‘Our backward integration investment aided cost leadership, hedge inflation’
Pawan Sharma is the Chief Executive Officer, Consumer Goods Business, Tolaram West Africa. It produces Indomie Instant Noodles, Hypo, Power Oil, among other consumer goods. In this interview with FEMI ADEKOYA, he talks about the group’s backward integration plan and efforts to improve local sourcing of raw materials.
Having being in operations in Nigeria for several years, can you give an insight into the group’s backward integration plan?
This business started in 1996 from Otta, Ogun State. Our first factory was erected in 1996 and since then, we have been involved in a lot of backward integration. As of today, we have more than 15 manufacturing plants all over Nigeria. Out of those plants, only three are producing noodles. We have factories designed to produce packaging materials, refined crude palm oil and flour. We are working with three flour mills. One is in Apapa, another in Aba and Port-Harcourt. In recent time, we are exploring backward integration in terms of palm oil plantation.
As we know, government is giving a lot of push on going into agricultural products and reducing imports. As of today, most of us in Nigeria, including those in palm oil industry are importing crude and refining it here. Now, government is giving a lot of support to put up plantation in the country so that we can have our own crude oil rather than importing.Recently, we acquired land in Edo state and we are starting plantation in that region. Government is helping by providing low interest loans through the Bank of Industry so that Nigeria can take its place as the leading producer of palm oil.
What is the present percentage of local raw materials sourcing?
As of today, the only raw materials we are importing is wheat. This is because Nigeria does not produce wheat as against what it consumes. Nigeria consumes four million tonnes a year in terms of biscuit, bread, noodles and any other thing you can imagine made from wheat flour. But the country produces only 100,000 tonnes of wheat in a year. Can you imagine the gap between demand and supply? In wheat production, there is a challenge because of the certain temperature requirement needed for it to grow. In Nigeria, the cold weather is not there except you go to the Northern side—Jos or Plateau State and that is also for a very short period. So, even if there is an intention to grow wheat in Nigeria, it is very difficult to reach 4million tonnes a year. Government needs to do more to support the industry if they want wheat to grow in Nigeria. Scientists may also come up with new solutions.
So, it depends on how you see it. As a manufacturer, I buy my flour from Flourmills of Nigeria, even though Flourmills imports its wheat and mills it locally before selling. If I am buying my flour from Nigeria, that shows that I am sourcing locally even though the millers are importing it. Directly, I am sourcing locally but indirectly, I am importing my raw materials.
So, I could say we are sourcing all our raw materials locally due to our investment in backward integration. However, if we consider that the major raw material—flour, is imported for milling in Nigeria, I could say that our local sourcing is 30 per cent.
What are the challenges experienced while embarking on backward integration?
We are not facing much challenges because we have already done most of it. That was why we invested in the different value chains like packaging, palm oil refinery and flour milling. Our core business is to produce noodles but these are all raw materials that we need. All these backward integration efforts help us to become cost leader in the market. Attaining cost leadership in the market has helped us, as our product is one of the products that we have taken least consumer price increases in the last 20 years that we have been in operation. Even if you compare with the local food like Garri in the last 20 years, the price of noodles is not as high as that of Garri or any other product. The reason we are able to achieve this is backward integration.
What is the cost profile of your backward integration investments?
That will be cooking oil and wheat flour as those are the major ingredients needed for production. Other than that, we have the taste maker that gives us the unique taste of indomie noodles.In the last 10 years we have put up a palm oil refinery that was expanded from the 500 tonnes a day to 1,500 tonnes. We invested more than $40 million. We also put up the flour mills that was worth N2.5 billion. We also put up a packaging plant where we produce the flexible wrappers and that cost another N2billion. These are our investments in backward integration.
Movement of goods appears to be challenging for many businesses considering the state of many roads and gridlocks. How are you dealing with it?
It is very difficult to transport your goods from one place to another, especially if your shipping from Otta factory to a long distance. The situation with the road network is not that great and the kind of volumes we move, we cannot depend on any third-party transporter. What we did was to backwardly integrate that aspect of the business by having our own haulage company in the name of Blackwood House Nigeria Limited. That is our logistics arm. We have about 1,200 trucks in that arm that does our logistics business, moving the goods from factory to the markets.
What informed your acquisition of land for palm oil?
We are forced to go into agriculture sector to aid raw material sourcing. We are a heavy user of palm oil products but the country does not have enough crude palm oil because no one else is doing new plantations because of the tenor. In terms of economic impact, palm oil consumption in Nigeria is about N700 billion or $2 billion a year. Out of the two million tonnes consumed locally, the country can only produce 600,000 tonnes and that brings a shortfall of 1.4million tonnes. The bulk of that deficit is being smuggled into the country and government is losing revenue on that. If different industries can come with the plantation exercise, then, we don’t have to import anything and government will save foreign exchange on it, even as it becomes raw materials for many industries.We have taken about 18,000 hectares of land and we will be doing plantation in phases.
What are your expectations from the administration in the next four years?
Government has been very supportive, especially in the free trade zone and provision of funds from BoI. Government is doing its best for the manufacturing sector. The other thing is the prohibition list of some raw materials that are not locally available, like the crude palm oil. I believe policies as such should be implemented in phases by pushing for plantations before removing access to forex. The country does not have the plantation size yet.
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