Adding value to African products and services

There is vigorous discussion throughout the international development community about the policies and priorities necessary to stimulate economic growth and to ensure that such growth is both inclusive and sustainable. For many African countries that have been heavily dependent on the export of raw commodities, there is growing recognition that the next stages of economic growth will require much greater attention to the work of ‘adding value’ to raw products and commodities as a means of accelerating job creation and promoting higher profit margins and returns on investment.

Moreover, to achieve structural transformation, value must be added to Africa’s commodities, and specific industrial policies and programmes such as regional value chains are of key importance. This strategy is ideal for addressing poverty in an economy like that of Kenya. Value-added products and services – also called value chains – consist of interlinked value-adding activities that convert inputs into outputs, which are eventually bought by clients and customers, thereby adding to a company’s profits and helping to create competitive advantage. A value chain typically consists of, first, inbound distribution and logistics; secondly, manufacturing operations; thirdly, outbound distribution and logistics; fourthly, marketing and sales; and, fifthly, after-sales service. This paper describes several opportunities for creating value chains and value-added products and services in Africa and the associated challenges.

QUALITY IS KING

For many African countries, the task of adding value to their products remains problematic. One reason for this is the quality of finished products. In Nairobi, for example, vast quantities of finished products, such as hand-crafted furniture, are on display along the roadsides in the outskirts of the city. Most of these products are of poor quality and attract only a limited number of buyers. Many vendors make the same things: they are loath to specialise in specific products, and thus products sell slowly. If the products were of higher quality they would fetch higher prices and encourage buyers to purchase them. A similar situation may be observed with agricultural products.

African countries would be well advised to promote local value chains in which local artisans were given incentives to specialise in making high-end products that were then aggressively marketed by African countries as part of their branding strategy. Imagine, for a moment, the production of a brand of high quality Kisii soapstone tiles in Kenya. The demand for tiles in the construction industry is now almost exclusively met by imports, even though places such as Kenya have local alternatives of very high quality.

A focus on quality control would add value and help expand both local and export markets. As observed by economists such as Tom Peters, quality rather than price dictates demand for a product and in Africa members of the middle class are increasingly willing to pay for quality. By contrast, specialisation in small and very specific tasks, albeit at the lower rung of the ladder of the value chain, means specialisation is not attained, technology and skills are not built or transferred and the result is poor quality. While productivity has an impact on profits, so far as profitably is concerned, quality is what counts.

LACK OF FUNDS

Today, many African countries continue to be export-oriented economies with an emphasis on selling raw materials to the rest of the world. In return, they buy back finished products made from the self-same raw materials that they exported in the form of clothes and processed foodstuffs, such as chocolate and even packaged and blended coffee, for example. Many African countries have no funds of their own to establish manufacturing plants to process the raw materials, and neither has there been significant foreign direct investment in African industry. The reasons for these lacunae are numerous, but they may principally be attributed to the poor governance exercised by the continent’s many corrupt and megalomaniac leaders.

At the same time, there are a few African entrepreneurs who, despite the obstacles, continue to invest in Africa, such as the Nigerian billionaire Dangote, who has invested in many African countries in such sectors as cement manufacturing, oil extraction, infrastructure and agriculture. African governments should encourage more public–private partnerships and joint ventures from within Africa and overseas to support small and large manufacturing plants. An example of such initiatives may be seen in the tea industry in Kenya, which was originally established and supported by the Brooke Bond and James Finlay companies under the umbrella of Unilever and is now managed by the government and individual farmers, who process the product locally and sell it locally, regionally and overseas.

To cut transport costs and as part of economic integration, private sector partnerships within each African sub-region should pool their efforts and raise funds for the creation of factories to manufacture products that may be sold locally, thus adding value to the raw materials produced in the sub-region concerned. In Cameroon, Côte d’Ivoire, Ghana and Nigeria, for instance, local industries produce banana chips, banana juice and even banana wine (taking advantage of the high level of sugar in the fruit), and sell these products to other West African countries. Such sub-regional initiatives are precisely what the United Nations Economic Commission for Africa has been promoting as a basis for growing regional value chains into which African businesses can more easily integrate than international value chains. To assist in building this into a success, more innovative ways should be explored of raising funds locally, such as taxation schemes designed to combat corruption, which is rampant in many – if not most – African countries.

African governments should also work closely with countries like Switzerland to persuade them to repatriate money from the bank accounts of corrupt leaders (a long list, including such notorious names as Abacha and Mobutu), and sell properties bought by those leaders, and by other corrupt people, including many Africans who have stolen Africa’s resources. The proceeds could then be invested in the creation of small-scale industries that add value to African products, whether agricultural or mineral, thus creating jobs and improving people’s living conditions.

Other paths may also be followed as in Kenya, where the local population has raised money to build vocational centres for the training of skilled workers in different trades, who can add value to the country’s products. Levies could be added to the sale of African products and commodities such as oil, gas and money, and the income thus generated used to support small and medium-sized enterprises. Without adequate funds from local and external sources, and without the application of strong political will, the process of adding value in Africa will continue to lag behind that of other developing regions.

NEED FOR RELEVANT SKILLS

The products of small and medium-sized enterprises are of mixed quality: these enterprises lack capacity and, as a result, building up their capacity will improve their production of high quality goods. As a priority, African governments should focus on upgrading the capacity of the people involved in productive sectors, specifically small and medium-sized enterprises. This undertaking will not be cheap; however, African governments should work together with local institutions to set up tailor-made vocational training courses at certificate, diploma and graduate levels. The experience of the so-called ‘Asian Tiger’ countries shows that to succeed they not only had to build their own organisational capacities, they also had to strengthen the capabilities of small and medium-sized businesses to adapt to a rapidly changing business environment and to new markets.

Apart from commodities, African countries can also add value to service industries. For example, the journal Canadian Business reported that almost half of all Canadians are ill equipped to perform their own jobs in an entirely satisfactory manner. The Canadian study went on to recommend an apprenticeship programme tied to essential skills training across a number of trades. Once established, the programme has in turn created better products and services and fostered a new attitude, more competitive and more geared towards profitability. This kind of approach, including internships and attachments, is highly instructive for African countries.

In addition, Africa should embrace scientific research to assist farmers to increase their yields. For example, as reported by the Innovations Partnership Scheme (United Kingdom), an innovative platform established in Kabare District in Uganda succeeded in bringing together farmers, researchers, extension agents, policymakers and consumers in the context of specific commodities or production systems. Moreover, according to Reuters, reporting on a recent initiative launched by the Rockefeller Foundation to cut food waste and loss, the foundation is supposed to work in partnership with food giants (such as Coca Cola) and other stakeholders to enhance the skills of African farmers in crop-preserving technologies and strategies to combat crop loss. To add value in Africa, the continent should seriously invest more in skills relating to science, research, technology and innovation.

WEAK INTRA-AFRICA MARKET

Given that exported products have to meet very high quality standards, Africa should first and foremost develop its internal markets. To date, this has not been easy, partly because of colonial hangovers and a reluctance to change mind-sets. Other obstacles that have hindered the expansion of manufacturing in Africa are heavy duties levied on products, and the continent’s complex bureaucracies and widespread corruption. It is embarrassing for Africans who travel to Europe and find themselves buying goods made in Africa or other developing countries to US or European specifications. In short, the importance of developing and expanding intra-African trading cannot be over-emphasised. Many people in African countries, especially members of the elite, have disdain for anything made in their own or any other African country, again because of innate prejudice or previous experience with the low quality of products made in Africa. People of this ilk make every effort to import their clothes, furniture and other luxuries from Europe, the US and Asia.

Today, Malaysia has a reasonably successful car industry, which produces 90 per cent of the cars on its roads and exports a growing number of vehicles, mainly within South-East Asia with a considerable number going to Europe. The industry began as a substitute in the local market for imports but has since successfully morphed into a manufacturer in its own right. Another success story is that of the African fashion industry. This is making inroads into both local and overseas markets, in particular among the African diaspora. Many prominent African women, such as the current president of Liberia, Ellen Johnson Sirleaf, the former president of Malawi, Joyce Banda, as well as female ministers and company executives patronise the African fashion industry. A similar trend may be observed with some men’s cotton apparel, popular in West, Central and North Africa. The growing volumes of sales of these products are leading to improvements in the quality and standing of the African fashion industry, for both women and men. These efforts may look modest but they are contributing towards expanding internal markets.

FAILURE TO SHARE RELEVANT EXPERIENCE AND BEST PRACTICES

Most of the Asian Tiger countries benefited by forming partnerships and joint ventures and sharing of best practices and experiences. In addition, these countries embraced industrial policies which had been developed around global value chains and fostered the formation of specific economic zones: this approach worked for these countries and could be replicated in African countries. Although comparable data on Africa are limited, one important example comes to mind: the partnership between Botswana and De Beers, which, over the last 40 years, has resulted in the country becoming the largest producer of diamonds by value in the world and its emergence as a middle-income country.

Ghana provides another example. Samba Foods decided to add value to shito, a traditional pepper sauce that forms part of the diet of Ghanaian coastal people. Initially the company’s product sold well locally and overseas, especially to Ghanaian soldiers serving in UN missions abroad. Following that initial surge, however, the company then collapsed. Undeterred, its determined owners managed to raise capital with which to buy new machines that significantly improved safety standards and product quality. That encouraged the global mega-concern YUM Brands to approach Samba and ask them to supply packaged pepper sauce to its KFC restaurants. Now even Bloomberg acknowledges Samba Foods manufactures and sells shito pepper sauce in jars and sachets and ground pastes, roasted groundnuts, and peanut-butter products under the Samba brand, which it is looking to expand into other West African countries.

Another initiative worth noting is the partnership between Nestlé South Africa, the South African Council for Scientific and Industrial Research (CSIR) and the South African Agricultural Research Council (ARC) for the commercial production of a particular flavour of Maggi noodles. The three organisations will produce the vegetable ingredients, thus providing an opportunity for small-scale farmers to implement a bio-economy strategy that will contribute to the national economy and help address the employment problem. Although partnerships and sharing best practices are not strong attributes in Africa, Botswana’s experience should remind us that it is the way forward in doing business in the twenty-first century.

CONCLUSION

The process of adding value is neither automatic nor easy. A comprehensive inspection of methods and attitudes is needed to deliver quality products that are competitively priced. Andrew Rugasira, a Ugandan coffee entrepreneur, points out that, ‘when you add value, you retain not just the financial value in the country, but you create jobs, businesses pay more taxes and that is how you develop the economy’. The investment platform Homestrings stipulates that African governments should identify the right partners and help investors identify the right projects. In that context, the acclaimed African expert on sustainable development Calestous Juma agrees that ‘adding value to raw materials is essential in its own right but it should not be fronted as a strategy for rapid industrialisation and economic diversification’. Furthermore, Leticia Osafo-Addo of Samba Foods acknowledges that adding value is extremely important, in particular for small and medium-sized enterprises in Africa, and adds a plea that financial institutions should help them consolidate and intensify efforts, instead of allowing them to fold.

One inescapable – if less palatable – truth is that adding value in Africa costs money: it requires capital, relevant skills (in science, ICT and innovation), clearly articulated policies, and the sharing of best practices and technology. All these costs and inputs are inextricably intertwined and none should be ignored if value-addition is to be widely embraced by Africa and if the continent is, at long last, to enjoy the fruits of its own richness.

* Amb. Dr. John O. Kakonge is Senior Consultant and Adviser in Sustainable Development.

REFERENCES

Canadian Business 15 May 2014.

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