Monday, 9 February 2015

Automotive policy and the rest of us

Professor Pat Utomi needs no introduction. He is one man I greatly admire. He has made a very strong impact on me and I believe on other young Nigerian entrepreneurs. His level of acumen and candour are legendary. If anyone qualifies to speak on the Federal Government's auto policy, it is the political Economist, Professor of Entrepreneurship and former Chief Operating Officer of the defunct Volkswagen of Nigeria (VWN). So in this column today, I bring you the views of the quintessential Utomi undiluted. Published on July 18, 2014, he titled it Automotive policy and the rest of us. Enjoy:
It was a little surreal to learn of a new automotive policy that had just been proposed for Nigeria. A close mimic of the import substitution industrialization strategy made famous by Latin American Economist Raul Prebisch from his time as Executive Secretary of the Economic Commission for Latin America (ECLA) and First Director-General of the United Nations Conference on Trade and Development (UNCTAD).
The logic is simple. To create jobs through industrialization the import list is taken up and some items deleted with substitution coming from local production. That local production may begin with CKD assembly in which on- costs may be quite high and uncompetitive. To make up, high tariffs or import bans are imposed to 'protect' local industry.
The trouble has been with the infant industry burden on local consumers as many infant industries fail to become competitive.
When Nigeria began industrializing the Nobel Laureate in Economics Arthur Lewis was promoting the ISI idea in his work in the Gold Coast (now Ghana). It was natural that ISI strategy affect policy choice in Nigeria. When National planning during the Gowon era identified the automotive sector as having great potential to stimulate production in several sectors, an ISI strategy took firm root.
To get things going Nigeria signed agreements with several automakers to set up plants to begin with CKD assembly and backward integrate. The result was the setting up of plants in Kano by Fiat Iveco, Bauchi for Steyr, Lagos to host Volkswagen, Kaduna, Peugeot and Enugu, Daimler Benz. Ilorin was to host Nissan.
On account of the agreements, import bans and tariffs went up to allow market demand build up. Nissan sold lots of Datsuns as part of that advantage. About 1977 the Datsun 180k was one of the most widely sold cars in Nigeria. When it came time to implement, Nissan begged off.
Peugeot, VWN etc, watched the policy environment unable to advance the goals of sustainable motor manufacturing. The contradictions were obvious. The Productivity Prices and Incomes Board (The Price Control Agency) stipulated prices which relative to costs meant giving away shareholders funds until the end could be seen. This produced ridiculous outcomes in sales of used cars. As prices for used cars could not be fixed you generated used cars and auctioned them and people bid twice the price of a new car that was hardly available, for a used car. The reason I never remember my car number is we used cars for weeks just to generate used cars.
When I went to work for VWN I declared the ISI model for automobile manufacture an anachronism. The nature of scale economies was such that the number of automakers in the world would shrink to a few, and the entry barriers were such that Nigeria competiveness was of little hope, and more importantly backward integration, otherwise known as local content; had failed very badly. The component manufacturers that established in Nigeria like Fichtel and Sachs were closing shop, etc.
My suggestion then was that we take advantage of the partners here, VW, Peugeot SA of France, Daimler Benz etc, to become suppliers into worldwide production of the firms in which our factor endowment gave us competitive advantage to become global leaders in its production. My favorite endowment was Rubber, of which we had at a time the best yield per hectare in the world. In my view, if we became the leading supplier of one or two rubber components produced most efficiently at the highest quality for supply into global value chains.
One of those who gave my views a good listen shortly after I joined VWN was Oxford University economist Paul Collier. Ironically he was, two decades later, commissioned by UNIDO to study China's rapid ascent in manufacturing and what Africa could learn from it. It was no surprise that what Collier learnt from the study was that the Chinese did what I was prescribing for Nigeria in the 1980s. His favorite example was one local government that produced nearly three quarters of all the buttons worn in the world. Had we become 80 percent producer of one rubber component used in motor cars world wide it would create hundreds of thousands of quality jobs and earn us more foreign exchange than crude oil.
To know this and see the same old game being played in ISI logic with the same Nissan that was a no- show a generation before is to feel deep sadness.

As we celebrate the hard work of a super salesman, Chief Michael Ade Ojo it is appropriate to make the point that sometimes you have to trade. Britain was renown, as a nation of shopkeepers. We all now go to Dubai trading. We can trade where that is strength and manufacture where we are competitive. Sony cofounder Akio Morita came to be known as the paramount salesman of the 20th century. Chief Ade Ojo is in many ways our Akio Morita. CVL is proud to hold him up as example of hard work, entrepreneurship and salesmanship. Even more importantly he is a role model in giving back to the community.

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