Challenges remain for Industrials, but calculus shifts

Disruption arising from COVID-19 has accelerated trends already apparent in the industrials market –– particularly digitalisation and trade volatility –– and transformation has gone from a “nice to have” to a necessity, according to the latest findings from Baker McKenzie. The law firm surveyed 700 company leaders in six industrial sub-sectors in early 2020, and again at the end of the year after the pandemic had taken hold of the global economy. In Africa, challenges in the industrials market were exacerbated by the pandemic, and highlighted by the requirements for seamless trade, strong supply chains, digitisation and sustainability, that were necessitated by the implementation of the African Continental Free Trade Area agreement (AfCFTA), as well as by the post pandemic market environment.

Interviews with sector leaders highlighted renewed action and energy, with companies looking to acquire technology and reimagine systems, networks and services to thrive in future. A License to be Bold: Transforming Industrials covers four areas of focus: adapting to the new market; digitalising for growth; disruption-proofing supply chains; and sustainability.

Nikolaus Reinhuber, Global Chair of Baker McKenzie’s Industrials, Manufacturing and Transportation (IMT) industry group says, “Our findings show that disruption arising from COVID-19 has accelerated trends already apparent in the market –– particularly digitalisation,  trade volatility and the importance of sustainability –– and transformation has gone from “nice to have” to necessity.  There is a significant imperative to change, with greater stakeholder buy in and long-term viability outweighing short-term performance.

“Those organizations that meet disruption with a bold and innovative vision and execute effectively on it, will be best placed to adapt and grow over the coming decades. The industry has an imperative to change and a new license to be bold –– the stage is set for transformation.”

Marc Yudaken, Partner and Head of the IMT industry group at Baker McKenzie in Johannesburg, notes that the IMT sector in Africa was clearly severely disrupted by the pandemic but that this and other factors had boosted transformation in the sector.

“Before the pandemic, IMT sector supply chains were already under pressure in Africa due to inadequate infrastructure, corruption and security issues, poor trade logistics, onerous regulatory requirements, and complex customs procedures. COVID-19 challenges meant that these chains became longer and more vulnerable to breaks. When AFCFTA became operational, it further highlighted the crucial need for improved infrastructure and stronger digital systems and supply chains to facilitate the free flow of trade across the continent. Addressing these issues would make it easier for IMT companies to be able to both facilitate and take advantage of AfCFTA opportunities.

“To improve transport infrastructure in Africa, large projects have been announced or are in progress, including the Trans-Maghreb Highway in North Africa and the North-South Multimodal Corridor, connecting extensive parts of Southern Africa, as well as the Central Corridor project and the Abidjan-Lagos Corridor Highway project. It won’t be an easy fix though, the African Development Bank has noted that between USD90 and USD 130 billion is needed every year to address the continent’s infrastructure gap,” Yudaken notes.

He explains further that reliable transport and utilities infrastructure is vital in terms of ability of the IMT sector to scale up production for regional export ahead of AfCFTA, and to develop its manufacturing bases. Many African countries have begun looking at ways to improve their manufacturing capacity so that they can produce local components that don’t need to be imported and that can be traded within the continent. Further, Africa needs an adequate supply of water and electricity to incentivise foreign companies to set up production facilities on the continent. Domestic policy changes that address these issues will therefore play a crucial role in alleviating some of Africa’s current IMT challenges.

“Additionally, the substantially increased focus on digitisation means that the development and harmonisation of a regulatory framework to integrate Africa’s digital economies has already been acknowledged as crucial for the region to be able to operate in the post-pandemic new normal. The process of digitisation has many benefits for the IMT sector. One advantage is that it could mean, for example, that lenders will be able to assess risk more accurately by accessing previously unavailable digital data, allowing them to do the necessary risk assessments before they deploy capital into IMT projects in Africa. This could make a difference in allowing projects that would otherwise seem too risky to go ahead,” Yudaken says.

He notes that after the pandemic, IMT initiatives in Africa are also expected to have a heightened focus on green, low-carbon and sustainable development, via, for example, clean energy production, community care initiatives, green transport and sustainable water projects, wildlife protection programmes and low-carbon development projects.

“A commitment to ESG principles will also be a primary focus in the quest for post pandemic funding in the IMT sector, with access to capital for large IMT projects now likely to contain sustainability requirements,” says Yudaken.

“With challenges, as well as new opportunities in the sector, highlighted by the pandemic, and the success of AfCFTA relying on the seamless flow of African goods across the continent, the transformation of the IMT sector in Africa is expected to be bold, swift and extensive over the next decade,” Yudaken adds.