[Guest Post] Concrete Dreams: Nigeria’s Industrial Development without upgrading
[Guest Post] Concrete Dreams: Nigeria’s Industrial Development without upgrading
This is a follow up/response to my earlier piece on cement by a friend of the house. From time to time we will publish pieces like these for the edification and gaiety of the nation.
In her seminal book Asia’s Next Giant: South Korea’s Late Industrialisation, Alice Amsden showed how one of the biggest chaebols (large family-run conglomerates in South Korea) used the cement industry as a stepping stone to more complex economic pursuits. Nigerian cement manufacturers have neither delivered cheap cement nor upgraded technologically, so it is fair to ask what has been the net positive of the whole exercise. According to Alice, one can appreciate the importance of the early import substitution activities that the government encouraged, the life cycle of a leading sector and the dynamics of comparative advantage. Unlike South Korea, Nigeria is still stuck in the early import substitution activity.
The rest of my response will borrow heavily from Alice Amsden’s Book, so I urge you to buy it if you can.
The Hyundai Cement Company
Consider this excerpt:
The Hyundai group accumulated its first fortune in the construction industry, having been founded by C. Y. Chung, a man of modest means and little formal schooling. With the start of the Korean War and its aftermath, however, construction projects became more technologically complex and lucrative. Even when U.S. aid began to wind down in the mid-1960s, Hyundai proved sufficiently confident about the future to petition the government for a license to establish its cement-making affiliate.
Cement-making never became one of Hyundai’s significant enterprises. The mill it established was uncharacteristically small, one of the smallest in Korea. However, the mill was critical for Hyundai’s internal development and was a first for Hyundai in two respects: It was its first manufacturing affiliate and its first attempt to construct an industrial plant. For both reasons and with an eye toward the future, Hyundai attempted to involve itself as much as possible in all aspects of project execution.
You can see how Hyundai moved from construction to cement making. This constant industry upgrading is how a country develops. You don’t get stuck in one phase. I assure you that it would have been easier for Hyundai to stick to government construction contracts. Remember that Hyundai tried to involve itself as much as possible in all aspects of project execution. So, how did that turn out?
Hyundai’s success at upgrading and technology assimilation is shown in the table above and summarised below:
In 1964, Hyundai took part in only the construction phase under the supervision of Allis Chalmer.
By 1968, Hyundai took over procurement and supervision and even collaborated with Fuller during the start-up phase.
By the second expansion in 1974, the only function Hyundai did not engage in was Basic Engineering, which is typically left to process specialists.
Contrast the above with Nigeria, where almost two decades after the extension of government support, foreign EPC contractors still execute nearly every process. In fact, one of the big 3 relies on a contract miner extensively. According to R. S. Suglo, contract mining is when the owners of a mine employ the services of specialist contractors to conduct the various mining operations such as drilling, blasting, equipment maintenance, processing operations, scheduling and budgeting where there is a legal agreement between the two parties that is enforceable by law.
So how did Hyundai Cement end up?
According to Alice Amsden in her book and reproduced here, the assimilation of cement-making technology was the basis for Hyundai’s successful bid, ten years later, on a turnkey cement plant export to Saudi Arabia worth as much as $208 million:
As for manufacturing capability, Hyundai used its cement plant as a laboratory to train its managers with backgrounds in construction before assigning them to other manufacturing affiliates. Trainees gained experience in inventory management, quality and process control, capacity planning, and so on, thus spreading basic production skills throughout the Hyundai organization. After Hyundai Cement, the following manufacturing affiliate in the group was founded in 1967 and named Hyundai Motors. Twenty years later, it became the first independent automaker from a late-industrializing country to export globally. The first president of Hyundai Motors was a former president of Hyundai Cement.
What is going on in the Nigerian cement industry is an excellent example of how countries stuck in the import substitution phase of the economic development cycle also get stuck chasing foreign exchange earnings. The Nigerian cement producers do not earn appreciable foreign exchange revenues, so where do you think the foreign exchange for building the brand-new expansion plants has been coming from? I am sure they have all spent over $5 billion, if not more, in industry capital expenditure, which is $5 billion from Nigeria’s foreign exchange reserves.
Back to Feyi’s article, Nigeria has not mastered cement, contrary to the broad opinion, and one can not help but be pessimistic about our industrialisation chances. The producers haven’t delivered cheap cement to help reduce housing costs, don’t earn the country foreign exchange and have not attained industry leadership or upgraded to more complex activities.
What have we learnt? What have been the positives? Why should the industry continue in its present form?