The sudden exit of Diageo from Nigeria might not rattle some analysts who may feel it is just a transfer of ownership, but the total exit of Kimberly- Clark is a different kettle of fish. Interestingly, this is not the first time Kimberly-Clark has burnt its fingers in the Nigerian market. The first time they started operations in Nigeria was in 2012. They battled for five years and ‘ran out of gas’, no thanks to some strange and unfavourable economic conditions. So, they left in 2019.
In 2021, they felt they had gotten the Mojo to tackle what chased them out initially. They felt with a war chest of over 100 million dollars, their market fecundity should be strong enough for big things to happen. When they landed, they plunged in with great dexterity, building a top-notch production facility at Ikorodu, a Lagos suburb.
The shocking news today is that Kimberly-Clark is in the process of shutting down its Ikorodu production facility, citing economic challenges despite the $100 million investment two years ago.
Kimberly-Clark is not a ‘backyard’ manufacturing brand seeking to reap without sowing. It is a listed multinational on the New York Stock Exchange with the majority of its shares held by institutional investors like Blackrock Inc., Vanguard Group, Morgan Stanley, etc. The company produces Huggies diapers, sanitary pads, Kotex, and other hygiene and personal care products. These are top-quality brands.
The Challenges
Sources reveal that the Ikorodu plant has been producing below capacity from 2023 into 2024 due to the harsh economic environment within the country.
The company, since late 2022, has battled with high energy costs, raw materials, and reduced demand from customers due to the prevailing economic situation. This has resulted in downsizing and reduced production time from every day of the week to just Mondays to Thursdays.
At the time it finally decided to pack up, the company was spending around N100 million on power generation monthly, aside from maintenance costs, and its monthly fixed spend on operations was over N500 million.
A source from the company revealed that: “Our first two years were fantastic in terms of sales growth and market shares within the diaper industry. 2022 and 2023 were really bad years for the company due to the economic situation.”
Others That Left Nigeria
The planned closure of operations of Kimberly-Clark from Nigeria and the reasons provided are similar to those of manufacturing companies that exited the country in the last few years.
High production cost, currency depreciation affecting the import of raw materials, and weak purchasing power of the populace.
Last year, a U.S.-based company in the personal care business Procter and Gamble (P&G) closed production in Nigeria in a similar fashion after investing about $300 million (the single largest non-oil investment by a U.S company in Nigeria) in a production facility in Ibadan.
Similarly, a segment of PZ Cussons, still within the personal care sector followed this disturbing trend.
Consequences
The closure of production in Kimberly-Clark’s facility in Nigeria is a huge blow government’s drive to attract foreign direct investment into the country.
The baby diaper industry in Nigeria is estimated at $920 million according to Statista. Leaders in the industry include Pampers produced by P&G, Molfix, and Kimberly-Clark’s Huggies. However, it is a hugely competitive industry with about 14 brands competing for market share.
With two of the three leaders in the diaper and personal care industry in Nigeria stopping production or transitioning to an import-based business model, it could exacerbate the cost of diapers and sanitary materials for babies and households following significant depreciation of the Naira and further increase the country’s imports at a time when the drive for local production should be high.
Local Challenges
The problem of collapsing manufacturing firms is not limited to multinationals. The Manufacturing Association of Nigeria (MAN) revealed that about 767 manufacturing companies shut down operations while 335 experienced distress in 2023.
This development is attributed to the same economic difficulties multinationals face – exchange rate volatility, rising inflation, high cost of energy and a general worsening of the investment climate.
Other challenges are a decline in capacity utilisation, rising interest rates, scarcity of foreign exchange and persistent need to import essential raw materials and machinery even with limited resources available.
The sector also faces an inventory of unsold finished products valued at N350 billion, alongside a real growth drop to 2.4%.
A statement from MAN read: “The capacity utilization in the sector has declined to 56%; interest rate is effectively above 30%; foreign exchange to import raw materials and production machine inventory of unsold finished products has increased to N350 billion and the real growth has dropped to 2.4%.
Can The Sleeping Giant Wake-Up?
It is disturbing that despite being the largest economy in Africa with an over 200 million human population with potential to make fortunes, multinational companies are exiting Nigeria because of the high cost of doing business and lack of basic infrastructure, especially electricity.
Analysts have noted the need to bring the issue to the front burner, especially now that the Tinubu government is marking its first year in office.
The President of the Manufacturers Association of Nigeria (MAN), Francis Meshioye, revealed that more multinationals would exit Nigeria if the current electricity problems persist.
Meshioye, stated that some international manufacturing firms had already exited Nigeria as a result of the electricity crisis, coupled with the unpredictability of the country’s forex. He added that over N144bn was spent on alternative sources of energy by manufacturers in 2022. The Manufacturers’ Association of Nigeria (MAN) also revealed that in 2023, 80% of manufacturers experienced production disruptions due to power outages and power generation costs often exceeded 30% of the total production costs.
Despite the commitment to infrastructure development by the government, the infrastructure deficit remains an albatross, always threatening the survival of the manufacturing industry. The crumbling infrastructure constitutes a significant roadblock to manufacturing firms. Many companies transport fragile food products on pothole-riddled roads, spending hours before delivery and incurring damage and spoilage costs
These enumerated challenges, also present opportunities to draw up new term plates for the Nigerian economy as a whole. Beyond the challenges of closed factories, job losses, dwindling aggregate demand, and reduction in tax revenue, there are opportunities for the development of domestic FMCG brands, innovation, and pursuing a long-term diversification plan.
Nigeria can take a cue from other countries with similar challenges to draw out valuable insights that can yield result-oriented mitigation strategies such as building resilient infrastructure, providing macroeconomic stability, adapting to local preferences, and diversifying the economy.
The Nigerian government and other stakeholders need to wake up and be proactive in addressing the challenges of infrastructural deficits, foreign exchange bottlenecks, and unstable regulatory environment while capitalising on the opportunities to ensure the long-term development of a competitive and diversified manufacturing sector. The manufacturing sector may remain subdued and vulnerable to external economic shocks beyond the near term if the exit of many struggling manufacturing firms is not met with drastic steps and result-oriented responses.