FSD UgandaRebooting the Manufacturing Sector Post the Covid-19 Pandemic: A Case for the Platform Economy
By Joseph Lutwama
Taking Stock
In the manufacturing sector, the Covid-19 pandemic came with a mixed bag of fortunes. The pandemic presented an opportunity for some industries and catastrophe for others. Industries producing accessories related to the pandemic and those producing necessities like processed foodstuffs were not severely affected as they continued to operate[1]. However, those that rely on global supply chains for their industrial inputs were severely affected as the economic lockdowns across the globe made it very difficult to easily access imports[2].
With the pandemic on its way out, how do we build the ruins into a more resilient manufacturing sector?
Most of the recovery initiatives have focused on short-term stimulus packages to keep the manufacturing industries afloat. However, a lot more emphasis needs to be placed on setting the right foundations that will ensure long-term sustainability and resilience to future economic shocks such as the one occasioned by the Covid-19 pandemic.
The State of Manufacturing in Uganda
What makes most manufacturers vulnerable to economic shocks is their size and individual production capacity that makes it difficult to adjust and adapt in the face of economic disruptions. Obwona et al[3]. in their research on the evolution of industry in Uganda note that eight out of every ten manufacturers employ less than 35 people and nearly five out of every ten employ less than 10 people.
Most of the manufacturers are small cottage industries heavily reliant on savings and informal credit from family and friends. In cases where they can access formal credit, it is limited in tenure and amount, usually not exceeding a year or two and small amounts ranging from US$100 to US$3000. Such terms leave no wriggle room for one to undertake long-term investments to build a strong foundation to cushion against economic shocks.
The Platform Economy: An Anti-Dote to the Vicious Cycle of Vulnerability
So then are these manufacturers doomed to a vicious cycle of vulnerability to economic shocks? I believe the platform economy has the anti-dote to this vicious cycle of vulnerability. The platform economy harnesses the power of technology platforms to transform micro and small manufacturing entities into viable and profitable business units with the capacity to grow into medium and large business ventures. There are three building blocks of the platform economy; aggregation, a supply-chain approach and technology.
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- Aggregation looks at the ability of technology platforms to aggregate small economic units into large collective business ventures which results into economies of scale and scope. Economies of scale in the sense that the small manufacturing entities can produce at scale what previously was unimaginable as individual units. One thousand producers of honey collectively can produce honey at scale enough to compete for the large honey markets with much higher returns on investment in both the domestic and export markets. Economies of scope make it possible for the manufacturers to receive a variety of services and products at a much lower unit cost. Some of these services are provided as a shared service across all the platform participants thereby spreading out the cost.
A clear path to scale allows these small manufacturers to consistently grow their business savings, providing them with a solid track record to access more reliable and affordable credit from formal Financial Service Providers (FSPs). It is these financial savings and formal credit that will provide a cushion in the event of an economic shock thereby building resilience within the business.
- Aggregation looks at the ability of technology platforms to aggregate small economic units into large collective business ventures which results into economies of scale and scope. Economies of scale in the sense that the small manufacturing entities can produce at scale what previously was unimaginable as individual units. One thousand producers of honey collectively can produce honey at scale enough to compete for the large honey markets with much higher returns on investment in both the domestic and export markets. Economies of scope make it possible for the manufacturers to receive a variety of services and products at a much lower unit cost. Some of these services are provided as a shared service across all the platform participants thereby spreading out the cost.
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- The supply chain approach facilitates and promotes specialization among small manufacturers as they can only focus on one or two products if they are to maximise returns from a particular supply chain. These small manufacturers are used to engaging in a wide variety of products and services which they keep changing from time to time. While this may be a great strategy to ensure survival as a small business, it is not attractive to formal financial institutions as it does not create a clear path to growth and long-term sustainability. It only keeps them small as they never produce a product long enough to gain mastery and specialty which are critical ingredients of growth and scale.
Operating in formal and organized supply chains (which technology platforms provide) forces these small manufacturers to focus and organize their businesses for scale and growth as they are now required to specialize in the production of specific products. This not only increases their access to formal financing but also reduces their financing risk. Being part of a formal and well-organized supply chain reduces the individual financing risk of a small manufacturing as their overall risk is spread out across the other more financially sound large supply chain actors.
- The supply chain approach facilitates and promotes specialization among small manufacturers as they can only focus on one or two products if they are to maximise returns from a particular supply chain. These small manufacturers are used to engaging in a wide variety of products and services which they keep changing from time to time. While this may be a great strategy to ensure survival as a small business, it is not attractive to formal financial institutions as it does not create a clear path to growth and long-term sustainability. It only keeps them small as they never produce a product long enough to gain mastery and specialty which are critical ingredients of growth and scale.
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- Technology is the third building block of the platform economy which connects all the dots of the platform economy. It facilitates the interactions among the platform participants in ways previously unimaginable in a physical environment. Technology is more efficient and cheaper as it enables interactions and transactions across a multitude of participants in real-time which otherwise would take days or months to accomplish at a higher cost in a physical environment. Technology not only enables efficiency gains and higher productivity (all critical to achieving scale and growth) but it also increases accessibility to finance at a much lower cost.
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A Parting Shot
Technology platforms, that can crack the puzzle of crafting the right business model, that brings together the different actors on to the platform, to harness the economic advantages highlighted above, present an immense opportunity to increase access to formal finance. These platforms are also a path to long-term sustainable growth for the manufacturing sector in Uganda – a sector that is more resilient to economic shocks, adaptable and responsive to the ever changing and disruptive domestic and global markets
REFERENCES
[1] https://www.ubos.org/wp-content/uploads/2020/06/Impact-of-COVID-2019-On-the-Ugandan-Economy692020.pdf accessed on 23/06/2022
[2] ibid
[3] https://www.brookings.edu/wp-content/uploads/2016/07/L2C_WP9_Obwona-et-al.pdf accessed on 23/06/2022
