Professional Documents
Culture Documents
2.1 INTRODUCTION
To this end the promoters of the project has commissioned Golden Africa Capacity
Center (GACC) P.L.C to prepare a feasibility study on the establishment of a steel sheet
galvanizing plant that constitutes market analysis, raw material and input analysis,
production capacity, technology study and selection, organization and management,
project implementation, financial analysis and cost-benefit (economic) analysis. This
draft report on the feasibility study for the establishment of a steel sheet galvanizing plant
is hence prepared as per the agreement between the two parties.
The main objective of the study is to conduct a full-fledged feasibility study to determine
the viability of establishing an electric wires and cables manufacturing plant in Mekelle
and to prepare an investment proposal acceptable by various stakeholders such as;
The promoter;
Investment office;
Banks;
Equity investors;
etc.
2.3 METHODOLOGY AND APPROACH
In general to attain the above stated objectives, the consultant has developed the
appropriate methodology which utilizes both quantitative and qualitative data/
information from both primary and secondary sources. Accordingly the methodology
and approach used to conduct the feasibility study is discussed hereafter.
2.3.1 DESK WORK
Deskwork was the principal secondary data-gathering instrument employed in the study.
The deskwork has involved review of existing data, documents and publications collected
from the following organizations:
Primary data was also collected through a rapid survey in and around Addis Ababa. The
collected primary data include;
3.1.1 GENERAL
External business environments affect the operations of the envisaged project. A prior
review of the situations would help to foresee factors that may affect the project and pave
the way to make preparations ahead.
The major external factors that affect the operation of a business enterprise are considered
to be the political, socio – economic/ socio-cultural and technological development
(PEST). Accordingly, analysis of the PEST factors and their impacts as related to the
activity of the envisaged project are briefly discussed below.
3.1.2 POLITICAL
The formal Ethiopian state structure has been transformed from a highly centralized
system to a federal and increasingly decentralized one. Due to business process
reengineering and extensive capacity building programs carried out, significant progress
has been achieved in good governance & public service delivery, in ensuring
transparency of operation and the efficiency and accountability of the justice system.
More specifically, even though Ethiopia is a large and very diverse country, the political
environment is characterized by very little crime and disorder. Since Ethiopia is one of
the less developed countries with the lowest levels of corruption, it can claim to offer one
of the cleanest business climates in the developing world. Thus, the publication cited
above describes Ethiopia as "Safe, peaceful, stable and very nearly free of corruption".
Ethiopia is also a signatory of the United Nations Convention Against Corruption.
3.1.3 ECONOMIC
a) Macro-Economic Development
Ethiopia is one of the fastest growing economies of the world. During the Plan for
Accelerated and Sustainable Development to End Poverty (PASDEP) i.e. 2004/05 to
2009/10, remarkable achievements of economic growth, and human resource
development were registered. During the past seven years, real GDP has registered an
annual average growth rate of 11.3%. On the experiences gained so far a Growth and
Transformation Plan (GTP) has been prepared with clear targets, including the
strengthening of the private sector. Ethiopia`s economy is expected to continue to grow.
The GTP estimates the growth to be above 11% during 2010/11—2014/15. Hence,
macro-economic development is generally positive for investment.
In the above proclamations the government of Ethiopia has put forward various
incentives to encourage private investment and promote the inflow of foreign capital and
technology into the country. Accordingly, the following incentives are granted to foreign
investors.
Duty free entry of all investment capital goods, such as plant machinery and
equipment, construction materials, etc;
Duty free entry of spare parts worth up to 15% of the value of the imported
investment capital goods; provided that the goods are not produced locally in
comparable quantity, quality and price;
Transfer of investment capital goods entered duty free to another investor
enjoying similar privileges;
Exemptions from customs duties or other taxes for raw materials necessary for
the production of export goods;
Exemption from the payment of any export tax and other taxes destined for
export.
Tax holiday which ranges from one to five years, depending on location and type of the
investment, is granted to investors.
Business enterprises that suffer losses during the tax holiday period can carry forward
such losses for half of the income tax exemption period following the expiry of the
exemption period.
4) Guarantees to Investors
Foreign investors can freely remit profits, dividends, principal and interest on
foreign loans, fees related to technology transfer and proceeds from the liquidation
of a business;
Foreign companies do not face any discrimination with respect to tax treatment,
license, import or export policies, and tariffs.
The country's current population is nearly 80 million, of which a significant number are
not gainfully employed, resulting in the high availability of labor force. One of the
features of Ethiopia`s demographic characteristics is that a large number of the
population join the national workforce each year. According to the document of GTP, the
ratio of the population of working age to the total population is about 54% and estimates
are that each year additional 1.2 million people join the national work force. Provided
that the additional workforce receive the support necessary to be productive, the
country`s workforce plays a significant role in increased economic growth and
development.
As the result of the major focus given by the government to education, the total student
population of the higher education system in Ethiopia has increased from about 78,322 to
185,788 during the period 2004/05—2009/10, registering an average annual growth rate
of 24 %. During the same period, the number of higher education institutes has increased
from 50 to 90 exhibiting an average annual growth rate of 15.80%.
Furthermore, as part of the government’s effort to create a skilled labor force, the
Technical and Vocational Education and Training (TVET) program is given high priority.
During PASDEP, the number of students enrolled in TVET education has increased from
106,336 to 717,603, registering an average annual growth rate of 30%, and the number of
schools has reached 253. Generally, during the PASDEP period the education sector,
which is the basis for human resource development, has shown a remarkable achievement
at all levels in various measures such as number of schools, class rooms, and teachers;
gross and net enrollment ratio; as well as student-teacher and student class room ratios.
To strengthen the human resource base of the country education sector is given high
priority during the GTP period. Accordingly, in addition to improving the quality and
number in the primary and secondary education, it is planned to increase the number of
under graduate students in government higher education institutions from the current
185,788 to 467,445 and TVET students from 717,603 to 1,127,330.
The above points discussed reveals that the country can avail skilled and semi skilled
labour force that are needed for industrialization. Moreover, due to the abundant work
force availability, the cost of the labor force is very competitive compared to the labor
cost of the Asian countries like China and India and many other African countries like
Kenya, Uganda, and Egypt. Health service provision is also improving from time to time.
Infrastructure of the country such as roads, energy and communication also shows a rapid
improvement.
3.1.5 TECHNOLOGY
The advancement of science and technology in the world and the spread of same in the
country will favorably influence the service rendering capacity of the envisaged project.
During the past ten years the ICT sector of the country has made a lot of progress. The
mobile network capacity has increased substantially from 0.5 million users in 2005/06 to
25 million in 2009/10. In the Universal Access Program, a CDMA wireless network
which covers 90% of the country and about 10 thousand km of fiber optic cables are
installed. Generally, ICT service quantity and quality has improved.
Realizing the importance of ICT in economic and social development the GTP has given
high priority to upgrade the existing ICT network to accommodate the latest information
technologies and improve network quality and expand services. Accordingly, in addition
to the planned expansion of fixed line, mobile and internet service coverage; the Global
Link Capacity is planned to reach 20 Gb/s from the current 3.5 Gb/s.
The spread of information and technology and the availability of internet services, the
ability to conduct virtual conferences, the possibility of processing and distribution of
data using computer hardware and software, telecommunications, and digital electronics
will create an opportunity for the envisaged project to become more effective.
From the above PEST analysis, it can be concluded that in the country there is a
continuous improvement of governance and public service delivery. The macro economic
performance in the past seven years has been very positive and the GTP indicates a very
good prospect, with a minimum of 11% GDP growth per annum, for the future. Although
the incentive packages that are currently given seem to be adequate the government is
planning to give additional incentives for the manufacturing sector. More specifically,
priorities will be given to the manufacturing sector in support provision in the areas of
licensing, land and finance allocation, training and the like.
The simplest form of electric wires for building wiring is two insulated conductors
twinned together to form a unit; wires & cables with two or three conductors are still
commonly used in the smaller gauges for low-voltage signal and control applications
such as doorbell wiring.
Modern power cables come in a variety of sizes, materials, and types, each particularly
adapted to its uses. Conductors used nowadays are made of copper or aluminum wires.
Conductors are usually stranded for flexibility, but small cables may use solid
conductors.
Conductors in a cable may be of different sizes. Each conductor has its own electrical
insulation. The cable may include un-insulated conductors used for the circuit neutral or
for ground (earth) connection.
Cables for high-voltage (more than 65,000 volts) power distribution may be insulated
with oil and paper, and are run in a semi-rigid steel pipe. The oil is kept under pressure to
prevent formation of voids that would allow partial discharges within the cable
insulation.
The electric wires and cables making plant described in this particular project is designed
for the production of low voltage (below 600V) electric wires and power cables; and it is
not intended for the production of telecommunication or high voltage power cables.
At present there are five local producers of electric wires and cables namely Ethio Plastic
Share Company, Alshwedy Cables PLC, Euro Cables, Electric World and Metal and
Engineering Corporation. The annual local production of electric wires and cables is
shown in Table 3.1.
Table 3.1
LOCAL PRODUCTION OF ELECTRIC WIRES IN ETHIOPIA
Local Production
Quantit
Year y Quantit
('000 y1
Meters) (tones)
2002 17,935 500
2003 11,387 318
2004 3,073 86
2005 19,917 556
2006 1,984 55
2007 1,322 37
2008 2,385 71
2009 2,704 80
2010 2,829 84
2011 29,152 863
Source: CSA, Large and Medium Scale Manufacturing Survey
As can be seen from Table 3.1, the supply of electric wires and cables from local
production exhibits three distinct trends. During the period 2002-2005 local production
except for year 2004, ranges from 318 tons to 556 tons. During this period the average
annual local production was 365 tons. However, during the next five years (2006 – 2010)
local production has plummeted to an annual average of only 84 tons. Nevertheless,
during 2011 local production of electric wires and cables has shot up to an all time high
of 863 tons (see Figure 3.1).
1
The conversion of the local supply data to tonnes is made based on the relationship of mass,
density, and volume (the density of copper being 8,960 kg/m 3), and considering copper accounts
for 70% of electric wires and cables weight. That is, mass in tonnes could be computed from the
formula: Density = Mass/Volume. Volume is computed by multiplying the cross sectional area of
the wire by its length. Furthermore, the proportions of different electric wires and cables sizes are
estimated based on observation of the market survey, practical cases of consumptions, and expert
opinion as 55%, 35%, 6%, and 4%, for 1x1.5mm2, 1x2.5mm2, 1x4mm2, 1x6mm2; respectively.
Figure 3.1
1,000
900
800
700
600
500
400
300
200
100
-
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
3.2.2 IMPORT
The supply of electric wires and cables from import shows a substantial increase, though
it fluctuates from year to year.
Table 3.12
Year Import
2002 2,595
2003 2,314
2004 3,167
2005 5,105
2006 3,191
2007 7,063
2008 10,314
2009 8,112
2010 5,113
2011 3,269
Source: Revenue and Customs Authority
Figure 3.2
10,000
8,000
6,000
4,000
2,000
-
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
The apparent consumption of electric wires and cables in Ethiopia over the years 1997-
2006 is shown in Table 3.18 and Figure 3.3. The apparent consumption is
Table 3.18
1997-2006
Forecasting is the estimation of the value of a variable (or set of variables) at some future
point in time. The selection and implementation of the proper market forecast
methodology is an important issue for a feasibility study. Often, the financial well-being
of the entire project relies on the accuracy of the forecast since such information will be
used to make fundamental decisions in areas of production and financial plans. For
example, any significant over-or-under market forecasting error may cause the project to
be overly burdened with excess inventory carrying costs or else create lost sales revenue
through selection of lower production capacity.
When demand is fairly stable, e.g., unchanging or else growing or declining at a known
constant rate, making an accurate forecast is less difficult. If, on the other hand, the
demand has historically experienced an up-and-down pattern, then the complexity of the
forecasting task is compounded.
There are two main approaches to forecasting. Either the estimate of future value is based
on an analysis of factors which are believed to influence future values, i.e., the
explanatory method, or else the prediction is based on an inferred study of past data
behavior over time, i.e., the extrapolation method. It is possible that both approaches will
lead to the creation of a reasonable and useful forecasts, but it must be remembered that,
even for a modest degree of desired accuracy, the explanatory method is often more
difficult to implement and validate than the extrapolation method.
Among the various forecasting techniques available the following are the most common
ones;
Simple Average;
Moving average;
Single exponential smoothing;
Double exponential smoothing (one parameter);
Holte’s two - parameter double exponential smoothing;
Time trend extrapolation
End use or consumption method
Regression method
Growth rate method
The simple average method assumes that for a given period the average total
supply/apparent consumption of all the years or some of the years, depending on the data,
approximate the demand for a product at least in the short run. However, the method is
highly unreliable since there are various factors that may affect the demand positively or
negatively. Thus, simply assuming the average of the last three years total
supply/apparent consumption approximates the present demand is found to be unrealistic.
When a constant number of data is specified at the outset and a mean is computed for the
most recent observations, the approach is called Moving Average. The moving average
method projects values to the forecast period, based on the average value, over a specific
number of preceding periods. A moving average provides trend information that a simple
average of all historical data would mask.
A time series is a sequence of observations, which are ordered in time. Inherent in the
collection of data taken over time is some form of random variation. There exist methods
for reducing of canceling the effect due to random variation. A widely used technique is
"smoothing". This technique, when properly applied, reveals more clearly the underlying
trend, seasonal and cyclic components.
Exponential smoothing is a method used of forecasting based on the time series itself.
Unlike regression models, exponential smoothing does not impose any deterministic
model to fit the series other than what is inherent in the time series itself.
One disadvantage of using moving averages for forecasting is that in calculating the
average all the observations are given equal weight (namely 1/L), whereas it is expected
that the more recent observations to be a better indicator of the future (and accordingly
ought to be given greater weight). Also in moving averages only recent observations are
used, however all previous observations should be taken into account. The smoothing
techniques give greater weight to more recent observations and takes into account all
previous observations. The methods are especially good for short-term forecasting where,
within reason, the past behavior of a particular variable is a good indicator of its future
behavior, at least in the short-term.
The single exponential smoothing analysis predicts a value based on the forecast for the
prior period, adjusted for the error in that prior forecast while the double exponential
smoothing predicts a value based on the forecast for the single exponential smoothing,
adjusted for the error in that prior forecast. Double exponential smoothing method is used
when the data shows a trend. Double exponential smoothing with a trend works much
like single exponential except that two components must be updated each period - level
and trend. The level is a smoothed estimate of the value of the data at the end of each
period. The trend is a smoothed estimate of average growth at the end of each period.
Forecasts based on exponential smoothing and trend extrapolation which are worked out
under the assumption that past marketing scenarios and developments will continue to
influence demand in the same magnitude and proportion in the future are considered to be
valid for short period projection (a year or two ahead), however the certainty of the
assumption is doubtful for forecasting to a longer period.
Accordingly, in order to estimate the current effective demand for the product under
consideration, the appropriateness of the above methods were tested and due to the nature
the data on the total supply of electric wire and cables the following methods are found to
be the most appropriate method.
The double exponential smoothing analysis predicts a value based on the forecast for the
single exponential smoothing, adjusted for the error in that prior forecast. Double
exponential smoothing technique involves the following equation:
Ft+m = at + btm
Where,
Accordingly, based on the above equation the estimated demand for corrugated iron sheet
products is given in Table 3.2.
Table 3.2
Single Double
Year Supply Exponential Exponential at bt Forecast
(Xt) Smoothed Smoothed Value
Value (S’t) Value (S’’t)
F” t+m = St + mbt,
Where:
St indicates the long-term level or base value for the time-series data, i.e. the level term,
bt indicates the expected increase or decrease per year, i.e., the trend term,
Alpha and beta are smoothing parameters, where α = 0.2 and β = 0.3 in this case.
Based on the above model, the estimated demand for corrugated iron sheet is shown in
Table 3.3.
Table 3.3
ESTIMATED PRESENT DEMAND BASED ON HOLT’S TWO PARAMETER
DOUBLE EXPONENTIALLY METHOD (TONS)
The principle of least squares is employed to fit a linear trend to the historical data of
supply (y) and time (t) and the relation is expressed by the following equation:
Y = α + bt,
Y = 5289 + 212.148t
Based on the above equation the resulting forecasted values are shown in Table 3.4.
Table 3.4
Total Forecast
Year Supply
2002 3,095 3,380
2003 2,632 3,804
2004 3,253 4,229
2005 5,661 4,653
2006 3,246 5,077
2007 7,100 5,501
2008 10,385 5,926
2009 8,192 6,350
2010 5,197 6,774
2011 4,132 7,199
2012 - 7,623
2013 8,047
3.3.4 EVALUATION OF THE METHODS USED TO ESTIMATE THE
PRESENT DEMAND
The result of the methods used to estimate the present effective demand is summarized in
Table 3.5.
Table 3.5
Present
Demand
Method (Tons)
Double exponential smoothing(one
parameter) 6,597
Holt's two - parameter double exponential
smoothing 7,459
Time trend extrapolation 8,047
As could be seen from Table 3.5 the time trend extrapolation method shows the highest
result which is 8,047 tons while Holt's two-parameter double exponential smoothing
method and double exponential smoothing have resulted with an estimate of 7,459 tons
and 6,597 tons, respectively. In order to select the most appropriate method, the
significance of the methods used for short-term forecasting was evaluated by using
different testing methods. The results of these test methods are shown in Table 3.6.
Table 3.6
Darbin-Watson
Projection Methods MAPE* U-Statistic Statistic.
Double Exponential
Smoothing 10.26 0.98 1.84
The test statistics in Table 3.8 shows that the mean absolute percentage error between the
historical data and the forecasts shows a better result with lower mean absolute
percentage error for double exponential smoothing method than the Holt’s two
parameters exponential smoothing method. The U-statistic also shows that double
exponential smoothing method is a better estimate since the result is less than one.
Moreover, the Darbin Watson statistic also shows favorable result for double exponential
smoothing method since the result is near to the optimum figure which is two. Hence, the
double exponential smoothing method is relatively appropriate to the data set under
consideration compared to Holt’s two parameters exponential smoothing method.
The other method i.e. the time trend extrapolation is evaluated using the F-test and the t-
test in order to observe the significance of the relationship between the historical apparent
consumption data and time trend and also to check whether the slope and the intercept of
the line are significantly different from zero or not . Accordingly;
(F calculated = 27.65) > (F(1,8)( α=0.01) =19.24) shows the appropriateness of
the time trend model at ( α=0.01) significance level.
(t calculated = (b/se(b)) = 4.741) > (t(8)( α=0.01) = 3.678) indicates the slope of
the relationship line between the data series and the time trend is
significantly different from zero. Similarly the intercept of the relationship
line is significantly different from zero as (t calculated = \(a/se(a))\= 63.26)
Besides, the r2 value which is 0.964 shows a high proportion of the data is explained by
the time series and this complements with the above tests.
Therefore, among the three methods the time trend extrapolation method is found to be
the best fit to estimate the present effective local demand for electric wire and cable.
Accordingly, the present effective demand for electric wire and cable is estimated at
8,047 tons.
3.4.1 FACTORS THAT AFFECT THE DEMAND FOR THE PRODUCT UNDER
CONSIDERATION
The target market for electric wires is mainly the building construction sub-sector which
is vast in scope and coverage. It includes all construction components undertaken in each
economic sector, such as residential buildings, commercial buildings, industrial
buildings, educational buildings and health buildings.
Accordingly, the demand for electric wires and cables depends on the growth of the end
users. Therefore, the demand for electric wires and cables is a derived demand, which
depends directly on the performance of its major end–users. On the other hand, the
performance of the end users is dependant on a number of interrelated variables. The
variables that are essential in determining the magnitude and trend of demand for electric
wires and cables are:
Among the factors that influence the demand for the product under consideration the
major one is the country’s economic performance, since it leads to increased construction
and infrastructure development. In Ethiopia, as a result of the appropriate policy adopted
by the government the country’s economy is on a higher growth path. According to the
Ministry of Finance and Economic Development (MoFED), overall real GDP has grown
rapidly at annual average of 11% per annum during the period 2005/06—2009/10, which
places Ethiopia among the top performing economies in Sub-Saharan Africa.
Agriculture, industry and services, have registered an average annual growth of 8.4%,
10% and14.6%, respectively. At the end of 2009/10 the percentage share of agriculture,
industry and service to the overall GDP was 41.6%, 12.9% and 45.5%, respectively. For
details of average growth target planned and average growth achieved during the period
2005/06—2009/10 see Table 3.7.
Table 3.7
GROWTH IN GDP AND MAIN SECTORS AS PERCENT OF GDP (2005/06—
2009/10)
Table 3.9 reveals that, with the exception of the industrial sector, the overall and sectoral
performances achieved were above the targets set in both the base case and high case
scenarios.
The positive performance of the Ethiopian economy is expected to continue in the future.
According to the GTP, during the period 2010/11 – 2014/15 the real GDP of the country
(at a base case scenario) is expected to grow at an average annual growth rate of 11.2%.
As a result, demand for electric wires and cables which are mainly used in housing
construction is expected to increase substantially as economic expansion continues.
During the GTP period, the annual average planned targets of growth for agriculture,
industry and service sectors are 8.6%, 20% and 16%, respectively. By the year 2014/15
the structure of the economy will have some changes. The share of agriculture and allied
activities from the total GDP will decline to 36.9% from the current 41%. On the other
hand, the share of industry will increase from the current 13% to 18.8% and service
sector contribution will be 44.3%.
The construction sector of the country has undergone tremendous changes and
development in recent years. The construction sector’s performance can be measured by
the sector’s contribution to the national Gross Domestic Product (GDP). The contribution
of the construction sector to the GDP during the period 2002 – 2012 is shown in Table
2.5.
Table 1.5
Construction
Sector's
contribution to
Year GDP
2002 3,204,762
2003 3,693,337
2004 4,626,752
2005 5,510,819
2006 6,921,071
2007 9,268,810
2008 12,000,273
2009 16,073,853
2010 15,882,454
2011 20,050,816
2012 27,220,5022
Source: Annual Publication of National Bank of Ethiopia
2
Estimated
The contribution of the construction sector to the GDP during the period 2002 – 2012
have been growing at annual average growth rate of 24.33 percent which is more than
double of the average annual growth rate of total GDP during the period under
consideration (11.4 %), indicating a rise in the share of the construction sector within
the overall economy.
Figure 2.3
30,000,000
25,000,000
20,000,000
15,000,000
10,000,000
5,000,000
-
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
The number of contractors which were 514 in 1998 has increased to 1,384 and 3,675 in
2009 and 2011, respectively. Between 1998 and 2011, the number of local contractors
has increased by more than seven fold, registering a compounded average annual growth
rate of 47.31%. The paid up capital of the contractors which were Birr 1.90 billion in
1998 has also increased to Birr 30 billion in 2011 (see Table 2.1).
Table 2.1
From the total number of contractors, in 2011, the majority i.e. 64.27% and 33.69% are
accounted by building contractors and general contractors respectively. In terms of
capital from the total paid up capital the highest share is accounted by general contractors
(64.28%) followed by building contractors (29.97%) and road contractors ( 5.38%).
Table 2.2
Figure 2.1
VALUE OF CONSTRUCTION OUTPUT
30,000,000
25,000,000
20,000,000
15,000,000
10,000,000
5,000,000
0
1998 2009 2011
The total out put of the constriction sector could be divided in three categories. In the first
category is the construction of residential buildings. Secondly, there is the construction of
non residential buildings such as schools, hospitals, health centers hotels, factories,
offices etc. The third category includes the construction of roads, dams, power stations,
drainage and water supply projects.
Accordingly, in Ethiopia as of 2011 from the total value of construction out put the
highest share (62.12%) is accounted by other construction works (the third category)
followed by non residential buildings (33.22%). The remaining 5.67% is accounted by
construction of residential buildings (see Table 2.3).
Table 2.3
VALUE OF CONSTRUCTION OUTPUT BY TYPE OF CONSTRUCTION ( in
000 Birr)
Year
Value Addition
Value added of the sector, which is defined as the deference between gross value of
construction out put and total construction cost, at constant market price has increased
from 904.95 million in 1998 to 12.52 billion in 2011 exhibiting a compounded average
annual growth rate of 91.75% ( see Figure 2.2). During 2011, general contractors
accounts for the great majority of the sector’s valued added (78.41%) followed by
building contractors (13.13%) and road contractors (7.81%). For details see Table 1.4.
Table 2.4
Table 2.2
12,000,000
10,000,000
8,000,000
6,000,000
4,000,000
2,000,000
0
1998 2009 2011
However, according, to the World Bank the construction industry usually accounts for
between 10 percent and 15 percent of a developing country’s gross domestic product.
However, despite the recent impressive growth of the local construction sector, during the
period 2002 – 2012 on average the sector’s contribution accounts for only 5% of total
GDP of the country which indicates that there is a room for a rapid growth of the sector.
The residential and commercial building construction sub-sector of the country is currently
going through a boom period witnessing a substantially marked increase in investment in
complex and high rise buildings in major cities and towns of the country like Addis Ababa,
Mekele, Awassa, Dire Dawa, Bahir Dar Nazereth, etc.
However, there is no data available that indicates the actual housing construction activity at
national level except for Addis Ababa. Therefore, in order to get an insight in to the size and
magnitude of building construction activities, actual housing construction activities in Addis
Ababa are analyzed.
There have been various efforts by the Addis Ababa city administration to enhance real estate
and housing development in the city. The efforts among others include the provision of land to
cooperatives and individual owners, the construction of low cost multi story condominium
building by its own, encouraging the private sector in real estate development through the
provision of lands on a lease and auction bases and removal of bureaucratic red-tapes in
construction permits.
Trend in the number of building permits issued is an indicator of the performance of the real
estate development sector. Table 3.2 shows number of building construction permits issued in
Addis Ababa during 2003 – 2011.
Table 3.2
Types of Building 2003 2004 2005 2006 2007 2008 2009 2010 2011
1 Storey and Villa 1,064 1,616 1,654 332 86 1,060 79 1,567 965
2 Storeys 100 141 187 330 53 901 43 1,862 1147
3 Storeys 44 61 53 217 52 631 93 1,144 705
4 Storeys 33 33 29 63 23 324 60 512 315
5 Storeys 11 10 9 54 87 536 120 141 87
6 Storeys 9 4 13 20 22 184 52 32 20
7 Storeys 5 2 2 6 17 89 18 82 51
8 Storeys 1 4 - 6 11 67 12 37 23
9 Storeys 1 2 1 6 9 69 21 17 10
10 Storeys 1 - 2 2 6 38 16 18 11
11 Storeys - - - 2 2 14 3 4 2
12 Storeys - - - 1 2 6 5 30 18
13 Storeys - - - 3 3 16 2 5 3
14Storeys and - - - 2 - 12 10 1 1
Total
above 1,269 1,873 1,950 1,044 373 3,947 534 5,452 3,359
As can be seen from Table 3.2 during the period under consideration the annual building
construction permit issued ranges from 373 in 2007 to 5,452 in 2010. However, on average
permits were given for the construction of 2,200 buildings annually in Addis Ababa.
The other development in housing construction is the construction of multi story condominium
houses by the government. According to the Ministry of Urban Development and Construction
(MUDC), during the GTP period (2011 -2015) a total of 170, 000 multi storey condominium
housing units will be constructed by the government and transferred to users, which means
34,000 housing units have to be constructed annually.
The other housing development projects envisaged by the government during the GTP period
are the residential and support service building of the planned sugar and fertilizer
manufacturing plants.
The GTP envisions building 10 new sugar factories and fertilizer manufacturing complexes.
According to a study prepared by MUDC; the sugar development projects and the fertilizer
complexes require 101,022 and 15,000 residential and support service buildings, respectively,
with a total built up area of 5,917,276 m2 and 904,500 m2 respectively.
According to the GTP, the planned capital budget expenditure on education and health sectors
will increased from Birr 27.96 billion in the year 2011 to Birr 57.91 billion in the year 2015 (see
Table 3.3).
Table 3.3
PLANNED GOVERNMENT CAPITAL BUDGET EXPENDITURE ON EDUCATION AND HEALTH SECTORS
(IN MILLION BIRR)
Year
Source: - GTP
Information obtained from MoFED shows that out of the total government capital expenditure
on education and health sectors the ratio of the amount of capital used for construction
purpose is 0.797 and 0.695 respectively. Accordingly, during the GTP period the total Birr
156.22 billion and Birr 47.09 billion planned capital budget expenditure on the education and
health sectors, the amount that will be used for construction purpose is estimated at Birr
124.51 billion and Birr 32.73 billion respectively.
a) Private Investment
During 1993-2011 a total of 56,421 investment projects with an aggregate capital of Birr 1.07
trillion were licensed by the Ethiopian Investment Agency and Regional Investment Offices.
The shares of domestic, foreign and public sector in approved investment projects were 84.1%,
15.7% and 0.2 % respectively. Of the total projects, about 11.4 percent have become
operational. The rest were in implementation and pre-implementation stage.
In terms of investment capital, Birr 424.1 billion originated from domestic investors, Birr 382.2
billion from foreign investors and Birr 272.4 billion from public sector. Upon commencement of
operation, the approved investment projects are expected to create job opportunities for
227,715 permanent and 586,380 casual workers.
In 2011 alone, 6,322 investment projects with total capital outlay of Birr 249.46 billion were
licensed which is a record high since 1993. Domestic private investment projects licensed in the
review period accounted for 84 percent.
Table 3.4
Annual
During the period of analyses, the number and investment capital of approved projects has
registered an average annual growth rate of 25% and 32%, respectively.
As a result of the various incentives provided by the government, the high growth rate of
investment activity witnessed in Ethiopia during the past few years is expected to continue in the
future. Considering the fact that new investment projects will require production and office
facilities it can be assumed that the increasing number of investment projects will increase the
demand for construction materials such as the products under consideration.
b) Government Investment
According to GTP the government envisages the implementation of various industrial projects
among which the sugar and fertilizer projects are the major ones. Accordingly, the cost of the
various industrial projects planned to be implemented during the GTP period are shown in
Table 3.5.
Table 3.5
Other indicators of the magnitude of housing construction include trend in real estate and
rental service’s contribution to GDP, trend in number of investment license issued in the area of
real estate development and construction and loan disbursed by banks for housing and
construction.
During the period 2000 – 2011 real estate and rental service’s contribution to GDP has
increased from Birr 3.92 billion to Birr 17.04 billion registering an average annual growth rate of
14.44% (see Table 3.6). During the same period, the share of the sub sector’s contribution from
the total GDP has increased from 4% to 8% which indicates the rapid growth of the sub sector.
Table 3.6
rental service's
Contribution
Year to GDP
2000 3,923,584
2001 4,278,979
2002 5,271,846
2003 5,784,827
2004 6,044,829
2005 6,491,637
2006 7,433,918
2007 8,565,094
2008 10,045,641
2009 11,641,143
2010 13,965,097
2011 17,047,646
Source: Annual Publication of National Bank of Ethiopia
During 2003-2010 a total of 11,373 investment licenses with a total capital of Birr 126.21 billion
were licensed by the Ethiopian Investment Agency and Regional Investment Offices in the area
of real estate development which means on the average 1,422 investment licenses with a total
capital of Birr 15.77 billion were annually issued.
Table 3.7
NUMBER AND INVESTMENT CAPITAL OF APPROVED PROJECTS IN THE AREA OF REAL ESTATE
DEVELOPMENT
The amount of loan disbursed by banks for housing and construction during the period 2003 –
2010 ranges from 373 million to 4.04 billion. However, during the period under consideration
on average a loan of Birr 2.22 billion have been annually provided for housing and construction
activities by local banks. During the same period though the loan disbursed by banks for
housing and construction fluctuates from year to year it shows an increasing trend. For example
the average amount of loan during the first four years ( 2003- 2006) which was Birr 1.22 billion
has increased by 163% to Birr 3.21 billion in the subsequent four years ( 2007 -2010) average
(see Table 3.8).
Table 3.8
THE AMOUNT OF LOAN DISBURSED BY LOCAL BANKS FOR HOUSING AND CONSTRUCTION ( IN
MILLION BIRR)
Year Amount
2003 373
2004 2,218
2005 627
2006 1,675
2007 2,018
2008 4,040
2009 3,916
2010 2,901
2.1 CAPACITY
In order to meet the increasing power consumption, the Ethiopian government has been striving
to exploit the huge electricity generation potential of the country. Even though the country’s total
installed capacity from hydropower plants raised very slowly for over half-a-century, from 2000
to 2011, it has shown a significant rise (see Table 2.1). In fact, the hydropower generation
capacity augmented more during 2010 than it did in half-a-century time. The increment in
generation capacity was also very slow before 2004. In 2004 however, it jumped to 800,406 KW
from 607,660 KW in 2003, and reached 2.04 million KW in 2010.
Three hydropower plants (Gilgel Gibe II, Tana beles, and Tekeze I) with a combined capacity of
1,180 MW were commissioned in 2010, more than doubling the previous installed capacity of
the country. Gilgel Gibe II, which does not have its own dam, has an installed capacity of 420
MW, Tana Beles has 460 MW, and Tekeze I has 300 MW.
Table 2.1
During the period 2000 – 2011 the electricity generation capacity of the country has registered an
average annual growth rate of 17.97% (Figure 2.1).
Figure 2.1
2,500,000
2,000,000
1,500,000
1,000,000
500,000
-
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
The Ethiopian Electric Light and Power Authority (EELPA), which was established in 1956,
after having undergone restructuring have been reorganized as the Ethiopian Electric Power
Corporation (EEPCo). EEPCo is responsible for generating, transmitting, distributing and selling
of electricity nationwide.
The Corporation maintains two different power supply systems; namely, the Interconnected
System (ICS), which is mainly supplied from hydropower plants, and the Self-Contained System
(SCS), which consists of mini-hydropower plants and a number of isolated diesel generating
units that are widely spread over the country.
In the ICS system EEPCo currently operates 12; hydropower, one geothermal- and 13 diesel
grid-connected power plants with a total capacity of 2,012.8 MW, 7.3 MW and 108.6 MW
respectively (see Table 2.2)
Table 2.2
CURRENT ELECTRICITY GENERATION CAPACITY OF THE ICS SYSTEM (2011)
Sr. Power plants Installed Capacity
1 Hydro
(MW)
1.1 Tis Abay I 11.5
1.2 Koka 42.3
1.3 Awash II 32
1.4 Awash III 32
1.5 Fincha 134
1.6 Melka Wekena 153
1.7 Tis Abay II 75
1.8 Gilgel Gibe I 184
1.9 Tekeze 310
1.10 Gilgel Gibe I 184
1.11 Gilgel Gibe II 420
1.12 Tana Beles 435
Sub Total 2012.8
2 Geotermal
2.1 Aluto-Langano 7.3
Sub Total 7.3
3 Desiel
3.1 Alemaya 2.3
3.2 Dire Dawa 40
3.3 Adigrat 2.5
3.4 Axum 3.2
3.5 Adawa 3
3.6 Mekele 5.7
3.7 Shire 0.8
3.8 Nekemt 1.1
3.9 Awash 7 Kilo 35
3.10 Kality 14
3.11 Jima 1
Sub Total 108.6
Grand Total 2128.7
Source: - Ethiopian Electric Power Corporation (EEPCo).
As can be seen from Table 2.2 hydropower plants with a total generation capacity of 2,012.8
MW, accounts for 94.54%, of the country’s total electricity generation capacity.
The geothermal stations and stand-by diesel stations are at different places including emergency
diesel units at Kaliti (14 MW), Awash Town (35 MW) and Dire Dawa (40 MW), which are
required to mitigate the power shortage during seasonal influence on the hydro reservoirs.
The SCS supplies isolated load centers, which are far from the ICS, mostly using diesel plants as
a source of generation. Currently this system has an aggregate installed capacity of about 20
MW, of which 70 percent, i.e. 13.8 MW is being generated from diesel stations. The remaining
balance of 6.2 MW is being generated from small scale hydro power plants located at Sor, Yadot
and Dembi.
2.2 PRODUCTION
During the period 2000 – 2011 electricity production has increased from 1.35 million KwH to
4.97 million KwH registering an average annual growth rate of 12.84 % ( see Table 2.3 and
Figure 2.2).
Table 2.3
Figurer 2.2
6,000,000
5,000,000
4,000,000
3,000,000
2,000,000
1,000,000
-
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
The expansion of electric coverage in the country as well as the increasing need from the
growing industry and service sectors has created unprecedented electricity demand that exceeded
the available electricity generation capacity in the last three-four years. Despite the fact that there
is a tremendous rise in installed electricity generation capacity and production in the past few
years, the country has recently faced a power shortage.
Table 2.4
NUMBER OF ETHIOPIAN ELECTRIC POWER CORPORATION CUSTOMERS (2004-
2008)
Tariff Year
Category 2004 2005 2006 2007 2008 2009 2010 2011
Domestic 559,205 597,976 685,433 820,379 971,135 1,207,894 1,441,304 1,576,964
Commercial 85,913 90,167 101,553 118,493 138,364 167,654 207,986 222,698
Street Light 1,043 1,207 1,389 1,740 2,137 3,056 3,060 3,260
LV Large
Industry 8,180 8,444 9,356 10,918 13,212 15,603 22,908 24,997
HV Large
Industry 99 96 107 132 150 196 242 216
Own
Consumption 445 470 522 1,345 1,466 1,689 1,834 1,916
Total 654,885 698,360 798,360 953,007 1,126,464 1,396,092 1,677,334 1,830,051
Source: - Ethiopian Electric Power Corporation (EEPCo).
The first National Energy Policy was issued in March 1994 during the period of the
Transitional Government of Ethiopia. This is still in force as the policy of the Government of
Ethiopia. The policy document states the Government’s intentions in each of the sub sectors.
Thus it aims to address household energy problems by promoting agro-forestry,
increasing the efficiency with which biomass fuels are utilized, and facilitating the shift
to greater use of modern fuels. Furthermore, the policy paper states that the country will rely
mainly on hydropower to increase its electricity supply but it also mentions to take
advantage of Ethiopia’s geothermal, solar, wind and other renewable energy resources where
appropriate. In addition it aims to further explore and develop oil and gas reserves. It also refers
to the need to encourage energy conservation in industry, transport and other major energy-
consuming sectors, to ensure that energy development is economically and
environmentally sustainable. Providing appropriate incentives to the private sector is the other
area the policy statements emphasize. The energy policy document is further elaborated by
different sectoral policies and strategies like industrial, agricultural, etc polices and
strategies. The general objectives of the energy policy are:
To ensure a reliable supply of energy at the right time and at affordable prices,
particularly to support the country's agricultural and industrial development
strategies adopted by the Government.
To ensure and encourage a gradual shift from the use of traditional energy sources to
modern energy sources.
To streamline and remove bottlenecks encountered in the development and
utilization of energy resources and to give priority to the development of indigenous
energy resources with a goal toward attaining self-sufficiency
To set general guidelines and strategies for the development and supply of
energy resources;
To increase energy utilization efficiency and reduce energy wastage; and,
To ensure that the development and utilization of energy is benign to the
environment.
EEPCO has engaged Acres International Limited of Canada to undertake a power system
Expansion Master Plan (EPSEMP) which is finalized in 2003. Taking in to account the entire
major changes that have occurred in the country and with in EEPCO since the formulation of
the Master plan (EPSEMP), the corporation has revised the EPSEMP and prepared the
Ethiopian Power Systems Expansion Master Plan Update (EPSEMPU) in a 25 years planning
horizon in April 2004 and June 2006.
The plan for the first 10 years was detailed to be adopted as sector development program,
whereas the plan for the remaining 15 years was indicative to provide long term insight for
decision makers.
Concerning the energy sector, the GTP sets as its target during the plan period of an additional
8,000 MW energy generated from renewable energy resources. This plan aims to address both
the domestic demand and the export of power to neighboring countries and beyond. The
need to expand the transmission and distribution system is also emphasized in order to
deliver the energy generation to the consumer in an efficient and reliable manner.
The strategic directions during the GTP period are the development of renewable
energy, the expansion of energy infrastructure, and the creation of an institutional capacity that
can effectively and efficiently manage such energy sources and infrastructure. During the GTP
period, the gap between the demand for and supply of electricity will be minimized.
The per capita consumption of electricity of households is expected to increase during the GTP
period. Moreover it is planned to produce sufficient electricity for export.
The electric power supply coverage will be increased through the ongoing rural
electrification access program. The Government will ensure a cost effective, high quality
supply of energy, as well as energy efficiency and conservation.
As the result of the expansion project it is assumed that during the plan period the EEPCo
customers will grow from two million in 2010 to four million in 2015. Moreover, the country’s
electricity coverage is assumed to grow from 41% in 2010 to 75% in 2015.
The plan is based on thirteen key projects, which are in varying stages of development. The
recently operational are at the Gilgel Gibe II dam (430 MW), the Tekeze dam (300 MW) and the
Beles dam (435 MW). Under construction include the massive Gilgel Gibe III (1,870 MW),
costing US$ 2 billion and the mega hydro power project to be constructed on the Abbay (Blue
Nile) River with a capacity of 5,500 MW which is planned to be the largest plant in the country.
The planned and under construction hydro power projects and power generation capacity are
summarized in Table 2.5.
Table 2.5
Sr. Capacity
No. Name ( in MW)
1 Gibe III 1,870
2 Hallele -Werabesa 422
3 Tekeze II 450
4 Gibe VI 1,900
5 Genale III 258
6 Genale IV 256
7 Gebe I & II 366
8 Karadobi 1,600
9 Boarder 1,200
10 Mendaya 2,000
In order to efficiently distribute the generated power within the period 2011-2015 about 6,800 km
of additional HV lines comprising of 400, 230, 132 kV voltage levels will be required. Out of
these lines 2,200 km are related to generation interconnections, 4,000 are related to planned
expansion to new areas and the balance 600 are related to reinforcements. Around 47 new
substations have to be constructed. Moreover, transformers with a total magnitude of 3500 MVA
and capacitive reactors of about 680 Mvar have to be installed at various locations in the system.
As Addis Ababa is the largest load center, it takes 70% of the above transformer installations and
60% of the capacitive reactor installations.
Moreover, Ethiopia is also going to export power to neighboring countries the Ethiopia–Sudan
interconnection feasibility study was conducted in 1987 by IVO International Ltd. Consultants.
The objective of the project was transmission of Ethiopian surplus hydroelectricity to Sudan. The
maximum amount of energy envisaged for transmission to Sudan during any single year was 665
GWh, while the maximum power transmission was set at 100 MW. The study recommended that
the power transfer follow a Debremarkos–Injibara–Roseires route on a 230-kV transmission line.
The link starts from Bahir Dar substation passing through Gonder and Shehedi substations in
Ethiopia and ends at Gedaref substation in Sudan with a total length of 296 km. The total cost of
line construction was estimated at USD 61.3 million, of which USD 46.1 million would be
invested in Ethiopia.
Dawa substation in Ethiopia and ends at PK-12 substation in Djibouti with a total length of 283
km. The investment on construction of the transmission line was estimated at USD 28.7 million,
of which USD 16.8 million would be invested in Ethiopia. This link will also create an
opportunity for Ethiopia to export energy to Yemenis market through undersea cable of 26 km
230 kV line.
The Ethiopia– Kenya interconnection is planned to start from Giggle Gibe-III power plant and
passes through mega substation in Ethiopia and ends at the towns of Nairobi or Eldorate in
Kenya. The link from Giggle Gibe-III to Mega might be double circuit 400 kV HVAC. HVDC
link of at least 500 kV with transfer capacity of about 600 MW is anticipated from Mega
substation to Kenya (Nairobi or Eldorate).
The Government of Ethiopia has initiated the Climate-Resilient Green Economy (CRGE)
initiative to protect the country against the adverse effects of climate change and to build a
green economy that will help realize its ambition of reaching middle-income status before
2025.
Accordingly, as part of the CRGE initiative, Ethiopia has outlined a strategy to build its
green economy. It follows a sectoral approach identifying and prioritizing initiatives that
could help the country achieve its development goals while limiting the 2030
greenhouse gas (GHG) emissions to today’s level.
Most of Ethiopia’s neighbors’ electricity expansion plans are significantly dominated with
conventional thermal generations. The ever soaring fuel prices will therefore place Ethiopia’s
cheep renewable generation at an advantageous position in the market that is going to be
created in the region when the ongoing interconnection projects are finalized. The replacement
of conventional thermal generations having high GHG gas emission with zero emission
renewable generations will entitle the importing countries to get additional benefits through
carbon credits. As the pricing of the power exchange between countries depends on the
benefit sharing scheme, Ethiopia could indirectly get these benefits through the power
purchase agreements that are going to be made with the importing countries.
3.5 WIND, SOLAR AND GEOTHERMAL RESOURCE ASSESSMENT MASTER
PLAN
The Master Plan recommends 51 wind projects (with total planned capacity of 6,820 MW) and
5 solar PV projects (with total planned capacity of 135MW) up to the period 2030.
The short term plan is to have around 800 MW by 2015, with the first ever 2 wind
farms in Ethiopia with a combined capacity of 171 MW already under construction.
Wind power will thereafter continue to be developed as a significant component of the
power system.
Regarding geothermal energy medium term plan to the year 2015 envisages geothermal power
plants at Aluto and Tendaho. The plan also propose exploration works in prospect areas of
Corbeti, Abaya, Tulu Moye, Gedemsa, Dofan, Fantale, Kone, Meteka, Teo, etc. Table 3.1 lists
the pipe line projects in order of priority.
Table 3.11
3.6 OTHERS
One of the hallmarks of the Ethiopian Government’s “Climate Resilient Green Economy
(CRGE)” is investment in new and sustainable green technologies that can provide the
population with more efficient, more reliable, and less expensive power. A key aspect of this
initiative is to identify energy sources that will not only expand the provision of power
across the country, but will do so in a manner that incorporates environmental protections
and associated socio-economic benefits. Accordingly, the Government has initiated a Waste-
to-Energy project.
The Reppie Waste-to-Energy project is the first of its kind in Ethiopia as it produces green
energy within city limits from municipal solid waste (MSW). It will also be the first base load
power in the country providing electricity 24 hours of the day for over 330 days of the year.
The facility will be a modern waste disposal system eliminating over 1,000 tons of waste
every day and producing 185,000,000 KWh per year. This energy is put into the grid
without long transmission lines required in remote hydro and wind projects.
Population Growth
According to the first national population and housing census, the population as of 1984
Ethiopia was estimated to be 39,868,572. During the second national population and
housing census (1994) the total population was estimated at 53,477,265 which is a 34%
increase compared to 1984. During the third national population and housing census
(2007) the population size is estimated at 73,918,505 which is a 38% increase compared
to the population size of 1994.
The recent census has also revealed that 83.9 percent of the population resides in the rural
areas, while 16.1 percent were urban dwellers. The country is among the high fertility
nations with a total fertility rate of 6.9 children per woman. Over 45 percent of the
populations are below age 15, indicating that there is a large potential of women in the
child bearing age. Because of this potential population momentum, what ever
intervention measures are to be taken to reduce fertility, the growth of the population will
show a fast increase for some to come. In fact, assuming the growth rate will decline
from the current 2.9 percent per annum to below 2.0 percent by the year 2030, the Central
Statistical Authority of Ethiopia projected the country's population to be over 106 million
by the year 2020 and nearly 130 million by the year 2030. The World Bank projected the
country's population to be over 122 million by the year 2020 and over 158 million by the
year 2030. This implies that the population will double in less than a quarter of a century
and may triple well before year 2050.
Urbanization
Accordingly, the rapid growth of population in general and urbanization in particular will
create a huge market potential for construction materials such as the product under
consideration.
3.4.2 DEMAND PROJECTION
From what was discussed in the preceding section, it is not difficult to conclude that the
demand for galvanized steel sheet will grow in the future. The issue, therefore, is how
best to estimate the future demand. Accordingly, in order to project the future demand
for the product the responsiveness of demand to various factors that influence its
movement should be examined and the most relevant projection should be selected.
Hence, the future demand for the products under consideration is estimated using
different projection techniques that implicitly or explicitly show the influence of major
variables on demand. Accordingly, the following two major techniques are, thus, applied
to estimate the size of the future demand for the product.
The regression method employs the cause-effect relationship between a product demand
and the factors affecting it. It is expressed like the trend extrapolation method either in
the form of linear or curve linear regression equation.
Among the factors that have a strong influence on the demand for electric wire and cables
economic growth and performance of the construction sector are identified to have the
most profound effect. Therefore, these variables are used to forecast the future demand
for the product. One of the indicators that measure the economic performance of a
country is GDP. Thus, it is assumed that GDP indicates the level of income development.
Moreover, performance of the construction sector is also assumed to be measured by the
sector’s contribution to GDP. Accordingly, the data used to develop the regression
equation are presented in Table 3.18.
Table 3.18
APPARENT CONSUMPTION OF electric wire and cable , GDP AND
CONSTRUCTION SECTOR’S CONTRIBUTION TO GDP
Construction
sector's
GDP contribution Total
( in 000’ to GDP ( in Supply
Year Birr) 000' Birr) ( in tons)
2002 55,819,782 3,204,762 3,095
2003 61,986,475 3,693,337 2,632
2004 68,153,168 4,626,752 3,253
2005 74,319,862 5,510,819 5,661
2006 80,486,555 6,921,071 3,246
2007 81,421,066 9,268,810 7,100
2008 91,044,094 12,000,273 10,385
2009 100,908,384 16,073,853 8,192
2010 106,187,154 15,882,454 5,197
2011 110,962,805 20,050,816 4,132
The regression equation is found to be linear and reveals that there is a strong relationship
among the above variables. This means that GDP and performance of the construction
sector have strong positive relationship with apparent consumption of electric wire and
cable.
Using the above equations and assuming that over the forecasting period GDP and
construction sector’s contribution to GDP will continue to grow at an equivalent rate of
the average growth rate registered during the period 2002 – 2011 the projected demand
for electric wire and cable has been worked out and presented in Table 3.19.
Table 3.19
FORECASTED DEMAND FOR GALVANIZED STEEL SHEET USING
REGRESSION METHOD (IN TONS)
Projected Demand
Based on
construction
sector’s
Based on contribution
Year Total GDP to GDP
2014 9,723 9,905
2015 10,817 10,631
2016 12,035 11,430
2017 13,389 12,308
2018 14,895 13,275
2019 16,571 14,338
2020 18,436 15,507
2021 20,510 16,794
2022 22,818 18,209
2023 25,385 19,765
2024 28,241 21,477
2025 31,418 23,361
Accordingly, a growth rate of 15% which is slightly higher than the expected growth rate
of the country’s GDP during the GTP period (2011 – 2015) is used for the first five years
(2014 - 2018) while a growth rate of 10% is used for the period 2019-2025.
Based on the above assumption and using the estimated present demand (8,047 tons) as a
base the projected demand for electric wire and cable is shown in Table 3.20.
Table 3.20
Projected
Demand
Year ( in tons)
2014 9,254
2015 10,642
2016 12,239
2017 14,075
2018 16,186
2019 17,804
2020 19,585
2021 21,543
2022 23,698
2023 26,068
2024 28,674
2025 31,542
The projected demand for electric wire and cable employing different alternative methods
is summarized in Table 3.21.
Table 3.21
Demand Projection
Based Regression Method
Based Based on
on construction Projection
Total GDP sector's Based on
contribution Growth Rate
Year to GDP Method
2014 9,723 9,905 9,254
2015 10,817 10,631 10,642
2016 12,035 11,430 12,239
2017 13,389 12,308 14,075
2018 14,895 13,275 16,186
2019 16,571 14,338 17,804
2020 18,436 15,507 19,585
2021 20,510 16,794 21,543
2022 22,818 18,209 23,698
2023 25,385 19,765 26,068
2024 28,241 21,477 28,674
2025 31,418 23,361 31,542
As can be seen from Table 3.21 various methods have resulted with different forecasts.
Each forecast is based on valid assumptions about market trends and development in the
future and each has its own drawbacks and merits.
The projection obtained using the regression model is based on forecasts of the
independent variable ( GDP and construction sector contribution to GDP), and the errors
from the forecasts of the independent variables could have a cumulative effect on the
errors of the regression model itself, which is considered as a major drawback. On the
other hand the major strength of the method is that it considers the performance of the
national economy and the construction sector which have a decisive influence on the
demand for the products under consideration.
The growth rate method considers the influence of factors that are expected to have direct
influence on the demand for a product. A growth in one of these indicators is assumed to
bring a proportional increase in the demand for the product. Therefore, the method
considers that the underlying events and factors that prevailed in the past would also
continue to influence demand in the same proportion and magnitude as in the past.
However, the influence either positively or negatively may exist but the proportion and
magnitude of impact or influence may change. For instance, if one of the influencing
factors is availability and the product becomes abundantly available, then the demand
situation will change drastically.
Thus, the drawbacks of each alternative method impose a need to combine different
methods in order to arrive at the best possible results. Combining forecasts provide a way
to compensate for deficiencies in each method, as averaging the forecasts obtained by the
different methods can contribute to the improvement of the forecasting accuracy, and the
shortcomings of one technique can be offset by the advantages of another. In fact, this
kind of approach is considered as better method as it takes into account the quantitative
aspect and the qualitative judgments on the future changes. Furthermore, this method
averages both extremes of over exaggeration and under estimation.
The combined demand projection for electric wire and cable is computed by assigning
35% weight for each of the regression method and 30% to the growth rate method. The
regression methods are assigned more weights in the combined forecasting as it is based
on GDP and performance of the construction sector which are among the decisive factors
that influence the demand direction of the product under consideration.
Accordingly, based on the above assumptions the combined demand projection for
electric wire and cable is shown in Table 3.22.
Table 3.22
Projected
Year Demand
2014 9,646
2015 10,700
2016 11,884
2017 13,216
2018 14,715
2019 16,160
2020 17,756
2021 19,519
2022 21,469
2023 23,623
2024 26,004
2025 28,635
As could be seen from Table 3.22 the demand for electric wire and cable will increase
from about 9,646 tones in the year 2014 to about 14,715 tons in the year 2018. By the
year 2022 and year 2025 the demand will reach 21,469 tons and 28,635 tones,
respectively.
4.4.1 DEMAND SUPPLY GAP (UNSATISFIED DEMAND)
At present there are 15 producers of bottled water. The hourly production capacity of
the existing local producers is shown in Table 4.20.
Table 4.20
Accordingly, the total projected demand for bottled water as compared with existing
local capacity and the supply- demand gap is presented in Table 4.21.
Table 4.21
However, the demand supply gap which is the portion of the projected demand that
could not be satisfied by existing local capacities indicates the minimum possible market
share that can be captured by the envisaged plant. Nevertheless, due to the high demand
for the product new entrants may also join the sector.
Therefore, after due consideration to the above factors, a production capacity of 7500
liters per hour (15,000 bottle/h @500 ml) considering 300 working days per annum and 2
shifts each 8 hours per day an annual production capacity of 72 million bottle is
recommended for the envisaged project from market point of view.
Investigation of the needs, feelings and attitudes of electric wires and cables users
revolves around the following questions:
Thus, for investigation of users’ needs and attitudes, a small scale survey of contractors
and distributors (wholesalers and retailers) in Addis Ababa is conducted in July 2008.
The summary results of the information obtained through the survey, which is more of
qualitative nature, is presented in this section.
Table 3.28
No. of
Location No. of
Building Materials
Of Respondents Shops Contractors
Senga Tera 8
22 Mazoria 5 2
Ayer Tena 2 2
Megenagna 2 3
Merkato 4
Urael 5 1
Arat Kilo 2
Kazanchis 3
Saris 4
CMC 3
Gerji 2
Bisrata Gabriel 1
Legahar 1
Total 26 24
The survey covered 24 contractors and 26 building materials shops (retailers and
wholesalers) in Addis Ababa. All corners of the city in terms of the location of the
respondents are covered by the survey and more or less evenly distributed as shown in
Table 3.28 above. In some areas like Senga Tera, higher number of building materials
shops is surveyed based on relative concentration of the shops in the area.
The range of electric wires and cables traded/used by the surveyed building materials
shops and contractors is shown in Table 3.29. As can be seen from the table, the electric
wires and cables sizes traded by all of the surveyed building materials shops are
1x1.5mm2 and 1x2.5mm2; followed by 1x4mm2, and 1x6mm2 which are traded by most
of the shops. Electric wires and cables sizes of 2x6mm 2 and 3x4mm2 are traded by
significant number of building materials shops. Furthermore, electric wires and cables
sizes of 2x1.5mm2, 2x2.5mm2, 2x4mm2, and 1x10mm2 are traded by few building
materials shops.
Table 3.29
Traded by Used by
1x0.8 mm2 3
1x1.5 mm2 4 20 2 1 23
1x2.5 mm2 4 20 2 1 23
1x4 mm2 3 16 2 23
1x6 mm2 4 15 1 20
2x1.5 mm2 - - 1
2x2.5 mm2 - - 1
2x4 mm2 - 1 -
2x6 mm2 - 3 1 5
3x4 mm2 - 12 1 11
1x10 mm2 1 - -
Similarly, the electric wires and cables sizes used by all of the surveyed contractors are
1x1.5mm2 and 1x2.5mm2. Electric wires and cables of 1x4mm 2, and 1x6mm2 are used by
most of the contractors; while 2x6mm 2, and 3x4mm2 are used by some contractors, but
significant in number.
The supply origin of the electric wires and cables traded by most of the building materials
shops is import; while that of the local origin is traded by few, mainly due to its supply
shortage. Also, the electric wires and cables used by most of the contractors are reported
as import origin; while that of local origin is used by few contractors mainly due to
supply shortage.
It is observed from the market assessment that the preferred electric wires and cables
sizes are determined by the specific requirements of the application. Due to their specific
purpose of application, the most commonly preferred sizes are 1x1.5mm 2 and 1x2.5mm2
followed by 1x4mm2, and 1x6mm2 (See Table 3.30). Thus, electric wires and cables sizes
of 1x1.5mm2 and 1x2.5mm2 are the leading ones, in terms of volume of requirements.
The volume of requirements of the sizes of 1x4mm 2 and 1x6mm2 is less due to their
specific application but significant, with the former being higher.
Table 3.30
COMMONLY PREFERRED
No. of
No. of
Building Materials
Sizes Shops Contractors
1x1.5 mm2 24 10
1x2.5 mm2 24 10
1x4 mm2 12 8
1x6 mm2 3 4
2x1.5 mm2 1
2x2.5 mm2 1
2x6 mm2 1
3x1.5 mm2 1
3x2.5 mm2 1
3x4 mm2 4 5
All needed 2 14
The different sizes of electric wires and cables needed for specific applications are as
follows:
o 1.5mm2 is used for installation in buildings bell and electric light system,
o 2.5mm2 is used for installation in buildings electric socket outlet system,
o 1x3mm2 is used for machines, as high in electric power resistance,
o 1x4mm2 is used for installation in buildings electric boiler and “mitad” socket outlet system,
o 3x4mm2 to produce electric “mitad”.
3.6.2.2 Electric Wires And Cables Preference By Supply Origin
According to the market assessment, the local electric wires and cables produced by
Ethio-Plastic are highly demanded compared to the imported ones due to its better quality
(See Table 3.31). The quality of electric wires and cables perceived by the surveyed
contractors and building materials shops is expressed in terms of the use of pure copper
material, good insulation and proper thickness. Also, compared to other local producers’
products, in terms of quality, the local electric wires and cables produced by Ethio-Plastic
are highly demanded and popular as products of Electric World (the other local producer)
are not available on the market and not known to most of the surveyed contractors and
building materials shops.
Table 3.31
Local 17 24
Import 3
Equally demanded 6
Total 26 24
Furthermore, comparing the locally produced and imported electric wires and cables with
respect to quality, packaging, and price, the local product is reported by the majority of
the surveyed building materials shops as higher in quality and price than the import;
while packaging is rated as equivalent. See Table 3.32.
Similarly, most of the surveyed contractors rated the locally produced electric wires and
cables as higher in quality, packaging, and price than the import. However, significant
number of the contractors rated packaging of the local and imported electric wires and
cables as equivalent.
Table 3.32
Quality 3 18 21
Packaging 2 8 10 20
Price 3 18 21
Contractors
Quality 22 24
Packaging 6 16 22
Price 2 20 22
On the other hand, import is equally demanded by customers of building materials shops,
and, even, highly demanded and preferred in some cases. The high demand benefit of the
imports is mainly contributed by the supply shortage of the local electric wires and
cables, among others. Significant number of surveyed building materials shops reported
that electric wires and cables imports from China and Turkey are highly demanded than
others.
Mostly, import from Turkey is rated as good in quality because of their proper thickness
and use of pure copper material for the product. The import from China is preferred
mainly for its availability and lower price. In terms of quality, China produces all sort of
products, that is, supply good quality products with higher price as well as supply
products of less quality with lower price.
The imported electric wires and cables are of less quality in some cases in terms of proper
thickness and use of pure copper material. The materials are copper coated outside with
other metals inside, which cannot resist heat and the insulations melt during usage.
The problem reported in relation to the thickness of imported electric wires and cables is
the variation between the specification and the actual size. The size of 1x2.5mm 2 electric
wire is found to be less than 1x2.5mm 2 in practice. Normally, 1x1.5mm 2 electric wire is
for electric light system and 1x2.5mm2 is for electric socket outlet system, but because of
problems in thickness there is a tendency of avoiding 1x1.5mm 2 and using 1x2.5mm2
instead for electric light system in addition to the electric socket outlet system. This is
clearly reflected in the data obtained from the project promoter on specification of
electric wires and cables requirement for different type of building and over the past four
years actual consumption (See Tables 3.33, 3.34, and 3.35). The dominant type of
electric wires and cables consumed by the project promoter is dominated by sizes of
1x2.5mm2 and 1x4mm2, which constitute about 83.2%. Of the electric wires and cables
consumed, more than 80% are found to be import origin.
1.1.1 Table 3.33
QUANTITY OF ELECTRIC WIRES AND CABLES CONSUMED BY THE PROJECT PROMOTER BY SIZE (QUANTITY IN METERS)
Size of wire Local Import Local Import Local Import Local Import
121,70 10,00
2
1x2.5 mm 0 44,000 0 165,000 130,000 229,000
3x1.5 mm2 50
4x6 mm2 80
5x10 mm2 60
Table 3.34
Size of wire %
32 1x4 mm2 40
1x4 mm2 50
1x4 mm2 70
1x4 mm2 70
1x4 mm2 80
3x2.5 mm2 2
3x2.5 mm2 16
According to the market assessment, electric wires and cables made of copper are highly
demanded. All the surveyed contractors preferred electric wires and cables made of
copper due to its quality. Copper, being best in electrical conductivity, is preferred for
use in electric wires and cables.
Similarly, all the respondents report that the electric wires and cables they traded is made
of copper. Only few of the respondents report that they traded electric wires and cables
made of aluminum next to copper.
Thus, as it is well confirmed from the market assessment, copper is the best non-precious
metal conductor of electricity as it encounters much less resistance compared with other
commonly used metals and carrying packing more power on a given diameter of wire
than any substitute material. Copper is also used in power cables, either insulated or
uninsulated, for high, medium and low voltage applications.
In addition, copper is the preferred and safest conductor for commercial and residential
building wiring due to its exceptional strength, ductility and resistance to creeping and
corrosion. Copper is easier to bend, yet tougher, and with it connections are reliable.
Copper does not creep or loosen at connections. As copper has a high melting point, it
can take surprisingly heavy overloads or current surges without damage or danger.
Constant expansion and contraction under “load, no-load” conditions can cause non-
copper materials to “creep,” a process which results in the loosening of terminals. In
turn, loose connections tend to heat up, and will sometimes arc dangerously.
The prevailing selling price of building materials shops and the purchasing price of
contractors are shown in Table 3.36.
Table 3.36
No. of
Respondents 4 7 21 3 3 6
No. of
Respondents 3 6 21 3 3 6
No. of
Respondents 2 3 17 3 3 6
No. of
Respondents 2 4 16 3 3 4
No. of
Respondents 12 3 3 3
As can be seen from Table 3.36, the building materials shops' selling price of all sizes of
local electric wires and cables is higher than that of the import.
The building materials shops' average selling prices of different sizes of import electric
wires and cables are equivalent with the average selling prices of the imports from China;
while the average selling price of imports from Turkey is higher.
The price information on electric wires and cables cannot be obtained from most of the
contractors as the purchases are made by others. However, significant number of those
who have the information responded on the purchasing price. According to the
information obtained, the contractors’ average purchasing price of import electric wires
and cables is equivalent with the building materials shops' average selling prices of
imports from Turkey.
Table 3.37
UNIT PRICE OF ELECTRIC WIRES AND CABLES CONSUMED BY THE PROJECT PROMOTER BY SIZE (2000
EC)
Furthermore, as observed from the market assessment, the higher price of the local
electric wires and cables and imports from Turkey corresponds with the preferences of
users due to their better quality. The price of local electric wires and cables is found to be
higher than that of imports. From imports of electric wires and cables, those of Turkey
origin are found to be higher in price.
On the other hand, the purchasing price of electric wires and cables by the project
promoter is shown in Table 3.37. The unit price of the dominant size (1x2.5mm 2) of both
the local and import electric wires and cables in use by the project promoter is lower than
the selling price of the building materials shops and the purchasing price of the
contractors, most probably due to bulk purchase or sellers & contractors may have quoted
unduly high prices.
The country's electric wires and cables demand is met from two major sources: local and
import. The local supply is so limited that substantial portion of the demand for electric
wires and cables is being satisfied through import.
Both local and import electric wires and power cables are distributed mainly through
building materials shops, serving as wholesalers and/or retailers, depending on their
capacity. Wholesalers of electric wires and power cables are almost all located in the
metropolis, Addis Ababa. These wholesalers in turn distribute to other retailers in the
metropolis and other regions. Most of local and imported electric wires and cables get
their way to customers through these distributors.
Most of the building materials shops surveyed are supplied with electric wires and cables
by wholesalers/distributors. Only few number of the building materials shops report as
being supplied directly from the local factory. On the other hand, most of the contractors
are supplied with electric wires and cables by retailers, and some of them by wholesalers.
See Table 3.38.
Table 3.38
Wholesalers/ Distributor 24 4
Retailers 16
Importer 1
As most of the surveyed building materials shops and contractors trade/use imported
electric wires and cables mainly due to availability, there is no constraint in the supply
(See Table 3.39). In addition, there is no seasonality at all in the supply and demand of
electric wires and cables. The supply constraint reported by significant number of
building materials shops and contractors is in relation to the shortage of local electric
wires and cables. Currently, purchase priorities by Ethio-Plastic are mostly given to
governmental organizations, such as EEPCO and large Government housing construction
projects like Condominium house construction projects. Due to the shortage, others
could not get the product easily from Ethio-Plastic. If a customer places orders for the
local product, it requires waiting for more than four months.
According to the market assessment, there is no arrangement from the local factory to
building materials shops and contractors - in terms of transport and credit provision,
among others - as the supply shortage is high.
Table 3.39
Yes 11 3
No 15 20
Total 26 23
The lack of promotional efforts by the local producers can be exploited by the new plant
to promote its products in all communication Medias like TV, Radio, and Billboard,
among others, with convenient distribution system. The marketability of a product
depends on its quality, price, and marketing efforts, among others. Therefore, the new
plant should make due efforts to supply good quality product at affordable price and with
sufficient marketing efforts.
The major competitors for the envisaged plant’s product are locally produced and
imported electric wires and cables.
Currently, there are two electric wire and cable producers i.e. Ethio-Plastic Share
Company and Electric World. Ethiopia Plastic Share Company is the oldest and the
largest electric wire and cable factory in Ethiopia, with over 37 years of experience.
Ethiopia Plastic Share Company is well known for quality products and it has built a
reputation in the minds of the public. The product electric wires and cables is
synonymous with the name Ethiopia Plastic Factory.
The Company is presently producing over 40 products for the domestic market. Major
production operation is done in plant two. Plant one produces insulated electrical wires
and cables, small detergent bottles and shutter profiles, while plant two produces
household articles, PVC pipes ranging from 50 to 160 cm diameters, garden hoses,
polyethylene bags and sheets, bottles, ball point pens and boots.
The company distributes its product through two shop outlets it has established in Addis
Ababa.
The plastic processing technology currently employed by the factory makes use of
different machines with different capacities. Some of the machines are versatile and can
produce different products by changing molds and dies.
However, the electric wire and cables produced by the factory are currently almost fully
supplied to government organizations such as the Housing Development Agency as per
pre-arranged contractual agreements and due to limited capacity the Company is not able
to supply it’s products to the general market as a result the Company’s products are not
currently available in the market. Moreover, the huge housing and electric power
construction activities initiated by the government has created a significantly large
demand for electric wires and cables. Accordingly, considering the limited capacity of the
company, it can be concluded that in the near future the company will not be a significant
competitor in the market for electric wires and cables except for the demand that emanate
from government institutions.
There are also two new entrants to the market of electric wires and cables on the pipeline,
one of which is currently advertising its products on the Ethiopian Television. As the
capacity and other information related to the new entrants are not available, they are
treated as possible future entrants in this project.
Locally produced electric wires and cables would have a significant price advantage over
the imported products due to costs associated with transportation and manufacturing.
Furthermore, Ethiopia being a country where significant proportion of its population lives
below poverty line, consumers are, by and large, price conscious and consumption
demand is very much sensitive to price. Therefore, the envisaged plant will have price
advantage against imported products.
As the above discussion pointed out, the envisaged plant has several competitive
advantages against both imported and locally produced products.
3.8.1 General
Marketing is an essential role of every business organization and marketing activities
must be performed, to some extent, for the survival of every business organization.
Although many factors affect an organization’s marketing strategy, all marketing
decision-making can be classified into four strategy elements, sometimes referred to as
the marketing mix or the four P’s: Product, Price, Place (distribution) and Promotion.
While these four factors are important individually, their real significance lies in the mix,
the unique way they are combined into a careful plan or strategy. The combination of
these four factors is the foundation of any marketing plan.
3.8.2 Product
Product quality and design are the basic and most important marketing mixes that affect
the success of a product. Product quality has two dimensions, i.e., level and consistency.
Level means the producer must first choose a quality level that will be acceptable in the
target market and in a level that comply with the quality of competing products.
Consistency refers to the consistently delivering of an established quality through strict
quality control measures.
As indicated earlier opinion given by retailers during the survey conducted in connection
with this study indicates that imported electric wires and cables are of less quality in
terms of proper thickness and use of pure copper material. Some of the materials are
copper coated outside with other metals inside which cannot resist heat and melt when
used.
Accordingly, the envisaged factory should give quality control top priority and the
company should acquire modern machineries and safe guarded production process with a
system of optimally combined machine operations and control by qualified and trained
technicians and technologists. Besides, quality control should be given top priority so that
the Company could achieve its aims through producing quality products.
3.8.2 Pricing
3.8.2.1 General
Pricing a product is an important and critical activity since it is the major factor in
determining revenue. If a lower price is fixed, it will affect the profitability of the
company, and if a higher price is fixed, the product will not be able to withstand market
competition and may be forced out of the market. Therefore, the right price has to be
fixed.
In general, price setting is done by selecting one of the two frequently used pricing
approaches. The simplest method is cost-based approach (Cost-plus pricing), which
involves adding a standard mark-up to the cost of the product. The other method is
competition based approach (going-rate pricing), which bases its price largely on
competitors’ prices.
At present, there are a number of local producers and importers of electric wires and
cables, which means the envisaged factory has to work within a competitive environment.
In a competitive market, a straight cost-plus pricing is not desirable as it is not sensitive
to demand and competitors’ price.
Furthermore, the Ethiopian market is, by-and-large, price conscious and consumption
demand is very much sensitive to price. In such a country, the first target of a
manufacturer should be to produce the products for the mass market and to charge a
reasonably lower/proportional price compared with competitors’ prices.
Accordingly, in order to determine the price to be adopted by the envisaged factory, the
factory gate price of Ethio-Plastic Share Company is collected (See Table 3.40).
2.1.1 Table 3.40
FACTORY GATE PRICE OF ETHIO PLASTIC SHARE COMPANY PRODUCTS
1x1 -
1x1.5 157
1x2.5 289
1x4 464
1x6 656
1x10 1,336
1x16 2,077
2x0.5 -
2x0.75 -
2x1 -
2x1.5 551
2x2.5 777
2x4 1,031
2x6 1,583
3x1.5 844
3x2.5 1,087
3x4 1,574
3x6 2,307
4x1.5 1,261
4x2.5 1,344
4x4 1,962
4x6 3,738
The envisaged factory as a new entrant into the market, has to penetrate the market and
create awareness and brand loyalty, first. Therefore, the objective of the pricing policy
should be to gain a foot hold in the market, curve out a sizable market share and sustain a
reasonable profitability, which at the initial stage, could only be achieved through
charging of lower prices that could influence consumers. However, the envisaged factor
in order to be sustainable need to make a reasonable profit i.e. have to sale a unit of its
products above the unit cost it incurred. Accordingly, the unit cost of the envisaged
factory products by type of product and the recommended margin and selling price are
indicated in Table 3.41
2.1.2
2.1.3
Table 3.41
UNIT COST OF THE ENVISAGED FACTORY PRODUCTS BY TYPE OF PRODUCT AND THE RECOMMENDED
MARGIN AND SELLING PRICE
Production
Cost per 100m
The
remaining
Cost of copper, balance of
PVC, power, the Total Recommended
water & Production Production Profit Selling
Product Packaging Cost per Cost per Margin Price per
Type per 100m 100m 100m (30%) 100m
3.8.3 Distribution
3.8.3.1 General
Distribution refers to the distribution of the product to the consumers by the producer
while channel of distribution is the network of middlemen through whom the product
flows till it finally reaches at the hands of the actual users or consumers.
The availability of various distribution channels is at the same time an opportunity and a
problem. The opportunity lies in the fact that the manufacturer can choose between
different channels to close the gap between himself and the consumer of the product. The
problem is to find out which channel is best suited to his needs and aims and is accessible
to him. Thus, the choice of the right channel is a critical decision and a complex task,
which has to be decided by considering a number of factors such as product and
consumer characteristics.
Channel of distribution varies in its form and length from consumer goods to industrial
goods and within one class of goods; it varies from product to product. For a consumer
market a retailer is essential, whereas in the industrial market the retailer can be
eliminated. For a perishable commodity, the producer prefers few and controlled levels of
distribution, while for durable and standardized goods a longer and diversified channel
may be necessary. Size and average frequency of customer’s orders also influence the
channel decision.
The producer must also choose whether to employ intensive, selective or exclusive
distribution. For convenience goods, which are frequently purchased, have low unit price,
and are bought by the consumer at the most accessible retail outlet, shortly after a need
for them is felt, the distribution strategy should be the unloading of the product through
every possible outlet with a view to achieving an extensive distribution.
Shopping goods, which are purchased after a careful consideration and comparison of
quality, price and suitability and unlike convenience goods, have a high unit price, are
sold in few retail outlets, thus, selective distribution strategy may be profitable.
In the purchase of specialty goods, the consumer insight on a specific brand and do
usually have adequate product information and have already made up their minds to go
for a specific brand. For such products, exclusive distribution, where only certain dealers
distribute the product will be ideal.
At present the major local electric wire and cable producer, i.e. Ethio-Plastic Share
Company, sells its product directly to consumers from factory premises.
An ideal distribution system has economic benefits for both the manufacturer and the
consumer and it involves the manufacturer or the intermediaries offering the 'right
product', in the 'right quantities', at the 'right place', at the 'right time', at the 'right price'
and with the 'right appeal'.
The country offers a large and rapidly growing market for electric wires and cables.
However, final consumers are widely scattered in different geographical areas of the
country. Therefore, in order to exploit the market the envisaged factory needs to set up a
distribution system, which is capable of meeting the demand generated at each major
domestic market segments. The envisaged factory could not position itself from both
financial and management point of view to target and canvas all potential market
segments through self-owned sales outlets. The involvement and deployment of
intermediaries become indispensable to efficiently and effectively distribute wires and
cables to all potential market segments.
Electric wires and cables like any other products reach the ultimate consumer through a
defined distribution system. The system consists of two principal elements - a physical
distribution and distribution channels. The former covers details on how the product gets
physically from the manufacturer to the consumer and while the latter deals with a set of
organizational relationship among the manufacturer and the various intermediaries or
agents that influence the products' passage through the physical distribution system. The
distribution channel has two parts - wholesaling intermediaries and retailers. The former
are expected to handle the product ownership and movement from manufacturers to
retailers. The highly visible process of selling to the consumer is the retailing side.
Depending on the nature and characteristics of the product producers can also have the
option of selling direct to consumers or retailers. The main objective of the producer is to
secure most effective and profitable channel or path in the process of selling its product
to the ultimate consumer.
This objective, depending on the product and its demand diversity, can be either met by
applying intensive distribution or selective distribution or exclusive distribution.
The following are the main alternative distribution channels commonly used by
producers to reach the consumers.
Manufacturer Consumer
At first sight, it would seem that direct sale offers a greater degree of control, more
efficient and less costly than indirect sale. This is, however, not necessarily true for a
number of reasons. The various distribution functions that need to be performed can be a
huge burden for one enterprise attempting to cover all of them, several intermediaries
cooperating and sharing responsibility for them may well be able to achieve a better
overall result. The distribution risks – delay in transport/shipment, loss of merchandise,
credit risk, seasonal and other variations in sales volume, etc. can also be absorbed more
readily if they are shared between several enterprises.
Therefore, the distribution channel proposed for the envisaged factory is:-
o Saves the trouble and expense that arise from dealing with a number of customers;
o Transportation problems, invoicing and credit control are comparatively simple; and
o Decreases the need for carrying large stocks, thus, reducing warehouse expenses.
However, special care should be taken in selecting regional market sole distributors.
Their experience and performance in similar activities, adequacy of their warehouse
facilities and capital should be carefully evaluated. Once the agents are selected, the
company has to motivate their efforts, evaluate their performances periodically and if
necessary it has to reorganize the channels considering the experience gained.
3.8.4 Promotion
3.8.4.1 General
However, it is important to realize that on its own, market promotion, on its own, will not
replace selling, change long-term trends, or build long-term customer loyalty. It has to be
supported by quality and distribution efficiency.
3.8.4.2 Advertisement
An advertisement would be effective only if the target audience accepts the message and
is motivated to take the required action. Thus, the sequence of events that advertisements
should trigger are:-
o Attract attention,
o Rouse interest,
o Build desire,
o Obtain buying action,
o Build brand image, and
o Maintain brand loyalty.
Initially, the objective of advertisement should concentrate on attracting attention for the
product. Once product acceptance has been achieved, advertisement usually concentrates
on building brand image and loyalty.
Selection of the media channel involves choosing among available advertising media and
deciding how they can be used; given the type of message, target audience and the budget
available.
An advertiser can use one or a combination of the media channels available. However, it
should achieve an optimum combination of “coverage” and “frequency” within a given
budget. In other words, whichever channel or channels used the advertisement should
reach as many prospects as possible within the target group (coverage), while at the same
time each of the prospects should be reached by a sufficiently large number of
advertisements (frequency).
3.8.4.3 Proposed Promotional Measures
3.8.4.4 Trade-Promotion
Producers usually offer a flexible mix to encourage and promote the selling effort of the
intermediaries. The major elements in trade promotional tools include favourable terms
of delivery (transport), terms of payment, terms of discount/rebate, and after sales
services. These are regularly monitored and evaluated vis-à-vis the package of offer that
competitors provide and are accordingly revised to draw up workable arrangements that
both parties benefit from.
Accordingly, the envisaged factory is recommended to offer discounts with the volume of
product bought and credit for one to two weeks.
Marketing is not only the act of selling goods or services. It is far beyond that. Marketing
is the act of "planning and executing the conception, pricing, promotion, and distribution
of ideas, goods, and services to create exchange that satisfy individual and organizational
objectives". It suggests that a business enterprise must strive to find what the customer
wants, when they want, where they want, at a value that creates customer satisfaction.
Therefore, the envisaged factory should establish a strong marketing department that
carries out market monitoring. The factory thus needs to establish a Marketing
Information System (MIS) to ensure the flow of pertinent marketing information to
decision makers at all levels. The best marketer is one who thoroughly knows its market.
There are marketing variables that are mandatory for such a factory to understand and
keep track of such variables to be up-to-date on developments in the marketing
environment. It needs to watch and track marketing variables such as the following:
o Overall market size (in value and volume) - The factory's share in value and volume;
o Overall market growth rate per year - The factory's annual growth rate;
o Market sensitivity to price - The factory's ability to influence the market;
o Supplier bargaining power - The factory's bargaining power with suppliers;
o Customer bargaining power - The factory's bargaining power with customers;
o Number and type of competitors - The factory's market knowledge, production and financial
strength, capability, service depth;
o Competitive change in market share - The factory's corresponding change in share;
o Competitive use of new technology - The factory's vulnerability to new technology;
o Vulnerability to economic changes - The factory's vulnerability to natural/local changes;
o Average industrial margins - The factory's margins;
o Technological maturity and volatility - The factory's ability to cope with technology change,
etc.
These are some of the marketing variables that a business enterprise must watch and track
in order to meet and maintain its business goals and objectives. Therefore, a strong
marketing department should be established and must be strengthened in manpower and
logistics to regularly evaluate its market at country level to enable the factory to create an
effective product to meet consumer's needs, create a plan that will reflect collected
information, and implement marketing activities that will optimize the factory's profits.