Editor’s note: As China's labor costs increase and tariffs disrupt the supply chain, other nations are lobbying for manufacturers’ attention. Recently, a Vietnam-based manufacturer announced it could help U.S. electronics companies avoid tariffs on Chinese imports.
EPSNews reached out to a number of sources for input on this topic, and heard from Maxine Gordon, Regional Executive Director of African Discovery Group, a New York based advisory, principal and commodity trading firm. Gordon responded to questions posed by EPSNews.
Additional articles on this topic are forthcoming.
EPSNews: Manufacturing companies will continue to spread their risk by manufacturing in different parts of the world. Which nations or regions are actively recruiting foreign businesses?
Gordon: Many nations have been groomed by China to become outsource hubs for light manufacturing/assembly including garments, toys, shoes and electronics complete with “special economic zones” with factories, machinery, and low-cost labor. Labor intensive light manufacturing has led the economic transformation of many of the most successful developing countries in Southeast Asia and the same goes for Africa today. If there was ever a time to look toward Africa for answers, it is now.
According to the Brookings Institution, Africa’s manufacturing sector is predicted to double in size, with annual output increasing from $500 billion in 2015 to $1 trillion in 2025 and creating an additional 14 million stable, well-paid jobs. Africa is in the early stages of a population boom that will reach 2 billion people by 2050, creating the largest pool of labor in the world.
Ethiopia, for example, has started an ambitious industrial park development program to provide the infrastructure and incentives for investors in light-manufacturing industries. Hawassa Industrial Park outside of Addis Abba is attracting world class textile and apparel companies to Ethiopia. PVH, a company known for marketing a diversified portfolio of brands including Calvin Klein and Tommy Hilfiger, has established its manufacturing industry inside Hawassa.
The industrial zone has 18 companies that have already started operations inside the park. Ethiopia has targeted to generate $1 billion annually and create 60,000 jobs operating at its full potential. Ethiopia hopes to replicate the success of Hawassa with 30 more industrial parks by 2025. This is part of the effort to make Ethiopia a manufacturing hub and American manufacturing companies should take note.
EPSNews: What kind of incentives can these nations provide? What are the most compelling incentives (low labor costs, no tariffs, available workforce, infrastructure, etc.)?
Gordon: The availability of low-cost labor and an abundance of natural resources and raw materials is definitely a big plus. In terms of the role of governments and incentives, many countries in Africa are working to establish special economic zones (SEZs) to empower manufacturing companies to capitalize on higher quality infrastructure, tax benefits, protection from import competition, and duty-free movement of goods.
Given country-level differences in natural endowments, these zones encourage countries to nurture certain industrial subsectors in order to take advantage of their own competitive advantage and drive growth. The best investment advice for manufacturers looking to invest in Africa is to identify optimal SEZs for the relevant subsector. These SEZs will be the first and priority recipients for government investment in infrastructural improvements; they have substantially lower barriers related to the time and cost of importing and exporting; and they confer initial tax benefits that help to offset start-up costs.
The cornerstone of U.S. economic relations with sub-Saharan Africa since 2000 has been the African Growth and Opportunity Act, or AGOA. The program offers more than three dozen participants preferential access to U.S. markets by eliminating import tariffs.
A productive path for American manufacturers to benefit from AGOA is for African and American companies to partner and manufacture in Africa. AGOA is a trade preference that was established in 2000 as part of a legislation to strengthen U.S. trade ties with Africa, enacted by President Bill Clinton. After completing its initial 15-year period of validity, the AGOA legislation, which was expected to end in 2015, has been extended by a further 10 years to 2025.
AGOA provides for duty-free entry of goods into the United States of America from designated sub-Saharan African countries. It applies to both textile and non-textile goods. The legislation, which was approved by the U.S. Congress in May 2000, is meant to incentivize African countries to open their economies and build free markets.
EPSNews: For nations that are still building a manufacturing infrastructure, what will be required for businesses to set up a supply chain?
Gordon: Access to consistent and inexpensive power is the key component to a successful supply chain.
EPSNews: Do these regions tend to have some of the limitations that we see in China, such as forced partnership with a Chinese entity; ‘guaranteed’ jobs for employees; a market that is heavily influenced by the government, etc.?
Gordon: Many governments in Africa have worked hard to grow their manufacturing sectors by reducing policy-related constraints, and even by implementing policy measures specifically intended to improve their attractiveness to investors, such as import restrictions for priority industries. Africa is made up of 54 countries. Some of the best countries to look at in manufacturing space, including government commitments, are Ethiopia, Kenya, Rwanda, South Africa, Morocco, Mauritius, Egypt, Nigeria, Ghana, Zambia and Lesotho.
EPSNews: What, in your opinion, is the bottom line for electronics companies?
Gordon: Investing in Africa today is the greatest opportunity of this century.
African Discovery Group is an African-focused Advisory, Principal and Commodity Trading firm based in New York. The firm is focused in the power, oil, gas, real estate, infrastructure and natural resource sectors. The goal of the firm is to attract private capital and leadership businesses into Africa to enhance the Continent's development.