Jun Hou (Senior Research Officer,ODI)
01 March 2017
Rising wages for unskilled workers in China signals that low-cost manufacturing may start to lose its competitive limit.  Our own ongoing background work suggests that from 2009 to 2014, China’s real manufacturing wages increased by an annual average of 11.4%, even though this was in the aftermath of the worst financial crisis since the Second World War. Both foreign multinationals located in China and Chinese manufacturers that are engaged in labour-intensive production in China are therefore actively seeking to relocate to new low-cost destinations. Apart from generating substantial employment opportunities in these destinations, the presence of labour-intensive manufacturing is also expected to foster the inflow of technological and financial resources which will eventually help the host country’s industrial transformation and economic take-off.
To seize the manufacturing relocation opportunity, Ethiopia has taken a proactive approach in recent years, making tremendous effort to attract foreign investors across the world, especially from China, including in the manufacturing sector. For example, the former prime minister ‘head-hunted’ one of the largest Chinese Original Equipment Manufacturers (OEMs, manufacturers who resell another company’s product under their own name and branding) in shoe manufacturing industry, Huajian Group, whilst attending the Shenzhen Universiade in 2011. The company’s representatives travelled to Ethiopia in August of the same year and met with the former prime minister, and a formal investment plan was announced soon after. In less than half a year, production lines opened up for operation near Addis Ababa employing 600 people. Now, five years later, the Huajian International Ethiopia employs over 4200 locals in six production lines and produces nearly 7500 pairs of shoes per day for well-known brands, all of which are exported to European and US markets.  Generating USD3 million export value, and making up to more than 50% share of the shoe exporting in the Ethiopia, Huajian International has become the largest exporter in Ethiopia. 
Huajian’s success in writing the ‘Sino-Africa’ cooperation story is by no means an accidental opportunity. Transforming ‘Made in China’ to ‘Made in Africa’ requires multiple supporting factors, including the inputs supply and capability of the company, as well as the commitment from both investors and host government.
“Labour costs normally makes up 30% of the total cost in shoe manufacturing. As the second most populous country in Africa, Ethiopia has abundance of cheap labour force, approximately one tenth comparing to the cost of China. Meanwhile, the country is rich in high-quality leather, which provides us adequate supply of raw materials. In addition, economic development and social environment are relatively stable. Government is also committed to accommodate investment-friendly environment. These are the factors attracting us to come and settle down”, Mr. Zhang said.
Unlike other shoe manufacturing FDI, Huajian group puts great effort in training local staff. New workers without experience in manufacturing industries need to participate in a pre-work training programme, and regular on-the-job training sessions are provided to employees. In addition, the company also regularly selects a group of young Ethiopian university graduates (normally several hundred) and sends them to the headquarter in Southern China for training. Back in Ethiopia, some of them will also have the opportunity to take on managerial positions in the company. It is believed that such forms of on-the-job training are vital in removing culture barriers, conveying corporate culture, as well as upgrading local technological and managerial capabilities.
In response to the continuous rising land and labour costs in China, Huajian Group had already started its internationalisation activities back in 2004. The company’s first attempt was to take advantage of the low cost labour in Vietnam. However, it ended unsuccessfully. Due to the lack of skilled workforce and formal training, the quality of the shoes failed to meet the clients’ standards. In addition, the industry chain was incomplete at the time and domestic suppliers were absent. Many raw materials and components needed to be shipped from China, which took extra time and incurred additional transaction costs. “Inadequate ‘going out’ talent, lack of communication with host government, unfamiliar with the local laws and regulations, and several incidences of labour disputes led to our decision to withdraw the investment from Vietnam”, said Mr. Liu, the deputy general manager. 
Learning from past experiences, Huajian International Ethiopia has now become the largest shoemaker in Africa. It appears support from Chinese and the host country government, as well as financial institutions were indispensable for the company’s growth and success in a foreign land.  In 2015, Huajian Group received a 138-hectare plot from the local government to boost its investment in Ethiopia. Mr Zhang Huarong, the general director of Huajian group, soon announced the Lebu industrial zone plan in the South Western outskirts of Addis Ababa. The project will inject USD 2.2 billion, supported by CAD (China-Africa Development) fund, to develop the shoe manufacturing industry chain (infrastructure, fabrics, leather, chemical, carton manufacturing etc.) in the region, as well as to attract more Chinese investors to support the industrial cluster development across light manufacturing industries including garment, shoemaking, and electronics.  By its completion in 2020, the industrial park is expected to create about 50,000 local job opportunities.
Using industrial parks to bring international investors has become a popular strategy adopted by international donors (i.e. DFID) to help low-income countries move away from aid-dependency towards becoming modern middle-income trading nations. Priti Patel, the UK Secretary of State for International Development states ‘creating factories where international investors would create jobs was fundamentally in Britain’s interest and creating jobs is the best way to alleviate poverty’ . With two operational industrial parks and another eight to come, Ethiopia is planning to achieve this goal within the next decade. 
China’s outward investment has expanded in an unprecedented speed during the past decades, which also brought nearly 100 Chinese overseas industrial parks across different continents. Yet, only few have been abloom and fruitful. Huajian international Ethiopia is often cited as one of the most well-known stories.  Following the ‘The belt, the road’ initiative, Huajian Group is now preparing their next overseas attempt to Bangladesh, another popular low-cost investment destination.
: McKinsey (2013) ‘A new era for manufacturing in China’http://www.mckinsey.com/business-functions/operations/our-insights/a-new-era-for-manufacturing-in-china
Photo credit: Huajian International Ethiopia, www.acfic.org.cn