Ricker 1 Jordan Ricker MGT 510 Professor Cattaneo 22 September 2016 Case Write Up - Ethiopia: An Emerging Market Opportunity? Investment Opportunity Ethiopia represents an attractive investment opportunity for a variety of industries. The Ethiopian government has recently started to encourage foreign direct investment by offering foreign companies income-tax exemptions for up to five years (for new companies) and the possibility of additional tax dedications after the first five years for certain sectors the government has deemed “underdeveloped.” Companies can benefit from the fact that the government has also allowed that capital and profits generated by foreign firms can be converted into foreign currency, although it should be noted that accessibility of this conversion is not always reliable, as cash shortfalls are relatively common in the country. Ethiopia also has a large and growing workforce, with over 10,000 graduates from university each year entering the labor force. Coupled with the overall population size of nearly 100 million people (the second largest in Africa after Nigeria), the size of the market is vast and nearly untapped by foreign companies. Furthermore, a growing GDP and the low cost of domestic labor makes Ethiopia ideal for businesses looking to develop. These factors, combined with the ability for expansion into the rest of East Africa in the future and an increasingly welcoming and improving business climate in Ethiopia, makes the country an overall appealing investment opportunity. Key Success Factors While Ethiopia represents an attractive investment opportunity, it also offers numerous challenges for foreign firms. The key success factors for this market are local partners, reliable backups/alternatives, and determination.
Ricker 2 One of the main challenges in investing in Ethiopia is domestic protectionism, as the Ethiopian government has a history of protecting local companies and encouraging import substitution, often at the detriment of foreign companies. This must be considered in tandem with the industrial policy of Ethiopia, as companies looking to invest in Ethiopia must have the ability to successfully navigate government relations. Both of these challenges can be mitigated through the use of local partners. Local partners would enable foreign firms to not be as hard hit in governmental preference for local businesses and they would also be able to share experience with their foreign partners in negotiating the complexities of Ethiopian governmental regulation. Another significant challenge for the Ethiopian market is the lack of reliable infrastructure. There are a limited number of roads in operation in the country and of those constructed, many are in need of repair. As such, a reliable and consistent inventory of backups and alternative methods of production and transport (i.e., trucks, generators, etc.) should be prepared by any foreign companies planning to invest in Ethiopia. Lastly, determination is a crucial success factor in entering the Ethiopian market as the ease of doing business and market access both present numerous issues. Cultural differences and corruption are just two of many challenges that companies must address to successfully operate in the country. Perseverance and stamina are values that need to ingrained into any Western team that starts operations in Ethiopia in order to confront the many unforeseen roadblocks that will emerge from entering the country. Individual Company Evaluation CareCo Evaluation Process CareCo’s proposal strength lies in its potential economic revenue, not in the ability to address other potential challenges. CareCo’s greatest weakness is its inability to think beyond economics. Item
Importance of Success factor (1-5)
Strength of proposal (1-5)
Ricker 3 Political
High level of government
Small amounts of
Environment and
corruption and domestic
consideration, but does not
Industrial policy Ease of doing
protectionism - 3 Corruption is very high - 4
seem to factor strongly - 2 Not adequately considered - 2
business Market
Success depends on true size
Projections very sensitive to
opportunity
and growth of addressable
how market grows – 2/3
Brand positioning
market - 5 Without local partners, there
Working with local companies,
locally
will be no success - 5
but not as many local partners -3
CareCo Payback Period CareCo’s payback period would be 5.7 years if it held a 20% market growth rate, achieving 25% of market share by 2022 and also attained 70% GM by 2022. However, if CareCo only had a 15% market growth rate with 15% of the market share by 2022 and its GM was 65% by 2022, then the payback period would be 8.6 years. In both cases, CareCo would start to make exponential profits starting in its second year in the black. Assumptions High End -20% market growth rate -Market share at 25% in 2022
Low End -15% market growth rate -Market share at 15% by 2022 -65% GM in 2022
-70% gross margin in 2022 Payback (years) 5.7 8.6 Recommendations It is recommended that CareCo enter the market in Ethiopia due to the reasonable payback period and potential for extremely high profit. However, it should be cautioned that while the payoffs have the potential to be very high, a lack of systematic consideration of different factors specific to Ethiopia could lead to longterm deleterious effects. ShoeCo
Ricker 4 Evaluation Process Item
Importance of Success
Strength of proposal (1-5)
Political
factor (1-5) High level of government
Attention paid to political
Environment and
corruption and domestic
environment – 3/4
Industrial policy Ease of doing
protectionism - 3 Corruption is very high - 4
Not adequately considered - 1
business Market opportunity Success depends on true size
Projections based on
and growth of addressable
competitors seem realistic –
Brand positioning
market - 5 Without local partners, there
3/4 Focus on knowledge transfer
locally
will be no success - 5
and partnerships - 5
Payback Period Assumptions High End -10% market growth rate -Market share at 10% in 2022
Low End -5% market growth rate -Market share at 5% by 2022 -60% GM in 2022
-70% gross margin in 2022 Payback (years) 3.5 4.0 Recommendations Item
Importance of
Strength of proposal (1-
Political Environment
Success factor (1-5) High level of
5) Small amounts of
and Industrial policy
government
consideration, but does not
corruption and
seem to factor strongly - 2
domestic protectionism - 3 Ease of doing business Corruption is very high Not adequately considered Market opportunity
-4 Success depends on
at all - 1 Projections are more
true size and growth
optimistic than pessimistic–
Ricker 5 of addressable market
3
Brand positioning
-5 Without local partners, Focus on building
locally
there will be no
partnerships - 5
success - 5 It is recommended that ShoeCo enter the market. Both on the high and low-end assumptions, the payback period would be a maximum of four years, which is favorable. Additionally, the focus on knowledge transfer and partnerships would be greatly encouraged by the Ethiopian government and would help ShoeCo in the long-run to establish a strong, government-backed presence in the market. MedCo Evaluation Process MedCo’s proposal focuses on “getting in on the ground, learning the market, and building partnerships” (p.6) but does not address several other crucial factors about entering the Ethiopian market. Payback Period Assuming a stable growth rate of 15%, 10% of market share by 2022, and a gross margin of 70%, MedCo’s payback period would be 7.8 years. At a smaller growth rate of only 10%, market share at 10% by 2022, and with a gross margin of 60% (Low End prediction) MedCo’s payback period would be 9.9 years. At a High End prediction of a 20% growth rate, 15% of market share by 2022, and a 70% GM, the payback period would be 5.7 years. Thus, the best estimate is that the breakeven point for MedCo would be between 7 and 8 years, assuming no unforeseen circumstances. Assumptions
High End
Medium
Low End
-20% market growth
-15% market growth -10% market growth rate
rate
rate
-Market share at 10% by
-Market share at 15% -Market share at
2022
in 2022
-60% gross margin in 2022
10% in 2022
-70% gross margin in -70% gross margin 2022 Payback (in years)5.7
in 2022 7.8
9.9
Ricker 6 Recommendations It is recommend that MedCo does not enter the Ethiopian market. Their payback period would be at least 7 years and they do not seem adequately prepared to deal with the difficulties of doing business and the amount of government and industrial policy they would need to overcome.
