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Globalisation To Localisation: Nigeria Must Prepare For The Impending Reality

by Cee Harmon
3 years ago
in Growth, Features
Reading Time: 4 mins read
Globalisation To Localisation
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Stemming from the America First policy of former president of the United States, Donald Trump, it would seem like the world is assuming a reverse trend, from globalization to localization. With that trend, Nigeria needs to prepare for a new reality, so as not to be caught unawares.

According to a new Bank of America (BofA) research, foreign firms looking to move their manufacturing processes outside of China in the wake of coronavirus could face $1 trillion in costs over five years.

However, the bank argues that such a move would likely be beneficial for companies in the long term.

Even before the pandemic, BofA’s survey of global analysts found that companies were shifting away from globalization and towards a more localized approach when it came to their supply chains. This was due to a host of factors that threatened the network that supplies modern factories, including trade disputes, national security concerns, climate change and the rise of automation.

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However, in a new study, BofA Head of Global Research, Candace Browning and her team suggested that Covid-19 has catalyzed the reversal of a decades-long shift in manufacturing from the U.S. and Europe to China.

The report revealed that the pandemic had caused 80 per cent of global sectors to face supply chain disruptions, forcing over 75 per cent to widen the scope of their existing re-shoring plans.

“While Covid has acted as a catalyst to accelerate this change, the underlying reasons are grounded in a shift to ‘stakeholder capitalism,’ concluding relocation favors a broader community of shareholders, consumers, employees and the state,” Browning explained.

While each of these stakeholders was approaching relocation from a different perspective, the analysts observed that they were broadly drawing the same conclusion: that portions of supply chains should relocate ideally within national borders, but failing that to countries deemed “allies,” the report said.

The trend has been accentuated by further supply chain disruptions consequent to the ongoing war in Ukraine, where disruptions have caused shortages of goods and services in major economies around the world.

Around two thirds (67 per cent) of participants in BofA’s Global Fund Manager survey thought localization or re-shoring of supply chains would be the most dominant structural shift in the post-Covid world.

Shifting all export-related manufacturing that is not intended for Chinese consumption out of China could cost firms $1 trillion over five years, BofA projected.

The analysts said this would likely reduce return on equity by 70 basis points (bp) and free-cash-flow margins by 110bp, offset by a potentially lower risk premium. This would mean that the negative effects would be “significant, but not prohibitive,” analysts suggested.

UBS Global Wealth Management Chief Economist Paul Donovan suggested that if companies voluntarily localized production because automation, digitization and robotics meant they could efficiently relocate closer to their consumers, the broad cost reduction would more than offset more expensive labor costs, making “business sense.”

Donovan argued that voluntary localization in this way “mitigates the damage” of protectionist policy.

Companies forced by taxation to shift their production does “more harm than good on a net basis,” he said.

“If companies are saying it is no longer efficient for us to produce in Shenzhen (China), we are going to produce in New York instead, then that is an efficiency call and that is a good thing.”

Whichever way, localization is an emerging trend.

Although Nigeria does not have much re-shoring to do in terms of capital investments in other countries, and vice versa, save for the likes of Businessman Aliko Dangote, whose foreign investment is not based on labour and other costs, there are certain implications for Nigeria that must impel policymakers to develop a solid manufacturing and service-driven economy, fairly free of supply chain constraints.

The internationalization of factors of production such as labour and relative ease of doing business in different climes has no doubt reduced cost of production, and by extension, prices of goods and services. The developing retrogressive trend of globalization to localization is likely to reverse the low production cost of goods and services in many countries, which in turn, will make the world poorer, at least in the short term. Since Nigeria is largely an import driven economy, such costs will be imported into the country.

Since one of the reasons for the evolving localization trend is on the heels of trade disputes, the re-emergence of bilateral trade and trade blocs, as opposed to global free trade, is a likely development. If that comes to pass, Nigeria must produce enough for domestic consumption and for export, while bridging her supply chain gap.

For example, while crude oil remains Nigeria’s largest foreign exchange earner, it is imperative that Nigeria adds value to petroleum products to the extent of self-sufficiency on the national economy. Everything must be done to make sure that is done.

Nigeria must also ramp up her production of agricultural products, not just for domestic consumption, but also as a foreign exchange earner.it is disheartening that as of date, according to data from Trading Economics, an American run data website, Nigeria imports $500 million worth of palm oil, whereas the product contributes as much as 5 percent of gross domestic product to the likes of Malaysia. Nigeria must expand her agric industry massively in preparation of the eventuality of localization.

Industry watchers tell NATIONAL ECONOMY that the only thing impeding the flood of local auto assembly plants in Nigeria is the fact that the auto policy remains only a policy, not an act, which scares investors away.

Nigeria cannot afford to lag behind in the auto industry when the likes of Ghana are pressing forward. The danger in that is the ECOWAS protocol, which allows for free movement of goods and persons, will give Nigeria’s neighbours the advantage of Nigeria’s huge market for its export of auto cars.

Most importantly, Nigeria must invest massively in her power industry to be competitive in its development drive.

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