The importance of building local industries
“By stimulating industry, by rewarding ingenuity and by using most efficaciously the peculiar powers bestowed by nature, it distributes labour most effectively and most economically: while, by increasing the general mass of productions, it diffuses general benefit, and binds together by one common tie of interest and intercourse, the universal society of nations throughout the civilized world”. - David Ricardo
I took a drive up Great North road last weekend from Kabulonga towards Kabangwe, a peri urban community situated north of Lusaka, on the Great North Road past Heroes’ stadium. This route, which I have taken countless times, revealed a very interesting phenomenon. The numerous Spar stores located along my route had Pick n Pay “coming soon” banners hanging prominently beneath the Spar signage. Spar is indeed leaving the Zambian market and it would appear Pick n Pay will be slotting into their place. The weaknesses exposed in the supermarket industry by the disruption in the supply chain due to the closure of borders brought by COVID-19 (check out last month’s blog for a deeper read on this) has led to a shake-up in the industry.
It is no secret that Zambia imports more goods and services annually than she exports; approximately 4.5% more – though it is believed this is a conservative estimate. Her main trading partners being: South Africa (29%); China (14%); Democratic Republic of Congo (15%); UAE (6%) and India (5%). The rest of the world combined represents 32%. According to 2018 figures , Zambia imported a total of USD 9.4 billion worth of goods and services.
Allow me to direct your attention to the agri space and the supermarket sector in Zambia. There are 4 larger chain grocers on the Zambian market, namely; Shoprite, Pick n Pay, Choppies, and Cheers. Other stores have differentiated models and form a smaller part of the grocer market. Heck! even Game Stores and Woolworths carry groceries in their establishments, but they are marketed at premium prices which cater to a select consumer. One observation is that the majority of these supermarket chains are South African (SA). With the largest portion of Zambian imports coming from SA, from agri produce to shoe polish, this presents serious complications for local grocers. I visited one of the aforementioned grocery shops, only to find a whole section with empty shelves. One would expect store shelves to be filled with inventory covered in eye-catching marketing labels, instead there stood before me a dismal curtain of grey “nothingness” supported by skeletal metal structures. It was a weird sight as empty shelves are not commonplace in Zambia.
I was intrigued by this, and as mentioned above, the problem is related to an inability to get goods into the country due to supply chain disruptions. The Zambian grocery market has long depended on the import of goods to maintain inventory. A colleague once threw some stats at me during an interesting conversation on the economy, proclaiming that goods found in local micro stores, called Ntembas, constitute 90% of Zambian produced goods. Goods in your large grocery stores on the other hand, constitute only 40% locally produced Zambian goods (again, I believe this figure could be conservative). Zambia cannot change this overnight, as the old Chinese adage goes, “a journey of a thousand miles starts with the first step”. The first step here would be to start with agri products. Zambia has vast, arable land and indeed a substantial percentage of Southern Africa’s freshwater supply. With ample investment in the agri-space combined with enabling government policy, Zambia can invigorate the sector and utilise its abundance in resources to produce more local based agri products that will help to increase the percentage of locally supplied food. This will decrease the industry’s dependence on imported agri and help minimise the damage caused by shock events such as the COVID-19 pandemic or currency devaluation. The same can be done in a few other industries and the following two history lessons provide test cases on how the manufacturing sector too can be revived. These lessons are a snapshot of the problem at large for which a new approach would lead to successful investment projects.
During the Import Substitution Industrialisation (ISI) of the 1960s through to the mid 1980s, the textiles industry, by way of an incentive system, received support from the government to strengthen the manufacturing sector. This was formed by a combination of quantitative restrictions, tariffs and exchange rate management. This was primarily done to protect the textile and clothing industry from external competition, reduce the role of the market and increase state involvement in establishing the level, composition and quality of investment in this sector. The industry employed approximately 25,000 people during the 1980s under protectionist policies, but after the liberalisation of the economy in 1991, the textiles industry began to contract. This led to redundancies due to mismanagement, underutilisation of capacity and the inability to compete with cheaper imports from Asia. All these factors ultimately led to the industry’s demise at the time.
There was an attempt by the government to revive the textiles industry via an investment that was born out of a joint venture between Zambia and the Chinese government. Zambia China Mulungushi Textile Ltd (ZCMT) came to life via an GBP 11.7 million interest free loan from the Chinese government in 1983. It was initially under the care of the Defence Ministry of Zambia. The factory closed its doors in 1994 due to deteriorating macroeconomic conditions and overall operational inefficiency. In 1995 the Chinese government decided that the GBP 11.7 million loan together with a further investment of GBP 1.5 million (to recapitalise the factory) would be converted into an equity stake of 66%. The Zambian government would retain the remaining 34%. It was also agreed that the positions of chairman of the board of directors as well as top management would be held by the Chinese. Immediately after the agreement was signed, Qindao textile corporation arrived and began overhaul work on the factory. Shortly after, the factory soon ran into more trouble due to poor product quality, low efficiency, insufficient varieties of products and long delivery periods, all of which demanded the replacement of the outdated equipment. Cotton supply also became a problem. The monopoly over the raw cotton market by a few big companies made it difficult for ZCMT to source cotton at a reasonable price. The company had to resort to importing cotton from Tanzania, which resulted in much higher costs. Later in 1998, ZCMT ventured into cotton farming in an attempt to secure cotton supplies.
Kapiri Glass Factory is another one too. On your way up Great North Road just after Kabwe as you approach Kapiri-Mposhi, on the left-hand side of the road (heading North from Lusaka) you will find a glass factory that was shut down in 1998. This factory once revamped would be one of the only glass manufacturing plants in the SADC region outside of South Africa. This project would add value not only to the surrounding region in the form of direct jobs but also in indirect jobs and create follow-on businesses along its value chain. Kapiri has a considerable amount of silica in and around the area, which is needed to produce a variety of glass products. There have since been multiple attempts to revive the factory with no avail due to a lack of financing. One Chinese company is taking a shot at bringing it back to life, and as of 2019 it is believed that discussions were at an advanced stage in an attempt to bring the factory back life. I hope this time it will be successful. Such a project would add to the manufacturing base of the economy and would significantly increase the country’s productivity. The domestic economy, in order to sustain itself, will need a robust manufacturing base. Much the same way China and the so called “Asian Tigers” have emerged as manufacturing powerhouses. The “flying geese model” (an economic development concept introduced by Japanese economist Kaname Akamatsu), has proven effective with China leading the way and now smaller regional economies have become manufacturing hubs that have managed to establish themselves as middle income economies. Countries such as Vietnam, Indonesia, Thailand, and Malaysia are solid examples that have built self-sustaining economies with domestic industries and as a result, most have become net exporters.
The two examples above showcase a few of the investment opportunities that, with the right investment approach, can provide a basis to revive domestic industries in the Zambian economy. Investment managers with their expertise and operational know-how would play a significant role in ensuring that investment projects are fostered and nurtured throughout their life span. The establishment of an investment strategy that accedes the engagement of the manager from the get-go to optimise performance is paramount. This will ensure that accountability and overall operational process is optimal to avoid the mistakes that befell the two examples above.
Developing local industries will, however, require a collaborative effort between the public and private sector. I am an advocate for the limited role governments should play in commerce, but I believe in this instance, it is incumbent upon and imperative that government builds the basis and foundation for an ecosystem with sustainable value chains that will fortify the domestic economy. This will in turn support auxiliary industries that will need further assistance from developmental stakeholders. The law of comparative advantage should also be at play here; officials need to assess which industries are in need of support to foster their growth to strengthen them domestically and thereby fortify their independence. This current lack of independence reared its ugly head recently in the grocery store industry during the COVID-19 pandemic. Grocery stores shelves wound up empty with the lack of availability of certain products due to the disruption of the supply chain. With a strong manufacturing base, most of the stores in Zambia would not rely on foreign goods and hence would provide for a stronger, self-sustaining economy.