Nigeria hopes that its ambitious Economic Recovery and Growth Plan (ERGP), will help it achieve its economic diversification agenda. It wants to see manufacturers source their raw materials locally, which it sees as a panacea to myriads of issues faced by manufacturers. Manufacturers are being asked to, therefore, embrace backward integration, with hopes that this would help Nigeria conserve scarce foreign exchange. But there are a number of hurdles to be crossed local manufacturers and multinationals looking to pursue this route. AJOSE SEHINDEMI examines the challenges and how some manufacturers are trying to work around it.
Raw materials are the soul and lifeblood of most manufacturers. They constitute an integral part of the industrial base of developed countries.
The absence or availability of raw materials necessary for production has been the deciding factor between a successful manufacturing company and one about to close down.
Many manufacturers are known to have closed down their businesses due to challenges faced in the acquisition of raw materials. Manufacturers in Nigeria with low funding are harder hit by the issue of availability of raw materials. This has seen manufacturing in the country presenting a monopolistic architecture as those with deep financial pockets tend to hold sway.
A broad sweep of the sector shows that the issues faced by manufacturers are the same. From the cement industry to FMCGs, to chemicals, to agro-allied industries, the issues have always been poor local capacity and a dearth of raw materials that can be sourced and processed locally.
Local sourcing of raw materials is an issue because of the dearth of foreign exchange in the country. Decades upon decades of relying on imports to meet most of its needs, Nigeria took its eyes off the ball and failed to make adequate preparation for the journey of diversification that it is now embarking on.
The foreign exchange crisis witnessed in 2015, 2016 and 2017 ruined many businesses and led to loss of thousands of jobs. It has been estimated that the sourcing and procurement of raw materials locally by manufacturers will save the country billions in foreign exchange expended on the importation of such manufacturing inputs. Most manufacturing companies in the country already face scarcity of raw materials in their production processes.
Now, backward integration and import substitution are being touted as the master key to making the Nigerian economy self-sustaining. But it is not only the nonavailability of raw materials that pose a challenge. Where some raw materials are known to be available, the lack of local capacity to add value to them makes the effective utilisation of such local raw materials a challenge; hence the penchant to resort to foreign capacity. Data from a report by the Lagos Chamber of Commerce and Industry (LCCI) show that despite Nigeria being globally acknowledged as a deep reservoir of rich raw materials for manufacturers’ use, only 46.71 percent of the needs of manufacturing companies is sourced from within the country. The report also stated that manufacturers source raw materials from other African countries which create a displacement that directly affects workers in the intermediate segments of the local economy.
The poor local capacity to process raw materials has seen the country incur losses in different sectors of the economy. For instance, about $10 billion exits the country’s purse annually for the purpose of importation of agricultural products.
In the textile sector, about $4 billion is spent annually importing textiles into the country. Aminu Jalal, the former director-general, National Automotive Council (NAC), in 2016 estimated that Nigerians spend about N600 billion annually on importations of automobiles.
In 2015, Aisha Abubakar, the minister of state for industry, trade, and investment, said N7 trillion was spent on the importation of consumables and household items into the country.
Godwin Emefiele, governor of the Central Bank of Nigeria disclosed at the launch of the apex bank’s Anchor Borrowers’ Programme that the country spends the equivalent of N1 trillion in foreign exchange annually to import rice and wheat. Just last week, Olowasina Olabanji, the executive director, Lake Chad Research Institute (LCRI), said Nigeria spends about $4.2 billion annually on wheat importation as the national consumption of wheat is about 4.7 million metric tonnes, while the production is less than what is being consumed, despite the country having the capacity to meet the local demands and even go into the export of the commodity.
In Calabar recently, Hezekiah Kolawole, director, policy, planning, research and statistics, National Sugar Development Council (NSDC) said at a Sugar Sensitisation Workshop on the implementation of the national sugar master plan, Nigeria also spends at least $600 million foreign exchange annually on the importation of sugar for domestic consumption.
“Our nation is well endowed with the resources in terms of land, water, and human capital that are required to produce sugar in large quantities to not only satisfy her domestic and industrial requirements but also for export to earn foreign exchange. Sadly, however, Nigeria has negative balance of trade in this promising sub-sector as it incurs a huge annual import bill of about $600 million to $650 million on sugar for her local requirements,” Kolawole said.
How manufacturers source raw materials locally
The Backwards Integration Policy (BIP) introduced by the government was happily embraced by manufacturers in the country, who saw in it an opportunity to cut their losses arising from huge foreign exchange cost. They also saw it as an opportunity to contribute to the development of the local economy through the provision of employment and also, helping to grow the country’s gross domestic products.
For Unilever Nigeria, backward integration issues appear to have been solved. In 2011 it launched what it calls, “Partner to Win”, an initiative of investing in capabilities of intermediary companies to enable them convert farm produce to usable goods that will be sourced by the company as part of its raw materials locally. In following this path, Unilever believes this will enable it to achieve a significant reduction in the importation of raw materials by working with local partners including vendors, farmers, and suppliers.
Unilever’s backward integration policy is to also quickly see to the diversification of the economy to promote quality growth, economic transformation, and employment by the development of value chains that facilitate higher-value-added processing and manufacturing activities within Nigeria and make greater use of locally produced inputs and services in production through the creation of backward linkages.
According to the company, the effects of its backward integration are to stimulate economic development; promote the development of local industries; creating economic linkages; building local capacity, capabilities, and technologies; developing skills within the workforce; boosting employment; and minimising capital flight.
Thomas Nwanza, cluster procurement director, Unilever West Africa, said at the recently held third annual Nigeria Manufacturing and Equipment Exposition in Lagos, that the multinational is ready to pump in 40 million Euros over a three year cycle to further deepen backwards integration in Nigeria and position the country’s economy towards the path of growth and development through diversification as being championed by the federal government.
Nwanza said the company has achieved 90 percent in local sourcing of packaging materials with the aim to be at 100 percent by the year 2019 and overcome the current challenges of local vendors’ capacity to meet up with global best standard. It is as a result of the drive to build capacity and source raw materials locally that expos such as the Nigeria Manufacturing and Equipment (NME) and Raw Materials (NIRAM) expo was held in Lagos, the third in the series. It is aimed at achieving the objective of reduction in the importation of raw materials for local production, as well as deepening access to plants and machineries necessary for value addition.
Frank Jacobs, president, Manufacturers Association of Nigeria (MAN), said the expo availed top stakeholders in the private and public sectors opportunity to appraise developments in manufacturing and industry to jointly propose quick-win solutions that will help Nigeria revive its manufacturing sector.
Nigerian Breweries Plc, also keying into the backward integration programme, has reaffirmed its commitment to it. In the process, it has mapped out strategic plans to achieve this through consolidation of its local sourcing of inputs for its operations, while also fast-tracking its plan to attain 60 percent local input sourcing from its initial 2020 target date to 2018. Patrick Olowokere, NB’s corporate communications, and brand public relations manager revealed that the company has also made progress in increasing the supply of sorghum used for some of its beverages as more than 100,000 metric tonnes of the cereal is annually sourced locally. “Over 250,000 farmers spread across several agronomic zones in the north have been impacted by our sorghum value chain programme as at 2013,” he said.
Currently, the company’s brands are packaged using locally sourced packaging materials such as bottles, cans, crates, cartons, crown corks, and labels among others. As at 2016, 99 percent of these packaging materials were locally sourced, opening a wide opportunity to clusters of local entrepreneurs.
Nestle Nigeria, Guinness (Diageo), Promasidor, Procter and Gamble (P &G) and many others are on the backward integration route, drawing huge value chains in terms of job creation, social transformation and foreign exchange conservation, all in a bid to position the country’s economy into the path of sustainability and development.
Hurdles in the way of backward integration
All the efforts being made to get the raw materials are not going smoothly as envisioned by the manufacturers. The challenges in the way include those that can be solved by the government; renewing of strategy and the need for a paradigm shift.
Nwanza, at the expo, cited weak responses to glaring opportunities by the local farmers as there exists a huge gap between raw-materials produced and conversion into usable products for industry.
On the part of the cottage industry, he said: “The cottage industries are unable to come together to pull big manufacturers to invest and, though research organisations exist, research outputs are not readily accessible to all.”
He called for the creation of support industries as primary and secondary industries that support FMCG businesses are at infancy stages, hence the reason why local raw materials sourcing is an expensive process.
Regarding infrastructure, he said the cost of conversion is higher in Nigeria than America, Europe, Asia and even a lot of African countries. Other manufacturers mentioned the harsh economic climate in the country, which forces frequent adjustments by them; but even then, the challenges are too enormous for them to cope with, they said.
One of those directly affected is the N4 billion Dangote tomato processing plant in Kano that was shut down due to lack of governmental support for tomato farmers, said Abdulkareem Kaita, managing director of Dangote Farms Limited.
Kaita said the federal government’s importation policy was frustrated by tomato smugglers and the factory was closed down because of inconsistent supply of tomatoes by farmers owing to shortfall in prices of the produce which later went very high because farmers were not getting support or incentive from the government to produce more tomatoes.