Abuja, Nigeria. 23rd August, 2016 – Latest Manufacturing sector survey conducted by NOIPolls in collaboration with CSEA (Centre for the Study of the Economies of Africa) has revealed that Unavailability of Petrol and Diesel, Poor Power Supply, Policy inconsistency, and Limited Access to Credit are cited as major challenges facing the Manufacturing sector in Nigeria. Majority of the manufacturers surveyed stated that, compared to one year ago, the availability of Petrol/Diesel (80 percent), Power supply (73 percent), Policy inconsistency (55 percent), and Access to Credit (49 percent) have worsened.
In addition, about 78 percent of companies revealed they have been negatively affected by the disparity in foreign exchange rates (in the official and parallel markets). This cuts across the different company-size categories as large 83 percent, Medium 76 percent, and Small 78 percent indicated this negative impact of forex. This finding is particularly poignant as 52 percent of sampled companies disclosed that they are highly dependent on imported inputs in their production, and only 25 percent indicated that the export market was highly important to their turnover. Furthermore, a majority of sampled firms (60 percent) decried the lack of support within their current business environment; with at least 90 percent of the firms not operating up to their optimum installed capacity, and 45 percent operating below 60 percent of installed capacity. However, Nigerian Manufacturers are upbeat and have a positive outlook on the economy over the next one year, with 76 percent expecting economic conditions to improve.
In summary, due to the chronic challenges of infrastructure and inputs, the Nigerian manufacturing sector is yet to transit from a demand-driven regime to a supply-driven regime that is essential for long-run growth. In the present demand-driven regime, population growth estimated at 3.2 percent per year is expected to strengthen local demand and stimulate growth, most notably in the necessities subsectors – food and textiles. The contraction of these two sectors during the period reviewed presents an ominous sign that needs to be carefully analysed and clearly understood. Responses to the poll show that the manufacturing sector remains dependent on the international market, buying inputs many times more than it supplies products to foreign markets. These are some of the key findings from the Manufacturing Sector Survey conducted in May 2016.
Background
Manufacturing, the business of large-scale industrial production, is central to economic growth and poverty reduction in both historical and contemporary contexts. As the base of the most essential value addition processes, the strength and quality of manufacturing is the most important determinant of economic competitiveness. As the essential secondary or “transformative” sector, a shift[1] of the economy from primary sector (base of activities related to harvesting raw materials such as agriculture and mining) toward the secondary or industrial sector is associated with development of value or processing chains, which results in rising productivity and reduction of labor share in the primary sector.
There are two elements in this shift. One, manufacturing growth drives productivity in agriculture and mining as farmers and miners reallocate resources to supply raw materials needed in industry.[2] Two, education and technical skills increase in order to provide the workforce needed in the factories.[3] In effect, this shift raises aggregate level of skills in the economy and aggregate income level which in turn drives a shift in consumption toward manufactured goods.[4]
Manufacturing also drives the emergence and growth of the tertiary sector by inducing demand for (and supply of) technical skills, workforce and workplace services including health and safety, as well as distribution of manufactured goods. Public infrastructure development to support industries and private investments further spur the growth of the services sector. Many of the skills required in the services sector would already have been developed during the industrial stage of the economy.
The manufacturing sector has historically been a very small fraction of the Nigerian economy. The share of manufacturing in the economy hovered around an average of 6.7 percent for the first three decades after independence (1960-1989), fell to 5.1 percent and further to 4.0 percent during the 1990s and 2000s respectively. A shift in policy emphasis toward agricultural productivity, value chain development and foreign direct investment in agriculture and manufacturing beginning in 2010 contributed to a doubling of manufacturing share to 8.4 percent during 2010-2015.
However, the manufacturing sector’s growth momentum of 2010-2014 was lost in 2015 despite continuous local demand growth. The sector reversed from 14.7 percent growth in 2014 to 1.5 percent contraction in 2015, while its contribution to GDP growth reversed from 21.8 percent in 2014 to -5.2 percent in 2015. In light of the above, NOIPolls and CSEA (Centre for the Study of Economies of Africa) conducted this manufacturing sector survey to provide a snapshot of the industry and elicit views of manufacturers across the country on their businesses and the environment.
Survey Findings
Among the companies sampled, about 60 percent consider the current business environment unsupportive, with only 31 percent stating that the environment is supportive. Interestingly, the geographical breakdown shows that while companies in the North East (93 percent), North West (73 percent) and South East (68 percent) find the business environment unsupportive; only companies in the South West (65 percent) seem to suggest that the business environment is somewhat supportive. Overall, one a scale of 1 to 5, the average score for the business environment is 2.6 points, which is about average.
Assessment of current business situation is overall not impressive, as at least 45 percent of manufacturing companies stating that their current business environment is bad and 12 percent stating that it is neither good nor bad. Only 43 percent of companies stated that their situations as good or very good, ranging from a lowest rate of 18 percent in the North-Central to the highest rate of 78 percent in the South-West. Large companies are the most likely to rate their situations this way (49 percent).
Companies in the South-East are most dependent on imported raw materials (80 percent), while those in the North-West are least dependent on them (25 percent). In the case of output, companies in South-East are most dependent on exports for turnover with 40 percent reporting high or very high importance of foreign markets, while manufacturing companies in the South-South are least dependent at 8 percent. In relation to foreign exchange movements and black market premium, a very high proportion (78 percent) of all sampled companies experience adverse effects ranging from 96 percent in the South-East to 74 percent in the North-West.
Local demand for manufactured goods is ranked as the most important factor that helped manufacturing companies remain profitable in the last year of operation, with a score of 70 percent. Next to local demand comes expansion of distribution networks helping companies to reach growing markets, and cheap inputs, both of which are ranked in second place with scores of 50 percent. Innovation and new technology are in fourth and fifth place respectively with scores of 38 percent and 37 percent. There are no significant differences in the rankings by geographical zone.
The challenges facing manufacturing in Nigeria are enormous, ranging from intense foreign competition from low-priced imports, domestic competition from more technically efficient and less technically efficient producers of fake goods, foreign sourcing of raw materials, corruption in government, policy instability, and enormous infrastructure gap. Cumulative efforts of government in these areas are expected to help improve the business environment and lessen the challenges faced by businesses in these areas.
However, many of the challenges became worse during the year under review for responding[5] sampled companies. Overall, petrol/diesel and power supply worsened over the last year for 80 percent and 73 percent respectively of the companies. Policy inconsistencies are still reported by a majority (55 percent) of companies as having worsened, while 49 percent of them reported access to credit to have become harder. Also, 50 percent of the companies that use the ports for imports or exports report the conditions have remained the same as last year.
Lastly, businesses exist to provide solutions to challenges and create new products and services. It is not unreasonable to expect businesses to find solutions to challenges they face in their operations. In addition to their own efforts, there could also be improvements in public sector provision of public goods that may ease the constraints affecting business. Among the sampled companies, 49 percent report developing their own innovations as key to easing the challenges, 31 percent report private market solutions, and 20 percent report improvements in public service delivery. In all, these developments are reported to be most notable in the North Central zone: with 76 percent indicating solving the challenges through their own innovation, 60 percent through alternative private markets, and 48 percent through public sector improvements.
One great finding from the survey though, is that Nigerian manufacturers are upbeat and positive about the future, with about 76 percent expecting the economy to improve over the next 1 year. On a scale of 1 to 5, this expectation index scored 3.8 points, which is rated as very good.
Conclusion
It is evident that the Nigerian manufacturing sector is yet to transform to a supply-driven regime that is essential for long-run growth. The dependence of manufacturing companies, especially the large ones, on importation remains a serious challenge to performance of the sector. Currency devaluations during the last year raised the cost of production and thus contributed to contraction of the sector. Further devaluation which seems inevitable will contribute to recession of manufacturing in Nigeria. While this may pose a challenge, it also presents an opportunity to develop innovations and find alternative solutions to the challenge.
Finally, the attention of all stakeholders – government, industry and development partners – need to centre on how to address the challenges of importation of manufacturing materials, the rising costs of energy inputs, and policy inconsistency. On the part of government, the following actions which are not limited to implementing an input import substitution program, creating strategic FX window for manufacturing, reforming public finance institutions to improve access to credit, implementing modular refineries and implementing sound industrial policy should be highly considered to foster better growth in the future. In the same vain, manufacturers should deem it necessary to develop capacity for innovation and evaluate product value chains whereas, development partners could do more to support manufacturing in Nigeria by supporting long-term funding of the manufacturing sector and supporting the business environment reforms.
Survey Methods
A mini-manufacturing sector survey was conducted in May 2016 by NOIPolls and the Center for the Study of the Economies of Africa (CSEA) to provide a snapshot of the industry and elicit views of manufacturers across the country on the business environment, company performance and operational challenges, and experience with labour and financial markets. Target respondents were Manufacturers, Owners, Managers, Directors, C-Level Officers, and decision makers within the manufacturing companies.
The Sample
Zone: 29 companies are from North-Central, 37 from North-East, 44 from North-West, 25 from South-East, 24 from South-South and 46 from South-West.
Size: 98 small companies (10-49 employees), 69 medium companies (50-199 employees) and 38 large companies (200 or more employees).
Turnover: 19.1 percent make turnover below N1 million, 29.4 percent make turnover of N1-10 million, 24.2 percent make turnover of N11-50 million, 6.7 percent make turnover of N51-100 million, 7.2 percent make turnover of N101-500 million, 9.8 percent make turnover of N501 million-1 billion, and 3.6 percent make turnover above N1 billion.
Ownership: 40.5 percent of the companies are Private Limited Companies, 32.2 percent are Sole Proprietorships, 10.7 percent are Family-Owned, 8.3 percent are Partnerships and 5.9 percent are Public Limited Companies.
Disclaimer
This press release has been produced by NOIPolls Limited to provide information on all issues which form the subject matter of the document. Kindly note that while we are willing to share results from our polls with the general public, we only request that NOIPolls be acknowledged as author whenever and wherever our poll results are used, cited or published.
NOIPolls hereby certifies that all the views expressed in this document accurately reflect its views of respondents surveyed for the poll, and background information is based on information from various sources that it believes are reliable; however, no representation is made that it is accurate or complete. Whilst reasonable care has been taken in preparing this document, no responsibility or liability is accepted for errors or fact or for any views expressed herein by NOIPolls for actions taken as a result of information provided in this report. Any ratings, forecasts, estimates, opinions or views herein constitute a judgment as at the date of this document. If the date of this document is not current, the views and content may not reflect NOIPolls’ current findings and/or thinking.
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[1] A shift toward a sector is meant to describe domination of aggregate economic activities by the sector, measured by both output and employment.
[2] This reference includes time (cutting back on leisure and sleep to work for more hours on the farm) and material resources (moving limited resources away from other crops toward those in high demand).
[3] Farmers will increasingly send their children to school to learn the new skills in high demand rather than retain them in learning-by-doing on the farm.
[4] Even farmers will be selling wood products to paper factories and buying stoves for cooking.
[5] Some of the sampled companies responded “not applicable” to the questions about the challenges. The rates reported here for each item reweighs the responses conditional on its applicability.