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Policy strangulation forces Dunlop to end tyre production


July 14, 2008/BusinessDay


•1000 jobs to go •End of 45 years of tyre manufacturing in West Africa


The groundnut pyramids have disappeared. The textile industry has been wiped out. And today, the count-down to the end of tyre manufacturing in Nigeria will be flagged off.


According to a special Business Day report, Dunlop plc, the nation’s only surviving tyre manufacturer is closing down its plant and will now import tyres from South Africa and other Dunlop factories around the world.


Impaired by persistent power outage, epileptic gas supply, rising cost and failed government policies, Dunlop plc’s board has approved a \"strategic redirection\" of the company, ending its 45 years history of manufacturing and signaling Nigeria’s further descent into economic maelstrom.


In particular, the company has suffered, like many other manufacturers in the country, from the inability of the Federal Government to solve Nigeria’s current most dangerous economic problem, inefficient power generation. This has severely crippled its production capacity.


Business Day also found that the company has for long suffered from inconsistent government tariff policies, some of which made nonsense of business plans predicated on production, a situation which placed importers of tyres at an advantage over genuine local manufacturers.


Dunlop produces both car and truck tyres in its factory at Ikeja in LagosState. This accounts for 15 percent of tyre consumption in the country. The remaining 85 percent is imported into the country by big tyre importers such as Michelin, Bridgestone, Pirelli, and Goodyear as well as imports from Asia and eastern Europe.


The move by the company is therefore seen by analysts as largely driven by a need to cut its losses. A first step is that it is scaling down on its production.


This is in order to restore shareholder value in the company after recent losses brought about by huge extra production costs, 40 percent of which is accounted for by power outages. The company currently spends about N150 million monthly to generate the power it needs instead of paying about N40 million if they had regular power supply from the Power Holding Company of Nigeria (PHCN).


In a statement released to Business Day, the company said that it had contacted the government on the twin issues of power and the uncompetitive tariff structure they face. Government is reluctant to change its tariff structure because local manufacture of tyre is not able to meet demand. But the company argued that it is nearly impossible to improve production capacity under the current climate.


With the scaling down of tyre production by Dunlop, it means in less than two years, Nigeria has moved from meeting about 60 percent of its tyre demand, which was the combined capacity of both Michellin and Dunlop to virtually nothing, which will happen when and if Dunlop finally shuts down its production.


The tariff for truck tyres had been reduced by the government from 40 percent to 10 percent. Dunlop claimed it had built its ultra modern truck tyre facility at a cost of N8 billion on the basis of the 40 percent tariff on such tyres, adding that the policy reversal of the government meant it can no longer compete with imported tyres. The plant was commissioned in 2005 but began commercial operations in 2007, coinciding with government’s introduction of a lower tariff regime.


The 1,000 job cuts planned by the firm will be a big blow for those affected, some of whom have worked in the company for many years. The losses will eventually mean a loss of 80 percent of the current staff level.


Asked about the plans for the subsidiary of the company in Delta and CrossRiver states, Pamol, Mohammed Yinusa, the group managing director of the company, said the company plans to export the rubber it produced. Only recently, the company expanded the rubber production capacity of Pamol by 6,000 to 15,000 hectares.


Just as many other firms, the company has been experiencing power outages, which it believes escalates its inability to compete with firms that engage in the importation of tyres.


In various presentations to the economic management team, the company alleged that many importers of tyres engage in sharp practices that include under invoicing and evasion of tariffs, thus making it difficult for them to compete on price in the Nigerian market. According to the company, the infrastructural deficiencies in the country make tariff policies an issue as manufacturers incur more costs than their counterparts elsewhere.


Recent increases in the price of diesel and frequent disruption in gas supply have made in-house power generation very costly, adding to the cost of doing business for the company, Yinusa said. In addition, input prices, such as the price of carbon black, a major input in tyre manufacturing, have gone up in response to the increase in crude oil prices.


Current production capacity in Dunlop, that involves the production of car, van, light truck, and truck tyres, is one million units of tyres as it is having only 50 percent capacity utilisation.


Reacting to the closure, Francis Ozonma Ozobia, chief executive of Frank Planeta Limited, said government should not stand by and watch the company close shop as this will have wider implications on safety on the roads. \"If they shut down, the campaign to encourage Nigerians to use only new tyres will fail. People will resort to using fairly used tyres and more lives will be lost in road accidents that will surely increase. I don’t think government realises this. No measure should be spared in stopping that factory from being closed. This is the real emergency. Whatever are Dunlop’s problems, government cannot just remain aloof. Those problems should be addressed to keep that factory open.


\"The manufacturing sector cannot keep up with the increasing rise in the price of diesel to power their generators. The operational environment is so unfriendly and cruel to entrepreneurs who spend their money to create wealth and employment. This state of affairs is painful and disgraceful. And until the energy sector is revived and the cost of production is brought down, we can only keep licking our wounds,\" Ozobia said.


Ausbeth Ajagu, former national council member, Manufacturers Association of Nigeria, (MAN) said that was exactly what happened to Mitchellin in Port Harcourt.


\"The problem is that their products cannot compete with products from the Asian countries because of inadequate infrastructure. One wonders how we can get industrialised when all the factors necessary for industrialisation are absent.


\"A few years ago, we had massive brain drain of our professionals like doctors. Now it is the turn of the real sector, manufacturers as many entrepreneurs have migrated to Ghana and other smaller African countries with better infrastructure especially stable power.


Unemployment will continue and the crime rate will keep on rising.


The short-term solution is the liberalisation of importation of diesel to force down the price rather than limiting importation to NNPC and a few people.


In addition, all oil companies should be made to produce a certain percentage of power and pump into the national grid rather than producing for their host communities alone.


The medium term solution is the immediate privatisation of refineries as PHCN is not just unbundling.


Also states should be encouraged to go into IPP to provide power in their states.


For the long term, Nigeria should move away from thermal power generation and use solar energy, which is the case in many parts of the developed world.


Ayo Teriba, a Lagos-based economist, said the closure of Dunlop Nigeria Limited or any mishap that happens to it will bring about huge unemployment. He attributes whatever ill wind that disrupts the company’s operations to unfair competition emanating from importation of cheaper tyres from outside Nigeria.


One other major problem that might has plagued Dunlop is the appreciation of the local currency, the naira, which has made it cheaper to import tyres from outside the country.


He is not too sure that the epileptic power supply may have been the major cause of the misfortune that has hit the company. He however agreed that the increasing cost of diesel may have been a major factor.

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