Wed, 29 Mar 2017
Global companies were supposed to be more efficient, leveraging resources from across the world, from places where they are best sourced, to create value on an unprecedented scale. That seemed to be the case in fact.
Western multinationals used cheaper labour in underdeveloped countries to manufacture products that relied on inputs from all over the world and technologies developed in their more expensive labour markets. Studies now suggest these advantages are being lost. Labour is no longer as cheap in many places.
In China, for example, lifestyles are becoming increasingly aspirational – more Chinese are now seeking the good life and consequently demanding higher wages. In addition, local firms are now themselves employing the technologies developed in the more advanced labour markets – think Safaricom and M-Pesa in Kenya.
As the Economist put it in January, “the companies at the cutting edge are local, not global.” As a result of these and other factors, such as the strong dollar, the profits of multinationals are falling.
Thus, it is increasingly difficult to make a business case for the global company, at least in the form of costly brick-and-mortar operations in numerous countries. And the reduction of global ambitions among the multinationals has coincided with resurgent populist nationalism in the developed world.
In response, the trend is increasingly towards localisation – a global company leverages its well-recognised brand but adapts it to the local conditions of the host country. General Electric, the American industrial giant, is a case in point.
In May 2016, Jeffrey Immelt, its chairman and chief executive, put the strategy succinctly: “Globalisation is being attacked like never before […] in the future, sustainable growth will require a local capability inside a global footprint.”
Other than in the large economies of Nigeria, South Africa, Egypt and Kenya, it hardly makes business sense for a multinational to build an entire supply chain in an individual African country. A cement manufacturer in Nigeria could easily supply the entire West African region.
A bank in South Africa, where capital is abundant but opportunities scarce, could deploy capital in African countries desperate for investment. It should be easy to sell fertiliser produced in Morocco anywhere it is needed on the continent.
So why have long-established Western conglomerates on the continent not seized this opportunity? Instead, most build independent country operations ship out primary commodities to their home countries in Europe or elsewhere, and subsequently ship back finished goods into African countries.
True, those in the fast-moving consumer goods sector do some manufacturing in-country and sell to the domestic market. But their operations are rarely regionally integrated.
African governments are partly to blame. Border restrictions, currency controls, incongruent trade regulations and so on stifle intra-African trade.
Governments say they want to promote such trade, but make little effort to do so. Even in the East African exception, where progress is being made in infrastructural integration, worries about the increasing dominance of Kenya have been a source of grumbling, for instance by Tanzania.
The challenge for companies
Still, if intra-African trade is to be lifted from its current paltry [...]