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A first and a second blog post on the theme of “Industrialization in West Africa” took stock of industrial development in West Africa and presented some of the strategies that could boost industrialization in the region. While all the mentioned strategies are relevant, provided they are adequately implemented, this post has a focus on the regional value chains (RVCs) strategy, and will highlight the benefits from this model.
As previously explained, the RVC strategy consists in implementing, at a regional scale, a production system which is comparable to the world-scaled one of the global value chains (GVCs). Unlike the latter, the RVCs are deployed within a world-region and are focused on producing a differentiated offer adapted to the specificities of the local demand and consumption practices. The cultural and geographical specialization of the regional production system then provides a significant added value, since the offer meets both the cultural preferences of consumers and the needs created by their environment.
Several sectoral examples allow to illustrate this model and its relevance. As regards with the pharmaceutical industry, for example, the region faces distinctive health problems, as seen not only with infectious diseases in the region (malaria, Ebola, neglected tropical diseases), but also the environmental health challenges (pollution, humidity, sun exposure). Because of the narrowness of the market and the low purchasing power of the population, few extra-regional companies, for now, are willing to invest in research programs dedicated to these local issues. The West African pharmaceutical industry, which would specialize in the local needs and be able to produce low-cost affordable medicines, would have the opportunity to tap a regional-wide market while contributing to the improvement of population health. Similar rational can be applied to the automotive industry. The Innoson Nigerian group, for example, has a competitive advantage based on its ability to produce trucks adapted to the poor state of the West African roads, on which vehicles designed for roads in developed countries wear out more quickly. Numerous additional examples exist in the food industry (processing of local foods such as yam and cassava), textile (African fabric), construction (local materials), or cosmetics (local products).
In terms of costs, the model may seem almost impossible to implement considering that logistics costs and low productivity in the region weigh heavily on the local industries’ competitiveness. For many textile companies, it is still more competitive to produce African fabrics in the Netherlands and China then export them to West Africa than to manufacture them in Ghana, for instance. This reasoning, however, do not take into account the multiple gains associated with local market specialization, which could more-than-offset the technical production costs. Indeed, a recent report of the Boston Consulting Group showed that African companies, including in West Africa, hold out on large multinationals in several areas, sometimes driving them out of their area of influence, as recently seen with Nestlé’s difficulties to duel with the competition of the Senegalese Patisen group.
According to the BCG report, the reasons for their success lie in four competitive advantages: focus on the local market, where they concentrate their development and branding strategies; their mastery of the industrial environment (logistics, suppliers); their flexibility, particularly in terms of standards adaptation and production modes; their knowledge of the expectations and behaviour of consumers, thanks to the data gathered since the beginning of their activity. In other words, with tariff conditions similar to those of foreign multinationals, these local champions make their advance on their ability to manage non-tariff costs, which is critical for tapping the developing markets.
The main obstacles to the development of indigenous competitors in West Africa is the lack of access to financing as well as a certain know-how regarding international development. These companies, although successful, do not necessarily have the capital to scale up nor to address alone the major regional challenges associated with logistics and market penetration. In this context, private equity funds and leveraged buyout (LBO) sponsors can be ideal partners to provide financial and technical support. Governments in the region could also assist their champions, including through their identification, export support, the organization of business meetings with financial partners, and the implementation of an intra-regional investment framework incentive. Although the interests of these companies are private, their development and expansion would support national ownership of industrial capital, while promoting job creation in these companies and among their local suppliers.
The proliferation of such initiatives could lead to the creation of an industrial base in the region that would not rival but complement global industries, with both giving birth to clusters that would increase competitiveness of the whole industrial territory.