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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
Political
environment +
Industrial
Policy

Ease of doing
business

Market
opportunity

Market access
1

Pros
Political stability since early
1990’s under rule of EFRDF,
with relatively low country
risk.
Efforts at market
liberalization by the govt of
Ethiopia including openness to
foreign investment and
privatization of state owned
business.
Significant investment in
public infrastructure to build
foundation for long term
growth.
Favorable tax and customs
regime for business that match
criteria for govt growth
priorities.
Ease of doing business
relatively good for sub Saharan
Africa Construction and
property registration
relatively easier than it is in
other SSA countries.
More than 90 million people.
Ranked 6th among African
countries for market
opportunity by Ernst and
Young.
Fast growing economy in
Africa over the last decade.
Fast growth GDP per capita
increasing the purchasing
power.
Supplier opportunity through

Cons
Single state party and limited
political freedom required
caution from companies doing
business and are accustomed to
more open environment.
State control of economy
remains significant with key
sectors off limits to foreign
investors.
State owned or party
affiliated business may enjoy
unfair advantage.
Significant purchasing
controlled by government
and public sector corruption
for tenders may exist (ranked
low by transparency
international)
Ease of doing business
remains poor by global
standards.
Investor protection, Cross
border trade among areas
where performance is
relatively poor.
GDP per capita remains low.
Below most comparison
countries.
Possible limits to addressable
market due to income
inequality and low
urbanization rate.

Fragmented distribution

Relationships and customs are paramount and may require reliance on local partners. Other costs limits addressable market and drives up costs. power. what would you need to know? 2 Factors Examples of success factor Political environment + Industrial Policy Business model that mitigates or minimizes exposure to govt and or state controlled sectors(e. influencers. and telecommunications can drive up costs of doing business. 2. Protection of the intellectual property may be costly and difficult. Human resources Low wages can create significant cost advantage for labor intensive business. policies or the right local partners and guides to help navigate these matters? . What key success factors will mater most in Ethiopia? If you were deciding whether to enter Ethiopia.g. Cross cultural management may be difficult for foreign firms. Local knowledge. leading to preference for hiring costly Ethiopian diaspora Infrastructure challenges for transport. Wholesale and retail business reserved for Ethiopian business only. Competitive position Limited competition due to legacy of state controlled economy creating opportunities for new entrants. telecom) Ability to navigate govt relations.Ethiopia: An Emerging Market Opportunity lower costs and access to potential growing market. Global brand strength may be mitigates in environment where foreign influence has been limited and small upstarts are on level playing field. Example of question and consideration What is our exposure to government decision making or policy? Do we have adequate understanding of this govt’s process.

logistics. such as Robust systems or unanticipated costs? processes that can overcome infrastructure challenges (e.g. relationships? Does our business model enable us to overcome market access challenges.g.Ethiopia: An Emerging Market Opportunity Market opportunity Market access Competitive position Human resources Other costs 3 Addressable market of adequate size or sufficient growth rate in addressable market Ability to overcome distribution challenges and our ability to control or create distribution channels Do we understand market size and dynamics in a granular. IP. backup power) . brand. country manager have? Managers with prior How important are a manager’s success and experience in adaptability and tolerance for the country expansion. segmented way? What are the barriers to reaching our market. (e. 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? Can we protect our advantage firms. ambiguity? How Business model that benefits from low cost labor. “downside” challenges. Robust economics that can Is our business plan sufficiently absorb high and or robust to accommodate unbudgeted costs.g. 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? Relevant and unique value Is our proposition truly relevant proposition vs. e. know-how)? Will we be competing on a level playing field? Quality of country general What attributes will a successful manager.

How would you evaluate each company’s proposal?  The companies CareCo. Evaluate each company’s proposed entry to Ethiopia based on these factors of success: a. But if appropriate conditions are found for local manufacturing then they could establish the manufacturing facility either wholly owned or as a joint venture. 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. could go wrong in the new country they try Ethiopia.Ethiopia: An Emerging Market Opportunity 3. 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.  They already tried entering the Ethiopian market by a local distributor.  The new method of subsidiary though by planning could cross an average gross margin of up to 70%. They have tried this in the same place where they used their traditional method to establish themselves.  So without getting the expected results in the previous place they tried getting a subsidiary. The new way they try out for entering Ethiopia is already carried out by them but not in any new country. .    MedCo:  4 b. 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. but has never seen any result yet. which is growing at a rate of 10% per annum.    ShoeCo: As per the previous establishments the ShoeCo entered the market by use of third part importers and local marketing.

ShoeCo is 2 years. d. The subsidiary could help achieving an average gross margin up to 70%.    ShoeCo: ShoeCo’s vice president of sales. 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. The main challenge is to train them about their process and make a unit which is equally good in terms of quality. c. What are the most important concerns and / or unanswered questions in each company’s proposal? 5 . With the capital equipment imported duty free.    MedCo: e.3 years.    ShoeCo: for ShoeCo it is important to make such a local subsidiary unit which would maintain the quality of the product. So they wanted to enter into the Ethiopian market as soon as possible.Ethiopia: An Emerging Market Opportunity  As per the calculation made with the available data the payback period for CareCo is 6. But the strategy they plan is to establish a local manufacturing subsidiary. This would save the cost of manufacturing as well as the transport charges for marketing the goods to the sub-distributors. The brand as it is planning for a great start should concentrate more on the quality than the profit. Which key success factors matter most for each company?    CareCo: for CareCo it is important to maintain the quality of the product. 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. the new unit will also give work to 2000 local workers. 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. But the major challenge in the local unit setup will be the skilled labor.    MedCo: MedCo’s chief operating officer Yousef Al-Abbar is very confident that the time is now favorable to build a facility. focused on tax incentives and the low cost of inputs. MedCo is 5 years. 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. Beatrice Chen. 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. Also their labor costs will be considerably low than the other factories of ShoeCo.

but the . HIGH Local manufacturing will reduce cost of goods Vs imports. MEDIUM Local manufacturing Vs imports key to business Strength of proposal Tax policy for local manufacture appears favorable for CareCo. but market is in early stages. HIGH Moving too slowly mat=y hurt CareCo’s ability to gain share in long term MEDIUM Some local hires likely required for the manufacturing and sales. which Some penetration from local and foreign competitors. MEDIUM Unclear but CareCo appears to have strong team available for global expansion. HIGH Success is dependent on CareCo’s ability to manage fragmented distribution channels to reach consumers. LOW. LOW Success required aggressive share gain.Ethiopia: An Emerging Market Opportunity CareCo Analysis Factors Political environment + Industrial Policy Market opportunity Market access Competitive position Human resources Other costs 6 Importance of success factor Business is not politically sensitive or subject to govt procurement. HIGH Success depends on the fast growth of addressable market. Success depends on true size and growth of addressable market of consumers for CareCo products.

5% market share increasing to 25% by 2022 60% gross margin increasing to 70% by 2022 $12MN fixed costs growing to $15MA by 2022 6.5 years ShoeCo Analysis Factors Political environment + Industrial Policy Market opportunity Market access Competitive position Human resources Other costs Calculation of payback period 7 Importance of success factor Strength of proposal . 5% market share increasing to 20% by 2022 60% gross margin increasing to 70% by 2022 $12MN fixed costs growing to $15MA by 2022 5. but duties may drive up product price. later has low fixed costs.Ethiopia: An Emerging Market Opportunity economics. 20% market growth pa. HIGH economics sales volumes materialize. MODERATE Calculation of payback period Assumption s Management case (High end) Low case (example) Assumption s $55MN upfront capital expenditure. 20% market growth pa.former has fixed costs but can reduce product price(if sales volume materialize). 15% market growth pa. 2.7 years $55MN upfront capital expenditure.3 years Payback In years Alternate case (import-only strategy) $3MN upfront capital expenditure.5% market share increasing to 20% by 2022 60% gross margin increasing to 70% by 2022 $12MN fixed costs growing to $15MA by 2022 3.

5 years MedCo Analysis Factors Importance of success factor Political environment + Industrial Policy Market opportunity Market access Competitive position Human resources Other costs Calculation of payback period Assumption s Payback In years 8 Management case (High end) 5.Ethiopia: An Emerging Market Opportunity Assumption s Payback In years Management case (High end) 3.2 years Low case (example) 3.0 Low case (example) 5.0 Strength of proposal .