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OHANES TESEMA TUFER

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Feasibility study for Foam Mattress and Foam Mattress

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JUNE 2021, ADDIS ABEBA

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YOHANES TESEMA Foam Industrial Enterprise June 2021 Addis Ababa

Feasibility study for Foam Mattress and Foam Mattress

I. EXECUTIVE SUMMAR

This document is about viability of project on the manufacturing of Polyurethane (PU) foam
that produces mattress and uncovered foam sheets. In order to bridge the prevailing gap
between demand and supply Ethiopia relies on imports, the foam mattress products are
supplied to the domestic market.

The plant commenced production by installing used foam processing machineries which has
less production efficiency that increases production cost when the production volume
increases. The existing machinery which has book value of less than half million would not
enable the promoter to produce competitive products. Therefore, in order to increase
production volume to better meet the demand and produce cost effectively, the expansion of
the project with brand new machinery has become paramount important.

The promoter of the project is Ato Yohannes Tesema, who has running a sole proprietor
business of wholesale and retail trade of similar foam products for the past 10 years.
Realizing the cost and benefit, he has entered into the manufacturing of foam mattresses and
foam sheets. The foam mattress has entered the market upon starting of Ato Yohanes’s
factory. The promoter has registered trade name of Yohannes Tesema foams. The plant is
located at Ayer Tena town within leased compound land. The total area required for the
envisaged project will be 960 m2. The built-up area of the plant will be 250 m2. The plant
will have production buildings, stores, office buildings and other civil structures. The total
cost of buildings and civil works shall be Birr 9.98 million. The less complex production
process, ever growing and persistent demand, encouragement of the government and the
promoter’s rich experience in the bedding articles wholesale and retail trade are among the
driving factors to involve in foam manufacturing.

The implementation of the project requires finalizing the construction of the production
building, importation of machinery, purchase of vehicles and recruitment of required human
resource.

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YOHANES TESEMA Foam Industrial Enterprise June 2021 Addis Ababa

Feasibility study for Foam Mattress and Foam Mattress

The total investment cost of the project is Birr 41 million. It is planned that 52% of the total
project or Birr 21 million would be financed from equity and the remaining 48% or Birr 20
million is expected to be financed with bank debt.

The factory starting with 40% capacity utilization rate and increment by 10% per year, up to
attainable capacity of 90%, would make attractive profit throughout its operational years and
generate positive net cash inflows. The corresponding of the cut-rate cash net inflows at the
rate of 17.5% less the original outlay cost equals Net Present Value (NPV) of Birr 114
million. The internal rate of return (IRR) is 54% which is a good deal on top of the
considered cost of capital. These two major feasibility indicators show that the project is
financially viable.

The realization of the project as ascertained in the financial appraisal, enables the promoter
to generate higher net benefits, creates employment to the local labor force, generates tax
revenue and save hard currency by substituting imports. Manufacturing Industry is one of
the top priority sectors that government selected to achieve the country’s development
targets. These parameters are basic indicators of the project’s priority, social desirability and
economic viability. Therefore, it is advisable to finance the cost requirements from any
available source.

1. Description of the Project

The project under consideration is an expansion of a recently operational foam mattress and
foam sheet manufacturing project establishment that produces foam mattress, pillow and
foam sheets for the local market. The expansion increases the project’s production capacity
by 30,000 foam sheet and or/foam mattress per year at attainable capacity. The final product
is distributed through own wholesale and retail of merchandise business and others
established traders throughout the country.

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YOHANES TESEMA Foam Industrial Enterprise June 2021 Addis Ababa

Feasibility study for Foam Mattress and Foam Mattress

2. Description of the Product

A mattress is a large pad for supporting the recline body, used as or on mattress support/bed/.
Mattresses may consist of a covered or similarly fastened case, usually of heavy cloth, that
contains hair, straw, cotton, foam rubber, etc.; a framework of metal springs; or they may be
hot-air balloon. Firm Mattress_ Manufacturers use specific design techniques to create beds
that have a firm style surface. The use of carefully selected foams, in conjunction with tighter
sewing patterns in the quilt, both help to create this firm feel. Firm mattresses typically have a
lower height than their plush top counterparts. Firm mattresses offer optimal support, but are
designed to offer limited contour ability. Firm
mattresses can also be classified by manufacturers
by terms such as luxury firm and cushion firm or
can be paired with a Cushion firm mattresses tend
to be a bit softer feeling than those classified
solely as firm, but are sometimes the only firm
feeling option from a manufacturer at a particular
level

3. Project Rationales, Incentives and Schedule

3.1. Rational

From his trading experience of about 10 years in the same type of goods, the promoter of the
project has realized existence of regular demand gap for foam mattresses in Ethiopia and
coupled with the incentives in the area availed by the government, helped him to decide to
invest in the foam production project.

The market analysis of the project has demonstrated that there is reliable market in the
domestic market. The local foam processors also couldn’t supply adequate quantity of foam
as compared to the demand of the consumers. The gap is filled from the import market.

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YOHANES TESEMA Foam Industrial Enterprise June 2021 Addis Ababa

Feasibility study for Foam Mattress and Foam Mattress

3.2. Industry Incentives

The manufacturing Industry fits the government’s development strategy of encouraging

industrialization and contributes to the generation of employment opportunities.

The investment proclamation improved successively is also designed to support investment

growth in the country by providing tax and better access to infrastructure service incentives.
The most important incentive packages include the following:

 Importation of machinery and other investment items free of tax.

 Importation of raw materials for export oriented establishments free of import tax;
 Exemption from income tax for the period covering 1-5 years depending on the location
of the project, industry type and product markets (favoring export).
 Deduction of expense incurred for research, improvement studies or training, from
taxable income;
 Tax exemption on any remittance made by a foreign investor from the proceeds of the
sale or transfer or shares or assets up on liquidation or winding up of enterprise.
The foam processing business falls under the Industrial sector that is eligible to access the
incentives prescribed for the sector. Yet again, according to type and location of investment,
companies that incur losses during the tax holiday period are allowed to carry forward such
losses for 3 to 5 years.

3.3. Implementation Schedule

Implementation of the project involves activities of finalizing construction work, obtaining

debt financing, and importation of machinery, installation, recruitment of employees,
commissioning and operation. Considering the current level of work, total of 12 months, is
scheduled for the completion of the expansion implementation. The Gantt chart below shows
the implementation Schedule.

The time frame for the project is deemed tolerable by assuming there will be no major
incidences out of the scope of the promoter control.

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YOHANES TESEMA Foam Industrial Enterprise June 2021 Addis Ababa

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Feasibility study for Foam Mattress and Foam Mattress

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e ts
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a n t t v c b a a n ly u
c n
e Ju p o o e
Ja
e p
Ju Ju
g
Y ly
S Jn D F M A M
A
u
Activity u
Securing
Finance
Completion of
Factory
Construction
2 Importation of
/2 Machinery
1
2
0
2 Installation of
Machinery
Recruitment of
Additional
Commissioning
& Operation

4 The Promoter Experience and Financial Performance

4.1 The Promoter

The promoter of the project is a sole proprietor Ato Yohannes Tesema. The Foam
business is the registered trade name-of the business. The promoter has 10 years’
experience in other business. Performance wise, Ato Yohannes has been successful in
smoothly undertaking his existing business activities transactions and generated
encouraging return over the preceding years. The promoters’ rich experience and the
returns of his business served as springboard for the new businesses that he is currently
undertaking.

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YOHANES TESEMA Foam Industrial Enterprise June 2021 Addis Ababa

Feasibility study for Foam Mattress and Foam Mattress

4.2 ORGANIZATIONAL STRUCTURE & HUMAN RESOURCE

4.2.1 Organizational Structure

Currently, the factory is managed by an interim management structure consisting of few

people. Upon implementation of the expansion however, the factory will be organized with
management structure that is capable of managing the factory’s functions. All the
management members will be Ethiopians. The owner is the managing director of the plant.
However, for effective management of the plant, a general manager and three functional
divisions; Production & Technique, Finance & Administration and Marketing & Promotion
divisions would be formed under the oversight of the managing director. The division heads
are in charge of managing and supervising the logistic supply, production, technical,
marketing, financial, human resource and marketing aspects of the factory. The division
heads will be sufficiently qualified and experienced professionals. The following chart shows
the organizational structure of the plant.

Quality
Manager Control
Producon
& Technique Head-
Sanitaon

Accounts
Managing Factory
Directorr Manager Manager-
Human
Finance &
Resource
Admin.

Logiscs

Manager--
RM
Markeng
Procurment
Sales
&Promoon

4.1.1 Human Resource Requirement and Cost

The plant require 33 permanent and 20 daily laborers, total 53 employees including
managerial, professional, skilled, semiskilled, and unskilled staffs. The total cost of human
resource is described below

Position No. of Monthl Annual

Employe y salary
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YOHANES TESEMA Foam Industrial Enterprise June 2021 Addis Ababa

Feasibility study for Foam Mattress and Foam Mattress

es Salary
Birr Birr
General Manager 1 35,000 420,000
Deputy General Manager 1 15,000 180,000
Administrative and HRM
Admin. And HR Manager 1 8,500 102,000
Admin. Officers and Assistant 5 4,500 270,000
Finance Department
Finance Manager 1 9,500 114,000
Finance team leader 1 6,400 76,800
Finance professionals 4 16,800 201,600
Production Department
Production Manager 1 9,500 114,000
Technical Manager 1 7,500 90,000
Daily Laborers 11 1,500 198,000
Foam production personnel 16 32,000 384,000
Procurement Department
Procurement Manager 1 9,500 114,000
Purchaser 2 3,00 72,000
0
Production and Logistic
Planning and logistics manager 1 8,50 102,000
0
Marketing & sales
department
Marketing and sales department 1 114,000
Manager 9,500
Marketing and Sales personnel 5 210,000
17,500
Total Existing Personnel 53 2,762,40
0

5 MARKET ANALYSIS

Polyurethane (PU) foams constitute the largest category of cellular polymeric materials. They
are produced, for the most part, in either flexible or rigid form. Within these groups, the
density and other properties vary depending on the end use. PU foams offer an attractive
balance of performance characteristics (aging properties, mechanical strength, elastic
properties, and chemical resistance, insulating properties) and cost. Flexible PU foams are
used primarily for cushioning and rigid PU foams for insulation.

Polyurethane foam demand is relatively close to production because trade is not economic
over larger distances. Even within the United States and China, supply geographically

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YOHANES TESEMA Foam Industrial Enterprise June 2021 Addis Ababa

Feasibility study for Foam Mattress and Foam Mattress

follows demand very closely. However, in Europe trade in higher-valued foams and
compressed foam rolls has increased significantly. The major drivers for global polyurethane
foam markets are regulation and energy efficiency increasing world population, particularly a
rising middle class in the emerging markets

Apart from the middle class population both in urban and rural, universities and hospitals buy
the bulk of the products directly from the factories whereas wholesalers and retailers will take
care of the individual market demand by providing various brands of foam from different
factories. Traditionally it is not only price but also older brands that lure customers to a
certain product in Ethiopia but there is still untapped market for the product.

5.1 Supply/Production of Foam

Supply of foam mattresses is originates from domestic producers and from the international
import market. Currently in Ethiopia the production of foam becomes competitive and the
number of producers has been increasing. According to Ethiopian Investment agency, the
country’s aggregate production is supplied by Kangaroo Foam, Addis Abeba Foam, Rainbow
Foam, Palm Ethiopia, Ethio-Foam, Amaga PLC, Tiger, New Flower, Metiket foam as well as
three Chinese and one Yemeni producer.

The chemicals which are inputs for the production of foam are mostly imported from China.
The amount of chemicals and their combination will determine the density of the foam,
which in return determines the quality of the foam. Foam, with a high density also known as
HD foam products represents a high quality, having longer durability and comfort while
medium density results an average quality and the lower density LD is known for being a
lesser quality product.

According to the CSA data summarized in the following table, the total foam production of
the country is between 99.6 millionM 3 and to 727.7million M 3 within the past 10 years (2011-
2020). This growing amount of production represents the total production achieved by a
combining effect of expansion of existing factories, increasing capacity utilization of existing
factories and due to new entrants.

From the foam produced which is used for different purposes such as mattresses, sofas,
vehicle seat, cleaning, the volume used to production of mattresses and pillows considered to

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YOHANES TESEMA Foam Industrial Enterprise June 2021 Addis Ababa

Feasibility study for Foam Mattress and Foam Mattress

take 65% of the total foam produced. A common size mattress consumes on average 0.416m 3
sheet of foam. The produced foam mattresses within the past 10 years therefore ranges from
155,652 to 1.137 million mattresses as shown below.

Foam Mattress Production (M 3)

for mattress (65% for
3 One Mattress on Avr.
Year Foam M growth
mattresses) = 0.416 m3
2011 99,617 64,751 155,652
2012 101,888 66,227 159,200 2.28%
2013 166,480 108,212 260,125 63.40%
2014 210,698 136,954 329,216 26.56%
2015 243,958 158,573 381,184 15.79%
2016 480,426 312,277 750,666 96.93%
2017 552,602 359,191 863,441 15.02%
2018 580,232 377,151 906,613 5.00%
2019 644,058 418,637 1,006,340 11.00%
2020 727,785 473,060 1,137,164 13.00%
Average 380,774 247,503 594,960 12.7%
Source: CSA & Own Computation
Almost 76% of the total pasteurized foam production is collected from the great Addis Ababa
area which is 150 km radius from Addis Ababa.

5.1.1 Import of Foam Mattress

Foam Mattress Import

Year Net Wt. (Kg) CIF Value CIF Value Conversation of Foam Mattress Kg Quantity
(ETB) (USD)
into Unit @ 5.5 kg/Unit

2011 59,776 781,467 89,282 10,868

2012 67,411 2,728,788 310,630 12,257 12.8%
2013 74,204 2,369,073 261,843 13,492 10.1%
2014 81,586 1,581,890 163,297 14,834 9.9%
2015 84,850 3,818,398 321,606 15,427 4.0%
2016 105,572 7,359,796 505,324 19,195 24.4%
2017 125,208 6,541,464 383,333 22,765 18.6%
2018 179,099 17,139,639 959,365 32,563 43.0%
2019 144,821 8,010,722 426,100 26,331 -19.1%
2020 205,934 18,740,209 930,331 37,443 42.2%
Av. 16.2%

Source:IRCA

IMPORT OF MATTRESS SUPPORT

Year Net Wt. (Kg) CIF Value (ETB) CIF Value No of Mattress Required Growth
(USD) @(11kg/Unit
2011 17,992.90 224,840.15 25,687.80
2012 19,800.66 376,888.00 42,902.76 10%
2013 41,311.75 852,188.60 94,188.43 109%
2014 60,095.14 1,299,723.71 134,169.17 45%

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YOHANES TESEMA Foam Industrial Enterprise June 2021 Addis Ababa

Feasibility study for Foam Mattress and Foam Mattress

2015 87,960.58 2,931,224.06 246,883.59 46%

2016 52,494.69 3,395,640.17 233,145.01 -40%
2017 41,694.97 2,024,980.49 118,664.88 -21%
2018 42,467.43 3,278,366.71 183,501.63 2%
2019 40,040.40 2,519,715.79 134,026.72 -6%
2020 99,325.38 4,732,064.23 234,916.51 148%
Average 50,318 2,163,563 144,809 33%

Ethiopia’s had been involving in exporting of foam mattresses however, the volume was only
insignificant but also ceased to continue as of the year 2011. The following table shows the
smaller and discontinued export volume.

Export of Mattresses
NetMass(Kg) FOB_Value(ETB) FOB_Value(USD)
2011 712 6,976 797 129
2012 810 4 910 559 147
2013 553 5,881 650 101
2014 110 2,773 286 20
2015 740 15,902 1,339 135
2016 304 12,308 845 55
2017 0 0 0 -
2018 0 0 0 -

5.1.2 Foam Past _consumption

Domestic Consumption is a function of production, import, export and ending stock. In

Ethiopia’s context where there is no high stock volume of items produced using imported raw
materials, the determinant data for consumption become production and import. Therefore,
demand or consumption equals Production +Import – Export. As the detail shown below,
consumption between the years 2005 and 2014 range from 168,026 to 1,183,636 pcs.
Average consumption growth is 12.82% per annum.
FOAM PAST
FOAM PRODUCTION, IMPORT , EXPORT - PCS CONSUMPTION TREND-PCS Growth
Year Production Import Export

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YOHANES TESEMA Foam Industrial Enterprise June 2021 Addis Ababa