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Manufacturing under stress: Nigeria may have the largest domestic market in Africa and may be attracting greater FDI than ever before, but its manufacturing sector has been going downhill rapidly. Williams Ekanem explains why the country's producers are raising the alarm.

During the African Nations Cup football tournament in Ghana earlier in the year, Nigeria, which considers itself the 'champion' of Africa in most aspects of life, had to swallow the bitter pill of defeat against their arch West African rivals, Ghana.

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Now it seems that it is not only in football that Ghanaians are taking over from Nigeria, it is also happening in business. In July, Dunlop Nigeria plc, which is quoted on the Nigerian Stock Exchange, announced plans to substantially scale down its activities in Nigeria. Although the tyre company did not publicly announce it at the time, industry sources say it has its eye on relocating to Ghana.

After producing tyres in Nigeria for 45 years, Dunlop said it will be closing its N8bn ($68.3m) tyre plant and will now import tyres from South Africa and other Dunlop factories around the world. The fate of at least 1,200 Nigerian workers hangs in the balance. Dunlop is not the only company considering taking this route to maximise its industrial capacity: Unilever, a household products manufacturing company with substantial investment in Nigeria, considered a similar option some months ago. Michelin, another tyre manufacturing company, has closed down its business in Nigeria after 30 years of operations in the country. When the tyre company folded its local production in the country, it took to the more lucrative option of full-scale importation of tyres and is said to be considering returning to the West Africa sub region via Ghana to stay in competition.

According to AllAfrica.com, a pan-African online news agency, "only 10 out of 170 textile companies are now operating. Companies that have closed shop in Nigeria are now joining Unilever which may soon move to Ghana."

A disagreement between Nigeria's government and Virgin Nigeria also erupted in July. The issue was over Virgin Nigeria's use of the international terminal for domestic flights. The airline announced that it is in talks to sell its 49% stake in Virgin Nigeria. Sir Richard Branson, president of Virgin Atlantic, accused the authorities of using Mafioso-style tactics to force Virgin Nigeria to move its domestic services from their base at the international terminal in Lagos. Virgin Atlantic is accusing the government of reneging on a deal signed with the previous administration of Olusegun Obasanjo.

Although Nigeria has Africa's largest population as a domestic market, which is proving very attractive to a growing number of foreign direct investors over recent years, the inability of the government to solve the nation's most pressing economic problem--inefficient power generation--has severely crippled the country's production capacity. Persistent power cuts have more than tripled the cost of production substantially reduced the ability of companies to make profits and give shareholders a decent return on investment.

What has gone wrong?

Reports indicate that persistent power outages, irregular gas supplies and inconsistent government policies, made worse by high interest rates, have resulted in abysmal earnings for companies.

Abiona Babarinde, external communications manager of Dunlop, says that the tyre company spends more than $800,000 annually on power generation and, in addition, it pays half that amount to a power holding company.

At the end of July, the Manufacturers Association of Nigeria (MAN), am umbrella body of all manufacturers in Nigeria, put capacity utilisation at 38%, dropping from 42% eight months ago. Causes, according to MAN, include failed basic infrastructure and the rising cost of production in addition to the ongoing power crisis. This has led to a plummeting of the manufacturing sector's contribution to the country's GDP.

The power sector is generally characterised by low generating capacity relative to installed capacity. Presently, electricity generation is in the region of about 3,300MW, while the estimated national consumption demand is for more than 25,000MW with potential demand as high as 100,000MW.

What are operators saying?

Sam Ohuabunwa, chairman of the Nigerian Economic Summit Group and managing director/CEO of Neimeth Pharmaceuticals plc, blamed the situation squarely on the country's failed infrastructure which, he points out, profoundly increases the cost of production.

According to him, the cost of energy is driving up the cost of production and in an impoverished economy such as Nigeria, when demand falls, capacity falls.

Ohuabunwa, who is also the chairman of the Ikeja branch of MAN, called on the government to work harder to ensure that it deals with the problem of energy, transportation and other infrastructure to enable operators in the sector to compete favourably in the international market.

The textile industry is probably the hardest hit by the erratic power supply with more closures than other sectors. Highlighting the problems facing the sector in Lagos recently, Paul Olanrewaju, director general of MAN, said that the industry currently faces, among other problems, the consequences of infrastructural decay, inconsistent government policies, multiple taxation, and the high cost of doing business.

Counterfeit goods

According to him, the textile industry also suffers to an unfair extent from the Nigerian penchant for foreign goods. This has led to the smuggling, faking and counterfeiting of Nigerian-made fabrics. He said smugglers now produce counterfeit versions of the country's popular textile designs. "In order to beat customs checks at the borders, most smugglers import Chinese-made textiles with a Nigerian brand name."

To make matters worse, the $600,000 revival budget for the textile industry, set up two years ago, is yet to be funded, Olanrewaju stated. Although the government consistently claims to be working on improving the power supply, not much positive impact has been felt so far.

It is on record that the former President Olusegun Obasanjo spent over $10bn on the sector during his eight-year tenure, but failed to deliver on his pledge to raise generation to 10,000MW by the end of 2007.

What is the government doing?

President Umaru Yar' Adua, who has come under mounting pressure in the last few months to revamp Nigeria's epileptic power sector, has taken some steps in this direction.

In August, Nigeria entered into partnership with a number of German companies to improve the power supply. Under the deal, Germany will generate 6,500MW by 2020 after building new power stations--hydro, gas thermal, solar, coal, wind and waste-to-energy plants--in different parts of Nigeria.

Germany will also help the country expand existing dams and upgrade power substations to improve power generation, which has dropped below 1,000MW from around 3,000MW a year ago, largely due to corruption and lack of maintenance. Five German power companies are involved in the Nigeria-German Partnership Memorandum of Understanding, among them Siemens AG.

Besides power, Yar'Adua has also set up the Infrastructure Concession Regulatory Commission (ICRC) to ensure the proper management of national infrastructure.

A statement signed by the Special Adviser to the President on Communications, Olusegun Adeniyi, in early August said the commission was put in place to give greater practical effect to the present administration's efforts to involve the private sector in the development of roads and other critical national infrastructure.

RELATED ARTICLE: Business-friendly environment

GHANA

Recovering from an economic downturn in the 1980s, Ghana, on the other hand, has over the years initiated policies targeted to make Ghana the gateway to West Africa through building a business-friendly environment.

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President John Kufuor (above) says he is committed to creating a golden age of business for Ghana by the end of his tenure of office. The essence of this vision, he said, is to energise the private sector to serve as the principal engine of economic growth.

This has found expression not only in closer collaboration and partnership with the private sector but also in the mobilisation of funding.

The government has created the Ministry for Private Sector Development (MPSD) tasked to facilitate the development and growth of a competitive and vibrant private sector and also to help reduce the cost of doing business in Ghana.

surveys rate Ghana as one of the most attractive locations for doing business in Africa. Ghana offers many attractions to the foreign investor including a stable political environment and sound macroeconomic policies as well as permitting 100% foreign ownership.
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Title Annotation:NIGERIA
Comment:Manufacturing under stress: Nigeria may have the largest domestic market in Africa and may be attracting greater FDI than ever before, but its manufacturing sector has been going downhill rapidly.
Author:Ekanem, Williams
Publication:African Business
Geographic Code:6NIGR
Date:Oct 1, 2008
Words:1344
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