Strategy Note /

Sub Sahara Africa manufacturing potential: Ethiopia tops our regional scorecard

  • Local investment, intra-regional trade, local consumer base should drive manufacturing investment (more than relocation)

  • Ethiopia has the lowest wages and improving power supply (GERD) should catalyse growth in scaled, low-cost manufacturing

  • Nigeria, South Africa score well (they dominate the existing sector); Mauritius top for those driven by tech and ethics

Sub Sahara Africa manufacturing potential: Ethiopia tops our regional scorecard
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
3 September 2020
Published byTellimer Research

If Sub Sahara Africa were to match the industrial intensity of South Asia (ie the Indian sub-continent, which is similar to Sub Sahara in terms of GDP per capita and lack of regional trade integration, not the East Asian "Tigers") then manufacturing activity could double.

The investment to realise that manufacturing potential is likely driven by serving local and nearby regional markets in contrast to North Africa (EU exports) or South East Asia (global exports and China relocation). Therefore, Sub Sahara should not be thought of as competing for the same investment dollar as those regions.

Using a scorecard to rank the relative attractiveness of countries (weighting metrics covering scale, cost, and skills of the labour force, physical infrastructure, ease of doing business, and ethics) we highlight Ethiopia as offering the most potential for growth.

Nigeria and South Africa score well but this is little surprise given they dominate the existing manufacturing sector proportionate to their overall economic size. Mauritius may offer the most attractive destination for investment driven by more advanced technology and more stringent ethical scrutiny.

Sub Sahara is not competing for the same investors looking at North Africa or South East Asia

Local entrepreneurial investment by local high net wealth (particularly in an era of low interest rates and greater anti money laundering scrutiny on investment in overseas assets), greater intra-regional trade, a growing and under-penetrated domestic consumer base, and, to a lesser degree, some relocation by multinationals from more expensive locations (multinational FDI) should drive the growth of industrial manufacturing in Sub Sahara Africa. A great deal more manufacturing activity may be justified by serving large domestic and nearby regional markets: eg Ethiopia in the east, Nigeria in the west, and South Africa in the south.

It is unlikely that Sub Sahara, in general, will compete for the same manufacturing investment dollar which considers North Africa (which has much lower tariff access and closer physical proximity to the EU) or Asia (which has much greater scale, eg the five biggest low-income countries in Asia ex-China has 4x, with India included, or 2x, without India, the aggregate labour force of the five biggest in Sub Sahara, and where the global exports and multinational relocation from China drive the investment decision at least as much, and often more than, the local consumer opportunity).

The risks are that trade barriers (tariff and non-tariff) remain high within Sub Sahara (either within the existing web of overlapping regional trade areas, eg EAC, WAEMU, SADC, let alone in the nascent continent-wide AfCFTA) and new technologies (ie robotics and 3D printing) undermine investment in new human-capital intensive manufacturing. And, of course, realising this ambition for Ethiopia (and all the other countries whether in this sample or a more global one) is contingent on getting the basics right or, at least, reforming in the right direction: free operation of markets (eg light and predictable regulation and a fully functioning FX market), the upgrade of human capital (healthcare and education) and physical infrastructure, social stability (rule of law and robust political institutions), and an absence of conflict (ie terror or war).

Assessing manufacturing competitiveness

In this report, we rank a sample of the larger economies in Sub Sahara in terms of their manufacturing competitiveness.

Our relative scorecard uses the same method as we have used previously when looking at manufacturing competitiveness in Asia. (It should be stressed that our rankings are relative within each region; the absolute score in our Asian sample of countries is not comparable with an absolute score from this Sub Sahara sample).

This scorecard considers a range of metrics covering labour force, cost, skills, infrastructure and ethics. We weight these metrics to create three styles of the scorecard: "cheap and scaled" "receptive to technology", and "governance".

We consider and chart the following metrics:

  1. Scale (size of the labour)

  2. Cost competitiveness (wages, wage pressure, tariffs, FX rate competitiveness and accessibility)

  3. Technology (productivity, skills of the workforce and R&D spend)

  4. Infrastructure (electricity access and logistics)

  5. Ease of doing business

  6. Anti-corruption

  7. Human freedoms

Constructing a manufacturing scorecard

We construct a manufacturing competitiveness scorecard (the results are illustrated in the chart at the top of this report) with varying weights for these metrics to reflect the varying priorities of investors in manufacturing:

  • “Scaled and Cheap”

  • “Higher Tech”

  • “Governance”

  • “Balanced” (a simple average of the above)

Footnote: Global scorecard with Asia and Africa

Below, for reference, we present the results of our manufacturing scorecard with countries from Asia and North Africa included. Note that this is for reference alone because, in our view, as expressed above, the commercial rationale for investment in manufacturing is likely specific to each region.

This scorecard is a relative scorecard among a sample peer group – it is not an absolute measure of manufacturing competitiveness. Changing the composition of the peer group can alter the ranking of two particular countries from the same region.

This may seem counter-intuitive, but an example should explain.

Within the Sub Sahara peer group alone, Nigeria scores very highly on the “scaled and cheap” version of the scorecard, because it has by far the largest labour force. However, when China is included, for a Global peer group then Nigeria’s labour force scores much worse. On the other hand, Ethiopia scores very well on low manufacturing wages in BOTH peer groups (Sub Sahara and Global) and therefore “retains” this high score in the Global peer group. Therefore, the gap between Ethiopia and Nigeria actually widens when the peer group is expanded to include Asia.

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