Manufacturing in Nigeria: The Many Huddles Facing the Small Manufacturer

The following story about a small company that manufactures suitcases in Nigeria highlights the many huddles that a manufacturer in this country must overcome before bringing the company's products to market.

J. Jumac International Company Limited -- a suitcase manufacturer
By Obi. O. Akwani Editor, Minorities' Global Village
August 28, 2007

Chief James Uzuh is the founder and CEO of J. Jumac International Company Limited, a suitcase manufacturer that is fast becoming a household name in Nigeria.
The story of James Uzuh and J. Jumac suitcase company reveals exactly how government policy influences businessmen and their choices in Nigeria.

Before he went into the manufacturing business, Chief Uzuh had been growing immensely rich as a trader and importer of suitcases and other manufactured goods into Nigeria. Through his profits as a trader, Uzuh had become a millionaire and the owner of several real estate properties in different parts of the country.
Because the nature of the business policy environment in the country, trading to this day remains the surest and most profitable type of business in Nigeria. Some of the most successful Nigerian businessmen started out as traders. This is the case with country's foremost industrialist, Aliko Dangote, who started out as a dry goods trader with a small initial capital borrowed from his uncle, Dantata -- the millionaire trader and transporter. As well as deal in the dry goods trade, Dangote also imported cement into Nigeria. Dangote soon completely cornered the import-trade business in Nigeria; there is the story of how he undercut a well financed competitor -- a bank, no less -- with lower prices to become the undisputed leader in sugar imports in the country. Dangote was so successful as a trader that today he is the leading industrialist in the country. His manufacturing interests span the range from cement to sugar to noodles.

Chief Uzuh confesses Dangote as one of his business models. And like the later, he dreamed of becoming a Nigerian manufacturer. The opportunity arrived when the Federal government, in 2004, put a ban on the importation of suitcases into Nigeria. That showed him the opportunity to go into manufacturing. He set-up his own local manufacturing outfit, J. Jumac Company. Uzuh had enough money from his import business to finance the construction of necessary factory buildings; then he sought the input of other venture capitalists and discovered that there were none for the type of venture he was getting into in Nigeria. He had believed that sourcing for the rest of the money needed to equip the factory and begin production would be easy, but to his surprise there were no takers for his offer equity stake or a straight loan to buy and install the factory equipment.

Financing Manufacturing Business in Nigeria

What Chief Uzuh discovered was that no Nigerian financier, including the banks, was interested in funding long-term projects like manufacturing. They were all interested in short-term import financing which provided a fast means for realizing considerable returns on investment within a very short time span. Even today, after the 2005 restructuring of the banking system that saw the emergence a smaller number of vastly better capitalized banks, the banking institutions remain reluctant to advance long-term financing to businesses.

Short-term finance was not what Uzuh needed as a manufacturer. He quickly realized that in order to finance the equipment of his factory, he had to find alternate means of long-term financing. He decided to do it himself by selling off some of his real estate properties in Nigeria. With proceeds from those real estate sales, he was able to buy the machinery he needed to equip his factory for production. After he had equipped his factory and commenced production, the banks then became interested and began to solicit his business and offer him more credit. Uzuh says that while the banks' custom is not unwelcome at this time, the time he really needed them was during his start-up period. Many small and medium enterprises are made or undone during this time.

Infrastructure

- Power Supply

Once he had commenced manufacturing Uzuh discovered that power was a major problem for manufacturers and businesses in general in Nigeria. As a trader it never really mattered much whether there was electric power or no electric power at any given time. While power consumption was a significant part of the costs of any business, for traders in general the cost of power was insignificant compared to what it meant for manufacturers.

When he started off, he had not factored in the need for a steady, reliable and safe power supply. Uzuh believed that he could depend on the national grid, owned and controlled by NEPA -- the National Electric Power Authority. But being solely reliant on the national grid, the J. Jumac factory suffered a lot of equipment damage due to power surges and down time due to unavailability of electric power during production time.
The J. Jumac CEO came to realize that he needed to invest in his own independent power supply system. Being a new company that had been independently financed, cash was short and it took some time before Uzuh found the additional N16 million (US$127,000) he needed for two new power generators for the factory. Today it costs the company N2 million (US$16,000) every month to fuel the generators. Those cost are bearable given the assurance of steady and safe power supply for other costly equipment they provide.

- Transportation

Uzuh figures that transportation is the next big obstacle to competitive manufacturing in Nigeria. By his own calculation, it costs at least four times more today to move a load of goods from the southwest port city of Lagos to Kaduna in the north central region. The J. Jumac chief blames the inflated cost of transportation on a poor transport network, especially on the fact that the government has allowed the railway transport system to fall into disuse. The river systems -- Niger, Benue and other smaller rivers in the country that could have provided cheaper alternatives (and did so in the distant past) for the transport of goods internally have been allowed to silt up and become non-navigable.

- Employment

The anemic condition of manufacturing business in Nigeria has repercussions not only for manufacturers, but for the economy as a whole. Uzuh sites his own case for illustration. As an import trader he only needed about five people to run his multimillion Naira enterprise, but now as a manufacturer running a factory, he has a minimum of 150 people on his direct payroll. Having more factories in Nigeria or at least creating an enabling environment for the existing ones to function and produce to their designed capacity will vastly reduce the unemployment situation in the country.

Visit their website
http://www.jjumac.com/index.html

Doing Business in Nigeria - Why Hernando de Soto matters

My last entry ended with a comment on how entrepreneurs in emerging markets need to be part Hernando de Soto, the Peruvian economist, and part Steve Jobs. In case the reference to de Soto was missed, I wanted to clarify why I mentioned him and explain why I feel so strongly about this point.

When doing business in an emerging market it is of the utmost importance to try and understand why it is a developing economy. Let’s be realistic, there are economic reasons behind why emerging markets are labeled as “emerging” and not as members of the OECD. Too often businesses and investors overlook these critical economic factors resulting in increasing timelines and spiraling costs.

I used Hernando de Soto as an example because his institute, the Institute for Liberty and Democracy, is dedicated to “opening up” emerging markets. The ILD looks for hidden patterns of social interaction within the barriers of the existing legal framework to see how the legal framework influences the sizes of the formal and informal economies. Or more simply, does the country's legal system cause people to work illegally and if so, which parts and why? Anyone wishing to do business in Nigeria, or any emerging market for that matter, should also study these patterns. Understanding how taxes and laws affect business behaviour is incredibly important. This knowledge will allow entrepreneurs and investors to determine if a business model will be succesful and what new opportunities will open up if a government starts a regulatory reform plan.

For example, from my time in the Balkans, I experienced the practice of misrepresenting asset values in order to create desired share capital. In many civil law economies share capital must be justified against actual assets and approved by a court appointed evaluator. Normally when a business is established the share capital represents the initial investment or the cash available and determining the share capital value is not complicated. But if the company is transitioning from a limited company to a joint share company, the existing fixed assets must be “valued” in order to justify the issued share capital. In these situations the court evaluator is bribed to ‘value’ the company’s assets at the desired amount of share capital. This archaic practice causes odd evaluations of company assets to be carried on the books year to year. I once took over a company that had gone through this situation - old equipment that was rusting in the courtyard was worth thousands of euro on the books. Before I figured out the story behind the asset values, I was repeatedly refused overdraft loans when I tried to use the assets as collateral. The better banks knew the book values of the equipment could not be trusted. If I had understood this common yet technically ‘corrupt’ practice before I took over, I would not have wasted time applying for loans using a court document stating the value of the company’s assets as a lien. Instead I would have focused on correcting the books first and foremost.

Anyone who has worked in or is from an emerging market knows of similar black & grey business operations. However, most people don’t understand why these some of these practices differ between economies and where they come from. Anyone doing business in an emerging market needs to understand that the root cause of the informal economy and black & grey practices is generally a poor and unfavourable regulatory environment. For example, a break through paper by Robin Burgess and Timothy Besley, titled: Can Labour Regulation Hinder Economic Perfromance? Evidence from India, made the connection between increased labour regulation and the informal economy, stating that the size of the former drives the size of the latter.

From a more general perspective, those doing business in Nigeria and other emerging markets should recognize that the root cause behind black & grey practices are generally driven by three generic business regulation scenarios:

• Poorly designed and outdated laws - for example the prominence of notaries in civil law systems probably helped stop forgeries 100 years ago, but today it is just an extra blockade causing gridlock in the business environment. In these environments otherwise honest brokers commit fraud just to get their day-to-day business complete. In Puerto Rico the most common reason for suspension of a law license is notary forgery.

• The “grabbing hand” theory - laws remain in place because they are lucrative to public officials who are able to take advantage of the power afforded to them - bribing officials to get a license or to push through documentation faster. These systems stay in place because they allow governments to keep civil service salaries low knowing the employees will earn the difference by collecting bribes. Do not expect to see reform in this area unless the involved government is combining an awareness campaign with higher civil service salaries.

• Good on paper, bad in practice (the enforcement/execution problem) – these scenarios are commonly found in countries like Nigeria where the federal system cannot be enforced evenly throughout the country. The legal system may present a favorable business environment in theory but the legal institutions do not have the capacity to execute causing local customs to take over. For example, the failure of state legal systems in the northern Nigerian states has prompted many states to take up Sharia law.

Before doing business in Nigeria, it is important to understand how Nigeria’s legal system will influence the behavior of your customers, suppliers, competitors, and employees. In some respect, doing business in Nigeria has its advantages compared to other emerging markets thanks to common law and the flexibility of an interpretive legal system. But Nigeria suffers from outdated legal practices left over from both colonial and military rule (especially in the area of property law) and from the good on paper, bad in practice problem. In many states tribal legal traditions take precedent over the official legal system, especially when it comes to dispute resolution. Where and how the official legal system of Nigeria is actually practiced is not an easy answer and before doing business in Nigeria you should understand which laws affect your business, how they vary by state and how they influence day-to-day business practices.

As a start, it is easy to become familiar with official Nigerian law. The International Centre for Nigerian Law has a complete online library of all current Nigerian laws and a Guide to Business in Nigeria.

But no matter how studied you are on Nigerian law, finding a good lawyer is still a must. An honest lawyer, with local knowledge and experience, can help you avoid potential potholes when setting up your business and help you structure the business so as to avoid operating in potential black or grey areas. I highly advocate everyone, even locals that feel they have their fingers on the pulse of the business environment, to not get involved in business in Nigeria without a good, local lawyer.

To find a Nigerian lawyer you don’t always need a local recommendation when you can access Oloja.com. There are 600 legitimate Nigerian lawyers listed on Oloja.com, just search for “Solicitor/Lawyer”.

Abraham Kamarck

P.S. I'd be very interested to hear about anyone else's experiences with grey business practices in emerging markets, especially Nigeria.

P.P.S. As I help Femi and Dapo set-up their new Nigerian e-businesses, I've become very interested in Nigerian Intellectual Property Law, as I research it more it will likely be the subject of my next blog.

Doing Business in Nigeria

The framework for most business blogs and reports is a structured attempt to distill a complicated and varied topic into a set of easily digestible bullet points. Unfortunately in most instances this attractive and simple approach ends up giving the reader nothing more than a list of vague, obvious and unusable information. To support my point with a piece of anecdotal evidence, I'll refer to a Knowledge@Wharton's post To Be a Successful Entrepreneur in Africa, 'Wake up Every Day Ready for Change' which essentially made the point that to be successful in Africa you need to be very flexible.....yes, that is very true.....but do you need a Wharton professor to teach you that?

Luckily, for those of us out there who feel they should be getting more value from our time, the World Bank has actually created a semi-useful document for entrepreneurs looking to start a business in Nigeria. Doing Business in Nigeria 2008 is the first subnational report
on Sub-Saharan Africa in the Doing Business series. While there are obvious and admitted problems in quantifying their methodology, the Doing Business series does directly addresses topics and hazards that entrepreneurs and investors need to be aware of when doing business in an emerging market.

Anywhere in the world an entrepreneur operates, he or she will always have to consider market factors like demographic size, make-up, spending power, spending habits, trends and traits - these considerations don't change when operating in an emerging market. What needs to be considered and well understood before operating in an emerging market are the factors that are taken for granted in OECD countries, mainly the country's infrastructure, human capital capability, legal structure and labor requirements.

The last factor, the nation's legal structure and requirements, is why the Doing Business series is a valuable tool. The ranking system is a nice reference and interesting for comparisons, but the World Bank itself will be the first to admit that the ranking system isn't perfect. The real value comes from the numbers behind the numbers. Compiling this report, the Bank focused on four critical areas that affect a business environment:

1. Starting a business
2. Dealing with licenses
   
3. Registering property
4. Enforcing contracts

While not all encompassing (the report is not all encompassing), these topics are some of the difference makers when doing business in emerging markets. They represent factors that make countries like Nigeria an emerging market in the first place and thus need to be understood.

Doing Business in Nigeria 2008 starts to help potential investors or entrepreneurs understand these factors. For example, according to this report, Abuja is the easiest and cheapest Nigerian state within which to start a business. In Abuja, a business can become incorporated in nine days and cost on average $425, compared to Lagos where incorporation can take 21 days and post incorporation fees can drive up the costs of starting a business by 35%.

Another example is the report's focus on registering property and identifying Nigeria as one of the most difficult places to register property in the world. Due to an arcane law requiring the state governor to approve every property transfer, purchasing property in Nigeria can be a frustrating and corrupt experience. This type of information is important because it could drive an entrepreneur or investor to change his or her business plan from purchasing property to renting....of course, then he or she would need to research the state's renter protection laws and contract enforcement.

Bottom line, the Doing Business Report is a good introduction to the business environment in Nigeria. It identifies the differences between states and gives analysis as to why certain practices are easier in some states vice others. For example, the Northern states may seem more efficient in contract enforcement and property registry because they have fewer cases to process compared to overburdened Southern states like Lagos.

Finally, anyone planning to start a business in an emerging market from a single entrepreneur to a large corporation expanding overseas needs to understand these regulations, how they effect local behavior, and if the political climate will induce change so they can adjust their business plan accordingly. Additionally, nuances need to be fully understood depending on the type of business. A manufacturing business with large land needs will likely want to stay out of Southern states - they have the longest and most expensive property registration and construction procedures. While an e-business that is more human capital intensive would be better situated located in a metropolitan area like Lagos.

Understanding these differences allows the new business to plan their working capital and start-up time-lines accordingly, thus avoiding situations where unexpected delays or costs could jeopardize the business and where government officials have the leverage over the start-up with which they can solicit bribes.

Therefore a good grasp of the local regulations are the building blocks that allow the entrepreneur to be flexible and thus successful. Proving that an emerging market entrepreneur needs to be 50% Steve Jobs and 50% Hernando de Soto!

By:
Abraham Kamarck