MANUFACTURING

Not making it – A successful manufacturing sector requires many things that Africa lacks
Apr 16th 2016 Economist

Bashir Danyaro stands in dismay in his shoe factory in Kano, northern Nigeria’s biggest city. In its heyday, around 15 years ago, up to 200 women operated rows of sewing machines producing footwear for soldiers and schoolchildren. Now the place is silent and covered in a layer of dust. It has been almost two years since the last decent contract came in, Mr Danyaro says. Dozens of his local competitors have closed up shop; his flailing business is flanked by a deserted leather tannery and a shuttered ceramics plant.

Nigeria’s deindustrialisation is perhaps more visible in this part of the country than anywhere else. The Sahelian north has fine leather and agricultural supplies, but its factories are falling into disrepair. A once-thriving textile industry is all but extinct. “It’s not profitable. But what else will I do?” asks Mr Danyaro. “This is the only business I know.”

Three thousand miles to the south, in a suburb of Pretoria, South Africa’s capital, things seem better. At the Nissan factory near Rosslyn, workers in grey overalls and white face masks assemble pickup trucks. This factory is probably more sophisticated than anything else on the continent, yet it, too, is struggling. It currently produces around 185 pickup trucks a day, mostly for the stagnant South African domestic market. With another shift it could more than double its output, but managers at the factory grumble that their bosses in Japan do not want to make full use of their investment.

Manufacturing in Africa is only for the brave. In Nigeria it makes up about 10% of GDP, according to official statistics, which may not be reliable. In South Africa, a far more developed economy, it accounts for 13% of GDP, down from a fifth in 1990. In Thailand the equivalent figure is 28%. Between 1970 and 2013, says the Brookings Institution, an American think-tank, Africa’s share of global manufacturing output fell from 3% to 2%; as a share of sub-Saharan Africa’s GDP, manufacturing has shrunk from almost 20% to about half that. Almost the entire output is for domestic consumption, not export.

Even though labour is generally cheap, making stuff can be more expensive than in parts of Europe because of poor infrastructure, powerful trade unions (in South Africa) and pervasive corruption. There is almost nothing like China’s electronics factories or Bangladesh’s textile sweatshops. Everything from cornflakes to kettles is imported from Europe or Asia.

Africa boosters say that the fall in commodity prices is a dose of nasty but necessary medicine. The way they see it, falling currencies will drive up the cost of imports, and governments will have to open up to investment and reduce regulation and corruption in order to increase tax revenue. Yet this scenario is far too rosy. South Africa and Nigeria are not entirely representative of the rest of Africa, but together they make up roughly half of sub-Saharan Africa’s GDP and give some idea of the challenges the region faces.

Powerless
The biggest immediate problem is power. Nigeria, which alone accounts for a third of sub-Saharan Africa’s GDP, has just 3,000MW of on-grid power-generating capacity, less than North Korea. Mr Danyaro says he gets four hours of power a day at most. Most factories have to rely on diesel generators to keep going. A new tomato-processing facility belonging to the Dangote Group, a huge Nigerian conglomerate owned by Africa’s richest man, has had to import two enormous generators which together produce about 2MW of electricity. “Every hour they use 400 litres of diesel,” says Alhaji Keita, who manages the plant. “It’s by far our biggest overhead.” Even the diesel is mostly imported: despite its oil wealth, Nigeria has very little refining capacity.

World Bank figures show that the amount of power consumed per person in Africa has fallen in recent decades because generating capacity has not kept up with population growth. With 1.2 billion people, the continent has a sixth of the world’s population but only 3% of its generating capacity, which is heavily concentrated in just a few countries. In places like Zambia and Malawi, most of the existing capacity comes from hydroelectric plants built in colonial times or shortly after independence, which often do not run in the dry season. South Africa has many crumbling power stations from the 1960s that have not been upgraded or replaced, so people in its big cities suffer blackouts and factories often come to a halt.
Poor roads are another problem. Suleiman Umar owns a factory in Kano that makes relief blankets on ancient-looking looms. But only ten of the 68 machines are currently working, and that is not bad for a textile business in Nigeria, he says. It costs him more to transport a container from coastal Lagos than it does to ship one all the way from China. Even in South Africa, where rail and road connections are generally good, the vast distances make it expensive to move anything across the country.

But fixing these fundamental problems is hard, so many African countries have tried to foster manufacturing through protectionism. In Nigeria the new government of Muhammadu Buhari has tried to stimulate local production by banning the use of foreign exchange for a list of items including toothpicks and glass. That comes on top of total import bans on products such as cloth from China and punitive tariffs on imports of new cars. In South Africa, the car industry is sheltered by a 20% tariff on imports of new cars and an outright ban on importing used cars.

In some ways, this has spurred production. Without the tariffs, South Africa’s car industry would have had a harder time. Nigeria became self-sufficient in cement after the government ruled that only manufacturers could ship it in. At the Dangote group’s biggest cement plant, an enormous site looming over the scrubland of the central Kogi state, managers admit that they would never have been able to compete under less sheltered conditions. And the profits have allowed Mr Dangote to invest in other businesses, such as his new tomato-canning factory.
But the main industry that thrives thanks to Nigeria’s trade barriers is corruption. In a Kano hotel, a gap-toothed smuggler explains that his syndicate has spent a decade manoeuvring fabric, rice, pasta and vegetable oil to huge warehouses in Kano via Benin and Niger. “The official process is tedious and expensive. You have to deal with customs, immigration, security, and it takes so long,” he says in the local Hausa language. “We organise the illegal route so the products come successfully.” Up to 50 containers might cross the Jibia border post at once, he says, each yielding a profit of up to 5 million naira ($15,000). In Lagos’s markets, “west African” fabric is invariably imported from China. The cars on its roads often arrive after being “lost” in transit to Niger, without payment of Nigeria’s hefty duties on imported cars.

And although trade barriers are helpful for those who are protected, they hurt other businesses. Mr Dangote has more than 60% of Nigeria’s cement market, a near-monopoly. “He has cornered the market. He has access to the limestone deposits. He is a friend of every government, he gets cheaper loans and he gets tax holidays. Which other business gets that?” says Oluseun Onigbinde, founder of BudgIT, a Lagos-based fiscal-analysis group. Last year Dangote, which makes one of the world’s most basic products, had a profit margin of 53%.

In South Africa smuggling is less of a problem, but policy is little better. The Nissan car factory is one of seven in the country. Broadly defined, the car industry makes up 30% of manufacturing output. Demand for cars of all sorts is soaring across the continent, yet South Africa’s huge potential is being wasted by a toxic combination of power cuts and poor labour relations. At the Nissan factory, stickers plastered all over the machinery encourage workers to vote for “strong shop stewards to confront the bosses”. Last year a strike shut the plant down for two months. For historical reasons, managers in the car factories tend to be white and workers black. Disputes are politicised, confrontational and frequent. Relative to their productivity, South African industrial workers are some of the most expensive in the world. A cheap rand should help, by lowering the cost of labour (although it may also raise inflation, which could induce more strikes). But it would take a fundamental change in South Africa’s rigid labour laws to create jobs for the one in four South African adults who are unemployed.

A local flavour
In the meantime, the best hope comes from locals, who know how the system works, and from products sold locally rather than across borders. At Wilson’s Juice, a new factory at the edge of Lagos, lemonade is being bottled on an assembly line manned by 16 people. On the other side of the room workers chop up pineapples. The business was started by Seun and Seyi Abolaji, two brothers who were raised and educated in America and returned to Nigeria, to the bemusement of their families. The margins are good and the firm is expanding quickly. The only materials that have to be imported from outside Africa are for the bottles and the labels, so the shortage of foreign exchange has not hurt too much. “A lot of people are apprehensive, but we are super-excited. For people who source their own materials locally, now is a great time to grow,” says Seyi.

Growth could be speeded up if foreign investors were building factories, too. If this were done on a large scale, as in Asia, it could create millions of export-related jobs. Huge obstacles need to be overcome before that can happen. But efforts to improve Africa’s dire trade links should help.

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I would like to think of myself as a full time traveler. I have been retired since 2006 and in that time have traveled every winter for four to seven months. The months that I am “home”, are often also spent on the road, hiking or kayaking.
I hope to present a website that describes my travel along with my hiking and sea kayaking experiences.

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