Ethiopia: An Emerging Market Opportunity

Case Study on Ethiopia: An Emerging Market Opportunity

Answer following questions:

1. Does Ethiopia represent an attractive investment opportunity?

Factors Pros Cons

Political Political stability since early Single state party and limited
environment + 1990’s under rule of EFRDF, political freedom required
Industrial with relatively low country caution from companies doing
Policy risk. business and are accustomed to
Efforts at market more open environment.
liberalization by the govt of State control of economy
Ethiopia including openness to remains significant with key
foreign investment and sectors off limits to foreign
privatization of state owned investors.
business. State owned or party
Significant investment in affiliated business may enjoy
public infrastructure to build unfair advantage.
foundation for long term Significant purchasing
growth. controlled by government
Favorable tax and customs and public sector corruption
regime for business that match for tenders may exist (ranked
criteria for govt growth low by transparency
priorities. international)
Ease of doing Ease of doing business Ease of doing business
business relatively good for sub Saharan remains poor by global
Africa Construction and standards.
property registration Investor protection, Cross
relatively easier than it is in border trade among areas
other SSA countries. where performance is
relatively poor.
Market More than 90 million people. GDP per capita remains low.
opportunity Ranked 6th among African Below most comparison
countries for market countries.
opportunity by Ernst and Possible limits to addressable
Young. market due to income
Fast growing economy in inequality and low
Africa over the last decade. urbanization rate.
Fast growth GDP per capita
increasing the purchasing
power.
Market access Supplier opportunity through Fragmented distribution
lower costs and access to limits addressable market and
potential growing market. drives up costs.

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Ethiopia: An Emerging Market Opportunity

Wholesale and retail business

reserved for Ethiopian business
only.
Local knowledge,
Relationships and customs
are paramount and may require
reliance on local partners.
Competitive Limited competition due to Global brand strength may
position legacy of state controlled be mitigates in environment
economy creating where foreign influence has
opportunities for new entrants. been limited and small upstarts
are on level playing field.
Protection of the intellectual
property may be costly and
difficult.
Human Low wages can create Cross cultural management
resources significant cost advantage for may be difficult for foreign
labor intensive business. firms, leading to preference for
hiring costly Ethiopian
diaspora
Other costs Infrastructure challenges for
transport, power, and
telecommunications can drive
up costs of doing business.

2. What key success factors will mater most in Ethiopia? If you were deciding whether to
enter Ethiopia, what would you need to know?

Factors Examples of success factor Example of question and

consideration
Political Business model that What is our exposure to
environment + mitigates or minimizes government decision making or
Industrial exposure to govt and or policy?
Policy state controlled sectors(e.g. Do we have adequate
telecom) understanding of this govt’s
Ability to navigate govt process, influencers, policies or
relations. the right local partners and
guides to help navigate these
matters?
Market Addressable market of Do we understand market size
opportunity adequate size or sufficient and dynamics in a granular,
growth rate in addressable segmented way?
market

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Ethiopia: An Emerging Market Opportunity

Market access Ability to overcome What are the barriers to reaching

distribution challenges and our market, e.g. logistics,
our ability to control or relationships?
create distribution channels Does our business model enable
us to overcome market access
challenges, or do we have the
right partners to do so?
Do we have the ability and
opportunity to create our own
market access solution or----
What are the implications to our
economics?
Competitive Relevant and unique value Is our proposition truly relevant
position proposition vs. competition. to the local market?
Fair competition free of Do we know how ti communicate
collusion and or market our value proposition in a
distortions favoring local relevant way?
firms. Can we protect our advantage
(e.g. brand, IP, know-how)?
Will we be competing on a level
playing field?
Human Quality of country general What attributes will a successful
resources manager. country manager have?
Managers with prior How important are a manager’s
success and experience in adaptability and tolerance for
the country expansion. ambiguity? How
Business model that
benefits from low cost
labor.
Other costs Robust economics that can Is our business plan sufficiently
absorb high and or robust to accommodate
unbudgeted costs. “downside” challenges, such as
Robust systems or unanticipated costs?
processes that can
overcome infrastructure
challenges (e.g. backup
power)

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Ethiopia: An Emerging Market Opportunity

3. Evaluate each company’s proposed entry to Ethiopia based on these factors of success:

a. How would you evaluate each company’s proposal?

 The companies CareCo, ShoeCo and MedCo propose to enter Ethiopia for their
respective products.
 CareCo: Its way to enter the market by a subsidiary is different from the traditional way
of entering through local distributor. The new way they try out for entering Ethiopia is
already carried out by them but not in any new country. They have tried this in the same
place where they used their traditional method to establish themselves.
 The new method of subsidiary though by planning could cross an average gross margin
of up to 70%, but has never seen any result yet.
 So without getting the expected results in the previous place they tried getting a
subsidiary, could go wrong in the new country they try Ethiopia.
 ShoeCo: As per the previous establishments the ShoeCo entered the market by use of
third part importers and local marketing. But if appropriate conditions are found for local
manufacturing then they could establish the manufacturing facility either wholly owned
or as a joint venture.
 They already tried entering the Ethiopian market by a local distributor, which is growing
at a rate of 10% per annum. So they have a rough idea about how the market is and how
much it is important to make a local unit capable in all aspects as that in other countries.
 MedCo:

b. What do you think is the payback period of each company?

 The Payback period is the length of time required for an investment to recover its initial
outlay in terms of profits or savings.
 As per the calculation made with the available data the payback period for CareCo is 6.3
years, ShoeCo is 2 years, MedCo is 5 years.

c. What recommendations would you make to each company?

 CareCo: CareCo’s director Axel Kazuo states that if they do not move decisively into the
competition then Ethiopia will also be a difficult country to catch up with the marketing.
So they wanted to enter into the Ethiopian market as soon as possible. But the strategy
they plan is to establish a local manufacturing subsidiary. The subsidiary could help
achieving an average gross margin up to 70%. The brand as it is planning for a great start

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Ethiopia: An Emerging Market Opportunity

should concentrate more on the quality than the profit. If it could build up the trust in the
consumer with the quality then it would be very easy for the CareCo to sustain in the
market as Ethiopia has an emerging market and making a good stand in the quality can
help them in sustaining in the market.
 ShoeCo: ShoeCo’s vice president of sales, Beatrice Chen, focused on tax incentives and
the low cost of inputs. The idea of setting up a local manufacturing unit in an economic
zone outside Addis Ababa will give an exemption of 5 years from the corporate taxes.
This would save the cost of manufacturing as well as the transport charges for marketing
the goods to the sub-distributors. With the capital equipment imported duty free, the new
unit will also give work to 2000 local workers. Also their labor costs will be considerably
low than the other factories of ShoeCo. But the major challenge in the local unit setup
will be the skilled labor. Native Ethiopians who worked in foreign countries are efficient
but are really scarce and costly. The workers majorly available in the market would not
be much trained or skilled. The main challenge is to train them about their process and
make a unit which is equally good in terms of quality.
 MedCo: MedCo’s chief operating officer Yousef Al-Abbar is very confident that the
time is now favorable to build a facility. And they can be operational within twelve
months of breaking ground. Also they trust that they can build a strong base from which
to capitalize on the fast growing spending on health care.

d. Which key success factors matter most for each company?

 CareCo: for CareCo it is important to maintain the quality of the product.

 ShoeCo: for ShoeCo it is important to make such a local subsidiary unit which would
maintain the quality of the product.
 MedCo:

e. What are the most important concerns and / or unanswered questions in

each company’s proposal?

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Ethiopia: An Emerging Market Opportunity

CareCo Analysis

Factors Importance of success Strength of proposal

factor
Political environment + Business is not politically Tax policy for local manufacture
Industrial Policy sensitive or subject to govt appears favorable for CareCo.
procurement. LOW. HIGH
Market opportunity Success depends on true Success depends on the fast
size and growth of growth of addressable market.
addressable market of LOW
consumers for CareCo
products. HIGH
Market access Success is dependent on Success required aggressive share
CareCo’s ability to gain, which
manage fragmented
distribution channels to
reach consumers. HIGH
Competitive position Moving too slowly mat=y Some penetration from local and
hurt CareCo’s ability to foreign competitors, but market is
gain share in long term in early stages.
MEDIUM MEDIUM
Human resources Some local hires likely Unclear but CareCo appears to
required for the have strong team available for
manufacturing and sales. global expansion. HIGH
MEDIUM
Other costs Local manufacturing Vs Local manufacturing will reduce
imports key to business cost of goods Vs imports, but the
economics- former has economics sales volumes
fixed costs but can reduce materialize. MODERATE
product price(if sales
volume materialize); later
has low fixed costs, but
duties may drive up
product price. HIGH

Calculation of payback period

Assumptions Management case Low case Alternate case

(High end) (example)

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Ethiopia: An Emerging Market Opportunity

(import-only
strategy)
Assumptions $55MN upfront $55MN upfront $3MN upfront
capital expenditure. capital expenditure. capital expenditure.
20% market growth 15% market growth 20% market growth
pa. pa. pa.
5% market share 5% market share 2.5% market share
increasing to 20% increasing to 25% increasing to 20%
by 2022 by 2022 by 2022
60% gross margin 60% gross margin 60% gross margin
increasing to 70% increasing to 70% increasing to 70%
by 2022 by 2022 by 2022
$12MN fixed costs $12MN fixed costs $12MN fixed costs
growing to $15MA growing to $15MA growing to $15MA
by 2022 by 2022 by 2022
Payback 5.7 years 6.3 years 3.5 years
In years

ShoeCo Analysis

Factors Importance of success Strength of proposal

factor
Political environment +
Industrial Policy
Market opportunity
Market access
Competitive position
Human resources
Other costs

Calculation of payback period

Assumptions Management case (High Low case

end) (example)
Payback 3.2 years 3.5 years
In years

MedCo Analysis

Factors Importance of success Strength of proposal

factor
Political environment +
Industrial Policy
Market opportunity
Market access

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Ethiopia: An Emerging Market Opportunity

Competitive position
Human resources
Other costs

Calculation of payback period

Assumptions Management case (High Low case

end) (example)
Payback 5.0 5.0
In years