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No matter how small the part, our Chinese partners wanted to build it locally.

The first new vehicle developed and launched by my team, during my time as executive chief engineer for GM's global crossovers, was the replacement for the world’s best-selling Cadillac, the SRX, which was renamed XT5. Crossover vehicles combine the high seating position, space, and utility of a sport utility vehicle (SUV) with car-like levels of refinement. Crossovers continued to grow in popularity in the US and were starting to also take off in China and other parts of the world, especially luxury-branded models. Global sales of the SRX were 99,397 units in 2015 ¹ , and with the launch of our XT5 replacement, this total would grow by 45% to 143,905 units in 2017 ² , the first full year of production. While the vehicle would be designed and engineered primarily in the US, it would be built in both the US and China.

Under Chinese law, non-Chinese automakers like Honda, BMW, Ford, or GM cannot build and sell vehicles in China on their own. Parts can be manufactured and sold by foreign companies, but not cars and trucks. Global automakers are required to form joint ventures that are at least 50% owned by a local Chinese company in order to produce and sell vehicles. The government must approve of the partnership, then the JV can receive the license. ³ The Chinese government views the automotive industry to be of key strategic importance to the country. One of the expected outcomes of the legally required joint ventures is the transfer of technology and know-how from global automakers to the local Chinese manufacturing business partners. As these new car-making ventures have come online, global parts makers scramble to develop the supply chain needed to produce the parts for these vehicles. These suppliers are not required to form JVs to obtain production licenses, making the opportunity to serve the Chinese market accessible to businesses ranging from multinational Tier 1 suppliers (sell major assemblies and parts directly to the automakers) and Tier 2 suppliers (sell smaller parts to the Tier 1 suppliers) to international and local entrepreneurs looking to capitalize on this sizable auto market. GM’s joint venture in China was with Shanghai Auto Industrial Corporation (SAIC), which is owned by the government of the city of Shanghai. The JV is called SAIC-GM or SGM.

A car is made up of approximately 30,000 individual parts. While the largest parts of the car, like the engine and body structure, are typically made by the automakers themselves in their own plant facilities, the vast majority (60-70% of the value) of these parts are actually manufactured by independent parts suppliers. Under the direction of the automakers product development team, these suppliers build various parts of the vehicle and ship these parts to the automaker’s assembly plant for installation on the vehicle. In some cases, suppliers partner with the automakers and complete portions of the part or vehicle subsystem design and engineering work as well. Under these scenarios, the automakers' engineers still maintain responsibility for the systems integration of the parts. This includes ensuring that the part fits with the adjacent parts on the vehicle, performs as expected, and has the expected aesthetics, i.e., looks good.

As my US team was completing the design and engineering of the Cadillac XT5 in the US, my China team at SGM stayed close to the process, since the XT5 would also be built in China. Like nearly all vehicle development programs at nearly all automakers, the vast network of auto parts manufacturers around the world bid to supply 60-70% of those 30,000 parts for a new vehicle program. While the engineers and purchasing managers on my team in the US selected suppliers from the US, Mexico, China, Korea, and Japan, my China engineering and purchasing team preferred nearly all Chinese suppliers. Building the same vehicle in multiple plants is very common in the auto industry. However, the preferred approach is to have the vehicles as close to identical as possible, with the same part designs, manufacturing and assembly processes, and supply chain. Commonality leads to increased efficiencies in execution and problem solving, fewer errors, faster time to market, and improved quality.

The desire of my China based team to primarily use local Chinese suppliers was at the urging of the SAIC partner side of the SAIC-GM JV leadership. No matter how small the part, our Chinese partners wanted to build it locally. China was deep into the process of industrializing automobile production, and they wanted to build as many parts in country as technically feasible and as business rationale would justify. A local supply chain would bring added volume and scale to these new suppliers’ operations, reduce labor, shipping and logistics costs, and develop skills. In addition, every new local supplier employee would gain confidence and pride from building parts for the world’s best-selling Cadillac.

Work Is Work…or Is It?

Not all forms of economic activity are created equal. That is, they do not all yield the same results. While all work can keep you equally busy for eight to twelve-plus hours per day, the level of added value, output, and economic benefits to the enterprise will vary. Industrial manufacturing can create more jobs, economic development, and societal benefits than farming, retail, services, tourism, and even the development of mobile technology apps.

Planting or the plant

A farmer who plants one acre of mangos could make more money and create more employment opportunities if he were to invest in the land needed to plant ten acres instead. If he brings in the right machinery, he could prepare the soil and harvest the fruit in a shorter amount of time, thereby keeping the expense of the additional employees at the most efficient level. However, even if he takes these actions, he must still wait until the one part of the year when he can harvest the mangos. But if he were to invest further in the agro-processing machinery needed to make mango juice and frozen mango chunks for yogurt smoothies, he could make greater profits from other offerings, generate revenue over a longer time period, create even more employment opportunities, and over time build a more valuable business.

Hawking or making

Businesses solely focused on retail transactions are also limited. In developing economies around the world, it is very common to see various goods being bought and sold via street hawkers and in huge crowded bazaars. Actually, you can experience the same type of retail in the US or Europe, except that here they are called farmers markets, flea markets, and swap meets. In nearly all cases, the merchandise is essentially the same between booths, and the key differentiator between one seller and the other is price. These booths are typically staffed with one to two people whose success is determined by how many people they can encourage to stop at their station instead of their neighbor’s. In this highly prevalent form of retail, typical profit margins are thin and only a few people are employed. Unless one of these retail businesses can stand out for reasons other than price, their earnings will bounce between feast and famine.

Cutting hair or manufacturing brushes

Launching a service business is a great way for an entrepreneur to create employment for himself and his partners. But, as the saying goes, you cannot build a vibrant economy based on cutting each other’s hair and cleaning each other’s clothes. The challenge with services is their lack of ability to scale. Service businesses tend to be transactional in nature and do not tend to create adjacent employment opportunities the way the manufacturing sector does. The relationships tend to be more one to one between customer and service provider. Manufactured hairbrushes can be exported and sold to customers all over the world.

Service businesses typically do not carry work in progress or finished goods inventory or make significant investments in research and development (R&D), and given the nature of face-to-face transactions, their opportunities for export are also limited. With the exception of online or telephone customer assistance centers, mass quantities of employees typically are not required to conduct service industry transactions with the customer. In addition, most of the value of a service company walks out the door every night in the form of its employees.

I am not minimizing the importance of service companies. As nations and economies develop, they tend to move from industrial to service firms largely because of the ability to create significant profits with small operations and little start-up cost. This point in time also tends to coincide with the developed nation becoming less competitive in manufacturing due to its rising trend in labor cost. Developing economies with lower labor rates join the global manufacturing sector and prove to be far more efficient from a total manufacturing cost standpoint, forcing the higher-cost legacy manufacturers into other sectors to create value. This is the natural economic progression cycle that has repeated itself in all regions of the world, and now has the potential to create the same benefits on the African continent. This economic trend was first described by Japanese economists as the flying geese paradigm. By this philosophy, manufacturing capabilities and cost advantages flow over time from more developed nations, the lead goose, to lesser-developed nations, the geese that follow in a traditional V-pattern.⁴

An industrialized economy benefits both the manufacturing and service sectors. The jobs created through manufacturing obviously create more consumers of services such as the previously mentioned barbers and dry cleaners. But it also creates opportunities for entrepreneurs and their companies to provide services to the manufacturing firms. As automobiles are produced, logistics companies are needed to bring the parts to the plant and transport the finished cars and trucks to the dealers. To support this production ecosystem, the services of accountants, lawyers, real estate brokers, physicians, and educators are also required. Industrialization has the potential to benefit all parts of an economy and society.

Off-road adventures in Swakopmund, or building “the jeeps”

Jeep is a registered trademark of Fiat Chrysler Automobiles N.V., but many use the word “jeep” generically to refer to any off-road vehicle. One of my favorite activities while on vacation is driving or riding all-terrain vehicles (ATVs) and utility-terrain vehicles (UTVs) off-road in unfamiliar countries. I’ve had the pleasure to go off-roading in locations including Swakopmund and Walvis Bay, Namibia; Punta Cana, Dominican Republic; and San Nicolas, Aruba. The vehicles of choice offered by the tour organizers were typically Honda FourTrax ATVs, Polaris Ranger side by side (SxS) UTVs, or Polaris Ace single seat UTVs. Riding these powerful machines through the sand, over rocks and gravel, around trees, through forests, through wide fields of mud, up hills, across public highways, and by the oceans was a great way to see the land up close. These simple machines provide hours of enjoyment and memories that last a lifetime. You even remember the vacation mates who rode beyond their capabilities and ended up with minor injuries.

Whether Aruba, the Dominican Republic, or Namibia, when the tourists were in town, it was great business for the off-road tour companies. Twenty or twenty-five off-road vehicles would be lined up and waiting to take the guests on a one- to two-hour tour of the island or local area. Two guides would be mounted on slightly higher-powered versions of the vehicles to serve as chaperones for the group. Their job was to make sure that the group stayed on the course, that no one got lost, and that no one attempted any ridiculous stunts with the vehicle. Also tagging along was a photographer driven by another member of the tour operator’s team, called the paparazzi. His or her job was to film the ride so that the tour company could sell overpriced video files of the experience to us tourists at the end.

It was great work for those who could get it, but what about the days when no cruise ships or tourists were in town? Business was completely dependent on whether customers visited the region. Sure, there was work to be done changing the oil and maintaining the vehicles, but that type of light work could be done by the operators between tour groups. In addition, the barriers to entering this business were very low. The beaches, trails, and public parks were open to all, meaning that anyone with two or more off-road vehicles could suddenly become a competitor.

Tourism has the potential to create many employment and economic opportunities, but it is limited by travel season and subject to the economic woes of the country from which the tourists are visiting. Tourism cannot be exported. You cannot ship an off-road experience halfway around the world and make a profit. Therefore, the market opportunity is limited.

Apps vs. assembly lines

Smartphones, tablets, and their software applications (apps) give us mobile access to the web and allow us to have virtually unlimited information and conveniences in our hip pockets and purses. Obviously, they are some of the greatest inventions of the early twenty-first century. Billions have benefitted from the creation of these technologies. Their software developers, company leaders, and shareholders have similarly enjoyed billions in value creation due to stock price escalation. While no one will argue how much these technologies have transformed our lives and made mundane tasks easier and more enjoyable, how does the mobile app industry compare to auto manufacturing in terms of job creation?

For a quick comparison between industries, the graph below takes the four largest US-based technology companies–Apple, Amazon, Alphabet (Google), and Microsoft–and compares them to the top four automakers in the world–Toyota, VW, GM, and Hyundai. While the combined market capitalizations of the tech companies are nearly eight times those of the automakers, the automakers create double the jobs of the tech companies.

Source: 2016 annual reports for each company

Like services, technology businesses concentrate wealth into the pockets of relatively few highly skilled (and deserving) professionals in the form of stock grants and stock options. In contrast, industrial ventures leverage higher amounts of labor and various skill levels to create value. This results in multiple and wider tiers of value creation.

Benefits of manufacturing and industrialization

Farming, mining, retail, services, and tourism are the business sectors that are most common in developing economies. These companies utilize available local resources, demand is local and visible, and they do not require significant amounts of skill or capital to launch. Introducing manufacturing sets up a new form of economic activity for a region. Local manufacturing enables the replacement of imported products with more cost effective, locally produced products and the creation of local jobs. But Motoring Africa’s proposition is not simply about introducing or increasing the number of manufacturing businesses in Africa. It is about building industries and enabling them to reach their full competitive potential. Industrialization and sustainable industrialization further the introduction of manufacturing by making the participating businesses as efficient and successful as possible, over the long term.

The potential benefits of industrialization have been known for quite some time. Every major developed region has gone through periods of industrialization on their path towards becoming major world economies, including Western Europe, North America, Japan, Southeast Asia, Latin America, and most recently China. While pockets of industrialization have taken root in parts of the African continent–the Eastern Cape and Gauteng Provinces of South Africa; the city of Addis Ababa, Ethiopia; and the cities of Casablanca and Tangier, Morocco for example–the continent as a whole is ripe with opportunities for economic transformation through a conversion to manufacturing.

While the opportunity for industrialization has been evident in Africa for quite some time, there were easier paths to prosperity, and the motivations were not always apparent. The commodity price boom of the early 2000s resulted in higher prices for oil, industrial metals, precious metals, chemicals, and food. As many African economies are driven by commodity exports, these higher prices resulted in periods of growth for their nations. As in many institutions, change is difficult when things are going well, and many African governments used their commodity boom riches for other budget priorities rather than investing in industrialization. Now that commodity prices have cooled significantly, these same economies are looking for new ways to drive growth. Creating the capabilities and capacity to manufacture high-value goods at scale through industrialization, in addition to creating jobs, would offer these nations the ability to offset swings in commodity prices. Economies would be less dependent on external forces, and the skills to convert some of the mined metals into exportable finished products would be developed. Industrialization helps nations become empowered participants in the global economy.

Putting the Growing Masses to Work

According to a United Nations 2015 report, the world’s population is forecast to grow from 7.3 billion people today to 8.5 billion in 2030, and 9.7 billion in 2050. Half of this growth is expected to occur in Africa, with the population of 28 of its 54 countries doubling. The continent’s total population of 1.2 billion people is expected to grow to 2.5 billion. The population of Nigeria is expected to exceed that of the United States by 2050.⁵ United Nations (UN) population analyses also show that 41% of Africa’s population are under the age of 15 and 19% are between the ages of 15-24 years old. These young people will make up the future workforce of the region. Many refer to this phenomenon as a demographic dividend. These population and future workforce growth forecasts demand that transformative actions be taken to gainfully employ Africa’s future young workers. Therefore, investments in emerging markets are not only about altruism. They should also be considered forward investments in making the people in the developing nations more secure at home.

In order to put this young and growing population to work, the UN’s Economic Commission for Africa estimates that 10 million jobs per year will need to be created on the African continent.

The McKinsey Global Institute forecasts that by the year 2034, Africa will have a working-age population of 1.1 billion, which will be larger than the workforce populations of either China or India. The value-creating and job-generating engine called industrialization can leverage this demographic dividend towards the creation of value-added manufacturing, along with opportunities in adjacent business sectors. McKinsey further estimates that 6-14 million jobs over the next decade can be created by industrialization alone.⁶ Industrialization creates jobs that benefit the nation and region, even if the end customers of the manufactured product are in another part of the world. Over the next thirty years, the end customer growth will take place in Africa.

Manufacturing takes raw inputs and creates higher value outputs. Industrialization increases the scale, success, and profitability of manufacturing ventures, which results in even more jobs being created. Nothing stimulates an economy like large numbers of employed people earning money and becoming consumers. Industrialization increases the number of job opportunities and the breadth and level of workers' skills. This is the greatest example of the positive impact that business can have on a community, region, and nation. Value-added manufacturing also allows workers to feel the pride that comes from creating and making high-value products for local consumption and export. Employed people tend to have higher levels of confidence and self-esteem. This leads to higher levels of care for and investment in their communities. Industrialization is an effective, lasting and sustainable economic hand up, as opposed to a handout. The skills gained through sustainable industrialization can put a region on a path to better controlling its own destiny.

Some will argue that the benefits of industrialization are no longer realizable due to robotics, artificial intelligence, 3D printing, advanced manufacturing, and other labor-saving technologies and innovations. They would argue that these advancements eliminate the need for manual labor. From my personal experience in industry, while these tools may eliminate some jobs, their net affect can still be positive. Robotic welding improves quality and reduces material scrap. Robotic lifting machines reduce injuries. Additive manufacturing (3D printing) can produce a wider variety of products at lower investment, giving consumers more choice and customization options. Lower-volume manufacturing and non-repetitive tasks in high-volume production will still require significant levels of human labor involvement. Also, higher-quality, customized, and more desirable products create more satisfied customers and a faster-growing business. A growing business creates more opportunities for the entrepreneur to create jobs.

The Jobs Multiplier Effect

Jobs created from manufacturing ventures lead to the creation of even more jobs. Manufacturers need the support of other companies, as they typically do not make all that is needed to create the finished product by themselves. They need companies that harvest, mine, make, and supply the materials and other inputs. They also need the businesses that will transport both the materials and finished goods into and out of the plant, then to the distributor, and then to the final customer.

Industrialization furthers this follow-on multiplier effect. Supply chains are developed to support the manufacturing company, its suppliers, and its competitors. Competition creates a battle over prices, which leads to a drive to increase efficiencies. This drive leads to more rigorous analyses and decisions regarding what the company should make or do itself–vertical integration–versus hiring the support of an external company with greater efficiencies and lower costs. The demand for these adjacent companies for outsourced services also creates opportunities for entrepreneurs. Whether the work is done in house, or done more efficiently by locally outsourcing, net jobs are created.

As new sectors of manufactured products are entered this process repeats, again and again, and can lead to a virtuous cycle. The culture of producing products can be infectious. Making things is part of human nature. Success in one product segment will encourage entrepreneurs to pursue manufacturing and industrialization in other segments. Success will also attract investors, whose capital will enable industries to build and achieve scale and an accelerated pace. Invariably, over time, some businesses will fail due to market missteps and changes in customer preferences. Manufacturers that build skills in innovation will quickly adapt to these changes and be ready to produce the next wave of desirable products. Innovating, building products, and creating jobs makes an economy vibrant!

New Skills Used in Many Ways

Developing the skills to manufacture one type of product can give a person, community, or region the potential to apply those skills to the creation of other related or unrelated products. Examples and descriptions of various manufacturing processes and the types of products that are made using them are as follows.

Beyond Manufacturing

In addition to the production skills and capabilities that are learned, developed, and perfected over time, industrialization gives regions the opportunities to participate and earn through other value-added work as well. Bringing a manufactured product to market essentially involves three steps: 1) developing the product, 2) making the product, and 3) selling the product. While there are many sub-steps and detailed actions within each step, they can all primarily align under one of these three broad categories of actions. More than likely, the African nation or region is already doing step three, selling the products; the products are more than likely being created someplace else and imported. Implementing an industrialization strategy moves the region to step two, making the product locally. Along with setting up the manufacturing operations and hiring and training workers, supplier networks need to be developed, and transportation and distribution service providers brought on line.

After conquering step two, making the product, the natural progression is to step one, creating, designing, and developing the product. Demands for design capabilities, engineering skills, and product testing capabilities will grow, as will the need for schools to educate and train the local workforce with these skills. An interesting point to add is that many developing nations already have strong educational infrastructures. The problem is that there are limited employment opportunities for the graduates across skill levels. With the local introduction of each step for bringing a product to market, new opportunities for entrepreneurs develop, more jobs are created, product creation and production skills are mastered, and more profits are retained in the region.

New Money…New Consumers

As the company becomes more efficient and successful, it can offer even greater varieties and quantities of desirable products to the local customer and the export market. That’s right, not only can local demand be met without importing, but companies that efficiently build quality product can access the export market. The business grows, the virtuous cycle repeats, and the community benefits. Successful businesses consistently create two things: employees who want to buy things (consume), and employees who recognize other needs in the marketplace and are motivated to start businesses themselves. This yields more entrepreneurs, more jobs, more saving, more consumption, and more economic benefits to the community and nation.

Henry Ford famously benefitted from this principle in the early 1900s in Detroit, when he doubled the wages of the workers in his car assembly plants from $2.25 to $5 per day.⁷ While the increase was primarily to increase employee loyalty and reduce turnover, it is hard to argue that it did not have a positive impact on the number of employees who were then able to become car owners. While the Ford wage increase seems sizable at twofold, moving from a retail sales or commodity-based local economy to an industrial economy can enable even higher multiples of wage increases, and for a greater number of people. The higher the skill level, typically, the higher the wages. “The way to significantly improve your life is to increase the demand for your labor,” as heard on the news show "CBS This Morning." Work that creates more value demands more wages. Higher employment levels and higher incomes lead to higher consumption. Higher consumption leads to greater demands for goods and services, which leads to additional opportunities for entrepreneurs, business leaders, and investors.

Making a Positive Difference

Businesses that are performing well and profitable are in a position to be better stewards of their local communities. Companies and their employees are able to invest in schools, community centers, churches, parks, the arts, and cultural activities. Their support of the local community creates a further sense of pride in the residents, which can lead to additional support of the local business. This support can come in the form of additional sales or higher quality employees. Businesses that are both doing well and doing good tend to attract the best people, and the best people typically generate the best business results. Again, the virtuous cycle continues.

In 2015 the United Nations adopted seventeen goals in support of its objectives to end poverty, protect the planet, and ensure prosperity for all. The UN believes that stability in one’s home creates the ability to provide for one’s self and family and reduces need for migration.

The 17 Sustainable Development Goals (SDGs)

Source: www.sustainabledevelopment.un.org

Goal 1. End poverty in all its forms everywhere

Goal 2. End hunger, achieve food security and improved nutrition, and promote sustainable agriculture

Goal 3. Ensure healthy lives and promote wellbeing for all at all ages

Goal 4. Ensure inclusive and equitable quality education and promote lifelong learning opportunities for all

Goal 5. Achieve gender equality and empower all women and girls

Goal 6. Ensure availability and sustainable management of water and sanitation for all

Goal 7 Ensure access to affordable, reliable, sustainable and modern energy for all

Goal 8. Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all

Goal 9. Build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation

Goal 10. Reduce inequality within and among countries

Goal 11. Make cities and human settlements inclusive, safe, resilient and sustainable

Goal 12. Ensure sustainable consumption and production patterns

Goal 13. Take urgent action to combat climate change and its impacts

Goal 14. Conserve and sustainably use the oceans, seas and marine resources for sustainable development

Goal 15. Protect, restore and promote sustainable use of terrestrial ecosystems, sustainably manage forests, combat desertification, halt and reverse land degradation and halt biodiversity loss

Goal 16. Promote peaceful and inclusive societies for sustainable development, provide access to justice for all and build effective, accountable and inclusive institutions at all levels

Goal 17. Strengthen the means of implementation and revitalize the Global Partnership for Sustainable Development

The job- and innovation-creation benefits of industrialization have been shown to enable many of the goals listed above. Goals 8, 9, and 12 reference the benefits of industrializationa growth, stability, and prosperity. Nearly all seventeen goals give reference to the importance of sustainability.

It is no secret that industrialization in nineteenth-century Europe and twentieth-century America and Asia was not environmentally sustainable. The introduction of manufacturing in these regions, to again refer to Dictionary.com’s definition, was often harmful to the environment, overly depleted natural resources, and did not support a long-term ecological balance. Not only were the products harmful to the environment, but the manufacturing processes used in production heavily relied on coal and fossil fuels to generate electricity. In addition, waste products filled the air, water, and landfills.

Implementing sustainable industrialization on the African continent need not follow this old model. Given the greater understanding that scientists now have of man’s impact on the environment, and advancements in renewable energy and manufacturing technologies, Africa has the opportunity to take a different approach. The industrialization of automobile production on the African continent can be done in a manner that is both environmentally and commercially sustainable. It is imperative that African governments and African businesses set out on the sustainable industrialization approach as soon as possible. This will allow them to locally control their own destinies, industrialize using environmentally friendly technologies, and avoid becoming one of the leading countries contributing to greenhouse gasses. Currently that title goes to Asia and the Americas. Automaker BMW is a leader in sustainable manufacturing and industrialization. Their 3 Series sedan and X3 sports activity vehicle assembly plant in Rosslyn, Gauteng, South Africa currently generates 30% of the electricity needed to run the plant using renewable energy.⁸ They have announced that their new plant in San Luis Potosí, Mexico will meet 100% of its energy needs with renewables.⁹ Renewable energy innovations and advanced manufacturing technologies make sustainable industrialization more feasible at a lower cost.

More Money, Fewer Problems

Growing businesses lead to growing economies and growing incomes. Sustainable employment and higher incomes can lead to greater governmental stability. Economist Dambisa Moyo estimated that it takes per capita income of at least US $6000 per year to reduce the likelihood of political unrest.¹⁰ The creation, production, sale, and export of value-added products at scale is the fastest path to creating the most jobs and brining the largest percentage of a region’s population to this income level.

I recently visited the website of Kiva Microfinance (kiva.org). Kiva allows anyone in the world to make microloans via the internet, i.e., to lend small amounts of money (US $25 or more) to low-income entrepreneurs in order to support their businesses. According to the Kiva website, since their founding in 2005, Kiva Microfinance has made US $931 million in loans, funded by 1.6 million lenders, to 2.3 million borrowers in 87 countries, and has a 97% repayment rate. In looking at several of the borrower proposals from various countries on the African continent, I noticed that many of the borrowers were looking for loans to buy merchandise for their retail shops. While I still decided to participate in several proposals as a lender, I had to ask myself: How much annual income can these entrepreneurs realistically generate for themselves with such small amounts of inventory, which will only be resold? What if more of these entrepreneurs’ businesses could be organized around value-added production and volume manufacturing of this same merchandise? What if these markets and manufacturing businesses could become sufficient enough to develop a local industry? I applaud Kiva’s efforts and progress over the last decade and I wish them continued success. However, in addition to the microloans, I would like to see commitments to support industrialization strategies.

The Fortune Throughout the Pyramid

In 2004, the late C.K. Prahalad, a former corporate strategy professor at the University of Michigan Ross School of Business, co-authored the book, The Fortune at the Bottom of the Pyramid. The book presents how companies can help reduce poverty by building businesses that serve the world’s poorest regions, while enabling the local people to participate in owning and operating these businesses. The book advocates that his form of inclusive capitalism could lift the poorest billion people in the world out of poverty. Following this same basic premise, industrialization and sustainable industrialization can have an impact at the base and throughout the economic pyramid, i.e., on all rungs of the economic ladder. The multiplier effect not only multiplies jobs, but also multiplies opportunities for entrepreneurs and investors, which is an incentive for everyone to get involved.

For a manufacturing business to grow into an industry, the market must develop and competitors must enter. Competitors are created by local entrepreneurs stepping up and taking the risk of organizing a business to serve the new market. Industrialization is the next logical step. As local entrepreneurs and business leaders create an industry, they will need even more entrepreneurs to step up and become suppliers, transportation and logistics companies, tax accountants, lawyers and other service providers, to enable the businesses to grow and become more efficient. The need for these entrepreneurs creates opportunities for business ownership, which is at the foundation of community development.

The need for entrepreneurs to launch these supporting enterprises also creates the opportunity for investors to participate. Entrepreneurs need investors to step up in order to realize their vision. Investors get the opportunity to generate a return on their capital while participating in the transformation of a community, nation, and region. They get the opportunity to join a potentially virtuous cycle of growth. Investing in a manufacturing business is highly transparent. The needs and uses of the capital–whether for new plant construction, new safety equipment, raw materials, transportation equipment–are visible and easier to follow than an investment in an app company. Successful exits from industrial investments help build a region's business track record and are likely to attract additional investors. Over time, as the industries grow and spawn new local industries in other market sectors, the investments will likely become larger and even more impactful. The local community’s participation in these investment opportunities can range from deposits in their local banks to private capital investment funds, to (one day) stock purchases of locally based publicly traded companies. Persons at all levels of the economic ladder can have a place to participate and reap the benefits. With industrialization, multiple virtuous cycles are created.

Don’t “Bring some in,” Make it Here

Why continue to only be a customer? Replacing imports with the outputs of local industrialized manufacturers not only creates jobs, but will result in the availability of better and more cost competitive products. Locally produced products can more closely match the needs and preferences of the local consumer. This will enable local brands to win against the imports. Also, not having to “bring some in” (as importing is referred to in parts of West Africa) from overseas reduces the added costs of duties, shipping, logistics, storage, and damage. Getting the product that they want, faster, is also pleasing to the customer.

The McKinsey Global Institute organizes manufactured goods into the following categories:

 Regional Processing – e.g., food, beverages

 Global Innovation for Local Markets – e.g., chemicals, motor vehicles

 Resource-Intensive – e.g., cement, petroleum

 Labor-Intensive – e.g., shoes, apparel

For Africa, McKinsey estimates that 60% of the products in the Global Innovation for Local Markets sector are imported.¹¹ I expect that this percentage is significantly higher for the automotive and motor vehicle sectors. When the demographic and income trends forecasts for the next 30 years are considered, this segment is ripe for significant growth in local demand. With this high and growing local demand, why not invest in local production?

With local production, the risk of price changes due to foreign exchange fluctuations is also reduced, as the product is both produced and sold in the country with the same currency. This impact cannot be overlooked, as the economies in many African countries cycle between boom and bust primarily due to the world market prices for commodities such as oil, cocoa, coffee, and bauxite, the main ore for aluminum production. More value-added local production will reduce the impacts of these commodity price and exchange rate cycles.

Strength through Sustainability

Sustainable industrialization has both an environmental and a commercial rationale. Industrialization creates the supply chains and support networks that make manufacturing businesses more efficient. Sustainable industrialization furthers these efforts and results in companies and industries that are built to last. Sustainable industrialization optimizes the performance of the business by reducing and eliminating inefficiencies throughout the value chain. Sustainable industrialization also takes the steps to ensure that the business is operating responsibly to the needs of the environment and community.

Let’s first look at optimizing the performance of the business and eliminating inefficiencies. Fundamentally, the success of a business comes down to two factors, revenue and cost; optimize the cost and maximize the revenue. The goal is always to deliver the best value to the customer. This does not necessarily mean the lowest price, but instead the most attributes in the product and service for the given price: design, style, performance, functionality, customer service, how it makes the customer feel, etc. Businesses that consistently successfully do this win in their respective market segments.

Understanding and Optimizing the Cost Structure

One of the first steps to optimizing business performance is developing a thorough understanding of the cost structure for the business. In my years as a business turnaround consultant, this was the main issue for several struggling companies. The cost to produce one unit of a given product is made up of the following elements or cost drivers:

 Material cost – steel, wood, plastic, and the cost of any other raw or semi-finished goods that go into producing the item

 Freight and logistics costs – packaging, transportation, warehousing, and insurance for inbound raw materials, work-in-process product, and finished goods to the customer

 Labor costs – work directly impacting the manufacturing and assembly of the good, work indirectly supporting manufacturing, e.g., in-plant material handling or plant maintenance

 Overhead/burden costs – engineering, administration, and other fixed expenses that are not production volume dependent; amortization of capital equipment used in the production process

 Warranty costs – repair or replacement of defective products

In addition to these per-unit costs are any investment that is required to produce the product, but will have a life longer than the production of the product. For example, you may construct a solar power generating station to provide electricity for the plant that will manufacture a specific product, but it will likely be used for and benefit other products and operations of the business as well. This will be part of the capitalized or annual investment budget for the business.

As the cost structure of the business is measured and understood, steps can be taken to improve and optimize it. A business with an optimized cost structure is more commercially sustainable. It is built to generate returns and avoid waste and losses. One of the key drivers of an optimal cost structure is scale, i.e., building products at sufficient speed and quantity to fully utilize the capacity of the machinery and labor assigned to the job. In other words, scale involves optimizing the output of an operation. The cost to build a vehicle is typically 50-60% raw material and purchased parts, with direct labor and overhead labor making up the remainder. Having an advantage on 40-50% of a vehicle’s cost structure can give a new company the advantage needed to break into a competitive market. As labor rates in most African countries are lower than those in Europe, the Americas, and Asia, completing this work locally will lower total product cost. Building the products locally will also reduce the shipping, storage, duty, and insurance cost vs. importing the same product. Just as the ingenious and resourceful taxi drivers in Accra figured out how to keep those 20-year-old Japanese cars on the road and operating with few new parts, local participation in manufacturing and industrialization will unlock new opportunities for African-originated innovation in cost reduction and building scale.

Measuring and managing a business's impact on the environment and community will yield benefits on both the revenue and cost side of its income statement. Green products and green operating procedures can boost profits. Building mutually beneficial relationships with the local community, nation, and region will build the value of the company’s brands and increase its pricing power and margins. As the business is successful, current employees become more loyal to the firm and the best prospective employees want to join as well. Sustainable industrialization can show that doing the right thing for the customer, the business, the environment, and the community do not have to be competing goals.

Conclusion: Investments in sustainable industrialization can create virtuous cycles, yielding more opportunities for entrepreneurs, jobs, economic development, and value creation than the agriculture, retail, and service sectors.