The electronic component manufacturing industry is a vital element of the global electronic hardware supply chain. Encompassing mechanical, electromechanical and purely electrical categories, component manufacturing is particularly critical to the thriving mobile phone production sector across the world. And the fact remains; whoever dominates the component production sectors stands a better chance of surviving the competitive global market. In 2000, most electronic components were produced by the US and Japan. Fast forward to 2017, China dominates most of the electronic component market in the world and Ethiopia is starting efforts to emerge as another destination of mobile component manufacturers. But, there are some challenges, write Asrat Seyoum and Dawit Endeshaw.
Nebret Ayalew, a 27-year old computer engineer, is a very busy and versatile young man. He looks like someone who shoulders big responsibilities; perhaps a bit too much for his age. Being one of the 1,500 staffers employed by Tecno Mobile Factory, Nebret stands out as one of few local professionals who are catching up fast with the cutting-edge ICT hardware technology. Currently, he is responsible for a dozen engineers working under his watch in one of Tecno’s mobile assembly plants in Ethiopia.
Housed in two separate assembly plants, one around Gofa Mazoria and the other in Alem Gena – one at the center and the other at the outskirt of Addis Ababa – Tecno is largely considered to be an icebreaker as far as assembling mobile devices on Ethiopian soil is concerned.
Quite fascinating, Nebret looks to have neither the charm nor the appearance to pass as a factory floor manager in an advanced industry like mobile device manufacturing. However, for the brief duration of his interview with The Reporter, Nebret was interrupted a couple of times by his aides wanting to be given direction.
“When I graduated in computer science from a private college five years ago, my dream was to work at Ethio Telecom, the sole telecom service provider in Ethiopia,” Nebret told The Reporter.
“Working for a foreign device maker was by far the least of my expectations; and certainly not on Ethiopian soil,” he says. “It was either Ethio Telecom or some other institution.”
The Gofa Mazoria plant, where Nebret works, accounts for nearly half of Tecno’s employees. The plant has five product lines where three of them are dedicated for assembly and the rest to product packing. Each line accommodates not less than 40 people.
Each small part and parcel of the mobile devices comes to life by the hands of these 40 people. On average, one line is expected to assemble 250 to 300 mobile devices per hour. Just like any product, the devices, after assembly, will pass through stages of rigorous quality inspections as well as laboratory test.
Nebret started working at the factory some four years ago as an ordinary line technician with a monthly salary of 1,800 birr. He has climbed to the top of the ladder since then; and now he is paid 13,000 birr.
“I am happy with what I have,” Nebret says. “I can afford to support my younger brother who is attending school.”
Tecno is a Hong Kong-based mobile manufacturer which was established in 2006. It first launched its operations in Ethiopia in September 2011 with a capital investment of more than one million dollars.
The company is now working to expand its production capacity and has already leased land to build its phase three factory at the Ethio ICT Park in the Yerer area, Bole Sub City. Although Tecno’s installed production capacity stands at one million devices a month, at the moment it claims that it is restricted to producing, on average, 250,000 devices, a month.
The fact remains; Tecno was the first and the only device manufacturer to introduce mobile phones with “Made in Ethiopia” tag. Well this was just five years ago, today Tecno, is one of the 14 local mobile device assemblers animating the emerging ICT hardware manufacturing industry in Ethiopia.
By the estimate of the industry, Hdase comes next with 300,000 monthly production capacity, while Brillion, G-Tide, SMADL, O’King and Kinxinda have a monthly capacity of 200,000, 120,000, 80,000, 60,000 and 60,000, respectively. Nevertheless, at this moment, not more 25 to 30 percent of these installed capacities are utilized by the industry.
For all its fast growth and untapped potential, the ICT hardware sector is not without challenges. For one, the host of FDI and local mobile phone assemblers still scramble over a minuscule 34 percent share of a huge market which is dominated largely by illegally smuggled devices and accessories.
Perhaps, the single most debilitating challenge for the local mobile phone assemblers has been the widespread contraband trade. In fact, industry experts put the breadth of contraband trade as high as 61 percent of the overall mobile phone market in Ethiopia. Devices imported through proper channels account for the difference five percent.
Meanwhile, the problem gets bigger for high-value smartphone devices as close to 90 percent of the smartphones imported to Ethiopia are brought in through contraband trade. Still, 90 percent of all the mobile phones imported to country via contraband channels are smartphones while feature phones account for the remaining 10 percent.
Industry estimates show that Samsung is the most popular brand from smartphone category with annual sales of 3.5 million units. However, global smartphone giants like Huawei also command a fairly high market share with sales of 1.8 million handsets annually followed by Nokia at one million. The local assemblers represented by Tecno come in only fourth with 700,000 followed by Apple at 287,000, ZTE with annual sales of 180,000.
According to Amare Teferi (PhD), leader of Information & Communication Technology Association-Ethiopia (ICT-ET) hardware wing, the impact of the contraband trade in electronic devices is not limited to affecting the sales and market shares. Rather, he explains, it is driving a long-term shift in the local assemblers by forcing them to focus more on feature phones.
True to form, currently, the 14 local assemblers are heavily invested in the production of feature phones, about 80 percent, as opposed to smartphone which accounts for less than 20 percent of the total annual production. Amare sees a number of problems with this trend. Most of all, he argues, this trend would restrict the local assemblers to feature phones while smartphones is clearly the future of device manufacturing industry.
“Even when one looks at the current trends in the mobile network infrastructure, including the one owned by Ethio Telecom, it is becoming highly advanced; and it has better compatibility with smartphone,” Amare says. Furthermore, he points out that most of the mobile devices which are imported through contraband channels are products of giant hardware manufacturers and if the country is to benefit from this sector these companies should be attracted to invest in local production facilities.
“If they are sold freely without paying duties and other tax obligation, why would they come to Ethiopia?” he argues. Not to mention its deterrent effect to local assembles and the loss of what would have been potential government revenue in the form of tax, he says. By his estimation, the state loses close to one billion birr in tax and duties from this surging contraband mobile phone trade in Ethiopia.
As a matter of fact, the whole thing boils down to realizing Ethiopia’s ambition to be the next big thing in the global ICT hardware manufacturing supply chain. A recent study conducted by ICT and Electronic Manufacturing working group under the auspices of the association, has taken an in-depth look at this target. The outcome document zeroed in on the issue of contraband trade as a major obstacle to the development of the sector as a major export revenue earner and to becoming the next big investment destination for the global ICT industry.
According to the study, mobile or other electronic device manufacturing is unthinkable without home-grown component (part) and accessory production capacity. This is particularly true for mobile phone production, according to Amare.
Based on the preliminary assessment of the working group, there are more than 140 parts and components that a mobile device assembler would need to import to produce one mobile handset in Ethiopia. So far, assemblers are importing components to make devices for the local market in Ethiopia, which has been well-received by consumers. But, both the government and the industry players alike are not content with supplying the domestic market alone; rather there is a strong drive for exploring export markets and destinations.
On its part, the government is adamant about assemblers exporting as high as 20 percent of their total production and fetch foreign currency. With the exception of the pioneer Tecno, which is expected to fetch USD 40 million in export this year, most assemblers voiced the difficulty of mounting export oriented operation when 100 percent of the raw materials (components and accessories) are imported from abroad; mainly china.
Industry players as well know that if the sector is to thrive in Ethiopia, there needs to be a strong parts and component production subsector in the country.
Here is where it gets tricky. Parts and component makers by their nature are attracted by the sustainable and adequate demand for mobile devices in destination markets; especially if they are to consider investing in manufacturing plants. The question is here is what level of demand is considered as adequate and attracts investments of component producers.
According to the estimation of the working group, for component and accessories producer to consider Ethiopia as lucrative destination for investment, there needs to be at least 100 million units annual demand for mobile phones.
However, current estimates put annual demand for mobile phones in Ethiopia at 20 million units showing 80 million deficit which would only be covered by a sustainable export market. According to Amare, even 20 million units domestic demand is largely covered by contraband phones, which component producers do not have to invest in Ethiopia to reach.
As far as the study is concerned this is the top conundrum that sector regulators and operators have to address if the industry is to go forward. This is the context where the monumental Equipment Identification and Registration System (EIRS), which Ethio Telecom is preparing to roll out in few months, has come to be.
Most operators agree on the vitality of EIRS if the local productive force is to take back the local market. The system first and for most would put some 4 million mobile phones (whose IMEI numbers were unrecognized) out of orders; the devices will be denied access to the network. However, EIRS is not without its problems. The system would only prevent contraband trade but it also nullifies existing devices.
This of course, entails a heavy financial toll on the telecom provider. And to that end, Ethio Telecom is reported to have requested for the help of assemblers which claims to have been hemorrhaging cash due to the contraband trade and argued that they are not in a position to contribute.
The procurement policy of Ethio Telecom, another giant buyer of mobile phones in Ethiopia, which according to some estimates could reach USD 100 million a year, is also something that warrants a consideration, according to Amare. One would wonder how assemblers are required to export while state-owned telecom provider doesn’t prioritize local products, he exclaims.
Speaking of procurement policy, Amare also says that the local procurement rule of requiring 20 percent value addition when Ministry of Industry (MoI) itself recognizes value addition in mobile assemblers to be at 5 percent is also another confusion in the sector. In fact, value added requirement for mobile assembly sector has been a bone of contention in industry.
Back in the days, the value addition requirement was set at 30 percent but was scaled back to 0.5 percent around 2010 up on review by the Ministry of Information and Communication Technology and MoI. Later one, the value addition slowly crawled by to 5 percent although a couple of the big assemblers were unable to meet 5 percent value addition requirement.
According to the study, the formula employed to calculate the value addition in the mobile assembly industry is slightly problematic. Amare says the formula which is based on profit margin needs to be more dynamic. “And to that end, both ministries have accepted our proposals and are reviewing other options,” he says.
Apart from that, the industry is also in bad need of adjustment when it comes to the Harmonized System Code and Custom Duty Structure. According to Amare, local assemblers are highly disadvantaged because the customs structure levies duties ranging from 5 t0 20 percent on accessories (earphones, chargers, USB cables, memory cards, mobile covers) which is imported by assemblers while local mobile importers pay only five percent for the complete set of accessories that they import. For average Smartphone costing 2ooo birr the duty on accessories make a big difference in terms of the final selling price, he says.
Nevertheless, with all its challenges, the Ethiopian ICT hardware sector, particularly mobile phone assemblers, are far better than most industries in the continent. And gradual presence in African markets is also a sign that this sector has potential to growth. Amare opines that it is hopeful to see some assemblers committed to nurture a sustainable export market in African in spite of all the challenges; in fact he is convinced that some of these assemblers are trying export their products even at a cost of losing money. “I can say they are committed to a cause and it is an asset to the emerging sector,” Amare says.