December 5, 2023/Coronation Research

Landscape

The manufacturing sector in Nigeria has experienced inconsistent growth, averaging a modest 0.46% y/y over the past seven years and contributing an average of 9.1% y/y to the total GDP during the same period. There are a number of factors that have influenced the current trend of the sector. They include: global economic conditions, infrastructural deficits, fx volatility, supply chain disruption.

In Q3 ’23, the sector grew by 0.4% y/y and accounting for 8.4% of total GDP. The manufacturing sector, heavily reliant on petrol-powered generators and vehicles, faced higher operating costs due to increased fuel prices in mid-2023. Furthermore, fx liquidity constraints, and high borrowing costs have spiked operational costs, thereby impacting competitiveness.

Deeper analysis of the Q3 ’23 national accounts show that within the manufacturing sector, the food, and beverages segment grew by 0.9% y/y and accounted for 49% of total manufacturing GDP. However, we note that most of the consumer goods companies recorded impressive revenue growth driven by the implementation of respective product price increases. For food staple producers, the inelastic nature of demand for products, resulted in easier price hike implementation. On the flip side, their bottom line (net revenue) was severely impacted by exchange rate losses (post-fx liberalization).

In contrast, the textile, apparel, and footwear segment contracted by -2.7% y/y, as textile manufacturers struggle with production capacity, limited purchasing power which has triggered relatively weak patronage. Perhaps, government policies that support the textile and apparel industry, such as tariff reductions on machinery, tax incentives, and initiatives to combat smuggling and counterfeiting would contribute to boosting output from this
manufacturing segment.

The latest update on the CBN’s Manufacturing Purchasing Managers’ Index (PMI), show that PMI expanded to 53.6 points in May ‘23 from 51.6 points in the previous month. Note that a reading above 50 points towards an expansion while a reading below 50 translates into a contraction. We expect subsequent readings (when released) would reflect the current market realities which include high operating costs.

China and South Korea are two countries that could serve can serve as a compelling case study for Nigeria’s manufacturing sector. Manufacturing in both countries has been characterized by strong growth over the past 10-years, as their industrial/manufacturing sectors accounted for 27.7% y/y and 25.6% y/y respectively of total GDP in 2022. Growth has been largely driven by strategic government policies, technological advancements, export-oriented industrialization, education and skills development.

China’s ability to offer cost-effective manufacturing solutions has made it the go-to destination for companies seeking efficient and affordable production. In South Korea, large conglomerates, known as “chaebols” (e.g., Samsung, Hyundai), have played a pivotal role in the country’s industrialization, stimulating growth across auxiliary economic sectors.

Given the current macroeconomic environment, businesses within the manufacturing sector require a cocktail of strategies to ensure they remain afloat or tilt towards expansion. From our vantage point, businesses within manufacturing should consider exploring currency hedging strategies to minimize fx risks as well as implement rigorous cost control measures to mitigate the impact of higher import costs. Furthermore, investing in backward integration and import substitution practices should be considered, as this would mitigate the impact of fx depreciation on production costs.

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