In the vibrant tapestry of Africa’s diverse cultures, craftsmanship has always held a place of pride. From the intricate beadwork of the Maasai to the renowned textiles of West Africa, the continent’s artisans have long been recognized for their exceptional skills. Yet, beyond the beauty and cultural richness these crafts represent lies a sector with the potential to enhance Africa’s economic footprint: Manufacturing in Africa. Despite its underappreciation, manufacturing in Africa is the engine that could drive the continent’s growth, just as it did for Asian powerhouses like China and Hong Kong.
Lessons from the Asian Tigers
Asia’s economic success stories, particularly China and Hong Kong, are intricately linked to their strategic investments in manufacturing. China’s manufacturing output saw a remarkable increase from less than 3% of the world’s total in 1990 to nearly 30% by 2010. This surge in manufacturing output was a result of the country’s shift from an agrarian economy to an industrial powerhouse. In just 35 years, China’s bet on manufacturing transformed itself into an industrial powerhouse that now produces nearly half of the world’s industrial goods, lifting the country from the rank of one the world’s lowest-income nations to the second largest economy.
Hong Kong, despite its smaller size, leveraged its strategic location and favorable business environment to become a significant manufacturing hub. This is particularly true in the fields of electronics and textiles. The region’s success in manufacturing and industrialization was not accidental but the result of deliberate policies and strategic investments. The government has been proactive in implementing policies that foster a business-friendly environment attracting numerous multinational companies and logistic service providers Hong Kong, despite its smaller size, leveraged its strategic location and favorable business environment to become a manufacturing hub, particularly in electronics and textiles.
These successes were not accidental but the result of deliberate policies, investments in infrastructure, and the development of a skilled workforce. Africa stands at a similar crossroads today; experts project that by 2030, business-to-business spending in manufacturing in Africa could reach $666.3 billion, $201.28 billion more than in 2015 with the potential to replicate these successes through strategic investments in manufacturing.
The Risk of Falling Behind
While Asia’s commitment to investing in the sector has propelled it to the forefront as the world’s manufacturing powerhouse, Africa only contributes less than 2% to global manufacturing output. This underperformance is in stark contrast to its potential, considering its vast resources and youthful population. It’s rapidly expanding population of young people coupled with a simultaneous surge in demand for foodstuff, and consumer goods has seen a growing submission of investment propositions from the private sector.
However, the consequences of inaction are severe. If Africa fails to revitalize and evolve the sector, it risks continued dependence on primary commodities, making the continent vulnerable to global market fluctuations. Moreover, without a robust manufacturing sector, Africa may fail to generate the jobs needed for its rapidly growing population.
Catalysts for Manufacturing Revival in Africa
We see three emerging trends that present a unique opportunity for Africa to revive its manufacturing sector:
The Green Transition: While Africa’s role in global carbon emissions has been far less prominent as compared to the western economies, The demand for critical minerals, essential for worldwide energy transmission, reduction of the global carbon footprint, and the powering of greener cities, is set to rise, offering a new opportunity. Moreover, the exponential growth of AI applications necessitates sustainable energy solutions, adding another dimension to Africa’s huge role in the world’s green transition potential.
Demographic Shifts: Africa is home to the world’s youngest population, with over 60% of its inhabitants under the age of 25. This demographic dividend can be harnessed to build a robust manufacturing workforce. Investments in education and vocational training to equip a generation for the new economy are crucial to equip this population with the skills needed for the requirements of modern manufacturing industries.
Industrialization and Urbanization: Africa’s urbanization rate is one of the highest in the world, with millions of people moving to cities every year. This urban growth will drive demand for goods and services, providing a ready market for manufactured products. Moreover, urban centers are more conducive to industrial activities, offering better infrastructure, logistics, and access to growing markets.
The Role of Institutional Capital
In the current fiscal cycle, the challenges of capital allocation in Africa are multifaceted, influenced by liquidity constraints, fiscal deficits, and the need for structural reforms in many nations. Despite these challenges, institutional capital remains a pivotal force in unlocking the continent’s manufacturing potential.
Two perspectives may play out. The bullish perspective hinges on the continent’s burgeoning urbanization, demographic dividend, and ongoing efforts toward industrialization. With strategic investments from private equity firms, development finance institutions (DFIs), and sovereign wealth funds, Africa’s manufacturing sector could experience significant growth. These entities may provide not only financial resources but also expertise in management and operations, essential for the scaling of manufacturing ventures.
Figure 1: Value Added in the African Manufacturing Market | Source Statista Market Insights
Conversely, the bearish case considers the risks associated with political instability, currency volatility, and high borrowing costs. These factors can deter institutional investors and lead to cautious capital allocation within the manufacturing sectors. Additionally, challenges such as inadequate infrastructure, limited access to technology, and the need for more effective governance could impede growth.
For institutional capital to be effectively deployed in Africa’s manufacturing sector, it is imperative to consider key macroeconomic indicators that signal the economic climate and potential for growth. GDP Growth Rates are a barometer of the economy’s vitality, indicating the government’s capacity to invest in development and create jobs. Foreign Direct Investment (FDI) Inflows serve as a gauge of international investor confidence, with high levels suggesting a robust and conducive business environment for manufacturing.
Trade Balances provide insight into the sector’s competitiveness, where a positive balance signifies a strong industry capable of meeting local needs and penetrating global markets. Inflation Rates are critical for cost stability, affecting consumer purchasing power and input prices, while Exchange Rates determine export attractiveness, influencing the global demand for manufactured goods. Together, these indicators and more may serve as an indicator for assessing the suitability and potential success of institutional investments in the sector.
Preparing for a Manufacturing Growth Cycle
Throughout history, manufacturing has experienced various cycles of growth and decline, often reflecting broader economic trends. These cycles can be traced back to the Industrial Revolution, which marked a significant transformation in manufacturing processes and economic structures. The cyclical nature of the industry underscores the importance of preparedness and adaptability—qualities encapsulated in the ancient adage “fortune favors the bold.”
To prepare for a potential cycle of manufacturing growth, experts and firms need to consider several key factors:
The Path Forward
Manufacturing may currently be the unloved sector in Africa, but it holds the key to the continent’s economic growth and development. The continent has a lot to learn from the successes of its Asian counterparts while simultaneously leveraging on emerging trends that were unavailable in the past. Africa can transform its manufacturing landscape through the use of institutional capital, innovative technologies, a skilled workforce, robust infrastructure, and supportive government policies.
The journey towards a manufacturing-led growth model will not be easy, but the potential rewards are immense. Africa’s emergence from the shadows as the next great partner of the world is likely to create millions of jobs, become a new generation of industries, and shorten the timeframe of its sustainable economic growth objectives. It is time to recognize the untapped potential of this sector and take bold steps toward realizing it. In doing so, Africa can truly rewrite its economic narrative and secure a prosperous future for the world.
DISCLAIMER: The information provided herein is for informational purposes only and should not be construed as investment advice. It is important to note that Arielle Advisory® operates as a sell-side and transaction advisory entity. As such, any investment decisions made in sectors around the region should be undertaken with sound investment guidance and experience. Arielle Advisory’s role is to facilitate transactions and provide insights; however, the responsibility for investment decisions lies with the investors themselves, who should exercise due diligence and consider their financial objectives, level of experience, and risk appetite before engaging in any investment activities.
Elishama is Arielle’s Chief of Client Relations, A marketing professional with a background in business consulting and financial services. He endeavors to bridge the gap between marketing, finance and technology. As an avid music lover, he enjoys discovering musical gems and keeping tabs with global and macro-economic affairs.
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