• Tuesday, July 16, 2024
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How manufacturers can use backward integration to beat FX crunch

How manufacturers can use backward integration to beat FX crunch

Globally, backward integration has proven to be a well-known competitive strategy for businesses. Its popularity in Africa’s biggest economy was fuelled by low oil revenue which has adversely affected foreign exchange (FX) inflows into the country, causing severe FX scarcity and disrupting production activities and supply chains.

Backward integration, as a policy, involves local sourcing of raw materials to reduce foreign exchange dependence. It is a process in which a company acquires or merges with other businesses that supply raw materials needed in the production of its finished product.

Through the control of more of its supply chain, manufacturers can bring down the costs as well as guarantee access to key materials, according to experts.

Backward integration is seen as an important strategy that can help Nigerian manufacturers protect themselves against FX volatility, especially amid the shortage of the greenback.

Depending on the sector, exposure to the FX market in the Nigerian manufacturing sector averages about 40 percent, according to the Manufacturers Association of Nigeria (MAN).

But it differs from sector to sector. Sectors like pharmaceuticals and chemicals would naturally have higher FX exposure because most of their inputs are imported owing to the lack of a limited petrochemical industry in Africa’s most populous nation.

Products from inputs to machinery are imported into the country every week by manufacturers. The fact that manufacturers are the biggest importers is, however, ironically, given that the sector should naturally be at the forefront of exporting and repatriating FX into the economy.

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High energy costs, difficult operating costs, huge infrastructural gaps, inadequate cheap credits, multiple taxation, port congestions, bad road networks, and insecurity among others are the country’s manufacturing that is meeting up with these expectations.

The realities of the time, especially around FX availability coupled with all the challenges confronting manufacturers, experts say now is the time for them to look inward.

According to experts, backward integration saves costs and reduces exposure to the FX, which has continued to stall production activities across the board.

“The foreign exchange trend has been raising production costs for manufacturers because of their dependence on imported raw materials,” said Muda Yusuf, chief executive officer for the Centre for the Promotion of Private Enterprise.

“One of the ways manufacturers can beat the FX crunch is by looking inwards for input sourcing,” Yusuf noted.

A typical example of a backward integration success story is Chicken Republic. The eatery business, a leading integrated food company that employs thousands in its quick service restaurant, poultry and bakery business is outshining its peers owing to its backward integration policy.

Chicken Republic’s eatery business is sustainable and has a significant competitive advantage over most of the other eateries because it receives broiler chicken supply directly from its poultry farms while most of its peers buy from vendors who mainly purchase imported poultry products into the country.

It also made prices in its restaurants relatively stable and not subject to price volatility, despite the rapid inflationary trend in the country amid low consumer purchasing power.

Nigeria’s monoproduct economy has become a punishing reality, which is now hurting the economy badly.

For manufacturers, sourcing raw materials locally by way of backward integration is looking inevitable. Apart from saving costs and reducing FX exposure, it gives a competitive advantage and enables firms to control the value chain.

However, backward integration requires huge and expensive investments, a reason experts have constantly urged the government to provide cheap credits for manufacturers.

Apart from the benefits it brings to manufacturers, backward integration also boosts jobs, rural development and reduces pressure on the FX market. It can also lead to the springing up of millions of small businesses working with large firms.

However, backward integration projects in the country come with some challenges, especially the country’s opaque land tenure system and community tussles which are stalling investments in the sector.

A lot of companies have, however, done considerably well in backward integration.