Obstacles and preconditions for logistics and manufacturing improvements in Africa ± a case study

Transcription

1 preconditions for and manufacturing improvements in Africa ± a case study Hans Voordijk Tilburg University, Tilburg, The Netherlands 293 Keywords Africa, Eritrea, Logistics, Manufacturing Abstract A supply chain can be analysed as a network made up of the total set of raw materials supply, and several manufacturing and distribution activities. In the case of the East African country of Eritrea, each element of this network causes problems. Decades of war in this region have deprived Eritrea of the necessary infusion of new investments, technology and skills. In order to solve their supply, production and distribution problems, firms have to improve their locally and seek co-operation with foreign companies. While the government has to reduce its own role by giving public firms more autonomy, it should strengthen its role in the national economy by increasing investments in education and the transport and communication infrastructure. These actions by government and the business community are necessary not only for Eritrea, but also for a lot of other African countries. Introduction Supply chain management refers to an integrated organisation of the supply of raw materials, and the manufacturing and distribution activities in a supply chain (Gopal and Cypress, 1993). In developed countries, this integration is linked to the introduction of information and production technologies that are directed towards the external integration of different firms in a supply chain. In developing countries, however, is it often difficult to realise supply chain management because basic conditions for it have not been fulfilled. Transportation and distribution networks are underdeveloped, production technologies are old-fashioned and there are no spare parts for defective machines (World Bank, 1994b). This article will investigate the obstacles and basic conditions associated with and manufacturing improvements that are needed to establish channels and increase manufacturing capabilities in Africa. The main objective is to identify these obstacles and preconditions in a country with a completely different culture and level of development to European countries. The author is grateful to Bert Meijboom and Job de Haan of Tilburg University for being a source of several useful suggestions for improving this paper. This study is the result of a linkage program between the Development Research Institute of Tilburg University (The Netherlands) and the College of Business and Economics of Asmara University (Eritrea). Special thanks also go to Ben Evers and Gerard de Groot (Development Research Institute), Kifleyesus Andemariam (Department of Management of Asmara University) and Mehari Tewolde (Dean of the College of Business and Economics of Asmara University). International Journal of Operations & Production Management, Vol. 19 No. 3, 1999, pp , # MCB University Press,

2 IJOPM 19,3 294 Empirical research was conducted in the East-African country of Eritrea. First, the focus was on the external environment of firms, which determines the and manufacturing improvements. Second, obstacles and these improvements were analysed in major Eritrean industries (textiles, leather and beverages). The research method comprised case studies of rudimentary supply chains in these industries. Data about these supply chains were gathered by interviewing managers of the firms involved and were supplemented with written documentation. In Part one of this article, a conceptual framework is presented that contains the main conditions for improved and manufacturing. Part two is devoted to the external environment of Eritrean firms. Three major Eritrean industries are described in Part three. In Part four, the main obstacles in the supply chains of these industries are discussed. Policy recommendations to firms as well as the government are given in Part five. Conceptual framework Efficiently organised flows of goods and information are only possible if there is a well-developed transport and communication infrastructure. In Sub-Saharan African countries, this infrastructure is, if present at all, poorly managed and maintained. Until recently about half of the region's paved roads and 70 percent of its unpaved roads were only in a fair to poor condition and required substantial repair (World Bank, 1991). Basic communication networks for telephone and fax services are underdeveloped too. Consequently, inefficient transport and communications form a major impediment to efficiently organised flows of goods and information in Sub-Saharan Africa. If farmers and manufacturers are to take advantage of reforms in agriculture and other productive systems, dependable transport and communication systems are indispensable. Such systems are of major importance for the facilitation of internal and external trade. Investments in infrastructure would improve distribution, increase productivity and lower production costs (World Bank, 1994b). In addition to a well-developed transport and communication infrastructure, a sound governmental industrial policy and a well-developed educational system are other necessary conditions for improved and manufacturing. A minimal level of autonomy for manufacturing firms enables them to react rapidly to developments at the supply or demand side of the firm. Until recently, African firms did not have this autonomy because of the heavy involvement by the government. As a result, bureaucratic procedures inside and outside the firm impeded the flexibility of the firm. It is only since the 1980s that greater autonomy for public enterprises and privatisation has become a major policy issue in African states. The problem with these privatisation programs is, however, that they yield new regulatory roles for the state that often cannot be performed because of administrative weakness (Biersteker, 1992; Mkandawire, 1994). A well-developed educational system is another necessary condition for improved and manufacturing. Education affects productivity and growth in several ways (World Bank, 1994a). A more highly educated person absorbs new information faster and

3 learns to deal with new production processes more effectively. Public expenditure on education is necessary to provide the Civil Service and private companies with the skills needed. In sum, a well-developed infrastructure, a sound industrial policy and a welldeveloped educational system are the main conditions needed to create efficiently organised flows of goods and information in supply chains. A supply chain can be analysed as a network made up of the total set of raw materials supply, manufacturing and distribution activities. Two important components of this network are the types, number and location of facilities that provide the infrastructure for these activities on the one hand, and the flow of products between these facilities on the other. Supply chain management aims at the integrated operation of both components in this network. The focus is on the movements of products between locations, supply sources and customers of a firm. By integrating these activities, management can realise cost savings in inventory and working capital as well as respond more rapidly to customer demand (Lambert and Stock, 1993). In Eritrea, firms are still far removed from the integration of information and materials flows into integrated supply chains (Handfield and Nichols, 1998). Companies are only just trying to establish rudimentary channels. A sound industrial policy and a well-developed educational system also influence the process of acquiring and developing core capabilities at the level of the firm in a supply chain (Porter, 1990; Wangwe, 1995). These core capabilities, which are often underdeveloped in developing countries, can be categorised in terms of investment, production, organisation, marketing and linkages. Linkage capabilities consist of linkages which are supportive to, or influence the development and utilisation of, a firm's internal capabilities. Purchasing materials is the linkage between external input suppliers and the internal production activities of the firm. The distribution of final products links the firm with wholesalers and other intermediaries in the supply chain. The basic conditions for improved and manufacturing and the roles important actors have to play in establishing these basic conditions are presented in more detail in Table I. External environment of Eritrean firms This part of the paper is devoted to the external environment of Eritrean firms: a well-developed infrastructure and educational system and a sound industrial policy (see Table I). Several elements in this environment are, however, not unique for this country but can be found in a lot of other African countries too. After a short profile of the Eritrean manufacturing sector, investments by the government in the Eritrean transport and communications infrastructure, its educational system and its industrial policy are discussed. The Eritrean manufacturing sector Modern industrial enterprises in Eritrea began with the advent of Italian colonialism (World Bank, 1994a). In the 1950s, the country was well-advanced 295

4 IJOPM 19,3 296 Table I. Basic conditions for and manufacturing improvements Basic conditions Well-developed infrastructure 1. Transport system a. Rehabilitation of existing roads b. Adequate maintenance program c. Building of new roads 2. Telecommunication network a. Reconstruction of the network b. Training technical staff c. Regulatory reform of telecommunications industry Enabling environment 1. Sound industrial policy a. Privatisation of public firms b. More autonomy for public firms c. Elimination of obstacles constraining domestic and foreign investments 2. Educational system for skills development a. More resources toward primary education b. Supplying skills for the Civil Service and the public and private firms Firm level 1. Purchasing materials a. Supply of inputs b. Less bureaucracy inside firms when materials have to be purchased 2. Manufacturing capabilities a. Investments in new machines b. Technical assistance 3. Export and distribution a. Marketing skills b. Linkages with the foreign markets Roles of main actors Planning and programming of road building and maintenance by the government Private domestic contracting industry for building and maintenance Joint ventures between domestic and foreign operators in provision of training and telecommunications services Medium- and long-term planning and regulation by government The government has to develop sound competition policies, a privatisation program and efficient investment approval procedures in order to attract foreign investments Greater role of the private sector in the provision of schooling Involvement of the Civil Service and the private sector in vocational and technical education Improving local supply networks by information provided by the Chamber of Commerce Introduction of more internal linkages between departments within firms Production and investment agreements with foreign manufacturers Provision of training by the Chamber of Commerce Joint ventures with foreign buyers Contacts with expatriate entrepreneurs compared with other Sub-Saharan African countries. However, decades of war and the implementation of inappropriate policies prior to 1991 have resulted in a weakened economy and a deterioration of the human resource base. The Eritrean industrial sector at present consists mainly of light manufacturing industries, producing a variety of goods including processed food, beverages, textiles, leather goods, chemical products, construction materials, glass, ceramics and metal products (World Bank, 1994a). At the end of 1993, there

5 was a total of 835 industrial enterprises, of which 42 were public enterprises while the rest belonged to the private sector. Of the registered private enterprises, 580 were considered to be operational. There is a distinct difference in scope between the public and private enterprises. Public enterprises are much larger with an average workforce of more then 250 employees. Private enterprises, in contrast, are mostly small, employing an average of six people (World Bank, 1994a)[1]. The regional distribution of Eritrean factories is uneven. A total of 55 percent of private enterprises and all but four of the 42 public enterprises are located in the capital of the country. Investments in transport and telecommunications infrastructure Currently, the government has prioritised investments in transport and communications realising it is a critical factor for successful economic development. Without efficient transport ± and in Sub-Saharan Africa transport, more than anything else, means roads ± economic growth would be impeded. In 1991, after 30 years of war, the Eritrean road network required extensive rehabilitation. Without this rehabilitation, roads continue to impede the flow of goods and services, to hamper the development of the agricultural and manufacturing sector, to increase transport costs and ultimately to slowdown the recovery of the economy. Therefore, besides investing in education, the government gives high priority to the rehabilitation of existing main roads. The main responsibility for road rehabilitation activities has been assigned to the Eritrean Road and Transport Construction Department (ERTCD) of the Ministry of Construction. Priority has been given to the maintenance and rehabilitation of roads which have the greatest importance for the national economy. The ERTCD has had to deal with several operational problems. One problem is that only 55 percent of construction equipment is in working condition because inadequate training of workers has resulted in equipment being used wrongly and a shortage of spare parts. A rate of 55 percent is not bad in comparison with other African countries where often only 20 percent of the maintenance fleet is in a working condition. Another problem is lack of qualified employees and knowledge about the techniques of modern road-building. Several engineering faults have already been made in building roads as a result of insufficient training and knowledge. The Eritrean telecommunication system is also in need of reconstruction. Since the Liberation, there have been several operational problems. There are no spare parts for telephone exchanges, there are no trained technical staff and funds for rehabilitation. On working days, the telephone lines between cities are often overloaded. An increase in economic activity can be expected to put even greater pressure on the network. The government has already taken several measures to improve the telecommunications system. International telephone services were restored in A satellite communication network has made possible direct telephone and fax services with the rest of the world (UNIDO, 1996). Further improvement to existing telecommunications services will be necessary, however, or economic growth will become stunted. 297

6 IJOPM 19,3 298 The macroeconomic and industrial policy and the educational system The official macroeconomic strategy of the government is to establish an efficient, outward-looking, private sector-led market economy. Under the rule of Ethiopia and its centrally planned economic strategy, Eritrea had little autonomy or policy-making powers. For that reason, the existing government has given high priority to developing and managing its own macroeconomic policies. Until 1997, Eritrea had been forming a currency union with Ethiopia and used the Ethiopian Birr as its legal tender. In order to have greater autonomy in fiscal and monetary matters, the Eritrean government introduced its own currency, the Nacfa, in Major agreements have since been signed between Eritrea and Ethiopia to facilitate bilateral trade. Historically, trade between Eritrea, Ethiopia and Sudan has been very important. Nowadays, trade with Sudan is restricted because of the war in this country. Most large and medium-sized manufacturing firms in Eritrea, which are owned by the government, were originally privately owned. After 1974, the communist Ethiopian regime nationalised more than 40 of the most important manufacturing firms of Eritrea. Decision making concerning these firms became highly centralised. Most decisions were taken by the Ministry of Industry, which was responsible for deciding on production plans, capital expenditure, profit margins and sales. Managers had only limited authority to take critical decisions at the firm level. All exports were channeled and marketed by the Ethiopian Import and Export Corporation. After the Liberation, the government liberalised the marketing of exports. For public enterprises, central marketing organisations and centrally-planned production targets were disbanded. Firms became responsible for the marketing of their own products, the determination of composition, level and quality of their output and in setting price levels for their products with the exception of the food and beverage industries. Each public enterprise is still housed under a government department but has to deal directly with the markets on its own. The knowledge and skills of the Eritrean people are a major condition for improved manufacturing and and an important factor for national competitiveness (Porter, 1990). In this matter, Eritrea is constrained by its educational system and a male adult illiteracy rate of nearly 80 percent (the rate for adult females is about 90 percent). There is a large backlog of young and old Eritreans with little or no exposure to formal or informal schooling. Most pupils who do attend school do not have access to textbooks and education takes place in substandard facilities, particularly in rural areas. The level of teachertraining is low. The government relies on national recruits and ex-fighters (men and women who fought in the liberation army) to teach. Opportunities for vocational training are limited. With 21,000 school leavers every year, there is enormous pressure to create on-the-job and apprenticeships schemes for youngsters and ex-fighters (UNIDO, 1996). This pressure increases with the return of Eritrean refugees from Sudan and elsewhere. Several governmental and nongovernmental organisations are trying to deal with this need by creating short- and medium-term training programs.

7 The major differences between the developing country Eritrea and most of the developed countries in the Western world are summarised in Table II. Three Eritrean industries After discussing the external environment, three major Eritrean industries are described in this section. The focus is on the basic inputs and structures of the textile, leather, shoe and beverage industries. These industries are important for Eritrean exports[2]. Textiles Textile production accounts for one third of overall employment in the stateowned industry. For firms in this sector, raw cotton is a major input. The destruction of cotton plantations in the west of Eritrea during the war has necessitated the importation of raw cotton from the north of Ethiopia. Since 1993, the area for cotton cultivation has increased in Eritrea (see Table III). In 1994, 31 percent of the annual demand in the textile industry was satisfied and in 1995 the industry managed to meet about 65 percent (UNIDO, 1996). Cotton is processed further for the domestic and Ethiopian markets at three stateowned textile plants. In these factories, raw cotton is converted into yarn and then into fabric of various designs and into knitwear. One public firm and 98 small-scale private enterprises are active in the clothing industry. Most of these firms are engaged in processing sweaters (about 80 percent of the firms) or in the production of ready-made garments. The distribution of textile products takes place by transporting these products from the factory to wholesalers which are located in Eritrea's main cities. They resell the products to retailers located in most Eritrean towns. Wholesalers and retailers are supplied at an average of every one to two months. The export 299 Eritrea Developed countries in the Western world Level of the transport and communication Low High infrastructure Recent macroeconomic policy Central planning Market economy Role of public enterprises in the Dominant Not dominant manufacturing sector Level of education and training Low High Table II. Major differences between Eritrea and the developed countries Area (Ha) 406 2,441 3,854 Raw cotton (tonnes) 460 4,300 6,937 Source: Ministry of Agriculture (1995) Table III. Cotton production in Aligheder ( )

8 IJOPM 19,3 300 channel is similar to that of the domestic distribution channel. Eritrean textile products are mainly exported to Ethiopia (about 80 percent) but also to Italy, Germany, France and the UK. Leather Because of the large numbers of livestock in Eritrea, there is a constant supply of hides and skins. As a result of the war and drought, the livestock population was severely reduced between the mid-1970s and the early-1990s (UNIDO, 1996). The advent of peace and relative stability, however, has enabled a strong increase in the numbers of livestock. Table IV shows the estimated number of livestock and de facto the availability of hides for leather production. Livestock breeding is encouraged because the value of livestock to the farmers is relatively high compared to that of food crop production. The tannery and pickling industries depend on this domestic supply. The two largest tanneries are state owned, while private entrepreneurs run five smaller factories. The tanneries import hides and skins from Ethiopia and Sudan to complement domestic supply. The tanneries supply leather to local shoe factories. The main producers of shoes are three state-owned companies. In addition to these large state-owned companies, there are about 20 smaller private shoe companies. Leather is also supplied to the Asmara Sweater Factory which has started, together with a Korean firm, the production of leather jackets. Firms in the leather industry distribute their products from the factories to the wholesalers who own warehouses in the big Eritrean cities. In most cases, retailers buy products from these wholesalers. Sometimes these wholesalers act as retailers and sell directly to final customers. To export leather products, firms use foreign wholesalers. For decades, Eritrea has exported semi-finished leather to Germany, Italy, Japan and the UK. Important markets for Eritrean shoes are Ethiopia, Tanzania and Uganda. Beverages There is one (state-owned) glass factory in Eritrea which manufactures the bottles for factories producing soft drinks, bottled mineral water, wine, liquor and beer. Bottles are also exported, mainly to Ethiopia. The bottles are made from high-quality local raw materials. At present, the glass factory is not Goats/sheep ('000s) Cattle ('000s) Table IV. Estimated numbers of livestock in selected years from 1973 until ,000 2, , , , ,950 1,300 Source: UNIDO (1996)

9 operational because of outdated machinery and severe production difficulties. The factory is now being rehabilitated. The beverage industry has anticipated on this by reserving millions of bottles. After rehabilitation, the factory will have a production capacity of 70 tonnes per day. The major advantages of investing in this factory is that almost all raw materials for glass production are locally available and there are no competing plants in the region. Besides the local supply of bottles, one of the biggest factories in the beverage industry imports bottles from Greece. One bottle-type is imported from Greece because the chemicals necessary for production of this type are not available at the local glass factory (see Table V for glass production figures). In the beverage industry, firms obtain a basic input, such as sugar, from different suppliers or traders based on the lowest price and quality requirements. Sometimes, two factories jointly import inputs from abroad in order to reduce transportation costs. The market demand for beverages grew enormously because of the post-war years of stability and the population increase, an increase in and development of market outlets (shops, snack bars, bars, clubs etc.), the improvement of transport facilities and the lack of competitors. At present, factories are unable to satisfy the entire domestic market. In the beverage industry, the companies distribute the final product to retailers in the capital of Asmara and surrounding villages themselves. For other regions in Eritrea, factories use agents and wholesalers. About 14 percent of beer and 35 percent of wine and liquor production is exported to Ethiopia. Obstacles in the supply chain After discussing the external environment and characteristics of three major Eritrean industries, some attention will now be devoted to major obstacles in three supply chains related to these industries. Within the Eritrean manufacturing sector, hardly any linkages are present between local input suppliers and internal production activities. Except for a few items (cement, glass, hides, leather and tobacco), factories seldom use the output of other firms as their inputs. About 80 percent of the raw materials required by all enterprises are purchased from foreign countries. According to official data, Eritrea imported raw materials for US$ 81 million in Over 53 percent of the total amount of imported materials was needed by the textile, metal and food sector (see Table VI). 301 Production (tonnes) , , ,851 Source: Ministry of Industry and Trade (1995) Table V. Production of glass

10 IJOPM 19,3 Sector Total imports (US$) (millions) Percentage of total 302 Table VI. Raw materials imports by sector in 1994 Textiles Leather and shoes Metals Beverages Food Chemicals Printing Tobacco and matches Nonmetals Total Source: Ministry of Trade and Industry (UNIDO, 1996). Three supply chains of basic raw materials for the production of textiles (raw cotton), leather products and shoes (leather) and drinks (sugar/bottles) were analysed. The focus was on obstacles related to the three elements of a supply chain: raw materials supply, manufacturing and distribution. Supply problems Typical Sub-Saharan problems related to the local and often unreliable supply of raw materials are the underdeveloped road system and the war in the region. First, unreliable supply of locally purchased materials is partly caused by the underdeveloped road system. Poor road conditions and lack of feeder roads constrain the efficient supply of raw materials and reduce linkages between regions. The supply of cotton from Ethiopia is constrained in the rainy season when several roads cannot be used. In this period, cotton from Ethiopia is transported by sea along the Red Sea coast. Sometimes hides and skins for the leather industry cannot be transported to the factories because there are no roads. A second constraint on local supply is the wars in the region. During the 30-year war between Ethiopia and the Eritrean liberation movement, the supply of raw materials to Eritrea was limited. Nowadays, because of the war in the neighbouring country Sudan and the politically strained relations between this country and Eritrea, the supply from Sudan has been restricted. Cotton, which was bought from Sudan in the past, now has to be imported from Ethiopia. If a supplier is of local origin, materials are ordered in small volumes. Cotton is frequently bought directly from agents in the surrounding region. Leather is purchased locally and, for leather jackets, on order. A shoe factory orders leather every month. In the beverage industry, sugar is bought when required. The market for these materials is stable. The major advantages of local supply are cheapness and short lead-times, which create more flexibility to respond to changes in demand. At the same time, local supply is unreliable in terms of quality and quantity. When materials are not available in the region, they have

11 to be purchased globally. These materials are expensive because they have to be paid for in foreign exchange. The lack of foreign exchange stimulates bureaucratic purchasing procedures inside and outside the firm as a result of involvement by the government. Global purchasing often requires that not only the products but also their transportation hasve to be paid for in foreign currency. In order to minimise the transportation costs per product and their payment in foreign currency, large quantities exceeding current requirements are ordered and relatively big ships are used for transportation. In the textile industry, the major raw material for producing sweaters is yarn, of which 125 tonnes are ordered per six months. Major chemicals used to produce plastic shoes and other plastic products are ordered once every six months too. Every three months, alcohol is ordered by the Asmara Wine and Liquor Factory. Raisins are ordered only once a year in order to reduce shipping costs. A major disadvantage of this ordering method is the increasing inventory which carries costs for the manufacturing firms. Ships are the major mode of transportation used when raw materials are purchased globally. In general, raw materials are shipped from a foreign supplier to Massawa (the major Eritrean port) by an independent ship liner. If a big ship is used, the transportation costs will be reduced but the time of delivery will become longer ranging between six to eight weeks. If a small ship is employed, however, the cost of transportation will increase while a shorter period of delivery (three to four weeks) will result. Big ships carry different items destined for different ports while small ships carry orders destined for one or two ports. Eritrean factories try to use Ethiopian or Eritrean ships and pay the transportation costs (sea freight costs) in local currency. Without the permission of the Ministry of Industry, they are not allowed to pay in hard currency in order to save foreign currency. Manufacturing capabilities Manufacturing capabilities are restricted by the fact that the equipment used in most firms is obsolete. In most factories, machines have an average age of 25 to 30 years and frequently break down. The major reason for the obsolescence of equipment has been the annexation of Eritrea by Ethiopia between 1961 and In 1974, the military regime of Ethiopia adopted a centrally-planned economy and a deliberate policy to stop the further industrial development of Eritrea (at that time, Eritrea was an Ethiopian province with a strong resistance movement). From 1974 on, the government stopped investing in Eritrea. As a result, machines have become obsolete and can often be rarely used. Firms employ mechanics to take care of the machines. Spare parts are usually imported and sometimes produced locally by small workshops or by the factory itself. Firms try to reproduce old spare parts in order to save the cost of importing them. The fact that such old machines are still functioning illustrates the skills of the Eritrean technicians who maintain them. It shows that Eritrea has inherited a relatively well-developed technological capability. Obsolete equipment also constrains supply to other Eritrean firms. Given the outdated machinery and 303

12 IJOPM 19,3 304 severe production difficulties, the production in, for example, the glass factory has now ceased completely. Available data show that capacity utilisation in 1992 varied greatly between the sectors with an average of less than 50 percent for that year (see Table VII). According to the Ministry of Industry and Trade, capacity utilisation in 1996 rose to about 70 percent. A shortage of electrical energy is a second major constraint to manufacturing activities in Eritrea. In the past, export orders have been canceled because it was uncertain whether there would be enough electricity for continuous production to allow firms to meet export target delivery dates. Current power generation in Eritrea is costly, increases production costs and reduces the competitiveness of Eritrean exports. Firms often lack general management skills because many skilled Eritreans left the country during the war and many Ethiopian managers left after the country became independent. A lot of skilled Eritreans are now reluctant to come back. One of the reasons is the shortage of housing in the country. As a result, enterprises lack qualified personnel in different fields. There is a shortage of skills in business planning, management and organisation, longrange planning, cost accounting and record-keeping. Another obstacle is that the Department of Industry still has to approve capital expenditure, thus limiting the role of firms in deciding about investments. The financial sector in Eritrea is not yet able fully to support demands from the business sector. Distribution problems and export constraints Major problems associated with the domestic distribution system include poor road conditions and inadequate storage facilities. Decades of war, isolation and a centralised economic system have also resulted in a lack of knowledge about how to enter international markets that Eritrean firms might want to exploit. A large proportion of industrial products are exported to Ethiopia (see Table VIII). About 90 percent of the aggregate manufactured exports are destined for Ethiopia. The two largest components of these exports are textiles and leather and shoes. About 80 percent of total Eritrean textile production is sold to the Ethiopian market. Shoes are mainly exported to Ethiopia and Uganda. More Industrial sector Percentage Table VII. Capacity utilization (1992) Food 54.7 Beverages 69.4 Tobacco 9.3 Textiles 24.1 Leather and shoes 23.0 Nonmetallic products 73.2 Paper and printing 87.5 Chemicals 63.9 Metal products 76.2 Total 49.8 Source: Ministry of Trade and Industry (UNIDO, 1996)

13 Sector Exports to Ethiopia and Asia Exports to Europe of total Total trade Percentage Textiles Leather and shoes Beverages 8.2 ± Chemicals and salt 6.9 ± Metals 5.4 ± Nonmetals 1.2 ± Printing ± Food Tobacco and matches ± ± ± Total Source: Ministry of Trade and Industry (UNIDO, 1996) 305 Table VIII. Profile of industrial exports (1993) (million US$) than 50 percent of exports to Europe and Asia consist of leather and shoes. Semi-finished leather is exported to Germany, Italy, Japan and the UK. Exporting is the most common organisation form used for the penetration of foreign markets. The only linkage with external markets is direct contact with the foreign wholesalers that distribute products made by Eritrean firms. Success in international markets depends to a large degree on these foreign intermediaries. For products such as semi-processed leather or salt, standard commodities with prices determined by the international market, the lack of pricing, promotion or distribution skills is not a major problem for Eritrean firms. Lack of these skills is more serious for final consumer goods such as sweaters, shoes, and other leather products and even more so for intermediate products such as finished leather. In developed countries, rapidly changing tastes, a demand for high quality and fierce competition require advanced marketing skills and a production and distribution structure that allows firms to respond quickly. Conclusions and recommendations Decades of war have deprived Eritrea of the necessary infusion of new investments, technology and skills development. As a result, several obstacles impede efficient and manufacturing. Actions are needed by both the government and the industries. These actions are necessary not only for Eritrea, but also for a lot of other African countries. The government can help to solve and manufacturing problems in several ways. First, an adequate infrastructure is an important prerequisite for efficiently organised flows of goods and information. For that reason, one of the main tasks of the government is to improve the transport and communication infrastructure and to invest in an electrical power supply system. Another important government task is to develop an institutional infrastructure that provides updated information to firms about current business practices. An

14 IJOPM 19,3 306 option is to set up business information centers all over the country. A second essential condition is that the government eliminates remaining regulatory and legal obstacles that constrain private (domestic and foreign) enterprises from investing in a country. Long approval procedures and strict requirements about the degree of local participation still discourage foreign investments and joint ventures with foreign manufacturers. In sum, the government has to follow two types of policy. On the one hand, it has to reduce its own role by giving public firms more autonomy and by eliminating the remaining regulatory and legal obstacles that constrain private (domestic and foreign) enterprises from investing. On the other hand, the government has to strengthen its role in the national economy by increasing investments in the transport and communication infrastructures. The policies of the government are a necessary but insufficient condition for improved and manufacturing in Eritrea. It is up to the companies to find domestic and foreign firms to do business with. Firms have, on the one hand, to improve their local linkages in order to decrease their supply, production and distribution problems. The institutional infrastructure just mentioned can be important in getting to know local business partners. On the other hand, firms have to seek co-operation with foreign companies in order to solve their supply chain problems. Foreign investments are crucial for the reconstruction of production facilities. In each of the industries studied, such projects have already been started on a small scale. Many decades of war and isolation from the international community have also resulted in a lack of knowledge concerning international markets that local firms wish to exploit. The only linkage with external markets is direct contact with foreign wholesalers. Consequently, firms have little control over the pricing, promotion or distribution of their products. Joint ventures with foreign firms are necessary to acquire international distribution skills and will enable firms in Eritrea and other African countries to have more control in international markets in the future. Notes 1. There are very few economic data available on Eritrea. Before 1992, information about Eritrea was incorporated with Ethiopia. After the Liberation, institutions such as the World Bank and the United Nations made estimates based on data provided by the Eritrean authorities, in particular the Ministry of Trade and Industry. These estimates are also used in this paper. A national statistics office is currently being established. 2. Because of the lack of desegregated industrial statistics, it is not possible to analyse statistically output growth and structural changes with regard to these industries over the last decades. References Biersteker, T.J. (1992), ``The logic and unfulfilled promise of privatization in developing countries'', in Putterman, L. and Rueschemeyer, D. (Eds), State and Market in Development, Lynne Rienner, London, pp Gopal, C. and Cypress, H. (1993), Integrated Distribution Management, Irwin, Boston, MA.

15 Handfield, R.B. and Nichols, E.L. (1998), Introduction to Supply Chain Management, Prentice- Hall, Englewood Cliffs, NJ. Lambert, D.M. and Stock, J.R. (1993), Strategic Logistics Management, Irwin, Boston, MA. Ministry of Agriculture (1995), Algheder Agricultural Development Project, Asmara. Mkandawire, T. (1994), ``The political economy of privatization in Africa'', in Cornia, G.A. and Helleiner, G.K. (Eds), From Adjustment to Development in Africa, Macmillan, London, pp Porter, M.E. (1990), The Competitive Advantage of Nations, Free Press, New York, NY. UNIDO (1996), Eritrea: A New Beginning, Industrial Development Review Series, Vienna. Wangwe, S.M. (1995), Exporting Africa, Routledge, London/New York, NY. World Bank (1991), The Road Maintenance Initiative ± Building Capacity for Policy Reform, Vol. 1, Report on the Policy Seminars, Washington, DC. World Bank (1994a), Eritrea: Options and Strategies for Growth, Vol. 1, Report No ER, Washington, DC. World Bank (1994b), Infrastructure for Development, Washington, DC. 307