Future oriented: Sector seeks growth in the transition to downstream manufacturing

Once the industrial engine of post-colonial West Africa, Côte d’Ivoire still retains a commercial and manufacturing fabric that is enviable by regional standards, although its lead over its neighbours has all but disappeared recently. As with other areas of the economy, industry has suffered from the years of political turmoil and economic stagnation from 1999 to 2011. Recovery has been rapid and impressive since 2011, however, and Ivoirian industrialists are optimistic about a return to sustained growth.

Côte d’Ivoire is the largest economy – and still the economic hub – of the Francophone West African sub-region. Even during its recent political difficulties, the country remained an important export centre for industrial firms. As stability increases, this industrial base can be expected to grow and recapture some of its former glory.

GROWTH DRIVERS: As the world’s leading cocoa producer, with conditions that favour a number of cash crops, Côte d’Ivoire’s traditional strength has been in producing unprocessed commodities. New exploration projects are also likely to see the mining and energy sectors become increasingly important. However, manufacturing and services are expected to be the country’s key sources of added value in the future. Currently the public sector and construction are driving growth, but the government aims to have more primary products processed domestically and has introduced a number of initiatives to stimulate investment. Agro-processing, for example of cocoa, rubber and palm oil, is an area ripe for development and central to the government’s plan to move the country up the value chain. Developing the manufacturing sector will provide tax revenues that cannot be collected from the informal sector, and provide taxable added value that will be indispensable for repaying money borrowed for the government’s public investment programme.

INVESTMENT PROGRAMME: As investment in infrastructure and buildings has been neglected since the turn of the century, it makes sense that construction and public works ( bâtiments et travaux publics, BTP) has been a standout sector in the early stages of recovery. With significant public investment planned for 2013 and 2014, and complementary private investment hoped for, this sector promises to remain among the most robust over the coming years. Despite past chronic underinvestment, Ivoirian infrastructure still compares relatively well, particularly in Abidjan, the commercial capital. Power generation capacity is a case in point; the country is now a net exporter of electricity in a region where blackouts and the use of back-up generators are common. More capacity is in the pipeline, and supplies to the industrial sector are relatively reliable. As the government’s investment programme bears fruit over the coming years, the country’s edge in infrastructure should be cemented, positioning it as a leading hub for one of the most economically dynamic regions in the world.

KEY PLAYERS: The country is home to some of the largest firms in Africa, predominantly in the hydrocarbons and agro-processing sectors. The largest company, which is ranked 73rd in size on the continent, is Société Ivoirienee de Raffinage (SIR), a refinery with CFA987bn (€1.48bn) in sales. It is followed by SIFCA and Cargill West Africa, both leading players in the country’s agro-processing sector, ranking 183rd and 198th on the continent.

Given its colonial history, it is hardly surprising that the French business community carries significant weight. There are more than 650 French firms – or firms with French interests or management – in the country, including leading global brands like Nestlé and Total. The Lebanese business community has also been heavily active in Ivoirian commerce for decades; businesses of Lebanese origin have generally dominated the retail and distribution sectors. Even as European investors left during the political crisis, the Lebanese stayed because of their deep roots in the country, and snapped up companies in an increasingly diverse range of industrial sectors, most notably cosmetics, plastics and chemicals.

As is the case elsewhere on the continent, Chinese firms are playing a growing role in the local market, as both suppliers and investors. According to Hassan Ghandour, director-general of electrical products firm SOGELUX, sourcing goods from China has reduced prices and margins for many products. “Ivoirian traders are increasingly going to China for business, thanks to more easily available information on the internet, and this has cut out the middle man. Although it is possible to have 40-50% margins on some products, more freely available market information has driven down prices,” Ghandour told OBG.

BY THE NUMBERS: Compared to the primary sector, the secondary sector was hit particularly hard by the 2011 crisis, experiencing a retrenchment of 7.4% on the year as domestic demand slumped and supply-side factors took their toll. Recovery has been swift, however, with nominal growth expected to come in at 14.8% in 2012, and forecast to reach 12.1%, 13.5% and 14.3% in 2013, 2014 and 2015, respectively. At an estimated 22% of GDP in 2012, the secondary sector may be smaller than both the primary and tertiary sectors, but its relative weight in the economy is expected to rise on the back of these strong growth rates to 22.7% of GDP in 2013, 23.4% in 2014 and 24.4% in 2015. If this progress is achieved and sustained, it could overtake the primary sector – which accounted for an estimated 30% of GDP in 2012 – in importance as soon as 2016. To a large degree, this newfound dynamism is being powered by the BTP sector; its nominal growth is forecast to come in at 28.6%, 33.9% and 31.8% in 2013, 2014 and 2015 respectively, having seen growth reach an estimated 32.7% in 2012. This will see the contribution of the BTP sector double in size from 4.5% of GDP in 2011 to 8.9% in 2015.

“Other industries”, primarily plastics and textiles, account for more than a third of the secondary sector, representing an estimated 8.1% of GDP in 2012. The sector was already on a downward trajectory in 2010, falling 2.1% in nominal terms, but it remained relatively flat in 2011, recording growth of 0.1% before rebounding by an estimated 6.9% in 2012 alongside all other sectors of the economy. Although nominal growth is expected to reach 8% in 2013 before moderating to 7.5% in 2014 and 7.2% in 2015, this will see it lag behind expected GDP growth and its weighting in GDP is expected to decline gradually from 8.1% in 2012 to 7.1% in 2015.

INDUSTRIAL PRODUCTION: As of end-June 2012, the index of industrial production provided further evidence of a strong recovery under way. The index, which measures industrial production, was up 30.3% year-on-year (y-o-y), representing a rebound from the 2011 crisis, and up 5.8% on 2010. Agro-processing was up 41.2% y-o-y and 10.2% on 2010. Textiles and shoes were up 81.5% y-o-y and 26.8% on 2010. Wood processing was down 7.2% y-o-y and 65.2% on 2010, while chemicals were up 98.9% y-o-y and 14.3% on 2010. Construction materials were up 76.1% yo-y and 8.2% on 2010. Diverse industry was down 15% y-o-y and 29.1% on 2010. Electricity, gas and water, assembly and manufacturing were all also up, by 15.7% y-o-y and 20.1% on 2010, 37.2% y-o-y and 11.7% on 2010, and 50.1% y-o-y and 8% on 2010, respectively. The construction index was up 154.9% y-o-y and 24.3% on 2010. In each case, progress since 2010 may be a more accurate illustration of underlying two-year growth.

PRICES: In conjunction with the Ministry of Economy and Finance, the General Confederation of Businesses of Côte d'Ivoire (Confédération Générale des Entreprises de Côte d'Ivoire, CGECI) conducted a survey of businesses across a variety of sectors in June 2012. Together, these businesses accounted for approximately CFA3trn (€3bn) in sales, or 30% of the sales of all CGECI members, which in turn represent 80% of the total sales in the Ivoirian economy. The survey results testified to an economic recovery borne out by other macroeconomic indicators. Sales prices remained relatively constant while the cost of inputs increased, thereby depressing margins.

More than half of all respondents reported an increase in sales by June 2012 relative to the precrisis levels, and fully two-thirds reported improvements on 2011 levels. In industry, a third reported growth on 2010, a third no change and a third a decline. Results were more positive in agro-processing, with more than 70% reporting sales higher than 2010 levels. All respondents in the energy sector reported increases, but only 40% in construction.

PERCEPTIONS: In terms of perceptions, 60% of respondents reported that their own sector was in good shape or better compared to 2010, with a further 19% saying it was average. A little over 80% of respondents in the agro-processing sector reported their sector to be in average to very good shape, with two-thirds saying it was good or better. Managers in the construction sector were only slightly less positive, with a little less than 80% perceiving their sector to be in average to very good shape. In industry, two-thirds reported their sector to be in pretty good or good shape, with the remaining third saying it was in bad shape, and none saying it was average. All respondents in the energy sector reported that their sector was in pretty good shape.

Compared to 2010, 54% of the respondents reported an increase in production, with a further 10% reporting no change. Reports of increases in production were strongest in the industrial sectors: 100% in energy, 75% in agro-processing, 75% in construction and 66% in industry. More than 75% of respondents across all sectors reported investing or having plans to invest during 2012, notably in software and in refurbishing plant and machinery damaged during the 2010-11 crisis. Meanwhile, fully 64% of respondents reported using exclusively internal sources of financing for investment, underlining prevailing credit constraints. In general, the price of inputs was reported to have been on an upward trajectory in June 2012. This was particularly the case for industry (100%) and agro-processing (nearly 60%), although prices were reported to be stable in the energy sector (100%) and in construction (more than 60%). Of the respondents, 90% reported stable or falling sales prices across all sectors, with the predominant trend being one of stability.

FOOD FOR THOUGHT: Agro-processing had been growing strongly before the crisis, recording a nominal increase of 15.5% in 2010, and was only mildly affected in 2011, falling back 0.7%. The sector rebounded strongly in 2012 with estimated nominal growth of 14.4%, and is expected to remain relatively robust with steady growth rates of 8.6-8.7% over the 2013-15 period. Though the government has made revitalising the sector the centrepiece of its industrial strategy, its share of GDP is expected to decline from an estimated 4% in 2012 to 3.6% by 2015 as other sectors come to the fore.

Given the country’s comparative advantage in the production of cash crops, it perhaps comes as no surprise that the authorities see increased domestic processing of this produce as a natural opportunity to develop the economy and move exports up the value chain. Traditionally, only a small fraction of the vast cocoa crop, which accounts for fully a third of the entire global supply, is processed domestically before being exported. This means that the majority of the value associated with producing the final product is captured by other countries. Efforts are under way to ensure this changes, and significant private sector investments in processing capacity are already in evidence. This is not confined to the cocoa sector, but also includes the production of cashew nuts, dairy products, rice and coffee, for example (see analysis and Agriculture chapter).

BLACK & BLUE GOLD: Although primarily known as a leading producer of cash crops, the country also possesses oil and gas reserves that have not been aggressively explored and exploited until recently, spurred by the success of neighbouring Ghana. Petroleum products are expected to prove dynamic in the coming years, with nominal growth of 15%, 14.5% and 14.6% in 2013, 2014 and 2015, respectively, coming on top of estimated growth of 31.4% in 2012. This is tempered somewhat by the fact that this was one of the worst affected sectors during (and even before) the 2010-11 crisis, falling back 13.8% in 2010 and 22.1% in 2011 in nominal terms. Still, the sector is set to more than double in size from its 2011 contribution of 1.7% of GDP, reaching 3.5% by 2014.

The country’s largest petroleum company, measured by sales, is the state-owned monopoly SIR, set up by the government in 1962 to refine and distribute petroleum products from its headquarters and refinery in Abidjan. The company has invested heavily in its refining technology, which is relatively sophisticated by continental standards, and currently has a refining capacity of 3.8m barrels of oil per year. Construction has already begun on a second SIR refinery in Abidjan, with the target of almost doubling refining capacity as part of the country’s drive to become a regional hub for refining in the West African basin. Côte d’Ivoire also produces bitumen, and has been developing a range of petroleum and bitumen-related products for export.

CEMENTING SUCCESS: With an ambitious public investment programme in place, and reconstruction efforts under way, demand for building materials is on the rise and likely to remain robust. Cement production has not traditionally been a significant sector. In 2011, however, Nigeria’s Dangote Group, one of the largest industrial conglomerates on the continent, confirmed plans to build a cement factory in Côte d’Ivoire. Dangote’s Ivoirian subsidiary plans to commission in the second half of 2013 a cement import terminal at Abidjan with a capacity to import and package 1m tonnes of cement per year. This should help meet surging domestic demand as well as that of neighbouring land-locked countries, such as Mali and Burkina Faso. The Chinese are also present in the cement sector, while Morocco’s Ciments de l’Afrique had begun construction of a facility that was expected to start production in July 2013.

PLASTIC PROGRESS: The country has a long-established sector specialising in the production of plastic products, including MIPA (a leading player and official producer of BIC pens) and Leader General Industry. This sector demonstrates the difficulties formalised businesses often face from competition from an informal sector that produces goods of low quality, at low prices, and with little respect for commercial laws and regulations. Moreover, operators also face competition from low-cost counterfeit merchandise produced in China. This has prompted some leading players to reorient their business towards the top of the pyramid, aiming to serve larger firms at the higher end of the market that are more concerned with quality over price, a phenomenon that has introduced a degree of segmentation into the sector. Plastics firms are investing heavily, above and beyond the replacement and refurbishment of equipment damaged during the 2010-11 crisis, to meet rising domestic demand. One regulatory change that may impact on the sector in the future is a proposal, currently under discussion, that all plastic bags must be biodegradable. This is aimed at helping the environment, but would increase production costs if implemented.

TEXTILES: The country produces high-quality cotton, and this has given rise to a long-standing – if relatively small – textiles sector. Rising cotton prices since 2011 have encouraged more planting, which should ease supply concerns ahead. Less than 10% of cotton grown in Côte d’Ivoire is transformed into more sophisticated products in country however. Much of the cotton produced locally is exported to China, with some re-imported as finished goods.

Competition from smaller players in the informal sector is also an ongoing issue, although this poses less of a challenge than foreign counterfeits, due to market segmentation. Uniwax, a part of the Dutch Vlisco Group, which belongs to leading private equity investor Actis, is the largest domestic textiles firm. The company produces wax-coated printed fabrics, which are prized across the sub-region. It registered sales of CFA22bn (€33m) in 2011, up from CFA18bn (€27m) a year previously, when it had made a net loss of CFA767m (€1.15m). Sales grew by 20% in 2012 but slowed to 6% in early 2013, as the rising cost of living undermined domestic demand. Increasingly, therefore, it looks to the export market, which accounted for half of the firm’s sales in 2012.

PHARMACEUTICALS: The country has always imported the majority of its drugs, but it does have a number of pharmaceuticals firms producing in certain niches, and this sector has shown signs of further development since the return of political and economic stability. Foreign investors, notably from China and Cuba, have disclosed plans to establish production facilities. Modest nominal growth of 5.2%, to CFA170.4bn (€256m), was forecast for the sector for 2012. Fosun Pharmaceutical Group established a facility in July 2012 to manufacture raw materials for the production of drugs, most notably anti-malarials. Labiofam of Cuba signed an agreement with the Ministry of Health in late 2012 to cooperate on a malaria control programme and establish a manufacturing plant.

In February 2013 ECOWAS held a ceremony to commemorate the construction of three biolavicide factories, one of which is to be in Côte d’Ivoire. Technical assistance was to be provided by Cuba and financial support by Venezuela, on the basis of a tripartite agreement between ECOWAS and the two countries dating back to 2009. In general, pharmaceuticals are viewed as being highly regulated in the country, and the approval process for products is reportedly lengthy and difficult.

WOOD: Lumber production has given rise to an increasingly important wood products sector, albeit one which has experienced a decline in production since 2009. Typically, wood is transported from the regions in which it grows, for instance from near Adzopi to Abidjan, where the vast bulk of woodbased manufacturing takes place. The EU is the main market for the country’s timber exports, with the bloc accounting for about 80% of the total.

Timber is seen as a sector with significant potential, as forests cover around 10.41m ha of the country’s territory, though sustainability is a key concern. According to EU figures, over the past 50 years local forests have been reduced by 75%, thanks to illegal logging for timber and fuel. Côte d’Ivoire began negotiations with the EU as part of its Forest Law Enforcement, Governance and Trade (FLEGT) initiative in mid-June 2013, with the goal of signing a voluntary partnership agreement. FLEGT is designed to combat illegal logging by establishing control and licensing systems to ensure that all timber imports into the EU are legally produced.

CHALLENGES & SOLUTIONS: As one might expect in a post-conflict country that has experienced a decade of political turmoil leading to a steep recession in 2011, the business environment presents challenges in all industrial sectors. Certainly, the return of political stability and economic growth has seen the situation improve greatly. The government has introduced a range of initiatives aimed at improving the business environment (see Economy chapter). In the joint CEGCI/Ministry of Economy and Finance survey, the most urgent concerns mentioned by senior managers were security, post-crisis refurbishment of plants and machinery, access to credit and adequate supplies at competitive prices, as well as the resolution of arrears.

CHALLENGES: Many of the greatest difficulties facing firms arise from the relatively weak institutional framework. Fraud, corruption, counterfeiting and tax evasion are all concerns. The judicial system has a reputation for being slow, costly, opaque and susceptible to manipulation, although this is expected to improve somewhat as the new Commercial Court becomes firmly established (see Economy chapter). Land tenure and registry can pose problems due to issues of legal title and judicial enforcement; this is a particular problem for firms in agro-industry that manage plantations in provincial areas. “To improve industrial activity, the authorities ought to prioritise improving access to land and finance, the fiscal framework and consolidating a reliable justice system,” A H Beydoun, CEO of multinational retail and industrial conglomerate Yeshi Group, told OBG.

Policy uncertainty creates further issues. There are, for instance, some 140 unofficial taxes levied by government. Tax audits can occur every six months, or even more regularly, imposing a burden that is particularly onerous for smaller businesses. The value-added tax (VAT) regime has been identified as particularly difficult; as it is currently constituted, the VAT regime poses a cash-flow challenge for many businesses, particularly exporters.

To ease this burden, the government has introduced a range of post-crisis tax reliefs and amnesties, codified a more attractive fiscal regime for newly established firms in the 2012 Investment Code and is also working on making the VAT regime less onerous overall for enterprises.

On the whole, the Ivoirian labour pool is relatively well-trained, although those under 30 who came of age during the decade of turmoil did not have access to the technical schools, which had ensured a highly trained cadre prior to the crisis. In recent times, the government has moved to rehabilitate these schools, as well as the universities. Where skills are lacking, or international experience is desired, larger firms will often look to recruit among the sizeable Ivoirian diaspora. In general, the labour market is flexible by regional standards, with regard to working hours, for instance.

Businesses, particularly small and medium-sized enterprises (SMEs), face chronic challenges in accessing credit (see Banking chapter). However, the largest firms are able to secure loans at relatively attractive rates from the banking system.

Although Ivoirian infrastructure may be enviable by regional standards, chronic underinvestment and the violence of 2010-11 has seen it degraded in more recent years; particularly in the country’s interior, the deterioration of road networks is regarded as an obstacle to industrial development. This makes distribution and production difficult, as it causes supplies to be more expensive to source and produce to be more challenging to bring to the market. Due to security concerns, moreover, there are still areas of the country – albeit none in which significant industrial areas are located – where it may be unsafe to travel or unwise to transport goods.

STRATEGIES: To address these problems, the government has set out an ambitious programme for public investment and has experienced some success in mobilising financial support to this end from donors and multilaterals. If private sector infrastructure investment can be stimulated as hoped, the overall business environment should see a number of improvements in the coming years.

The port in Abidjan is reasonably effective, but costly and not subject to much competition; its handling charge of $260 per tonne is higher than that of neighbouring ports in Togo and Ghana, and the San Pédro Port lacks the capacity to alleviate bottlenecks. Customs procedures take three to four days, but this could fall to as low as 24 hours if software investments under consideration bear fruit, and if documentary requirements were streamlined. Although electricity supply generally does not pose problems for industry as the country is a net exporter, it is provided by a monopoly and therefore costly.

OUTLOOK: In the joint CEGCI/Ministry of Economy and Finance survey, 82.6% of senior managers reported being optimistic for the future. Optimism was especially notable in the energy sector, with a lot of positive sentiment in the construction, industry and agro-processing sectors. Upward revisions in macroeconomic indicators as well as forecasts in late 2012 and early 2013 seem to bear out the case for cautious optimism over the medium-term trajectory.