12 SCS:AFRICA
Out of Africa
The growth of manufacturing
in China is pushing up prices
so pressure is building to look
at other regions. SIGI OSAGIE
looks at the potential for Africa to
become the next low-cost
manufacturing region.
Does Africa have the potential to be the next major lowcost
manufacturing region, following in the footsteps
of Latin America, Eastern Europe and Asia? It is
certainly possible and quite probable as well.
But making this a reality would demand considerable effort,
large investments and a healthy dose of determination.
Importantly, it could have major implications for
multinational manufacturers who endlessly seek new
geographies as bases for low-cost manufacturing.
Exploiting low-cost economies as manufacturing bases is
not a new idea, but interestingly the only region that remains
as yet untapped is Africa. The reasons for this are many and
varied, and well-publicised.
Africa has many problems which have so far prevented
exploitation of its potential as a low-cost manufacturing hub,
including the lack of physical infrastructure, poor security,
and corruption. But perhaps the single biggest challenge
African countries face is the lack of good leadership and
robust governance.
However things may be changing; we can look to countries
like Ghana and Senegal for evidence that some national
governments are taking action to tackle their economic and
industrial malaise, and
making a success
of it too.
With Africa’s resurgence on the world political and trade
agendas this may well be the perfect time for multinational
manufacturers to get involved as well – there are multiple
potential benefits to be gained by all stakeholders, not least
multinational OEMs themselves. Private enterprise can have a
stronger impact on economic growth and prosperity than
national governments in many free market economies.
Through foreign direct investment in local manufacturing
plants and infrastructure, multinational manufacturers are
well-placed to reap sizeable potential benefits and
simultaneously support those African states already trying to
revamp their economies.
The benefits of low-cost manufacturing really boil down to
lower product costs hence higher gross margins. In the early
days of moving manufacturing operations to Asia some
multinational OEMs saw product cost differentials of up to 40
per cent (compared to manufacturing in Western countries).
Labour is significantly cheaper in Africa than in Asia or
Eastern Europe, so it is easy to imagine the spoils that await
those multinationals that choose to brave the risks and gain
first-mover advantage – 50 per cent reduction in direct
product costs? Very possible.
Challenges
Many of the risks and challenges multinationals would face in
moving manufacturing operations to Africa are identical to
those they face in moving to other low-cost regions –
increased transport costs, protection of intellectual property,
maintaining quality standards, and so on – so similar
mitigating approaches could be adopted. Fraudulent activity
and financial mismanagement, by far the biggest risk with
Africa, could be addressed by defining robust protocols for
disbursing investment capital. Several not-for-profit
organisations currently operating in Africa under the
auspices of the UN and the World Bank employ such
protocols and have successfully implemented many
development initiatives.
Aside from effective risk management there are
several other critical success factors that would apply,
just as there were several critical success factors when
OEMs first moved to Latin America, Eastern Europe
and Asia as low-cost manufacturing regions. As most
investment managers know, risk and reward go in
tandem – Africa may pose a high-risk option vis-à-vis
low-cost manufacturing, but it also holds potentially
huge rewards.
Any multinational OEM moving into Africa now
could reap significant first-mover advantages from
entrenching their operations and building
familiarity to leverage economies of learning.
Multinational manufacturers really could do
worse right now than explore this possibility.
The view from your next office window?
OCTOBER 2008 SUPPLY CHAIN STANDARD
www.supplychainstandard.com
Labour is
significantly
cheaper in Africa
than in Asia or
Eastern Europe,
so it is easy to
imagine the
spoils that
await those
multinationals
that choose to
brave the risks
and gain firstmover
advantage
– 50 per cent
reduction
in direct
product costs?
Very possible.
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