Manufacturing in Africa

Impact investing – Addressing the challenges of manufacturing in Africa

State of manufacturing in Africa

Africa, home to over 1 billion people, with the highest rate of urbanization in the world and an economic growth rate second only to East Asia[1] – yet the source of only 1.5% of the world’s manufacturing output[2]. The vast natural resources on the continent have drawn African governments to build their economies around commodities, but despite the abundance of natural resources, the standard of living for African’s is low. 3 in 4 Africans live in poor conditions as opposed to the world average of 1 in 5[3]. According to a recent BBC report, “Some experts say that the current dearth of vibrant manufacturing sectors in Africa is among the biggest factors preventing countries on the continent from cutting unemployment and spreading wealth”[4].

Challenges facing manufacturing in Africa

There are challenges that limit the advancement of manufacturing in Africa. An absence of regional integration prevents new production facilities from accessing the full extent of the African market. Rather than having a billion people within reach, companies are restricted to their own local communities. The slow development of infrastructure also tends to constrain the movement of products and raise the cost of doing so. As in all developing economies, SMEs are often excluded from obtaining investment capital and suffer from inadequate business processes. Lack of access to finance and business support are cited as key reasons why more than 90% of new businesses fail within the first 5 years.

Opportunities for manufacturing in Africa

Nevertheless, there may have never been as significant an opportunity as the present for entrepreneurs in the manufacturing sector of Africa. Rapid urbanization is bringing a growing market of low and middle income earners together in new communities, causing a rise in demand for products. The movement of people into cities also brings a number of job seekers close to manufacturing centres. A McKinsey report states that the demographic trends of Africa show that the continent will have the largest working age segment of the population by 2034 – surpassing even China and India[5]. At the same time, the cost of labour in the East is rising as their economies mature. Labour costs in Ethiopia are 1/4th of the equivalent cost in China and ½ of the cost in Vietnam[6]. Africa’s competitive advantage is thus strengthening over other world manufacturing centres. World Bank reports show that up to 80 million manufacturing jobs could move from China due to increased labour costs and Africa is ideally positioned to step in as the replacement[7].

The role of development finance and impact investing

Development financing and impact investing vehicles are now supporting entrepreneurs with access to finance and business support so that they can succeed in taking advantage of the opportunities, while overcoming the challenges. Impact investors raise funds through international development finance institutions, development organisations, foundations, large companies and private funders and invest this capital in Small and Growing Businesses in developing economies. Coupled with the investment capital these funders provide business support to entrepreneurs to enable them to formalize their business processes and minimize their risk. In addition to the business success of the SGBs, the investments have a direct social impact through the creation of jobs and further ripple effects.

GroFin is one such development financier achieving remarkable results in the challenging environment of Africa. GroFin’s client, Rene Turck, a company, which specializes in customized and advanced glass products in South Africa was constrained by an inability to finance an expansion to their production facility. An investment of just over USD 600,000 enabled them to invest in a new production line by importing a state of the art glass tempering furnace. GroFin has also provided business support in key areas like monitoring financial performance and managing Forex volatility. 22 jobs are being created for the new production line bringing the total number of jobs sustained at Rene Turck to 153.

This is just one of many investments that are making a direct social and economic impact in the manufacturing sector of Africa. Development finance through the engine of SGBs in the developing world is resulting in the creation of jobs, reduction in poverty and steady progress towards achievement of the UN Sustainable Development Goals.

[1] McKinsey & Company. 2017.  Lions on the move II: Realizing the potential of Africa’s economies | McKinsey & Company . [ONLINE] Available at: http://www.mckinsey.com/global-themes/middle-east-and-africa/lions-on-the-move-realizing-the-potential-of-africas-economies. [Accessed 21 February 2017].
[2] BBC. 2017. Made in Africa: Is manufacturing taking off on the continent? – BBC News. [ONLINE] Available at: http://www.bbc.com/news/world-africa-27329594. [Accessed 21 February 2017].
[3] African Development Bank, Organisation for Economic Co-operation and Development, United Nations Development Programme. 2016. African Economic Outlook 2016. [ONLINE] Available at: http://www.africaneconomicoutlook.org/sites/default/files/2016-05/eBook_AEO2016.pdf. [Accessed 21 February 2017].
[4] BBC. 2017. Made in Africa: Is manufacturing taking off on the continent? – BBC News. [ONLINE] Available at: http://www.bbc.com/news/world-africa-27329594. [Accessed 21 February 2017].
[5] McKinsey & Company. 2017.  Lions on the move II: Realizing the potential of Africa’s economies | McKinsey & Company . [ONLINE] Available at: http://www.mckinsey.com/global-themes/middle-east-and-africa/lions-on-the-move-realizing-the-potential-of-africas-economies. [Accessed 21 February 2017].
[6] Data & Research – Book: Light Manufacturing in Africa – Targeted Policies to Enhance Private Investment and Create Jobs. 2017. Data & Research – Book: Light Manufacturing in Africa – Targeted Policies to Enhance Private Investment and Create Jobs. [ONLINE] Available at: http://econ.worldbank.org/africamanufacturing. [Accessed 21 February 2017].
[7] The Economist. 2014. Manufacturing in Africa: An awakening giant. [ONLINE] Available at: http://www.economist.com/news/middle-east-and-africa/21595949-if-africas-economies-are-take-africans-will-have-start-making-lot. [Accessed 21 February 2017].