47.

PROFILE ON CLUTCHS AND PARTS

 47 - 2

TABLE OF CONTENTS

PAGE

I. SUMMARY 47-3

II. PRODUCT DESCRIPTION & APPLICATION 47-3

III. MARKET STUDY AND PLANT CAPACITY 47-4

A. MARKET STUDY 47-4
B. PLANT CAPACITY & PRODUCTION PROGRAMME 47-8

IV. MATERIALS AND INPUTS 47-9

A. RAW & AUXILIARY MATERIALS 47-9
B. UTILITIES 47-9

V. TECHNOLOGY & ENGINEERING 47-10

A. TECHNOLOGY 47-10
B. ENGINEERING 47-11

VI. MANPOWER & TRAINING REQUIREMENT 47-15

A. MANPOWER REQUIREMENT 47-15
B. TRAINING REQUIREMENT 47-15

VII. FINANCIAL ANLYSIS 47-16

A. TOTAL INITIAL INVESTMENT COST 47-16
B. PRODUCTION COST 47-17
C. FINANCIAL EVALUATION 47-18
D. ECONOMIC BENEFITS 47-20

I. SUMMARY

This profile envisages the establishment of a plant for the production of clutches and
parts with a capacity of 400 tonnes or 282,353 pieces of assorted sizes of cluches per
annum.

The major raw materials required are asbestose fiber, steel rod, graphite and phenolic
resin, which have to be imported.
 47 - 3

The present demand for the proposed product is estimated at 179.909 pieces per annum.
The demand is expected to reach at 354,088 pieces by the year 2017.

The total investment requirement is estimated at about Birr 7.51 million, out of which
Birr 1.39 million is required for plant and machinery. The plant will create employment
opportunities for 40 persons.

The project is financially viable with an internal rate of return (IRR) of 22.30% and a net
present value (NPV) of Birr 4.92 million, discounted at 8.5%.

The project will create forward linkage with vehicle assemblers. The establishment of
such factory will have a foreign exchange saving effect to the country by substituting the
current imports.

II. PRODUCT DESCRIPTION AND APPLICATION

A Clutch is a mechanism for transmitting rotation, which can be engaged and disengaged.
Clutches are useful in devices that have two rotating shafts. In these devices, one shaft is
typically driven by a motor or pulley, and the other shaft drives another device. In a drill
for instance, one shaft is driven by a motor and the other drives a drill chuck. The clutch
connects the two shafts so that they can either be locked together and spin at the same
speed (engaged), or be decoupled and spin at different speeds (disengaged).

There are many different vehicle cultch designs but most are based on one or more
friction discs, pressed tightly together or against a fly wheel using springs.

Clutches found in heavy duty applications such as trucks and competition cars use
ceramic clutches that have a greatly increased friction coefficient, however these have a
“grabby” action and are unsuitable for road cars.

III. MARKET STUDY AND PLANT CAPACITY

 47 - 4

A. MARKET STUDY

1. Past Supply and Present Demand

Clutch is a mechanism for transmitting rotations, which can be engaged and disengaged.
Clutches are useful in devices that have two or more rotating shafts. In these devises, one
shaft is typically driven by a motor or pulley, and the other shaft drives another device.

There are many different vehicle clutch designs; but most are based on one or more friction
discs which are pressed tightly together or against a flywheel, by using springs. The friction
material varies in composition depending on other considerations.

Demand for clutches and their parts are being met through imports; although some minor
modifications and maintenance work is undertaken here to clutch disks with minor damages.

To estimate present supply and effective demand for clutches and their parts, import data
from 2001 to 2006 is presented in Table 3.1.
 47 - 5

Table 3.1
IMPORT OF CLUTCHES AND THEIR PARTS {Kg}

Year Quantity
2001 90,193
2002 84,048
2003 111,385
2004 88,814
2005 136,694
2006 221,112
Total 732,246
Average 122,041

Source: Ethiopian Customs Authority: Annual External Trade Statistics; Unpublished.

To assess the level of supply and determine present demand, the average growth rate
experienced in imports from 2001-2006 is applied. There is no indication in the data
regarding the proportion of clutches imported being for use in small, medium or large
vehicles. It is; however, fair to assume that importation is dictated by the number of each
type of motor vehicle in the country. First of all, these vehicle parts are not uniform in size
and have differences in weight and all types of motorized vehicles with gears to change
(including motor cycles) are equipped with one such clutch.

The average import of the six years has shown an increase of 7.06% from the import in
2001. The demand size for 2008 is, therefore, estimated by annually increasing the import
for 2006 by 7.06%. Present supply is calculated at 251, 872 kilograms of clutches and parts
of assorted sizes.

For the calculation of the proportion of the demand for clutches and parts by different sizes
of vehicles, only vehicles on the road have been considered. Motors of vehicles to be
assembled locally are supposed to have clutches mounted onto them before the parts were
brought into the country. Table 3.2 depicts existing stock of vehicles in the country as at
2006.
Table 3.2
 47 - 6

EXISTING STOCK OF VEHICLES

Type of vehicle Numbers

Small cars 31,908
Pick ups 12,741
4 WD vehicle 6,373
Buses/Minibuses (imp.) 34,322
Lorries/trucks (imported ) 21,219
Locally assembled buses 13,342
Locally assembled trucks 25,946
Dump Trucks 8,226
Total 154,077
Source: Ethiopian Road Transport Authority.

The proportion of vehicle population, calculated on the basis of information in Table 3.2,
is: 28.98% for small cars and pickups, 26.41% for 4-Wheel drives and mini-buses, and
44.61% for buses, Lorries and all types of big trucks.

Experienced mechanics attest that the clutch flywheels for the three groups of vehicles
weigh on average 0.75, 1.5 and 2.0 kg apiece for small cars, medium-size cars and buses &
trucks respectively. Average weight of a clutch flywheel is 1.40kg. It can be deuced then
that the average number of present supply of clutches and parts are 179,909 pieces. The
present demand by the small, medium and large vehicles is thus computed to be 52,138,
47,514 and 80,257 pieces, respectively.

2. Projected Demand

Now that present demand level is converted into numeric terms, future demand for clutches
and parts is to be estimated in terms of pieces in accordance with the types of vehicle they
are intended for; and demand is assumed to annually increase at 7.0% rate, which has been
practically the trend as the increase rate of road vehicles (see Table 3.3).
 47 - 7

Table 3.3
FORECASTED DEMAND FOR CLUTCHES and PARTS (No)

Year For Small For Medium For large

Vehicles Vehicles Vehicles
2009 55,788 50,840 85,875
2010 59,693 54,399 91,886
2011 63,871 58,207 98,318
2012 68,342 62,281 105,200
2013 73,126 66,641 112,564
2014 78,245 71,306 120,444
2015 83,722 76,297 128,875
2016 89,583 81,638 137,896
2017 95,853 87,352 147,549
2018 102,563 93,467 157,878

3. Pricing and Distribution

Imported clutches and parts are currently being sold at the following retail prices:
- Clutches for small vehicles are sold from Birr 165.00 to Birr 180.00 apiece.
- Clutches for medium vehicles are sold from Birr 250.00 to Birr 290.00 apiece.
- Clutches for large vehicles are sold from Birr 550.00 to Birr 600.00 apiece.
- The sales price of clutches from a local manufacturer should take into account all
costs involved in driving the sales price of the imported competitors; and adjust
selling prices at maximum 70% of the price rates indicated above.

It is recommended that a local manufacturer sell:

- Clutches for small vehicles at Birr 116.00 to Birr 126.00 apiece;
- Clutches for medium vehicles at Birr 175.00 to Birr 205.00 apiece; and
- Clutches for large vehicles at Birr 385.00 to Birr 420.00 apiece.

Vehicle maintenance garages are the major, probably the only consumers of clutches.
Distribution through spare parts’ whole sellers is recommended.
 47 - 8

It is assumed that a local manufacturer will satisfy at least 50% of the demand for
clutches and parts; and be prepared to meet the challenges of competition from imported
products both in quality and selling price terms.

B. PLAN CAPACITY AND PRODUCTION PROGRAMME

1. Plant capacity

Based on the market study above, the envisaged plant will have an annual production
capacity of 77,079 units, 70,243 units and 118,649 units for small, medium and large
vehicles respectively. Considering the average weight 0.75, 1.5 and 2.0 kg a piece for
small, medium and large vehicles respectively, the average production capacity will be
400 tons or 282,353 pieces of assorted clutches and parts per annum.

2. Production programme

The plant will initially operate at 70% of its rated capacity. During the second and third
years, the plant will produce 85% and 100% of its rated capacity, respectively. The
production programme is shown in Table 3.3 below.

Table 3.3
PRODUCTION PROGRAMME
Year 1 2 3
Capacity Utilization (%) 70 85 100

Production (tons) 280 340 400

 47 - 9

IV. MATERIALS AND INPUTS

A. RAW MATERIALS

The raw material required for the manufacture of clutch and parts are steels, graphite,
phenolic resin and asbestos fiber. Steel rod is available in Ukraine, Turkey & Moldova
and graphite, phenolic resin & asbestos fiber are available in China. Lubricants are found
locally from fuel stations.

The annual requirement of the raw material at full capacity production and the annual raw
materials cost is presented in Table 4.1.

Table 4.1
RAW MATERIAL REQUIREMENT AND COST

Qty. Cost’000 Birr

Sr. Description (Tonnes FC LC TC
No. )
1 Steel rod 154 800.80 160.16 960.96
2 Graphite 35 365.75 73.15 438.90
3 Phenolic resin 61 890.60 178.12 1,068.72
4 Asbestos fiber 110 4,400.00 880.00 5,280.00
5 Lubricants LS - 75.00 75.00
Total 6,457.15 1,366.43 7,823.58

B. UTILITIES

Electricity and water are inputs required by the envisaged plant. The total electric power
consumption is 18,000 kWh and its cost at the rate of 0.4736 Birr per kWh is estimated at
Birr 8,525.
The annual water requirement is estimated at 1000m3, and the cost at the rate of Birr
3.25/m3 will be Birr 3,250. Thus, the total cost of utilities per annum will be Birr 11,775.
The annual consumption is shown in Table 4.1.
 47 - 10

Table 4.1
ANNUAL CONSUMPTION OF UTILITIES AND COST

Sr. No. Description Rate Qty Cost in Birr

1 Electric power (kWh) 0.4736 Birr/kWh 18,000 8,525.00
2 Water (m3) 3.25 Birr/m3 1,000 3,250.00
Total 11,775.00

V. TECHNIOLOGY AND ENGINEERING

A. TECHNOLOGY

1. Production Process

The manufacturing process of clutches and its parts comprises mixing graphite and
phenolic resin to form a graphite mixture. Then soaking an asbestos fiber string with in
graphite mixture will follow. Removing the soaked string such that phenolic resin content
of between 14-24 weight percents and graphite content of between 1-8 weight percent for
every 100 weight percent is produced. Then bonding the string to the clutch facing so that
the Rockwell hardness of the clutch facing is 20 - 60 on the Moh scale.

The linings and the steel are then cut to the required size and punched. Then using the
trimming machine, trimmed the edges to ensure exact alignment with the shoe and the
brake drum.

The clutches are then drilled and riveted, and bonded to the prepared brake shoes. The
production process has no any adverse environmental impact.

2. Source of Technology
 47 - 11

The machinery for the production of clutches and parts can be found in many countries
like Europe, India, China and Middle East countries.

Therefore it would be possible to place order from the supplier addressed below:
Company : YUHUAN MACHINERY FACTORY
Address : Kanmen Technology Industrial Zone, Yuhuan,
Taizhou, Zhejiang, CHINA
City/Province : Taizhou/Zhejiang
Country Region: China
Zip/postal code: 307602
Telephone No : 86-576-87274003
Fax No : 86-576-87274009

B. ENGINEERING

1. Machinery and equipment

Machinery and equipment required by clutches and parts plant and the corresponding
costs are shown in Table. 5.1.
 47 - 12

Table 5.1
MACHINERY AND EQUIPMENT REQUIREMNT AND COST

Sr. Description Qty. Price, Birr’000

No. Nos. FC LC TC
1 Mixing machine (V-Type) 4 180.00 45.00 225.00
2 Mixing machine 5 225.00 56.25 281.25
3 Hydraulic Pressing machine 1 350.00 87.50 437.50
4 Trimming machine 2 70.00 14.00 84.00
5 Drilling machine 2 56.00 11.20 67.00
6 Cutting machine 1 35.00 7.00 42.00
7 Hardness testing machine 1 125.00 25.00 150.00
8 Inside grinding machine 2 30.00 6.00 36.00
9 Outside grinding machine 2 20.00 5.00 25.00
10 Oven 2 40.00 10.00 50.00
Sub-Total 1,131.00 266.95 1,397.95

2. Land, Building and Civil Works

The total land requirement for the plant is 1,000 m 2. The floor space area required for
plant building and other facilities will be estimated 650m 2. The area covered by
production hall and store building is 500m2 while the remaining 150m2 will be for office
building. The production hall and store building is to be constructed in such a way that
the under ground is used as store and the ground floor is used for production hall. Thus
the cost of building and civil works at the rate of Birr 2,300/m2 is about Birr 1.5 million.

According to the Federal Legislation on the Lease Holding of Urban Land (Proclamation
No 272/2002) in principle, urban land permit by lease is on auction or negotiation basis,
however, the time and condition of applying the proclamation shall be determined by the
concerned regional or city government depending on the level of development.

The legislation has also set the maximum on lease period and the payment of lease
prices. The lease period ranges from 99 years for education, cultural research health,
sport, NGO , religious and residential area to 80 years for industry and 70 years for trade
 47 - 13

while the lease payment period ranges from 10 years to 60 years based on the towns
grade and type of investment.

Moreover, advance payment of lease based on the type of investment ranges from 5% to
10%.The lease price is payable after the grace period annually. For those that pay the
entire amount of the lease will receive 0.5% discount from the total lease value and those
that pay in installments will be charged interest based on the prevailing interest rate of
banks. Moreover, based on the type of investment, two to seven years grace period shall
also be provided.

However, the Federal Legislation on the Lease Holding of Urban Land apart from setting
the maximum has conferred on regional and city governments the power to issue
regulations on the exact terms based on the development level of each region.

In Addis Ababa the City’s Land Administration and Development Authority is directly
responsible in dealing with matters concerning land. However, regarding the
manufacturing sector, industrial zone preparation is one of the strategic intervention
measures adopted by the City Administration for the promotion of the sector and all
manufacturing projects are assumed to be located in the developed industrial zones.

Regarding land allocation of industrial zones if the land requirement of the project is
blow 5000 m2 the land lease request is evaluated and decided upon by the Industrial Zone
Development and Coordination Committee of the City’s Investment Authority. However,
if the land request is above 5,000 m2 the request is evaluated by the City’s Investment
Authority and passed with recommendation to the Land Development and
Administration Authority for decision, while the lease price is the same for both cases.

The land lease price in the industrial zones varies from one place to the other. For
example, a land was allocated with a lease price of Birr 284 /m 2 in Akakai-Kalti and Birr
341/ m2 in Lebu and recently the city’s Investment Agency has proposed a lease price of
Birr 346 per m2 for all industrial zones.
 47 - 14

Accordingly, in order to estimate the land lease cost of the project profiles it is assumed
that all manufacturing projects will be located in the industrial zones. Therefore, for the
this profile since it is a manufacturing project a land lease rate of Birr 346 per m 2 is
adopted.

On the other hand, some of the investment incentives arranged by the Addis Ababa City
Administration on lease payment for industrial projects are granting longer grace period
and extending the lease payment period. The criterions are creation of job opportunity,
foreign exchange saving, investment capital and land utilization tendency, etc.
Accordingly, Table 5.2 shows incentives for lease payment.

Table 5.2
INCENTIVES FOR LEASE PAYMENT OF INDUSTRIAL PROJECTS

Payment
Grace Completion Down
Scored Point Period Period Payment
Above 75% 5 Years 30 Years 10%
From 50 - 75% 5 Years 28 Years 10%
From 25 - 49% 4 Years 25 Years 10%

For the purpose of this project profile the average i.e. five years grace period, 28 years
payment completion period and 10% down payment is used. The period of lease for
industry is 60 years .

Accordingly, the total lease cost, for a period of 60 years with cost of Birr 346 per m 2, is
estimated at Birr 20.76 million of which 10% or Birr 2,076,000 will be paid in advance.
The remaining Birr 18.68 million will be paid in equal installments with in 28 years i.e.,
Birr 667,286 annually.

VI. MANPOWER PREQUIREMENT AND TRAINING

A. MANPOWER REQUIREMENT
 47 - 15

The manpower requirement and the corresponding labor costs are show in Table. 6.1

Table 6.1
MANPOWR REQUIRMENT AND LABOUR COST

Sr. Description Required Salary in Birr

No. Number Monthly Annual
1 Plant Manger 1 3500 42,000
2 Secretary 1 900 10,800
3 Accountant 1 1500 18,000
4 Purchaser/sales person 1 1,500 18,000
4 Clerks 2 650x2 15,600
5 Store kipper 1 700 8,400
6 Production & technical head 1 2,000 24,000
7 Machine Operators 20 750x20 180,000
8 Laborers 10 450x10 54,000
9 Production Supervisor 1 1,600 19,200
10 General Service 2 400x2 9,600
Sub-Total 40 399,600
Employee’s Benefit (25% of 99,900
basic salary)
Total 40 499,500

B. TRAINING REQUIREMENT

The training is required for machine operators, supervisor and production and technical
head for a period of one month. The training cost is therefore estimated at Birr 50,000.

VII. FINANCIAL ANALYSIS

The financial analysis of the clutches and parts project is based on the data presented in
the previous chapters and the following assumptions:-

Construction period 1 year

Source of finance 30 % equity
 47 - 16

70 % loan
Tax holidays 3 years
Bank interest 8.5%
Discount cash flow 8.5%
Accounts receivable 30 days
Raw material local 30 days
Raw material foreign 90 days
Work in progress 1 days
Finished products 30 days
Cash in hand 5 days
Accounts payable 30 days
Repair and maintenance 5% of machinery cost

A. TOTAL INITIAL INVESTMENT COST

The total investment cost of the project including working capital is estimated at Birr
7.52 million, of which 15 per cent will be required in foreign currency.

The major breakdown of the total initial investment cost is shown in Table 7.1.

Table 7.1
INITIAL INVESTMENT COST ( ‘000 Birr)

Sr. Cost Items Local Foreign Total

Cost Cost Cost
No.
1 Land lease value 2,076.00 - 2,076.00
2 Building and Civil Work 1,500.00 - 1,500.00
 47 - 17

3 Plant Machinery and Equipment 266.95 1,131.00 1,397.95

4 Office Furniture and Equipment 150.00 - 150.00
5 Vehicle 450.00 - 450.00
6 Pre-production Expenditure* 495.98 - 495.98
7 Working Capital 1,446.87 - 1,446.87
  Total Investment Cost 6,385.80 1,131.00 7,516.80

* N.B Pre-production expenditure includes interest during construction ( Birr 345.98

thousand), training (Birr 50 thousand ) and Birr 100 thousand costs of registration,
licensing and formation of the company including legal fees, commissioning expenses,
etc.

B. PRODUCTION COST

The annual production cost at full operation capacity is estimated at Birr 9.06
million (see Table 7.2). The cost of raw material account for 86.68% of the production
cost. The other major components of the production cost are depreciation, financial cost
and direct labour which account for 3.86 %, 3.05% and 2.65 % respectively. The
remaining 3.77 % is the share of utility, repair and maintenance, labour overhead and
administration cost.

Table 7.2
ANNUAL PRODUCTION COST AT FULL CAPACITY ('000 BIRR)

Items Cost %
Raw Material and Inputs
7,853.58 86.68
Utilities 11.79 0.13
 47 - 18

Maintenance and repair

69.80 0.77
Labour direct 239.76 2.65
Labour overheads
99.90 1.10
Administration Costs 159.84 1.76
Land lease cost
- -
Total Operating Costs 8,434.67 93.09
Depreciation 349.80 3.86
Cost of Finance 276.02 3.05
Total Production Cost
9,060.49 100

C. FINANCIAL EVALUATION

1. Profitability

Based on the projected profit and loss statement, the project will generate a profit through
out its operation life. Annual net profit after tax will grow from Birr 1.11 million to Birr
1.62 million during the life of the project. Moreover, at the end of the project life the
accumulated cash flow amounts to Birr 12.67 million.

2. Ratios

In financial analysis financial ratios and efficiency ratios are used as an index or yardstick
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 such as return on sales which is computed by
dividing net income by revenue, return on assets ( operating income divided by assets),
return on equity ( net profit divided by equity) and return on total investment ( net profit
plus interest divided by total investment) has been carried out over the period of the
project life and all the results are found to be satisfactory.

3. Break-even Analysis
 47 - 19

The break-even analysis establishes a relationship between operation costs and revenues.
It indicates the level at which costs and revenue are in equilibrium. To this end, the
break-even point of the project including cost of finance when it starts to operate at full
capacity ( year 3) is estimated by using income statement projection.

BE = Fixed Cost = 25 %
Sales – Variable Cost

4. Payback Period

The pay back period, also called pay – off period is defined as the period required to
recover the original investment outlay through the accumulated net cash flows earned by
the project. Accordingly, based on the projected cash flow it is estimated that the
project’s initial investment will be fully recovered within 4 years.

5. Internal Rate of Return

The internal rate of return (IRR) is the annualized effective compounded return rate that
can be earned on the invested capital, i.e., the yield on the investment. Put another way,
the internal rate of return for an investment is the discount rate that makes the net present
value of the investment's income stream total to zero. It is an indicator of the efficiency or
quality of an investment. A project is a good investment proposition if its IRR is greater
than the rate of return that could be earned by alternate investments or putting the money
in a bank account. Accordingly, the IRR of this porject is computed to be 22.30 %
indicating the vaiability of the project.

6. Net Present Value

Net present value (NPV) is defined as the total present ( discounted) value of a time
series of cash flows. NPV aggregates cash flows that occur during different periods of
time during the life of a project in to a common measuring unit i.e. present value. It is a
 47 - 20

standard method for using the time value of money to appraise long-term projects. NPV
is an indicator of how much value an investment or project adds to the capital invested. In
principal a project is accepted if the NPV is non-negative.

Accordingly, the net present value of the project at 8.5% discount rate is found to be
Birr 4.92 million which is acceptable.

D. ECONOMIC BENEFITS

The project can create employment for 40 persons. In addition to supply of the domestic
needs, the project will generate Birr 2.31 million in terms of tax revenue. The
establishment of such factory will have a foreign exchange saving effect to the country by
substituting the current imports. The project will create forward linkage with vehicle
assemblers