The growth rate of the manufacturing sector in a country truly reflects its economic potentiality. The sector should be seen as one of the potent tools for tackling the developmental issues of the state. Most of the developed countries are strong enough in their manufacturing sector.
Though the services sector in Nigeria has brought faster economic success, still the manufacturing sector plays an important role on the ground of sustainability.
In Nigeria today, though the manufacturing sector is growing at a faster pace, still it has failed to a large extent with regards to its percentage share in the total GDP
All because of the challenges in that sector. In the decades since independence, the Nigerian manufacturing sector has witnessed ups and downs as its contribution to GDP rose and fell. In 1970, it had risen to 9.4 per cent of GDP.
During the oil boom in 1973, it fell to 7 per cent but rose to 13 per cent in 1980 at the height of the second oil boom. However, according to the National Bureau of Statistics, manufacturing only contributed 4.1 per cent of Nigeria’s GDP in 2010. In other words, despite tens of billions of dollars in public and private investments since independence, the manufacturing sector actually contributes less to Nigeria’s economy than it did before independence 50 years ago (Nasir, 2011).
Challenges faced by manufacturing companies in Nigeria
Challenges faced by manufacturing companies in Nigeria warrant appropriate responses from the government as well as the industry for improving the competitiveness of the sector. There are a few areas where both the government and the industry need to put in efforts through a well-designed Public-Private partnership model. If fully implemented, it provides the key performance indicators (KPIs) upon which the sector can be monitored.
The following need to be understood
- The manufacturing sector needs to access the vast market possibilities available at the bottom of the income pyramid in the country.
- The first essential for ensuring manufacturing competitiveness is macroeconomic stability.
- Lowering the cost of manufacturing and improving the quality is essential for competitiveness
- Domestic indirect taxes are often singled out as a major reason why Nigerian manufacturing is uncompetitive.
- For instance, in India, there has been advocacy of industrial watchers that high-interest rates and availability of credit are problems that hinder the growth of the industry as reported by Rakesh, (2007) in his commentary on Challenges Faced by Manufacturing Sector.
- Innovation holds the key to increasing productivity.
- The government should consider establishing technology parks.
- The manufacturing sector is critically dependent on infrastructure facilities particularly, in the transportation sector – roads, railways, ports, airports etc. for the movement of goods.
- It is estimated that power shortage alone contributes to a production loss of at least one percent of GDP.
The present scenario in Nigeria is not different from other countries in the sub- Saharan region of Africa. There is no doubt that Nigeria is even worst off considering our technological deficiency. Below is an array of challenges faced by this sector, its impact and ways out:
One major obstacle is that of inadequate access to credit. A recent study by Nasir, (2011) showed that 47 per cent of firms placed access to credit among their top problems.
Inadequate access to credits results in low investment, making it difficult for manufacturers to procure modern machines, information technology and human capital which are vital in reducing production costs, raising productivity and improving competitiveness. Banks have abandoned the real sector and are unwilling to make credit available to manufacturers because they are afraid of borrowing short and lending long – the tenor of funds needed by industries. Besides, banks perceive manufacturing as high-risk ventures and would rather engage in contract and trade financing which often guarantee quicker and higher returns.
Even when credit is available, high lending rates, (usually at about 24-35 per cent) make it unattractive and even riskier since returns on investments in manufacturing have consistently been below the rates of borrowing. Other factors militating against manufacturing include inflation which constitutes a disincentive to saving and retards investments and growth. It also encourages speculative activities and diverts resources from productive ventures.
Worthy of note is the cabal effect among the key players and the financing institutions of the sector. The cabal in the sector retains the sacred rights to single-digit interests on loans that are hardly likely to be paid back while others who may have genuine investment intentions are saddled with double digits interests on loans that are scarcely available to them. This has grossly reduced competitiveness and therefore, discouraged new corners into the sector.
Product Flexibility and Technology
World economies are changing rapidly. Developments in technology and innovations are the primary forces propelling industrialisation across the world today. New ideas and innovations are becoming increasingly the drivers of economic growth and societal progress. Industries are becoming knowledge-intensive. Even traditional industries are caught in the swing of the information revolution. New powerful industries unimaginable a few years ago are now emerging. New processes and procedures of doing old things and automation have radically transformed manufacturing and multiplied productivity. Thus, the low level of technology in our industries is another drawback.
The Olusegun Obasanjo administration’s input in the areas of communications was a vital impetus to the performance of the manufacturing sector. However, the extent of that impact, unfortunately, did not metamorphose to a measurable global increase in the sector contribution to the GDP because the collateral effects of other infrastructural propellers did not grow in tandem.
High Cost of Raw Materials
The high cost of raw materials both domestic and imported, also contribute to poor capacity utilization. Nigeria’s industrial capacity utilization according to the CBN was about 55.5 per cent in 2010. With the levels of fixed costs that have to be distributed across low volumes of output, the competitiveness of Nigerian manufacturers is further worsened.
Investor confidence in the manufacturing sector is an indispensable factor anyone intending to outlay his/her capital for any product development and manufacture must consider.
According to Oyati (2010), it is a known fact that an investor/entrepreneur is the individual who creates the enterprise that becomes a new entrant to the market. Similarly, an entrepreneur accepts the risks associated with establishing and operating a commercial venture (Boone & Kurtz, 1984). Paraphrasing the words of Calvino (1988), the entrepreneur, like the engineers, must be adept at correlating exactitude with chaos to bring visions into form. It has to be realised however that risks that are macro-environmental as grave as national insecurity through the various agents of terrorism, kidnapping etc are not to be ignored when deciding business location and development
Quite unlike the era after the Nigeria civil war when the then Federal Government rolled out programmes on national reconciliation and integration and everyone was encouraged to invest, live and do business in any part of the country, the scenario changed when spates of various ethnic unrests, youth agitations, kidnapping, armed robbery, willful destruction of life and property started to rock the boat of the sector. Ethnic and youth emancipation are now powerful tools to mock our democratic journey to one powerful and independent giant of Africa. We have failed to realize that for our nation to be truly an economic giant, the issues of stability and security need no compromise, to say the least.
Another major challenge of the manufacturing sector is the overstretched and dilapidated infrastructure in our Sub-Saharan Africa with particular reference to the Nigeria situation. Raw materials and finished goods alike need good and motorable roads for easy access to manufacturing sites and commodities markets. The current state of our roads and railways cripple the manufacturing sector.
Despite the huge appropriation to capital projects particularly roads and bridges every year, we seem to be very distant from the solution to our decaying infrastructures. This is a disincentive to the manufacturing sector as most factories that rely on road transport for their raw materials usually have to close shop due to delay in getting their raw materials into their factories. Worthy of note is the Lagos-Benin Expressway. Similar situations exist in the network of roads connecting the economic nerve centres of Nigeria.
Availability of Ready Market
Today, the manufacturing sector is inundated with both ethical and non-ethical competition from existing and new entrants to the market place for their products.
Buying into the assertion on product marketing challenges, according to MIT Sloan, (2011), one wishes to state that even the most successful organizations are having new and unexpected challenges. Traditional approaches to the management of business outfits that might have had a magic wand effect in a booming economy are no longer sufficient to meet the demands of a changing market place.
Stiff competition in the market place demands innovative business models to survive. “The only way that manufacturing companies can prosper in these emerging markets is to cut costs relentlessly and accept profit margins close to zero”.(Mathew, Mark& Hari, 2011)
Unfortunately, Nigerians in the key leadership positions are the greatest patrons of foreign goods and services most of which cannot meet the standards of those that have their origin in Nigeria. They still patronize common table water, flavoured fruit juices, to mention just a few of them, thereby ceding our robust markets to foreign nations, empowering them economically and equally giving them the leverage in employment capabilities.
The manufacturing sector is fraught with power challenge as far as Nigeria is
concerned. Today, if you must do any reasonable business in Nigeria which has to do with power, you should be armed with your own “candle”.
The resultant effect of near non-existent power is low capacity utilization. The current campaign against the depletion of the ozone layer and its collateral effects of climate change is heavily compromised by the use of alternative power sources we are used to in Nigeria today. The amorphous prices of petroleum products which are the drivers of the alternative power available to manufacturers do not allow any competitive product pricing. The effect is that goods locally manufactured price themselves out of the market, giving way to imported goods. The absence of power has led to the low contribution of the manufacturing sector to the GDP of the nation.
Proper Tax Regimes
Tax regimes in Nigeria as they affect the manufacturing sector are both lopsided and in the writer’s opinion, immoral and unhealthy for meaningful growth of the economy. Multiple taxation and imposition of levies on manufacturers are both disincentives to investment and give the impression of systematic unfairness. Worst off is the irritating and annoying manner local government and state government agents who neither provide any services nor have any agenda for meaningful utilisation of the so-called levies show up at the manufacturer’s gate repeatedly with claims of taxes and levies, payable with immediate effect! Sadly, this happens all the time with no sanctions.
Nigerians view these levies as outright rip-off. The money so realised hardly gets to the government coffers as huge chunks of it filter into private bellies of shameless cronies, who neither know what it takes to manage a manufacturing outfit nor set up any in the first place.
Next to EVERYTHING, Nigerians must uphold the highest values in relating to truth and transparency. The extent of corruption one sees in Nigeria highlights the fact that when values are not observed, there can be an economic disaster. The ill impact of corruption cannot be overemphasised.
Money stolen and not invested is a loss to the nation. Criminal minds that find themselves in the seat of governance and trust betray our hopes and aspirations as they most often than not, cross the shores of this great nation to hide their loots with no guarantees. These loots end up in other national treasuries at the demise or exit of the perpetrators.
The Libyan lessons are instructive. Today, there exist so many unclaimed dividends in stocks; so many dormant accounts in our financial institutions running into trillions of naira whose ownership are either questionable or are abandoned to banks on the demise of their owners who kept their secrets till death. One may ask where this money is. It is sad to know the waste some of Nigeria’s mindless leaders have put the nations in Africa through.
The impact of corruption is systematic: it generates negative economy-wide externalities that denigrate the performance of the system as a whole and compromise the economy’s long-term dynamic efficiency. Corruption leads to favouring of inefficient producers, distorts the allocation of scarce public resources and causes leakage of revenue from government coffers to private hands, which without doubt, would have provided enough incentive for the manufacturing sector were it to be available for the
funding of the sector.
Nigeria’s trade policy stifles industries and hampers economic development, Import bans are often imposed and lifted with little regard for overall impact on the domestic economy. The import ban list currently includes some 25 categories of goods, whose restricted status impedes local development. Even worse is the flip-flop in policy positions about import bans!
Besides, most of our manufacturing companies lack the muscle to persevere in the face of challenges. They lack the aggressive strategies which are rated according to their marketing assertiveness, their risk propensity, financial leverage, product innovation, speed of decision making, and other measures of business aggressiveness required to flourish in different business environments. The morality to consider delayed gratification is lacking in most African businessmen.
These strategies can be classed into four:- prospector strategy, defender strategy, analyser and reactor strategies. The prospector is ready to employ any tool including taking risks to take the lead. The defender takes minimal risks but uses any means to keep its current status. The analyser watches out for opportunities but will neither take risks nor defend a position with aggression. The last only takes steps when external forces make it impossible to survive at all. It has no proactive strategy. It only responds when forced by macro-environmental pressures. This is the least effective of the four strategies and that has been the Nigerian approach (Government as manufacturers inclusive).