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Challenges and opportunities of exits of MNCs from Nigeria 16 Feb 2024

Nigeria, Africa's most populous nation and one of its largest markets, has recently experienced a worrying trend of major fast-moving consumer goods (FMCG) companies relocating from its manufacturing landscape. This trend, marked by high-profile departures of multinational companies (MNCs), paints a picture of a manufacturing sector that is struggling to thrive.

In March 2023, Unilever Nigeria Plc, the iconic consumer goods giant, announced its exit from home care and skin cleansing production. The company cited a need to accelerate growth and sustain profitability as the primary reason for the adjustments. The pharmaceutical company, GlaxoSmithKline (GSK), closed its Nigerian manufacturing facility and shifted to a third-party distribution model in August 2023.

Similar to Unilever, GSK cited difficulties in accessing to foreign exchange, coupled with a decline in consumer spending, and other factors, as the reasons for its exit decision. Following its soap production relocation to Ghana in 2022, PZ Cussons further scaled back its Nigerian operations in 2023 by shutting down its bleach and detergent production lines. Just a year after opening its $300 million factory in Agbara, Procter & Gamble (P&G) shut it down in 2022 for reasons stated by the other MNCs.

Before the current wave of operational adjustments, closures, and relocations out of the country by the MNCs, the most notable trend was the relocation of manufacturing plants and administrative offices by major FMCG companies from Lagos, the economic hub, to other regions/states in the country. Nestlé exemplified this trend in 2018 by relocating its Maggi seasoning production from Lagos to Ogun State, having attracted by tax breaks and wanting closer proximity to its source of raw materials. Similarly, Flour Mills of Nigeria (FMN) established a pasta plant in Edo State, capitalising on government incentives and access to cassava starch. FrieslandCampina WAMCO, the Dutch dairy firm, shifted production of its Peak evaporated milk from its Lagos plant to its Kano facility in 2023, tapping into the region's large dairy farming sector.

As desirable as this diversification across the country is, fostering regional development and creating employment opportunities across the country, it was a wake-up call to infrastructural deficits, inadequate locally sourced inputs/materials, and the need for tax incentives. Unfortunately, these warning signs were not heeded until the eventual shutdown and relocation of major manufacturing companies to neighbouring countries. While the reasons behind the closures and relocations vary, they are not limited to high logistics costs, erratic power supply, volatile business environments, inefficient ports, inconsistent government policies, high operational costs, and a shortage of foreign exchange, to mention just a few.

The policies of the Central Bank of Nigeria (CBN) regarding foreign exchange, especially the import substitution programme designed to encourage local production of some goods, have made it difficult for most FMCG companies to access foreign exchange for essential raw materials, including goods that are not substitutable locally. The operations of multiple exchange rates created uncertainty for many businesses. And based on supply shortfall, relative to demand, it has become increasingly difficult to access foreign exchange at the official rate, given that they are usually reserved for priority sectors, while the alternative parallel market exchange rate is volatile, and unpredictable, impacting cost planning and profitability. Moreover, the process of obtaining foreign exchange approvals from the CBN is bureaucratic and time-consuming, often causing delays in decision-making. The persistent depreciation of the naira against the dollar makes raw materials more expensive, squeezing profit margins for FMCG companies. These hurdles disrupt production schedules and increase production costs of many manufacturing firms.

Despite the commitment of the last administration to infrastructure development of the country, infrastructure deficit remains an albatross, threatening the survival of the manufacturing industry. The crumbling infrastructure constitutes a significant roadblock to manufacturing firms. Many companies transport fragile food products on pothole-riddled roads, spending hours before delivery and incurring damage and spoilage costs. According to a report by the African Development Bank in 2023, poor transport infrastructure adds 25-30% to the cost of goods in Nigeria. Similarly, the problem of erratic power supply in the country has caused a significant increase in production costs and operational inefficiency of manufacturing firms. Since Nigeria has become a “generator economy,” many manufacturing companies rely heavily on expensive diesel generators, which add significantly to production costs. According to the Manufacturers’ Association of Nigeria (MAN), in 2023, 80% of manufacturers experienced production disruptions due to power outages, and power generation costs often exceed 30% of the total production costs.

However, the withdrawal of major companies from local production has serious implications for the economy, including high inflation rates, unemployment, and decline in aggregate demand. The exit of manufacturing companies connotes a shortage of products, particularly those previously manufactured within the country. This could result in high reliance on imported goods. With a depreciating naira, the resultant high import costs would increase the prices of goods in the country. Furthermore, the closure of many FMCG factories implies job losses and decrease in aggregate demand. This vicious cycle of reduction in production, lower demand, and decreasing employment and income will continue to see prices go up as the cost of production per unit increases. The National Bureau of Statistics reports that unemployment rose to 33.3% in Q4 2023, with youth unemployment even higher at 42.3%. Inflation rate stood at 28.9% in December 2023. The relocation of FMCG companies is expected to further exacerbate these trends.

This trend, apart from its enumerated challenges, also presents opportunities for industry players and the Nigerian economy as a whole. Beyond the challenges of closed factories, job losses, dwindling aggregate demand, and reduction in tax revenue, this trend offers opportunities for the development of domestic FMCG brands, innovation, and diversification in the long run.

Nigeria can take a cue from other countries like Argentina, Venezuela, Indonesia, and Russia who have witnessed the closure of major FMCG companies due to unfavourable conditions. These countries provide valuable insights into possible mitigation strategies such as building resilient infrastructure, providing macroeconomic stability, adapting to local preferences, and diversifying the economy.

The Nigerian government and other stakeholders need to be proactive in addressing the challenges of infrastructural deficits, foreign exchange bottlenecks, and unstable regulatory environment while capitalising on the opportunities to ensure the long-term development of a competitive and diversified manufacturing sector. The manufacturing sector may remain subdued and vulnerable to external economic shocks beyond the near term if the exit of many struggling manufacturing firms is not met with drastic steps and right responses.

Olusola Dahunsi, PhD, who is a chartered accountant, is a lecturer and researcher.