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Global companies were supposed to be more efficient, leveraging resources from across the world, from places where they are best sourced, to create value on an unprecedented scale. That seemed to be the case in fact.

Western multinationals used cheaper labour in underdeveloped countries to manufacture products that relied on inputs from all over the world and technologies developed in their more expensive labour markets. Studies now suggest these advantages are being lost. Labour is no longer as cheap in many places.

In China, for example, lifestyles are becoming increasingly aspirational – more Chinese are now seeking the good life and consequently demanding higher wages. In addition, local firms are now themselves employing the technologies developed in the more advanced labour markets – think Safaricom and M-Pesa in Kenya.

As The Economist put it in January, “the companies at the cutting edge are local, not global.” As a result of these and other factors, such as the strong dollar, the profits of multinationals are falling.

Thus it is increasingly difficult to make a business case for the global company, at least in the form of costly brick-and-mortar operations in numerous countries. And the reduction of global ambitions among the multinationals has coincided with resurgent populist nationalism in the developed world.

In response, the trend is increasingly towards localisation – a global company leverages its well-recognised brand but adapts it to the local conditions of the host country. General Electric, the American industrial giant, is a case in point.

In May 2016, Jeffrey Immelt, its chairman and chief executive, put the strategy succinctly: “Globalisation is being attacked like never before […] in the future, sustainable growth will require a local capability inside a global footprint.”

Wasted opportunities

Other than in the large economies of Nigeria, South Africa, Egypt and Kenya, it hardly makes business sense for a multinational to build an entire supply chain in an individual African country. A cement manufacturer in Nigeria could easily supply the entire West African region.

A bank in South Africa, where capital is abundant but opportunities scarce, could deploy capital in African countries desperate for investment. It should be easy to sell fertiliser produced in Morocco anywhere it is needed on the continent.

So why have long-established Western conglomerates on the continent not seized this opportunity? Instead, most build independent country operations ship out primary commodities to their home countries in Europe or elsewhere, and subsequently ship back finished goods into African countries.

True, those in the fast-moving consumer goods sector do some manufacturing in-country and sell to the domestic market. But their operations are rarely regionally integrated.

African governments are partly to blame. Border restrictions, currency controls, incongruent trade regulations and so on stifle intra-African trade.

Governments say they want to promote such trade, but make little effort to do so. Even in the East African exception, where progress is being made in infrastructural integration, worries about the increasing dominance of Kenya have been a source of grumbling, for instance by Tanzania.

The challenge for companies

Still, if intra-African trade is to be lifted from its current paltry level, it is likely to come about through the cross-border supply chain activities of pan-African multinationals. Thus, it behoves African companies to take on the mantle of intra-African trade.

“African economic development is going to be driven by African champions who operate across borders”, says Andrew Nevin, chief economist at the Lagos office of PwC, a global consultancy. “[They] will be the primary way we connect African economies and make sure that Africans trade with Africans.”

Amid longstanding lamentations by African policymakers about meagre intra-African trade (Benedict Oramah, president of Afreximbank, recently estimated it at 19% of the continent’s total trade), could the pan-African company be a panacea? Charles Robertson, global chief economist and head of macro strategy at Renaissance Capital, an investment bank, seems to think so: ‘[The] idea about pan-African corporations or banks driving trade integration makes sense,” he says.

Besides, African banks are already well set up for the task. Ecobank is the quintessential pan-African bank – headquartered in Togo, it has operations in 36 African countries. Another example is Nigeria’s United Bank for Africa, which already operates in 18 African countries, but has plans to expand to another seven.

Building the supply chains

Meanwhile, some retailers and manufacturers have moved from being regional champions to developing an African ambition. Shoprite, the South African retailer has operations in at least 15 African countries, selling products manufactured in its home country across the continent.

In countries where the authorities have sought to buoy their domestic manufacturing capacity, Nigeria for instance, the retailer has adapted, adding locally manufactured products to the mix of goods on its shelves. And in the construction sector, Nigeria’s Dangote Cement, largely owned by Africa’s richest man, Aliko Dangote, is not only building plants across the continent, but has now begun to export cement from these plants to those countries where it only has import terminals.

Nigeria has become a net exporter of cement, courtesy of Dangote. With plants in Nigeria, Cameroon, Ethiopia, Congo, Tanzania, Zambia, and South Africa, and import terminals in Sierra Leone and Ghana, Dangote Cement is proof of the potential of the pan-African manufacturer as a veritable channel for intra-African trade.

In some cases, firms have been forced by circumstances to export to other African countries. The two companies licensed by Nigerian authorities to manufacture and distribute fertiliser, Notore Chemical Industries and Indoroma Eleme Petrochemicals, together produce twice the national requirement of 1.1m tonnes. They export the excess.

This has proved a little troublesome, however. Raymond Agbi, group head of shared services at Notore lists some of the typical challenges as erratic customs regulations, transport and infrastructural bottlenecks and language differences. Currency controls can also be problematic. For intra-African trade to thrive, “regional organisations would need to streamline trade regulations,” he says.

Rafiq Raji

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from African Business Magazine http://ift.tt/2oc4y7K