Draft Report

_______________B. H. Trading and Manufacturing P. L. C.___________

CHAPTER ONE - EXECUTIVE SUMMARY

1.1 MARKET STUDY

1.1.1 Analysis Of The Market Structure

The Ethiopian markets for vehicles, the market is served through both import and local

production/ assembly. Mesfin Industrial Engineering, AMCE, Maru and Holland Cars PLS

are the local companies engaged in the assembling and marketing of vehicles. Mesfin

Industrial Engineering, AMCE and Maru assemble mainly freight trucks while the recently

inaugurated Holland Cars PLS assemble small automobiles. Supply through import consists

of a number of importers and small intermediaries that are either involved in direct

importation of small consignments mainly second hand vehicles.

On the demand side, the target markets for vehicles include mainly individuals,

government and non government institution such as NGOs, international institutes

( ECA, AU etc) and diplomatic missions.

1.1.2 PRESENT EFFECTIVE DEMAND

a) Existing Vehicle Fleet

The total number of vehicles in the country excluding military and police vehicles in

1997 was only 69,719. This number has grown to 126,060 in 2005 with vehicle

ownership; at on average about one vehicle for 555 persons. During the period 1997 –

2005 the number of operational vehicles has registered an average annual growth rate of

7.78%.

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Regarding type of vehicles on average during the period 1997 – 2005 private cars with

39.51% share account for the highest share of the total vehicle fleet flowed by pick up

and tracks with up to 70 quintals capacity ( 16.68%), trucks with 71 to 180 quintal

capacity ( 9.99%), bus less than 30 seats ( 8.57%) , station wagon ( 6.57%) and taxi 5 –

12 seats ( 5.08%) . The remaining types of vehicles i.e. taxi less than 5 seats, bus above

30 seats, trailer, truck tractor, semi trailer and trailer together account for 13.61% of the

total vehicle fleet.

During the period under consideration overall vehicle population has registered an

average annual growth rate of 7.8%.

b) Supply Analysis

The local market for vehicles is met from both local production and imports. Currently,

the local producers/ assemblers of vehicles are Mesfin Industrial Engineering MIE) ,

Automotive Manufacturing Company of Ethiopia ( AMCE) , Maru Metal Industery

(MMI) and Holland Cars PLS. Mesfin Industrial Engineering, AMCE and Maru

assemble mainly freight trucks while the recently inaugurated Holland Cars PLS

assemble small automobiles.

The combined local vehicle assembling capacity is about 5,710 of which the grate

majority ( 3,960 or 69.35%) is accounted by trucks and trailers the remaining 30.65% is

accounted by small automobiles. However, there is no local plant which assembles

station wagons and pick ups.

The major source of vehicle to the local market is import. The major importers are

MOINCO, Nyala Motors, Ethionipon and Equatorial Business Group. During the period

2000-2006, the maximum import was 14,454 (year 2006), while the minimum 9,102 was

registered in year 2000. In the remaining years, import was fluctuating between these

two extremes, around a mean figure of 11,094 units.


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The import data of vehicles does not show import of pickups and station wagons

separately. Therefore, in order to estimate annual import of station wagons and pickups it

is assumed that the proportion of station wagons and pickups out of the existing vehicle

fleet approximate the share of station wagons and pickups from the total vehicle import.

Import of pickups and station wagons during the period 2000 – 2006 has shown a

considerable growth, increasing from 1,365 units in year 2000 to a peak of 2,168 units in

year 2006, increasing by an annual average growth rate of 11.12 % during the period

under review, with average annual import of about 1,664 units.

c) Present Effective Demand

The current demand for pickup and station wagon is estimated using four approaches,

i.e., single exponential smoothing, double exponential smoothing (one parameter),

Holte’s two - parameter double exponential smoothing and time trend extrapolation.

However, the time trend extrapolation method is found to be plausible. Accordingly, the

present (2008) demand for the products is estimated at 2,082

1.1.3 DEMAND FORECASTING

The future demand for vehicle is influenced by factors such as income, population

growth and economic development. Thus, to project the future demand for the product

among different projection techniques that consider the most influential factors on

vehicle demand were used. Accordingly, trend extrapolation method and growth rate

method were used to project the demand.


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After due consideration to the advantages and disadvantages of each projection methods

it was found out that even though each forecasting technique is based on a legitimate

assumption they are also not free from drawbacks. Thus, the drawbacks of each

alternative method impose a need to combine different methods in order to arrive at the

best possible results.

Combining the forecasts will 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 requires averaging of both extremes of over

exaggeration and under estimation.

Accordingly, the combined estimates of the future demand is computed by assigning

20% weights to each projection methods based on which the local demand for station

wagons and pickups in year 2009 is estimated to be 2,223 units and projected to reach

3,229 units and 4,496 units in year 2015 and in year 2020 respectively. Moreover, by

the year 2025 the projected demand will reach 6,381 units.

1.1.4 MARKET SHARE ANALYSES AND PRODUCT MIX

RECOMMENDATION

Assuming that the envisaged factory will produce quality products that compete with

imported ones, under take well coordinated marketing efforts and be price competitive

with import, it is assumed that the envisaged assembly plant will capture about 15%

market share initially and as awareness increase and promotion activates are carried out

the market share will increase to 20 % in the second year. In the third year and than

after market share is assumed to be constant at 25 %.


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A product mix of 40% station wagon and 60% pickups is recommended.

1.1.5 MARKETING

After assessing alternative distribution channels the produceragent consumer

channel in combination of direct supply to consumers is recommended.

The recommended price is Birr 252,726 for station wagons and Birr 215,569 for pickups.

As a new entrant to the market, it is recommended that the envisaged assembly plant

advertise its products aggressively.

1.2 ASSEMBLING CAPACITY AND ASSEMBLING PROGRAMME

The supplier of parts to the project has recommend semi knockdown (SKD) parts

assembly process . However, any vehicle assembly plant in Ethiopia has to acquire an

investment license from the Ethiopian investment authority and registered as an assembly

plant to get a tax privilege, which reduce taxes from 244% to 5% with 15% VAT and 3%

with holding tax. Moreover, the regulation of Ethiopian Customs Authority indicates that

in order to get the tax privilege the assembly plant has to make a 30% value addition

locally. The authorities will assign an auditor by the end of each product to investigate

weather the value addition of the assembly plant is in reality not less than 30% of the

total production cost to be entitled the tax privilege.

SKD parts assembly do not permit the obligatory 30% local value addition as the parts in

SKD state are almost at final level including painting. Therefore, if the envisaged

assembly plant engages in SKD parts assembly it will not be eligible for the tax

incentives which means the tax required on the imported parts will be equivalent to the


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tax paid to imported vehicles as a result if the envisaged assembly plant engages on SKD

parts assembly it will not be competitive at all.

Therefore to meet the requirement, the assembly plant should start its operation with

CKD-2 assembly. Initially it needs about 3 days to finish the first unit, then after it will

be a continuous flow, that means;

1st year production 271 units

2nd year production 417 units and

3rd year production 548 units

Moreover, based on the recommendation of the market study from the total annual

production the share of pickups and station wagon is considered to be 60% and 40%

respectively. Therefore, the annual assembling capacity of the envisaged plant at full

capacity operation is selected to be 329 pickups and 219 station wagons

1.3 MATERIALS AND INPUTS

The components required to assemble in CKD-2 condition have to be imported.

However, finishing and auxiliary materials such as paints, lubricants and tires will be

obtained locally. The total cost of raw material at full capacity operation is estimated at

Birr 105,224,176.

The utilities required by the project consist of electricity and water the total annual cost

of which is estimated at Birr 540,000.

1.4 TECHNOLOGY AND ENGINEERING

Abay Trading and Technical S.C is located in a prime business area of Addis Ababa in

Kirkos sub city kebele 10 with a total land area of 12,310 m2. The location is ideal and


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all the necessary facilities for the operation of the envisaged assembly plant are readily

available.

Abay Trading and Technical S.C is engaged in provision of vehicle maintenance service.

As a result the Company possesses most of the machinery and equipment required by the

envisaged assembly plant.

The company has got enough electrical power and municipality water connection for the

envisaged assembly. Moreover, the company also have water well in its compound.

The existing building of Abay Trading and Technical S.C can properly accommodate the

machinery and equipment, raw materials, and the intermediate and finished products of

the envisaged assembly plant with minor modification.

The additional machinery and equipment required comprise power tools, crane and hoists

and testing equipment. The total cost of the additional machinery and equipment

required is estimated at Birr 2,977,444.

The machinery and equipment for the envisaged assembly plant do not require any

additional building. However, installing additional equipment such as cranes and

rearranging the existing machineries according to the proposed plant lay out requires

civil works. For rearranging the machinery lay out, the floor area, after the removal of the

machineries, has to be covered with smooth cement screed having a thickness of 5 cm.

Moreover, construction of fences, show room , minor repair on the asphalt road and

painting of walls and steel structure will be carried out. Accordingly, the total cost of the

civil works is estimated at Birr 250,000.


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1.5 ORGANIZATION AND MANPOWER

1.5.1 Organization Structure

The proposed organizational structure of the envisaged assembly plant comprises the

following departments.

Manpower and administration department,

Technical and production department,

Finance department, and

Commercial Department.

1.5.2 MANPOWER REQUIREMENT

Considering the productivity level of the local works around 77 workers and management

staff are required for the smooth and efficient operation of the envisaged assembly plant

in full capacity operation.

1.6 FINANCIAL ANALYSES

The financial implications of the results of the market and technical studies are analyzed

under two scenarios. The first scenario assumes that the investment requirement for

acquiring Abay Trade and Technical SC will be covered by equity capital and the

additional investment requirement will be covered through bank loan . Under the second

scenario, it is assumed that the total financial requirement i.e. investment requirement for

acquiring Abay Trade and Technical SC and the additional investment will be covered

through 30 per cent equity and 70 per cent long-term bank loan.

The investment requirement and the benefit of the project under the two scenarios is

summarized in Table 1.1.


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Table 1.1

INVESTMENT REQUIREMENT AND THE BENEFIT OF THE PROJECT

UNDER THE TWO SCENARIOS

ItemsScenario I Scenario II

Investment Cost 42,500,060.00 43,882,690.00

Production costat full capacity

operation ( Year 4) 112,156,000 113,335,000

Cumulated cash flow ( year 11) 129,790,000.00 108,060,000.00

Net profit ( Year 4) 14,113,090.00 12,934,000.00NPV 48,011,000.00 50,030,000IRR 25.39% 25.87%

Pay back period Five years Five years

Break even at full capacity operation

( Year 4) 36% 38%

As can be seen from the above Table the investment cost required in scenario one

( assuming investment requirement for acquiring Abay Trade and Technical SC will be

covered by equity capital and the additional investment requirement will be covered

through bank loan ) is lower by Birr 1.38 million compared to scenario two (assuming

that the total financial requirement i.e. investment requirement for acquiring Abay Trade

and Technical SC and the additional investment will be covered through 30 per cent

equity and 70 per cent long-term bank loan). Annual operating cost of the project is also

higher under scenario two. The project is viable under both scenarios with an IRR of

25.39% and 25.87% under scenario one and two respectively.


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Moreover, net profit and cumulated cash flow at the end of the project under scenario one

is also higher by about Birr 1.17 million and Birr 21.73 million respectively. Moreover,

the project has better NPV and IRR in scenario one. The break even point is also lower in

scenario one.

1.7 CONCLUSION AND RECOMMENDATION

1.7.1 CONCLUSION

After the assessment of the market condition the local management capability and

productivity level of work force, rules and regulation of the country and other relevant

external environments the following conclusion are forwarded.

CKD-2 parts assembly plant could be ideal solution to meet the requirement of

Ethiopian customs Authority to be entitled to the tax privilege;

There should be a FOB price difference between fully assembled automobile,

SKD,CKD-1 and CKD-2 parts

The productivity and quality of local labor force need to be address to get the

intended result;

Flexible automotive assembly plant is needed to give a room to adjust production

output according to the market condition;

Implementation of QMS and IPM is vital for the successes of the assembly plant

The study shows that there is a relatively large and progressively growing local

market for station wagons and pick ups

The financial analysis which has been done under two scenarios indicates that the

project is viable under both scenarios with a Net Present Value (NPV) of Birr


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48.01 million and 50.03 million, discounted at 10 per cent, and an Internal Rate of

Return of 25.39 and 25.87 per cent for scenario one and two respectively.

1.7.2 RECOMMENDATION

We recommend the followings for the successful implementation of the project and

viability of the assembly plant.

Creation of a joint-venture with the supplier is recommended. The supplier will

make a profit from motor vehicle assembly plant in Ethiopian for this reason they

will create a conducive-atmosphere to reduce cost of production and also extend

supports to increase productivity, quality of workmanship and to get an acceptable

quality end product.

The study reveals that attractive interior and exterior design, availability of safety

measures like air bags, availability of central locking system and good quality

stereo, availability and cost of spare part and fuel efficiency are critical factors

considered while choosing vehicles. Therefore, the above attributes should be

given top priority by the envisaged plant Besides, quality control should also be

given top precedence so that the envisaged assembly plant could achieve its aims

through producing top quality products that can compete with imported vehicles

in all aspects.

.

Moreover, in order to successfully penetrate the market it is very essential to

adopt efficient distribution channel and competitive price for the products.

Therefore, in the long run the envisaged assembly plant should open show rooms

and service centers in strategic locations such as Awasa, Bahere Dar, Mekele and

Dire Dawa.


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CHAPTER TWO - BACK GROUND

2.1 INTRODUCTION

B. H. Trading and Manufacturing P. L. C. was established in 1996 E. C. with a capital of

Birr 1.3 million with the objective of producing crushed aggregate to be supplied to local

contractors for the construction of major road projects, concrete works, etc.

In 2004, the Company underwent major expansion to establish a fully automated concrete

block manufacturing plant with a capacity of 17,000 pieces of hollow blocks per one shift

of 8 hours.

Currently, the Company has a paid – up capital of Birr 7 million and an investment of

over 25 million Birr. B. H. Trading and Manufacturing P. L. C. is currently the sole agent

and distributor of large – scale Chinese state – owned and private manufacturers of

automobiles, heavy duty trucks, and construction machinery.

The Company has a signed agreement with Great Wall Motors, which is the biggest

private – owned SUV, pickups, and passengers’ car manufacturer in China, SinoTruck,

the biggest heavy – duty manufacturer in China, and Xiang Construction Mchinery, one

of the leading state – owned construction machinery suppliers in China.

The Company had an audited sales volume of about Birr 62 million in year 2007. In

2008, the Company has launched a large expansion project of about Birr 55 million

during which it has been awarded a tender for the purchase of Abay Technical and

Trading Share Company from the Privatization and Public Enterprises Supervising

Agency.

The Company is now desirous to establish Vehicles’ Assembly Plant for the Great Wall

Motor Vehicles in Ethiopia with the co – operation of the parent company. Thus, the


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Company is currently undergoing the necessary steps towards the accomplishment of this

project.

In line with the above facts, B. H. Trading and Manufacturing P. L. C. invited the present

team of experts to undertake a feasibility study for the establishment of vehicle assembly

plant.

Consequently, this draft report on feasibility study for the establishment of vehicle

assembly plant is prepared based on the agreement reached between the Client (. H.

Trading and Manufacturing P. L. C) and the team of Consultants.

This feasibility study encompasses multiple aspects related to the subject, among which,

market study, technical study and financial analysis are the major ones. Finally, after a

thorough examination of these aspects, a conclusive conclusion and recommendations are

forwarded.

2.2 OBJECTIVE OF THE STUDY

The main objective of the study is to investing, whether the envisaged assembly plant is

financially viable or not.

2.3 STUDY METROLOGY

The study has relied on both primary and secondary data, which involved both desk and

field works.

Secondary data such as the historical local production (assembly) and import of vehicles

and other pertinent data was collected from Central Statistics Authority (CSA), Customs

Authority, Road Transport Authority, and other relevant sources and is analyzed


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objectively to identify major marketing variables such as the supply and demand trends,

apparent consumption of the product, etc.

The field research, on the other hand, involves the collection and compilation of market -

related information which is more of qualitative nature from users and intermediaries

(distributors and retailers).

Accordingly primary, data regarding the following issues is collected.

Price of brand – new and second – hand vehicles by origin, type and at various

distribution level,

Existing distribution setup,

Desired features,

Constraints faced in marketing the products etc.


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CHAPTER THREE - MARKET STUDY

3.1 PRODUCT DESCRIPTION

Automobile, self-propelled vehicle used primarily on public roads but adaptable to other

surfaces. Automobiles changed the world during the 20th century, particularly in the

United States and other industrialized nations. From the growth of suburbs to the

development of elaborate road and highway systems, the so-called horseless carriage has

forever altered the modern landscape. The manufacture, sale, and servicing of

automobiles have become key elements of industrial economies.

Automobiles are powered and controlled by a complicated interrelationship between

several systems. The major systems of the automobile are the power plant, the power

train, the running gear, and the control system. Each of these major categories include a

number of subsystems. The power plant includes the engine, fuel, electrical, exhaust,

lubrication, and coolant systems. The power train includes the transmission and drive

systems, including the clutch, differential, and drive shaft. Suspension, stabilizers,

wheels, and tires are all part of the running gear, or support system. Steering and brake

systems are the major components of the control system, by which the driver directs the

car.

The automobile is built around an engine. Various systems supply the engine with fuel,

cool it during operation, lubricate its moving parts, and remove exhaust gases it creates.

The engine produces mechanical power that is transmitted to the automobile’s wheels

through a drivetrain, which includes a transmission, one or more drive shafts, a

differential gear, and axles. Suspension systems, which include springs and shock

absorbers, cushion the ride and help protect the vehicle from being damaged by bumps,

heavy loads, and other stresses. Wheels and tires support the vehicle on the roadway and,

when rotated by powered axles, propel the vehicle forward or backward. Steering and

braking systems provide control over direction and speed. An electrical system starts and

operates the engine, monitors and controls many aspects of the vehicle’s operation, and _____________________________________________________________Feasibility Study For The Establishment Of Station Wagon And Pick Up

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powers such components as headlights and radios. Safety features such as bumpers, air

bags, and seat belts help protect occupants in an accident

Automobiles are classified by size, style, number of doors, and intended use. The typical

automobile, also called a car, auto, motorcar, and passenger car, has four wheels and can

carry up to six people, including a driver. Larger vehicles designed to carry more

passengers are called vans, minivans, omnibuses, or buses. Those used to carry cargo are

called pickups or trucks, depending on their size and design. Minivans are van-style

vehicles built on a passenger car frame that can usually carry up to eight passengers.

Sport-utility vehicles, also known as SUVs, are more rugged than passenger cars and are

designed for driving in mud or snow.

The envisaged assembly plant will assemble station wagons and pick ups. A station

wagon is a passenger automobile with a body style similar to a sedan (saloon in British

usage) but with the roofline following an extended rear cargo area.

Certain cars with this body style have historically been called a shooting brake, a British

term. A few models are referred to as a break, using the French term (which is sometimes

given in full as break de chasse — literally "hunting break"). The German term for this

type, Kombi or combi, is also sometimes used. Volkswagen's proprietary name for a

Kombi is Variant, Opel sometimes uses the word Caravan, BMW uses Touring, and

Audi's wagons are called Avant. Fiat often uses the term Weekend, while Alfa Romeo

uses Sportwagon. Peugeot and Land Rover have sometimes used "station wagon" even in

markets which use British English. Another term infrequently used by some American

and Australian car makers is station sedan.

Most station wagons are modified sedan-type car bodies, having the main interior area

extended to the near-vertical rear window over what would otherwise be the enclosed

area of the sedan version. A hatchback car, although meeting a similar description, would

not enjoy the full height of the passenger cabin all the way to the back; the rear glass of a

hatchback being sloped further from vertical, and the hatch tending not to reach fully to

the rear bumper, as it commonly would in a station wagon. Station wagons also have side _____________________________________________________________Feasibility Study For The Establishment Of Station Wagon And Pick Up

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http://en.wikipedia.org/wiki/Hatchback

http://en.wikipedia.org/wiki/Automobile

http://en.wikipedia.org/wiki/Land_Rover

http://en.wikipedia.org/wiki/Peugeot

http://en.wikipedia.org/wiki/Alfa_Romeo

http://en.wikipedia.org/wiki/Fiat

http://en.wikipedia.org/wiki/Audi

http://en.wikipedia.org/wiki/BMW

http://en.wikipedia.org/wiki/Opel

http://en.wikipedia.org/wiki/Volkswagen

http://en.wikipedia.org/wiki/German_language

http://en.wikipedia.org/wiki/French_language

http://en.wikipedia.org/wiki/British_English

http://en.wikipedia.org/wiki/Shooting_brake

http://en.wikipedia.org/wiki/Style

http://en.wikipedia.org/wiki/Sedan_(car)

http://en.wikipedia.org/wiki/Car_body_style

http://en.wikipedia.org/wiki/Automobile


windows over the cargo area, whereas some hatchbacks have thick "C" pillars and no

cargo area windows. Two exceptions to this rule include Rambler station wagons (1952–

62) on which the roof line subtly dipped down over the cargo area, and GM's Oldsmobile

Vista Cruiser (1964–72) and Buick Sportwagon (1964–70) on which the rear roof section

was slightly elevated and combined with four skylights; the "sportwagon" name has been

popularised again in recent years by some manufacturers. Certain models of Land Rover

have also been described by the manufacturer as station wagons (even in British usage);

these had a tall wagon-like body with extra "alpine lights", or windows, above the cargo

bay side windows.

A station wagon is distinguished from a minivan (multi-purpose vehicle) or sport utility

vehicle by still being a car, sharing its forward bodywork with other cars in a

manufacturer's range.

A pickup truck is a light motor vehicle with an open-top rear cargo area which is almost

always separated from the cab to allow for chassis flex when carrying or pulling heavy

loads. A full-size pickup is a small truck suitable for hauling goods and performing other

functions.

The following Tables shows the specifications of the station wagon and pick up which

are going to be assembled by the envisaged plant.


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http://en.wikipedia.org/wiki/Motor_vehicle

http://en.wikipedia.org/wiki/Sport_utility_vehicle

http://en.wikipedia.org/wiki/Sport_utility_vehicle

http://en.wikipedia.org/wiki/Multi-purpose_vehicle

http://en.wikipedia.org/wiki/Minivan

http://en.wikipedia.org/wiki/Land_Rover_Series

http://en.wikipedia.org/wiki/Buick

http://en.wikipedia.org/wiki/Vista_Cruiser

http://en.wikipedia.org/wiki/Oldsmobile

http://en.wikipedia.org/wiki/General_Motors

http://en.wikipedia.org/wiki/Rambler_(automobile)


Table 3.1

SPECIFICATION OF PICKUPS THAT WILL BE ASSEMBLED BY THE

ENVISAGED PLANT

Model CC1021PS05 CC1021PS06 CC1031PS25 CC1031PS41Type 4 X 2 4 X 2 4 X 4 4 X 2Vehicle curb weight (kg) 1,660 1,620 1,780 1,700Max. total mass (kg) 2,465 2,425 2,585 2,505Load weight (kg) 480 480 480 480

Axle Load distribution

no load

Front axle (kg) 890 870 980 950rear axle (kg) 770 750 800 750

Full load

Front axle (kg) 960 940 1,050 1,020Rear axle (kg) 1,505 1,485 1,535 1,485

Overall dimension

Length (mm) 5,040 5,040 5,040 5,040Width (mm) 1,800 1,720 1,800 1,720Height (mm) 1,730 1,675 1,730 1,675

Wheel base (mm) 3,050 3,050 3,050 3,050

Wheel trackFront (mm) 1,515 1,460 1,515 1,460Rear (mm) 1,525 1,460 1,525 1,460

Min. ground clearance (mm) 194 178 194 194Min. turning diameter (m) 14 14 14 13Front suspension (mm) 745 745 745 745Rear suspension (mm) 1,245 1,245 1,245 1,245Approach angle (°) (no load) 30 24 30 24Angle of departure (°) (no load) 24 21 24 21Inner wheel turning angle (°) 32 37°6' 32 32°6'Max. climbing speed (%) ≥40 ≥40 ≥40 ≥30Minimum stable vehicle speed of direct gear (km/h) ≤25 ≤25 ≤25 ≤25Max. vehicle speed (km/h) 140 140 140 140


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Table 3.2

SPECIFICATION OF STATION WAGONS THAT WILL BE ASSEMBLED BY THE ENVISAGED PLANT

Model Gasoline DieselEngine Mitsubishi4G64 16V 4 cylinder in line GW2.8TC GW2.8TCIPower(kw) 93/5250 100/5250 70/3600 85/3400

Torque(N.m) 195/2500 200/2500-3000225/1600-2600

285/1800-2600

Type of drive 4X2/4X4 4X2/4X4Displacement(L) 2.4L 2.8LDimension(L x W x H)(mm) 4620X1800X1710Compressive ratio 9.5:1 9.8:1 17.2:1Transmission box 5-gear manual transmissionSteering gear system Gear rack integral Power steeringFront suspension Double fork-arms type, independent suspension with torsion bar springsRear suspension 4-link coil spring dependent suspension

Brake systemTwo-circuit hydro-vacuum brake, front and rear disc brake

Min.ground clearance(mm) 200 180/175 200 180/175Max.grade ability not less than 0.35Tyre P235/65R17

3.2 ASSESSMENT OF THE BUSINESS ENVIRONMENT

On assuming power in mid-1991, the Ethiopian Peoples Revolutionary Democratic Front

(EPRDF) led Transitional Government of Ethiopia (TGE) has committed to introduce a

market economy in the country whereby the private sector would be the driving force in

the development of the economy. To this end, the government has pursued a step-by-step

approach to abolish most of previous legislations restricting market forces and private

enterprise flourishing.

Accordingly, a range of policy measures and reforms has been undertaken. The reforms

include among others are the following measures;


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The complete liberalization of prices,

The devaluation of the national currency (Birr),

The enactment of a new more liberal investment law for the promotion and

encouragement of private investment both foreign and local,

The granting of autonomy to public enterprises and undertaking of privatization

program,

Establishment of a more market determined foreign exchange and interest rates,

Liberalization of foreign trade,

Abolishing of all export taxes (except on coffee), and

Reduction of inflation through budgetary and monetary controls,

Moreover, in recognition of the significant role private capital plays in the development

of an economy, the Government of Ethiopia has eliminated discriminatory tax and credit

to private sector, simplified administrative procedures, and established a clear and

consistent set of rules regulating business activities.

Regarding investment, the legal framework for private investment has evolved overtime

to accommodate more features that respond to the needs of investors. Accordingly the

following proclamations were issued at different times to expand the range of incentives

and the areas of participation of the private sector.

First Investment Code No.15/1992

Proclamation No.37/1996



Each of the proclamations has specific features that are either expanded or improved by

the latter versions.


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The above proclamations and accompanying regulation determine the size of initial

investment and areas of investment, areas reserved for domestic investors, and provide an

array of incentives. In addition to the generous incentive the following guarantees are

provided to investors

- Repatriation of capital and profits

Capital repatriation and remittance of dividends and interests is guaranteed to foreign

investors under the investment proclamation. Any foreign investor has the right, in

respect of an approved investment, to make the following remittances out of Ethiopia in

convertible currency at the prevailing exchange rate on the date of remittance: profits and

dividends accruing from an investment, principal and interest payments on external loans,

payments related to technology transfer or management agreements, proceeds from sales

or liquidation of an enterprise, proceeds from the sale or transfer of shares or of partial

ownership of an enterprise to a domestic investor, compensation paid to a foreign

investor and expatriates employed in an enterprise may remit, in convertible foreign

currency, salaries and other payments accruing from their employment in accordance

with the foreign exchange regulation or directives of the economy.

- Guarantee against Expropriation

The constitution of the Federal Democratic Republic of Ethiopia protects private

property. The investment proclamation also provides investment guarantee against

measures of expropriation and nationalization that may only occur for public interest

and in compliance with the requirements of the law. Where such expropriations are

made, the government guarantees to provide adequate compensation corresponding to the

market value of property and such payments shall be effected promptly.


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- Other Guarantees

Ethiopia is a member of the World Bank- affiliated Multilateral Investment Guarantee

Agency (MIGA) which issues guarantee against non commercial risks to enterprises that

invests in signatory countries. Ethiopia is currently concluding bilateral investment

promotion and protection agreements with a number of developed and developing

countries and it is ready to conclude such treaties with any country at any time. Ethiopia

has also signed the World Bank treaty, ‘the International Convention on settlement of

investment disputes between states and Nationals of other States (ICSID).”

Moreover, Ethiopia has a significant export potential of electric wires and cables to

neighboring countries and the Meddle East. Therefore, the government’s policy and

strategy is also important. In recent years, Ethiopia is adopting export led strategy to

enhance economic growth. One of the central elements of the strategy is to increasingly

open the economy to foreign competition with the view of benefiting the economy from

expanded markets and increasing its efficiency. Some of the strategic instruments

employed to realize the broader aims are;

Substantial reduction of import tariffs

Lifting of non tariff barriers except in areas of national security, environment,

health and safety regulations.

Duty drawback on import of raw materials for production of exports

Elimination of export duty

Foreign exchange surrender requirement on exporters was replaced by permitting them to

sell their foreign exchange receipts at freely negotiated rate to Banks or permitting the

use of foreign exchange proceeds for current account transaction within four weeks.

Exporters were also allowed to hold 10% of their foreign exchange earnings indefinitely.


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Furthermore, the government support investment by facilitating access to credit, access to

land and through dialogue with sub sector representatives by which sector issues

discussed and obstacles are removed.

- Capital Requirement for foreign Investors

USD 100,000 for a single and wholly foreign owned investment in cash and/ or in

kind

USD 60,000 on cash and/ or in kind per project if the investment is made in

partnership with domestic investors

USD 50,000 in cash and/ or in kind per project in areas of engineering,

architecture, accounting and audit service, project studies or business

management, consultancy services, or publishing

USD 25,000 in cash and/ or in kind if the investment is made in partnership with

domestic investors in areas of engineering, architecture, accounting and audit

service, project studies or business management, consultancy services, or

publishing

No capital requirement or investors who;

- Export at least 75% of his output

- Reinvests his profit or dividend

Therefore, it can be concluded that currently in Ethiopia there is a conducive business

environment.


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3.3 ANALYSIS OF THE MARKET STRUCTURE

A market structure refers to the number and characteristics of the firms operate in it.

Many industries or markets are dominated by a few firms while others contain many

sellers. In some markets, products are homogeneous where sellers can meet the needs of

consumers equally well. In other markets, products are heterogeneous that different

customers may have preferences for different sellers.

Four basic types of market structure are monopoly, monopolistic competition, oligopoly

and perfect competition. Table 3.3 summaries the characteristic of each market structure.


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http://www.businessdictionary.com/definition/type.html


Table 3.3

SUMMERY OF MARKET STRUCTURES

Indicators Monopoly Monopolistic Competition

Oligopoly Perfect Competition

Size & number of buyers Many buyers; small relative to the market

Many buyers; small relative to the market



Size & number of sellers One Seller Many sellers; small relative to the market

A few sellers; some of them are large relative to the market

Many sellers; small relative to the market

Degree of substitutability among products

No close substitutes

Differentiated products

May or may not be close substitutes

Close substitutes

Conditions of entry Barriers prevent entry

No barriers to entry; firms may be barred from making identical products

Often have barriers that limit (but do not completely prevent) entry

No barriers to entry

In the case of the Ethiopian markets for vehicles, the market is served through both import

and local production/ assembly. Mesfin Industrial Engineering, AMCE, Maru and Holland

Cars PLS are the local companies engaged in the assembling and marketing of vehicles.

Mesfin Industrial Engineering, AMCE and Maru assemble mainly freight trucks while the

recently inaugurated Holland Cars PLS assemble small automobiles. Supply through import

consists of a number of importers and small intermediaries that are either involved in direct

importation of small consignments mainly second hand vehicles.


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On the demand side, the target markets for vehicles include mainly individuals and

government and non government institution such as NGOs, international institutes

( ECA, AU etc) and diplomatic missions. The whole market setup including the major

actors is depicted schematically in Figure 3.1.

Figure 3. 1

THE ETHIOPIAN MARKET STRUCTURE FOR VEHICLES

Supply Side Demand Side

(Rare occurrences)


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Foreign

Manufacturers

Local

Assemblers

Importers of new vehicles

Importers of second hand vehicles

Individuals

Government and non

government institutions


As can be realized from the above discussion, there are three local producer/ assemblers

of vehicles on the supply side. However, there is a large number of importers, while

regarding demand side, the final consumers are numerous and scattered in different

geographical areas of the country. Moreover, there is no visible entry barrier.

Therefore, the market structure for vehicles is characterized by multiple suppliers both

local and foreign origin. Therefore, there is a strong and fierce competition between

suppliers of the products, which means one supplier’s marketing decisions materially

affect the other suppliers’ marketing decisions.

3.4 PRESENT EFFECTIVE DEMAND

3.4.1 EXISTING VEHICLE FLEET

The total number of vehicles in the country excluding military and police vehicles in

1997 was only 69,719. This number has grown to 126,060 in 2005 with vehicle

ownership; at on average about one vehicle for 555 persons. During the period 1997 –

2005 the number of operational vehicles has registered an average annual growth rate of

7.78%. ( See Table 3.4 ). However, despite the high growth rate the proportion of

motor vehicles to the population of the country is extremely low

compared to other African countries. According to different sources,

the number of vehicles per 1000 people is only 2.2, where as, in Kenya

13, in Namibia 85 vehicles per 1000 persons and in South Africa the

figure reached 143.


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Table 3.4

NUMBER OF OPERATIONAL VEHICLES IN ETHIOPIA

Type 1997 1998 1999 2000 2001 2002 2003 2004 2005

Private cars 30,928

34,791

36,167

39,001

40,608

40,611

41,985

43,770

47,456

Taxi 4,869

6,305

6,595

6,524

9,847

9,598

9,858

10,325

11,434

Commercial 17,046

23,294

28,990

30,315

34,033

34,615

39,122

42,724

44,828

UN & AU 874

1,200

1,535

1,098

1,178

1,089

1,139

1,129

1,108

C.D 733

587

751

1,485

721

786

819

815

921

International organizations

3,493

3,656

3,561

3,330

3,310

3,475

3,491

3,965

3,816

Government 11,338

13,136

13,510

14,239

12,983

15,356

15,573

15,750

16,194

Mass organizations 438

310

348

510

200

320

235

254

303

Total 69,719

83,279

91,457

96,502

102,880

105,850

112,222

118,732

126,060

Source: Road Transport Authority

_____________________________________________________________Feasibility Study For The Establishment Of Station Wagon And Pick Up Assembly Plant

28


Regarding type of vehicles on average during the period 1997 – 2005 private cars with

39.51% share account for the highest share of the total vehicle fleet flowed by pick up

and tracks with up to 70 quintals capacity ( 16.68%), trucks with 71 to 180 quintal

capacity ( 9.99%), bus less than 30 seats ( 8.57%) , station wagon ( 6.57%) and taxi 5 –

12 seats ( 5.08%) . The remaining types of vehicles i.e. taxi less than 5 seats, bus above

30 seats, trailer, truck tractor, semi trailer and trailer together account for 13.61% of the

total vehicle fleet. ( See Table 3.5)


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Table 3.5

NUMBER OF OPERATIONAL VEHICLES IN ETHIOPIA BY TYPE

Type 1997 1998 1999 2000 2001 2002 2003 2004 2005

Private cars 30,902 35,686 35,219 37,906 42,293 43,338 42,767 42,586 47,566

Station wagon 6,094 6,101 7,847 8,090 5,535 5,603 6,282 6,984 7,001

Taxi less than 5 seats 1,705 1,850 1,935 2,057 3,786 4,179 4,130 4,547 5,006

Taxi 5 - 12 seats 3,164 4,455 4,660 4,465 6,049 5,408 5,716 5,764 6,414

Bus less than 30 seats 5,453 6,994 7,567 9,635 9,778 12,076 7,745 9,416 9,015

Bus above 30 seats 889 1,699 2,387 2,625 2,825 2,129 2,173 2,551 2,903 Pick up and trucks ( up to 70 quint.) 10,347 11,069 11,492 12,286 13,983 15,193 24,423 27,069 25,332

Trucks ( 71 to 180 quint.) 5,866 8,504 10,713 10,996 10,778 10,171 10,113 10,518 12,907

Trailer 2,037 3,382 4,127 4,554 3,808 3,168 3,876 3,892 4,359

Truck tractor 515 480 1,286 1,108 1,005 1,028 1,235 1,278 1,396

Semi trailer 522 367 978 226 372 909 484 504 106

Tanker 760 1,191 994 1,085 1,236 905 1,211 1,453 1,480

Sub Total 68,254 81,778 89,205 95,033 101,448 104,107 110,155 116,562 123,485 Motor cycles and special machinery 1,465 1,501 2,252 1,469 1,432 1,743 2,067 2,170 2,575

Grand Total 69,719 83,279 91,457 96,502 102,880 105,850 112,222 118,732 126,060


30


During the period under consideration overall vehicle population has registered an

average annual growth rate of 7.8%. However, when type of vehicles are individually

considered the growth rate ranges from 5.72% for private cares to 21.64% for truck

tractors. ( See Table 3.6 )

Table 3.6

AVERAGE GROWTH RATE OF REGISTERED VEHICLE POPULATION BY TYPE

Type

Average

Growth rate

Private cars 5.72Station wagon 3.13Taxi less than 5 seats 16.61Taxi 5 - 12 seats 10.49Bus less than 30 seats 8.78Bus above 30 seats 19.73Pick up and trucks ( up to 70 quint.) 13.17Trucks ( 71 to 180 quint.) 11.52Trailer 12.50Truck tractor 21.64Semi trailer 18.41Tanker 11.51Sub Total 7.80Motor cycles and special machinery 9.89Grand Total 7.80

The existing vehicle fleet is composed of old cars. As can be seen from Table 3.7 of the

total vehicle fleet the age of 28.1% is above 25, 17% between 21 and 25 and 11.4%

between 16 and 20 which indicates most of the existing vehicles ought to have been

scrapped long ago had it not been to the absence of a vehicle retirement policy in the

country.


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Table 3.7

PASSENGER VEHICLE AGE DISTRIBUTION IN ETHIOPIA

Age % from totalUnknown 3.81 to 5 12.56 to 10 13.311 to 15 13.616 to 20 11.421 to 25 17.3Above 25 28.1

Total 100

3.4.2 SUPPLY ANALYSIS

The local market for vehicles is met from both local production and imports. Details of

the supply from both sources are discussed as follows.

a) Local Production

Currently, the local producers/ assemblers of vehicles are Mesfin Industrial Engineering

MIE) , Automotive Manufacturing Company of Ethiopia ( AMCE) , Maru Metal

Industery (MMI) and Holland Cars PLS. Mesfin Industrial Engineering, AMCE and

Maru assemble mainly freight trucks while the recently inaugurated Holland Cars PLS

assemble small automobiles.

Maru Metal Industry (MMI) was established in 1975 . MMI started its business by

manufacturing metal doors, windows, fences and beds. Later shifted to constructing

trusses, silos, mobile houses, etc. After developing its engineering capability and

gathering enough experience on the field it moved in the production of more

sophisticated fabrications and made a niche for itself for the sector of industrial vehicles

like cargo bodies and vans as import substitution. Again after gaining sufficient


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experience moved on the production of complete drawbar trailers, semi-trailers, low beds,

etc being the first to produce the same in the country.

AMCE, (Automotive Manufacturing Company of Ethiopia) is a company that’s owned

70% by IVECO and the rest 30% by the Ministry of Industry of Ethiopian Government.

The AMCE plant located in Addis Ababa has a total area is about 132,000 sqm out of

which 18,600 are sheltered.

The main activities of AMCE are:

Assembling of commercial vehicles including buses of IVECO range

Manufacturing of bus bodies

Sale and trade of IVECO products manufactured by the Company or imported

built- up

Import and distribution of original IVECO spare parts

Assuring a proper after sale service, according to IVECO standard

Mesfin Industrial Engineering ( MIE) was founded in 1992. It is located 780 kms-North

from the capital city Addis Ababa, at Mekelle in Tigray region. The company is engaged

in the production of metal equipment and components for energy, mining, construction,

transport, agricultural and other related sectors. With an annual assembling capacity of

3,000 trailers and semi-trailers, MIE is the biggest trailer manufacturer in East Africa. It

designs and manufactures vehicle bodies, trailers, as well as high & low-bed semi-

trailers. MIE's product range includes inter-city and city buses, skip-loaders, and waste

and sewer cleaners for the municipal services.

Holland Car PLC is established in 2005 and is a joint venture between the Dutch

company Trento Engineering BV in Sittard (50%) and the Ethiopian company Ethio-

Holland PLC in Addis Ababa (50%). This cooperation is combining the expertise of

production equipment and processes (Trento) and the knowledge of the local market


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(Ethio-Holland). The production-site of 20.000 square meters is situated in Modjo, about

65 km south of Addis Ababa. The sales-office and the service-dealers are located in

Addis Ababa.

The assembling capacity of the above local companies is

Mesfin Industrial Engineering = 3,000 Trailers & Semi-trailers

AMCE = 460 Trucks and trailers

Maru = 500 trucks and trailers

Holland Cars = 1,750 Small automobiles

Accordingly, the combined local vehicle assembling capacity is about 5,710 of which the

grate majority ( 3,960 or 69.35%) is accounted by trucks and trailers the remaining

30.65% is accounted by small automobiles. However, there is no local plant which

assembles station wagons and pick ups.

b) Import

The major source of vehicle to the local market is import. The major importers are

MOINCO, Nyala Motors, Ethionipon and Equatorial Business Group.

The External Trade Statistics of the Ethiopian Customs Authority categorizes import of

vehicles under the following headings:

Public transport vehicles seat capacity < 15 passengers

Public transport vehicles seat capacity >= 15 passengers

Vehicles with cylinder capacity of < 1000 CC

Vehicles with cylinder capacity of > 1000 CC and < 1500 CC

Vehicles with cylinder capacity of > 1500 CC and < 1800 CC

Vehicles with cylinder capacity of above 1800 CC

Goods Vehicles


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The import data of Ethiopian Customs Authority has a limitation on specific products due

to its aggregate nature.

The quantity of vehicles annually imported during the period 2000 – 2006 is shown in

Table 3.8. During the period 2000-2006, the maximum import was 14,454 (year 2006),

while the minimum 9,102 was registered in year 2000. In the remaining years, import

was fluctuating between these two extremes, around a mean figure of 11,094 units.


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Table 3.8

IMPORT OF VEHICLES ( IN PIECES )

Year

Public transport vehicles

seat capacity < 15

passengers

Public transport

vehicles seat capacity >=

15 passengers

Vehicles with

cylinder capacity

of < 1000 CC

Vehicles with

cylinder capacity of > 1000 CC and < 1500

CC

Vehicles with

cylinder capacity of > 1500 CC and < 1800

CC

Vehicles with

cylinder capacity

of above 1800 CC

Goods Vehicle

s Total 2000 1,951 402 126 1,433 547 2,634 2,009 9,1022001 1851 483 108.5 1285.5 664 5217 1833.5 11,4422002 2,046 214 193 1,380 363 2,529 2,354 9,0782003 1,957 510 75 3,632 614 2,157 2,840 11,7852004 1,744 456 142 2,939 714 3,277 2,827 12,0992005 1214 206 133 2102 160 2273 3614 9,7022006 2,878 221 253 4,658 566 2,784 3,094 14,454

Average 1,949 356 147 2,490 518 2,982 2,653 11,094% share 17.56 3.21 1.33 22.44 4.67 26.87 23.91 100

Source: External Trade Statistics


36


Import of vehicles though characterized by a noticeable growth trend (See Figure 3.2),

exhibits fluctuations from year to year. In 2001, total import has increased by about

25.71% as compared to 2000. However, in 2002 import has decreased by 20.66% .In

2003 and 2004 import has increased by 29.82% and 2.66% respectively. However,

import has decreased by 19.81% in 2005 compared to import level of 2004. In 2006,

import has registered a huge growth, increasing by 48.97 %. On average, during the

period under review (2000 – 2006) import of vehicles has registered an average annual

growth rate of 11%.

Figure 3.2

IMPORT OF VEHICLES

The import data of vehicles does not show import of pickups and station wagons

separately. Therefore, in order to estimate annual import of station wagons and pickups it


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is assumed that the proportion of station wagons and pickups out of the existing vehicle

fleet approximate the share of station wagons and pickups from the total vehicle import.

Accordingly, as indicated earlier of the total vehicle fleet in the country during the period

1997 – 2005 on average the share of station wagon and pickups and trucks with a

capacity of up to 70 quintal was 6.57% and 16.68% respectively ( a total of 23.23%).

However, in order to be conservative and due to the fact that the heading “pickups and

trucks with a capacity of up to 70 quintal” also includes larger trucks than pickups the

share of station wagon and pickups from the total vehicle import is estimated to be 5%

and 10% respectively.

Accordingly, Table 3.9 shows total vehicle import and estimated share of station wagons

and pickups.

Table 3.9

TOTAL VEHICLE IMPORT AND ESTIMATED SHARE OF STATION

WAGONS AND PICKUPS

YearTotal Vehicles

Station wagons Pickups

Total station wagon

and pickup

2000 9,102.

0 455 910 1,36

5

2001 11,442.

0 572 1,144 1,71

6

2002 9,078.

0 454 908 1,36

2

2003 11,785.

0 589 1,179 1,76

8

2004 12,099.

0 605 1,210 1,81

5

2005 9,702.

0 485 970 1,45

5 2006 14,454. 723 1,445 2,16


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0 8

As it can be seen from Table 3.9, import of pickups and station wagons during the period

2000 – 2006 has shown a considerable growth, increasing from 1,365 units in year 2000

to a peak of 2,168 units in year 2006, increasing by an annual average growth rate of

11.12 % during the period under review, with average annual import of about 1,664 units.

3.4.3 PRESENT EFFECTIVE DEMAND

There are two main approaches for estimating the demand for a product. Either the

estimate of future value is based on an analysis of factors which are believed to influence

future values, the explanatory or end - use method, or else the prediction is based on an

inferred study of the behavior of historical supply data and trend over time - the

extrapolation method. Both approaches can produce accurate forecasts, but the former

method is often more difficult to implement and validate than the latter approach, due to

lack of data at the required level.

The extrapolation method does not take into consideration the underlining factors that

affect the demand for a product. Instead, in order to infer about its future behavior and

trends, past behaviors and trends on time series supply data are scrutinized. The method

used to produce a forecast may involve the use of deterministic models such as

smoothing and linear extrapolation or the use of a complex stochastic model for adaptive

forecasting.

Accordingly, in order to estimate the current effective demand for pickup and station

wagon in Ethiopia, the following methods were applied:

- Single exponential smoothing;

- Double exponential smoothing (one parameter);

- Holte’s two - parameter double exponential smoothing; and

- Time trend extrapolation.


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Each method of estimating the current effective demand is discussed briefly as follows.

a) Single Exponential Smoothing

The single exponential smoothing analysis predicts a value based on the forecast for the

prior period, adjusted for the error in that prior forecast. Exponential smoothing technique

involves the following equation:

Ft+1 = αXt + (1 - α) Ft,

where

Ft+1 : represents forecast value for one time ahead (current demand for that period),

Xt : actual sales volume at time t and

α : the smoothing constant having a value between 0 and 1.

Accordingly, based on the above equation the estimated present effective demand for

station wagons and pickups is about 1,716 units (see Table 3.10)

Table 3.10

APPLICATION OF THE SINGLE EXPONENTIAL SMOOTHING METHOD

ON THE HISTORICAL DATA ( in unit)

Year Supply Forecast2000 1,365 1,3652001 1,716 1,4352002 1,362 1,4212003 1,768 1,4902004 1,815 1,5552005 1,455 1,5352006 2,168 1,6622007 1,6922008 1,716


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b) Double Exponential Smoothing (One Parameter)

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:

St’ = αXt+ (1-α) S’t-1

St’’ = α St’+ (1-α) S’’t-1

Ft+m = at + btm,

Where

S’t is the single exponential smoothed value,

S’’t is the double exponential smoothed value,

Ft+m = at + btm is the forecasted value one time ahead,

at = St’ + (St’- St’’) ,

bt = (α/1- α) (St’- St’’)

m is the number of periods ahead to be forecast

Xt actual sales volume at time t and

α is the smoothing constant having a value of 0.2 .

Accordingly, based on the above equation the result arrived is about 1,572 units (see

Table 3.11)


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Table 3.11

APPLICATION OF THE DOUBLE EXPONENTIAL SMOOTHING METHOD ON

THE HISTORICAL DATA

Year Supply Forecast2000 1,365 1,3652001 1,716 1,3792002 1,362 1,3872003 1,768 1,4082004 1,815 1,4372005 1,455 1,4572006 2,168 1,4982007 1,5372008 1,572

c) Holt’s Two – Parameter Double Exponential Smoothing

Holt’s two - parameter double exponential smoothing model is given by:

Y” t+k = Lt + kTt,

Lt = alpha * Yt+ (1-alpha) (Lt-1 + Tt-1),

Tt = beta (Lt- Lt-1) + (1-beta) Tt-1,

where:

Y” t+k stands for forecasted value,

Lt indicates the long-term level or base value for the time-series data, i.e. the level term,

Tt indicates the expected increase or decrease per year, i.e., the trend term,

K stands for the number of time periods we want to forecast,

t-represents time, and

alpha and beta are smoothing parameters.


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Based on the above model, the estimated present demand for station wagons and pickups

is shown in Tables 3.12.

Table 3.12

DOUBLE EXPONENTIALLY SMOOTHED FORECAST (HOLT’S TWO -

PARAMETER)

Alpha = 0.6

Beta = 0.4

Year SupplyTend Term

Level Term Forecast

2000 1,365 1,365.00 351.00 2001 1,716 1,716.00 351.00 1,7162002 1,362 1,644.00 181.80 2,0672003 1,768 1,791.12 167.93 1,8262004 1,815 1,872.62 133.36 1,9592005 1,455 1,675.39 1.12 2,0062006 2,168 1,971.41 119.08 1,6772007 2,0902008 2,210

d) Time Trend Extrapolation

The principle of least squares is employed to fit a linear trend to the historical data of

sales (y) and time (t) and the relation is expressed by the following equation:

Y = α + bt,

Where


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‘a ‘ is the intercept and ‘b’ is the slope. Accordingly, the following linear equations is

developed,

y = 1,664 + 41.7857x

Based on the above equation the present ( 2008) effective demand for station wagons and

pickups is estimated at 2,082 units.

e) Evaluation of the Methods Used To Estimate The Present Demand

The result of the various methods used to estimate the present demand is summarized in

Table 3.13.

Table 3.13

SUMMARY OF ESTIMATED PRESENT EFFECTIVE DEMANED FOR

PICKUPS AND STATION WAGONS

MethodEstimated

present demand

Single exponential smoothing 1,716

Double exponential smoothing(one parameter) 1,572

Holt's two - parameter double exponential smoothing 2,210

Time trend extrapolation 2,082


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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 3.14.

Table 3.14

SUMMARY OF TEST STATISTICS FOR SOME OF THE METHODS

Projection Methods MSE* MAPE*

U-Statistic

Darbin-Watson Statistic.

Single Exponential 5706628071440.43 75.58 0.77 0.4Double Exponential 5317656760710.02 134.15 0.96 0.78

Holt's two - parameter 6872354050807.04 453.17 1.49 1.19

* MSE = mean squared error, * MAPE = mean absolute percentage error.

The test statistics shown in Table 3.14 shows that there is a high percentage error

between the historical data and their forecasts. However, the U-statistic which provides

relative comparison of the formal forecasting methods with intuitive methods indicates

that the single exponential smoothing and the double exponential smoothing methods are

relatively acceptable as they are below unity. But the Darbin Watson statistic shows the

error terms between the data series and their estimates do not have a random distribution

and the error terms have certain relationships among themselves in all the three cases.

This indicates the inappropriateness of these methods.

The other method used, time trend extrapolation, is evaluated using the F-test and the t-

test in order to observe the significance of the relationship between the data series and

time trend and also to check whether the slope and the intercept of the line are

significantly different from zero or not . The test result indicates that;


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(F calculated = 16.22) > (F (1, 8) (α=0.01) =11.26) shows the appropriateness of

the time trend model at (α=0.01) significance level.

(t calculated = (b/se (b)) = 4.03) > (t (8) (α=0.01) =2.896) 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))\= 56.93)

Besides, the r2 value which is 0.7 shows that a high proportion of the data is explained by

the time series and this complements with the above tests. Therefore, the time trend

extrapolation method is the best fit to estimate the present effective demand for station

wagons and pick ups.

Accordingly, the present ( 2008) effective demand for the products is estimated at 2,082

units.

3.5 DEMAND FORECASTING

3.5.1 ASSESSMENT OF THE TREND OF MAJOR FACTORS THAT AFFECT

DEMAND FOR VEHICLES

Knowledge of the determinants of market demand for a product and the nature of the

relationship between demand and its determinants is very helpful in analyzing and

estimating demand for a product. A lot of factors determine the demand for a product.

However, regarding vehicles the following factors are identified to be the most

influential factors,

Performance of the national economy

Investment Activity _____________________________________________________________Feasibility Study For The Establishment Of Station Wagon And Pick Up

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Rate of population growth and urbanization

Expansion of road transport infrastructure such as roads

Trend in the presence of international institutions, NGOs and diplomatic missions

Activities of the federal government’s sectoral offices

The present government’s policy of decentralization

Accordingly, a thorough assessment of current status and future prospect of these factors

is conducted hereunder as they have decisive influence on the likely direction of the

demand for the products under consideration.

a) Performance Of The National Economy

There is a strong relationship between economic development and transport demand. The

Ethiopian economy has responded positively to the reform measures and the appropriate

sectoral development policies and strategies adopted by the present government.

During the period 2001 – 2006, real GDP and real GDP per capita have grown from Birr

64.34 billion and Birr 985 to Birr 85.15 billion and 1,134 respectively, registering an

average annual growth rate of 6.5% in terms of real GDP and 5.28% in terms of real GDP

per capita. However, regarding real GDP, during the last three years i.e. 2004,2005 and

2006 a high growth was achieved in a row (i.e. 11.9 percent in 2004, 10.5 percent in

2005 and 9.6% in 2006), which places Ethiopia among the top performing economies in

Sub-Saharan Africa. (See Table 3.15)


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Table 3.15

TRENDS IN ETHIOPIA’S REAL GDP AND REAL GDP PER CAPITA

Year

Real GDP

( million Birr)

Growth

rate

Real GDP

Per capita

Growth

rate

2001 64,343 7.2 985 4.6

2002 64,990 1 967 -1.8

2003 62,844 -3.3 909 6

2004 70,345 11.9 989 8.8

2005 77,730 10.5 1,065 7.6

2006 85,184 9.6 1,134 6.5

Source; National bank of Ethiopia “annual Bulletin” 2006

Moreover, during 1999 - 2005 export grew by about 5% a year, annual inflation averaged

about 4% and by 2005 investment had risen to 16% of GDP.

The positive performance of the Ethiopian economy is expected to continue in the future.

As a result demand for vehicles may also be reasonably expected to increase as

economic expansion continues.

b) Population Growth And Urbanization

1. Population Growth

According to the second national population and housing census the population of

Ethiopia was estimated to be 53,477,265 in October 1994. The census also revealed that

86.3 percent of the population reside in the rural areas, while 13.7 percent were urban

dwellers. The country is among the high fertility nations with a total fertility rate of 6.9


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children per woman. Over 45 percent of the population are below age 15, indicating that

there is a large potential of women in the childbearing 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 a couple of years to

come. In fact, assuming the growth rate will decline from the current 2.9 percent per

annum to below 2.0 percent by 2030, the Central Statistical Authority of Ethiopia

projected the country's population to be over 106 million by 2020 and nearly 130 million

by 2030 (CSA1999). The World Bank projected the country's population to be over 122

million by 2020 and over 158 million by 2030 (WB, 1994/5). This implies that the

population will double in less than a quarter of a century and may triple well before 2050

which will create a substantially large market for vehicles.

2. Urbanization

Urbanization is a development phenomenon that comes about with the development of a

country's economy in general and industrialization in particular. The rate of urbanization

is directly related to the demand for houses. It is expected that as a country becomes more

urban, more houses will be needed to accommodate the increasing population in urban

centers. In 1984 the urban population of Ethiopia contributed only 11.2 percent to the

total population of the country (CSA, 1984). Over the ten years between the two census,

the proportion grew to 13.7 percent (CSA, 1999).

Because of the backwardness of the agricultural practice and diminishing return of

productivity of the arable land population in the rural areas are on the verge of being

pushed out of their rural niche. This and the above mentioned factors will trigger faster

urbanization in Ethiopia as in any developing country. In fact, according to the United

Nations population projection the proportions of urban population in the country will be

26 percent by the year 2015 and 34 percent by 2025. (UN, 1987).


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c) Investment Activity

During 1993 – 2006 at national level a total of 19,363 investment projects involving Birr

229.28 billion capitals were licensed by the Ethiopian Investment Agency and Regional

Investment Offices. (See Table 3.16). Of the total licensed projects, 17,310 (or 89.4

percent) were domestic, 1955 (or 10.1 percent) foreign, and 96 (or 0.5 percent) public. In

terms of investment capital Birr 140 billion (or 61.1 percent) were domestic, Birr 63.5

billion (or 27.7 percent) foreign and Birr 25.67 billion (or 11.2 percent) were public.

Table 3.16

NUMBER AND INVESTMENT CAPITAL OF TOTAL APPROVED PROJECTS

( CAPITAL IN MILLION BIRR)

Year Number Capital1993 545 3,9831994 526 3,4211995 693 5,3381996 908 6,4901997 795 6,7221998 898 9,9391999 713 10,0602000 624 14,1272001 687 8,8562002 801 9,1902003 1,217 13,4372004 2,225 21,2202005 2,872 36,4642006 5,859 80,036Average 1,383 16,377Cumulative 19,363 229,283

Source: Annual Report by the National Bank of Ethiopia


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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

vehicles for collection and distribution of inputs and products and commercial and

administrative activities it can be assumed that the increasing number of investment

projects will increase the demand for vehicles.

d) Expansion Of Road Transport Infrastructure Such As Road Net Work

Ethiopia is a vast country covering over 1.1 million km 2 .Its population of 67 million is

widely dispersed, with 85% living in rural areas and deriving their livelihood from settled

peasant agriculture. Road transport is the dominant mode that carries about 95 percent of

the country’s passenger and freight traffic and is the only form of access to most rural

communities.

However, although road transport is the dominant mode of transport, Ethiopia has a much

less developed land transport infrastructure than most African countries, with an

estimated 51 km per 1000 sq. km and 0.49 km per 1,000 population in 2007.

The road net work in Ethiopia comprises a road network estimated (end 2007) at 37,018

km, out of which Federal roads constitute 18,612 km, while Regional roads are 18,406

km.

In recognition of lack of road net work the Government of Ethiopia has attached a high

priority to the road sector and launched a major 10-year Road Sector Development

Program . The program targets construction of almost 20,000 km of new roads by 2010.


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e) Trend In The Presence Of International Institutions, NGOs And Diplomatic

Missions

As the seat of the Headquarters of the United Nations Economic Commission for Africa

(UNECA), the African Union (AU) and other regional and international organizations,

Addis Ababa is the diplomatic capital of Africa.

The presence of more than 100 embassies and consular missions has enabled the capital

to be a venue of international activities and the fourth most important center of

international organizations as well as embassies after Washington D.C., New York and

London.

NGOs operating in Ethiopia could be categorized into two main categories:

Indigenous NGOs, which are NGOs established in the country by either

Ethiopians or non-Ethiopians.

International NGOs, which are NGOs that have their head offices abroad and

obtain most of their support from those offices.

The first organizations in Ethiopia which can be defined as NGOs were traditional self

help systems. They existed in the country for centuries before they started to develop

some sort of structure. In time developing further, some were registered as proper

organizations and today they are better know as Community Based Organizations

(CBOs). In 1960 both foreign and local NGOs were established when these self-help

groups could no longer suffice to support the needy of the country. The first NGOs as we

know them today, that were established in the country were the Ethiopian Red Cross and


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Swedish Save the Children. Following this and the famine of 1973 and later of 1984, the

number of NGOs increased and these were mostly international. Later on with the change

in government in 1990 a more conducive environment was established further

encouraging the growth of NGOs in Ethiopia.

In 2000 it was reported that around 240 local and international NGOs were registered in

Ethiopia. Currently, the number has risen above 485. These organizations are under

taking the construction of health centers, schools, potable water supply, irrigations,

sanitary facilities and feeder roads. In a country where about 40% of the total population

is living below the poverty line, the imitative taken by the development partners are

expected to increase and continue for quite some time.

Consequently, the demand for vehicles, emanating form the international institutions,

diplomatic missions and NGO’s is assumed to be potentially high and increases

progressively.

d) Activities Of The Federal Government’s Sectoral Offices

The Ethiopian government committed to the expansion of infrastructure to facilitate

economic growth. Moreover, pursuant to the development strategy which gives priority to

multi-dimensional rural development effort and commitment to improve social services

(education, health, etc), country-wide infrastructural constructions are anticipated to

increase at faster pace.


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One way of assessing the trend in the activity of government agencies is scrutinizing

planned expenditure. Planned budgetary expenditure by the various government agencies

is given in Table 3.17


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Table 3.17

PLANNED BUDGETARY EXPENDITURE (MILLION BIRR)

Items

Year

Total2006 2007 2008 2009 2010

Irrigation 2,150 3,785 3,507 5,031 6,282 20,755

Education 8,236 9,372 11,612 12,620 11,902 53,742

Health 4,725 5,677 6,872 8,133 9,473 34,880

Water & sanitation 3,816 4,174 4,015 1,768 1,815 15,588

Roads 5,126 6,307 9,533 10,907 11,287 43,160

Power 9,728 11,964 9,941 11,319 7,670 50,622

Urban housing

development 4,850 4,850 5,834 5,834 9,334 30,702

Grand Total 38,631 46,129 51,314 55,612 57,763 249,449

Source: PASDEP.

As it can be seen from Table 5.35, budgetary allocation to government agencies has

increased from Birr 38.63 billion in year 2006 to Birr 57.76 billion by the year 2010

registering an average annual growth rate of 10.72%. Accordingly, it can be reasonably

expected that demand for vehicles by government agencies, which execute the

government’s development program will exhibit a substantial growth as their operation

expand.

e) The Present Government’s Policy Of Decentralization

The decentralization of governance to woredas assumed the form of devolution, which

grants decision making powers to woreda authorities and allows them to take full

responsibility without referring back to zones or regions. Following the decentralization


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process, rural woredas are entitled to design development projects and programs, involve

communities in the process, plan social and cultural programs, implement projects and

programs as well as effectively monitor the process.

In general, the Woreda administration is required to:

Direct the economic and social development of the Woredas;

Ensure safety and security of the people of the Woreda and their property;

Provide political guidance; and

Administer the civil servants.

The benefits of fully implementing this process are believed to contribute to:-

Institutionalizing decision making process at the grass root level, and

Transformation of rural Woredas into viable development centers with enhanced

capacities.

The envisaged goals of devolution of power to the Woredas can be realized only if the

capacity of the woredas is upgraded gradually in line with the function they are expected

to perform and the corresponding deliverables. Accordingly, one of the requirements is

vehicle availability which is a decisive factor for the smooth operation of the woreda

sectoral offices. Therefore, it can be concluded that the government’s decentralization

policy will create a huge demand for vehicles.


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3.5.2 FORECASTED DEMAND

From what was discussed in the preceding sections, it is not difficult to conclude that the

demand for station wagons and pickups will grow in the future. The issue, therefore, is

how best to estimate the future demand.

The projection methods used for current demand estimation cannot be good to provide a

forecast covering a longer period of 10 to 15 years. A number of factors that are taken for

granted to be constant under this method will not remain constant over a span of that

length. The method properly serves for a shorter period or under a known less variable

circumstances.

As discussed earlier there are number of factors that influence the demand direction of

the products under consideration singularly or jointly. Some of these factors influence

demand negatively and others will make demand to increase linearly or exponentially

having different shapes and turning points. Therefore, in order to project the future

demand for the products the responsiveness of demand to various factors that influence

its movement should be examined and the most relevant projection should be selected.

Therefore, the future demand for pickups and station wagons is estimated using different

projection techniques that implicitly or explicitly show the influence of the major factors

that have decisive influence on future movement of demand. Accordingly, the following

two major techniques are applied to estimate the size of the future demand for the

product.

Projection based on regression, and


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Projection based on growth rate method

a) Projection Based On Regression Method

This method involves the development of relations between two or more variables. It is

expressed like the trend method either in the form of linear or curve linear regression

equation.

Among the factors that have a strong influence on the demand for pickups and station

wagons , income and population growth are identified to have the most profound effect.

Therefore, these variables are used to forecast the future demand for the products.

One of the indicators that measure the economic performance of a country and the well

being of the population is per capita GDP. Thus, it is assumed that per capita GDP

indicates the level of income. Moreover, the urban population is the predominant

consumer of the products. Therefore, in estimating the demand for the product only urban

population is considered. Accordingly, the data used to develop the regression equation

are presented in Table 3.18.


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Table 3.18

HISTORICAL SUPPLY OF STATION WAGON AND PICKUPS, GDP AND URBAN POPULATION

Year

Urban Population

(in 000)

Per capita GDP

Total Supply

2000 10,792.

0 848.

0 1,365

2001 11,105.

0 872.

9 1,716

2002 11,427.

0 898.

6 1,362

2003 11,759.

0 925.

3 1,768

2004 12,172.

0 945.

9 1,815

2005 12,475.

2 972.

6 1,455

2006 12,816.

6 997.

5 2,168

The regression analysis has revealed that both GDP and size of urban population have

strong positive relationship with apparent consumption of vehicles. The relation ship of

the above variables has been found to be linear in both cases and is expressed by the

following equations.

Y = 14.59 + 0.139883(x), based on per capita GDP, and.

Y = 14.72 + 1.787094 (x), based on urban population.


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Using the above equations and assuming that over the forecasting period per capita GDP

will continue to grow at an equivalent rate of the average growth rate it registered during

the period 2000-2006, which was 5.8% and using CSA’s estimation of urban population

size, the projected demand for station wagon and pickups has been worked out and

presented in Table 3.19.

Table 3.19

FORECASTED DEMAND BASED ON REGRESSION METHOD

Year

Per capita GDP

ProjectedDemand

UrbanPopulation(In ‘000)

ProjectedDemand

2009 1,161.18 2,126 14,417 2,0312010 1,207.63 2,248 14,994 2,1122011 1,255.93 2,378 15,593 2,1962012 1,306.17 2,515 16,217 2,2832013 1,358.42 2,660 16,866 2,3742014 1,412.75 2,813 17,540 2,4682015 1,469.26 2,976 18,242 2,5662016 1,528.03 3,147 18,972 2,6682017 1,589.15 3,329 19,731 2,7752018 1,652.72 3,521 20,520 2,8852019 1,718.83 3,725 21,341 3,0002020 1,787.58 3,940 22,194 3,1192021 1,859.09 4,167 23,082 3,2432022 1,933.45 4,408 24,005 3,3732023 2,010.79 4,663 24,965 3,5072024 2,091.22 4,933 25,964 3,6472025 2,174.87 5,218 27,003 3,792


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b) Projection Based On Growth Rate Method

This method considers the influence of major determent factors on the demand for the

products under consideration. Factors such as economic performance and population size

etc. are expected to have direct influence on demand for vehicles. A growth in one of

these indicators would stimulate an increase in the demand for the products.

According to the Department of the National Income Accounts of the Ministry of Finance

and Economic Development, the GDP of the country exhibited an average annual growth

rate of 5.8 % during 2000 - 2006. If GDP continues to grow at this rate over the forecast

period, it is most likely that the demand for pickups and station wagons would also

increase at a similar rate. Thus demand for pickups and station wagons is projected based

on a 5.8% growth rate over the forecast period.

A second alternative is also provided assuming that the demand for the products under

consideration increases parallel to the growth in urban population . According to CSA the

urban population of the country grows at a rate of 4% annually, therefore a similar

growth is anticipated in the demand for pickups and station wagons.

The third alternative is based on the assumption that the average growth rate registered by

the products historical total supply ( apparent consumption) will also continue in the

future. Accordingly, the average growth rate exhibited by total supply of pickups and

station wagons during the period 2000 -2006 which was 11.12% is used to forecast the

demand for the products.

Accordingly, based on the above discussed methods and taking the year 2006 total supply

( apparent consumption) as a base the projected demand for the products are given in

Table 3.20.


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Table 3.20

PROJECTED DEMAND BASED ON GROWTH RATE METHOD

Year4% growth Rate

5.8% growth Rate

11.12% growth Rate

2009 2,255 2,294 2,4092010 2,345 2,427 2,6772011 2,439 2,568 2,9752012 2,536 2,716 3,3052013 2,638 2,874 3,6732014 2,743 3,041 4,0812015 2,853 3,217 4,5352016 2,967 3,404 5,0402017 3,086 3,601 5,6002018 3,209 3,810 6,2232019 3,338 4,031 6,9152020 3,471 4,265 7,6842021 3,610 4,512 8,5382022 3,754 4,774 9,4872023 3,904 5,051 10,5422024 4,061 5,344 11,7152025 4,223 5,653 13,017

c) Evaluation Of Alternative Forecasting Methods

The summary of forecasted demand station wagon and pickups obtained through

different alternative methods are shown in Table 3.21. The projections based on the

products past growth rate is higher than the other alternatives; while the projection based

on regression ( with urban population) is the lowest.


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Table 3.21

SUMMARY OF THE ALTERNATIVE PROJECTION METHODS

Year

Growth Rate Method

Regression Method

4% growth Rate

5.8% growth Rate

11.12% growth Rate

Based on GDP

Based on Urban

population2009 2,255 2,294 2,409 2,126 2,0312010 2,345 2,427 2,677 2,248 2,1122011 2,439 2,568 2,975 2,378 2,1962012 2,536 2,716 3,305 2,515 2,2832013 2,638 2,874 3,673 2,660 2,3742014 2,743 3,041 4,081 2,813 2,4682015 2,853 3,217 4,535 2,976 2,5662016 2,967 3,404 5,040 3,147 2,6682017 3,086 3,601 5,600 3,329 2,7752018 3,209 3,810 6,223 3,521 2,8852019 3,338 4,031 6,915 3,725 3,0002020 3,471 4,265 7,684 3,940 3,1192021 3,610 4,512 8,538 4,167 3,2432022 3,754 4,774 9,487 4,408 3,3732023 3,904 5,051 10,542 4,663 3,5072024 4,061 5,344 11,715 4,933 3,6472025 4,223 5,653 13,017 5,218 3,792

Among the different methods used to forecast the future demand for station wagons and

pickups the regression ( with GDP) method was found to be the viable option due to the

fact that the regression ( with urban population) method resulted with R2 (measure of

goodness of fit) of 0.20, which is not the best compared to the R2 of the regression ( with

GDP) method which is significantly lower ( 0.59). On the other hand, the estimates

obtained using the regression model are forecasts based on forecasts of the independent

variables (projected urban population and per capita GDP), and the errors from the


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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.

The growth rate methods are based on the fact that factors such as GDP and population

growth will influence demand in the same magnitude and proportion in the future as in

the past which as the demand for the products is profoundly affected by growth in income

and population size is a valid assumption. However, even if the influence exist, the

proportion and magnitude of the influence may change. For instance, if one of the

influencing factors is price and it is reduced substantially, then demand will tend to

change differently.

Accordingly, even though each forecasting technique is based on a legitimate assumption

they are also not free from drawbacks. Thus, the drawbacks of each alternative method

impose a need to combine different methods in order to arrive at the best possible results.

Combining the forecasts will 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 requires averaging of both extremes of over

exaggeration and under estimation.

The combined estimates of the future demand is computed by assigning 20% weights to

each projection methods ( See Table 3.22).


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Table 3.22

COMBINED PROJECTION (IN UNITS)

Year

Projected Demand(Combined Estimate)

2009 2,2232010 2,3622011 2,5112012 2,6712013 2,8442014 3,0292015 3,2292016 3,4452017 3,6782018 3,9302019 4,2022020 4,4962021 4,8142022 5,1592023 5,5342024 5,9402025 6,381

As cab seen from Table 3.22 the local demand for station wagons and pickups in year

2009 is estimated to be 2,223 units and projected to reach 3,229 units and 4,496 units in

year 2015 and in year 2020 respectively. Moreover, by the year 2025 the projected

demand will reach 6,381 units.


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3.6 DEMAND-SUPPLY GAP AND MARKET SHARE

Currently, the local producers/ assemblers of vehicles are Mesfin Industrial Engineering

MIE), Automotive Manufacturing Company of Ethiopia ( AMCE) , Maru Metal

Industry (MMI) and Holland Cars PLS. Mesfin Industrial Engineering, AMCE and

Maru assemble mainly freight trucks while the recently inaugurated Holland Cars PLS

assemble small automobiles and since the envisaged plant assembles station wagons and

pickups it do not compete with the existing local assemblers.

However, there are three on pipeline projects that envisaged to assemble various types of

vehicles.

Holland Car has unveiled a new vehicle assembly plant 11 km west of Addis Ababa at a

place known of Tatek, at a cost of 25 million Birr. The company is finalizing the

assembling infrastructure for the ‘Cassiopeia’ (a Greek word for prince of Ethiopia)

factory which rests on a 30,000 sqm plot. When Cassiopeia begins operating at full

capacity, it will assemble 1,000 pickup vehicles per year. Cassiopeia is a sister company

of the first vehicle assembler in Ethiopia, Holland Cars, known for its Abay and Awash

model.

Lifan Group, one of the biggest privately-owned enterprises in China, is in the process of

setting up a vehicle assembly plant in Ethiopia with an initial investment outlay of $10

million. Lifan Group is also the sole supplier of engines, motors and spare-parts for the

local vehicle assembler i.e. Holland Car which produces Abay and Awash automobiles

for the local market and export. The envisaged assembly plant is planed to produce

different kinds of cars, including buses and minibuses.

Belayabe Enterprise (BE), is firming up negotiations with Ethiopia's Oromiya Investment

Bureau for a 15,000 meter square plot to establish a 65 million birr facility. BE has


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already started building a workshop on 2,800 sq.mt it has secured in Akaki. Three

individuals; Aschalew Belay, Zenebe Belay and Abraham Solomon, all of who living in

China for 25 years has established the company. BE envisaged assembling heavy trucks

and construction machineries.

Therefore, the major local competitor of the envisaged plant is Cassiopeia which has an

annual assembling capacity of 1,000 vehicles. Accordingly, Table 3.23 shows

projected local assembling capacity, forecasted demand and the supply demand

gap.

Table 3.23


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PROJECTED LOCAL ASSEMBLING CAPACITY , DEMAND PROJECTION AND THE SUPPLY DEMAND GAP FOR PICKUPS AND

STATION WAGONS

Year

ProjectedLocal

Assembling capacity

ProjectedDemand

SupplyDemand

Gap2009 1,000 2,223 1,2232010 1,000 2,362 1,3622011 1,000 2,511 1,5112012 1,000 2,671 1,6712013 1,000 2,844 1,8442014 1,000 3,029 2,0292015 1,000 3,229 2,2292016 1,000 3,445 2,4452017 1,000 3,678 2,6782018 1,000 3,930 2,9302019 1,000 4,202 3,2022020 1,000 4,496 3,4962021 1,000 4,814 3,8142022 1,000 5,159 4,1592023 1,000 5,534 4,5342024 1,000 5,940 4,9402025 1,000 6,381 5,381

The demand supply gap in Table 3.23 indicates the possible production frontier that the

envisaged assembly plant can take over. It shows that there is unsatisfied demand for the

product in the future which increases from 1,223 in year 2009 to 2,229 and 5,381 million

tones in year 2015 and 2020 respectively.

The market share of an enterprise is influenced by a number of factors, amongst which

are:-_____________________________________________________________Feasibility Study For The Establishment Of Station Wagon And Pick Up

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Relative product quality,

Marketing effort/expenditure,

Marketing effectiveness,

Competitors strength, and

Relative price.

The envisaged assembly plant enjoys a strong price advantage over imported products

due to the tax break provided by the government as compared to imported vehicles.

Moreover, as the experience of Holland Cars PLC’s product ( Abbay) indicates that

locally assembled vehicles can be easily accepted in the market provided that the product

has good quality that is comparable to imported ones.

Accordingly, assuming that the envisaged assembly plant provide quality products and

services with competitive price and with additional injection of sales promotion as well as

other marketing mix, significant proportion of import could easily be replaced; and the

market share of the new plant could be high.

However, in order to be conservative it is assumed that the new plant could capture about

25% market share initially and as awareness increase and promotion activates are

carried out the market share will increase to 30 % in the second year. In the third year

and than after market share is assumed to be constant at 35 %. Accordingly, the

projected demand supply gap for pickups and station wagons and the market share that

can be possibly captured by the envisaged plant is shown in Table 3.24.

Table 3.24


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MARKET SHARE

Year Projected Demand

supply gap Market

share2009 1,223 306 2010 1,362 409 2011 1,511 529 2012 1,671 585 2013 1,844 645 2014 2,029 710 2015 2,229 780 2016 2,445 856 2017 2,678 937 2018 2,930 1,026 2019 3,202 1,121 2020 3,496 1,224 2021 3,814 1,335 2022 4,159 1,456 2023 4,534 1,587 2024 4,940 1,729 2025 5,381 1,883

As can be seen from the above table, the market share of the envisaged assembling plant

is estimated to grow from 306units in year 2009 to 780 units and 1,883 units in the

year 2020 and 2025, respectively.

3.7 PRODUCT MIX RECOMMENDATION

In order to propose an appropriate product mix due consideration is given to existing fleet

of pickups and station wagons . Accordingly, as can be seen from Table 3.25 of the total

pickups and station wagons in the country during the period 1997 – 2005 on average the

share of station wagon and pickups and trucks with a capacity of up to 70 quintal was

30% and 70% respectively. However, in order to be conservative and due to the fact that

the heading “pickups and trucks with a capacity of up to 70 quintal” also includes larger


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trucks than pickups the recommended product mix is 40% for station wagon and 60% for

pickups.

Table 3.25

EXISTING NUMBER OF PICKUPS AND STATION WAGONS

Year

Station

wagon%

share

Pick up and

trucks ( up to

70 quint.)

% share Total

1997 6,094 37 10,347 63 16,4411998 6,101 36 11,069 64 17,1701999 7,847 41 11,492 59 19,3392000 8,090 40 12,286 60 20,3762001 5,535 28 13,983 72 19,5182002 5,603 27 15,193 73 20,7962003 6,282 20 24,423 80 30,7052004 6,984 21 27,069 79 34,0532005 7,001 22 25,332 78 32,333

Average 6,615 30 16,799 70 23,415

3.8 COMPETITORS ASSESSMENT

The major competitors for the envisaged assembly plant’s products are imported

vehicles. Locally assembled vehicles would have a significant price advantage over the

imported product due to costs associated with transportation cost and government tax

break which is only 5% for components to be assembled locally as compared to above

200% for vehicles . Furthermore, Ethiopia being a country where significant proportion

of its population lives below poverty line consumers are, by and large, price conscious


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and consumption demand is very much sensitive to price. Therefore, the envisaged

assembly plant will have price advantage against imported products.

3.9 MARKETING

3.9.1 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 strategic 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.

3.9.2 PRODUCT

Product quality is 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 targeted

market and in a level that comply with the quality of competing products. Consistency,

refers to the consistent delivering of ones established quality through strict quality control

measures.

The purchase of a car is a highly involved process when compared with other retail

experiences. Mostly focus on consumer product evaluations, which are occurred during

the stages of the consumer buying decision process, where knowledge about product

attribute information is needed. Knowledgeable persons on the local vehicle market


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indicates that most of vehicle buyers have incomplete information about product quality

and limited understanding of technical attributes. Because of the limited product

information, most of byres to rely on the brand name and company reputations. They

can make buying decision without searching the products’ information. This is the

repeat-purchase mechanism, where the good past performance and reputation will be

rewarded with future profitable sales, and where the poor performance will be punished.

Especially, in the face of highly competitive market, customer retention is critical . One

way to protect products and markets from competitive inroads is to have highly satisfied

customers, which minimize customer turnover . Not only the cost of retaining an existing

customers cost less than the cost of acquiring a new customer but also existing customers

cost less to maintain than newly acquired customers. Thus customer satisfaction is

important.

In the local market for vehicles there are a lot of brand choices of passenger car to

compare and evaluate before making a purchase decision. With the severe competition

among vehicle brand, it is very critical to understand the customer requirement and

provide the products that satisfy the customer needs.

Therefore, understanding of the vehicle attributes and characters on which consumer

preference is based on is critically important and should be the base on which the

marketing strategies of the envisaged plant is crafted.

Product Attribute can be defined as features that an object may or may not have. It can

be identified into two classes: intrinsic attributes and extrinsic attributes. Each attribute

provides the customer with a specific benefit that has some degree of utility .

Currently, a wide spectrum of vehicles in make, size and model populate the roads,

however Toyota seems the most popular vehicle. A rapid survey of vehicle owners


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reveals that the reasons which make Toyota preferable over other vehicles are availability

and cost of spare part and fuel efficiency.

Moreover, the following attributes are also found to be a critical factors considered while

choosing vehicles.

Attractive Interior and exterior design

Availability of safety measures like air bags

Availability of central locking system and good quality stereo

Accordingly, the above attributes should be given top priority by the envisaged plant

Besides, quality control should also be given top precedence so that the envisaged

assembly plant could achieve its aims through producing top quality products that can

compete with imported vehicles in all aspects.

.

3.9.3 PRICING

a) 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 stand in market

competition and may be forced out of the market. Therefore, the right price has to be

fixed.

The determination of selling price for a consumer-oriented product depends on a complex

series of factors such as the production and marketing costs, distribution techniques, the

prevailing competitors’ price and market conditions.


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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, and competition based

approach (going-rate pricing), which bases its price largely on competitors’ prices.

b) Proposed Pricing Strategy and Price

At present, the price of imported pickups and station wagons are on the high side. Table

3.26 shows the price of imported pickups and station wagons which are comparable with

the envisaged pickups and station wagons.

Table 3.25

PRICE OF IMPORTED VEHICLES WHICH ARE COMPARABLE TO THE

ENVISAGED ASSEMBLY PLANT’S PRODUCTS

S.No ProductsPrice ( in

Birr)1 Station wagons

1.1 TOYOTA PRADO ( GX15L ) 1,370,000

1.3 HONDA ( CIVICS) 885,000

1.4 NISSAN ( x - trail) 1,050,000

2 Pickups

1.1 TOYOTA ( HILUX) 848,000

1.2 FORD ( Ranger) 570,000

1.3 ISUZU ( DMAX ) 642,000

1.4 MISBUSHI ( l 200) 924,000

1.5 NISSAN 850,000


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However, due to the tax privilege provided by the government the cost of locally

assembled vehicles is expected to decrease dramatically which provides a critically

important advantage for easy market penetration through fixing substantially lower

price with out compromising quality.

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. Hence, it is reasonable to position the products at the lower end of the current

prices that prevail in the market.

However, the envisaged assembly plant 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.

Therefore, the cost plus pricing method is recommended to be adopted by the envisaged

assembly plant. Accordingly, the unit cost of the envisaged assembly plant products by

type of product and the recommended margin and selling price are indicated in Table

3.26.


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Table 3.26

UNIT COST OF THE ENVISAGED ASSEMBLY PLANT PRODUCTS BY TYPE

OF PRODUCT AND THE RECOMMENDED MARGIN AND SELLING PRICE

Items Station wagon Pick upCost of imported components 158,600 131,290Sea and inland transport and duties 31,720 26,258Labour cost 32,550 32,550Lubricants 650 650Tyre, Battery , Paint and utility 10,515 10,515

Total Unit Assembling Cost 234,035 201,263Profit Margin ( 30%) 70,210 60,379

Recommended Selling Price per unit 304,245 261,642

3.9.4 DISTRIBUTION

a) General

Distribution refers to enable the product reach to the consumers by the producer, while

channel of distribution is the network of middlemen through whom the product flows till

it finally reaches to 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 now to find out accessibly is best suited channel to the needs of the customer.


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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 achieve an extensive distribution .

Shopping goods, which are purchased after a careful consideration and comparison of

quality, price and suitability, have a high unit price, are sold in few retail outlets. Thus,

selective distribution strategy may be profitable.

In the purchase of specialty goods, consumers have insight on a specific brand and do

usually have adequate product information and have already made up their minds to go

for a particular brand. For such products, exclusive distribution, where only certain

dealers distribute the product will be ideal.

b) Evaluation of Existing Distribution Practices


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At present, the assemblers and importers of vehicles sell directly to consumers through

own sales branch ( show rooms) located in Addis Ababa and major towns such as

Nazareth, Awassa, Bahir Dare, Dire Dawa etc.

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 vehicles. However, final

consumers are widely scattered in different geographical area 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.

c) Proposed Distribution Channel

Vehicles like any other products reaches 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 product's 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


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retailer. 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 main alternative distribution channels commonly used by producers to reach

consumers are the following.

Direct sale to consumers:

- Manufacturer Consumer

Indirect sale through the medium of third party:

- Manufacturer Wholesaler Retailer Consumer

- Manufacturer Agent Retailer Consumer

- Manufacturer Retailer Consumer

A combination of both direct and indirect sale.

At first sight, it would seem that direct sale offer 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 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 shipments, 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.


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Therefore, the distribution channel proposed for the envisaged assembling plant is both:-

Manufacturer Agent Consumer.

And

Manufacturer Consumer.

This distribution policy is proposed by considering the conventional wisdom, that there

does exist a private sole agency with a high managerial quality skill, organizational

network and adequate financial resources in marketing a significant amount of the

companies’ products at national level. Furthermore, the above proposed distribution

channel, i.e., dealing with main agents and also distributing directly to consumers have

the following advantages.

Saves the trouble and expense that arise from dealing with a number of customers;

Needs relatively few sales persons;

Less administrative work since contact would be limited to a few agents; and

Transportation, invoicing and credit control activities are comparatively simple;

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 have to motivate their efforts, evaluate their performance periodically and if

necessary it has to reorganize the channels considering experience.

Moreover, in the long run the envisaged assembly plant should also open show rooms and

service centers in strategic locations such as Awasa, Bahere Dar, Mekele and Dire Dawa.

3.9.5 PROMOTION


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a) General

Market promotion is an important part of the marketing mix , as it is required to create

and increase consumer awareness , knowledge and readiness to buy through media

communications (advertising) and through special offers to trade and / or consumers

(sales promotion).

However, it is important to realize that, on its own, market promotion will not replace

selling, change long-term trends, or build long-term customer loyalty. It has to be

supported by quality and distribution efficiency.

b) Advertisement

Advertising is a potential tool of marketing and a component of overall promotion

activities. It serves as a communication link between the producer /seller and the buyer or

the consumer. It does not simply provide information about products but also attempt to

influence people by an overt appeal to reason or emotion. In other words, advertisement

does not end with the flow of information from seller to the buyer; it goes further to

influence and persuades people to action or belief.

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 and advertisement

should trigger is:-

Attract attention,

Rouse interest,

Build desire,


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Obtain buying action,

Build brand image, and

Maintain brand loyalty.

Initially, the objective of advertisement should concentrate in attracting attention for the

product. Once product acceptance has been achieved, advertisement usually concentrates

on building brand image and loyalty.

However, in order to be successful an advertising campaign has to convey the right

information to the right people in the right way. Thus, message creation and media

selection should be considered carefully. While choosing the message or content of an

advertisement in view of the target audience is culture, age, sex and life style , the words ,

pictures , associations and images to be used should carefully be selected .The advantages

,benefits and uses of the product to be advertised should be relative to the target audience.

Selection of the media channel involves choosing among available advertising media and

deciding how they can be used; given the type of message, targeted audience and the

budget available.

Currently, in Ethiopia various media channels are available for advertisers such as;

Broadcast media (Television and Radio),

Print media (News papers and Magazines),

Outdoor media (Posters and Metal stands ),

Specialty media (T-shirts, Buttons, Caps, Stickers, Badges and Bazars), and

Point-of- purchase or in-shop media (Banners, Hangings, Packaging and Painted

signs).


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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).

c) Specific Measures

At present, vehicle importers and local assemblers advertise their products aggressively

using mainly TV advertisements. The envisaged plant is also recommended to

aggressively advertise its product using TV at least for the first one year of production.

The choice of TV as a main media to carry out the advertisements is because the

consumers of the products are predominantly urban residents of the Country and ETV

coverage reaches almost all major urban centers and also viewed by the majority of the

urban residents. Thus, TV provides a maximum exposure probability for the

advertisement. Furthermore, the audiovisual impact of TV advertisement is thought to be

higher than any other medium. Along with this the plant should prepare and distribute

calendars as well as participation in exhibitions and bazaars is very important for

promoting the products. Moreover, the envisaged assembly plant should also provide

price discount with number of vehicles purchased and longer warranty period such as

three years and 30,000 km i.e. which ever comes up first.

3.10 EXPORT POTENTIAL

Geographical location of Ethiopia provides it with a potential advantage for exporting to

East and Central Africa, European and Middle East markets.


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Ethiopia is a member of the Common Market for Eastern and Southern Africa

(COMESA) embracing 23 countries in eastern and southern Africa with a total

population of approximately 300 million. Exports and imports with member countries

enjoy preferentially tariff rates.

Export products from Ethiopia to the European Union market are entitled to duty

reductions or exemptions and are free from all quota restrictions under the terms of the

Lome Convention. The trade preference accorded Ethiopia includes duty free entry of all

industrial manufactured products.

Under the generalized system of preference (GSP), a wide range of Ethiopia's

manufactured products are entitled to preferential duty treatment in the United States,

Canada, Switzerland, Norway, Sweden, Finland, Austria, Japan as well as most European

Union countries. Besides, no quantitative restrictions are applicable on Ethiopia's exports

of any of the 3,000 plus items currently eligible for GSP treatment.

Accordingly there is a wide opportunity for the envisaged assembly plant to export its

products to various countries.

CHAPTER FOUR - ASSEMBLING CAPACITY AND ASSEMBLING

PROGRAMME

While determining the feasible capacity for the envisaged assembling plant, different

factors were considered, among which the main ones are discussed hereunder:

As depicted in the market study, station wagons and pickups are highly demanded in

Ethiopian market. The projected demand for the products rises from 2,223 units in year


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2008 to 6,381 units in year 2025 while the estimated market share of the envisaged

assembly plant increases from 333 units to 1,595 units in the same years.

The technology to be applied in the project and know - how is another important factor in

determining the plant capacity. Specific processes are often related to certain levels of

production or become technically and economically feasible only at such levels

(minimum economies of scale). The nature of technology choice and usage constitutes a

key factor in the determination of plant capacity.

The supplier of parts to the project has recommend semi knockdown (SKD) parts

assembly process considering the technological development of the country. If the

envisaged assembly plant engages in SKD parts assembly the plant production capacity

will be five units per day based on one shift 8 working hours.

Considering Saturday as half a day working day with 4 working hours, there will be 274

working days in a year. Therefore, the plant capacity at full operation will be 1370

vehicles per annum.

However, any vehicle assembly plant in Ethiopia has to acquire an investment license

from the Ethiopian investment authority and registered as an assembly plant to get a tax

privilege, which reduce taxes from 244% to 5% with 15% VAT and 3% with holding

tax. Moreover, the regulation of Ethiopian Customs Authority indicates that in order to

get the tax privilege the assembly plant has to make a 30% value addition locally. The

authorities will assign an auditor by the end of each product to investigate weather the

value addition of the assembly plant is in reality not less than 30% of the total production

cost to be entitled the tax privilege.

SKD parts assembly do not permit the obligatory 30% local value addition as the parts in

SKD state are almost at final level including painting. Therefore, if the envisaged


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assembly plant engages in SKD parts assembly it will not be eligible for the tax

incentives which means the tax required on the imported parts will be equivalent to the

tax paid to imported vehicles as a result if the envisaged assembly plant engages on SKD

parts assembly it will not be competitive at all.

Therefore to meet the requirement, the assembly plant should start its operation with

CKD-2 assembly. Initially it needs about 3 days to finish the first unit, then after it will be

a continuous flow, that means;

1st year production 271 units

2nd year production 417 units and

3rd year production 548 units

Moreover, based on the recommendation of the market study from the total annual

production the share of pickups and station wagon is considered to be 60% and 40%

respectively. Therefore, the annual assembling capacity of the envisaged plant at full

capacity operation is selected to be 329 pickups and 219 station wagons

CHAPTER FIVE - MATERIALS AND INPUTS

5.1 COMPONENTS , FINISHING AND AUXILIARY MATERIALS

The components required to assemble in CKD-2 condition and which have to be

imported are;

Front floor


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Middle and rear floor

Lower rill ( LH and RH)

Upper parts of cowl panel

Side panel ( LH and RH)

Tail door

Roof liner

Engine compartment

Left and right fender

Cover of oil thank cap

Engine hood

Front door ( LH and RH)

Rear door ( LH and RH)

Connecting panel of fender ( LH and RH)

Left and right bracket of shock absorber

Parts of inner decoration

Engine

Transmission

Front axle

Rear axle

Propeller shaft

Oil thank

Steering booster

Lower control arm

Moreover , finishing and auxiliary materials such as paints, lubricants and tires are also

required which will be obtained locally.

Accordingly, the cost of components, finishing and auxiliary materials for assembling a

unit of pick up and station wagon is shown in Table 5.1.


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Table 5.1

THE COST OF COMPONENTS, FINISHING AND AUXILIARY MATERIALS

FOR ASSEMBLING A UNIT OF PICK UP AND STATION WAGON

Items Station wagon Pick upCost of imported components 158,600 131,290Sea and inland transport and duties 31,720 26,258Lubricants 650 650Tyre, Battery , Paint and utility 10,515 10,515

Total Unit Assembling Cost 201,485 168,713

Accordingly, the total cost of raw material at full capacity operation is estimated at Birr

99,631,842 ( Birr 44,125,186 and Birr 55,506,656 for station wagon and pickup

respectively.

5.2 UTILITIES

The utilities required by the project consist of electricity and water. Electricity is

consumed by process equipment including auxiliary equipment and lighting. Water for

the process and the general purpose such as drinking, cleaning etc. is also considered.

Accordingly, the total annual cost of utilities is estimated at Birr 540,000.

CHAPTER SIX - TECHNOLOGY AND ENGINEERING

6.1 TECHNOLOGY

The first major step in assembly is the body shop. At this stage the car begins to take

shape as sides are welded together and then attached to the underbody of the car. The


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underbody is composed of three primary pieces of galvanized steel that include the floor

pan and components for the engine and chassis. After the underbody has been welded

together, it is tested for dimensional and structural accuracy. It is then joined together in a

tab-slot fashion with the side frame and various other side-assemblies. A worker then taps

tabs into slots and clamps the tabs. Roof supports, and the roof, are now ready for

installation. The car is now ready for final welding. After welding chassis lids and

bonnets are installed.

Motor vehicle finishing is a multi-step process subdivided into three categories:

Anti-corrosion operations, consisting of cleaning applications, a phosphate bath,

and a chromic acid bath;

Priming operations, consisting of an electrodeposition primer bath, an antichip

application, primer-surface application and joint sealant application; and

Finishing operations, consisting of a colour coat application, a clear coat

application, and any painting necessary for two-tone colour or touch-up

applications.

After the vehicle body has been assembled, anti-corrosion operations prepare the body for

the painting and finishing process. Initially, the body is sprayed with and immersed in a

cleaning agent, typically consisting of detergents, to remove residual oils and dirt. The

body is then dipped into a phosphate bath, typically zinc phosphate, to prevent corrosion.

The phosphate process also improves the adhesion of the primer to the metal. The body is

then rinsed with chromic acid, further enhancing the anti-corrosion properties of the zinc

phosphate coating. The anti-corrosion operations conclude with another series of rinsing

steps. Priming operations further prepare the body for finishing by applying various

layers of coatings designed to protect the metal surface from corrosion and assure good


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adhesion of subsequent coatings. A primer coating is applied to the body using an

electrodeposition method, creating a strong bond between the coating and the body to

provide a more durable coating. In electrodeposition, a negatively charged car body is

immersed in a positively charged bath of primer for approximately three minutes. The

coating particles, insoluble in the liquid and positively charged, migrate toward the body

and are, in effect, plated onto the body surface.

Prior to baking, excess primer is removed through several rinsing stages. The rinsing

operations use various systems to recover excess electrodeposited primer. Once the body

is thoroughly rinsed, it is baked for approximately 20 minutes at 130°C to 180°C.

Next, the body is further water proofed by sealing spot-welded joints of the body. Water-

proofing is accomplished through the application of a paste or putty-like substance. This

sealant usually consists of polyvinyl chloride and small amounts of solvents. The body is

again baked to ensure that the sealant adheres thoroughly to the spot-welded areas and

again emissions of solvents could be expected. Alternatively, this process can be carried

out in the primer surfacer bake oven.

After water-proofing, the vehicle body proceeds to the anti-chip booth. Here, a substance

usually consisting of a urethane, vinyl plastisol, or an epoxy ester resin, in conjunction

with solvents, is applied locally to certain areas along the base of the body, such as the

rocker panel or the front of the car. This anti-chip substance protects the lower portions of

the body from small objects, such as rocks, which can fly up and damage vehicle finishes.

The primer-surface coating, unlike the initial electro deposition primer coating, is applied

by spray application in a water-wash spray booth, usually via automatic profile – tracking

rotary atomizers. The primer-surface consists primarily of pigments, polyester or epoxy

ester resins, and solvents. Due to the composition of this coating, the primer-surface


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creates a durable finish that can be sanded. The pigments used in this finish provide

additional colour layers in case the primary colour coating is damaged. The water-wash

spray booth is generally 30 to 70 meters long and applies the primer-surface in a constant

air stream through which the vehicle body moves. A continuous stream of air, usually

from ceiling to floor, is used to transport airborne particulates and solvents from primer-

surface over-spray. The air passes through a water curtain that captures a portion of the

airborne solvents for transfer and treatment at a wastewater facility.

After the primer-surface coating is baked, the body is then sanded, if necessary, to

remove any dirt or coating flaws. This is accomplished using a dry or moist sanding

technique. The next step of the finishing process is the application of the primary colour

coating. This is accomplished in a manner similar to the application of primer-surfacer.

One difference between these two steps is the amount of pigments and solvents used in

the application process. In addition to the pigments and solvents, aluminum or mica

flakes can be added to the primary colour coating to create a finish with unique reflective

qualities. Instead of baking, the primary colour coat is allowed to flash off, or in other

words, the solvent evaporates and is emitted to air with the application of heat below the

bake temperature.

After the primary colour coating is allowed to air-dry briefly, the final coating, a clear

coat, is applied. The clear coat adds lustre and durability to the vehicle finish. This

coating generally consists of a modified acrylic or a urethane and is baked for

approximately 30 minutes at 140°C to 150°C.

Following the baking of the clear coat, the body is inspected for imperfections in the

finish. Operators finesse minor flaws through light sanding and polishing and without any

repainting.


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Repairs of major flaws are carried out by repeating the sanding process and reprocessing

the bodies in either a repair booth or a spot repair facility. The latter uses small amounts

of catalysed paint applied with hand guns, followed by a lamp bake.

Once the clear coat is baked, a coating known as deadener is applied to certain areas of

the motor vehicle underbody. Deadener, generally a solvent-based resin of tar-like

consistency, is applied to areas such as the inside of wheel wells to reduce noise. In

addition, anti-corrosion wax is applied to other areas, (eg. the inside of doors), to further

seal the vehicle body and prevent moisture damage. This wax contains aluminum flake

pigment and is applied using a spray wand.

All the above processes will be done by the principal and the reaming works such as

painting and finishing like installing instrument panels, steering columns, weather

stripping, and body glass will be accomplished locally. Than the car body is passed

through a water test where, by using phosphorus and a black light, leaks are identified.

Soft trim, including seats, door pads, roof panel insulation, carpeting, and upholstery, is

then installed.

Next, the motor vehicle body is fitted with the following: gas tank, catalytic converter,

muffler, tail pipe, and bumpers. Concurrently, the engine goes through a process known

as dressing, which consists of installing the transmission, coolant hoses, the alternator,

and other components. The engine and tyres are then attached to the body, completing the

assembly process.

The finished vehicle is then rigorously inspected to ensure that no damage has occurred

as a result of the final assembly stages. If there is major damage, the entire body part is

replaced. However, if the damage is minor, such as a scratch, paint is taken to the end of

the line and applied using a hand operated spray gun. Because the vehicle cannot be


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baked at temperatures as high as in earlier stages of the finishing process, the paint is

catalysed prior to application to allow for faster drying at lower temperatures.

6.2 ENGINEERING

6.2.1 Assessment Of Existing Facilities In Abay Trading And Technical S.C

In this section, the plant machinery and equipment, the in place buildings and civil works,

and other facilities of Abay Trading and Technical S.C is assessed as follows:

a) Location

Abay Trading and Technical S.C is located in a prime business area of Addis Ababa in

Kirkos sub city kebele 10 with a total land area of 12,310 m2. The location is ideal and

all the necessary facilities for the operation of the envisaged assembly plant are readily

available.

b) Machinery And Equipment

Abay Trading and Technical S.C is engaged in provision of vehicle maintenance service.

As a result the Company possesses most of the machinery and equipment required by the

envisaged assembly plant.

The technical assessment conducted by the consultants indicate that all the production as

well as utility machinery and equipment are in good condition, except some replacement

and modifications that may be required for efficient operation of the envisaged assembly

plant.

c) Power And Utilities Supply


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Abay Trading and Technical S.C has got enough electrical power and municipality water

connection for the envisaged assembly. Moreover, the company also have water well in

its compound.

d) Building

The existing building of Abay Trading and Technical S.C can properly accommodate the

machinery and equipment, raw materials, and the intermediate and finished products of

the envisaged assembly plant with minor modification. The existing building comprise;

Building for vehicle maintenance with different workshops ( engine overhaul, body

work, electric shop, pump testing, general maintenance and paint and spray rooms)

Spare part stores ( main stores, intermediate stores and satellite stores)

Office building

Employee’s club and cafeteria

Vehicle washing and greasing area in the open

Large store for tyres storage and distribution

6.2.2 ADDITIONAL MACHINERY AND EQUIPMENT REQUIRED

FOR THE ENVISAGED PROJECT

The additional machinery and equipment required comprise power tools, crane and hoists

and testing equipment. The total cost of the additional machinery and equipment

required is estimated at Birr 2,977,444.

Table 6.1


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LIST OF ADDITIONAL MACHINERY REQUIRED AND THE

CORRESPONDING COST

Sr.No DescriptionQty

PriceIn USD

PriceIn Birr

1Steel structure(KBK) design for loading frame, engine and rear axle to the line

1 set 7,608.8

84,457.94

2Structure(KBK) design for loading frame, engine and rear axle to the line

1 set 5,735.3

63,661.76

3Hanger design for loading frame on the line

1 set 841.2

9,337.06

4Hanger design for loading engine on the line

1 set 114.7

1,273.24

5Hanger design for loading rear axle on the line

1 set 382.4

4,244.12

6Metal rack design for moving frame

3set 4,588.2

50,929.41

7Metal rack design for moving body and cargo box

5set 9,558.8

106,102.94

8Steel structure design for loading body and cargo box to the line and loading chassis off the line

1set 23,132.4

256,769.12

9Hanger design for loading body on the line

1set 382.4

4,244.12

10Hanger design for loading body on the line

1set 535.3

5,941.76

11Hanger design for loading frame off the line

1set 420.6

4,668.53

12 shower room 1set 17,205.9

190,985.29

15Motor hoist (loading body, cargo box and chassis)

1set 1,500.0

16,650.00

16 Motor hoist(loading frame) 1set 1,341.2

14,887.06

17Motor hoist(loading rear axle and engine)

1set 1,164.7

12,928.24

18 2-pole lifter 1set 2,470.6

27,423.53


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Sr.No DescriptionQty

PriceIn USD

PriceIn Birr

19 4-pole lifter(test wheel alignment) 1set 2,823.5

31,341.18

20 wheel alignment survey meter(with wheel steering angle survey meter)

1set 21,176.5

235,058.82

21Refrigerant filling-up machine(repair level)

1set 4,376.5

48,578.82

22 lamp survey meter 1set 14,117.6

156,705.88

23 side slide survey meter 1set 6,882.4

76,394.12

24brake and axle weight survey meter

1set 14,470.6

160,623.53

25 speed survey meter 1set 7,588.2

84,229.41

26 exhaust survey meter 1set 4,058.8

45,052.94

27 horn classis survey meter 1set 441.2

4,897.06

28 survey control system 1set 35,294.1

391,764.71

29 Torque tool 1set 14,117.6

156,705.88

30 Air-powered assembly tool 2 set 14,117.6

156,705.88

32 manual lifter 5set 5,294.1

58,764.71

33 packing and other charge 8,000.0

88,800.00

Total 229,741.

2 2,550,127.0

6

Sea and inland transport and

duties ( 25%)

57,435

637,532

Grand Total 287,17

6 3,187,65

9


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6.2.3 BUILDING AND CIVIL WORKS

a) Plant Layout

The plant layout of the envisaged project is worked out to effectively respond to the

smooth, logical and economical mass flow of materials and end product within the site

premises as well as inside the production building.

While preparing the overall plant layout, due consideration was given to the proper

utilization of spaces within the assembly plant. The raw material store and sites such as

those accommodating material preparation and assembling line are made to be situated

close to each other with enough access to facilitate the day-to-day traffic movement.

c) Additional Investment On Building

The machinery and equipment for the envisaged assembly plant do not require any

additional building. However, installing additional equipment such as cranes and

rearranging the existing machineries according to the proposed plant lay out requires

civil works. For rearranging the machinery lay out, the floor area, after the removal of the

machineries, has to be covered with smooth cement screed having a thickness of 5 cm.

Moreover, construction of fences, show room , minor repair on the asphalt road and

painting of walls and steel structure will be carried out.


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Accordingly, the total cost of the above civil works is estimated at Birr 250,000.

CHAPTER SEVEN - ORGANIZATION AND MANPOWER

7.1 ORGANIZATION STRUCTURE

The proposed organizational structure of the envisaged assembly plant comprises the

following departments.

Manpower and administration department,

Technical and production department,

Finance department, and

Commercial Department.

The functions and responsibilities of the units in the proposed organizational structure

are as described below: -

a) GENERAL MANAGER

The General Manager with the assistance of the the department managers performs the

following duties;

Plan, Organizes, directs, coordinates and controls all the activities of the plant ;

In consultation with the concerned departments, hires, promotes and dismisses

personnel that are accountable to the departmental managers as per established

systems and procedures;


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Formulates and develops financial policies and procedures and ensures its

implementation;

Maintains good relationships among departments and other internal work groups

and with clients and government agencies;

Represents the plant in all aspects of its operation and in legal proceedings

brought by or against it, negotiates and enters into agreements; and ensures their

proper implementations;

Based on his delegation of authority approves payments; delegates subordinates

as per established system;

Ensures that there exists an efficient and effective personnel administration

system including proper staffing and equitable pay;

Ensures that the resources of the plant are properly managed, handled and

efficiently used; also ascertains that the repairs and maintenance services are

properly organized and operated to support the smooth operation of the plant;

Ensures that financial transactions of the plant are properly recorded and

reported as per the established systems;

b) ADMINISTRATION DEPARTMENT

Under the broad guidance of the General Manager, the department carry out the

following duties and responsibilities:

Plans, directs, coordinates, organizes and controls the overall activities of

personnel, man power planning and development, health & safety and general

service activities;

Ensures that personnel policies, regulations and procedures of the plant are

compiled;

Assures that the delegation given to the department is duly and efficiently

carried out to the satisfaction of all;

Develops an efficient human resources planning & development system and on

approval, ensures its implementation;


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In consultation with concerned departments, performs personnel actions such as

recruitment, placement, promotions; and demotions;

Handles grievances and investigates general personnel problems in cooperation

with the concerned departments and maintain good labour relations;

Provides efficient office services in the areas of communications (telephone),

transport, safety protections, and cleanliness;

In collaboration with the concerned departments, administers job evaluations,

salary scales and incentive systems. Also handle other staff benefits such as

medical, pension, staff loan etc and controls their costs;

Makes sure that the properties of the plant are identified, well protected, safely

handled and guarded;

Ensures that the plant has appropriate insurance polices for its personnel and

properties. Follows up claims in case of accidents;

Makes sure that each personnel file is up-to-date and well documented with the

pertinent information. Handles also the general archives and records

management system;

Prepares the annual budget of the department and ensures the proper utilization

and handling of the resources allocated to it; and

Prepares and submits periodic management reports about the department and its

achievements.

c) FINANCE DEPARTMENT

The department undertakes the following duties and responsibilities:

Plans, organizes, directs, coordinates and controls the financial costing, stock

and budgetary control activities of the departments;


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Ensures that the plant has modern accounting & costing systems and fiscal

polices & procedures; also ensures their implementation

Keeps up-to-date and reliable accounting and cost records;

Coordinates the preparation of annual budgets and controls its allocations and

utilizations;

Checks and ensures the regularity and authority of requests for payment and

effects disbursements;

Ensures that taxes and residuals are paid to the Government in time;

Establishes costing standards and selling prices in collaboration with the

concerned departments;

Ensures timely reconciliation of bank accounts, creditors, debtors and other

accounts;

Effectively manages the working capital of the factory and with the approval of

Management, arranges short and long term bank credits;

Prepares and issues daily, monthly and annual financial reports; and

In collaboration with the concerned departments, conducts cash & stock counts

as and when necessary.

d) COMMERICIAL DEPARTMENT

The department conducts the following duties and responsibilities.

Plans, organizes directs, coordinates and controls the overall activities of sales

and purchase and the store and property administration;

Develops systems & procedures necessary for the efficient and effective

operation of the sales, purchasing and storage functions of the plant;

Promotes the business of the plant through sales campaigns and advertisements;

Identifies suitable supply markets local and foreign purchases on the basis of

established systems and procedures and bargains prices; ascertains the delivery

of supplies on time.


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Ensures that all supplies purchased are of the required type, quality and

standards;

Initiates and prepares operational directives and guidelines governing

procurement, sales and store and property administration of the plant;

Ensures that properly receives and keeps in stores all materials ( plant supplies

and inputs, spare parts, office supplies and harvested products) as per established

rules and regulations;

Exercises inventory control and materials programming that ensures an effective

materials management system; and

Submits periodic reports about the activities of the department.

e) PRODUCTION AND TECHNICAL DEPARTMENT

The department carryout the following duties and responsibilities:

Plans, organizes, directs, coordinates and controls the overall assembling ;

Establishes modern assembling systems that would enhance the productivity and

effectiveness of the plant and ensures its implementation;

Supervises allocation of workers and machines, minimizes idle time;

Assesses the skill and efficiency of the workers and proposes development

programmes;

Ensures that cost data is properly captured and passes the data to the cost control

section every day;

Sets standards and issues guidelines for handling and operating plant

machineries and inspect their proper implementations;

Makes plant machinery replacement recommendations; and plans future

expansion requirements;

Conducts preventive maintenance of plant machineries to ensure continuity

production and operation;

Conducts maintenance work (electrical, carpentry, plumbing, masonry) etc.


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Causes the purchase of spare parts and other maintains supplies on economic

order quantities;

Maintains cost and history cards for the machineries and

Prepares and submit periodic reports.


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Figure 7.1

PROPOSED ORGANIZATION STRUCTURE OF THE ENVISAGED PLANT


General Manager

Production and Technical Department

Manpower Administration Department

Personnel

General Service

Finance DepartmentCommercial Department

Production Division

Inspection

General Accounts Division

Sales Division

Purchase Division

Store and Supplies Division

After sales ServiceMarketing Division

105


7.2 MANPOWER REQUIREMENT

According to the client’s component supplier only 18 production workers are required

for SKD parts assembly plant. However, as indicated earlier we have shifted to CKD-2

parts assembling in order to be entitled to the tax incentives. Considering the

productivity level of the local works around 77 workers and management staff are

required for the smooth and efficient operation of the envisaged assembly plant in full

capacity operation.

The concept of assembly line originated the motor vehicle manufacturing industry. The

production process of assembly of motor vehicle is preceded by extensive design work,

engineering, testing and production planning. These tasks often require years and huge

amount of money. But in our case the design and engineering parts of the work will be

accomplished by the clients principal.

Executives and manager establish guidelines to follow from the earliest stages of

planning and design the specialists help assess whether the vehicle will satisfy consumed

demand, meet safety and other local regulations and proves economically practical to

make .

Industrial production manager oversee-blue-collar worker supervisors

These supervisors (forman ) oversee skilled craft and repair workers, operators and

laborers , and coordinate all production activities scheduling, staffing equipment, quality

control and inventory control. A variety of manufacturing process are used like fitting

and fixing of parts, parts painting and electrical installation etc Through the assembly

process “ statistical process control “ (team work and quality control) is emphasized.

From initial planning to final assembly, numerous tests and inspections insure that

vehicles meet quality and safety standards. Operators, technicians, and laborers comprise

over half of the industry employment. These workers need physical stamina and


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coordination, and they must adapt to technological advances. Assembles put together

various parts to form subassemblies and then put the subassemblies together to build a

complete motor vehicle. Some perform other routine takes such as mountings and

inflating fires, adjusting brakes, and adding fuel, oil, brake fluid and coolant . Grinders

and polishers works on metal, plastic and glass parts.

Keeping the plant running smoothly requires vehicle and mobile equipment operators and

manual laborers. Industrial truck and tractor operators carry raw materials and

equipments around the factory, warehouses. Truck drivers carry raw materials to plant

( initiallly it will be economical to purchase this service). Among unskilled laborers,

freight, stock, and material movers move materials to and from storage areas, loading

docks, delivery vehicles, and containers. Machinery feelers and off bearers feed

materials into or remove materials from machine or equipment on the assembly line, and

hand packers manually package or wrap materials. Vehicle washers and equipment

cleaners clean vehicles and machinery using various cleaning equipment and agents.

Accordingly, the type of labour required are shown in Table 7.2.


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Table 7.1

MANPOWER REQUIEREMENT

S.No

Job title

QualificationNumber

of persons Experience

1 Plant manager BSC Mech. Eng. 1 8 years 2 Secretary Secretarial science 1 3 Years

3

Technical and production department head BSC. Mec. Eng. 1 6 years

4 Production head Chinese 1 6 years 5 Commercial department head BSC in marketing 1 4 years 6 Financial department head BA Accounting 1 4 years 7 Administration department head BA. Mang.. 1 14 years 8 Inspection Head Chinese 1 9 Inspectors 10+3 2 10 years 10 Forman Chinese 3 11 years 11 After sales service head 10+3 1 2 years 12 Receptionist 10+3 1 8 years 13 Senior machines 10+3 14 2 years 14 Mechanics 10+3 16 12 years 15 Upholstery senior No formal education 3 2 years 16 Upholstery No formal education 3 8 years 17 Senior electrician 10+3 3 2 years 18 Electrician 10+3 2 2 years Purchaser 10+3+Driving license 1 2 years


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S.No

Job title

QualificationNumber

of persons Experience19 20 Transistor 10+2+Transtior license 1 5 years 21 Store head College Diploma 1 2 years 22 Store man 10+3 1 5 years 23 Sales coordinator College dip marketing 1 2 years 24 Sales man 10+3+Driving license 2 2 years 25 Senior accountant 10+3 1 2 years 26 Accounts clerk 10+3 1 1 years 27 Forklift driver 10th Grade+2GradeDrL 1 0 years 28 Service car driver 10th Grade+ 3GradeDrL 1 3 years 29

Laborer 10th Grade 10 0 years

Total 77

7.4 LABOUR COST

In estimating the labour cost of the envisaged assembly plant the various activities that

have to be performed to assemble a vehicle was taken in to consideration and for each

activities based on the complexity of the task the number of workers and the time

required to achieve the task is estimated first than based on the estimated number of

workers and time the labour cost for each task is estimated. ( See Table 7.2)


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Table 7.2

ESTIMATED LABOUR COST FOR ASSEMBLING ONE UNIT VEHICLE

Sr.No ActivitiesLabour Cost

( in Birr )1 Engine and engine parts mounting 1,200 2 Fuel system and air filter assembly 550 3 Muffler system assembly 450 4 Clutch system assembly 850 5 Transmission system assembly 500 6 Front axle and rear axle assembly 400 7 Propeller shaft system assembly 200 8 Deferential assembly 450 9 Frame system assembly 350 10 Suspension system assembly 450 11 Wheel system assembly 200 12 Steering system assembly 1,000 13 Braking system assembly 900 14 Electronic parts assembly 1,500 15 Instrumental panels assembly 500

16Name plate and in car tools system assembly

250

17 Door wiring harness system assembly 450 18 Lamp system assembly 250 19 Body suspension system assembly 400 20 Body floor system assembly 1,250 21 Wiper and wind shield assembly 350 22 Front well system assembly 1,100 23 Side window system assembly 850 24 Sun roof and rack system assembly 550 25 Safety belt system assembly 150 26 Front door lock and front door system 350 27 Rear door lock and rear door system 350 28 Tail door system assembly 150 29 Seat system assembly 250 30 All hock and lock assembly 150 31 Sound system assembly 150 32 A/C system assembly 250 33 Side wall system assembly 350 34 Engine hood system assembly 600 35 Painting 1,500


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Sr.No ActivitiesLabour Cost

( in Birr )36 Others 2,500 37 Over head 10,850

Total 32,550

As can be seen from the above Table the cost of labour for assembling one vehicle is

estimated at Birr 32,550. Therefore, at full capacity operation the total labor cost is

estimated at Birr 17,837,400.

7.3 Training Needs

Faced with technological advances and the continued need to cut costs manufactures

increasingly emphasize continuing education and cross-train many workers, that is, they

train workers to do more than on job. This has led to a change in the profile of the

industry’s workers. Standards for new hires are much higher now than in the part.

Employers increasingly require a minimum of a high school diploma as a number of

unskilled jobs declines. The average worker is expected to work with much less

supervision than in the part and needs to be self-motivated. Because many plants now

emphasize the team approach, employees interact more with co-workers and superiors to

determine the best way to get the job done. Therefore, employers look for employer with

good communication and math skills, as well as an aptitude for computers, problem

solving and critical thinking. However, manual dexterity will continue to be necessary in

many production jobs.

Opportunities for training and advancement vary considerably by occupation, plant size

and sector. Training programs in large auto and light truck assembly plants usually are

more extensive than those in smaller parts and accessories, truck trailer, and motor home

factories production workers receive most of their training on the job or through more

formal apparent ship programs. Training normally takes from and few day to several

months and may combine class room with on the job training under the guidance of more


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experienced workers. Attaining the highest level of skill in some production jobs

requires several years, however training includes coworkers in health and safety,

teamwork and quality control with advanced training and experience, production workers

can advance to inspector or more skilled production, craft or repair jobs.

Motor vehicle manufactures provided training opportunities to all workers, regardless of

educational background. Manufactures pay tuition for workers who enroll in colleges,

commercial schools or technical institutes. But at a moment the inclusive of Chinese

production and quality control head and the three Forman in the contract at least for the

first production year will create a great opportunity for the realization of on the job

training for the production worker. Moreover the following trainings program are

rewarded for the first year.

Occupational health and safety

Right and responsibility of workers according to labor-proclamation

Basic concept of Quality assurance

Team-work or IPM

Labuor management relationship

The total cost of such training is estimated at Birr 40,000.

CHAPTER EIGHT – FINANCIAL ANALYSES

8.1 BASIC ASSUMPTION FOR FINANCIAL ANALYSIS

Based on the results of the market and technical studies, the financial analysis is made

under three scenarios. The first scenario assumes that the investment requirement for

acquiring Abay Trade and Technical SC will be covered by equity capital and the

additional investment requirement will be covered through bank loan . Under the second

scenario, it is assumed that the total financial requirement i.e. investment requirement for


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acquiring Abay Trade and Technical SC and the additional investment will be covered

through 30 per cent equity and 70 per cent long-term bank loan. The third scenario

assumes that the envisaged assembly plant will rent the facilities of Abay Trade and

Technical SC and the additional investment will be covered through 30 per cent equity

and 70 per cent long-term bank loan. For all scenarios the following assumptions are

made.

8.1.1 PROJECT LIFE

It is assumed that the processes of acquiring Abay Trade and Technical SC, financial

arrangements , negotiation with the parts supplier and carrying out modification of the

existing building and machinery at Abay Technical will take one year. With regard to

operational life of the project, a standard assumption of 10 years is considered. Hence,

the costs and benefits of the project are computed over 11 years.

8.1.2 REPAIR AND MAINTENANCE COST

The annual repair and maintenance cost of the envisaged plant is estimated based on the

following rates.

Item Rate

a) Machinery and equipment 1% of total cost

b) Building and civil works 1% of total cost

c) Vehicles including tyres and tubes 11% of total cost

d) Office furniture and equipment 1% of total cost

8.1.3 INSURANCE COST


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Insurance cost is computed based on the following rates

Item Rate

a) Machinery and equipment 0.4 % of total cost

b) Vehicles 4% of total cost

c) Fidelity guaranty 0.3 % of daily sales

8.1.4 DEPRECIATION AND AMORTIZATION

The following depreciation rates are applied to depreciate the assets of the project:

Buildings and associated Civil works 5%, linear to scrap Value

Agricultural Machinery and Implements 10%, linear to scrap Value

Vehicles 20% linear to scrap Value

Office furniture 10%, linear to scrap Value

8.1.5 TERMINAL (SALVAGE VALUE)

Salvage value of the project is computed based on the following rates

a) Building 50%

b) Machinery and equipment 20%

c) Office furniture and equipment 20%

d) Vehicles 15%

e) Working Capital 100%

8.1.6 WORKING CAPITAL


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The working capital requirement of the project is computed based on the minimum days

of coverage required for the various components that constitute the working capital.

Accordingly, the following minimum days of coverage are assumed.

Inventory Minimum Days of coverage

Raw materials 90

Work in progress 5

Finished product 30

b) Accounts Receivables 30

c) Cash in hand 5

d) Accounts Payable

Repair and Maintenance 30

Labor 30

8.1.7 DISCOUNTING

The total investment and equity capital of the project are discounted at 10.5 per cent over

the life of the project.

8.1.9 INCOME TAX

According to the Investment Incentives Council of Ministers Regulations No.7/1996, the

project is entitled to the following incentives:

Income tax exemption for 3 years

Losses carry forward for 2 years, and

Exemptions from payment of custom duty on machineries and equipments

For the rest of project’s life, a 30% tax rate is applied on the taxable income._____________________________________________________________Feasibility Study For The Establishment Of Station Wagon And Pick Up

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8.1.10 BANK LOAN

The type of loan is assumed to be a constant principal bank loan, with a loan repayment

period of eight years. The annual interest rate including the various fees is taken to be 8.5

per cent. The interest accrued during construction period is capitalized.

8.1.11 OTHER ASSUMPTIONS

Travel and per diem Birr 140,000

Audit fee Birr 15,000

Employees benefit 17% of gross salary

Telephone, fax, stationery Birr 100,000

Cleaning materials Birr 10,000

Promotion expense Birr 150,000

8.2 FINANCIAL ANALYSIS RESULTS

The financial analysis of this project is carried out based on the results of the investment

and operational costs discussed in previous sections and the above assumptions. The

analysis is done using Computer Software for the Financial Analysis and

Reporting(COMFAR)software developed by UNIDO.

8.2.1 SCENARIO I

a) Investment Capital


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Total investment cost of the project is estimated at Birr 44.11 million ( See Table 8.1).

Out of the total investment requirement of the project Birr 24.87 million is the value of

existing asset at Abay Technical and Trading Share Company while Birr 19.23 million is

accounted by additional investment costs.

Table 8.1

INVESTMENT COST ( in 000 Birr)

Items

Existing asset at Abay

Technical and Additional

TotalTrading Share

Company investmentCivil works, structures and buildings 22,540.55 250 22,790.55Plant machinery and equipment 889.75 3,187.66 4,077.41Vehicles 1,045.00 600 1,645.00Office furniture and equipment 402.45 - 402.45Initial working capital* - 14,854.99 14,854.99Pre production cost** - 343.2 343.20TOTAL INVESTMENT COSTS 24,877.75 19,235.85 44,113.60

* The working capital required will be mainly used for the procurement of material and to

cover related operational expenses. Based on the minimum days of converge indicated

earlier the total working capital required at full capacity operation is Birr 28.04 million.

However, only the initial working capital of Birr 13.46 million during the first year of

operation will be funded through external sources during the remaining years the working

capital requirement will be financed by funds generated internally. ( for detailed working

capital requirement see Annex 9.A.1)

** Pre operation expenditure is interest during construction which is capitalized


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b) Cost Of Production

Operating cost of the project includes material cost, labor cost, depreciation expense etc

as shown below in Table 8.2 for a selected year. The detailed cost breakdowns are

indicated in Annex 9.A.2. From the total annual cost of production which amounts to Birr

112.15 million the highest share is accounted by raw material (93.82%) followed by cost

of labour (1.51%) and financial cost (1.16%)

Table 8.2

OPERATING COST FOR SELECTED YEAR( YEAR 4 in 000 Birr)

Particulars Cost%

shareRaw materials 105,230 93.82Utilities 540 0.48Spare parts 298 0.27Repair and maintenance 240 0.21Labour 1,693 1.51Labour overhead costs 412 0.37Administrative overhead costs 728 0.65Depreciation 1,218 1.09Marketing costs 500 0.45Financial costs 1,296 1.16TOTAL PRODUCTION COSTS 112,156 100

c) Financial Flow

In this scenario it is assumed that the cost of acquiring Abay Technical and Trading Share

Company will be covered by the promoter of the project while the additional investment

cost will be covered through bank loan. Table 8.3 shows the proportion of equity and

bank loan.

Table 8.3


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SOURCE OF FINANCE

Equity Loan Total 24,877.75 17,622.32 42,500.07

d) Loan Repayment Schedule

It is assumed that the bank loan including interest will be paid back with in eight years.

The type of loan is assumed to be constant principal. Table 8.4 shows detail repayment

schedule.

Table 8.4

LOAN REPAYMENT SCHEDULE

YearDisbursemen

tCapitalized

interestRepaymen

tDebt

balanceInterest payable

1 3,827.44 325.33 0 4,152.78 02 13,469.54 0 0 17,622.32 1,497.903 0 0 2,372.09 15,250.23 1,497.904 0 0 2,573.72 12,676.51 1,296.275 0 0 2,792.48 9,884.03 1,077.506 0 0 3,029.84 6,854.19 840.147 0 0 3,287.38 3,566.81 582.618 0 0 3,566.81 0 303.189 0 0 0 0 010 0 0 0 0 011 0 0 0 0 0

Total 17,296.98 325.33 17,622.32 0 7,095.49

e) Cash Flow

The projected cash flow of the project shows that the project would generate positive net

cash flows throughout the operation years. Cumulative cash flow generated by the project


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towards the end of the operation (year 11) will amount to 129.79 million. ( See Annex

9.A.3)

f) Income Statement

Based on the projected profit and loss statement shown in Annex 9.A.4, the project will

generate a profit through out its operation life. Annual net profit after tax will grow from

Birr 6.5 million during first year of operation to Birr 10.98 million. Net profit as % of

sales revenue is modest which lies between 8-10 %. Net profit to equity and net profit to

total investment or return on investment (ROI) are also attractive.

g) Discounted Cash Flow

The discounted cash flow also shows that the project is viable with a net present value

(NPV) of Birr 48.01 million, discounted at 10.5 per cent, and an internal rate of return of

25.39 per cent.

The project will pay back the total investment in about 5 years (See Annex 9.A.5 for

details).

h) Balance Sheet

The positive financial performances are manifested in the balance sheet. As can be seen

from the projected balance sheet depicted in Annex 9.A.6, the net worth of the project,

which was about Birr 24.87 million at the beginning of the operation year, has risen to

Birr 129.79 million at the end of the project life.

Important financial efficiency ratios like Current assets to current liabilities, and net cash

flow to sales all show that the project is highly liquid and has sound financial

performance.

i) Break-Even Analysis


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The break-even analysis establishes a relationship between production costs and

revenues. It indicates the level of production at which costs and revenue are in

equilibrium. To this end, using full capacity operation costs of the 4 th year of operation,

the break-even point for capacity utilization is computed as followed.

BE = Fixed Cost = 36 %

Sales – Variable cost

j) Sensitivity Analysis

A sensitivity analysis on selected cost components has been further conducted to test the

strength and viability of the project. In view of this, extreme conditions like cost

escalation on investment and operating cost and a decrease of revenue due to various

factors have been therefore examined and the result is as shown in Table 8.5.

Table 8.5

SENSITIVITY ANALYSIS ON KEY VARIABLES

Item IRR ( %)

Investment cost

Increase by 10%

Increase by 20%

Increase by 30%

23.71

22.23

20.92

Operating cost

Increase by 5%

Increase by 10%

Increase by 15%

15.83

12.21

7.01

Revenue

Decrease by 5%

Decrease by 10%

14.81

10.71


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Decrease by 13% 6.3

As can be seen from the above Table ,the project is very sensitive to decrease in revenue

and increase in production cost in case of above 13% decrease in revenue and 15%

increase in production coast the project will not be viable. However, investment cost

increase by 10-30 % still show an IRR between 23.71 and 20.92%.

k) Ratios

In financial analysis financial ratios and efficiency ratios are used as an index or yard

stick for evaluating the financial position of a firm. It is also an indicator for the strength

and weakness of the firm or a project. Using the year-end balance sheet figures and other

relevant data, the most important ratios has been carried out over the period of the project

life and all the results of the financial and efficiency ratios for the project are found to be

satisfactory (see Annex 9.A.4 and 9.A.6)

8.2.2 SCENARIO II

a) Investment Capital

Total investment cost of the project is estimated at Birr 43.88 million ( See Table 8.6).

Out of the total investment requirement of the project Birr 24.87 million is the value of

existing asset at Abay Technical and Trading Share Company while Birr 19 million is

accounted by additional investment costs.


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Table 8.6

INVESTMENT COST ( in 000 Birr)

Items

Existing asset at Abay

Technical and Additional

Total

Trading Share

Company investmentCivil works, structures and buildings 22,540.55 250 22,790.55Plant machinery and equipment 889.75 2,977.44 3,867.19Vehicles 1,045.00 600 1,645.00Office furniture and equipment 402.45 - 402.45Initial working capital* - 13,469.54 13,469.54Pre production cost** - 1,707.96 1,707.96TOTAL INVESTMENT COSTS 24,877.75 19,004.94 43,882.69

* The working capital required will be mainly used for the procurement of material and to

cover related operational expenses. Based on the minimum days of converge indicated

earlier the total working capital required at full capacity operation is Birr 28.04 million.

However, only the initial working capital of Birr 13.46 million during the first year of

operation will be funded through external sources during the remaining years the working


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capital requirement will be financed by funds generated internally. ( for detailed working

capital requirement see Annex 9.B.1)

** Pre operation expenditure is interest during construction which is capitalized

b) Cost Of Production

Operating cost of the project includes material cost, labor cost, depreciation expense etc

as shown below in Table 8.7 for a selected year. The detailed cost breakdowns are

indicated in Annex 9.B.2. From the total annual cost of production which amounts to Birr

113.33 million the highest share is accounted by raw material (92.85%) followed by

financial cost (2.18%) and cost of labour (1.49%).

Table 8.7

OPERATING COST FOR SELECTED YEAR( YEAR 4 in 000 Birr)

Particulars Cost%

shareRaw materials 105,230 92.85Utilities 540 0.48Spare parts 298 0.26Repair and maintenance 240 0.21Labour 1,693 1.49Labour overhead costs 412 0.36Administrative overhead costs 728 0.64Depreciation 1,218 1.07Marketing costs 500 0.44Financial costs 2,476 2.18TOTAL PRODUCTION COSTS 113,335 100

c) Financial Flow


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In this scenario it is assumed that the source of finance will be 30% equity and 70% loan.

Accordingly, . Table 8.8 shows the proportion of equity and bank loan.

Table 8.8

SOURCE OF FINANCE

Equity Loan Total 12,652,419 31,230,271 43,882,690

d) Loan Repayment Schedule

It is assumed that the bank loan including interest will be paid back with in eight years.

The type of loan is assumed to be constant principal. Table 8.9 shows detail repayment

schedule.

Table 8.9

LOAN REPAYMENT SCHEDULE

Year DisbursementCapitalized

interest RepaymentDebt

balanceInterest payable

1 20,093.63 1,707.96 0 21,801.59 02 9,428.68 0 0 31,230.27 2,654.573 0 0 2,105.16 29,125.11 2,654.574 0 0 2,284.10 26,841.01 2,475.635 0 0 2,478.25 24,362.76 2,281.496 0 0 2,688.90 21,673.86 2,070.837 0 0 2,917.46 18,756.41 1,842.288 0 0 3,165.44 15,590.97 1,594.299 0 0 3,434.50 12,156.47 1,325.23


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10 0 0 3,726.43 8,430.03 1,033.3011 0 0 4,043.18 4,386.85 716.5512 0 0 4,386.85 372.88

Total 29,522.31 1,707.96 31,230.27 19,021.64

e) Cash Flow

The projected cash flow of the project shows that the project would generate positive net

cash flows throughout the operation years. Cumulative cash flow generated by the project

towards the end of the operation (year 11) will amount to 108.06 million. ( See Annex

9.B.3)

f) Income Statement

Based on the projected profit and loss statement shown in Annex 9.B.4, the project will

generate a profit through out its operation life. Annual net profit after tax will grow from

Birr 5.35 million during first year of operation to Birr 10.48 million. Net profit as % of

sales revenue is modest which lies between 7-10 %. Net profit to equity and net profit to

total investment or return on investment (ROI) are also attractive.

g) Discounted Cash Flow

The discounted cash flow also shows that the project is viable with a net present value

(NPV) of Birr 50.03 million, discounted at 10.5 per cent, and an internal rate of return of

25.87 per cent.

The project will pay back the total investment in about 5 years (See Annex 9.B.5 for

details).

h) Balance Sheet


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The positive financial performances are manifested in the balance sheet. As can be seen

from the projected balance sheet depicted in Annex 9.B.6, the net worth of the project,

which was about Birr 7.46 million at the beginning of the operation year, has risen to Birr

108.43 million at the end of the project life.

Important financial efficiency ratios like Current assets to current liabilities, and net cash

flow to sales all show that the project is highly liquid and has sound financial

performance.

i) Break-Even Analysis

The break-even analysis establishes a relationship between production costs and

revenues. It indicates the level of production at which costs and revenue are in

equilibrium. To this end, using full capacity operation costs of the 4 th year of operation,

the break-even point for capacity utilization is computed as followed.

BE = Fixed Cost = 38 %

Sales – Variable cost

j) Sensitivity Analysis

A sensitivity analysis on selected cost components has been further conducted to test the

strength and viability of the project. In view of this, extreme conditions like cost

escalation on investment and operating cost and a decrease of revenue due to various

factors have been therefore examined and the result is as shown in Table 8.10.


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Table 8.10

SENSITIVITY ANALYSIS ON KEY VARIABLES

Item IRR

Investment cost

Increase by 10%

Increase by 20%

Increase by 30%

21.71

19.23

17.92

Operating cost

Increase by 5%

Increase by 10%

Increase by 15%

14.83

10.21

5.01

Revenue

Decrease by 5%

Decrease by 10%

Decrease by 13%

12.81

10.01

5.30

As can be seen from the above Table ,the project is very sensitive to decrease in revenue

and increase in production cost in case of above 12 % decrease in revenue and 14%

increase in production coast the project will not be viable. However, investment cost

increase by 10-30 % still show an IRR between 21% and 17%.

k) Ratios

In financial analysis financial ratios and efficiency ratios are used as an index or yard

stick for evaluating the financial position of a firm. It is also an indicator for the strength


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and weakness of the firm or a project. Using the year-end balance sheet figures and other

relevant data, the most important ratios has been carried out over the period of the project

life and all the results of the financial and efficiency ratios for the project are found to be

satisfactory (see Annex 9.B.4 and 9.B.6)

CHAPTER NINE – CONCLUSION AND RECOMMENDATION

9.1 CONCLUSION

We reached to the followings conclusion after the assessment of the market condition the

local management capability and productivity level of work force, rules and regulation of

the country and other relevant external environments.

The idea of establishment of SKD –parts local assembly plant couldn’t give the

necessary out-put to win the automotive market in Ethiopia;

CKD-2 parts assembly plant could be ideal solution to meet the requirement of

Ethiopian customs Authority to be entitled to the tax privilege;

There should be a FOB price difference between fully assembled automobile,

SKD,CKD-1 and CKD-2 parts, which should be visible to any interested party

also could be used as a key parameter to win the market by reducing the cost of

production using Ethiopian Customs Authority’s tax privilege and also

investment support’s from Ethiopian Investment Authority and other government

regulatory institution;

Unless other wise the cost difference between the above three different parts

assembly stage create clearly visible selling price gap, it will be difficult to

entertain customers with duty free privilege specially in 4WD pick-up sales and

also can hindered the marketing process of station wagon;


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The productivity and quality of local labor force need to be address to get the

intended result;

Flexible automotive assembly plant is needed to give a room to adjust production

output according to the market condition;

Implementation of QMS and IPM is vital for the successes of the assembly plant

The study shows that there is a relatively large and progressively growing local

market for station wagons and pick ups

The financial analysis has been done under two scenarios. The first scenario

assumes that the investment requirement for acquiring Abay Trade and Technical

SC will be covered by equity capital and the additional investment requirement

will be covered through bank loan . Under the second scenario, it is assumed that

the total financial requirement i.e. investment requirement for acquiring Abay

Trade and Technical SC and the additional investment will be covered through 30

per cent equity and 70 per cent long-term bank loan. The analysis has revealed

that the project is viable in both scenarios considered for this study with a Net

Present Value (NPV) of Birr 48.01 million and 50.03 million, discounted at 10 per

cent, and an Internal Rate of Return of 25.39 and 25.87 per cent for scenario one

and two respectively.

9.2 RECOMMENDATION

We recommend the followings for the successful implementation of the project and

viability of the assembly plant.


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Since the automotive assembly plant mostly receive parts and component from motor

vehicle parts manufacturing plant from both domestic and foreign manufactures it will

not be to the benefit of the supplier to deliver SKD or CKD parts with out value addition.

Therefore they will not be ready to give a price difference between the fully assembled

vehicle, SKD and CKD parts. Moreover the supplier can not be sure on the productivity

and quality of local workforce, for this reason they don’t want to be committed to

establish a CKD parts assembly plant in an under-develop country like Ethiopia without

their direct involvement and control.

In line with the above facts we recommend to create a joint-venture with the supplier.

The supplier will make a profit from motor vehicle assembly plant in Ethiopian fore this

reason they will create a conducive-atmosphere to reduce cost of production and also

extend supports to increase productivity, quality of workmanship and to get an acceptable

quality end product.

The partnership will pave a better ground of solve any production and marketing and

sales related problems emanated, during the operation of the assembly plant. In other

words it will create a better capacity to analyze the will be arising problems and to give

timely and appropriate solution.

It will be also easier to adapt the Quality management system (QMS) and transfer the

experience of supplier’s integrated performance management system (IPM) and other

management tools to boast the out put of local-workforce

The study shows that there is a relatively large and progressively growing local market

for station wagons and pick ups. However, there are a lot of brand choices of vehicle to

compare and evaluate before making a purchase decision. With the severe competition

among vehicle brand, it is very critical to understand the customer requirement and

provide the products that satisfy the customer needs. The study reveals that the following

attributes are critical factors considered while choosing vehicles.


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Attractive Interior and exterior design

Availability of safety measures like air bags

Availability of central locking system and good quality stereo

Availability and cost of spare part and

fuel efficiency.

Therefore, the above attributes should be given top priority by the envisaged plant

Besides, quality control should also be given top precedence so that the envisaged

assembly plant could achieve its aims through producing top quality products that can

compete with imported vehicles in all aspects.

.

Moreover, in order to successfully penetrate the market it is very essential to adopt

efficient distribution channel and competitive price for the products. Therefore, in the

long run the envisaged assembly plant should open show rooms and service centers in

strategic locations such as Awasa, Bahere Dar, Mekele and Dire Dawa.


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Annex 9.A

FINANCIAL ANALYSES SUPPORTING TABLES


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Annex 9.B

FINANCIAL ANALYSES SUPPORTING TABLES


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Documents

Draft Report