Invest in Manufacturing to Meet Africa's Booming Consumer Demand
By: Leah Ngari
Africa’s manufacturing sector is slowly but surely growing. Thanks to increasing urbanization and access to electricity, the continent is gradually embracing manufacturing. Agriculture professionals are not alone in developing their processing operations. From car assembly to ceramics, textiles, and mattresses, industrial production is taking off.
Manufacturing is not only limited to the larger nations in Africa, like South Africa and Nigeria. Your Levi’s jeans and Reebok shoes, for example, might come from Lesotho!
Africa’s Consumer Market Biggest Draw for African Manufacturers
It might seem that businesses setting up manufacturing facilities on the continent want to cut labor costs on products intended for consumers outside the region. But international companies building factories on the continent are often trying to meet the demand of Africa’s rapidly growing consumer market. Many African manufacturers got their start as trading companies that imported goods, before realizing it was more lucrative to build operations to manufacture those goods locally.
Many businesspeople share the misconception that manufacturing in Africa is only profitable if they sell the manufactured products outside the continent. Those who understand the opportunity can thrive while contributing to Africa’s sustainable economic development. After visiting Nigeria to explore cheaper relocation alternatives for his Chinese manufacturing operations, one Chinese manufacturer recognized the local market’s potential. Despite his higher electricity costs, the ceramics manufacturing plant he established in Nigeria now enjoys a 2% increase in profit margins compared to what its Chinese counterpart.
Volkswagen is another international company that has been setting up shops in strategic locations all over the continent. With vehicle assembly facilities in Ghana, Nigeria, Ethiopia, and Rwanda, Volkswagen is targeting areas where the local market for vehicles is growing steadily. And as locals’ purchasing power increases, local demand for products will continue to rise.
Intra-African trade has been growing and is expected to increase further thanks to the passage of the African Continental Free Trade Agreement, which went into force last year. The AfCTA will give African manufacturers access to a sizable, readily available market. Although trading under the AfCTA was slated to begin July 1st, the date was postponed due to the COVID-19 pandemic. Nevertheless, once implemented, the agreement is expected to increase the market size for companies based in Africa and will propel the continent’s industrialization forward.
Ethiopia, the Upcoming Manufacturing Hub
While some manufacturing companies embrace the significant commercial opportunities created by the rising local demand, other manufacturing entrepreneurs focus on creating products for global consumers. International manufacturers have often favored Asian countries, where labor is cheap. Recently, however, the rising costs in China and India and social issues surrounding factory work in Bangladesh has made Africa look increasingly attractive.
Ethiopia looks particularly promising as the next major manufacturing destination. The country has the closest labor costs to Bangladesh, and a stable government that has fostered a suitable environment for manufacturing, including tax breaks for specific industries. The country also boasts a growing road and rail transport system. Establishing production lines in the country creates employment and enables capacity building among the locals. Volkswagen has set up an entire transportation facilitation ecosystem in the country, with an assembly plant, training centers, and automated transport solutions, including car-sharing and app-based taxi services.
Ethiopia’s flagship Hawassa’s Industrial Park has attracted some of the largest fashion brands in the world and makes use of renewable hydroelectric electricity and ecological waste management practices. While some of the business practices – most notably, the meager wages – have been criticized, the project has created tens of thousands of jobs. The World Bank is currently evaluating the social impact of the Hawassa Industrial Park on its workers and community. The findings will help companies and the government continue to industrialize Ethiopia in a socially responsible manner.
The Ethiopian manufacturing sector has taken a hit in the wake of the Coronavirus epidemic that has made it difficult to import raw materials and other components into the country. Companies that will manage to pivot their operations to source raw materials regionally and sell their goods to local consumers may thrive.
Despite the recent manufacturing growth, several challenges may still hold manufacturers back from venturing into Africa. Most African countries do not yet have the infrastructure capable of sustaining large scale manufacturing and relatively high labor and capital costs. As a result, manufacturing on the continent is concentrated in only a small number of countries.
The increasing automation of many low-skilled processes may make Africa less attractive as a manufacturing destination: Automation-heavy factories require an abundance of electricity. And with robots replacing human workers, companies might stop outsourcing production abroad.
Now is the Time for Investments in African Manufacturing
Automation also creates opportunities. Manufacturing companies can strategically involve themselves in developing infrastructure on the continent and use the latest tools and techniques to build functioning roads and ports. Private investment in African infrastructure can yield profits while contributing to the continent’s economic success. The trend away from production outsourcing should not affect manufacturing companies that focus on meeting the increasing demand for consumer products on the continent. Governments can choose to nurture specific sub-sectors, as Nigeria did with cement, to grow their competitive advantage. Entrepreneurs can draw on their creativity and innovation to face the infrastructure challenge and leapfrog over outdated production and distribution processes. Companies that enter the market now may well enjoy a first-mover advantage as they contribute to building Africa’s long term production capacities.