The matrix (from page 102 of the full report) maps the location of manufacturing FDI by taking a group of companies and tallying the number of manufacturing facilities they have in each of the ACET 15 countries and in Brazil, China, India, countries in South- East Asia, and a catchall “other,” representing Mexico, Turkey, and other Latin American markets.*
The dataset comprises 200 companies selected from ACET’s survey of companies and from the 2012 IndustryWeek 1000, the magazine’s annual ranking of the 1,000 largest public global manufacturers based on revenue.** The companies were selected based on four criteria:
- Industry: light manufacturing in those sectors more aligned to Africa’s relative comparative advantage in labor and natural resources.
- Revenue growth: companies with positive global growth or strong demonstrated growth in Africa.
- Revenue: companies above $3.5 billion.
- Geographic representation: companies headquartered in traditional OECD countries (Europe, Japan, and the United States) as well as in South Korea and in emerging economies (Brazil, China, India, and Turkey).
The sample clearly is biased toward large multinational corporations and likely misses FDI manufacturing plants of medium-size companies, which are beginning to move to Africa. We plan to rectify this over time.
*The South-East Asian countries comprise members of the Association of South East Asian Nations: Indonesia, Malaysia, the Philippines, Singapore, Thailand, Brunei, Burma (Myanmar), Cambodia, Lao PDR, and Vietnam.
**www.industryweek. com/ resources/ iw1000/2012
Source: ACET research.
The figures here show how Sub-Saharan Africa is performing in relation to eight earlier transformers on various indicators of depth.
This inaugural issue of the African Transformation Report highlights a subset of 15 Sub-Saharan countries, the ACET 15. Future issues will progressively expand the coverage to include other African countries. The ACET 15 are Senegal, Burkina Faso, Ghana, and Nigeria in West Africa; Ethiopia, Kenya, Uganda, Tanzania, and Rwanda in East Africa; Cameroon in Central Africa; and Zambia, Botswana, South Africa, Mozambique, and Mauritius in Southern Africa. Rather representative, these countries comprise 70% of the population (in 2010), 76% of GDP, 85% of manufacturing value added, 65% of agricultural value added, and 80% of exports. All the subregions of Sub-Saharan Africa are represented (some more than others), as are the major official languages of English, French, and Portuguese. Countries in conflict or recently emerging from conflict are not included, since reconstruction is more pressing in these countries than economic transformation. Working with local think tanks, ACET prepared country transformation studies for each of the 15, assessing the transformation record, platform, and prospects.
The comparator countries are Brazil, Chile, Indonesia, Malaysia, Singapore, South Korea, Thailand, and Vietnam, whose economies 30–40 years ago had several features in common with many African countries today—widespread poverty, low productivity, low levels of technology, and limited exports. But they ignited and sustained long periods of high GDP and export growth, technological upgrading, and substantial improvements in the lives of their people to become middle- or high-income countries.
From Chapter 1 of the African Transformation Report
ACET interviewed top executives of 10 multinational manufacturing companies with operations in sectors aligned to Sub-Saharan Africa’s comparative advantages and with some type of manufacturing presence in emerging markets. The objective was to find out the key factors that the companies consider when deciding where to locate their manufacturing operations, with a specific view to Sub-Saharan Africa.
The most important factors they cite are labor productivity (expressed primarily as the education and skills of the workforce) and policies (consistent policy environment, fiscal incentives, and tariff and nontariff barriers).
The low productivity and high costs arising from the lack of education and skills make it infeasible for them to locate in Sub-Saharan Africa, especially in comparison with India and other low-cost producers. As one executive said: “Until there is an educated and skilled workforce, all other initiatives and incentives are of no use.”
The lack of skills affects not only the companies’ manufacturing but also the presence of a reliable and skilled local supply chain. Several executives interviewed indicated that a strong local supply chain does not yet exist, except for South Africa to a degree. Companies need to be able to source components and parts locally to sustain cost-effective manufacturing. And the more technically sophisticated the product, the more difficult it is for companies to find local components.
Source: ACET interviews of company executives.
From Chapter 8 of the African Transformation Report
Tourism, at about 13% of GDP in 2012, is one of Tanzania’s largest exports (about $1.4 billion in 2012, or 25% of exports). The earnings were second only to those from gold, ahead of agriculture and manufacturing. The sector employs about 430,000 people directly.
With 843,000 international visitors in 2011, Tanzania reached an enviable position as a high expenditure–low volume destination. The top five source markets were Italy (mainly vacation clubs), the United Kingdom, United States, Germany, and Spain. Some 55% of visitors were ages 25–44, and 27% were ages 45–64. Almost 80% were leisure travelers.
Tanzania attracts some of the world’s most illustrious tour operators, some that market only Tanzania. It has about 32,000 rooms of all types, with 58,000 beds and room occupancies around 50–60%. Most hotels are privately owned, medium to small, and locally branded, except in Dar es Salaam, where several international groups operate. The travel industry, represented by the tour operators and travel agencies, has been improving its products and services through creative packaging, including visits to local communities.
Responsibility for tourism policy lies with the Ministry of Natural Resources and Tourism. Three departments (tourism, wildlife, antiquities) lead the sector through a number of agencies, such as TANAPA (the national park authority), the Ngorongoro Conservation Area Authority, and the Tanzania Tourist Board, which markets the country. The Tanzania Investment Center handles investment promotion. The Presidential Parastatal Sector Reform Commission encourages wider ownership of productive assets, and privatization in tourism has been substantial. Zanzibar has three agencies for tourism: the Zanzibar Tourism Commission, the Zanzibar Investment Promotion Agency, and the Commission for Land and Environment. The Tourism Confederation of Tanzania, the umbrella private sector institution, has 14 industry and trade member associations. The Tanzania Tourist Board has done a good job of marketing tourism on a very limited budget.
A Tourism Master Plan (PDF) was widely circulated and debated in 1996 as a strategic document and updated in 2002. The plan emphasizes clusters, aggressive management to stay abreast of trends, and differentiating products to add value. A plan for Zanzibar, completed in 2003, focuses on beach and cultural tourism. There is also a new tourism law, but it offers little improvement over earlier versions.
Tourism investment has been concentrated in a few areas, notably around Arusha (the northern circuit) and Zanzibar. A new National College of Tourism is a state-of-the art facility expected to enroll 600 African Transformation Report 2014 | Boosting tourism 162 students annually from Southern African Development Community countries. This gives Tanzania a much-needed option to improve service standards in its tourism industry and to serve the region.
What does Tanzania need to do to get to the next level?
Implement the master plan in phases.
With the northern circuit overcrowded in the mid-1990s, Tanzania imposed moratoriums on new construction. And a United Nations Educational, Scientific and Cultural Organization threat to delist the Ngorongoro Crater created the necessity for early action. The southern circuit is the most accessible and, unlike the western zones (with Gombe National Park), it offers an internationally competitive product mix of wildlife and beach tourism at reasonable investment costs. It will require new and rehabilitated infrastructure (road and rail and better park investment), through public private partnerships, nongovernmental organization support, and private groups, as well as the state.
Revisit the sector’s constraints and opportunities in the legal framework.
The tourism law does not measure up to the industry’s expectations. So the country should revisit the law’s basic principles and add policies in subsequent ministerial or national decrees without having to redo the underlying law. It should create a commission with clear goals, objectives, and terms of reference and a mandate to propose action on key pressing issues. Actions are also needed in other areas including:
- Options for an open skies policy.
- Pooling wisdom on new products.
- Seeking an implementable budget mechanism.
- Reviewing the fiscal and incentive regime.
- Simplifying and rationalizing the licensing system and harmonizing payments.
- Elaborating proposals for a destination management organization.
- Proposing a master tourism plan for East Africa.
- Considering a single visa for international visitors to the region.
From Chapter 7 of the African Transformation Report
The regulatory frameworks in Ghana have not integrated artisanal mining activities into the mainstream economy. As a result, artisanal mining coexists, often in conflict, with large-scale mining. Many aspects of the artisanal mining value chain are unregulated, and legitimate traditional activities are often confused with “illegal mining.”
The land tenure system vests much of the administration of land rights in traditional leaders, while mineral rights are vested in the state. The separation poses a challenge for state institutions seeking to regulate artisanal mining because access to land is the first regulatory gateway. Reconciling the role of traditional leaders and the state may require establishing a single and final authority for artisanal mining. This could resolve the licensing of exploitation; the setting of health, safety, and environmental standards; and the monitoring of production, sales, and exports.
Revenue collection is complicated by the formal and informal structures that regulate artisanal mining, by the informality of artisanal mining, by the large numbers of miners involved, and by the structure of the artisanal value chain. Informality means that miners cannot be easily identified and traced for tax purposes. Many Ghanaian traders in the artisanal value chain are merely agents of foreign buyers that have links to global commodity markets. So the prices paid in Ghana do not reflect the true market value, and the state and citizens do not receive fair value.
Social and physical environmental challenges receive inadequate regulatory control and monitoring. The Obuasi gold areas show how artisanal mining can destroy the environment. The use of mercury persists despite the well known negative environmental impacts. And health and work conditions defy global conventions for labor and industrial relations.
From Chapter 6 of the African Transformation Report
Improvements in agricultural technology have come slowly in Africa, and not much is known about the diffusion of better technologies. In many ways, Africa is late in developing research capacity, and many crops and commodities had very little research effort until the past 10–20 years. In addition to research and technology, many challenges remain, including:
- Roads. Many rural areas are cut off from markets so it is very costly to move goods— including agricultural inputs and outputs, but also nonagricultural goods.
- Power. Electricity is essential for agricultural processing and postharvest uses of crops and livestock. And for dairy products it allows cooling and makes more efficient collection schedules possible.
- Irrigation. Infrastructure to convert rainfed to irrigated farming will be a public good in some places and purely private in others. But irrigation has the potential to transform agriculture in many locations, both by increasing productivity and by reducing weather risk.
- Competition. Rural isolation opens the door for noncompetitive behavior. With rural markets spread thinly and handling low volumes, traders can often set prices for both farmers and consumers. Transport also lacks competition, especially on long-haul and cross-border routes. Mobile phones can reduce information asymmetries.
- Property rights. Tenure security is necessary for farmers to invest in longterm land improvements, but in most parts of Africa, cadastral surveys are lacking, and formal programs of land registration and titling have not advanced far. Customary systems of property rights provide adequate security for traditional agriculture, but it is not clear that they can provide the tenure security required for agriculture’s transformation. And western-style land titles and markets cannot be introduced without doing violence to existing economic, social, and cultural arrangements. An enigma.
Source: ACET agriculture study prepared for this report.
From Chapter 5 of the African Transformation Report
To find out more about Sub-Saharan Africa’s prospects in the global value chain for garments, ACET surveyed senior executives from eight companies in the industry and conducted more extensive interviews with three of the companies.
Of the three, one is a very large U.S. retail chain that sources its own brand garments from suppliers in several countries. The vendors are outside Africa, but some have factories in Sub-Saharan Africa. Two other companies are brand manufacturers that have manufacturing plants in several countries. Both had plants in Sub-Saharan Africa at one time but have since pulled out.
The retail company’s project design and development group decides on the apparel (and accessories) product, including design, sizing, and colors. It then decides which of its approved vendors to place orders with. Vendors are in charge of production decisions, and the product may be manufactured in several vendor or vendor- affiliated factories in different countries. The retailer inspects the factories periodically for quality and social compliance.
The main criterion for vendor selection is execution, including time to market. As the executive noted, “A vendor needs to be late in delivery only once to be dropped from the list.”
When the MFA came to an end, the African countries became uncompetitive.
The vendors are mainly in the United States (with overseas representatives), South Korea, Hong Kong SAR (China), Shanghai, and Taiwan (China). The factories are mainly in China (a majority of factories), South Korea, South- East Asia, the Indian subcontinent, Egypt, Turkey, and Central America.
To take advantage of quotas during the MFA period, the retailer sourced from Sub-Saharan Africa through vendors in Hong Kong SAR (China) that had factories in Kenya, Lesotho, and Namibia. But when the MFA came to an end, the African countries became uncompetitive.
The main reason for dropping them was their difficulty in meeting the time-to-market requirement. Usually, the agreed date is around 90 days. Within that time, fabric must be sourced and garments made, packaged, transported, cleared through customs, distributed to the stores, and put on store shelves.
Sub-Saharan countries have had difficulty meeting the timeliness requirement—for four reasons. The majority of fabric and other inputs (zippers and buttons) were imported from China, adding to long lead times. If there were last minute changes in design by the retailer after the fabric was shipped, it was difficult to change production. Difficulties in the domestic environment added to production times. And shipping times were long because of poor logistics. The other companies surveyed also identified the same main obstacles to their sourcing from Sub-Saharan Africa.
Separately, one of the other executives surveyed indicated the need to air-freight garments from Sub-Saharan Africa in order to meet deadlines, adding considerably to production costs.
The retailer experience is mirrored by that of the brand manufacturers. One, a pioneer in “fast fashion” clothing (inexpensive, designer-mirrored, and ready-to-wear), set up operations in Sub-Saharan Africa before AGOA was launched in 2000 and advocated strongly for that program. But its operation failed, mainly because of political instability and political interference that made it difficult to meet cost and timeliness targets. The company is now looking to set up production in India, saying that Sub-Saharan Africa is “no longer on the radar screen.” The other manufacturer cites difficulties with the “low productivity of the unskilled workforce.” Its operation failed, but it is considering setting up again on a “very small” scale, mainly for reasons of corporate and social responsibility.
Source: ACET interviews with senior executives of multinational garment companies.
From Chapter 4 of the African Transformation Report
Debswana Diamond Company, the world’s leading producer of gem diamonds, is owned in equal shares by the government of Botswana and the South African company DeBeers. Early on it built and ran primary schools at its Orapa and Jwaneng mines, targeting employee children but also benefiting those from the communities. Later it set up junior secondary schools in the two towns, working with the government. And through its Government Schools Development Program, launched in 2002, it promotes the quality of teaching in English, science, and mathematics.
For some fields, such as rigging and refrigeration mechanics, company trainees receive theoretical training at government-run centers and practical training at Debswana centers. Debswana set academic and technical standards for technical and vocational training before Botswana had an accreditation system—standards that later informed government standards, such as the national craft certificate, which Debswana then adopted.
Another collaborative effort is the Botswana Accountancy College, to provide qualified accountants for both Debswana and the ministry of finance and development planning, which joined in the venture along with the Botswana Institute of Accountants. Enrollments grew from 349 in 1996 to 2,355 in 2007, by which time the college was financially self-sufficient and the partners ended their support.
Then there is PEO Venture Capital Limited—to teach entrepreneurial skills and provide scholarships in mining and other fields in secondary and higher institutions. In one year the scholarships supported 232 students in Australia, 83 in Botswana, 58 in the United Kingdom, 30 in South Africa, and 1 each in Canada and the United States.
Source: ACET research.
From Chapter 2 of the African Transformation Report
In August 2011 late Prime Minister Meles Zenawi went to Beijing, advised by Justin Lin, then chief economist at the World Bank, about the rising wages and pending relocation of the Chinese shoe industry to low-income countries. Zenawi’s mission? Bring a factory back to Ethiopia.
Meeting with Chinese investors on this trip, Zenawi emphasized that Ethiopia’s transformation plan was targeting industrial development to grow its economy. In that spirit, he invited the investors to visit Ethiopia, which they did two months later, to consider prospects for investing in the country in areas that would provide jobs and boost exports.
The investors were enticed by Ethiopia’s low wages, social stability, and double-digit GDP growth over the previous 10 years. They were also impressed by the government’s proactivity to make FDI attractive, manifested in this visit by the Prime Minister and the appointment of deputy trade minister as the project’s champion.
In January 2012, five months after the Prime Minister’s visit, the Huijan Group opened a shoe factory outside Addis Ababa, Ethiopia’s capital, hiring 550 Ethiopians. With plans for expansion into a multibillion dollar industrial park and projected to create 30,000 jobs by 2016, this factory has become one of Ethiopia’s largest exporters, earning worldwide praise as a promising model for transforming African economies.
The Huijan Group, a large-scale Chinese shoe manufacturer, had seen a win-win formula in the making. Like most African countries, Ethiopia boasts young, abundant, and eager labor at low wages. Besides, Ethiopia’s established cattle industry provided consistent raw material, which, with Huijan’s capital and expertise, promised a winning formula.
The success of the partnership is due in large part to the government’s focused efforts. In addition to attracting Chinese investors, the government offered four-year tax breaks, cheap land for factory development, and low-price electricity to investors who set up in the industrial zone.
Contrary to popular perceptions of Chinese attitudes toward Africa, Huijan’s Vice President and General Manager for overseas investment, Helen Hai explains, “One thing in my strategy is very clear: I don’t want to compete with locals,” she says. “The sheepskin and goatskin processing by Ethiopian artisans is good, but local people don’t know how to manage cowskin. I want to offer my skills to help the locals. I don’t want to have my own tannery because I don’t want to create problems,” she says. “I want to help them grow because when local producers grow, the whole market is growing. If it is just myself growing here in five years’ time, I will leave.”
Zemedeneh Negatu, managing partner at Ernst & Young Ethiopia, applauds Hai’s efforts to transfer skills and build a complete supply chain for the shoe industry. He says, “That should be the goal. You create clusters around one or two major foreign or Ethiopian investors, throughout the country, based on competitiveness and comparative advantages. It should be made clear to investors that they need to help build local capacity.”
Other African countries can learn from this project, above all the need for leadership at the highest levels to make projects happen. Two other key lessons are to target sectors in the economy’s comparative advantage and to integrate various elements of a transformation strategy. Taxation, power generation, and skills training had to come together to make the project work.
Investors can also learn—that producing and exporting profitably in Africa are possible and that, with government support and citizen motivation, the traditional barriers to business on the continent can be overcome.
Source: ACET research.
To make the case for transformation as growth with depth, we compare Africa’s performance with that of eight earlier transformers: Brazil, Chile, Indonesia, Malaysia, Singapore, South Korea, Thailand, and Vietnam. Forty years ago their economies had features that today characterize many African countries—widespread poverty, low productivity, low technology, and limited exports. But they ignited and sustained long periods of high GDP and export growth, economic diversification, technology upgrading, and productivity increases and greatly improved the lives of their people. Today several of them are upper middle- or even high-income countries.
Individual comparators could also be related to individual ACET 15 countries. Brazil and Indonesia—with their large populations, agriculture, and oil—could be related to Nigeria. Brazil, a middle-income country with budding technological prospects, and Korea could point the way for South Africa. Chile, Malaysia, and Thailand could point the way for Ghana, Kenya, and Senegal in agribusiness and in attracting foreign direct investment for manufacturing. Chile, a big copper producer that has also managed to develop agribusiness, could point the way for Zambia, a large copper producer with large tracts of undeveloped agricultural land. And Vietnam, evolving from a statist economic approach to an attractive foreign direct investment destination, could hold lessons for Ethiopia, which has roughly the same population and a government with a fairly heavy hand in the economy
See how Sub-Saharan Africa compares to these eight countries on key indicators.