Manufacturing under pressure (1) – Understanding the issues

Manufacturing in Nigeria has long since been uncompetitive and a struggle. I have some insight, having first become a director in Guinness Nigeria in 1993, and having thereafter managed manufacturing businesses that include boats in Borokiri, soap in Aba and, more recently, food and beverages in Lagos. This might make me biased but no one should discount my credentials as I attempt a review of the sector that will stretch into four columns.

Successive governments have talked up industry as key to Nigeria’s competiveness, import substitution and source of employment, but in reality very little has been done to truly encourage the sector. Over the years it has been oil & gas, banking and finance, and now agriculture that have been beneficiaries of positive attention. Trading and contract seeking have been a quicker and apparently easier route to the quick buck. According to Ayo Teriba in a BusinessDay article last week, manufacturing is the sixth largest sector after agriculture, trading & retail, oil & gas, telecoms and real estate; contributing to about 7 percent to GDP.

Generally, economists will tell you that for an economy to move from developing to developed, then industry needs to be a minimum of 12 percent. However, a further look at the figures tells an even more worrying story. Over 70 percent of manufacturing output comes from the food, beverage and tobacco sector, with none of the remaining 12 sub-sectors producing more than 0.5 percent each. These are not healthy signs.

One of the problems for industry is that a progression of administrations has had little experience in or understanding of the practice of manufacturing. Successive governments have recruited from the private sector – from oil & gas, banking and consultancy – for ministers, but not from industry. One of the few ministers that have come from the sector was Kola Jamodu during OBJ’s tenure and his insight was critical in the development of indigenous cement manufacturing. As president of MAN, he enabled the voice of industry to be heard at the Economic Management Team but his retirement has meant that voice has fallen quiet.

As much as I respect the experience and intellect of Ngozi Okonjo-Iweala and Olusegun Aganga as the key ministers today, it is clear neither has huge sympathy for manufacturing as both display impatience with pleas from the sector. Way back in March 2006, I wrote a column protesting that the then minister of finance showed her lack of comprehension when she complained that manufacturers were always moaning. That still seems to be the dominant attitude from the public sector, including recent comments by the governor of the CBN.

Yet, if practitioners say it has been difficult for years, many are saying this year has been the worst since the early 90’s at least; for several reasons. Businesses here have been coping with security issues for what seems to be generations. Indeed, this has been one of the factors in the consolidation of manufacturing in Lagos and Ogun State, where there have been seen to be less problems from kidWnapping, armed robbery, religious and tribal conflict. For many years such conflict has been a major contributor to the decline in investment in parts of the country where once large factories created employment and encouraged local satellite businesses. Kano, Kaduna, Jos, Enugu, Aba are all shadows of their former manufacturing selves and there is little sign of future investment. Enlightened state government has encouraged some new investment in Anambra and Cross River and the concept of Export Processing Zones may help, but this is nothing compared to what is needed. Some companies have managed to keep depots or small operations open in Maiduguri and the north-east; one or two, such as NBC, still have plants functioning but it is currently very difficult to manage any kind of business there.

It is the local population who bears the brunt of the appalling violence but distributors and staffs of the food manufacturers that distribute there have suffered. Apart from the burden of management, the cost of operating has increased drastically.

Struggling to produce goods for export or even the local market with epileptic power, an inconsistent and overbearing regulatory framework and little rule of law over the behaviour of labour is not easy. However, the area that has most damaged the competitiveness of Nigerian-produced goods over the years is poor transport infrastructure. Anyone manufacturing here suffers from an inordinately long supply chain, as one has to cope with long delays through our inefficient ports and poor roads/no rail to get raw materials to the factory gate and thereafter finished goods distributed across the country to customers.

Despite improvements in some stretches, it can still take anything up to six days during the rainy season to get goods from Lagos to Uyo or the far north-east. This adds to uncompetitive costs of demurrage, transport, extra warehousing, labour and management time. Financing these logistics inefficiencies alone adds a minimum of 60 to 90 days to manufacturers’ working capital requirements in an environment where blue chips can borrow for around 15 percent but most local businesses pay interest at 20 to 22 percent. It is no coincidence that local operators struggle so badly to break into the big league so dominated by the major players. When SMEs (so critical to our economic growth) fail, it is more often for reasons to do with managing working capital than for start-up costs.

This is just the start of the pressure on manufacturers and will be continued next week.

Life is a ladder. Every new person we meet is a rung, upper or lower, a step upward or downward…

KEITH RICHARDS…
is a director of a number of Nigerian institutions and businesses and lives in Lagos.
[email protected]
@insiderinside1