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April 29, 2013

Made in Africa

Africa has long been a producer of raw materials that are shipped elsewhere for processing. But factories are now being establish on home soil, a move that could ultimately push the continent out of poverty.

Sharon Kahn

Consider the roundabout travels of the lowly cashew. Africa grows a lot of them — about 45 percent of the world total. Farmers typically sell the raw nuts to manufacturers in India or Vietnam for about 3¢ for an average grocery-store-sized bag. Once processed, some of the cashews are re-imported to African grocery stores, where consumers pay about $2 for a packaged bag.

These labyrinth logistics are one reason Africa remains the poorest continent on earth. To rise out of its third-world status, “Africa has to stop being a donor market to the rest of the world,” Chris Cleverly, CEO of the Made in Africa Foundation, a nonprofit that provides expertise and introduces entrepreneurs to international investors, told attendees at the 10th annual African Economic Forum held at Columbia University in March.

By taking raw materials and moving further up the value chain, manufacturers not only command more for their products, they also employ many people. A global side effect: products are cheaper not just for locals but for consumers everywhere as the middle transportation step vanishes.

Dinh listed three reasons why Africa can compete with Asia to become the world’s factory:

  1. Labor is cheap. A World Bank study broke down the cost of a polo shirt from thread to buttons, comparing assembly in three African and two Asian countries. African labor costs came in at half of Vietnam’s and one-fifth of China’s. As labor costs rise in Asia, companies that outsource their labor “can't get out fast enough,” reported Chid Liberty, cofounder of Liberty & Justice, a garment manufacturer in Liberia.
  2. Africa has a rich supply of natural resources. Raw materials provide fodder for relatively inexpensive apparel, metal, and agriculture manufacturing and processing businesses.
  3. The continent is centrally located. Africa enjoys “privileged access” to world markets, making transportation faster and cheaper to Europe and many parts of the United States than from Asia.

Still, the manufacturing model has been a long time coming to Africa as foreign expertise and money has shied away from the troubled continent. But in a session titled “Is Manufacturing a Viable Sector in Africa?,” panelists at the forum described how locals, expatriates, and entrepreneurs are taking matters into their own hands. In each case, the startups have solved pressing problems and made the most of opportunities.

Finance is a stumbling block — until it's not

The African Cashew Alliance is a case in point. Established in 2005 as an association of African and international businesses, the group has built factories in countries such as Kenya, the Ivory Coast, and Mozambique that allow farmers and local manufacturers to do the processing and keep a great deal more of the $2 bag’s profits. The labor-intensive process of shelling the nuts means that an average cashew plant employs about 200 workers.

One of the biggest constraints has been capital to jump-start industry. Banks have focused on financing short-term trade transactions rather than providing the longer-term funds needed to buy and store a year’s worth of nuts during the harvest season so workers can process the cashews during the rest of the year. The Alliance and project partners, including USAID, West Africa Trade Hub, and the African Cashew Initiative, initially tapped angel capitalists and social investors to set up the factories. Once the factories have a credit history, the factories can approach lenders that are more eager to work with them.

If you're starting from scratch you might as well get it right

One success story is Chid Liberty. Born in Liberia, he left as an infant when his father became ambassador to Germany. The family was later exiled to the United States, where he grew up steeped in Silicon Valley culture. Inspired by Liberia’s new president, Ellen Johnson Sirleaf, he returned in 2009 with the intent of providing jobs for women, whose unemployment rates hovered around 80 percent. That year, he founded apparel company Liberty & Justice.

Liberty chose apparel manufacturing as a way to employ a large number of women in a relatively inexpensive capacity. A garment factory, he says, costs a couple of million dollars to build, compared with around $50 million for a mineral operation. And the natural resource was available. “Africa has an amazing cotton industry,” he said, but, as with cashews, farmers were sending the raw material to Asia.

Key to Liberty’s plan was getting the entire production chain certified as Fair Trade, a designation indicating good working conditions, high wages, and sustainable environmental practices. Since the label had previously been applied only to agricultural practices, he worked with both the Liberian and US governments to stamp the factory as the world's first “Free Trade Certified.” Liberty & Justice used the fair trade designation to interest brands such as Haggar slacks to sign the factory on as a supplier. The next step? Liberty is expanding into Ghana, with plans to build 7–10 small garment factories.

Take it slow, take it steady

As a Peace Corps volunteer, Tim McCollum learned that 65 percent of the world’s cocoa comes from Africa, but less than 1 percent of chocolate is made there. A corollary: “Cocoa is a $5 billion a year business; chocolate is a $105 billion market,” he told conference attendees. He launched his company, Madécasse Chocolates, in 2008.

McCollum saw a competitive advantage to setting up shop in Madagascar, listing reasons why the big European and American chocolate makers are afraid of Africa (it’s hot, electricity is sparse or unreliable, corruption is rampant).

Still, “most manufacturing problems can be solved with patience,” he said. Referring to the lack of basic roads, for example, the entrepreneur shrugged, saying “it may take a couple of extra hours to get to port.” His factory relies on a backup generator when the power fails. Lack of skilled labor can be solved with some basic training. Even though Madécasse Chocolates doesn’t grow its own cocoa, it works with farmers to employ best practices. “Our quality control starts in the farms,” McCollum indicated, noting that the income of the farmers with whom it works has doubled since the company began operations. “We invest in co-op equipment and skill training, making everything including the packaging locally.” As for corruption, McCollum simply refuses to pay bribes and insists that his suppliers do the same.

Madécasse Chocolates now sells its premium chocolate bars worldwide, and McCollum talked of replicating his African business formula in other fields, from bananas to leather to rubber. He's already revving up to turn vanilla extract into a full-fledged business. “In Africa,” McCollum said, “agriculture is the beginning of the value chain.”

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