Tunisia boasts Africa’s sixth-largest manufacturing sector behind Egypt, South Africa and Morocco, and ahead of Kenya. Tunisia’s geography is an important asset for growth, offering direct access to the Mediterranean Sea and proximity to the European market, to which the bulk of the country’s exports are destined. Despite such logistical advantages, manufacturing comprised just 1.4% of Tunisia’s GDP in 2009, reflecting diminished exports following the EU slowdown. By the beginning of 2011, manufacturing had rebounded somewhat to comprise 2.4%, although still lagged behind a number of larger primary and tertiary industries. In the years since Tunisia’s 2011 revolution, manufacturing growth has sometimes stumbled, declining from approximately 2.3% in 2014 to 1% of GDP in 2015.
Uneven Growth
Despite manufacturing’s smaller contributions to overall GDP, industrial investment in and exports of manufactured products both rose between 2014 and 2015, by 4.9% and 3.7%, respectively. However, growth was uneven across industrial subsectors. While exports of textiles, clothing and leather goods all posted sizeable decreases between 2014 and 2015, exports of construction and food products rose by 9.1% and a remarkable 117.8%, respectively. “In order to cope with international food franchises, local small and medium-sized enterprises (SMEs) must modernise their information system and acquire infrastructure that meet international standards. A solution to funding those investments is going public,” Hatem Denguezli, CEO of Land’or, a Tunisian cheese products company, told OBG.
This uneven growth reflects broader trends. Though certain manufacturing subsectors, such as automotive parts and aeronautics, have taken significant strides over the last decade, others, such as textiles and chemical products, have lagged behind. These subsectors, which together once comprised 65% of Tunisia’s exports, have seen a slide in their contributions, overtaken by Tunisia’s three fastest growing subsectors for industrial investment, which are agribusiness, construction products, and the manufacture of machinery and electrical equipment.
Addressing Challenges
The low percentages are not out of line with many other regional emerging markets, but given Tunisia’s success with certain segments – such as automotive component manufacturing, where the country has eked out a key role in global supply chains – the scope for improvement is significant. However, realising the country’s potential will involve addressing a number of challenges.
The year-on-year decline in 2015 was mainly due to the decline of the value-added in industry, particularly in manufacturing industries, and decline in local and foreign demand due to the poor economic climate. Productivity, which the IMF dubs “particularly worrisome” and is below Tunisia’s emerging market peers, and industrial action, with strikes a regular occurrence, are also concerning. Other constraints mirror those in North Africa’s other large manufacturing economies like Egypt and Morocco, including problematic access to finance, stringent labour regulations and ageing investment codes. Many industries also suffer from expansion of the informal market. “The informal sector represents around 55% of the car market in Tunisia; this is due to the fact that Tunisians living abroad are allowed to import one car per person with a tax break, which gives them the opportunity to sell it for a very competitive price in Tunisia, and has created a sizeable industry. This informal market is the result of an irregular quota system that heavily penalises the rest of the sector,” Mehdi Mahjoub, CEO of Kia Motors Tunisia, told OBG.
Exports
Industrial production over the past decade has been driven by export growth in mechanical and electrical equipment, whose main exports are automotive and aeronautical components, including wiring, cables and cable harnesses, electrical command apparatus, transformers and printed circuits. According to Tunisia’s Foreign Investment Promotion Agency (FIPA), in 2014 Tunisia had 824 companies focused on mechanical and metallurgical production and 454 companies associated with electrical and electronic industries, including household appliances. Approximately one-third of those enterprises are fully export oriented. Factory-produced goods are aimed mainly at export to European markets, especially France and Italy – countries which have outsourced some assembly to Tunisia.
Tunisia’s investment-friendly offshore regime has succeeded in attracting large-scale foreign investment, particularly in mining, energy and banking, resulting in the creation of numerous offshore firms clustered primarily in coastal areas. These firms are largely spared the bureaucratic red tape that burdens the onshore sector. Yet barriers to competition and market entry that weaken Tunisia’s onshore sector have rendered many backbone services, on which offshore firms rely, inefficient. According to the World Bank, this “weak performance” of the onshore sector has “undermined the potential of the offshore sector” so that offshore firms focus on low value-added activities and assembly.
The sophistication of Tunisia’s main export products, measured by the product complexity index (PCI), remains modest. PCI scores for main export groups include machinery and electrical (0.63), textile (-1.74) and mineral products (-3.35). Even in mechanical and electrical manufacturing, Tunisia has attracted predominantly assembly tasks at the low end of the value chain, according to the World Bank.
Industrial Clustering
More than 83% of industrial firms in Tunisia are concentrated in specialised industrial zones along the Sahel (coast) – a region stretching from the city of Bizerte, on Tunisia’s northern coast, to Sfax on the eastern coast. Aeronautics and automotive parts manufacturing tend to be clustered in the Tunis governorate (province), with some also clustered in the Enfidha industrial zone near Sousse. There is also a cluster for mechanics and electronics parts manufacturing in Sousse. According to Tunisia’s Ministry of Industry (MoI), IT clusters exist in the Gazala region, near Tunis and in Sfax, which also houses many agro-industrial companies. Textiles production centres are focused in Tunis, as well as in Bizerte and Monastir.
Benefits
The presence of a large number of companies operating in related sectors in a single geographic area can provide a host of benefits. Efforts to encourage clustering extend back to the late 1980s when Tunisia adopted a structural adjustment programme to speed up privatisation and deepen integration with European markets. To achieve such goals, Tunisia committed more consciously to clustering as a means to boost productivity levels of both firms and the labour force. However, industrial clustering has also contributed to sharp regional disparities, as the development of coastal zones has outstripped poorer rural and interior regions. “Today, Tunisia is reaping the benefits of this [industrial clustering] policy,” Lilia Kammoun, a senior analyst with Tunisie Valeurs, a local business management consultancy firm, told OBG. “Regional disparities fracture north and south, and unemployment and poverty in the interior regions is breeding social tensions.”
In the short term, the government is looking simply to improve transportation and IT networks in Tunisia’s underdeveloped interior. Few international advisors or Tunisian policymakers are thinking seriously about developing an actual industrial cluster in Tunisia’s interior. Instead, international financial institutions like the World Bank have encouraged Tunisia to focus on much-needed upgrades of its existing industrial areas, such as Radès Port, many of which are failing to meet their capacity.
Agribusiness
An especially resilient subsector of Tunisia’s economy is agribusiness, accounting for roughly 10% of Tunisia’s overall exports and 16% of its jobs in 2014. Olive oil dominates Tunisian agribusiness, representing 40% of Tunisia’s agricultural exports. 2015 was an exceptionally good year for Tunisia’s olive oil industry, with yields 400% higher compared to the previous season (see Agriculture chapter). The bumper crop delivered record export growth, with agricultural exports up approximately 118% compared to 2014. Approximately 70% of these exports went to EU markets, mainly Spain and Italy.
Due to sporadic rainfall and because olive trees cannot produce a good crop two years in a row, 2016 exports are expected to be lower. To boost long-term agribusiness capacity, the Tunisian government offers a range of incentives, including fiscal benefits to foreign investors, which allow foreigners to retain stakes of up to 66% in agricultural businesses, provided they have a local partner. According to the CEO of Tunisia’s Agency for Agricultural Investment Promotion, Abderrahmane Chafii, foreign entrepreneurs account for 5-10% of total agribusiness investments.
Cement
Tunisia’s total installed cement capacity was approximately 13.5m tonnes in 2014. Decreased construction due to the slower headline growth of recent years impacted the production of construction materials in 2015, slowing industrial investment in the construction subsector by 22.5% from 2014. However, exports of construction materials, particularly cement – which accounts for the bulk of construction materials – rose in 2015 as manufacturers sold surplus product to neighbouring countries, especially Algeria. Tunisia has nine cement plants – one produces white cement while the rest produce Portland (grey) cement. Three of these companies are public and produce more than 5m tonnes, while the other six are private, belonging to multinational groups like Prasa and Cimpor.
The sector saw a new arrival with the launch of full production by Carthage Cement in 2015. In February 2015 Carthage Cement sought to increase market share by lowering its prices of cement by TD6 (€2.75) per tonne for bagged cement and TD10 (€4.59) per tonne for bulk, a price drop of between 4.5-7.5% per tonne. The move marks a new era of price competition in the market. Until December 2013 the state set fixed prices for cement, so there was no competition between companies on pricing. In January 2014 the Tunisian government stopped subsidising energy for the cement industry, which has been a huge consumer of energy (responsible for 11% of Tunisia’s total electric consumption). In accordance with this policy of liberalisation, cement prices were allowed to float freely on the market.
Plastics
Tunisia’s plastics industry has recorded steady average annual growth rates of approximately 10% for the last five years, and by the end of 2014, foreign direct investment in plastics reached TD454m (€208.2m). Tunisia has 500 plastics manufacturing companies employing at least 11,000 people. Of these companies, 63 are joint ventures or with foreign capital, of which 42 are fully exporting.
Growth in the sector has benefited from a range of trends, including a rise in packaging materials for agro-industrial and food processing clients, but it has seen the biggest boost in supplies for public infrastructure, such as high-density polyethylene pipes and polyvinyl chloride pipes, known as PCV pipes. “This growth is related to efforts by the Tunisian government to accelerate the construction of basic infrastructure in all regions of the country, because until 2011 it was mainly greater Tunis, the Sahel and to a lesser extent other coastal cities that were properly equipped,” Zied Lahiani, executive vice president of Inoplast, a local plastics company, told OBG. Due to the fact that so much growth has been driven by public infrastructure initiatives, plastics companies have been impacted by the government’s budgetary manoeuvres, including delays in payment, the postponement of projects and outright cancellation of others (see Economy chapter).
Mechanical & Electrical
Mechanical, electrical and electronic industries (MEEI) products comprised 18% of Tunisia’s industries and 26.4% of its employment in 2014, according to FIPA. Over 1000 companies are operating in the sector, 435 of which are fully exporting, with an average annual growth above 13%. The sector produces an estimated 45% of Tunisia’s industrial exports, 75% of which go to European markets, especially France.
The main MEEI products exported include cables and cable harnesses, electronic assemblies, electrical components, lighting materials, printed circuits, transformers and machined mechanical parts. While most of these products become automotive and aeronautic components, China’s Haier Group – the world’s largest producer of white goods – also has a production site near Tunis which produces a range of appliances for the domestic as well as export markets, including refrigerators, freezers, washing machines and microwave ovens.
Automotive Components
Tunisia enjoys a robust supplier network in the automobile wiring sector, and a large pool of skilled engineers and technicians, with hiring costs a fraction of those in the EU, and also lower than its North African peers. In the early 2000s Tunisia joined Morocco and Poland as leading producers of automotive components to international brands, especially French and German firms. Today, automotive parts comprise a sizeable chunk of MEEI exports. According to FIPA, Tunisia is the second-largest manufacturer of autoparts in Africa after Morocco, with more than 230 companies producing automotive components, 134 of which are fully exporting. However, strikes – a common feature of the industrial post-revolution landscape – have impacted the unionised automotive sector. “The biggest challenges for the automotive industry since the revolution have been security and strikes,” Khalil Ghorbel, finance and accounting director at SIA-AM, an autoparts producer, told OBG. “But I’m optimistic about 2016 because the security situation seems to be improving and there are fewer strikes now.”
A worldwide rebound of the auto industry boosted local production in 2015, with some manufacturers struggling to meet the growing demand because of import quotas in the country. “A major issue in Tunisia is that import quotas are not moving in step with car demand. As a result, because the import quotas are limiting supply for official car retailers, the difference is compensated for by the informal market,” Ibrahim Debache, CEO of Ennakl Automobile, a local car distributor, told OBG.
Aeronautics
Similar to the country’s auto components sector, Tunisia’s aerospace components industry has expanded steadily since 2003, supporting double-digit growth even post-revolution. Between 2003 and 2013, export volumes multiplied by 13 with growth of 21% in 2013. In 2014 the sub-sector employed over 13,000 people (1000 more jobs were created in 2015) and included more than 70 companies, many of which specialise in the production of Airbus components. Tunisian companies include Demat and Telnet, while international players include Latecoere Group, Sabena Technics, Zodiac Aerospace, Hutchinson and Stelia. “Almost all aerospace companies are investing and doing extensions now,” Wassim Srarfi, secretary general of GITAS, told OBG. In 2015 Zodiac Aerospace opened a new entity, Zodiac Composites Monuments Tunisia, which will produce galleys for airline companies. Stelia also announced an extension of TD67m (€30.7m), an investment which will stimulate growth amongst its partners and subcontractors at Park Aerospace Mghira industrial site in the Tunis governorate.
The Tunisian government offers incentives to offshore investors who locate their aeronautical factories in Tunisia, including the right to possess 100% of the project capital and freely repatriate dividends, simplified establishment procedures, an association agreement with the EU – which resulted in a free trade area since January 2008 – and preferential agreements with North African and Arab countries. “In Tunisia we don’t even speak of free zones but rather free points,” Srarfi told OBG. “That means a company can settle wherever they wish in Tunisia and benefit from offshore status.”
Textiles
The textiles industry has historically been one of the manufacturing sector’s major contributors, with thousands of companies operating in the segment. The industry, which in 2014 accounted for approximately 9% of the workforce with 280,000 low-skilled workers across almost 2000 clothing and textile companies, has played a critical role in Tunisia’s economic development. However, the sector has seen numerous setbacks over the last 10 years – in 2013 the industry attracted $24.5m in foreign investment, less than half of what it attracted in 2009. A major upheaval was the dismantling of the Multi Fibre Arrangement in 2005, which lifted restrictions on the amount textiles manufacturers were permitted to export worldwide. This resulted in the Tunisian textile industry taking a hit because of strong competition from Chinese and Indian goods.
According to the UN Conference on Trade and Development, trading figures over the last 10 years show that total annual exports of textile products peaked in 2008 with $4.3bn worth of goods exported. Post-revolution, the sector’s export earnings decreased to $3.2bn for both 2012 and 2013, and $3.3bn in 2014. This decline can be attributed to the deterioration of consumption levels, particularly from the EU, Tunisia’s biggest trade partner.
This trend has continued through recent years, further complicated by the post-revolutionary labour environment. Textile exports fell 7.5% in 2015 against a 3.7% overall increase in manufacturing industries’ exports. “Structural problems related to the country, particularly social demands and protests, held the textile sector back in 2015,” said Nafaa Naifar, president of the Economic Commission at the Tunisian Industry, Commerce and Handicrafts Union, an industry employers association. Organisation under the Tunisian General Labour Union is strong in the textiles industry, which some analysts indicate has made sector strikes more frequent. “Since the revolution, many textile companies closed in a very abrupt way, with employees arriving to work in the morning to find that the company had closed,” said Sami Adouani, an expert on labour unions at the Friedrich Ebert Foundation in Tunis.
Tunisia’s MoI also has a promotion programme for the textile sector, which aims to incentivise companies to move from subcontracting production of the final product to activities that would add more value. These include weaving of textiles and investment in “technical textiles” production, including fire-proof, anti-bacterial, biodegradable and composite textiles.
Phosphate
While Tunisia’s hydrocarbon reserves are more modest than its neighbours, it does have significant deposits of phosphates which have helped it eke out a sizeable global market share. In 2010 state-owned Gafsa Phosphate Company (CPG) – which controls phosphate production – produced 8.26m tonnes of phosphate, generating nearly 4% of Tunisia’s GDP and 10% of its exports, making Tunisia fifth among producers of phosphate worldwide.
Cumulative phosphate exports for the four years from 2011 to 2015, however, totalled only 11.2m tonnes – just 26% more than Tunisia’s annual phosphate export in 2010 alone. Four years of lower exports had reduced Tunisia to the ninth-largest exporter of phosphates globally. Residents of Gafsa – the phosphate mining region in Tunisia’s south – often say “when Gafsa moves, it is Tunisia that trembles,” and recent history appears to have proven them right. In the wake of the revolution, Gafsans protested regularly, demanding jobs within the CPG – the only major employer in the region – and decrying air and water pollution caused by the industry. Hampered by protests, phosphate production slowed to 2.2m tonnes in 2011. By 2014 it had recovered to 3.8m tonnes, largely thanks to relying on existing stocks of quarried phosphate rock.
The CPG has worked with local stakeholders as a result, looking to expand employment and improve community engagement, although protests continued through May 2015, at one point blocking production for several weeks. Production decreased by 37% compared to the same eight-month period in 2014. Exports in Tunisia’s chemicals industry, driven almost entirely by phosphate production, declined 19% in 2015. To help prevent further disruptions, the government has also taken a proactive role in addressing the situation, announcing several major local infrastructure projects, including a hospital, new roads and wells for impoverished farmers.
In line with this, an ambitious set of production upgrades in the Gafsa mining basin have been announced, which, if successful, aim to raise overall phosphate production from its current capacity of 9m tonnes to 19m tonnes by 2021. This upgrading project, set to begin in 2017, is part of the Tunisian government’s strategy to consolidate its position in the international phosphate market. According to initial estimates, the project’s cost reached TD100m (€45.9m) with an annual production capacity of 0.5m tonnes of phosphate, which could help create 400 jobs in its final phase. World demand also remains strong, and India continues to be a leading export market for over 50% of Tunisian phosphates.
Access To Finance
As is the case with most emerging markets, limited access to finance – due in large part to credit rationing from domestic banks – has made it difficult for local industrial firms to grow (see Banking chapter). “Financing mechanisms are totally unsuitable for this sector,” Lahiani told OBG. “Potential entrepreneurs, who are generally young, do not have the necessary funds or safeguards.”
The Bank of Financing Small and Medium Enterprises (BFPME), a public Tunisian bank, created assists in access to finance for the creation and expansion of SMEs in Tunisia. In 2015 BFPME co-financed over 1500 projects (over 18% of the project applications it received) at an average cost of TD700,000 (€321,02) per project. Other private and development-oriented initiatives, like Enda Inter-Arabe, a microfinance institution in Tunisia, have sought to extend microfinancing options to Tunisian SMEs.
Labour Market Productivity
Another challenge facing the industrial sector is labour productivity, which has been lagging since the 1990s. Between 2000 and 2010 labour productivity in manufacturing industries contributed only 0.9% per year to real GDP growth per capita, according to the World Bank. Total productivity per worker fell with the onset of the global financial crisis, creating a slump in growth from 2008 to 2010. Today, productivity of Tunisia’s manufacturing sector remains only slightly higher than its agricultural sector. On the World Economic Forum’s 2015-16 Global Competitiveness Report, Tunisia ranks poorly on labour market efficiency, standing 133rd out of 144 countries – dropping four places from 2014. Factors driving low productivity include women’s low participation in the workforce (130th), inflexibility of wage determination (121st), lack of labour-employer cooperation (125th) and rigid firing and hiring practices (119th). Termination of open-ended contracts, for instance, requires government approval. According to the IMF, firms unable to meet the regulations often “slip into informality” or keep their labour force size under a certain limit.
Informal Sector
In line with all North African economies, informal activity represents a challenge, with a number of Tunisia’s industries impacted by unregulated producers and distributors. “This grey market is circumventing Customs duties, and since they’re not paying import taxes it’s very tough for us to compete,” Ghalien Gharbi, commercial director at Le Moteur, Tunisia’s official distributor of MercedesBenz and Mitsubishi, told OBG.
Although it is impossible to measure by its very nature, some estimates indicate the informal economy accounts for 45-50% of GDP, with anecdotal evidence suggesting that it has grown since the revolution. The government has been looking to address the issue through tax exemptions but with limited success thus far. “Too many people make their livelihoods off the informal economy and the government has nothing to replace it with yet,” Adouani told OBG. “So it’s not about fighting it, but rather the most they can do now is try to regulate it through a policy of tax exoneration aimed at just integrating people into the informal system.” Adding to this topic, Kammoun told OBG, “This affects many sectors. I don’t see short-term signs of improvement.”
A solution to the problems generated by the informal market may include reducing Customs tariffs. “Customs tariffs must fall in order to both reduce the size of the informal market and increase the size of the car industry’s tax base. To achieve that requires more lobbying from automotive importers and retailers at the parliamentary level,” Lassaad Ben Ammar, managing director of Le Moteur, told OBG.
Training
Tunisia’s labour pool is relatively large for many industrial subsectors, particularly at the higher levels of engineering as Tunisia has nine post-secondary engineering institutions. As a result, supply of highly skilled white-collar workers often exceeds demand, but mid-level talent and skilled entry-level labour is lacking. “We have the most difficulty recruiting mid-level employees, that is, people with advanced technical training,” Lahiani told OBG. “Very few academic institutions offer practical training. There’s not a widespread technological culture.”
The benefits of improving employability are clear, given that youth unemployment – which currently stands at 15.2% – is twice as high in many rural and interior regions. To address this, Tunisia publicly funds a network of 137 vocational training schools nationwide, and offers some help in matching unemployed youths with available jobs. But awareness of these programmes is very low and according to the World Bank and local press reports, the trainings are often hobbled by overcrowded classes, old and obsolete equipment, poor administration and lack of coordination with private sector employers.
The private sector has also sought to address the gap. The aerospace industry, for instance, will open the Centre of Excellence for Trades and Aerospace Industry in September 2016, training 600 students in related blue-collar jobs like boiler making, sheet metal working, surface treatment and painting.
Outlook
Tunisia’s geographic proximity to European markets constitutes a logistical advantage. However, labour productivity, the size of the informal sector and problems in some subsections – such as textiles – suggest significant room for improvement. Meanwhile, subsectors such as agribusiness, construction products and machinery manufacturing have proven relatively successful in recent years.
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