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Real Sector And Success Story Of Backward Integration

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As economic realities dictate looking inwards in the real sector, OGUNMOLA-OMILANI captures the giant strides of Nigeria’s manufacturing concerns in backward integration.

Nigerian companies, especially those in the manufacturing sector, are weathering the storm posed by a myriad of macroeconomic challenges with attendant pressure on their limited resources and attempt to cripple their move towards enhanced capacity utilization.

Since the economy slid into recession in the first quarter (Q1) of 2016 creating serious economic headwinds that attacked virtually all the sectors, manufacturing companies have eventually, taken serious, for the first time, the call for them to embrace backward integration as prescribed by government in 2002.

Backward integration means local sourcing of raw materials as import substitution policy. It was a deliberate strategic government policy aimed at conserving foreign exchange, boosting local capacity, creating jobs, enhancing skill acquisition and ensuring that less emphasis is placed on imported raw materials.

It is established that 80 per cent of manufacturing needs are imported-dependent which is one reason Nigeria’s foreign reserves have been low in recent times, leading to the massive depreciation of the naira. The local currency has, for instance, lost over 45 per cent of its value since June 2016 when the Central Bank of Nigeria (CBN) introduced the flexible foreign exchange (forex) policy that saw the naira tumble from N199 to U$1 before June 20, 2016 to the current exchange rate of N305 to US$1 on the inter-bank (official) forex window.

Early this year, the scarcity of forex forced many companies to close shop; others relocated to neighbouring countries while many retrenched their workers or placed them on paltry remunerations. Some of them were rescued by their foreign or home offices which supplied them with raw materials on credit and which have to be paid for when the forex market stablised.

Perhaps, out of sheer patriotism or the determination to remain in business and continue to earn returns for the shareholders, many companies have indeed embraced backward integration.

In a couple of months, the manufacturing sector has shown signs of recovery, though slowly, while the economic headwinds continue to surge. This, analysts say, is for the benefit of the country and the companies as both parties have a stake in the domestic economy.

Investigations showed amazing results in the activities of the companies that have embraced backward integration without showing signs of regression. Companies like Nigerian Breweries, Nestle Nigeria, Dangote Group, Coca Cola, Uniliver, Cadbury and others have embraced backward integration in the most determined way. Aside making use of what is available; most of these companies are breaking new grounds by expanding their coasts into backward integration and ensuring that those involved in the value chain are taken care of.

For instance, malted barley importation was banned in 1988 and all breweries were forced to brew with only locally available grains. In response, Nigerian Breweries commenced exploratory work in reformulating some of its brands with local substitutes. One of the local grains that then received the attention and patronage of the company was sorghum. The company which produces both alcoholic and non-alcoholic drinks uses the grain in the production of beverages.

The products that enjoy the input of the local raw materials include: Maltina, Malta Gold, Amstel Malta, Gulder, Heineken amongst others.  As part of its effort to key into local raw materials, the company has a subsisting consultancy agreement with an expert on the development of sorghum seeds. The company also entered agreements with local cassava starch processors whose activities have impacted positively in the communities where they operate.

Even when the policy was reversed in 1999, the company continued with its exploratory work in reformulating some of its brands with local substitutes. Findings also revealed that the company focused on two other items: cassava and sugarcane, as arrow-heads of its backward integration initiative. This, in turn, has generated numerous employments for farmers, women and youth, as well as middlemen like transporters and dealers.

Nigerian Breweries says its pursuit of commercial growing of the grains and hybrid sorghum was a product of intense research. It also said that the process led to the introduction of modern farming technique for the local farmers who, before then, did not use modern farming methods and inputs like fertilizer. “By this, the company is encouraging the large scale farmers to go into mechanized farming which is what obtains in advanced economies because of the economy of scale and the buoyant returns it yield”, said Akindele Balogun, a Sagamu (Ogun State)-based farmer.

According to Nigerian Breweries 2016 Annual Report, it is the policy of the company for its locations in Africa to source 60 per cent of their agricultural raw materials locally by the year 2020. In 2015, the company fully implemented the partnership agreement it signed the previous year with Psaltry International Company limited, a Nigeria cassava processing company, the International Fertilizer Development Centre and 2scale, a Dutch consortium to improve the cassava output of farmers.

As a result of this partnership, 2,000 direct farmers have benefited in 2017 from the processing to cassava starch project. Investigation showed that the producers have offtake arrangement with a multinational company that has huge investment in sugarcane value chain which aimed at replacing imported sugar in recipe with a local substitute.

In a related development, President of Dangote Group, Alhaji Aliko Dangote recently, shared the success story of his companies’ backward integration policy with investors at the Financial Times’ Fourth Annual Africa Summit at Claridges, London. Dangote outlined the following as key to his success: “self-sufficiency and backward integration; a manufacturing strategy that extracts value from entire processes.”

He declared: “We are not going to import anything any longer. In Nigeria, we are learning how to produce the entire value chain. Once a heavy importer of fertilizer, Nigeria is now gearing up to produce three million tonnes of locally manufactured fertilizer, transforming the country into one of the largest fertilizer exporters in Africa.”

In 2007, Nigeria was the second largest importer of cement after the United States. Dangote told the audience: “Today, we have not only satisfied domestic needs, we have become a leading exporter of six to seven million tonnes of cement.” He said his group leveraged on the backward integration of government to intensify effort on the exploration of local contents in order to boost the economy and create jobs for the people. All the subsidiaries of the group are involved in the pursuit of local content.

Diversifying into agriculture, Dangote has eyes on the dairy industry, motivated by the fact that 98 per cent of all milk consumed in Nigeria is imported. Same for rice. Dangote Group has invested heavily in rice production by investing in local farmers and then offering to buy back the one million tonnes at open market prices that they are growing. “Soon we will be able to feed not only Nigeria but the entire 320million large West African market,” he added.

By 2100, Dangote stated that Africa would represent 49 per cent of the world’s population, up from 30 per cent today. “If you don’t think big we won’t grow at all; in Africa you have to play long-term, he noted.

Looking at how backward integration is thriving in Lafarge Africa Plc, procurement director of the company, Mr. Lolu Alade-Akinyemi, said in Abuja during the 23rd Nigeria Economic Summit, themed ‘Opportunities, Productivity and Employment’,  “backward integration policy of the federal government in the cement industry saves Nigeria N240 billion yearly.”

He explained that since the inception of the backward integration policy in 2002, the local manufacturer of cement has seen installed capacity increase from two million to 32 million metric tonnes.

Alade-Akinyemi stated that “Increased local capacity in the manufacture of cement has so far attracted $6 billion in investment. The industrial policy of the government has harnessed Nigeria’s huge limestone deposit, saving the country N240 billion per year.

“Nigeria’s leading building solutions provider has increased local sourcing of critical materials using alternative fuel (biomass) and locally mined coal and lately doubled production capacity at its Mfamosing Plant in Calabar to five million metric tonnes, expanding significantly Lafarge Africa’s footprint in Nigeria and West Africa.”

Speaking further at the summit, Alade-Akinyemi, said that the policy has created about two million jobs, boosted local content, productivity and innovation, adding that the growth of the industry has also broadened government’s tax base.

In ensuring it follows government policy on backward integration, Nestlé Nigeria invested huge amount of money on sorghum and millet, including training of farmers.  In a statement made available to our correspondent, the company revealed that since 2016, it has been working with smallholder farmers in Northern Nigeria.

“This forms part of the company’s ambition to help develop thriving resilient communities. We aim to help to improve 30 million livelihoods in communities directly connected to our business activities worldwide.

“Empowering smallholder famers through sustainable agriculture in partnership with the International Fertilizer Development Center (IFDC), Nestlé started the Sorghum and Millet in the Sahel (SMS) Project to strengthen the resilience of millet/sorghum farming systems in North-western Nigeria, by empowering smallholder farmers (SHFs) on sustainable farming practices,” it said.

In 2016, about 15, 000 of the smallholder farmers (SHFs) benefited from the training programme while 8,237 farmers have so far been reached in 2017.

Speaking to the farmers as part of the visit, Corporate Communications and Public Affairs manager for Nestlé Nigeria, Victoria N’dee Uwadoka said: “Smallholder farmers are very important stakeholders to help us to continue to deliver high quality nutritious meals for Nigerian families.”

Stakeholders and industry experts have expressed concern over the high level of infrastructure deficit in the country that cripples efforts towards backward integration. They also condemn high cost of production following multiple taxation and high cost of funds. If these anomalies are not addressed, it will be difficult to embrace backward integration because the small businesses which feed the large manufacturing firms should be operating in a convenient environment.

“Funding is a big issue. For most of them or generally in the economy, cost of funding is well over 20 per cent. And for the real sector operators, it is difficult to sustain a business at that level with that kind of corporate funding especially when you realise again that you are facing competition from products that are coming from Asia that are very cheap.

“So if operating cost is that high and you don’t have control over most of the variables, then, it creates problem of competition for the manufacturer and that is why the mortality rate of manufacturing firm is very high especially at the medium and small scale level”, said Muda Lawal, director general, Lagos Chamber of Commerce and Industries (LCCI)



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