Friday, October 8, 2010

Africa: The land of business opportunities

Africa – the first few thoughts that used to come to mind were apartheid, poverty, dictatorships, savannah grasslands and of course, lions. This perception has seen a polar shift in recent times. With an increase of 4.9% in real GDP from 2000 to 2008, Africa has experienced immense economic progress. Though still the poorest continent, it is perceived as a promising land with opportunities galore.

Why Africa?

Africa has abundant and varied natural resources ranging from diamonds to tropical fruits, gold to black gold, and other minerals and ores (like iron, cobalt, uranium, copper, bauxite). A majority of Africa’s resources are untapped even today. Given the rising prices of commodities one would believe Africa’s natural resources to be the only reason behind its rapid economic growth. However, natural resources directly account for only 24% of the GDP growth from 2000 to 2008. Many other factors have fuelled growth in Africa apart from its geological blessings.

Governance has improved drastically in Africa over the last decade. Macro and micro economic reforms along with a move to end armed conflicts have helped businesses grow. Several countries like Angola and Mozambique ended hostilities recently, creating political stability in the continent. Furthermore, Africa was able to reduce its inflation from 22% (1990s) to 8% (post 2000). Governments have shrunk fiscal deficits, decreased corporate taxes, removed trade barriers and strengthened regulatory systems. Privatisation has also played a role in improving the macro-economic environment.

Social and demographic trends in Africa are another reason for the continent’s growth. On one hand, the middle-class African consumer has emerged as a major growth driver. On the other, rapid urbanization which has led to an urban population of 40% is also a big factor. Incomes have risen steadily, 85m households in Africa have an annual income above $5000 (believed to be the point where a family starts discretionary spending). Such households are expected to increase by 50% in the next 10 years. Africa’s labour force is also expanding at the highest pace in the world. This large workforce could become a significant engine for consumption in future.

Attracted by the high rates of return, investors have flocked Africa in the recent years, increasing total capital inflows from $15 billion in 2000 to $87 billion in 2008. Companies investing in Africa not only provide capital but also bring technological and managerial know-how. Although this might harm regional players in the short term, it bodes well for long-term growth.

Booming Sectors

Global demand is likely to remain high for oil, coal and gas which account for 85% of Africa’s current resource production. With growth in African economies, the continent will have a flourishing market within itself and might not even need to rely on importers outside Africa. Smaller mining companies (Katanga Mining Company) or large companies from developing countries (Vedanta from India) seem most prepared to enter unexplored and unstable African countries. Such companies have more experience in working in developing countries and understand the risks present in setting up business in Africa.

With 60% of the world’s uncultivated arable land and low crop yields, Africa is waiting for a “Green revolution”. The continent’s agricultural output could increase from $280 billion a year today to $500 billion by 2020 and as much as $880 billion by 2030 according to a report by McKinsey Global Institute. This sector promises enormous potential to any player in the industry, be it a fertiliser/pesticides manufacturer, seeds supplier, machinery manufacturer or food processor. Although the know-how for a transformation in the agricultural sector is easily available, bringing about a change is easier said than done. The entire agricultural value chain has barriers that cannot be overcome by a single player. A comprehensive policy change with regards to supply, technology, distribution, availability of finance, better tax and land laws is the way to go forward. African governments have increased investments in agriculture and are open to involving the private sector, making this one of the most lucrative and easy to enter industries in Africa.

Consumer sectors in Africa are growing two to three times as fast as those in the countries belonging to the Organization for Economic Co-operation and Development (OECD). Spending patterns tend to change as discretionary household spending increases. Hence, consumer facing industries like retail banking, telecom, education, health-care and other consumer goods and services are expected to experience higher growth. One of the major challenges faced by such industries is the lack of infrastructure. So, companies entering Africa need to come up with innovative strategies for sales and merchandizing. Also, just like in India, companies cannot afford to concentrate only on the high-income segment of customers.

Africa has the distinction of being the first continent in the world where cellular telephony outnumbered the fixed line network. In recent years, Africa has witnessed massive reforms and development in the ICT (Information and Communication Technologies) sector. Mobile penetration is 42% while internet penetration stands at 8%. It comes as no surprise that Bharti would look attentively towards South Africa and make an all-out attempt to participate in the budding market.

A comparison of Africa with BRIC countries in terms of infrastructure reveals that the former lags far behind. The BRIC’s power consumption is twice that of Africa’s and road density is five times that of Africa. According to World Bank estimates, Africa needs an investment of $118 billion a year to cover its backlog. This need for infrastructure has implications for African governments as well as private players all over the world. Currently, 65% of infrastructure funding comes from the continent’s governments. In order to increase growth, governments would have to encourage the entry of private players in this sector. Although private investment has been growing at 13% since 2000, minimal support from the government and prevalence of unhealthy trade practices have discouraged private companies from entering the market.

Should I ...

Companies which wish to enter Africa should plan to build their consumer base in a range of African countries. Since nations vary widely in terms of stability, profitability and risk characteristics this strategy will help in hedging a company’s risks. The company could benefit from good infrastructure in a relatively developed country like South Africa and provide services across the continent, cashing in on the high growth in undeveloped countries.

Companies that engage in socio-economic development in Africa seem to perform better. Investing in communities by building plants, creating job opportunities or encouraging entrepreneurs help a company in establishing a stronghold by building a good rapport with consumers and governments.

.. or should I not?

Most companies take the rosy pictures of growth and potential opportunities with a pinch of salt. African countries differ greatly in their individual circumstances but the problems plaguing them are very basic and similar. Poverty, high mortality rates, unstable governments leading to frequent breaches in peace, highly unstable economies are few of the plethora of problems faced. Regulatory challenges also form major barriers to entry for companies. Most government processes are inefficient and involve extensive paperwork. Also, rules and processes are unclear and implemented badly, leading to corruption.

A few countries like Mozambique have started marketing themselves proactively. The president of Mozambique was in India recently, promoting his country as an economically and politically stable nation in order to encourage investments. International institutions have played an important role in bringing about peace and reducing mortality in the continent but most countries still have a long way to go.

References: Lions on the move: The progress and potential of African economies – McKinsey Global Insitute

1 comment:

  1. Rwanda reaches out to Indian businesses: