Motoring Africa. Edward T. Hightower
West Africa) from overseas reduces the added costs of duties, shipping, logistics, storage, and damage. Getting the product that they want, faster, is also pleasing to the customer.
The McKinsey Global Institute organizes manufactured goods into the following categories:
Regional Processing – e.g., food, beverages
Global Innovation for Local Markets – e.g., chemicals, motor vehicles
Resource-Intensive – e.g., cement, petroleum
Labor-Intensive – e.g., shoes, apparel
For Africa, McKinsey estimates that 60% of the products in the Global Innovation for Local Markets sector are imported.11 I expect that this percentage is significantly higher for the automotive and motor vehicle sectors. When the demographic and income trends forecasts for the next 30 years are considered, this segment is ripe for significant growth in local demand. With this high and growing local demand, why not invest in local production?
With local production, the risk of price changes due to foreign exchange fluctuations is also reduced, as the product is both produced and sold in the country with the same currency. This impact cannot be overlooked, as the economies in many African countries cycle between boom and bust primarily due to the world market prices for commodities such as oil, cocoa, coffee, and bauxite, the main ore for aluminum production. More value-added local production will reduce the impacts of these commodity price and exchange rate cycles.
Strength through Sustainability
Sustainable industrialization has both an environmental and a commercial rationale. Industrialization creates the supply chains and support networks that make manufacturing businesses more efficient. Sustainable industrialization furthers these efforts and results in companies and industries that are built to last. Sustainable industrialization optimizes the performance of the business by reducing and eliminating inefficiencies throughout the value chain. Sustainable industrialization also takes the steps to ensure that the business is operating responsibly to the needs of the environment and community.
Let’s first look at optimizing the performance of the business and eliminating inefficiencies. Fundamentally, the success of a business comes down to two factors, revenue and cost; optimize the cost and maximize the revenue. The goal is always to deliver the best value to the customer. This does not necessarily mean the lowest price, but instead the most attributes in the product and service for the given price: design, style, performance, functionality, customer service, how it makes the customer feel, etc. Businesses that consistently successfully do this win in their respective market segments.
Understanding and Optimizing the Cost Structure
One of the first steps to optimizing business performance is developing a thorough understanding of the cost structure for the business. In my years as a business turnaround consultant, this was the main issue for several struggling companies. The cost to produce one unit of a given product is made up of the following elements or cost drivers:
Material cost – steel, wood, plastic, and the cost of any other raw or semi-finished goods that go into producing the item
Freight and logistics costs – packaging, transportation, warehousing, and insurance for inbound raw materials, work-in-process product, and finished goods to the customer
Labor costs – work directly impacting the manufacturing and assembly of the good, work indirectly supporting manufacturing, e.g., in-plant material handling or plant maintenance
Overhead/burden costs – engineering, administration, and other fixed expenses that are not production volume dependent; amortization of capital equipment used in the production process
Warranty costs – repair or replacement of defective products
In addition to these per-unit costs are any investment that is required to produce the product, but will have a life longer than the production of the product. For example, you may construct a solar power generating station to provide electricity for the plant that will manufacture a specific product, but it will likely be used for and benefit other products and operations of the business as well. This will be part of the capitalized or annual investment budget for the business.
As the cost structure of the business is measured and understood, steps can be taken to improve and optimize it. A business with an optimized cost structure is more commercially sustainable. It is built to generate returns and avoid waste and losses. One of the key drivers of an optimal cost structure is scale, i.e., building products at sufficient speed and quantity to fully utilize the capacity of the machinery and labor assigned to the job. In other words, scale involves optimizing the output of an operation. The cost to build a vehicle is typically 50-60% raw material and purchased parts, with direct labor and overhead labor making up the remainder. Having an advantage on 40-50% of a vehicle’s cost structure can give a new company the advantage needed to break into a competitive market. As labor rates in most African countries are lower than those in Europe, the Americas, and Asia, completing this work locally will lower total product cost. Building the products locally will also reduce the shipping, storage, duty, and insurance cost vs. importing the same product. Just as the ingenious and resourceful taxi drivers in Accra figured out how to keep those 20-year-old Japanese cars on the road and operating with few new parts, local participation in manufacturing and industrialization will unlock new opportunities for African-originated innovation in cost reduction and building scale.
Measuring and managing a business's impact on the environment and community will yield benefits on both the revenue and cost side of its income statement. Green products and green operating procedures can boost profits. Building mutually beneficial relationships with the local community, nation, and region will build the value of the company’s brands and increase its pricing power and margins. As the business is successful, current employees become more loyal to the firm and the best prospective employees want to join as well. Sustainable industrialization can show that doing the right thing for the customer, the business, the environment, and the community do not have to be competing goals.
| Conclusion: Investments in sustainable industrialization can create virtuous cycles, yielding more opportunities for entrepreneurs, jobs, economic development, and value creation than the agriculture, retail, and service sectors. |
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