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INDUSTRIAL STRATEGY GROWS BIG AND SMALL
BY RÉHAB EL-BAKRY
Ever since the Nazif government embarked on its comprehensive industrial development program four years ago, a debate has raged over who needs support more – big industry or the little guy? One camp argues that support should be given to the nation’s largest manufacturers because they have the capacity to produce sufficient quantities of goods to move the economy, while the other camp argues that the myriad of small and medium-sized enterprises (SMEs) deserve support because they have more room to grow and are flexible enough to respond to the changes taking place in today’s global market.
According to the man in charge of orchestrating Egypt’s industrial reform program, both camps are right. Big companies have the capacity needed to grow the economy, but without SMEs to supply them they cannot fully utilize it, says Minister of Trade and Industry Rachid Mohamed Rachid.
“You need the big companies because, at the end of the day, they’re going to be your champions. They’re the ones that are going to be competing on your behalf on the international market... pulling the small and medium companies behind them, and spearheading all of the competitiveness and productivity battles in the country. At the same time, you need to support the small and medium companies because they’re the biggest job generators in any community. They allow young entrepreneurs to get into the business market and, of course, they give the momentum of growth to the community. We have tried to make it clear from the very beginning that we need to support all sizes, but at the same time we need to link all those sizes together,” Rachid told Business Monthly.
Creating these links is a priority of the Industrial Modernization Center (IMC), an affiliate of the Ministry of Trade & Industry that provides business development support to industrial enterprises to make them more competitive. IMC chairman Adham Nadim takes a holistic approach to industrial development, recognizing the important role all sizes of enterprise play in creating growth, as well as supporting one another. “It’s like a pyramid,” he says, describing the model adopted by the IMC.
A group of 700 of the nation’s biggest industrial enterprises, representing 60 percent of Egypt’s exports of manufactured goods, comprise the top segment of this pyramid. “These companies are globally competitive and already exporting,” he says. “[Now] they need to [identify] their competitors, work on their productivity and access new markets.”
The middle segment is comprised of about 2,000 factories that Nadim characterizes as “occasional exporters.” “They concentrate on the local market and, more importantly, they feed the 700 companies [at the top of the pyramid] in one way or another.”
The final group, forming the base of the pyramid, comprises around 8,000 factories. These are local companies competing for a local market share and to supply companies in the middle and top tiers of the pyramid.
According to Nadim, sound industrial development strategy requires that the pyramid functions as a unit, and that one tier does not develop faster than the rest. “There’s no sense in developing the top 700 if you don’t develop their supply chains,” he says. “The first thing a company that grows will need is to expand its consumption of goods from the suppliers. So if the suppliers don’t develop as fast and as efficiently as their demanding clients at the top tier, they will lose market share and the tier one company will start importing these components from elsewhere.”
That’s not only bad for the supplier, it’s bad for the tier one company, he says. Large multinationals are at risk of losing or failing to fulfill contracts because the SMEs that supply the components to their products are far less organized and reliable. “Somebody lower down in the pyramid, they could be [producing, for example,] a very small component in the packaging of a material, yet block the delivery of the shipment because they [can’t deliver] on time and with the needed quality. This could stop the entire shipment of a large factory worth millions.”
Helping to enlarge the supply chain pyramid while keeping it in proportion is the National Supplier Development Program (NSDP), an IMC program that supports companies at the top tier by helping those in the lower two tiers to grow and graduate to the next level. Launched in 2005, the program lets selected multinationals working in Egypt identify five to 20 of their suppliers. Nominated suppliers receive up to LE 1 million in funding from the IMC for management and technical upgrades based on the recommendations of consultants. The upgrade costs are split 80:20 between the IMC and supplier.
The NDSP aims to upgrade the productive capacity and quality of nominated suppliers to suit the requirements of their multinational sponsor. At the same time, it leverages the multinational’s experience in the market to develop and grow its suppliers, helping these SMEs to compete for international contracts. “This was exactly the role that big companies should play in any business community,” says Rachid. “They will be the ones mentoring and adapting the quality and specifications of small and medium companies to international standards.”
Unilever, Procter & Gamble, General Motors and Farm Frites were among the 40 multinationals selected for the first phase of the NSDP. Three years into the program, the companies report excellent results and are now requesting to nominate a new batch of suppliers.
The sponsored SMEs have also reported success. Product label maker Fastick, one of the suppliers nominated by consumer goods giant Unilever Egypt, has improved overall efficiency and reduced waste, according to the company’s chairman, Yasser Enan. He explains that IMC consultants identified several weak points in the company’s production line, particularly its inconsistent productivity.
Whereas previously Fastick depended on teams of two to print and verify the information on the labels – one worker printing labels and another worker inspecting them – the new production process allows one employee to do both jobs. New techniques have allowed Fastick to increase its production capacity by almost 100 percent.
The consultants also determined the time required for each step in the manufacturing process and helped to train the company’s employees to work more accurately within a set standard time. The training helped eliminate waste – both inefficiencies of time and material. “[We] eliminated any step that was not adding value,” says Enan, adding that the training reduced manufacturing waste by over 10 percent.
Enan is thankful for the consultants made possible through the NSDP, which has helped the company grow and, for the first time, export its products. “We wouldn’t have been able to finance consultants of that caliber to [develop] such a program for our [small] company.” Three year’s since joining the program, Fastick’s quality and productivity have improved to the point that Unilever Egypt has recommended it as an outsource supplier to the multinational’s other branches. It now supplies labels to Unilever Saudi Arabia and recently signed a contract to supply labels to Unilever Turkey.
Such success stories have encouraged IMC to look at ways of expanding the program. In the next stage, Nadim says, multinationals in the program may get the opportunity to nominate more suppliers. It is also expected that the program will expand to include nominations by large homegrown industrial firms seeking to improve their supply chains.
The inclusion of these local firms in the program would pose its own set of challenges, Nadim admits. He points out that local companies do not have the benefit of international guidelines for supplier quality, as their international counterparts do. “Our companies here don’t necessarily have divisions to develop their suppliers or divisions to monitor the performance of their suppliers,” he says. “They just want [components] and they want them in a [certain] quality and they don’t care how their supplier gets them.”
Here again multinationals may come into play. The IMC will work closely with multinationals already in the NSDP to develop a supplier program for large local firms. The hope is that by bringing more companies into the program the IMC can create stronger links between the top and bottom of the supply chain. But there is also the realization that the supplier pyramid is dynamic. Small companies grow to be larger, making room for others at the base of the pyramid. The key to sustainable industrial growth, says Rachid, is creating a system that facilitates movement up the growth ladder.
ADDITIONAL REPORTING BY LOUIS WASSER
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