Backward Integration Strategies for Nigerian Industries
Dayo Bello writes on strategies that can enhance backward integration in the Nigeria’s march towards industrialisation
In the early seventies, under General Gowon’s government, Nigeria came up with two major policies designed to give Nigerians a measure of control over the production of goods and services. These are the Indigenisation Decree and the Import Substitution Policy. The purpose of the policies was to tailor the country towards self sufficiency through local manufacture of essential goods thereby conserving foreign exchange. For many of the consumer goods, local demand was capable of sustaining local production at reasonable economies of scale. One of the major spin-off from the import substitution policy was the establishment of six(6) car/vehicle assembly plants in Nigeria; Peugeot in Kaduna, Volkswagen in Lagos, Steyr tractor in Bauchi, Fiat trucks in Kano, Leyland buses in Ibadan, Mercedes in Enugu. As at today, 50 years later, only Peugeot and Anamco are managing to keep their heads above water, mainly due to heavy government patronage. All the rest have gone bankrupt. The high mortality rate among assembly plants is not peculiar to the auto sector alone, the electronic/ telecom industry has passed through the same ordeal. Examples include Maiden Electronics radio assembly factory, Ijora; Adebowale electrical; Sanyo assembly plant in Ibadan; Phillips electronic factory, Ojota; GTE telephone assembly plant, Orile-Iganmu; Bata Shoe factory, Ojota, Raleigh bicycle plant, Kano etc etc. In recent times, as a result of ICT boom, we now have five (5) computer assembly plants in Nigeria which are just managing to survive. If care is not taken, the same fate that befell the Auto assembly plants will also kill the Computer assembly plants. What is responsible for the high mortality rate for assembly plants? South Africa, Brazil, South Korea, Malaysia, India have successfully built viable and sustainable local motor and electronic industries by starting with assembly plants. Why did Nigeria fail where others have succeeded?
The following are the major reasons in order of importance: Lack of a pragmatic backward integration strategy Failure to develop and support local sub-contract industry for component parts manufacture Lack of indigenous research and development (R&D) activity to support innovation, adoption of new technologies and product enhancement Slow pace in the adoption of efficient production techniques such as CNC machines and robotics Governments indecision and inability to evolve policies that will strike a reasonable balance between the protection of local industry and exposure to moderate international competition.
I will now further explain the above points in order to produce a clearer understanding of the issues at stake.
Backward Integration Strategy: Final assembly aspect of a production line is actually the last and the lowest value segment of a product manufacture value chain. In a recent analysis, it was discovered that the value-added by the assembly of an Apple’s i-phone in China is only about 5% of the selling price of the phone. The rest of the cost is attributable to conceptualization, Research and development cost, android operating software cost, chipset development and intellectual property cost e.t.c. Similarly, it is clear that the assembly activity we carry out at the Peugeot factory in Kaduna accounts for only about 5 to 7 per cent of the selling price of the car. The rest of the 93 to 95 per cent goes to the parent company in France.
What is local manufacturing? When you say that Peugeot is a French car, what really do you mean? There are about five(5) main stages involved in the manufacture of a product.
1. Conceptualization i.e. developing an idea or coming up with an invention
2. Research and development activity needed to bring an idea into reality 3. Prototype development and refinements 4. Product design, product specifications and blueprint including materials selection, mass production techniques and process technology
5. Fabrication of component parts and subassemblies 6. Final assembly, testing and quality control Stages 1 to 4 confer intellectual property rights/ patent rights on the developer of the product and determines ownership. That is why the companies that undertake stages 1-4 are called Original Equipment Manufacturers(OEM’s). Also, 80% of the product cost is associated with the first four stages. The decision to undertake stages 5 &6 in-house or through sub-contractors is based on economic and political considerations. For most manufacturers today, stages 5 is outsourced to local or foreign subcontractors who specialise in such component parts or subassemblies. Such companies supply the same parts to many original equipment manufacturers and hence enjoy a higher economy of scale and lower prices than OEM’s who try to produce the same parts in-house. The last stage, 6, is undertaken in China, India, Malaysia, Mexico in order to take advantage of cheap labour.
The example given below will illustrate the above business model now being adopted by most manufacturers. Boeing company in Seattle, Washington, USA is the largest manufacturer of commercial planes in the world. All functions relating to stages 1 to 4 above are carried out in their R&D facilities in Seattle. Thereafter, the component parts of the plane are outsourced to 64 subcontractors scattered over 5 continents. The landing gear is made in Canada. The tail section is made in Japan. The jet engines are made by Rolls Royce in UK. Infact 80% of all large commercial engine planes are made by Rolls Royce of UK and Pratt & Whitney of USA. The parts produced by the 64 subcontractors are then brought together and assembled in Seattle. The reason why Boeing 777 is called an American plane is that activities 1 to 4 above are carried out in USA.
Innoson Motors is rolling out vehicles from its Nnewi plant in Anambra State and this effort is commendable. Nevertheless, until they can carry out the first four stages above in Nigeria, Innoson has no legal right to call its vehicle a made-in-Nigeria bus or pickup. 2. Undeveloped Local Sub-contract industry: For complex products and for most consumer goods there is hardly an original equipment manufacturer that produces 100% of the component parts required in-house. After a product is designed and its parts are fully specified, they are contracted out to sub-contract manufacturers. A serious and business-oriented manufacturer will consciously and deliberately develop a network of parts suppliers to produce the various component parts it requires at the final assembly line. Where necessary they will provide support to the subcontractors in terms of finance, technical assistance, quality control and acquisition of new technologies.
In the automobile sector, the inability of Nigerian Auto assembly plants to develop a network of local suppliers of component parts was one of the major factors that led to their collapse like a pack of cards in the mid-eighties.
3. Absence of indigenous research and development (R&D) Activities: Our Nigerian assembly plants never saw the necessity to set up high-level R&D in their factories. They had relied entirely on their parent companies to supply CKD parts and to also undertake product enhancements, upgrades and new models. There are 3 major functions that an R&D unit should have performed: namely, technology acquisition, absorption and adaptation. As long as we don’t take possession of the product, process and manufacturing technologies deployed in our assembly plants, we shall remain vulnerable to the disruptive changes in product technologies happening internationally. Nokia phones, which controlled about 40% of the world’s phone market a few years ago, did not respond fast enough to Apple’s smart phone technology and rapidly lost market share. Consequently it almost went bankrupt but for the takeover by Microsoft.
All product manufacturers must closely track development in technology to avoid their product becoming obsolete. Recently, a racing car newly developed by Renault of France has achieved 35% reduction in fuel consumption. The new engine uses a turbo-charged V6 energyrecovery hybrid engine. It is predicted that by the year 2020 to 2025, this technology will be deployed in passenger cars. Any Nigerian vehicle assembly plant that does not adopt the new technology at the appropriate time will be left behind and will rapidly lose market share and probably die a natural death like the Volkwagen factory in Lagos or the Fiat factory in Kano. The same goes for other assembly plants that assemble computers or electricity meters for DISCOS; there must be continual upgrade of product quality and technology in order to keep pace with international trends or else the assembly plant will lose market share and die a natural death. OUTDATED PRODUCTION TECHNOLOGY The highest priority objective of any manufacturing company is to achieve a level of efficiency comparable to any of its competitors to ensure it maintain its market share. Since globalization has turned the world into a global village, a Nigerian manufacturer is in essence competing with other companies located anywhere in the world including China, India, Malaysia and other countries with low labour cost. High labour cost countries achieve low cost through the use of robots or computer controlled machines. For example, in Bangladesh, there are 5000 (five thousand) garment manufacturing companies employing over 4 (four) million workers who earn an average of 30Euro (=N=7,200) per month; less than half of Nigeria’s minimum wage of =N=18,000. At the BMW car factory in Munich, Germany, the entire production line consists of 400 (four hundred) robots which perform over 90% of the tasks including 6,000 (Six thousand) spot welded joints. A 2,000 ton press shapes coils of flat steel into doors, fenders and other chassis parts. Chasis is made rust proof in a 1,000 A (One thousand amps) electroplating bath. Plasma torch at a temperature of 4,500 degree centigrade is used for cutting through a 15cm steel plate. The heavy dependence of automatic machine results in high production efficiency and ensure competitive pricing.
Nigerian vehicle assembly plants must adopt highly efficient production methods in order to remain competitive. Since we cannot achieve the low labour rates obtainable in China and the highly automated production line of Germany, we must be innovative in striking a delicate balance between the use of medium level automation and moderatelabour production lines. The ultimate aim is to remain competitive in the world market because there is a limit to which protectionism can insulate an inefficient production system from international competition.
ABSENCE OF PRAGMATIC GOVERNMENT POLICY
Some people have postulated that the Toyota panel van car killed Volkwagen Bettle in Nigeria. Elizade, RT Briscoe and others flooded the Nigerian market with cheap Toyota cars. Why couldn’t Volkswagen Nigeria respond to the challenge despite the presence of business gurus like Professor Pat Utomi in the top management of Volkswagen Nigeria at that time. The engineers in VW Nigeria hadn’t the skill or authority to come up with a new model that could match the price and performance of Toyota panel van. Even if they did, there were no Nigerian auto components manufacturers that could have helped them produce the chassis, transmission and engine parts required. They were technically and commercially handicapped to respond to Toyota’s challenge and they had no option but to close down.
On one hand, couldn’t the then federal government have imposed a 200% duty on panel van in order to protect VW Nigeria? On the other hand should government protect an inefficient and outdated locally produced car at the expense of denying Nigerians access to a more functional and more economical imported car. That was the dilemma faced by the then government which at that time was unable to find a compromise solution to the divergent interests.
In conclusion, it is imperative that all assembly plants in Nigeria evolve a pragmatic and time bound backward integration plan as part of their corporate strategy failing which their long term survival will be threatened.
Globalization has made it impossible for any country to operate in isolation, consequently, Nigeria must position itself strategically for full participation in the global supply chain. Assembly plants in all industrial sectors including auto assembly plants, computer assembly plants, smart card assembly plants, must join the backward integration train in order to secure their future.
As a result of the new automotive policy developed by Jonathan’s government, history is repeating itself, new vehicle assembly plants are being established again 50 years after those that were established as a result of Gowon’s import substitution policy. What is the guarantee that what happened to Gowon’s assembly plants wouldn’t happen to Jonathan’s assembly plants.
The two assembly plants, Stallion motors in Lagos (Datsun/Hundai) and Innoson motors in Nnewi (Innoson DVT) , claim to be producing ‘ Made in Nigeria’ cars and trucks. In a recent documentary by Bank of Industry, they showed the then Honourable Minister for Trade & Commerce, Olusegun Aganga commissioning the Innoson factory and confirming that the car was ‘ made in Nigeria’ and not ‘assembled in Nigeria’ The Honourable Minister is not an engineer by profession, for me, I will not take that statement on its face value, I need more concrete evidence.
Innoson Motors must answer the following questions before I can agree that they produce ‘ made-in-Nigeria’ vehicles.
1. Do you have research and development (R&D) department in Nigeria that produced the initial prototype of your bus?
2. Do you have the detailed technical specifications (Blueprints) for each of the 25,000 parts that make up your vehicle.
3. Who determined the performance parameters of the vehicles such as power output, efficiency, engine cooling capacity(BTU), operating temperature at equilibrium, cylinder bore, fuel consumption per km e.t.c.
4. Who determined the materials specifications? Is the engine block made of cast Iron or alloy material? What gauge of steel sheet are the body parts made of? What materials are the crankshaft and gear box made of? Were these determined by your engineers and metallurgists in your Nnewi factory?
5. Does your vehicle have a brain box? Is the brain box control mechanism based on wired logic, programmable logic array or stored program control? Is the control loop a first order or second order? Are you employing a proportional, integral, differential or PID control mechanism? What type of microprocessor is deployed in the brain box? How many sensors are connected to the brain box? In what programming language is the control software written – Cobol, FORTRAN, machine language, PHP, C, assembly language, Java or Visual Basic? Do you have a copy of the source code in your Nnewi factory?
6. What percentage of the vehicle parts are manufactured in your Nnewi factory? Are the engine block, crank shaft, alloy wheels, cylinder head casted in your Nnewi site? Do you have a 2,000 ton press for producing the body parts in-factory? Is there a flat steel factory in Nigeria supplying you with steel coils for body parts? Are there Nigerian producers that are supplying you ancillary parts such as speedometer, fuel pump, oil pump, water pump, alternator, radiator, starter motors, brain box, fuel injector e.t.c
If Innoson motors cannot provide satisfactory answers to the above questions it means that they are deceiving Nigerians that they are producing ‘made-in-Nigeria’ cars.
On the other hand if, for argument sake, we adopt the Nigerian Automotive Council’s definition of made-in-Nigeria vehicle as published in Financial Punch of Monday 24th June, 2013, quoting the D.G. Mr Aminu Jalal. The policy papers states that a vehicle can only be called made in Nigeria if 60 to 70 per cent of the parts are produced in Nigeria. Can Inosson and Stallion motors proof beyond all reasonable doubts that 60% of their vehicle parts are locally made, ie parts designed by Nigerian companies and for which we have patent rights?
To avoid unnecessary controversy, the Ministry of Trade and Industry should come out with a definite and unambiguous definition of the following terminologies both from technical and commercial points of view : (a) Made-in-Nigeria (b) Assembled in Nigeria (a) A Nigerian car or a Nigerian product Without a clear understanding of the above terminologies, we will not be able to come up with a pragmatic backward integration strategy for our industries.
We would be operating under a false illusion that we are making something in Nigeria when in fact we don’t have the ability for independent product development, product enhancement, new product innovation or mass production techniques. The day the umbilical cord connecting us to our parent technical partners in the industrialised world is cut off, that is when we would realise how ignorant and underdeveloped we are.
Local manufacturing goes far beyond just attaching indigenous names to foreign-made component parts that are coupled together in Nigeria.
Dangote industries is a typical example of how backward integration can assist in wealth creation, business continuity and long-term stability. From the humble beginning of being a seller of essential household commodities, he has become the richest man in Africa and has contributed so much to Nigeria’s industrial base. Dangote industries should not truncate its backward integration journey but should rather pursue it further. It should begin to set up research and development facilities that will enable him develop new products, more efficient production machinery and process technology for his cement and food and petrochemical industries.
Mr Manuel Oyeniyi in his article in Thisday newspaper of April 24, 2014 gave a graphic illustration of the secrets and intricacies of automobile manufacturing. Issues such as total demand, economic production volume, number of manufacturers, local auto parts industry, manufacturing technology etc have to be addressed.
From his analysis, it is clear that the new auto policy, though commendable, is just the first step of a long journey and it may take up to ten years before we see a truly made-in-Nigeria car. The Toyota factory in South Africa has over 50% local content and the QUEST model of Toyota was developed entirely in South Africa and adapted to the African market. They produce 260,000 cars per annum, some of which are even exported to Europe. This number, according to Mr Oyeniyi as about the minimum production volume for a car factory to break even and become profitable.
Nigeria must develop a comprehensive backward integration strategy for all sectors of our manufacturing industries. The private sector must take the lead, while government should support the process by developing appropriate policies. These, coupled with the academia producing quality technical manpower, will help us move gradually from local assembly into local manufacturing with at least 50% local content.