Thursday 30 April 2009

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.


- 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.

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