Key Elements in Management of Free Zone Enterprises
By CHRIS OKWY NDIBE
In the early part of this blog , we posted the definition of Free Zone to enable us be on the same page with our numerous readers, including those who are just beginning to hear and know about the Free Zone concept.
In Africa, there are many successful enterprises built around free zones. I was impressed with what I saw with the development of such enterprises in Mombasa – Kenya, Tema – Ghana and combination industries in Calabar, Nigeria. Also the enterprises in the IDZs of South Africa are legendary.
The key factors in an enterprise operation are basically the same all over the globe and some of them include:
– Applying the best cost strategy
– Adapting to change in the global Economy
– Persevering in the obstacles
1. APPLYING/MAINTAINING THE BEST COST STRATEGY: this is one of the first among the many elements that drives a company into looking for a free zone. It is also one of the conditions that drive the incentives of host government. The whole idea is working towards being able to compete at the international markets as well dominating the market, where possible.
Many multinational enterprises have sought relocation to a Free Trade Zone or Special Economic Zone when they cannot maintain low cost competitive edge of their products with the many zones world over and about 700 in Africa, a company selects a zone based on some reasons that will at the end enable it achieve its objective of competing favourably at the international market.
Some of the conditions are:
– Proximity to the customers targeted
– Low cost labour and availability of a good labour pool
– Competitive duty rate structure
– Well managed Free Zone offering specific services to support start-up companies – availability of ‘shelter plan’. A country in Southern Africa once paid for the relocation of a plant from where they were coming from and took up the labour cost of the employed locals for two years to enable the company adjust.
– Security: this has posed a lot of problems to companies especially in the developing world and has to be a fundamental factor in any enterprises decisions – making process. Enterprises must heighten their security; reviewing their long-term; and evaluating other alternatives. In my consultancy services, I have recommended this to zone manager/developers. The levels of security in zone rub off on the companies in the zone.
2. ADAPTING TO CHANGE IN THE GLOBAL ECONOMY: The new environment may not be easy especially at the speed at which the world is moving.
Countries and companies strategies change overtime in response to progressive business developments. Therefore the decision of companies to locate into a Free Zone is driven by the conditions that were lacking where they were.
Some of the considerations that should be top most in the mind of any company looking into a Zone, among many, are:
– Stable and corrupt free government
– Outstanding economic bureau (EDB) staffed with competent professionals. Supports from EDBs are always helpful.
– Availability of training scheme for new employee of foreign enterprise;
– Special conditions/incentives
– Excellent infrastructure along with one of the world’s best communication networks and sea ports
– Educated labour pool: skilled, experienced management and technical people.
– Living conditions for expatriate in terms of housing schools, medicals, food etc.
Another aspect of adaptability is changing objectives based on the experience overtime. A company can start with the objective of being a “LOW-COST PRODUCER” and overtime maybe modified to become the “BEST-COST PRODUCER”.
Having the lowest labour cost is only a small aspect of the challenges. Coming to terms with the costs of the Free Zone operations requires quantifying the following:
– Total Labour Cost – including productivity
– Total cost of quality
– Total cost of expatriates
– Recruitment expenses
– Training expenses
The ability to understand and manage the business of the enterprise around these elements will lead to “Best-cost producer” enterprises.
Another area of adaptability is, as host government move into new economic development scheme, so should the companies inside the zone change to adapt. Government changes will involve incentives, policies, training and Research & Development, investment programmes to support the rapid global changes in technology-telecommunications, electronics, aerospace, and high tech research parks which are the priority of today.
Adaptability is one of the most underestimated factors in the management of the enterprises in a zone. It has immensely posed difficulty in transferring know-how and technology for start-up business. Transfer of technology and knowledge fail because of these primary reasons:
– Languages and cultural differences.
– Expatriates not knowing how to work effectively in the foreign environment.
– New employees lacked any industrial experience.
– Constant turnover of employee. This places a huge cost in terms of productivity, quality, training and profitability. The associated management frustration to this is high. There are a number of external factors contributing to turnover problems, especially with regards to young ones and first time employed coming from neighbouring towns and cities:
– Inadequate and limiting housing
– Security for women
– Poor public transportation
– Availability of day care for children
– Culture of strong family ties which always resulted in an average of high percentage of new employees not returning after going home for Christmas.
All these can be taken care of by “shelter plan” of zones. Shelter plan is a valuable service zones can provide their foreign clients to cushion some of their problems.
3. PERSEVERANCE IN THE OBSTACLES: This is one key factor to be given consideration by both zone operators and enterprise managers. This has to do with languages, cultures, economic and political differences. Persevering in spite of the obstacles, opposition and discouragement is critical.
Example of these obstacles, opposition and discouragement could be:
– Release or clearing of goods arriving at the port of entry
– Constant inspection of warehouses and residences by the police and custom officers.
– Power and water disruptions at regular intervals
These factors could cause significant drain on management time and clearly impede the efficiencies of companies which are not to the best interests of the zones and host country. With steadfastness such as changing the mind-sets, sustaining the work expectations, dealing with the outside interference, which are very time consuming, a company can still achieve its goal in spite of these aforementioned challenges.
The above information articulated is aim to be a guide to both zone operators and investors, as well as consultants. Also can be used in evaluating the effectiveness of zones services and incentives in today’s rapidly changing global economy, more so, now that the scheme is moving to “Free Zone of the Future” initiative.
CHRIS OKWY NDIBE
Is the Executive Secretary (AFZA)
And the CEO, thefreezoneblog.com