Resilience Amidst Adversity: Localization in Nigeria's Ailing Economy
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Resilience Amidst Adversity: Localization in Nigeria's Ailing Economy
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Martin Nkonge
Aug, 2024
Nigeria is Africa's largest economy and is on track to become the world's fourth-most populous country by 2050. However, the nation is currently experiencing major economic downturns characterized by rampant inflation and a weakening currency. President Tinubu's recent economic reforms, such as removing the oil subsidy and floating the foreign exchange market, aimed to address these issues, but they have only exacerbated the problem. One of the fallouts of the new economic policies has been the exodus of Western multinationals from Nigeria, highlighting the challenging nature of the present economic environment.
Equally, this exodus reinforces that the ability of businesses to localize production, value-addition and strategization to adapt to Nigeria's unique market conditions will be crucial for their long-term resilience in the face of ongoing economic volatility.
Why Were the Reforms Necessary?
When President Tinubu assumed office in May 2023, he introduced a raft of economic reforms, including scrapping the oil subsidy. The oil subsidy lowered the petrol prices for the residents of Nigeria, who, despite producing oil, have to paradoxically rely on imports. The subsidy was a huge drain on public finances, accounting for 15% of the budget in the first half of 2023 - more than the government spent on health or education. Mr. Tinubu argued that these funds could be better utilized elsewhere, leaving oil prices to be shaped by international market rates.
In addition to removing the oil subsidy, President Tinubu also floated the foreign exchange market, allowing the currency valuation to be determined by international supply and demand dynamics. While this move aimed to stabilize the economy in the long run, it led to an immediate increase in the prices of imports, contributing to the current hyperinflation.
How are the Reforms Affecting Foreign Businesses?
These reforms have had unintended consequences on the economy. In June, Nigeria’s inflation rates rose to 34.19% largely due to the rising prices of consumer goods. The Central Bank of Nigeria (CBN) has, on multiple occasions, increased the interest rates to curb the galloping inflation to no avail. The Naira has also lost more than 60% of its value against the dollar since June 2023.
Nowhere else has this effect been more pronounced than among Western multinationals, who have continued a streak of scaling down operations or exiting the troubled market altogether. In the last five years, multinationals leaving the Nigerian market have cost the country up to 94 trillion Naira ($57 billion).
Examples of companies that have exited or scaled down operations recently include but are not limited to American-based Microsoft Corp.; Sanofi, a French pharmaceutical multinational; Procter & Gamble (P&G), an American consumer goods multinational; and Unilever, a British fast moving consumer goods company. More recently in June, Diageo, a British multinational alcoholic beverage company, sold 58% of its Guinness Nigeria stake to Tolaram Group, a Singapore-based company.
The resulting market dynamics have exposed the frailties of foreign businesses that rely on cheap imports and previously lower cost of conducting business. Notably, the multinationals rushing for market exits are European or American. Ordinarily, these corporations adopt profit maximizing strategies at the expense of localization. For instance, they will trade in local currency in Nigeria, but production costs are dollar-denominated. Therefore, when the Naira takes a tumble, they cannot outcompete firms that have localized their costs.
Companies with Local Production and Distribution are Riding the Tide Better
Businesses with localized strategies have adapted better. Asian firms like Tolaram are holding up well amidst the adverse economic situation in Nigeria due to their ability to localize costs.
Besides local production, firms prioritizing local partnership engagement are also thriving in Nigeria. An example of this is Hayat Kimya (Molfix) that has rivaled P&G’s diapers chain in Nigeria. Hayat Kimya successfully adapted to the local market by offering a product that met the quality expectations of Nigerian consumers at a competitive price point. They also established a robust distribution network that ensured their products were readily available across the country, unlike P&G’s mega distributor model. This strategic approach allowed Molfix to capture a significant market share, growing from 4% in 2016 to 60% by 2020, while P&G’s Pampers saw a dramatic decline from 76% to 30% in the same period.
The spillover effects of a deteriorating economy have also affected local companies in Nigeria, with most struggling to meet high production and operational costs. Falling consumer demand is not helping the situation. Even so, most local companies and SMEs have managed to curb the effects of the economic shocks due to domestic production and distribution chains. For instance, amidst GSK’s departure, Lagos based Fidson Healthcare has grabbed the opportunity and expanded its range of products and increased its exports.
Ultimately, the ability to localize costs and adapt to the economic environment has proven to be a critical factor for survival and growth in Nigeria's challenging market. While the economic policies and conditions in Nigeria have posed significant challenges, companies that have localized their operations and adapted to the local market dynamics have managed to not only survive but also thrive. As the economic landscape continues to evolve, businesses that can effectively manage their costs and meet the needs of local consumers will be better positioned for long-term success.
Martin Nkonge is an Analyst at Botho Emerging Markets Group