Neil Balchin (Research Fellow, ODI)
11 June 2018
This blog is part of our ‘Making Firms Work’ series. Read other blogs in the series: on Tanzanian textile manufacturer A to Z, Nepali ICT firm CloudFactory and Kenyan garment firm Hela.
The presence of Midal shows that clustering around megaprojects can help build manufacturing in Mozambique, but very specific factors – including, in this case, Mozal’s decision to sell molten aluminium locally – can play a key role in determining success. Examples such as Midal, with its direct linkages to Mozal (the largest company in Mozambique and one of the country’s most prominent megaprojects), show how megaprojects can support economic transformation and job creation in Mozambique. Transforming the economy will be critical for Mozambique to address short-term macroeconomic challenges and create much-needed jobs in a sustainable way.
The product of an initial $65 million investment, Midal Cables International Limited is a local subsidiary of Midal Cables Limited, a multinational headquartered in Bahrain with a production footprint spanning Saudi Arabia, Turkey and Australia (and now Mozambique). After signing a deal with Mozal in 2013, Midal commenced production in Mozambique in December 2014 and began exporting in January 2015. The company’s 14,500 m2 plant is situated adjacent to Mozal in Beluluane Industrial Park, a duty-free zone in Matola, about 25 km north-west of downtown Maputo.
Midal produces aluminium rods, wire and conductors primarily for export to Europe (Spain and Italy) and Africa (including Kenya, Namibia, Nigeria, South Africa and Tanzania). The company’s current annual total production capacity is in the order of 50,000 metric tonnes. Around 98% of this is exported, with only a small volume going to the domestic market. On average, Midal produces 4,200 metric tonnes of aluminium rods each year, mostly for export to Africa and Europe. The wires and conductors the firm produces are primarily exported to other Southern African Development Community (SADC) countries to support electricity transmission and distribution, with a strong focus on rural electrification.
Midal’s presence is important for economic transformation in Mozambique. It is the first firm operating in the country to add value to the aluminium produced by the Mozal smelter and represents an important step towards higher value-added industrial production. Examples such as this show how private firms can support economic transformation; and in some sectors these contributions can be enhanced through effective public–private collaboration.
More of this is needed to help spur diversification into higher-productivity industrial activity and manufacturing. Despite strong growth of 5–7% annually over the past decade, little progress has been made in altering the structure of the economy and accelerating job creation. Manufacturing still has a peripheral role in the economy, absorbing just 0.6% of the labour force and accounting for less than 10% of total gross value added (down from 29.7% in 1975).
A recent survey shows that, while there are some positive signs of the persistence of Mozambican manufacturing firms, growth among these firms has been limited and some have shrunk over the past five years (particularly those operating in the textiles, wood, metal, machinery, furniture and other manufacturing sectors). Many manufacturers have closed in the face of an increasingly challenging business climate aggravated by political conflict and a subsequent economic crisis. A significant share of the remaining firms are unprofitable, particularly in Tete and Nampula provinces. Very few Mozambican manufacturers are exporting – just 19 out of 520 firms (or less than 4%) surveyed in 2017. Job losses have also been significant, with more than 5,000 shed across the surveyed companies between 2009 and 2017.
Even amid this turmoil, Midal has managed to grow a manufacturing base and create jobs. The firm currently employs 142 people directly in Mozambique, and it is estimated to generate employment indirectly for more than 1,000 people as service contractors. Creating more jobs is critically important given that Mozambique faces a looming jobs crisis and an ongoing debt crisis. Approximately 420,000 young people enter the labour market each year and formal employment needs to grow substantially if they are to be absorbed into jobs. Generating new employment on this scale will require a different focus towards economic transformation. SET’s Making Firms Work series showcases firms that are generating large-scale transformational jobs in Kenya, Tanzania and Nepal.
Midal, with its linkages to Mozal, offers a model for manufacturing development that can potentially be upscaled and replicated, but it is important to understand the details behind these inter-firm relationships.
A set of four specific circumstances encouraged Midal to establish operations in Mozambique. First, geographical proximity to Mozal’s aluminium smelter – the largest of its kind in Africa – promised ready access to a key input: good quality molten aluminium.
Second, the Midal Group was attracted by strong regional growth in Africa. Locating in Mozambique provided further advantages in terms of supplying major electricity transmission projects within the country and elsewhere across the SADC.
Third, the prospect of exporting duty-free to certain African countries as well as the US (under the African Growth and Opportunity Act) and the EU (through the Everything But Arms initiative) provided further motivation.
Finally, Mozambique also offered electricity and gas (although the reliability of the supply remains an issue), an important factor given the firm’s energy-intensive production processes.
However, since Midal began operations, other aspects of the business environment have proven problematic. Midal believed that proximity and access to Maputo Port would mean it would be able to export cheaply. However, the firm’s initial cost assumptions were overly optimistic and logistics costs associated with the use of Maputo Port remain very high. These costs are said to surge to $800 per container once customs and other expenses have been factored in. The alternative option, using the port in Durban, is equally costly owing to the need to transport products over more than 600 km to get to the port.
Despite these challenges, Midal’s presence in Mozambique is a compelling example of what can be done to grow the country’s manufacturing base. It shows how clustering around megaprojects can help develop local linkages and downstream activity as long as specific business and pricing factors are supportive. This suggests an important role for government, not least in setting up a conducive framework for megaprojects and for locally based upstream or downstream firms to interact effectively with such megaprojects.
This blog has been adapted from a previous version.
Photo credit: Midal cables