Backward integration occurs when a company buys its suppliers or internally produces segments of its supply chain.
A number of Nigerian manufacturers have acquired previous firms which supplied inputs to them or begun production of part of their supply chains.
The concept has become popular in Nigeria today because of the need to source inputs or raw materials locally, rather than import them.
While it is mainly done by the private sector, it has become a public or government policy melody aimed at sustaining favourable foreign exchange, boosting local capacity, creating jobs, enhancing skill acquisition and reducing the importation of raw materials.
The key question, however, is, does it make sense for Nigerian manufacturers? The answer could be in the affirmative or in the negative.
While fiscal and monetary authorities often emphasise backward integration, the fact they ignore is the financial outlay required to start it. In sugar, for example, Dangote, BUA, Flour Mills, Confluence Sugar and other investors have pumped over $1 billion in land acquisition, nursery plantation and acquisition of expensive equipment used in raw sugar processing.
Santosh Pillai, managing director of PZ Wilmar, told BusinessDay that the company had invested $150 million in oil plantations in Cross River State alone.
PZ Wilmar, a subsidiary of PZ Cussons, has almost 26,500 hectares of palm oil plantations in Cross River State. About 5,549 hectares (ha) of oil palm plantation are located in Calaro Estate, while 2,369 ha are in an area known as Calaro Extension. The firm also acquired Ibiae plantations with 5,595 ha; Ibad plantations in Akampa with 7,805 ha; Kwa Falls in Akampa Akpabuyo with 2,014 ha, and Oban plantations, also in Akampa, with 2,986 ha. PZ Cussons has completed two palm oil processing plants in the Calaro Estate. Only a company with a financial muscle will take this kind of risk.
Secondly, to establish a backward integration project, manufacturers acquire land, which costs a lot of money. In some cases, the plots of land go into contention, leading to litigations that last for years.
For instance, BUA acquired 15,000 hectares of land for the purpose of nursery plantation and final sugar production at Lafiagi in Kwara State. It took the company eight years to use the land owing to community land cases.
An importer bringing in finished sugar within this period would have been a billionaire, while the manufacturer would be struggling to start.
Nigerian manufacturers borrow billions to go into backward integration. Many of them get loans at 20 to 35 percent to go into these projects at commercial banks, promising to pay back in one to three years. In some cases, their investments at taken over by debtors when they are incapable of meeting their obligations.
Importers, however, do not suffer such fate. They import, pay duties and face the market squarely.
More importantly, some inputs in Nigeria do not always meet the anticipated standards of manufacturers, especially multinationals.
Rather than rely on such inputs, manufacturers ignore local suppliers for another market.
Once upon a time, cement makers ignored locally available gypsum and limestone to import them. It was not in the news because only few Nigerians understood the economics of that.
Firms are not necessarily set up to create jobs. Shareholders must get their dividends. Workers must get their salaries and all other stakeholders must get what is due to them. So, should manufacturers backward integrate when it makes sense to import? Analysts argue that manufacturers must be allowed to choose the best option that will keep them afloat.
However, many Nigerian companies think that backward integration is better for them. The biggest reason is that it saves them time and resources needed to seek foreign exchange during crisis similar to that of 2016.
In August 2016, the Manufacturers Association of Nigeria (MAN) and the NOI Polls reported that over 50 manufacturers and 222 small-scale businesses closed shops, leading to 180,000 job losses.
This happened because oil price drop meant low dollar inflows, translating into little dollar availability in the FX market. To avoid such situations, Nestlé Nigeria, a top player in the fast-moving consumer goods industry, has done huge investments in backward integration of sorghum, millet, soya, cassava starch, cocoa powder, and palm olein.
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 over 10,000 farmers.
Nigerian Breweries (NB), the country’s biggest brewer, is getting sorghum locally to replace barley.
The brewer also needs processed cassava (starch), having entered into an arrangement with local farmers for constant supply of it. One of such partners is Psaltry International Limited, based in Alayide village, Ado Awaiye near Iseyin, Oyo State.
The cassava processing firm has today become the biggest revelation coming out of the backward integration story. Oluyemisi Iranloye, MD/CEO of the firm, said in 2017 that the firm had created a supply chain of up to 5,000 farm families, including more than 2,000 registered and unregistered out grower farm families, marketers, transporters and retail input suppliers.
Nigeria’s biggest flour miller Flour Mills of Nigeria Plc has its own farms and engages local farmers to work as partners. It, therefore, sources local raw materials from its own farms.
Its subsidiary Agri Palm Limited located at Iguiye and Ugbogui near Benin City (with 4.500 hectares of oil palm plantation) supplies palm oil, olein and other by-products of palm oil to the group.
Another subsidiary— Agro-allied Syrups Limited—which has cultivated 800 hectares of cassava in Shao, Kwara State, in the last 16 months, supplies starch to the group. Some of its wheat flour is sourced from northern Nigeria.
Unilever, a FMCG firm, sources palm oil for its BlueBand and soaps. The company is also getting local herbs and spices for its seasoning cubes.
Under its ‘Partner to Win’ initiative, it partners local farmers and intermediary companies to source inputs.
“Already, we have achieved over 90 per cent in local sourcing of packaging materials. The aim is to achieve 100 per cent by the end of 2019 and overcome the current challenges of local vendor’s capacity to meet up with global standards. In agro-allied sector, Unilever is partnering with intermediary companies, for the supply of cassava and starch,” Thomas Mwanza, procurement director for Unilever West Africa, said recently.
Promasidor Nigeria Limited, makers of Cowbell Milk, Loya Milk, Miksi Milk, Onga seasoning, and Top Tea are also sourcing some of its inputs locally. It recently unveiled Nigeria’s first zip-lock packaged ready-to-go cereal.
Anders Einarsson, managing director of Promasidor Nigeria, said recently that 75 per cent of the product’s inputs are sourced locally. He added that the decision to look inward for raw materials was informed by the company’s desire to contribute to the growth of agricultural value chain.
“The raw materials of SunVita are about 75 per cent sourced locally. This demonstrates our commitment to backward integration and local capacity utilisation in line with the economic need of the country,” he said.
Experts say backward integration by manufacturers, when done sustainably, will not only create a number of value chains and jobs, but will also bring huge foreign exchange and development.
Local input sourcing is rising, showing that it makes sense for many manufacturers. It was 60.29 percent in 2018 and 63.21 in 2017.
Many more manufacturers believe backward integration will be cheaper for them in the long run. But they want to see good and stable policies, convenient operating environment, cheap funds, harmonised taxes, and quick out-of-court resolutions of land cases.
ODINAKA ANUDU& GBEMI FAMINU
