Business Day

African fac­to­ries have room to grow

Too many goods are im­ported, write TENBITE ERMIAS and ACHA LEKE

- Business · Finance · Consumer Goods · Africa · Asia · Egypt · Morocco · Nigeria · Tunisia · ASEAN · Ethiopia · Beijing · Vietnam · United States of America · World Bank · Mercosur · Kenya

AFRICAN in­comes are ris­ing, and con­sumer and busi­ness spend­ing is vi­brant — but the con­ti­nent’s man­u­fac­tur­ers are still not tak­ing ad­van­tage of dy­namic home and re­gional mar­kets. This is a large lost op­por­tu­nity. New re­search from the McKin­sey Global In­sti­tute finds that Africa could nearly dou­ble man­u­fac­tur­ing out­put in less than 10 years, cre­at­ing as many as 14-mil­lion wage-pay­ing jobs.

Over­all, African economies have un­der­per­formed. Value added from man­u­fac­tur­ing in­creased at a rate of 2.5% a year be­tween 2000 and 2015, far weaker than Asia’s 7.4%. To­day’s $500bn of out­put is heav­ily con­cen­trated in five coun­tries: Egypt, Morocco, Nige­ria, SA and Tu­nisia. And man­u­fac­tur­ers sell com­par­a­tively lit­tle to the rest of Africa — just 10%.

But Africa could nearly dou­ble its out­put to an es­ti­mated $930m in 2025 — man­u­fac­tur­ing out­put would grow at 6.4% a year, triple the rate achieved since 2000. Three-quar­ters of the op­por­tu­nity to boost man­u­fac­tur­ing comes from serv­ing home mar­kets — pro­duc­ing at home more of what Africa cur­rently needs.

Africa im­ports a third of the food, bev­er­ages and sim­i­lar pro­cessed goods it con­sumes. By con­trast, mem­ber states of the As­so­ci­a­tion of Southeast Asian Na­tions (Asean) im­port about 20% of such goods from out­side their re­gion, and the South Amer­i­can coun­tries in the Mer­co­sur trade bloc im­port about 10%.

Africa has the raw ma­te­ri­als to make ce­ment in abun­dance, and yet it im­ports 15% of its needs com­pared with 5% in the case of Asean and Mer­co­sur.

Yet con­sumer and busi­ness spend­ing is grow­ing ro­bustly. African con­sumers and busi­nesses al­ready spend $4-tril­lion a year. By 2025, that will rise to $5.6-tril­lion.

Con­sump­tion by house­holds is ex­pected to grow at nearly 4% a year to $2.1-tril­lion. Busi­ness spend­ing is set to grow from $2.6tril­lion to $3.5-tril­lion. That means ris­ing de­mand for man­u­fac­tured goods from pro­cessed food and bev­er­ages to plas­tics, ap­pli­ances, cars and trucks, con­struc­tion ma­te­ri­als, fuel and in­dus­trial in­puts.

Of the $430bn ad­di­tional man­u­fac­tur­ing out­put McKin­sey be­lieves is pos­si­ble, up to $209bn could come from a cat­e­gory called “global in­no­va­tions for lo­cal mar­kets” that in­cludes mo­tor ve­hi­cles and chem­i­cals, where re­search and de­vel­op­ment is a key com­po­nent, and which al­ready ac­counted for 27% of African out­put in 2015.

The re­gional pro­cess­ing of goods such as food and bev­er­ages, with the largest share of man­u­fac­tur­ing to­day at 38%, could add as much as $122bn. Re­source-in­ten­sive man­u­fac­tur­ing of ce­ment and pe­tro­leum prod­ucts could con­trib­ute another $72bn of ad­di­tional out­put, and labour-in­ten­sive man­u­fac­tur­ing of such prod­ucts as ap­parel and footwear the re­main­ing $27bn.

Such a step change in man­u­fac­tur­ing in Africa is, with­out doubt, achiev­able. A num­ber of suc­cess­ful in­dus­trial clus­ters have al­ready emerged over the past 10 years, in­clud­ing Ethiopia’s ap­parel and footwear sec­tor and Morocco’s au­to­mo­tive and aero­space in­dus­tries. The chal­lenge is to cre­ate more such suc­cess sto­ries.

It won’t be easy — and it won’t be on low labour costs alone. For both do­mes­tic and ex­port op­por­tu­ni­ties, African coun­tries need to ad­dress over­all pro­duc­tiv­ity and cost com­pet­i­tive­ness.

Ethiopia’s suc­cess in ap­parel and footwear has been due to its low unit labour costs. So it is able to man­u­fac­ture a polo shirt for $0.14, less than half the cost in China and Viet­nam, and leather loafers for one-third the unit cost of Viet­nam and one-fifth the unit cost in China.

Ethiopia’s ex­pe­ri­ence demon­strates the need to act on a broad front to im­prove the com­pet­i­tive­ness of African man­u­fac­tur­ing.

One help­ful ex­port lever is the African Growth and Op­por­tu­nity Act trade agree­ment be­tween the US and about 40 sub-Sa­ha­ran African na­tions. McKin­sey’s re­search shows this agree­ment could re­duce the cost of African goods im­ported into the US by up to 50%. But few coun­tries fully ex­ploit this op­por­tu­nity.

To make the op­por­tu­nity a re­al­ity will re­quire African com­pa­nies to im­prove their pro­duc­tiv­ity and com­pet­i­tive­ness and build scale. To en­able them to do so, Africa’s gov­ern­ments need to weigh in with an ag­gres­sive agenda to en­able African busi­nesses to step up their per­for­mance.

Although Africa’s busi­ness en­vi­ron­ment has im­proved in the past two decades, even this year the World Bank put only seven African coun­tries in the top half of its Do­ing Busi­ness rank­ing. To im­prove the pro­duc­tiv­ity of cor­po­rate Africa, gov­ern­ments need to en­sure that the ba­sics of re­li­able power sup­ply, lo­gis­tics, and avail­able in­dus­trial land are in place.

They can en­able the growth of mar­kets by us­ing po­lit­i­cal en­gage­ment and trade agree­ments to deepen re­gional trade and re­move non-tar­iff con­straints. They can also mar­ket African pro­duc­tion ca­pa­bil­i­ties, bol­ster agen­cies to pro­mote in­vest­ment, and de­velop spe­cial eco­nomic zones.

The re­wards of ac­cel­er­ated in­dus­tri­al­i­sa­tion would be im­mense, trans­form­ing wealth, tax re­ceipts, pro­duc­tiv­ity and skills, and the bal­ance of pay­ments, and cre­at­ing mil­lions of jobs. Africa has its man­u­fac­tur­ing suc­cess sto­ries, but they re­main too few and far be­tween. Now is the time to put that right.

Leke is a se­nior part­ner at McKin­sey & Com­pany in SA and Ermias is a part­ner at McKin­sey & Com­pany in Kenya.

 ?? Pic­ture: REUTERS ?? Work­ers in a leather fac­tory in Ad­dis Ababa help Ethiopia to grow ex­ports of man­u­fac­tured goods in one of sev­eral in­dus­trial clus­ters aris­ing in Africa in re­cent years.
Pic­ture: REUTERS Work­ers in a leather fac­tory in Ad­dis Ababa help Ethiopia to grow ex­ports of man­u­fac­tured goods in one of sev­eral in­dus­trial clus­ters aris­ing in Africa in re­cent years.

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