How African businesses could play a key role in global supply chains

John Félicité, Director, Ocorian Mauritius explains how supply chain disruption in the wake of Covid-19 might well open doors for African nations and businesses who have previously struggled to take advantage of global trade.

As global trade has accelerated certain countries, most notably China, have emerged as true manufacturing powerhouses. This has largely been driven by businesses needing to reduce costs and increase profitability, which has led many to shift manufacturing to low-cost regions.

On the surface, it could be argued that this has levelled the global playing field, with countries given the option to manufacture or import goods and carve out their own place in the global trade landscape. Unfortunately, the matter is nowhere near as clear cut as that – something that is particularly evident when looking at the disparity among African nations.   

While the discovery of natural resources provided immediate wealth to a few; it did not act as a catalyst for the economic development of all equally. And while other countries in the world transitioned from the industrial revolution into the modern age, many African nations have been left in the past despite others making amazing leaps in innovation.

All of this is creating an imbalance in the continent – and the way forward is still unclear. However, as the world emerges from the Covid-19 pandemic, it’s possible that African nations may find unexpected opportunities.

The way forward for Africa

The future for many nations in Africa is said to be through technology – especially as the world has entered the so-called ‘Globalisation 4.0’ era of the digital economy. However, the capex required for nations to build first-class technology is a barrier to entry that, unfortunately, many are unlikely to ever overcome.

The largest projects, however, focus on industrialization. Among these is ‘Industrialise Africa’, which is spearheaded by the African Development Bank. It prioritises ‘identifying and investing in high-value industrial projects, which have a catalytic effect on countries’ economies and foster the transformation of African economies’.

This is unsurprising, given that the largest component of exported products can be accounted for by raw materials, at approximately 44% – with this breaking down between petroleum oils, gold and other precious metals, diamonds (non-industrialised, simply cut) and cocoa beans (whole, broken, raw or roasted).

It is also worth considering the environmental impact of exporting millions of tonnes of raw materials out of Africa, only for them to be manufactured into products which are then shipped back to Africa for its consumer market. It would be more sustainable both environmentally and socio-economically if Africa could for example, produce and export batteries rather than export the raw materials used to create them.

Some have argued that Africa shouldn’t focus solely on manufacturing and industrialisation to create jobs, reduce poverty and grow incomes, but should also consider services as an alternative pathway to development.

It’s critical to remember that African nations are very much at different points in their development and it’s difficult to take a single view. So exactly how can Africa in the 21st century write its own history and take responsibility and pride in the development of the continent on its own terms?

Involvement in global supply chains.

It is perhaps worth starting by looking at what role exists for Africa in the context of global trade and global value chains. The pandemic demonstrated their vulnerability – as did the Ever Given container vessel becoming stuck in the Suez Canal. There has been much talk in the last two years of ‘localisation’ – bringing supply chains closer to the intended market. This may well have created some level of opportunity for Africa.

The African Continental Free Trade Area (AfCFTA), under which free trade officially began in January 2021, will hopefully allow for greater and freer trade between African nations as well as acting as a catalyst to build manufacturing locally for distribution locally. With the continent expecting to make up 20-30% of the global population by 2050, it makes sense for supply chains to be closer to home.

Without this concept being properly understood, the consequences for the youth of Africa and the development of jobs and economic growth could be potentially disastrous.

Research carried out by Professor Lawrence Edwards of Cape Town University in June 2020 points to the role of African manufacturing firms in global trade. A particular focus was on those companies who participate in global value chains (GVCs) through employment, export volume and other factors.

African firms need to find ways to enter GVCs as by doing so, they will enable their local governments to create and implement policies that will ultimately be beneficial to the firms, the country and the continent as a whole.

Rising wages in China have also created opportunities for manufacturing in Africa, enabling some of the low-cost, labour-intensive activities to be produced in the continent. This is already demonstrated by the rapid growth in footwear manufacturing seen in Ethiopia, making the country the largest sub-Saharan Africa (SSA) footwear supplier to the USA.

Research has also shown that export participation is connected to import participation – those firms that import from a wider source tend to be more productive. Analysis by the United Nations Industrial Development Organization (INIDO) shows that in Ethiopia, participating in importing raises a firm’s productivity by 3.5%-4.9%. For South African firms, the numbers are even higher.

Balancing importing and exporting

This does beg the question, however, of why we don’t see more African companies importing the materials necessary to produce finished goods. For this to be properly understood, there are certain areas that need to be assessed by governments. Firstly, policies that hinder access to imports, such as tariffs, import permits and domestic content requirements, can impede progress.

Secondly, the high trade costs associated with poor transportation and infrastructure sit alongside the weighty paperwork associated with importing and exporting procedures in many African countries. Incentives to facilitate the reduction of tariffs on intermediate inputs costs could assist here, as could increasing port capacity to ensure the ease and efficiency of exportation.

As the end of 2021 approached, there was an expectation that the global vaccine market would grow more than 250% in terms of volume and 550% in terms of value. It is expected to be worth around $170bn compared to $30bn in 2018. And this has led many to ask what role does or could Africa play in the GVC of vaccines.

The continent continues to import 99% of all vaccines. Yet countries like Egypt, Tunisia, Senegal and South Africa arguably have the skills necessary to manufacture and allow transfer of knowledge to take place.

While the focus should not be solely on Covid, as there may possibly be other pandemics in the coming decades, the pharmaceutical industry and African governments should position themselves to ensure manufacturing can take place closer to the markets where demand will be greatest.

African businesses have, for some considerable time, faced often-insurmountable challenges when it comes to getting a foothold across the continent, let alone on the global stage. While there may be a sense that times are changing – firms and governments still have to grab any opportunities with both hands.

At Ocorian, we specialise in assisting the C-suite in making decisions that will add real value to their businesses. Our global footprint also means that we understand the interconnected nature of doing business around the world. For African businesses, having a local and global perspective has arguably never been more important.

Contact John at john.felicite@ocorian.com to discuss how Ocorian can support your business operations.