Recent international events have prompted Nigeria to alter its production strategies to insulate itself from ongoing global supply chain shocks. Prior the Covid-19 pandemic, 19% of Nigeria’s manufacturing components were imported from China. However, the latter’s extended lockdowns and restrictions on movement resulted in disruption and delays. Exports from China to Nigeria fell by 5% year-on-year in December 2022, from $2.03bn to $1.93bn, according to data from the Observatory of Economic Complexity.
Nigeria has traditionally been reliant on imports of vital food and produce – most notably wheat – from Ukraine. Following Russia’s invasion in February 2022, global food supply chains were heavily disrupted as Russia and Ukraine collectively supply approximately one-quarter of the world’s grain. These events resulted in rising prices for businesses and consumers, with commodities exposed to steep inflation.
Supply Chain Shift
One way Nigeria could insulate against external shocks is through backwards integration – giving companies more control over earlier stages of the supply chain through mergers and acquisitions with suppliers. Through strategic investment aimed at boosting and diversifying local supply and value chains, particularly relating to the sourcing of raw materials, Nigeria has the opportunity to increase its production of manufacturing inputs and reduce the need for imported goods, thereby limiting its exposure to global inflation and supply shortages.
“We need to mobilise a supply chain superhighway for the entire region – from capital mobilisation to training and education – to maximise developmental gains,” Jean-Marc Ricca, managing director of chemicals company BASF West Africa, told OBG. “Leveraging the Lagos Free Zone’s infrastructure will facilitate the mobilisation of a supply-chain superhighway for the region, enabling investment in critical elements ranging from local manufacturing capabilities to research and development, thus maximising value creation.”
The concept of backwards integration is not new to Nigeria. In 2002 the government introduced the Backwards Integration Policy (BIP), to conserve foreign currency, boost local capacity and enhance job creation. Strategies that focused on key commodities such as cement and sugar, and more recently petroleum, have been implemented since BIP was first implemented.
Deepening Integration
The Central Bank of Nigeria has launched several corresponding schemes alongside BIP. Its Anchor Borrowers’ Programme is designed to improve links between small-scale farmers and agro-processing facilities. As of May 2022 the initiative had allocated N1.1trn ($2.6bn) to local smallholder farmers since its launch in 2015.
Consumer goods companies such as Nestlé Nigeria, Cadbury and Unilever have stated intentions to pursue backwards integration in Nigeria. In September 2022 national media reported that these firms, along with NASCO and Dangote Sugar, had collectively spent N287bn ($683.8m) on raw materials and packaging in the second quarter of that year, up 30.4% from the same period of 2021. Rising costs have highlighted the need for these types of supply chain solutions.
However, some commentators believe that while the policies have facilitated growth for large companies, they have not served the broader production base or consumer population. It has been argued that BIP has given rise to monopolistic market structures that have made it more difficult for small-scale producers to operate, and ultimately raised prices for end consumers due to the lack of wholesale and retail competition.
The utilisation of locally produced raw materials fell by 5.4 percentage points year-on-year in the first half of 2020 and a further 3.5 percentage points in the corresponding period of 2021. Looking ahead, ensuring that small and medium-sized producers and consumers can benefit from the increased availability of raw materials could help strengthen the country’s manufacturing supply chain on a level playing field.
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