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An Overview of the Integrated Value Chain Analysis™ Of Selected Strategic Sectors The Government of Ethiopia and The World Bank Group Addis Ababa, Ethiopia 23 May 2006 Presented by Global Development Solutions, LLC™ www.GDS-LLC.com. Sectors Presented Cut Flowers (Roses)

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slide1

An Overview of the

Integrated Value Chain Analysis™

Of Selected Strategic Sectors

The Government of Ethiopia

and

The World Bank Group

Addis Ababa, Ethiopia

23 May 2006

Presented by

Global Development Solutions, LLC™

www.GDS-LLC.com

slide2

Sectors Presented

  • Cut Flowers (Roses)
  • Cotton-to-Garments (Polo Shirt)
  • Skins-to-Leather Shoe
  • Housing/Road Construction
slide3

Value Chain Analysis for

Cut Flowers (Roses)

market opportunities and characteristics

Cut Flowers

Roses

Market Opportunities and Characteristics

Ethiopian Exports (Roses): $10 million (2005)

Global Demand (Cut flowers/buds) $12.3 billion (2005)

  • Fierce Competition with downward price trends
  • Stricter breeders’ rights as well as environmental and social codes of conduct increasingly important
  • In some countries, such as the UK, increased importance of supermarket (direct sales) distribution channels
key findings from the value chain analysis

Cut Flowers

Roses

Farm-to-Market Value Chain for Soil-Grown Roses

Farming

24.8%

Post-Harvest

Handling

1.7%

Transport &

Marketing

73.5%

Farm-to-Market Value Chain for Hydroponics-Grown Roses

Farming

24.1%

Post-Harvest

Handling

1.5%

Transport &

Marketing

74.4%

Key Findings from the Value Chain Analysis
  • Farming with self propagated material or in hydroponics media both provides superior cost competitiveness via reduced plant material cost and higher yields

US$255,683/ha

US$0.155/stem

1.65 mil stems/ha

US$294,190/ha

US$0.150/stem

2.1 mil stems/ha

  • Insufficient coverage of cargo flights exacerbates the already high portion of transportation and marketing cost in the total farm to market value chain
slide7

Cut Flowers

Roses

Cut Flower Supply Chain

for Ethiopia

Local Inputs

Flower Producer

Imported Inputs

Imported Input Traders

On-site inspection and customs (MoA, Customs Inspectors)

Refrigerated Truck

Airport

Airlines

(EA, KLM, Lufthansa)

Freight Forwarding Services

Cold Storage

Passenger

Cargo

Cargo

Source: Global Development Solutions, LLCTM

Export Market

Dutch Auctions

Export Market

Other

2/3

1/3

slide8

Cut Flowers

Roses

Hydroponics vs. Soil Production

slide9

Cut Flowers

Roses

Benchmarking Key Characteristics of Rose Production in Ethiopia

key constraints and challenges

Cut Flowers

Roses

Key Constraints and Challenges
  • Poor clearinghouse services
  • Undeveloped network of supporting service providers, especially in the area of insurance and freight forwarding/clearing
  • Nonexistent research and development, at business and public sector level
  • Increased diversification away from direct sales towards Dutch Auctions
actions way forward

Cut Flowers

Roses

Actions/Way Forward

Firm Level

  • Increase usage of hydroponics growing medium
  • Increase self-propagation of plant material
  • Increase usage of support services rather than do all marketing by themselves
  • Do not entirely diversify away from direct sales

Industry Level

  • Establish Codes of Conduct
  • Create captive cost-minimizing supply chain structures for fertilizer and other inputs
  • Create industry level linkages with the support industries such as insurance and freight forwarding
  • Create partnerships with the public sector to intensify research and development
actions way forward1

Cut Flowers

Roses

Actions/Way Forward

Public Sector

  • Establish a working system of breeders’ right protection with eventual membership in the UPOV - gain observer’s status in UPOV as an intermediary step;
  • Establish clearing house facilities at airport and increase cargo freight fleet by Ethiopian Airlines; and
  • Increase spending in research and development.
slide13

Value Chain Analysis for

Cotton-to-Garments

market opportunities and characteristics1

Cotton to

Garments

Polo

Shirt

Market Opportunities and Characteristics

Ethiopian Exports (Textiles/Garments): $3.6 million (2005)

Global Demand: $183 billion (2005)

China: 60% of US Market

AGOA: 1.3 billion sme (only 11.7% quota filled)

  • Multiple fashion trends in one season, mass customization and shortened lead times
  • Increased leverage and market power of large retailers who can and do downward price pressures on suppliers
  • Quota removal has removed competitiveness from suppliers relying on quota preferences for market access
  • AGOA window of opportunity narrowing: proliferation of AGOA-type preferential treatment on the part of the USA extended to many countries.
  • Chinese temporarily withdrawal from knit shirt and cotton trouser market, key segment of African apparel exporters
slide15

Cotton to

Garments

Polo

Shirt

slide16

Cotton to

Garments

Polo

Shirt

Diagram XXX: Value Chain for Exported Polo Shirt, Private Firm, Ethiopia

slide17

Cotton to

Garments

Polo

Shirt

Key Findings from the Value Chain Analysis :An Example of Polo Shirt Production

  • Lack of transparent cost accounting (SOE)
  • Poor labor skills
  • Excise duty on fabrics hamper competitiveness
  • High cotton fabric waste (SOE)
slide19

Cotton to

Garments

Polo

Shirt

slide20

Cotton to

Garments

Room for Improving Lint-to-Yarn Conversion Ratio

Polo

Shirt

slide21

High Cost of Ginning

Cotton to

Garments

Polo

Shirt

slide23

Cotton to

Garments

Polo

Shirt

Need for Improving Farming Practice

key constraints and challenges1

Cotton to

Garments

Polo

Shirt

Key Constraints and Challenges
  • Poor training know-how and non-existent institutional support in the area of skills improvement;
  • Counterproductive Government taxation in the form of VAT and excise duty;
  • Inefficient and wasteful public textile companies unable to supply sufficient quality and quantity of fabric for garment exporters;
  • Cotton lint production dominated by large scale companies with no access to irrigation (private companies) and thus have low cotton yields; and
  • Large scale farms with access to irrigation (mostly SOEs) are challenged by an overburdened administrative overhead cost structure.
actions way forward garments and textiles

Cotton to

Garments

Polo

Shirt

Actions/Way Forward – Garments and Textiles

Firm Level

  • Improve productivity training; and
  • Reduce waste on the part of SOEs both at fabric and textile level.

Industry Level

  • Create research and training centers; and
  • Pool resources for marketing efforts abroad.

Public Sector

  • Privatize textile assets;
  • Remove or reduce excise duty on textiles; and
  • Expedite VAT refunds.
actions way forward cotton

Cotton to

Garments

Polo

Shirt

Actions/Way Forward – Cotton

Firm Level

  • Improve farm management and remove OH redundancies at both farms and ginneries;
  • Invest in seed production; and
  • Maintain high GOT levels.

Industry Level

  • Develop market linkage mechanisms to help link the most productive farms (usually irrigated farms) with the most efficient ginners

Public Sector

  • Extend the irrigation network;
  • Establish and enforce rules for chemical usage at farm level;
  • Increase spending on cotton research; and
  • Stimulate seed sector.
slide27

Value Chain Analysis for

Skins-to-Leather Shoes

market opportunities and characteristics2

Shoes

Leather

Market Opportunities and Characteristics

Fresh Sheepskin Production

Africa (Total): 154,285 MT

(8.6% of World Production)

Ethiopia: 10,0800 MT

Ethiopia’s Export of Dried Salted Skins: 2,888 MT

(73.2% of African exports)

(6.6% of Global exports)

slide29

Raw Sheepskin Supply Chain in Ethiopia:

High Waste and Damage

Shoes

Leather

slide30

Poor Quality of Skins

Shoes

Leather

Declining Share of Grade 1-3 and 4 Skins

slide32

Shoes

Leather

High Opportunity Cost of Ekek

market opportunities and characteristics for leather shoes

Shoes

Leather

Market Opportunities and Characteristicsfor Leather Shoes

EU Demand for Shoes: €61.8 billion

Sourcing from Developing Countries: 24% - 53%

Italy (Largest EU Consumer): 395.3 million pairs/year

Ethiopian Production

Formal Sector: 1.9 million pairs/year

Informal Sector: 3.5 million pairs/year

  • Low capacity to respond to international orders both in quantity and time;
  • Poor finishing due to lack of skilled labor and appropriate technology;
  • Slow responsiveness to change shoe models;
  • High production costs; and
  • Lack of marketing skills.
key findings from the value chain analysis1

Shoes

Leather

Key Findings from the Value Chain Analysis
  • High cost of raw material (Birr 79.77/pair)
  • High wastage of material during cutting (15%)
  • High cost of material for lasting and finishing (27.6% of shoe manufacturing)
slide35

Shoes

Leather

High Assembly Costs

Poor Labor Productivity

key constraints and challenges2

Shoes

Leather

Key Constraints and Challenges

Raw sheepskin

  • Ekek attack(almost 80%of sheepskin from highland Ethiopia) ;
  • Unorganized supply chain in raw sheepskin;
  • Per piece pricing does not reward quality;
  • Poor slaughtering and post slaughter handling; and
  • Low awareness for quality of sheepskin along the entire supply chain.

Leather

  • Overall shortage of sheepskin and under capacity operation (48%) and
  • High cost of input raw sheepskin (60% of production cost);
  • Defect of raw sheepskin (80% Ekek, 10%lack of preservation, and 10% lack of proper handling): and
  • Shortage of skilled workers.

Shoes

  • High cost of raw material (upper shoe leather 90% of cost);
  • Lack of skilled labor and inflexible technology to respond to market;
  • Dumping of low price and low quality shoes from China; and
  • Low capacity utilization of shoe producers (56%).
actions way forward2

Shoes

Leather

Actions/Way Forward

Firm Level

  • Install and strengthen the finishing lines in the tanneries;
  • Conduct training of workers; and
  • Improve environmental performance.

Industry Level

  • Establish a quality-based pricing system for sheepskin;
  • Assist improvement and expansion of slaughter houses and raw sheepskin storage;
  • Form Public-Private Partnerships to eradicate Ekek;
  • Arrange supply of semi-finished skin to tanneries that process finished leather so that shortage is avoided and prices normalized.
actions way forward cont
Actions/Way Forward (Cont’)

Public Sector

  • Take immediate action on ekekcontrol and eradication;
  • Strengthen and expand extension services on skin and hide;
  • Give incentive to tanneries that process sheepskin to finished leather;
  • Strengthen LLPT1 as a center of excellence that provides training and conduct R&D to support tanneries;
  • Encourage export of meat and suppress export of live animals;
  • Encourage investment in animal husbandry farms;
  • Expand modern slaughterhouses; and
  • Expand veterinary services.
slide39

Value Chain Analysis for

Housing and Construction

slide40

Housing & Road

Construction

Housing: Profile

Building Height: Ground + 6 floors

Total Building Area: Multi-family apartment (24 units)

175.23 m²

Site Work: 850 m² of asphalt pavement

Engineering Estimates

slide41

Housing & Road

Construction

Housing Construction Value Chain

Construction Phase

slide42

Housing & Road

Construction

slide43

Housing & Road

Construction

High Cost of Input Material

slide44

Housing & Road

Construction

slide45

Housing & Road

Construction

Low Road Density

key findings from the value chain analysis road

Housing & Road

Construction

Key Findings from the Value Chain Analysis (Road)
  • The bulk of the value added comes from construction of the road (90% of the total cost of road construction);
  • The highest cost of construction for base-course (constitutes 48% of road construction work );
  • Quarry rock production activity is the highest (33% of base course cost) during the base-course phase due to high cost of equipment (constitutes 49.37%)
slide47

High Equipment Input Requirement

Housing & Road

Construction

slide48

Housing & Road

Construction

High Cost of Equipment Rental and Finance

key constraints and challenges3

Housing & Road

Construction

Key Constraints and Challenges

Housing

  • Unavailability of adequate standards and norms;
  • Limited design checking/review and approval procedures;
  • Lack of IT know-how and training;
  • Lack of Standard Contract Documents;
  • Shortage of construction material;
  • Shortage of construction machinery;
  • Scarcity of finance and lack of management skill; and
  • Lack of Building Code.

Road

  • Shortage of equipment rental company and high rental cost;
  • Limited access to Finance;
  • Shortage of qualified national engineers and technicians;
  • Lengthy dispute settlement mechanism and lengthy judiciary process;
  • Bureaucratic and lengthy bid analysis practices; and
  • Absence of proper mechanism for addressing material cost escalation.
actions way forward3

Housing & Road

Construction

Actions/Way Forward

Firm Level

  • Facilitate and provide proper training and capacity building programs to overcome the shortage of skilled human resource to deliver efficient services; and
  • Applying the use of contemporary IT software and equipment.

Industry Level

  • Introduce a mechanism whereby design fees reflect industry wide quality standards; and
  • Implement industry-wide Code of Conduct and certification program to ensure a quality rather than price driven project bidding process.
actions way forward cont1
Actions/Way Forward (Cont.)
  • Introducing land policy reforms;
  • Creating favorable loan provisions by banks;
  • Upgrade skills of City Administrations and regional bureaus staff;
  • Reduce prevailing government ownership and control over sales and distribution of major inputs for construction materials such as cement; and
  • Implementing Building Standard Code.

Public Sector

slide52

An Overview of the

Integrated Value Chain Analysis™

Of Selected Strategic Sectors

The Government of Ethiopia

and

The World Bank Group

Addis Ababa, Ethiopia

23 May 2006

Presented by

Global Development Solutions, LLC™

www.GDS-LLC.com