• Sunday, June 23, 2024
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BusinessDay

For multinationals, Africa’s allure is fading, hurting jobs and wealth creation

Nestlé SA in August shuttered production of Nesquik chocolate milk powder in South Africa, citing falling demand. A year ago, Unilever Plc pulled the plug on the manufacturing of home-care and skin-cleansing products in Nigeria to “sustain profitability.” And pharma giants Bayer AG and GSK Plc have outsourced distribution of their products to independent companies in Kenya and Nigeria.

Drawn by rapid growth, youthful populations and increasing wealth, legions of top multinationals rushed into Africa in recent decades. But lately, the difficulties of doing business there—cratering currencies, overweening bureaucracies, unreliable power and congested ports—have dimmed the allure. “It doesn’t justify the effort,” says Kuseni Dlamini, a former chairman of Walmart Inc.’s African unit who now heads the American Chamber of Commerce in South Africa. “This should be a wake-up call to African authorities. If you do not have a conducive environment to grow and scale businesses, you will be left by the wayside.”

The pullback is most noticeable in the trio of countries multinationals typically choose for their initial efforts in the region: Kenya and South Africa, with relatively large middle classes, and Nigeria, with its population of more than 200 million. Together, the three account for 44% of sub-Saharan Africa’s economy and about 30% of its population.
Multinationals’ reluctance to expand or even maintain current operations frustrates African leaders desperate to ease unemployment and reduce their reliance on commodities as an economic engine.

In Kenya, President William Ruto has said manufacturing could raise his country to middle-income status by 2030, but poor infrastructure and increasing regulation have eroded competitiveness and hindered economic growth. Nestlé, which had considered increasing production in Kenya, says it’s instead curtailing operations at its sole facility there. While it will continue making a few products such as Maggi noodles, it’s downgraded parts of the facility to packaging imported foods like Cerelac baby cereal.

In January, Neumann Gruppe GmbH, the world’s largest coffee trader, said it would close its Kenyan mill and a unit that offered finance and marketing assistance to small farmers, retaining only an operation that sources coffee beans for export. The company says jobs will be lost, without giving a number, and blames a 2022 government decree barring companies from both marketing coffee and grinding the beans, forcing them to choose one or the other.

Companies in Kenya are also contending with higher taxes, notably a levy on imports of key raw materials such as cement, metals and paper. The Kenya Association of Manufacturers says that last September, 53% of members were operating at a quarter of capacity or less, and 42% anticipated job cuts within six months. “All the numbers are negative,” says Anthony Mwangi, chief executive officer of the Kenya Association of Manufacturers, which represents both domestic and foreign companies. “Those spaces that were used for production, now they are empty spaces. There are warehouses that are importing the same stuff.”

Since 2016, major South African retailers such as Mr Price, Shoprite and Truworths have closed in Nigeria, a country they’ve long considered a priority for international growth. Unilever last year stopped making Omo washing powder, Sunlight dishwashing liquid and Lux soap in Nigeria, now instead importing the products. And in March, Nestlé’s local unit announced its first nine-month loss in a dozen years after the local currency plunged.

In South Africa, which has the continent’s most developed economy, the once-admired infrastructure is in tatters. There are near-daily power cuts, and water outages are increasing, with 40% of water lost to leaks in some cities’ networks. And multinationals say a byzantine work permit system makes it hard to bring in foreign executives. The South African-German Chamber of Commerce last year said delays threatened operations owned by German companies responsible for 100,000 jobs in the country. “The visa matter spans the entire hierarchy of German business in South Africa,” the group said in a statement. “This is of course not only a concern to German business but also to the country itself.”

The regular interruptions to production and the pullback from manufacturing present a problem for local retailers. Shoprite Holdings Ltd., Africa’s biggest supermarket chain, says it’s had to increase its stockpiles of products to ensure it won’t have empty shelves, and it’s building additional distribution centers to hold more goods. “This gives you an idea of how constrained the supply chain is,” says Shoprite CEO Pieter Engelbrecht. “There’s very little investment in production capacity in South Africa amongst the manufacturers, and the multinationals have completely stopped.”

Plunging currencies, meanwhile, have made it harder for multinationals to repatriate any profits. In Nigeria the naira has lost 88% against the dollar over the past decade, while the Kenyan shilling is 34% weaker and the South African rand has depreciated 44%. That means lower spending power for residents, particularly when it comes to imported goods or those with foreign components. To fill the void, local manufacturers are increasingly stepping in with cheaper replacements that mimic the global brands.

South Africa’s Bliss Brands (Pty) Ltd. has long sold its MAQ washing powder in the poorer townships that surround big cities. These days, the brand is increasingly easy to find at Shoprite’s Checkers outlets and at Pick n Pay Stores in suburbs with manicured gardens and gated streets—at almost 30% below the price of Unilever’s Omo and Skip detergents. While MAQ hasn’t always been cheaper than international competitors, it’s managed to keep a lid on price increases, says Moaz Shoaib Iqbal, a director at Bliss. “Our structure is more nimble,” he says. Multinationals are “relying on the equity of their brands to carry them through.”

The retreat has helped lower-cost producers from other emerging nations challenge the big brands with their own plants in Africa. In Nigeria, diapers made locally by a Turkish producer are edging out Procter & Gamble Co.’s Pampers, and a Singapore company’s ramen is displacing Nestlé’s Maggi noodles. “In Africa, the market for pricier items is dwindling,” says Alec Abraham, an analyst at Sasfin Securities in Johannesburg. “We are seeing a shift in ranges to suit more basic needs, which means fewer items as manufacturers match their ranges to income levels.”