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Contract Manufacturing

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Introduction

Contract manufacturing enables the firm to have foreign sourcing (production) without making a final commitment. Management may lack resources or be unwilling to invest equity to establish and complete manufacturing and selling operations. Yet contract manufacturing keeps the way open for implementing a long-term foreign development policy when the time is right. These considerations are perhaps most important to the company with limited resources. Contract manufacturing enables the firm to develop and control R&D, marketing, distribution, sales and servicing of its products in international markets, while handing over responsibility for production to a local firm Payment by the contractor to the contracted party is generally on a per unit basis, and quality and specification requirements are extremely important. The product can be sold by the contractor in the country of manufacture, its home country, or some other foreign market.

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Contract manufacturing also offers substantial flexibility. Depending on the duration of the contract, if the firm is dissatisfied with product quality or reliability of delivery it can shift to another manufacturer. In addition, if management decides to exit the market it does not have to sustain possible losses from divesting production facilities. On the other hand, it is necessary to control product quality to meet company standards. The firm may encounter problems with delivery, product warranties or fulfilling additional orders. The manufacturer may also not be as cost efficient as the contracting firm, or may reach production capacity, or may attempt to exploit the agreement.

Thus, while contract manufacturing offers a number of advantages, especially to a firm whose strength lies in marketing and distribution, care needs to be exercised in negotiating the contract. Where the firm loses direct control over the manufacturing function mechanisms need to be developed to ensure that the contract manufacturer meets the firm’s quality and delivery standards. (Hollensen 2008). This form of business organization is quite common in particular industries. In a contract assembling arrangement a vehicle assembler receives, imported knocked down vehicle kits and locally procured components for assembly into a vehicle and delivers the finished vehicle to its owner.

Overview of Ethiopian Manufacturing Industries

The industrial sector in Ethiopia is only 11.1% which is much less than the world average (26.29%) and the sub- Saharan average (30.34%). The manufacturing sector contributes only 3.7% of output to GDP which is declined from its 6.4% proportion of the 2003/04. (WDI, 2013). Considering the average of three years value before and after GTP at constant factor price, the manufacturing value added has been 8.9 billion birr and 13.12 billion birr. Besides, the lead of the manufacturing sector has been taken by the group of light industries such as food, beverage, leather and textile. Hence, those whose multiplier effect would be more are less in their physical commencement. This would be seen as the other line disparity in industrial development. The import intensity and export value are different in each sub-sector. Heavy industries such as chemicals and basic iron and steel are found to be import intensive while the light categories such as food and beverage, textile and others are domestic resource intensive ones. Of course, the import intensive groups have shown reduction in their import intensity in the post GTP period. For example, in case of iron and steel it has been 0.93 and 0.91 in the pre-post GTP respectively.

Export value in real terms has shown small increment in the post GTP period than in its pre counterpart. Food and beverage industries followed by leather have been the better performers in the export sector. Textile wakens up in the post GTP season to strengthen its export. This entails us that the transformation plan has opened new opportunities to the manufacturing firms to create and enhance their capability to export. The export duty elimination, the industrial finance priority, new export destinations as additional demand and others have made the export sector waken up. Regional disparity in the distribution of manufacturing firms especially in those important heavy manufacturing industries serious prejudice has been made against Amhara region. Basic iron and steel, fabricated metals and chemical manufacturing firms are dismally few or none at all relative to other regions which are economically influential.

Thus, it would be shrewdness to objectively distribute the manufacturing sectors among the regions so that the balanced regional development would commonly be enjoyed. Otherwise, the intentionally crafted inequity problem would bear social turmoil and instability for all. The physical resource endowment, human resource accumulation, population size a base for effective demand and the infrastructure set ups have to be the objective criteria in determining the location decision of the manufacturing firms. Turning to the phase of the heavy industry fabrication for they have wider multiplier effects (backward and forward linkages) of the economy is the other core element the researcher desires to recommend. This would of course, be scrutinized in a way that the labour intensive categories would be selected thereby to augment their employment impact (Amare Mitiku Prof.S.K.V. Suryanaryanaraya Raju, 2015).

OPPORTUNITIES AND CHALLENGES OF THE ETHIOPIAN MANUFACTURING SECTOR

Opportunities of the Manufacturing Sector

  • Private sector friendly government
  • Relatively cheap electricity charge in comparison to other African countries
  • Macroeconomic stability and rapidly growing economy
  • Relatively cheap labor force and rapidly increasing number of trained employees
  • Access to wide market which include large domestic market, COMESA, AGOA, EBA opportunities and China market etc.
  • Competitive incentive packages which include export incentives
  • The coming into being of Integrated Agro-Industrial Parks which facilitate one stop shopping for all the services, to gain economies of scale, for bulk purchasing and selling, extension services, and development of common infrastructure
  • The country has gotten a strong global attention due to its remarkable economic growth and credit worthiness

Challenges of the Manufacturing Sector

  • High logistics and transportation cost
  • Limited study and action on export incentives
  • Low labor productivities
  • High cost of imported raw materials for the manufacturing
  • Limited compliance to the international requirements and market
  • Limited research on manufacturing industries including end market study
  • Underdeveloped rural infrastructure which limits the expansion of manufacturing industries to the potential areas
  • Weak supply chain integration
  • Low level of technology
  • Weak market institutions and information system (Tekeba Eshete, 2018).

CURRENT STRUCTURE OF AUTOMOTIVE INDUSTRY OF ETHIOPIA

Ethiopia arguably is a relatively untapped investment opportunity in Eastern Africa especially in the manufacturing sector. Given the current limited disposable income, Ethiopia’s automotive market is dominated by second-hand imported vehicles particularly commercial vehicles. Commercial vehicles10 were Ethiopia’s second most valuable import overall in 2014, worth US$859 million.11 Commercial vehicles were also Ethiopia’s highest earning automotive export in 2014. Ethiopia has the lowest motorization rate globally, with only two cars per 1 000 inhabitants in 2014.12 OICA estimates that in 2014 there were 150 000 vehicles in use in Ethiopia, of which 90 000 were passenger vehicles and 60 000 were commercial vehicles.

However, figures differ by sources, with OICA reporting perhaps the most conservative estimates. The World Health Organization, for example, estimates that there were 377 943 registered vehicles in Ethiopia in 2010 Ethiopia’s Ministry of Transport reports that there are 587 400 vehicles on the road, with an annual growth rate of approximately 6%. Approximately 84% of the market is passenger vehicles while commercial vehicles make up 16%. Second-hand vehicles dominate the market. Approximately 85% of vehicles are second-hand imports, of which almost 90% are Toyotas. These vehicles are imported primarily from the Gulf States, through the Port of Djibouti. The vast majority of Ethiopia’s vehicles are concentrated in Addis Ababa, while the number of vehicles in rural areas remains low. Few grey or illegal imports exist in any of the big cities. Points of entry to Ethiopia are well controlled, with the exception of the area around the border with Somalia. The average age of Ethiopia’s fleet is 15-20 years. Vehicles are considered to be second-hand ten years after their production date, compared to the global norm of four years after production. The majority of these are second-hand vehicles. Each year, 2 000 new Toyotas and between 5 000 and 7 000 used Toyotas are imported.18 In total, Toyota controls approximately 65% of the total market (new and second-hand) due to its reputation as being reliable and inexpensive to maintain.

The main drivers of new commercial vehicle sales are construction, agri-business and retail while passenger vehicle sales are driven by government (including diplomatic corps) purchases. Due to low disposable income, the absence of vehicle finance facilities and the ban of vehicle leasing schemes, 19 personal vehicles remain out of reach for the majority of the population. Limited availability of foreign exchange to purchase imports also restrains access to vehicles. Vehicle affordability is further locked up by prohibitively high vehicle taxes of sometimes more than 220% depending on engine size. As taxes in Ethiopia are cumulative, excise tax is calculated on the customs duty, surtax is charged on top of the excise tax, and customs duty and final VAT is calculated once the surtax, excise tax and customs duty have been added. Imported vehicles may cost as much as three times the retail price of the vehicle outside of the country. Commercial vehicles, such as pick-ups, vans and trucks, have a lower tax rate than vehicles for personal use. Relative disincentives exist vis-à-vis personal vehicles compared to commercial vehicles. Diplomats and foreign investors are allowed to import vehicles duty-free. The supply-depressing character of foreign exchange shortages21 contributes to imbalances in the market and drives up the market price of vehicles, thus also having a negative impact on the affordability of vehicles in the Ethiopian market.

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  • Category: Business, Law
  • Topic: Contract
  • Pages: 3
  • Words: 1592
  • Published: 10/04/19
  • Downloads: 33
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