Dangote Group is one of the most successful companies in Africa. It has the operational quality and scale to compete and win markets. It is an industrialized conglomerate. And it has one feature every major global conglomerate has: it taxes the economy. I will explain three ways conglomerates tax economies. It is a good thing when you have many of such companies, because at the end, the net effects are always positive.
Conglomerate Tax: Nations
Dangote wants to invest excess of $1 billion in rice farming. It is moving heavily into agriculture and agro-processing deploying its management philosophy which is to vertically integrate any business. So, the vision begins in farms all the way to food processing thereby giving it the opportunity to extract any possible efficiency along the chains. That helps it to set competitive prices, and with its scale, that creates a moat for any competitor to overcome. When it perfects all the value chains, you have nothing left to improve and that means, you cannot find an opening to enter. The rice farming begins from Kogi State, as noted in a newswire Tekedia received.
A multi-million Naira Youth Farming Initiative that will engage teeming unemployed Nigerian graduates in rice farming has been launched by the Dangote Rice Limited in Kogi State. This is even as the Company prepares to hit the market with One million metric tons of Dangote rice in 2018.
The Dangote Youth Rice Farm project, mainly an out-grower scheme for youths only was flagged off at the Lower Niger River Basin Authority, Kampe, Ejiba in Yagba West local government area of the state where youth have embarked on rice cultivation over 100 hectares of land. The rice farm project, which was preceded by a special training for the youth farmers on the dynamics of the rice farming, will see the youths cultivating the rice paddy on a 100 hectares of land, which will then be bought over by the company for processing.
Under the scheme, the Dangote Rice Company provides the seedling, anti-pest-chemicals, and fertilizers while the Basing Authority provided the land for the young farmers.
The Kogi state scheme will be launched in more states soon. As noted in the press release, the Basing Authority will provide the land. That means Dangote Group will not have to pay for it. There is nothing wrong with that. He is investing to provide food security, provide youth employment and also improve the communities. That is what conglomerates do because they are the best creators of jobs, at least in short terms. While the state can plan to sell the land and invest the proceeds in startups, it may take years before those startups can generate the kind of employment and economic activity a conglomerate like Dangote can deliver in a year. For having that capacity, conglomerates tax nations. In other words, you have to subsidize their businesses through government supports for them to help you fix your pain points like unemployment as a government. They operate at the upstream level where the pain points are massive in the operations of governments. Their reward is Conglomerate Tax: the subsidization of their business operations due to their capabilities to help support government initiatives at scale.
Please note that Conglomerate Tax is a global thing. U.S. government may waive taxes for GE but will not listen to Facebook because GE is a conglomerate. They are treated differently because they technically build nations. Government may have the money but may also need a special plastic for a new warplane. There are few companies that can deliver such products. So, a government may engage a company like GE to research and develop the plastic. The company can ask for concessions to take that risk. Those concessions are taxes to nations since the nations must still buy the plastics if the conglomerate succeeds.
Conglomerate Tax: Businesses
Another way conglomerates tax the economy is through their capacities to exert influence on practically any part of the economy. If you are building a major house, the possibility is that you may be using Dangote Cement. Largely, the conglomerate taxes the construction industry which as they scale and expand, Dangote Cement takes a cut in whatever they are doing because it is the industry-near monopoly in cement. You can also be in bakery, requiring flour from Dangote Flour; as your business empire expands, there is a tax from the industry-leader on your business. There is nothing wrong with that. That is how conglomerates operate. They make critical infrastructure investments which help to unlock values and opportunities in markets. The reward is that they become centrally critical that everyone depends on them to operate. The implication is that they tax those sectors usually operating at the downstream level of the business.
Companies must develop and accumulate capabilities in order to compete in the market place. In this video, I explain how any firm can do that and why accumulating capability is very strategic. From Google to Dangote Group, when companies accumulate capabilities, they see themselves operating in the segments of markets with higher value (usually upstream) compared with where their competitors operate (usually downstream). Dangote Group can deploy massive assets and technical know-how in cement production, making it harder for new entrants and rivals
Interestingly, conglomerates tax themselves also. But that is the brilliance of their business models. Dangote Fertilizer will begin operations next year. Its biggest customer will likely be Dangote Rice which will quickly stop buying fertilizer from other sources to buy in-house. The implication is that Dangote Fertilizer will be a customer to Dangote Rice, removing any market risk associated with external demand. Simply, even if there are no other buyers, Dangote Rice is a ready buyer for Dangote Fertilizer. And as Dangote Rice expands across Africa, Dangote Fertilizer will mimic its trajectory. It can be making 10-20% margin on that business: call it the tax on Dangote Rice.
For all the talks of startups, the reality is that nations need conglomerates because their sizes help them make critical investments. For example, Dangote Refinery can help fix some challenges in the transportation sector through efficient supply of fuel in the economy. When you have many of them, your economy does better. That means, you have companies with capacities to tackle serious market challenges. Yes, as conglomerates do so, they get huge rewards: they become tax collectors on the economy.