Nigerians Want to Consume More Stuff from Their Own Soil; Can Unilever Make that Happen?
Falling oil prices stoked economist protectionist policy in Nigeria. The government had no choice but to ban the importation of 41 items due to dollar scarcity forcing Unilever to re-assess its import-based raw material sourcing model. Will this mark a permanent change in its raw material supply chain?
The manufacturing sector accounts for less than 10% of the Nigerian economy[i]. This is no surprise for a largely consumption-based economy with a very low manufacturing base. Most local and multinational businesses rely on imports for sourcing a significant percentage of raw materials, with minimal value add (mostly packaging) taking place in Nigeria. The growing food import bill was a major concern to the government considering the sizable fertile land and favorable climate. In 2014 alone, Nigeria spent $6 billion on food import[ii]. The consequence of this import fed model was a high level of unemployment and limited inclusive growth.
Though profitable in the short term, the import-based model was clearly unsustainable. Companies depended on foreign currency supply from the Central Bank of Nigeria (CBN) to pay for imports. CBN’s dollar supply was however limited to oil receipts (Nigeria’s biggest export accounting for 75% of Nigeria’s export and 90% of foreign earnings), a function of the price and volume of Nigeria’s crude oil, both outside Nigeria’s control as it turned out.
In 2014, international crude oil price tanked touching new historic lows[iii] – sub $40 per barrel from a peak of c.$100/ barrel, while political disturbance in the Niger Delta region (Nigeria’s oil-producing region) hampered oil production leading to a double-dip decline in Nigeria’s petrodollar receipts. Predictably, the CBN’s ability to finance imports was negatively impacted. It was clear something has got to give!
While the need to domesticate manufacturing in Nigeria was well acknowledged within Nigeria’s political circles, the political will to act was always absent. The dollar shortages in 2014 called for immediate actions and the CBN acted accordingly – Nigeria placed a ban on the importation of 41 items (mostly imported raw materials for food, clothing and other industries) in June 2015 citing government’s desire to transition the import-dependent economy into an export-led economy[iv]; this was also followed by higher import duties further depressing the economics of imports. This development sent shock waves through the consumer goods sector in general forcing companies to reconsider their sourcing model and supply chains. In particular, palm oil, a key input for Unilever Nigeria across its different product lines including laundry, oral, soap, skin care, bouillon, and margarine was included on the list, thus hampering the company’s operations in Nigeria.
This protectionist sentiment evoked by the dollar scarcity has shaped Nigeria’s trade policy in the last 2 years. After working with the EU for several years, Nigeria refused to endorse the Economic Partnership Agreement with the EU[v] (an agreement under which Nigeria is expected to remove or reduce tariff on some imports from Europe in exchange for tariff exemption on its export to EU) over concerns that such an agreement is antithetical to ongoing efforts to promote local sourcing in the country.
In the face of the immediate challenges, Unilever’s immediate reaction was to re-route supply through other markets outside Nigeria as a short-term measure, while it immediately commenced exploring strategic partnerships for sourcing raw materials in Nigeria as well as making investments in backward integration[vi]. It is in the process of partnering with local suppliers, following which it plans to ramp up local manufacturing capacity. It plans to achieve significant local sourcing by 2020 and potentially supply other West African countries from Nigeria in the long run. The plan is to make the Nigeria evolve into a core manufacturing base for West Africa.
Despite significant long-term benefits thereof[vii], the transition to local sourcing will not be easy for obvious reasons – unstable power supply, poor road infrastructure, suboptimal level of farm mechanization etc. The company has to view this as a long game and work with the government for policy consistency to ensure it reaps full benefits. One way to lock-in government support is to involve local farmers through an out-grower scheme. However, a lot of open questions remain: Is the Nigerian government fully committed this its backward integration agenda – will it return to a dollar spree when oil price recovers making local sourcing uncompetitive relative to imports? Will other West African countries follow Nigeria’s policy, potentially limiting the benefit of regional integration in West Africa? Will this move have any impact on product quality in the short term?
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[i] National Bureau of Statistics, “Nigerian Gross Domestic Product Report, Q2 2017”, September 2017. www.nigerianstat.gov.ng/download643
[ii] FBN Capital Research, “Good Morning Nigeria: Movement on import substitution” September 15, 2016
[iii] “Oil Prices Fall to the Lowest Since 2009”, Clifford Cross, New York Times, January 12, 2015. www.nytimes.com/2015/01/13/business/energy-environment/oil-prices-fall-to-their-lowest-since-2009-recession.html
[iv] Inclusion of Some Imported Goods and Services on the List of Items Not Valid for Foreign Exchange in the Nigerian Foreign Exchange Markets”, Foreign Exchange Circular, Central Bank of Nigeria, June 23, 2015
[v] EU, ECOWAS Urge Nigeria to Sign the EPA, Vanguard, August 1, 2017. https://www.vanguardngr.com/2017/08/eu-ecowas-urge-fg-to-sign-economic-partnership-agreement/
[vi] Femi Adekoya, Unilever to Explore Local Sourcing, Backward Integration in Nigeria, The Guardian, January 26, 2016
[vii] “Local sourcing: A Multi-billion Dollar Opportunity for Companies in Africa”, Summary Report of a Panel Discussion on Africa’s Local Sourcing Opportunity at the Africa CEO Forum, March 2017
From a Unilever perspective this presents two interesting thoughts for me. First of all, how trustworthy is the standpoint of the Nigerian government? If the Nigerian government truly wants to develop an own food supply chain in Nigeria in the long-term, I think Unilever would be interested in helping developing this (Nigeria will be a massive growth market in the future due to population growth and supply chain presence might have a positive impact on consumer perception), however if Unilever thinks that the opinion of the government will change every few years, Unilever might think that the risk of investing in the supply chain is too high (i.e. if Nigeria after a few years is willing to go back to importing). Second, as the European Union sanctions on Russia have shown, building up an own food supply chain in a country is not an easy task at all. Sanctions on Russia were imposed in 2014 and Russian counter-sanctions stopped the import of many food products. One of the thoughts behind the counter-sanctions was that this would provide Russia an opportunity to develop their own food supply chain within many food product areas. However until today, this development has been very modest. [1] Unilever should keep case Russia in mind, when thinking about building up their supply chain presence in Nigeria.
[1] “The embargo has transformed the Russian food market”, Jakub Olipra, Central European Financial Observer, January 24, 2017. https://financialobserver.eu/cse-and-cis/russia/the-embargo-has-transformed-the-russian-food-market/ Accessed November 2017.
I agree that the long-term benefits to developing more domestic manufacturing are significant. However, it requires the Nigerian government to incentive private investment in infrastructure and the like while also using public funding to support these initiatives. I wonder if the opportunity cost of the public funding in the eyes of the public / media is too high. Presumably, there are many, perhaps more visible, needs that the people may demand the government support. How can the government manage its budget and manpower to set the country up for long-term success while also work to create a strong foundation and tackle everyday issues? Additionally, will consumers also react poorly to a decreased variety of goods available in the market as well as potential cost increases? How might that impact quality of life?
In writing the above, I realized that you can substitute the the Nigerian government for any other country’s government and/or private company’s management. Balancing short-term demands (of consumers, analysts, constituents) with decisions that will fuel long-term success are always challenging.
The success of this strategy appears to rely heavily on capital expenditures from the Nigerian government. Improvement of roads, infrastructure, and agriculture will be essential to a developed export market, yet Nigeria’s reliance on oil income implies that it has initiated this movement in a time when available capital is limited. I suspect that there may be risk of future delays and pauses to development progress with the volatility of oil futures throughout the project lifetime, and this may force Unilever to take on greater capital outlays than they may expect in order to support progress when the government is unable. Separately, global warming creates new challenges of growing seasons and irrigation, which may add further risk to this local supply chain.
Messi, this is a wonderfully written article. I think what some of the comments are missing is that domestic supply chains are not only beneficial to the Nigerian government but also to Unilever. @Phil Mackeson, in investing in domestic supply chains Unilever is not “helping develop”, as you noted (as though they’re giving hand outs by making an investment) and it there are far more benefits to Unilever than “perception of local consumers” because Nigeria is a long-term growth market. I strongly argue that building out a local supply chain is in the best economic interest of Unilever too. Firstly, it reduces its inflationary and currency exposure as it will eliminate the P&L mismatch between local currency revenues and foreign currency costs. Secondly, it mitigates regulatory risks that it would be subject to as international trade policies may change between administrations. Thirdly, as Unilever becomes a more involved investor in the country, it will increase its negotiating leverage with the government over the any challenges it may have with infrastructure that everyone is commenting on above, and fourthly, Unilever is likely to benefit from tax rebates by making this incentive. The combined effect would lead to less variance in margins and long-term stability for the business, which will ultimately drive shareholder value!
I would however agree with @Justine that these protectionist measures do have an impact on the local consumer in the interim as they may lack the products they need. Additionally, a ripple effect across the economy is unavoidable as the many actors involved in the import business such as traders may be altogether out of business, therefore increasing unemployment rates.
Declining oil prices coupled with the protectionist policy can be a blessing in the long term. Low oil prices have finally forced the government to act and diversify the country’s economy beyond oil. The journey towards being a manufacturing powerhouse will not be a smooth one. Indeed, product quality will fluctuate and will affect Unilever’s output. Power issues will mean increased spend on alternative, more expensive, power sources which will feed into higher retail prices. However, if heavy capital expenditure accompanies the protectionist policy, the country can stabilize its manufacturing industries more quickly.
Obviously, this will depend on the political will of subsequent administrations to follow through with the policy began by the current administration, especially when oil prices rebound.
Thank you for this nicely written article. Whenever I hear such stories I wonder how such phases of difficulty will improve the economical health of a country. Governments blessed by natural resources sometimes tend to rely too heavily on commodity exports and forget to invest locally by building infrastructure and steering a diversified economy. Even if I agree with @Dietmar that declining oil prices can be a blessing in the long term, the positive impact of protectionist policies will depend on political stability and consequently on what the Nigerian government will be doing once oil price recovers.
Very interesting problem faced by Nigeria’s people and Unilever. On one hand, it’s easy to understand tidal waves of protectionist views in developing countries; issues like food-supply, rapid inflation, income inequality / poverty, and government corruption all contribute to this sentiment. On the flip side, protectionist measures make it exponentially painful in the short term for those who take the position in the first place, thus leading to more frustration and social unrest. It’s interesting to see how Unilever has attempted to respond with backwards integration – I do hope that this provides some economic benefit for the people of Nigeria in terms of additional labor demand and income generation, as well as access to important and affordable products.
This is a very interesting and informative article touching on the intersection between private and public sectors. I agree with Justine that consumers may react poorly to the government’s policy banning imports, which can severely damage the policy’s effectiveness. I think one tactic the government can use is to publicize how serious the current situation is to the economy and nudge the consumers to change their behaviors. The consumers should perceive the import ban not as something inconvenient but a movement that is beneficial to them in the long run. I see a parallel here with South Korea when its economy lacked foreign currency right after the Korean War and during the Asian Financial Crisis. The government leaders and media talked about the scarcity of foreign currency all the time. The Korean population learned that foreign currency is expensive, and they voluntarily started purchasing domestically produced goods. A stigma was newly formed and attached to purchasing foreign goods. It not only helped the government to maintain the balance of foreign currency but also helped the domestic manufacturers to grow quickly and start exporting to other markets, which is what Nigeria is now aiming to do. The key is to communicate the purpose and goal of its policy to the public.
Thanks for exploring this topic. It would have been helpful to hear more about Unilever’s reaction and strategy as a proportion of the word count. I am curious to hear how the government did the analysis weigh the benefits and negatives to banning import items and how the actual outcome differed from their expectations. Was there a lead time to the ban to give companies time to alter their sourcing process?