By
with contributions from Edmund Blair
 on September 5, 2014

ADDIS ABABA (Reuters) — As basic wages soar in China, low-end manufacturing is starting to shift to cheaper locations around the world, and frontier African nations such as Ethiopia are positioning themselves to reap the benefits.

With rock-bottom wages, cheap and stable electricity and improving transport infrastructure, the continent's most populous nation after Nigeria is building a reputation for producing clothes, shoes and other basic goods.

The sector is still in its infancy in what was for decades a Communist-run economic backwater. Bureaucracy and poor transport links mean business costs aren't quite as low as they might be.

But state investment in factory zones and the arrival of firms from Turkey, India, the Gulf and China suggest industrialization is finally taking root in the east African giant, where many still rely on subsistence agriculture.

"We have to move because of manufacturing's development in China, due to the high increase in wages and in raw materials," said Nara Zhou, spokeswoman for Huajian, a Chinese company that makes over 300,000 pairs of boots and sandals a month for retailers such as Guess from a factory near the capital.

"Ethiopia enjoys stability, the government is eager to industrialize and there is also the low labor cost here - a tenth compared to China," she added.

HIGH GROWTH RATES

For years, investors gave Ethiopia a wide berth, wary of the heavy role played in the economy by a government that shuns the liberalization seen in other African nations and which has retained its monopoly on telecommunications and bar on foreigners in the financial sector.

However, in the last few years the commercial logic of factory production has started to outweigh those concerns, and the wider effects are dramatic.

The government is projecting gross domestic product (GDP) growth at 11 percent a year, and even though the International Monetary Fund is more sober its 8.5 percent forecast for this year indicates Ethiopia is one of Africa's - and the world's - fastest-growing economies.

Despite the government's socialist roots, there is no minimum wage, letting firms such as Huajian pay salaries of $50 to $70 a month - still higher than the average per capita income.

"Almost every young person in this locality now works here," said Desta, one of 7,500 employees at Ayka Addis Textile and Investment Group, a Turkish-owned factory 13 miles west of the capital.

"We all struggled to make ends meet beforehand. We can now afford proper healthcare or sending a child to school," Desta, who did not give his surname, added.

CHEAP POWER

With 90 million people already and annual population growth forecast to exceed 2 percent until 2030, the government is desperate to attract labor-intensive investment and jobs.

To this end, it says it has introduced incentives such as tax holidays and subsidized loans to investors with interest rates as low as 8 percent - below even the 9.75 percent benchmark rate in South Africa, the continent's most developed economy.

Ethiopia is also investing heavily in hydropower to boost the scope of a grid that offers electricity at 5 U.S. cents per kilowatt hour, compared with 24 cents in neighboring Kenya.

"The availability of power and the cost is cheaper than any other country in the world. We are providing power, land and labor all very cheaply," said trade and industry minister Tadesse Haile, who wants Ethiopia to export $1.5 billion of textiles a year in five years, from just $100 million now.

Other east African nations such as Kenya and Uganda are also chasing textiles investment but cannot compete on input costs against Ethiopia,  where wages are 60 percent lower than the regional average, said Jaswinder Bedi, Kenya-based chairman of the 27-nation African Cotton and Textile Industries Federation.

"Ethiopia is a new player," Bedi said. "They are growing and they are growing rapidly."

BOTTLENECKS

Even so, bureaucracy and transport impose a major cost on companies, leaving Ethiopia languishing at 141 in a World Bank global trade logistics index published last year.

Importing or exporting a container takes on average 44 days, compared to 26 for Rwanda, another landlocked East African nation.

"Our logistics costs are second to input," Ayka Addis chief executive Amare Teklemariam told Reuters. "It affects the competitiveness of the company."

To this end, the government says it is pouring funds equivalent to two-thirds of GDP into new infrastructure every year, expanding the road network to 84,000 miles by next year, from just 31,000 miles in 2010.

It also has grand plans to build 3,100 miles of railway lines by 2020 from less than 500 miles  at the moment.

"Infrastructure development is something Ethiopia is working seriously on," Tadesse said.

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