{"id":26085,"date":"2017-11-15T21:49:11","date_gmt":"2017-11-16T02:49:11","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/what-mncs-are-beginning-to-understand-about-doing-business-in-africa\/"},"modified":"2017-11-15T22:24:51","modified_gmt":"2017-11-16T03:24:51","slug":"what-mncs-are-beginning-to-understand-about-doing-business-in-africa","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/what-mncs-are-beginning-to-understand-about-doing-business-in-africa\/","title":{"rendered":"What MNC\u2019s are beginning to understand about doing business in Africa"},"content":{"rendered":"

Shortly following his inauguration in 2015, Nigeria\u2019s President, Muhammadu Buhari, put in place some stringent measures against imported goods to spur domestic industries into manufacturing. Africa\u2019s largest economy, Nigeria, with a gross GDP of over $400 billion[1]<\/a>\u00a0(International Monetary Fund, 2016), derives 95 per cent of export earnings and 70 per cent of government revenue from the oil sector[2]<\/a>. In a world where oil prices are $30-60 per barrel Nigeria\u2019s access to foreign exchange is severely limited. At the top of President Buhari\u2019s agenda was to boost domestic manufacturing in order to curtail the country\u2019s oil dependency.<\/p>\n

With broad sweeping bold strokes, on June 23rd<\/sup> 2015, Buhari\u2019s administration introduced a central bank policy that banned the use of foreign exchange for imports of 41 items[3]<\/a> from rice and vegetables to soap and glass. Having worked in African private equity for the last four years, I have seen first hand the challenges facing Nigerian businesses as the ripple effect of this decision hit supply chains very hard. The heavy handed message from the CBN was effectively invest locally or get out! MNC\u2019s have historically imported semi-finished and finished goods directly into African countries with minimal investment in Africa.<\/p>\n

Why this is of concern to PZ Cussons<\/em><\/strong><\/p>\n

PZ Cussons, producer of detergents and soaps, has been operating in Africa since 1899. The company generates a third of its revenues and almost a quarter of its profits in Nigeria[4]<\/a>. PZ Cussons also imports about 70% of its raw materials[5]<\/a>. Fatty acids, derived from refining crude palm oil (CPO), are key inputs for the saponification process to produce soap noodles (the base product for bar soap). After forming PZ Wilmar in 2010 (a JV with Wilmar to refine CPO in Nigeria), PZ Cussons was effectively engaging in some local activities one step up the value chain. However, the reality was that most of the CPO was imported directly from Wilmar\u2019s operations in Indonesia and Malaysia[6]<\/a>. Following the CBN announcement, PZ Cussons, like many others was now in a place where it could not obtain dollars for its imports of palm oil products and had three alternatives before going out of business: (1) find substitute products to import \u2013 not really a viable option in this case (2) pay a significant premium for the limited dollars in short circulation on the parallel market (through bilateral deals with exporters) or (3) seek to further consolidate their supply chain locally.<\/p>\n

What PZ Cussons has been doing about it<\/em><\/strong><\/p>\n

The company\u2019s initial short-term strategy was to stock pile inventory whenever it obtained dollar liquidity for its Nigerian business before the supply of dollars shored up. However, in the medium term, PZ Cussons has no other choice but to double down on its backward integration strategy and develop thousands of hectares of oil palm plantation in Nigeria. However, quoting the FT article written by Chris Stein in November 2016, the challenge is Nigeria\u2019s palm oil production is not currently enough to satisfy demand and it will probably take years.<\/p>\n

Other steps PZ Cussons could take<\/em><\/strong><\/p>\n

PZ Cussons could attempt to use an out-grower scheme: guaranteeing offtake of palm oil from domestic suppliers should motivate them to increase yields. This could be coupled with leveraging Wilmar\u2019s agri-expertise to educate local farmers. Furthermore, as it develops its own plantations, PZ Wilmar should engage firms like Indigo Agriculture to use their plant microbiome technology with hope of achieving radical efficiency gains in production yields. Finally, regardless of the whether the ban holds or not, I suggest PZ Cussons remains committed to further investing in Africa to consolidate its backward integration plan as this will provide much needed stability for the company for years to come.<\/p>\n

Open questions <\/em><\/strong><\/p>\n

A few open questions remain as to how this will play out. Will protectionist policies in Nigeria be effective in building domestic supply chains? Will Nigeria\u2019s infrastructure keep pace with required demands from domestic manufacturing? Will the production cost of a fully domestic value chain retain competitive pricing for Nigerians at attractive margins for PZ Cussons?<\/p>\n

(785 words)<\/p>\n

Source of cover photo:\u00a0\u201cInvesting in Nigeria Special Report,\u201d Financial Times, November 14, 2017, https:\/\/www.ft.com\/reports\/investing-in-nigeria, accessed November 2017.<\/em><\/p>\n

[1]<\/a> International Monetary Fund, 2016. IMF Database. http:\/\/www.imf.org\/external\/datamapper\/NGDPD@WEO\/OEMDC\/ADVEC\/WEOWORLD\/NGA<\/p>\n

[2]<\/a> Ministry of Budget and National Planning. (2014). Nigeria\u2019s oil sector contribution to GDP lowest in OPEC – Blueprint<\/em>. http:\/\/www.nationalplanning.gov.ng\/index.php\/news-media\/news\/news-summary\/333-nigeria-s-oil-sector-contribution-to-gdp-lowest-in-opec-blueprint<\/p>\n

[3]<\/a> Central Bank of Nigeria. (June 23, 2015). Inclusion of some imported goods and services on the list of items not valid for foreign exchange in the Nigerian foreign exchange markets.<\/em> https:\/\/www.cbn.gov.ng\/Out\/2015\/TED\/TED.FEM.FPC.GEN.01.011.pdf<\/p>\n

[4]<\/a> Lex Team, \u201cPZ Cussons: navigating Nigeria,\u201d Financial Times, January 27, 2015, \u00a0https:\/\/www.ft.com\/content\/15cfbf48-a640-11e4-89e5-00144feab7de, accessed November 2017.<\/em><\/p>\n

[5]<\/a> Chris Stein, \u201cCurrency controls force Nigerian manufacturers to buy locally,\u201d Financial Times, November 27, 2016, https:\/\/www.ft.com\/content\/160b19a4-8978-11e6-8cb7-e7ada1d123b1, accessed November 2017.<\/em><\/p>\n

[6]<\/a> Hadassah Egbedi, \u201cPZ Wilmar Sinks 75m into Nigerian Vegetable Oil Plant,\u201d Ventures Africa, February 18, 2015, http:\/\/venturesafrica.com\/pz-wilmar-sinks-75m-into-nigerian-vegetable-oil-plant\/, accessed November 2017.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

Despite making marginally positive contributions to African economies, MNC\u2019s have historically followed the trend of our colonial masters but are now beginning to feel the pinch\u2026<\/p>\n","protected":false},"author":9633,"featured_media":26086,"comment_status":"open","ping_status":"closed","template":"","categories":[89,2515,3239,400,3240],"class_list":["post-26085","hck-submission","type-hck-submission","status-publish","has-post-thumbnail","hentry","category-africa","category-international-trade","category-isolationism","category-nigeria","category-protectionism","hck-taxonomy-organization-pz-cussons","hck-taxonomy-industry-consumer-products","hck-taxonomy-country-nigeria"],"connected_submission_link":"https:\/\/d3.harvard.edu\/platform-rctom\/assignment\/rc-tom-challenge-2017\/","yoast_head":"\nWhat MNC\u2019s are beginning to understand about doing business in Africa - Technology and Operations Management<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/what-mncs-are-beginning-to-understand-about-doing-business-in-africa\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"What MNC\u2019s are beginning to understand about doing business in Africa - 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