Manufacturing is a hot topic in the global economic environment. Americans want to see locally made products. Same in the U.K. and other parts of Europe. The labor force in these markets are focused on creating jobs.
African leaders are equally concerned about jobs but they have the added advantage of low labor costs to produce goods locally for less than the West.
Home to over 1 billion people, Africa has the highest rate of urbanization in the world and overall economic growth second only to East Asia. Yet manufacturing of local products in Africa accounts for less than 2 percent of global output.
As commodity prices have fallen, African manufacturing has increased leverage — and the attention of investors — to garner more foreign investment.
Sub-Saharan African manufacturing has its challenges. Lack of productivity undercuts the relative value of low labor costs. Raising worker productivity and managing costs is necessary to escape the remnants of nationalized manufacturing. Skills training and innovation are consequently major factors in upticking productivity.
Scaling manufacturing requires achieving gains in cross-border trade. Most countries do not present sizable growth strategies if manufacturing is concentrated in one or two urban communities. Private investors and government-backed companies accordingly have focused on opportunities that can be exported or scaled within a region.
Infrastructure, particularly transport and power, is another major challenge. Some countries are facing the problem head-on while others are punting responsibility, according to one global investor.
East Africa, home to the current manufacturing stars, is an example of early infrastructure investing reaping later rewards. West Africa, with countries such as Cote d’Ivoire and Senegal, will reap rewards in the near term as infrastructure investment pushes forward strongly. But until West African infrastructural investment reaches full fruition, East Africa is the star region for manufacturing in sub-Saharan Africa in 2017.
This is probably one of the easier bets if you are following the crowd. Manufacturing represents approximately 25 percent of foreign investment in Tanzania. Industry has grown an average of 7-to-8 percent over the past five years and contributes approximately 25 percent to the country’s GDP.
Critics say manufacturing is generally tracking the country’s growth rate or that it is heavily based in the food and beverages subsector (which receives protection from the government). Both criticisms obscure a couple of realities:
Growth success stories in Tanzania include include Catalyst Principal Partners, an East Africa-focused private equity firm based in Kenya which invested in Zenufa Laboratories, a leading Tanzanian pharmaceuticals manufacturer. Catalyst also invested in Chemi Cotex, which makes toothpaste, skin and hair products. Both involve non-food and beverage consumer goods that are manufactured locally and have taken market share due to quality products and competitive pricing.
But agro-processing with food and beverages do present investment opportunities in Tanzania — a country with a significant agricultural base and a government adamant to help it prosper. You can’t blame investors for taking advantage of that scenario.
This East African giant is the African manufacturing growth story. Many observers point to Chinese investment, especially in labor-intensive garment manufacturing, as a sign that the country is solely benefiting from a mix of highly competitive labor costs and a protectionist government. But both assertions misrepresent the government’s leadership in this process.
Labor costs are actually on a gradual rise in Ethiopia. Yet many firms, especially Asian giants, find refuge in the vastly improved Ethiopian investment climate and the country’s drastically improved infrastructure in the past five years, especially in transport and power.
H&M, a Swedish retail-clothing firm, and Huajian, a Chinese shoemaker, made headlines in 2014 and 2015 when they entered Ethiopia. But the upswing in local manufacturing and processing is coming from smaller local companies manufacturing food and beverages, detergents and personal care products.
Critics point to the working capital and foreign exchange challenges in 2016, but the government is pushing forward to address these issues. The country is benefiting from the bulls-eye focus on infrastructure in the short term.
Uganda is another big player in the African manufacturing scene and part of the growing East African movement in manufacturing. Industry is still small and requires a significant bump in foreign investment. The sector currently benefits from investment from multinationals who navigated the challenges of introducing private manufacturing subsidiaries during the last decade. But the country is primed to benefit, in part, from the Tanzania model. Private investors are scouring the country for food and beverage processing opportunities as well as light manufacturing.
Power supply and stability remain constant challenges in Uganda. The government should be focusing on these issues in the near term, especially if it sees how Uganda’s neighbors are creating economic growth opportunities by addressing such issues.
Nigeria is home to over 180 million people and projected by the U.N. to reach 240 million by 2050. This suggests that Nigerian consumers could account for nearly 30 percent of Africa’s consumption growth over the next 10 years. Those are the positives and the clear upsides of manufacturing in Nigeria.
In the second quarter of 2016, economic recession dragged Nigerian manufacturing down. The Central Bank of Nigeria took 40-plus items off the list of things that could be imported into Nigeria — foreign exchange utilizers — and the currency continued to nosedive. Manufacturers struggled to import raw materials and lacked dollars to pay suppliers on time.
Can Nigeria can fix its foreign exchange debacle and unleash its manufacturing sector on its large consumer base in 2017, or does the giant take another year — or more — to return to full force?
Kurt Davis Jr. is an investment banker focusing on the natural resources and energy sectors, with private equity experience in emerging economies. He earned a law degree in tax and commercial law at the University of Virginia’s School of Law and a master’s of business administration in finance, entrepreneurship and operations from the University of Chicago. He can be reached at firstname.lastname@example.org.