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The drive for local input sourcing in manufacturing sector

Manufacturing Sector
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One common denominator among economic commentators in Nigeria is to assume that the local manufacturing sector imports more inputs than it sources locally.

From economic to investment analysts, down to investors, many assume that since manufacturers agitate more for dollar availability in the foreign exchange market, they must be importing more raw materials than they source in the local market.

But the point is that local input sourcing is not equal among all sub-sectors. For instance, while food and beverage firms get more of their inputs locally, pharmaceuticals get more from outside.

Another explanation is that there could be over 20 inputs needed to manufacture just one type of drug. While some of the inputs may be locally available, others may not be in the required quality and quantity.

Data from the Manufacturers Association of Nigeria (MAN), comprising about 2,500 members, show that local input sourcing rose from 47 to 52 percent between 2014 and 2015. Since 2015, this number has passed the 50 percent mark. Ordinarily, when local input sourcing is less than 50 percent, as in 2014, it means that manufacturers import more than they source locally. And when it exceeds the 50 percent mark, then manufacturers source more locally.

In 2016, local raw materials sourcing stood at 60.4 percent. It further rose to 63.2 percent in 2017. Last year, manufacturers’ local input preference stood at 60.3 percent, according to MAN.

In fact, since 2016 when dollar scarcity and economic recession struck, manufacturers have been forced to look more inwardly for inputs. In simple terms, local sourcing has stood above 60 percent mark since the foreign exchange crisis of 2016.

In 2016/2017, Frank Jacobs, the then president of MAN, had told BusinessDay that manufacturers were becoming aggressive in local input sourcing, fabricating machines at local institutes such as Federal Institute of Industrial Research Oshodi (FIIRO) and the Projects Development Institute (PRODA).

But the story does not end there. Companies are driving local sourcing in what is generally known as backward integration.

A typical example is what FrieslandCampina WAMCO does in five communities in Oyo State.

The dairy maker supports herdsmen to stay in these communities and produce raw milk from their cows. The dairy maker then buys the milk and uses it as input.

The herdsmen do not move their cows about, thereby guaranteeing sound health for the cows. The system eliminates clashes between farmers and herdsmen, which have become commonplace in many communities.

The Nigerian Breweries is also in this party. At the annual general meeting (AGM) held two weeks ago in Lagos, Jordi Borrut, managing director, said hundred percent of the brewer’s packaging materials come from Nigeria while 60 percent of its raw materials are sourced locally.

Nigerian Breweries is the biggest buyer of cassava starch from Psaltery International Limited, followed by Nestle Nigeria Plc and Yale Foods, Ibadan.

NB’s supply chain director Martin Kochl corroborated Borrut’s claim by saying that as sorghum constitutes 70 percent of the company’s raw materials, the company is making plans to explore other substitutes like barley which can be found in the northern part of the country.

Guinness Nigeria sources some of its sorghum and malt extract locally through various local chains suppliers.

“Currently, our local content sourcing is 75 per cent, and we plan to increase this significantly within the next couple of years,” Baker Magunda, managing director/chief executive officer, Guinness Nigeria, said in January.

Manufacturers scrambled for dollars in 2016 when the country fell into an avoidable recession. Some of their inputs are not found locally and it makes sense to get them from any part of the world where they are available.

About 64 small-scale manufacturers shut down in eight months to end of 2016 as they could not produce or stay afloat. At least 222 small-scale businesses closed shops, leading to 180,000 job losses, according to a report by NOI Polls.

The trend has forced manufacturers to begin to pump billions into local inputs to beat future dollar crunch.

Nestlé Nigeria, a food manufacturing giant, sources 80 percent of its maize, sorghum, millet, soya, cassava starch, cocoa powder, and palm olein from more than 41, 600 local farmers and processors scattered across the country. These crops serve as inputs for the Fast-Moving Consumer Goods (FMCGs) giant.

Nestlé Cereals Plan project has over 30,000 farmers who supply 100 percent of the grain requirement for Golden Morn Maize. Through its Sorghum and Millet in the Sahel (SMS) project, now called Nestlé Nigeria & IFDC / 2Scale Project Sorghum & Millet, the food and beverage giant has engaged up to 10,671 farmers.

More so, PZ Wilmar has continued to plant oil palm to serve as input for its vegetable oil and other products.

Santosh Pillai, managing director of PZ Wilmar, told BusinessDay that his firm has pumped approximately $150 million into oil palm plantations in Cross River State.

Findings show that most food and beverage firms today buy sugar, an essential input, from Dangote Sugar and Flour Mills’ Golden Sugar Company.

Flour Mills of Nigeria (FMN) has on its part, invested billions into oil palm, wheat, sugar and cassava, among others.

Through its Premium Cassava Products Limited (PCPL), FMN sources High-Quality Cassava Flour (HQCF) used in further production.

Dangote Group has also been among the biggest investors in backward integration.

Banks are also seeing the impact of rising local input sourcing.

“Local corporates are supporting out-grower schemes to support farmers for their inputs. In paper and packaging, operators are recycling used cartons as against importing tons of craf paper from across the globe,” said Bolatiti Ajibode, head, conglomerates and industrials, Stanbic IBTC Bank PLC, told BusinessDay.

To help shore up local production and input sourcing and also cut imports, the CBN restricted 41 items, from palm oil to margarine, from accessing the FX market. This pushed up local sourcing and raised production.

 

ODINAKA ANUDU& GBEMI FAMINU

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