African countries need to rethink how they trade with each other

If Africa wants to change how it trades with the rest of the world, it needs to start by rethinking how it trades with itself. Without urgent improvement, Africa risks remaining a supplier of solely primary materials to which others add value. But to succeed in moving higher up the global value chain, Africa will first need to develop efficient local and regional supply chains to facilitate higher levels of trade within the continent itself.

Multinational companies that recognised the opportunity to serve Africa’s growing market for consumer goods realised that the only way to do this successfully is to invest in their own “bespoke” supply chains on the continent. They know that getting their supply chains right is crucial to their businesses, while a more stable, locally owned and operated industry also has wider economic and social benefits. But there is now a need for scale and collaboration to drive this beyond the individual efforts of corporates.

The stars should be aligned for the development of fully integrated and locally funded supply chains, with the increase in consumer demand for companies to source products locally combined with growing pressure on consumer-facing industries to buy local. However, it is no secret that supply chains in Africa need to be strengthened and are plagued by a number of issues.

The continent has limited amounts of locally produced “secondary” processed materials, which is key to adding manufacturing value. This means that suppliers and distributors must often rely on imports of ingredients from countries outside of the continent, which can be so costly that it encourages suppliers to choose the cheaper option of importing the whole product, as opposed to merely parts of it.

All parts of the chain are challenged by factors like poor infrastructure, logistics, capacity, and long lead times. In several countries like Ethiopia and Ghana for example, significant parts of the population do not have access to decent roads or transport links, especially during rainy seasons. Countries that are landlocked can be particularly affected by long lead times. For example, in Burundi it can take up to 71 days to import goods from other East African countries and clearing customs at airports in the Democratic Republic of Congo can take significantly longer than in South Africa.

So what is the answer? It starts with scale. Suppliers need to have an efficient and cost-effective supply chain in local conditions. It is impractical for each manufacturer to invest in its own bespoke supply chain for every country. This means that especially in smaller economies collaboration, often across different sectors, is a major opportunity for both private and public entities. In addition, regional rather than local country chains are essential.

Collaboration is necessary both at primary level and also at a horizontal level for common parts of the chain. Many companies that have successfully established themselves in Africa are finding opportunities to partner with others in order to spread the cost of supply chain channels and maximise the rewards realised.

But these arrangements need careful regulatory planning and ultimately they will only work with public sector facilitation. There is not only the need for public private partnerships in terms of investment, but governments have an even more important role to play in terms of policy formulation and implementation. For example, internal defensive tariffs that prevent cross border trade can make supply chains uneconomic by preventing scale and, in turn, damage local business.

Governments need a clear strategic view – if they want to promote local capacity they need to embrace wider scaled-up business to facilitate local development. In essence, they need a holistic plan. Policymakers should look for ways to implement policy so it does not penalise local producers, but instead makes them more attractive to businesses hoping to source materials for their products.

Policies that allow global businesses to thrive in a local context form a crucial part of this. Corruption and excessive red tape will simply suffocate trade. A major part of this will involve adopting sensible policies on artificial barriers to trade like tax policies and exchange controls and to encourage greater investment and supply. Lastly, businesses should also assess how best they can use advancements in technology such as blockchain, trade finance and aviation to assist in maintaining efficient supply chains. Similarly, many companies are using fintech and mobile money to provide micro-solutions to local distribution networks.

Although the problems plaguing African supply chains have deep-seated origins, the solutions are there, even if they are not always easy to execute. However, without scalable, collaborative innovation, Africa risks remaining vulnerable to the vagaries of external commodity price and market fluctuation.

Andrew Skipper is head of Hogan Lovells Africa