Navigating Global Challenges Affecting Nigeria’s Manufacturing Industry

The global manufacturing industry is a cornerstone of economic development, accounting for 16% of global GDP and employing 23% of the global workforce. This sector drives innovation, job creation, and economic growth. However, for Nigerian manufacturers, this sector faces substantial challenges, including foreign exchange volatility, power supply instability, and declining growth rates. 

Recent data highlights that nominal GDP growth for the manufacturing sector in Q1 2024 fell to 8.21% year-on-year, a significant drop from 17.85% in the same period of 2023 and a dramatic decrease from the previous quarter's 38.06%. This decline underscores the severe impact of these challenges.
This article explores the key challenges facing the manufacturing industry and offer some strategies for navigating these obstacles effectively.

FX Challenges

The FX Crisis and Regulatory Pressures

One of the largest challenges manufacturers in Nigeria face is navigating the foreign exchange crisis, worsened by restrictive government policies and fluctuating oil prices. The Central Bank of Nigeria (CBN) has imposed strict foreign exchange controls, making it difficult for manufacturers to source dollars to pay for imports. This has led to inflation, rising costs of production, and, in many cases, business closures. 

Strategies for Mitigation

• Local Sourcing: To mitigate FX risks, manufacturers should explore local sources for raw materials and components.
• Collaborating with Financial Institutions: Engaging with local banks for specialized FX schemes can help ease currency constraints.
• Risk Management Practices: Businesses must implement financial risk management strategies, such as FX hedging, to better navigate regulatory hurdles and currency volatility.

Supply Chain Disruptions

Globalization and Complexity

Global supply chains have become increasingly complex, with manufacturers sourcing raw materials and required components from multiple countries A report by the United Nations Conference on Trade and Development estimates that 80% of global trade involves global value chains, highlighting the extent of international interdependencies. This complexity exposes manufacturers to significant vulnerabilities, as disruptions in one region can ripple across the entire supply chain. 

One notable example is the 2021 Suez Canal blockage. When the Ever Given, a massive container ship, became lodged in the Suez Canal, it halted approximately 12% of global trade for six days. This incident caused delays in the delivery of goods and raw materials, exacerbating existing supply chain challenges and highlighting the critical need for robust contingency planning. The blockage led to an estimated $9.6 billion in daily shipping losses, illustrating the far-reaching impact of supply chain disruptions.

Strategies for Mitigation

• Diversification: Manufacturers should diversify their supplier base to avoid over-reliance on a single source. This includes developing relationships with suppliers in different geographic regions.
• Technology Integration: Leveraging advanced technologies such as IoT and blockchain can enhance supply chain visibility and traceability, allowing manufacturers to respond quickly to disruptions. By 2027, the global market for supply chain management software is expected to grow to $42.46 billion, driven by the need for better supply chain oversight.
• Risk Management Plans: Establishing comprehensive risk management plans that include scenario planning and contingency measures can help manufacturers prepare for and mitigate the impact of supply chain disruptions.

Technological Advancements

Industry 4.0

The advent of Industry 4.0—characterized by the integration of digital technologies such as artificial intelligence (AI), machine learning (ML), and robotics into manufacturing processes—has revolutionized the industry. The global Industry 4.0 market was valued at $86 billion in 2020 and is expected to grow to $267 billion by 2026, reflecting widespread adoption. 

While global manufacturers are moving towards adoption of Industry 4.0 technologies, the Nigerian manufacturing industry lags due to the high cost of implementation and inadequate infrastructure.

Challenges and Opportunities

• Implementation Costs: The high initial investment required for implementing advanced technologies can be a barrier for many manufacturers.
• Skilled Workforce: A 2021 World Economic Forum report found that 54% of employees in manufacturing will need significant reskilling by 2025 due to automation and smart manufacturing.
• Data Security: With increased connectivity comes a heightened risk of cyberattacks. In 2022, the manufacturing sector saw a 300% increase in ransomware attacks, making data security a critical concern.

Strategies for Adoption

• Incremental Implementation: Manufacturers can adopt a phased approach to technology implementation, starting with pilot projects to demonstrate value before scaling up.
• Workforce Development: Investing in training programs and partnerships with educational institutions can help develop the necessary skills within the workforce.
• Robust Cybersecurity Measures: Implementing comprehensive cybersecurity strategies, including regular audits and updates, can protect against data breaches and cyber threats. The cybersecurity market for the manufacturing industry is expected to grow to $22.2 billion by 2025.

Regulatory and Compliance Challenges

Global Standards and Regulations

Manufacturers operating in multiple countries must navigate a complex web of regulations and standards, including environmental regulations, labor laws, and trade policies. Compliance is essential to avoid legal penalties and maintain market access. In Nigeria, compliance with regulatory standards, such as the National Environmental Standards and Regulations Enforcement Agency (NESREA) guidelines, is increasingly emphasized.

Globally, environmental regulations are tightening, with the Paris Agreement pressuring manufacturers to reduce carbon emissions. The global manufacturing industry contributes approximately 19% of CO2 emissions, underscoring the need for sustainable practices.

Strategies for Compliance

• Staying Informed: Keeping abreast of regulatory changes and trends in different markets is crucial. This can be achieved through industry associations, legal counsel, and regulatory agencies.
• Cross-Functional Teams: Establishing cross-functional teams that include legal, compliance, and operational experts can ensure that regulatory requirements are integrated into business processes.
• Sustainable Practices: Adopting sustainable manufacturing practices not only ensures compliance with environmental regulations but also enhances brand reputation and market competitiveness. Manufacturers should integrate sustainability into their core business strategies. This includes adopting energy-efficient processes, utilizing renewable energy sources, and reducing waste through recycling, engaging in sustainability reporting and circular economy practices. Compliance with environmental regulations can be achieved by staying informed about changes in legislation and implementing proactive measures. Partnering with environmental experts and investing in green technologies can also help manufacturers achieve their sustainability goals.

Market Volatility and Competition

Global Economic Fluctuations

Economic instability, fluctuating commodity prices, and shifting trade policies can create significant uncertainty for manufacturers. These factors can impact demand, production costs, and profitability. Intense global competition and the need for continuous innovation pose significant challenges for manufacturers. Companies must differentiate themselves through unique value propositions and innovative products to stay ahead of competitors.

Strategies for Resilience

• Agile Business Models: Developing flexible business models that can adapt to changing market conditions is essential. This includes diversifying product lines and exploring new markets.
• Financial Hedging: Utilizing financial instruments such as futures contracts can help manufacturers hedge against commodity price volatility.
• Customer Relationships: Building strong relationships with customers through reliable service and quality products can provide a stable revenue base even during economic downturns.
• Research and Development: To foster innovation, manufacturers should create a culture of continuous improvement and encourage collaboration across departments. Investing in research and development (R&D) is crucial for developing new products and improving existing ones. Building strategic partnerships with technology providers, startups, and research institutions can also accelerate innovation. Understanding customer needs and preferences through market research and customer feedback can guide product development and ensure market relevance.

Sustainability and Environmental Responsibility

Consumer and Regulatory Pressure

There is increasing pressure from consumers, governments, and stakeholders for manufacturers to adopt sustainable practices and reduce their environmental footprint. This includes minimizing waste, reducing emissions, and adopting circular economy principles.

Strategies for Sustainability

• Eco-Friendly Processes: Implementing energy-efficient technologies and processes can reduce environmental impact and lower operational costs.
• Sustainable Sourcing: Ensuring that raw materials are sourced sustainably and ethically can enhance brand reputation and meet regulatory requirements.
• Circular Economy Initiatives: Developing products that can be easily recycled or repurposed can contribute to a circular economy and reduce waste.

Conclusion

Navigating the myriad challenges in the global manufacturing industry requires a multifaceted approach. By embracing technological advancements, diversifying supply chains, ensuring regulatory compliance, and adopting sustainable practices, manufacturers can build resilience and drive long-term success. As the industry continues to evolve, those who can adapt and innovate will be best positioned to thrive in an increasingly complex and competitive global market.

At Stransact Chartered Accountants, our mission is to help businesses navigate change with confidence and empower them for the future. Our industry expertise equips us to provide tailored solutions that address the complexities of today's manufacturing landscape. From optimizing supply chains and integrating advanced technologies to ensuring regulatory compliance and fostering sustainability, we are dedicated to supporting your business through every challenge.

Partner with us to leverage our deep understanding of the manufacturing sector and benefit from our comprehensive advisory services. Together, we can turn challenges into opportunities and position your business for enduring success in an increasingly competitive global market.
 

Written by:
Peace Olayori - Audit & ESG Consultant