costs: General wage rates in Zambia are relatively high compared to
other African economies, and also compared to Vietnam. However, because
of severe competitive pressure, the apparel subsector in Zambia is not highly
paid by local standards. Local apparel producers pay US$150 to US$170 a
month for skilled workers and US$100 to US$120 for unskilled workers.
However, these rates are significantly higher than Ethiopia, averaging about
50 percent higher for skilled workers, and 200 percent higher for unskilled
workers. In some economic analyses, a shadow wage is used if market wages
are significantly different from the opportunity cost of labor. Because apparel
wages are relatively low compared to the market levels, they are not adjusted
for this here.
 The effective CIF price including transport and handling cost: The CIF price
plus transport and handling is the effective price of the competitive product.
The valuation of the product, including costs to market, is a very sensitive
parameter from the point of competitiveness. The FOB price of the main
supplier, China, is increased by international and inland transport and
handling costs to get an approximate internal valuation for the market.
Transport and handling costs from the port to Lusaka range from US$1,200
(via Durban) to US$3,500 (via Dar es Salaam) per 20-foot container. On the
example of polo shirts (18,000 polo shirts per 20-foot container, inland costs
of boxer briefs would be US$0.07 per piece (Durban) or US$0.20 per piece
(Dar), which is about 5 percent to 14 percent of CIF (US$1.45). This would
increase the effective competing price from US$1.34 per piece (FOB China
port) to US$1.65 per piece in Lusaka (wholesale) depending on port of entry,
with an average of US$1.59 (Table 216).
169
10,000 kg fabric per 20-foot container = US$0.12 per kg (Durban) or US$0.35 per kg (Dar). China
internal fabric cost = US$6.4 to US$6.6 per kg.
365
Table 216: Effective CIF Price (US$), Zambia
China Cost China to Dar/Dur Dar/Dur to Lusaka
Transport margin 8% Average 10%
Factory price 1.15
Wholesale price 1.25
FOB price 1.34 1.45 1.59
Some prices quoted in Lusaka were higher than these levels. A CIF price of
US$2.50 was quoted which would translate to US$2.64 delivered. If import
tariffs and taxes are excluded in this quote, then this would translate to about
US$2.10. The quoted prices reflect quality and style differences as well as
cost differences. In view of the discrepancies, there are two prices for boxer
shorts, US$1.59 and US$1.80 per piece.

an analysis is provided of the scenario for the likely Kwacha/Yuan
relationship. Because of the general upward pressure on wages and prices in
Zambia caused by rising copper prices and the wage pressure from labor
shortage in China, the relative RER of the Chinese Yuan to the Kwacha is not
necessarily likely to change.
The feasibility calculations give the following results for the base case using the above
assumptions.
Table 217: Economic Returns to Boxer Briefs Production in Zambia*

Item US$ or Units US$ or Units
Base Case High Price Case
Output (year 3) 410,000 pieces 410,000 pieces
Employment (year 3) 150 150
Asset Life 10 years 10 years
Capital Costs $456,000 $456,000
Operating Costs (year 3) $590,000 $590,000
Total operating plus capital cost/pc $1.51 $1.51
Total Benefit (year 3) $651,000 $737,000
Wholesale Price per piece $1.59 $1.80
Economic Rate of Return 3.30% 26.30%
*Assumptions - No change in productivity or relative exchange rates.
The above base case results show a ‗best estimate‘ sub-marginal rate of return in relation
to the opportunity cost of capital (discount rate) of 12 percent. This would be equivalent
366
to a DRC ratio of somewhat above 1.0. Clearly there are many assumptions behind these
results and it cannot be known at this stage what the true costs would be ‗on the ground.‘
The base case result is consistent with what might be expected in the current conditions.
One modified assumption is a delivered price of US$1.80 per piece. The results are
highly sensitive to this parameter and on the basis of the costings would yield a healthy
rate of return of 26 percent.
are possible in productivity within Zambian factories, which will lower costs. Thus a 1
percent improvement per annum in gross output per unit of input over 10 years would
raise the ERR to 12 percent.
VIII.8. Conclusions and Recommendations
VIII.8.1. Ethiopia
While currently Ethiopian production of boxer briefs is shown as marginally inefficient

(at 9 percent ERR), factoring in plausible productivity increases over a ten-year period,
the domestic production of boxer briefs as representative of the apparel industry is
economically viable and also financially profitable. It has to be stressed that these are
‗synthetic‘ calculations based on a greenfield investment and using the data on actual
performance of polo shirts. It may be that the 21 percent economic rate of return is
optimistic even with fairly strong but plausible assumptions about changes in
productivity over ten years. One reason for this could well be the quality of local
products. If it were not possible to produce the equivalent quality of imports either
initially or over the ten year period (even though absenteeism, wastage and reject rates
are substantially reduced) then a discount on the assumed value of output (i.e., the CIF
price of Chinese origin products) would apply. This would reduce the ERR below 9
percent.
Two reasons for affirming that competitive potential exists are a) the relatively very low
cost of Ethiopian labor by Asian and even by African standards, and b) the natural
protection afforded local production by high transport costs to the main market of Addis
Ababa.
If Yuan RER appreciation is factored in, resulting in increased CIF prices for imported
products, the potential for competitiveness would be improved further. With the above
assumptions and a 3 percent Yuan appreciation over the first five years, the ERR cold rise
to 30 percent.
367
These results, subject to the appropriate reality checks, do suggest that there is scope for
investment over the next few years and that the Ethiopian Government should promote
private local and foreign investment in this sector.
VIII.8.2. Tanzania
Tanzania faces severe competition in the apparel sector, but it is not facing the upward
pressure on wages that Zambia faces. It has scope for both retaining real wages at current
levels and reducing absenteeism, thereby raising labor productivity. As reflected in total
output per unit of input, there is also scope and need for significant productivity increases
from improved capacity utilization and labor efficiency. A 1 percent increase over a ten-
year period would be feasible with reduced absenteeism and some improvement in
capacity utilization, and this would see the productivity gap with China and Vietnam
closing.
While currently the best estimate of production of boxer briefs shows a low return of 4.2
percent, by factoring in a plausible productivity increase over a ten-year period, the
domestic production of boxer briefs as representative of the apparel industry could
become economically viable. It has to be stressed however that these are ‗synthetic‘
calculations based on a greenfield investment. It may be that the enhanced economic rate
of return with productivity increase is optimistic and that the main barriers are in terms of
the quality of local products.
These results suggest that opportunities for renewed investment in Tanzanian apparel
production over the next few years are possible, certainly in niche products, but the
overall outlook is not good without productivity improvements.
VIII.8.3. Zambia
Zambia appears to be in a particularly difficult position at the moment competitively.

This is because of a combination of a rising RER and production costs caused probably
by the knock on effects of rising copper prices, which leads to reduced demand and in
turn increased excess capacity, which exacerbates rising costs.
There is scope and need for significant productivity increases from capacity utilization
and labor efficiency, reflected in total output per unit of input. A 1 percent increase over
a ten-year period could see the productivity gap with China and Vietnam closing.
While currently best estimate of production of boxer briefs shows a low return, by
factoring in a plausible productivity increase over a ten-year period, the domestic
production of boxer briefs as representative of the apparel industry could become
368
economically viable. It has to be stressed however that these are ‗synthetic‘ calculations
based on a greenfield investment and using the data on actual performance from China.
It may be that the enhanced economic rate of return with productivity increase is
optimistic and that the main barriers are in terms of the quality of local products. As
stated, Zambian manufacturing also faces particular problems from an appreciating real
exchange rate due to copper price increases, which will continue to squeeze
manufacturing.
These results do not suggest major opportunities for investment over the next few years
except in niche products which hold a differential advantage. Aside from locally
produced work clothes and school uniforms for the local market, there is not an apparent
competitive advantage to the local apparel sector with the exception of possible niche
opportunities as recognized by an investor.
369
Feasibility Study of the Domestic Production of
Golf Gloves in Ethiopia
370
VIII.9. Background and Objective
The purpose of this analysis is to determine the potential for competitive production of
leather golf gloves in Ethiopia. This analysis conducts an outline feasibility study using
apparel production as a representative example of a product in the industry that is not
currently being produced domestically.170
VIII.10. Product Selection Method
Following a review of the first product screening in which 40 products were selected for
consideration for the value chain analysis and feasibility study, the World Bank (WB)
and Global Development Solutions (GDS)/HQ teams immediately agreed on seven out of
the ten products needed for the analysis. The seven products selected by the teams were
as follows:
1. Apparel:
a. Polo shirt; and
b. Underwear
2. Agribusiness:
a. Milk; and
b. Wheat milling
3. Leather:
a. High-end sheepskin loafers
4. Wood:
a. Windows/French windows and frames
5. Metal:
a. Padlocks.
To finalize the selection of the remaining products from the wood, metal and leather
sectors, based on the Africa Competitiveness: Phase 1.1 - Preliminary Product Screening
in Ethiopia report (July 2010), the WB and GDS/HQ teams chose six products as
potential candidates to be included in the list of the final ten products to be the target
products for the value chain analysis and feasibility study. The six products included the
following:
1. Wood products:
a. Wooden doors; and
b. Wooden chairs (not upholstered).
2. Leather products:
a. Leather golf gloves; and
170
Apparel is by and large defined as anything that one puts on one‘s body. Clothing, shoes, hats, gloves,
and scarves are all examples of apparel items.
371
b. Sports footwear of leather.
3. Metal products:
a. Metal doors, window-frame (security window frame); and
b. Aluminum doors and windows.
In order to screen the final six products, a product screening survey was developed which
revolved around six factors:
1. Whether these products are currently produced by companies with less than
50 employees;
2. If companies identified in #1 above can be set up with less than US$100,000
in investment capital;
3. The minimum level of skills and know-how required to produce the products;
4. Whether the products produced by the companies in #1 are being exported;
5. Whether products produced by companies in #1 are consolidated by brokers
or other intermediaries for exports; and
6. Whether companies identified in #1 can readily access raw material inputs in
the market to produce the products.
These questions were posed to the wood, metal and leather sector associations in both
China and Vietnam. Following interviews with sector associations, additional interviews
were conducted at the firm level to identify specifically the level of investments and
minimum level of technical skills required for an entrepreneur or existing SMEs to set up
a production operation. These questions were posed to existing operators in China and
Vietnam to identify whether:
 Barriers to market entry, particularly from a financial and skills
requirement, were sufficiently low to allow entrepreneurs and SMEs in
Ethiopia to easily establish operations; and
 These products are currently being produced by SMEs in China and
Vietnam, and are effectively being sold in local and export markets.
The product screening survey identified the following products as viable candidates to be
targeted for the value chain and feasibility analysis.
1. Wood product:
a. Wooden chairs (soft wood); and
b. Wooden door (semi-solid).
Although French windows and their frames made of wood had originally been
preselected for analysis, a decision was made to opt to analyze both wooden
chairs and wooden doors. This decision stemmed from the fact that French
windows require glass thus introducing an outside factor that could influence
372
the manufacturing of the final product. Wooden doors (without glass) and
wooden chairs (without upholstery) are more representative of wood
processing exclusively.
2. Leather products: Leather golf gloves or sports glove of comparable structure

and weight.
3. Metal products: Both the pre-selected products (security window frame; and
aluminum doors and windows) were screened out of the selection due to
various factors including high initial investment requirements. As a result,
further analyses of products identified during the preliminary product
screening were conducted. Interviews with metal sector associations and
enterprises currently operating in China and Vietnam, as well as interviews
with existing operators in the fabricated metal products sector in Ethiopia
identified crown corks (bottle caps) as a viable candidate to be targeted for
value chain analysis. Crown corks currently are produced in four of the five
countries (excluding Tanzania), but Ethiopia continues to import substantial
volumes of this product, including imports from China. As a result, crown
corks have been chosen as the final fabricated metal product to be the focus of
a value chain analysis in the target countries.
VIII.10.1. Respective Government Definitions of Small, Medium and

Large Enterprises in Ethiopia, Tanzania, Zambia, China and
Vietnam
Ethiopia: For Ethiopia, the classification of enterprises into small, medium and large
scale depends on a number of variables such as level of employment, turnover, capital
investment, production capacity, level of technology and subsector. Accordingly, the
following scales are referred to the classification of enterprises in the Ethiopian context
(Table 218).
Table 218: Company Size Classification Structure for Ethiopia

Number of Employees
Sub-sector Small Scale Medium Scale Large Scale Remark
According to the Central
Statistics Agency (CSA)
Textile and Apparel 5-9 10 – 49 above 50
Leather 2-10 21 – 50 above 51
According to Federal
Diary 2-10 21 – 50 above 51
Medium and Small
Wheat 2-10 21 – 50 above 51
Enterprise Development
Wood Processing 2-10 21 – 50 above 51
Agency (FeMSEDA)
Metal 2-10 21 – 50 above 51
Source: Ethiopia CSA and FeMSEDA
373
Tanzania: For Tanzania, the classification of enterprises into small, medium and large
scale depends on a number of variables such as level of employment and capital
investment in machinery. The classification cuts across sectors and subsectors of the
economy. Accordingly, the following scales refer to the classification of enterprises in
the Tanzanian context (Table 219). Note that the small enterprise type is most
appropriate for all sectors studied in this analysis.
Table 219: Company Size Classification Structure for Tanzania

Capital Investment in Machinery
Category Employees (TZS million) Remarks
Micro enterprise 1-4 Up to 5 Majority in the informal sector
Small enterprise 5 - 49 5 - 200 Most in the informal sector
Medium enterprise 50 - 99 200 - 800 Most in the formal sector
Large enterprise 100+ 800+ All in the formal sector
Source: Tanzania Chamber of Commerce, Industry and Agriculture (TCCIA)
Zambia: Zambia classifies enterprises as micro, small, medium and large based on
several factors including number of employees, annual revenue and capital investment.
The capital investment category is further delineated by whether the firm is engaged in
manufacturing or if it is a trading/services firm. For microenterprises, the minimum
revenue and investment requirements are kept intentionally low in order to encourage
registration, although few microenterprises actually register.
Table 220: Company Size Classification Structure for Zambia

Capital Investment Capital Investment for
Annual for Manufacturing Trading/ Services
Revenue Firms Firms
Classification Employees (ZMK million) (ZMK million) (ZMK million)
Micro < 10 < 20 < 10 < 10
Small 10 - 50 150 - 250 80 – 200 150
Medium 51-100 300 - 800 200 – 500 151 - 300
Large > 100 > 800 > 500 > 300
Source: Zambia Development Agency
China: The China government is challenged in defining sizes of firms. Temporary

definitions have been used for the past several years, and the government promised to
revise the standard in 2010. The definition from the National Bureau of Statistics of
China is complex. The definition was published in 2002 jointly by the Ministry of
Finance, National Bureau of Statistics of China, State Economic and Trade Commission
(no longer exists), and China Planning Commission, which has since split and exists as
the State Development and Planning Commission (SDPC) and the National Development
and Reform Commission (NDRC). A simplified presentation of the company size
374
classification is shown in Table 221. Note that the Industrial type is most appropriate for
all sectors studied in this analysis.
Table 221: Company Size Classification Structure for China

Type Index Unit Small Medium Large
Industrial Revenue million RMB Less than 30 30-300 More than 300
Construction Revenue million RMB Less than 30 30-300 More than 300
Wholesale
Retail
Transportation
Post services
Lodging and Employee person Less than 400 400-800 More than 800
Catering services Revenue million RMB Less than 30 30-150 More than 150
Source: National Bureau of Statistics of China
Vietnam: A small firm has less than 50 laborers, while a medium-size firm has 51-200
laborers. Within the small and medium-size classifications, there are some detailed
categories depending on the purpose of research and management. For instance, a firm
with less than 10 laborers is called a super small-size firm. Such a regulation is in line
with Social Insurance Law.171
VIII.10.2. Product Technical Specifications
Following the identification of products to be targeted for the value chain and feasibility
analysis, a detailed technical profile of each product with an accompanying diagram or
photograph was complied and sent to the field teams to help ensure that product data
collection in the field focused on products with similar - if not identical - technical
specifications. Table 222 below provides the product technical specifications for all ten
products for which product data are being collected.
171
Information garnered from
http://laws.dongnai.gov.vn/1991_to_2000/2000/200004/200004280005_en/lawdocum
375
Table 222: Product Technical Specifications
Weight Dimension Material
Unit of
Product Weight Unit of measure
measure
1 Golf gloves 85 - 141 grams Men's medium Sheepskin
Loafer 780 grams Heel Width Insole
2 cm Sheepskin
Size US = 8 EU = 7 2.5 10 30
3 Padlock* 760 grams 7 7 NA* cm Brass
Crown cork Thickness Diameter Height
tin free steel
4 (metal bottle 290 mg mm
0.24 31.9 6.6 (tfs)
cap)**
Width Depth Height
5 Wooden chair 6.5 kg cm Pine
45 45 75
Width Depth Height
6 Wooden door 12 kg cm Pine
80 4 210
Protein Lactose Ash Vitamins Fat content
7 Milk 0.5 liters
3.5% 4.7% 0.8% B1, B2, C and D Full
Type (German) Type (French) Ash Protein Moisture
8 Milling approx. All purpose flour Wheat or rice
550 55 <0.65% <14.5%
11%
9 Polo shirt 250 - 270 grams Refer to diagram 100% cotton
80% cotton/
10 Underwear 80 - 100 grams Refer to picture
20% spandex
* Overall height is 14 cm with a 2 cm shackle diameter
** The weight of the cover (plastic sole made from PVC) in the internal surface of the cap is 290 mg
VIII.11. International Competition – China and Vietnam
The leather and leather products industry in China is based mainly in Zhejiang and
Guangdong provinces. The total industrial output of leather, fur, feather and related
products in China in 2009 was US$34 billion (excluding leather footwear).172 According
to China Leather Industry Association, the country‘s total production value in the leather
sector in 2010 surged 25.4 percent in the first half compared to the previous year; up by
18.2 percent year-on-year. In terms of exports, the 7 percent year-on-year decline in
industry exports in 2009 was more than compensated in 2010 when only in the first half
of the year the exports of articles of leather posted a growth of 25 percent to US$22.8
billion. Of these, exports of leather apparel and accessories from China - including sports
gloves - were worth US$1.8 billion in 2009, or 26 percent of the world trade in leather
apparel and accessories.
Vietnam‘s exports of articles of leather apparel and accessories are minimal and very low
compared to country‘s total apparel exports: in 2009, Vietnam exported US$59 million
worth of these articles, or less than 1 percent (0.8 percent) of world trade (Table 223
172
Data according to China Statistical Yearbook, which does not include firms with annual turnover of less
than RMB5 million.
376
below). In terms of leather gloves for sports, however, Vietnam exports are significant.
The country exported roughly US$35 million of sports leather gloves in 2009, which is
almost 10 percent of the total sports leather gloves traded annually. China, however,
dominates one-quarter of the sports leather gloves international trade, which was worth
US$420 million in 2009.
Table 223: Exports of Sports Leather Gloves and other Apparel/Accessories of Leather, China and
Vietnam, 2006-2009
China's Exports to World (US$ thousand) % of World

Product label
Value in 2006 Value in 2007 Value in 2008 Value in 2009 (2009)
Articles of apparel of leather or of composition leather $ 1,643,757 $ 1,292,117 $ 992,580 $ 780,834 23%
Gloves, mittens & mitts, for sports, of leather or of composition leather $ 110,402 $ 116,923 $ 106,121 $ 98,306 23%
Gloves, mittens & mitts, other than for sport, of leather or of composition leather $ 760,857 $ 723,824 $ 726,526 $ 581,378 42%
Belts and bandoliers of leather or of composition leather $ 361,782 $ 420,556 $ 396,461 $ 358,860 19%
Clothing accessories nes, of leather or of composition leather $ 16,101 $ 15,661 $ 15,644 $ 11,916 12%
Total, Articles of Apparel and Clothing Accessories, of Leather or Composition
Leather $
2,892,899 $ 2,569,081 $ 2,237,332 $ 1,831,294 26%
Product label Viet Nam's Exports to World (US$ thousand) % of World
Value in 2006 Value in 2007 Value in 2008 Value in 2009 (2009)
Articles of apparel of leather or of composition leather $ 157 $ 2,177 $ 2,572 $ 13,113 0.4%
Gloves, mittens & mitts, for sports, of leather or of composition leather $ 27,389 $ 36,578 $ 40,497 $ 34,980 8%
Gloves, mittens & mitts, other than for sport, of leather o of composition leather $ 4,151 $ 6,361 $ 6,773 $ 9,252 1%
Belts and bandoliers of leather or of composition leather $ 1,358 $ 2,907 $ 2,130 $ 1,775 0.1%
Clothing accessories nes, of leather or of composition leather $ 3 $ 30 $ 36 $ 83 0.1%
Total, Articles of Apparel and Clothing Accessories, of Leather or Composition
Leather $ 33,058 $ 48,053 $ 52,008 $ 59,203 1%
Global Development Solutions LLC from ITC/UN Comtrade
VIII.12. Feasibility Analysis of Leather Golf Gloves Production in Ethiopia
Currently, Ethiopia does not produce leather golf gloves. The objective of the feasibility
study is to determine the probable economic and financial profitability by simulating the
production of leather golf gloves given the current level of labor productivity, and
production costs associated with polo shirts.173 The input material for the production of
leather golf gloves is sheepskin leather, which is abundantly available in Ethiopia. The
VCA uses actual cost of sheepskin leather in Ethiopia and input utilization rates from
China to arrive at raw material costs.
A number of assumptions were made in order to develop a profile of a hypothetical

factory to simulate the production of golf gloves in Ethiopia. The following provides a
brief description of how figures were adjusted.
Size of operation: The size of the operation was adjusted according to the labor
productivity ratio between a factory producing polo shirts in China and Ethiopia.
173
Golf gloves are apparel items whose assembly is more similar to clothing items than leather footwear
items. Productivity figures from clothing apparel production will therefore be used to estimate golf glove
assembly productivities in Ethiopia.
377
Specifically, the average labor productivity in China was approximately 25 shirts per
person per day, as opposed to 11 shirts per person per day in Ethiopia. Given the
differential production of 56 percent, the size of the operation was scaled down
accordingly.
Number of employees: The total number of employees was kept the same as the factory
in China, but the number of skilled, unskilled and casual employees was adjusted
according to the proportion of these categories of workers in the representative factory in
Ethiopia.
Labor turnover and absenteeism rate: The same turnover and absenteeism rate as the
representative factory in Ethiopia was used.
Output: shifts, average capacity utilization and output: Figures from the representative
factory in Ethiopia were used, starting at 65 percent utilization for one shift operation.
Output and revenue figures were adjusted to reflect the revised operations figure for the
hypothetical factory.
Major production equipment: The F/S assumes that the same equipment currently used
by the leather golf gloves factories in China is available to the manufacturer in Ethiopia
at a price to include import costs and local distribution of 15 percent of FOB China.
Average spoilage, reject, waste and loss rates: These figures were revised to reflect the
figures in the representative factory in Ethiopia.
Raw material input: The amount and cost of raw material input, including packing and
packaging material, was adjusted to reflect the revised number of leather golf gloves
produced per day at the hypothetical factory. The cost of transport and handling was
incorporated into the total cost.
Salary and wages: Total annual salary and wages were adjusted to reflect the revised
distribution of skilled and unskilled workers, and used the current wage rates for these
skill levels in Ethiopia.
Electricity: The cost of electricity was adjusted to reflect the revised number of leather
golf gloves produced per day multiplied by the actual unit cost of electricity in Ethiopia
today. percentage of time off the grid per month is the same figure as the representative
factory in Ethiopia.
378
Water and fuel: The cost of water and fuel was adjusted to reflect the revised number of
leather golf gloves produced per day multiplied by the actual unit cost of water in
Ethiopia today.
Administrative overhead: The cost of administrative overhead costs was adjusted to

reflect the revised number of leather golf gloves produced per day.
License and certification fees, taxes, VAT: These fees were adjusted to reflect payment
rates made by the representative firm in Ethiopia, and adjusted to reflect the revised units
of leather golf gloves on a daily basis.
VIII.12.2. Value Chains Analysis for Leather Golf Gloves
In order to assess the potential competitiveness of producing leather golf gloves in

Ethiopia, a value chain analysis for the production of leather golf gloves was first
conducted in both China and Vietnam. The average cost of producing leather golf gloves
in China ranged from US$2.4 to US$2.5 per piece at a labor productivity level between
10 and 20 pieces per person per day. As with most apparel items, manufacturers in
Vietnam were generally focused on CMT rather than establishing their own supply chain
for accessing all of the necessary input material. The cost of assembling leather golf
gloves in Vietnam was US$0.47 per piece with labor productivity of roughly 11 pieces
per person per day.
Based on the assumptions and methodologies presented above, the estimated cost of
producing leather golf gloves in Ethiopia using local sheepskin leather is approximately
US$1.95 per piece. As with the production of other apparel items, the relatively low cost
of labor in Ethiopia could provide a competitive advantage to prospective golf glove
producers. 174 As the value chain diagram below indicates, this advantage could be
accentuated by the abundance of relatively well-priced sheepskin leather in Ethiopia,
which could contain the raw material costs of Ethiopian producers on par with levels
prevailing in China (approximately 80 percent of the cost of producing gloves or roughly
US$1.6-US$1.9 per piece).
174
The average wage rate for all apparel firms interviewed has been taken for this feasibility simulation.
379
Table 224: Benchmarking Data for the Production of Golf Gloves
Benchmarking Data Sheet: Leather Golf Gloves China Viet Nam Ethiopia
1.0 FACTORY CMT Simulated
1.1 Capacity utilization 85% - 100% 80% 70%
1.2 Installed capacity (piece/day) 1000 - 2,500 4,600 1,300
1.3 Labor absenteeism rate (%) 1% - 3% 5% 11%
1.4 Average salary/wage/month
1.5 Skilled $339 - $413 $ 93 $ 114
1.6 Unskilled $177 - $251 $ 73 $ 39
1.7 Days of operation/month 26 - 28 27 25
1.8 Average age of major equipment 4-9 10 4.0
2.0 Exported Output (finished primary product)
Relatively low
2.1 Direct Export without consolidator/broker % 100% 100%
2.2 Indirect Export Through Local Consolidator 20% - 70% % % labor costs
2.3 Indirect Export Through Overseas Consolidator % % % could make golf
3.0 Domestically Sold Output (finished primary product) glove production
3.1 Direct Sales to Wholesalers/Retailers without consolidator % % % using local leather
3.2 Direct Sales Through Own Outlets/Shops/Showrooms 30% - 80% % % competitive
3.3 Indirect Sales Through Local Consolidator/Trader % % %
4.0 Unit production cost ($/piece) $2.4 - $2.5 $ 0.47 $ 1.95
380
Figure 68: Simulated Value Chain Diagram for Leather Golf Gloves in Ethiopia
Leather Golf Gloves Ethiopia Simulated
Raw material Cutting Decorating Sewing Finishing Packing Admin OH

56.3% 3.4% 7.8% 15.0% 13.3% 3.7% 0.5%
Leather 100.0% Labor 36.3% Labor 10.3%

Raw Material 56.7% Raw Material 89.7%
Raw Materials $ 1.6 82% Fuel/oil/ water 5.1%
Labor $ 0.1 7% Other 1.9% Global Development Solutions, LLC
Figure 69: Value Chain Diagram for Leather Golf Gloves in China
Leather Golf Gloves China

57.7% 4.2% 7.4% 14.8% 11.6% 3.3% 1.0%
Leather 100.0% Labor 44.9% Labor 14.4%

Raw Materials 47.7% Raw Materials 85.6%
Raw Materials $ 1.9 79% Fuel/oil/ water 4.3% Other 0.0%
Labor $ 0.4 17% Other 3.1% Global Development Solutions, LLC
381
Figure 70: Value Chain Diagram for Leather Golf Gloves in Vietnam
Leather Golf Gloves Viet Nam

0.0% 9.0% 6.0% 34.3% 37.5% 8.1% 5.1%
Labor $ 0.4 81%

Raw Materials $ 0.03 3% Labor 100.0% Labor 91.6% Labor 95.6%
Electricity 4.9% Fuel/oil/ water 0.0%
Fuel/oil/ water 3.6% Electricity 4.4% Global Development Solutions, LLC
382
The major challenge for manufacturers in Ethiopia, however, is whether they are able to
control key problems that prevail across apparel value chains in the country:
 Problems with consistent quality of stitching, finishing and other assembly
processes;
 Low labor productivities;
 High absenteeism rates; etc.
Without some interventions to address these and other inefficiencies within the firm, golf
glove producers are unlikely to be able to overcome already significant disadvantages
that come from operating in Ethiopia. These factors include weak supply chains and a
relatively weak business environment not conducive to growth, as well as the fact that
Ethiopia as a landlocked country in Africa and that it is relatively unknown to foreign
buyers as a source of apparel.
Table 225: Benchmarking Data for the Production Golf Gloves

Benchmarking Data Sheet: Leather Golf Gloves China Viet Nam Ethiopia
CMT Simulated
4.1 Export Rebate* $0.4 - $0.9
$ - $ -
5.0 Avg Selling Price (US$)
5.1 Factory gate $2.5 - $5.1 $ - -
5.2 Wholesale $2.8 - $5.5 $ - -
5.3 FOB price $3.1 - $5.8 $ 0.87 -
6.0 Avg Spoilage & Reject rate: List different types (3)
6.1 In-factory product rejection 2% - 5% 0% 3%
6.2 Product rejection by client 1% - 6% n.a 2%
7.0 Avg Waste & losses: List different types (% of total )
7.1 Production waste (leather-to-glove) 2% - 4% n.a 2%
7.2 Losses (theft) 3% n.a 3%
8.0 Electricity
8.1 On grid (Cost/kWh) $ 0.15 $ 0.08 $ 0.12
8.2 Off grid (Cost/kWh) - self generated na n.a na
8.3 % of time off grid/month 0% - 4% % 3%
9.0 Water ($/m³ ) $0.44 - $0.66 $ 0.37 $ 0.12
10.0 Fuel & Oil ($/liter) $0.88 - $1.00 $ 0.37 $ 1.92
11.0 PRODUCTIVITY & EFFICIENCY
11.1 Labor productivity (leather golf gloves) : Pieces/person/day 10 - 20 10.6 5.9
11.2 Electricity usage: On-grid (kWh/1,000 pieces) 98 - 198 237.34 119.05
11.3 Electricity usage ($/1,000 pieces) $14 - $29 $ 18.45 $ 14.22
11.4 Water usage (m³/1,000 pieces) 8 - 16 7.84 11.90
11.5 Water usage ($/1,000 pieces) $3 - $9 $ 2.90 $ 1.42
11.6 Fuel & oil usage (liters/1,000 pieces) 11 - 24 29.18 14.88
11.7 Fuel & oil usage ($/1,000 pieces) $10 - $21 $ 10.72 $ 28.53
11.8 Transport ($/km-ton) $0.22 n.a na
* Rebate is collected by the exporting firm. In cases when the manufacturer exports via an
exporter/trading company, the rebate may or may not be passed from exporter to manufacturer
depending on terms of contract between manufacturer and its exporter. Manufacturers collect
entire rebate when exporting on their own (most small firms don't export directly)
383
Producing Leather Golf Gloves
The major factors affecting the feasibility analysis of producing leather gloves are as
follows:
may well be set up as a new product line in an existing leather products plant,
in which case the costs would be incremental and the return would be
enhanced because of the presence of sunk costs. The reason for treating it as a
reflect the overall competitiveness of the industry.
 Importable or exportable product: Given the extent of livestock production in

Ethiopia and the net direction of current trade, leather products, including
leather gloves, are exportables. This is the case even if there is a good
domestic market because the opportunity cost is in terms of exports.
 The size of the market: Total demand per annum for leather gloves is
considered to be large assuming adequate quality. Ethiopia would be a
relatively small producer and would therefore be a ‗price-taker‘ in the world
market, in effect facing unlimited demand.
 Capital Costs: The analysis assumes imported equipment based on Chinese

origin prices plus transport and handling from China via Djibouti to Addis
Ababa of 15 percent of FOB price. Capital costs are about US$0.3 million
including buildings, equipment, ancillaries, vehicles and installation.
 Wastage rates: Based on footwear as an example of a leather garment,

wastage rates may be as much as 40 percent from in-factory rejection,
delivery rejection, inline defects and cutting waste compared to 3 percent
production waste and 3 percent reject rate in China. In addition, labor
absenteeism in Ethiopia is as much as 12 percent (compared to 3 percent in
China). Finally, based on the footwear experience, labor output per hour is
about 44 percent of that achieved in China. In sum, the assumption made is
material costs allowing for wastage at 30 percent above those of China. As
such, there is clearly scope and need for significant productivity increases
reflected in total output per unit of input. The main assumption made is for a
2 percent annual increase in output at the same level of input as wastage falls.
384
 The Impact of Power shortages: Electricity downtime has averaged about 17
percent in Ethiopia. However, large scale investments in new power capacity
in Ethiopia are expected to alleviate this early in the unit‘s life. The likely
decline in power outages is assumed to be incorporated within a measurement
of the general rate of increase in productivity (total output per unit of input).
 Capacity, output and productivity: Initial maximum output will be 300,000

pieces per annum by year 3 at current Ethiopian productivity levels
(approximately 44 percent of that of China). A discount on Chinese factory
wages is incorporated to allow for lower Ethiopian real wages. The
employment per unit is 150 workers, which would be a small/medium scale
enterprise in Ethiopia. Capacity utilization would be about 70 percent on one
shift. Taking account of the assumed 2 percent annual productivity increase,
maximum output will increase for the same inputs.
 Negative natural protection: In the case of a domestic material based

exportable product, high transport and handling costs create a disadvantage
(unlike the case of an importable). Based on the case of boxer briefs, total
transport related costs for gloves are assumed at about 10 percent of ex-
factory cost up to the port of Djibouti. (This is a low estimate for closely
packed garments.)
 Effective price including transport and handling costs: The FOB price at
Djibouti less transport and handling to the port is the effective price obtainable
by the Ethiopian producers. The valuation of the product is a very sensitive
parameter from the point of competitiveness. The VCA shows the low end
ex-factory price of leather golf gloves in China at about US$2.50 per piece,
with a range up to US$5.00. For the purposes of this analysis the lower end is
applied (US$2.95) in order to reflect current Ethiopian quality levels and
transport/handling costs to the port.
 Changes in the real exchange rate: In a separate analysis we project an

appreciation in the RER for the Chinese Yuan in relation to both the US
Dollar and the Ethiopian Birr at as much as 3 percent per annum over five
years, leading to a 16 percent overall increase as of year 5. This increase is
based on the high case projection made by the World Bank to reflect both the
productivity growth differentials and a catch-up effect. However, in view of
the uncertainty over RERs this is used as a residual adjustment only and the
focus is first on possible productivity increases within the Ethiopian factory.
385
VIII.12.4. Results of the Analysis
The feasibility calculations give the following results for key changes in assumptions
(Table 226).
Table 226: Economic Returns to Leather Gloves Production – Base Case Estimate*
Item US$ or Units
Output (year 3) 300,000
Asset Life 10 years
Capital Costs $320,187.50
Operating Costs (year 3) $826,336.46
Total Production and Capital Costs per Piece $2.82
Revenue/ Benefit (year 3) $885,000.00
Initial FOB Based Price $2.95
*Assumptions - No change in productivity or real exchange rates.
The above results show a satisfactory return on production of gloves in current

conditions. This would be equivalent to a DRC ratio of somewhat above 1.0. Total
production cost per piece including capital costs in year 3 is about US$2.82 with product
ex-factory price of US$2.95. The rate of return is not exceptional mainly because of high
material costs only partially offset by savings in labor costs. In addition, Ethiopia faces a
transport cost disadvantage on exports.
The relatively low cost of labor in Ethiopia combined with considerable reduced material
wastage could provide a competitive advantage to future golf glove producers
complemented by the abundance of relatively well priced sheepskin leather in Ethiopia,
which could contain the raw material costs of Ethiopia compared to competitors.
are possible in a) productivity increase within Ethiopian factories that will lower
Ethiopian costs, b) infrastructure improvements such as roads and power supply that may
lower Ethiopian costs relative to some competitor countries and c) real effective
exchange rates in main competitor countries (e.g., China) that would increase Chinese
prices relative to Ethiopian. The analysis allows for a) and b) through an overall
productivity increase in terms of output per given level of input.
386
Table 227: Economic Returns with Productivity Improvement*
Item US$ or Units
Output (year 3) 312,120
Asset Life 10 years
Capital Costs $320,187.50
Operating Costs (year 3) $826,336.46
Total Production and Capital Costs per Piece $2.71
Revenue/ Benefit (year 3) $920,754.00
Initial FOB Based Price $2.95
*Productivity improves at 2% per annum
With a modest productivity increase of 2 percent per annum in terms of output per unit of
input, costs per piece fall from US$2.77 in year 3 to $2.36 in year 10, and the ERR would
rise to 29 percent. With a 3 percent annual productivity increase (which would
significantly narrow the productivity gap by year 10) total production cost would fall to
about US$2.16 per piece by year 10, closer to current Chinese ex-factory costs. In this
case the ERR would rise to 35 percent. In addition, the probable relative movements in
the RER of China and Vietnam (discussed in a separate study) would raise their supply
prices on the international market and create more competitive headroom for Ethiopia,
resulting in highly competitive production in the medium term.
VIII.13. Conclusions and Recommendations
Ethiopia has an indigenous source of excellent sheepskin for leather golf gloves.
Factoring in plausible productivity increases combined with low real wages, over a ten-
year period the domestic production of leather gloves as representative of the leather
products industry is economically viable and also financially profitable. Productivity
improvements (including reduced absenteeism, reduced wastage and increased labor
output per hour) could result in strong profitability down the road. If Ethiopia‘s internal
transport and handling costs are reduced then this result is reinforced, and RER
movements complement these changes. There clearly is scope for major additional
investment in the leather products industry provided productivity and quality
improvements occur.
387

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Competitive Africa: The Value Chain and Feasibility Analysis Module – Draft 4

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VIII. Feasibility Study of the Domestic

VIII.1. Background and Objective

VIII.2. Product Selection Method

a. Leather golf gloves; and

2. Leather products: Leather golf gloves or sports glove of comparable structure

VIII.2.1. Respective Government Definitions of Small, Medium and

Table 196: Company Size Classification Structure for Ethiopia

Table 197: Company Size Classification Structure for Tanzania

Table 198: Company Size Classification Structure for Zambia

China: The China government is challenged in defining sizes of firms. Temporary

Table 199: Company Size Classification Structure for China

VIII.2.2. Product Technical Specifications

Table 200: Product Technical Specifications

VIII.3. International Competitiveness of the Garments Sector in Ethiopia,

VIII.3.1. Sector Profile - Ethiopia

Table 202: Ethiopia Apparel Production and Trade Statistics, 2009

Table 203: Employment Statistics for Ethiopia Apparel Sector

Multiple problems persist along the cotton-to-garment processing chain in Ethiopia.

Figure 64: Ethiopia Cotton-to-Garment Processing Road Map

Ethiopian Cotton Farms/cotton

Ginning & Spinning Mfs

Textile & Garment Manufacturers

Principal problems of textile & garment industry

Source: Global Development Solutions, LLC

VIII.3.2. Sector Profile - Tanzania

be published in 2011, the country had 47 establishments manufacturing textiles, apparel

Table 205: Apparel Trade Statistics, Tanzania, 2009

VIII.3.3. Sector Profile - Zambia

Table 206: Firm Statistics, Apparel Manufacturing, Zambia

VIII.4. International Competition – China and Vietnam

Despite success to date, Chinese competitiveness is eroding because of labor shortage.

Table 208: Enterprises in the Apparel Sector in Vietnam (2010)

Size Classification No. of Enterprises % of Total No. of Employees

VIII.5. Feasibility Analysis of Boxer Briefs Production in Ethiopia

VIII.5.1. Production Assumptions Based on the VCA

A number of assumptions were made in order to develop a profile of a hypothetical

Administrative overhead: The cost of administrative overhead costs was adjusted to

Can the Cost of Transporting Input Material to Ethiopia be Reduced?

Breakdown of Tax on Imported Fuels (November, 2010)

Source: Global Development Solutions, LLC

VIII.5.2. Value Chains Analysis for Boxer Briefs

In order to assess the potential competitiveness of producing boxer briefs in Ethiopia, a

Fabric 100.0% Raw material inputs 89.8% Packing material 88.4%

Figure 66: Value Chain Diagram for Boxer Briefs in China163

Fabric 100% Raw material inputs 84.6% Packing material 66.1%

Figure 67: Value Chain Diagram for Boxer Briefs in Vietnam164

Labor $ 0.22 79.1%

VIII.5.3. Assumptions for Estimating Economic Feasibility of

 Greenfield project: The entity is treated as a ‗greenfield‘ unit. In practice it

 Capital Costs: The analysis assumes imported equipment based on Chinese

 The price of domestically produced fabric and whether it is competitive with

 The Impact of power shortages: Electricity downtime has averaged about 17

 The extent of the natural protection accorded to domestic production:

 Projections in the real exchange rate: In I.1 Introduction: Factors Affecting

VIII.5.4. Results of the Feasibility Analysis

Table 213: Economic Returns for 2 percent Annual Increase in Productivity*

VIII.6. Feasibility Analysis of Boxer Briefs Production in Tanzania

VIII.6.1. Production Assumptions Based on the VCA

VIII.6.2. Assumptions for Estimating Economic Feasibility of

 Greenfield project: The entity is treated as a ‗greenfield‘ unit. In practice it

 The price of main material – fabric: Fabric is produced in Tanzania, but it is