Competing for African markets: Strategies to win new business now

By Harry G. Broadman

Harry Broadman is PwC’s chief economist and leader of the firm’s Emerging Markets practice.

From a business perspective, Africa is on the move. While the US and Europe attempt to recover from the bruising one-two punch of the 2008 financial crisis that engendered a deep cyclical drop in output, incomes, and job growth—and exposed the fragility of the Eurozone—sub-Saharan Africa has sustained average GDP growth rates of more than 5 percent. The trend of strong economic growth in sub-Saharan Africa—which dates back two decades—allowed the continent to better withstand the effects of a trough in the global business cycle. In fact, the International Monetary Fund predicts that between 2011 and 2015, seven of the world’s top 10 fastest-growing economies will be African.

Longer term, the African Development Bank forecasts average annual growth of more than 5 percent over the next 50 years. So, how do savvy multinational companies (MNCs) share in the vast potential of this largely untapped market? By complementing normal business practices with innovative approaches. As emerging market expert and Africa authority Harry G. Broadman contends, successfully exploiting the market opportunities and mitigating the risks in Africa require a business model that marries local know-how with new global strategies that leverage stakeholder relationships both on the ground and around the world.

The future for Africa has never looked brighter. Over the next several decades, sub-Saharan Africa will continue to attract the highest rates of foreign direct investment (FDI) inflows per capita of any developing region.1 Business case studies on the continent suggest that risk-adjusted returns for new investors on the continent have never been higher.

Perhaps counter-intuitively—since most US and EU companies still think of Africa as only a natural-resource commodity play—growing consumer demand, including at the retail level, is becoming the main catalyst for this investment bonanza. By 2030, countries in Africa with large populations—such as Ethiopia, Nigeria, and South Africa—could spend as much as $2.2 trillion on consumer goods, about 3 percent of worldwide consumption.2 Trade with Africa has been steadily on the rise: Between 2000 and 2010, trade between African countries and the rest of the world increased by 200 percent.3

Today, there’s real muscle behind the “trade, not aid” refrain. In 2011 alone, trade exceeded aid by $7 billion.4 Social venture funds, which used to be seen as pioneering in Africa, have increasingly become routine, combining the best elements of aid and trade to invest in health, sanitation, energy, housing, and agriculture in Kenya, Tanzania, Uganda, Rwanda, and Ghana.

As Ann MacDougall, Chief Operating Officer of the Acumen Fund—one of the more innovative social venture funds—recently noted, “We invest in sustainable, scalable businesses that illustrate both financial and social impact.” She explains, “We use the term ‘patient capital’ to describe our long-term objective. Entrepreneurs have up to 10 years to achieve financial sustainability—and, hopefully, lasting social impact.”5

Even Bob Geldof, who founded Band Aid and Live Aid in the mid-1980s to raise money for Africa, now heads a private equity fund looking to invest $450 million in African agribusiness, financial services, and telecommunications.6 In fact, access to high-growth economies with large populations, rising affluence, and the potential for innovation makes a presence in African markets essential for many companies. This is especially true for the consumer goods, telecommunications, and financial services sectors—industries that many multinationals don’t typically associate with Africa.

The shifting global business landscape

Despite the data, not everyone has jumped on the Africa bandwagon. Surprisingly, among many of the most sophisticated international businesses and investors—even some of the keenest of the geopolitical Africa-watchers—there is scant recognition of its growth.

However, as American and European companies look for new global growth opportunities, they are beginning to reverse long-held views about Africa. In fact, 74 percent of respondents to PwC’s 16th Annual Global CEO Survey said they expect to expand their operations in Africa going forward.7 (See Figure 1.)

Figure 1: Global CEOs see explosive growth in Africa

As Maria Ramos, Group Chief Executive of financial services company ABSA Group Ltd., South Africa, a division of the Barclays Group, says of her global clients, “The question we get asked all the time is ‘Can you help us do business in Africa?’”8 The question is straightforward, but oftentimes the answer is not.

A growing number of African countries are distinguishing themselves from other emerging markets with newfound resilience to global economic shocks. They are also standouts as major targets of MNCs from other emerging markets, for example, Chinese and Indian businesses that invest in Africa. This trend reflects the explosion of so-called “south-south” commerce, a term used to describe trade and investment between emerging economies, in contrast to the traditional “north-south” pattern of commerce, that is, multinationals from the advanced countries (for example, the US and EU) investing in emerging markets.

Although many African countries have made greater strides in economic, social, and political reforms over the past two decades than most investors realize, they continue to be dominated by nascent institutions, weak governance structures, poor infrastructure, and underdeveloped health care and educational systems.

Which means doing business successfully in Africa will involve innovative approaches to identify rapidly emergent—but not yet fully apparent—new market opportunities. Those include competing with non-traditional MNCs, leveraging national-level and regional markets to find economies of scale, and nurturing local talent.

Africa’s resilience

The steady evolution of Africa’s political reform progress is among the primary reasons behind Africa’s economic resilience. Over the past 20 years, the number of democracies in sub-Saharan Africa has increased almost eight-fold.9

In Ghana, for example, the transition of power from the recently deceased president occurred without incident. A stable democracy, Ghana has held peaceful elections for more than a decade. But Ghana is not alone. With several decades of multi-party democracy under its belt, Botswana has made huge progress in fighting corruption. And recent tax reform in Rwanda has decreased tax preparation time with a lower total tax rate and fewer total payments.

As depicted by the World Bank’s Doing Business Index (DBI), 36 of 48 economies in sub-Saharan Africa have enhanced their business environments over the past year. And since 2005, the average DBI throughout the region has more than doubled.10 Part and parcel of these changes is greater economic diversification; for example, resource-rich countries like Gabon, Nigeria, and Angola have begun significant growth in their technology, services, and manufacturing sectors to reduce their dependence on commodity prices.

Benefits of south-south commerce

While companies from the US and Europe have a decades-long tradition of investing in Africa—90 percent of the existing stock of FDI accumulated in Africa originates from companies based in the “north”—Chinese and Indian multinationals and other businesses from the “south” now dominate the rates of new flows of FDI into Africa.11

Africa’s south-south trade flows are also growing rapidly. India’s two-way trade target with Africa is $90 billion for 2015, up from $3 billion a decade ago.12 China, meanwhile, is now Africa’s largest trading partner, having surpassed the US in 2009. Bilateral trade between China and Africa tallied $160 billion in 2011, up from $10.6 billion 10 years ago.13 (See Figure 2.)

Figure 2: Exports to emerging economies 2012*

Technology has played a role in this new wave of “south-south” commerce. Up-to-the-minute tracking of raw materials and finished products allows companies to import raw materials from one destination, process them in another, and then ship them to a third. Ghana and Kenya already have a reputation for apparel manufacturing while Tanzania specializes in food processing, and South Africa is well known for manufacturing automobiles.

As noted by Hussein Hachem, CEO, Middle East and Africa, for shipping and logistics company Aramex, “In the next three to four years, we will have active operations in at least 20 African countries. Many multinationals are talking about coming to Africa, but not many are moving into Africa. I think that will change. Because of the economic situation in Europe and in the US and because of China as a major trade partner with Africa, people will invest more in Africa so they can capitalize on that trade route.”14

Of course, “northern” companies with an established presence in Africa are also beginning to reap rewards. General Electric (GE), which had a sales office in South Africa more than 100 years ago, began actual operations on the continent about a decade ago. It is now in 22 countries and expects to grow approximately 15 percent a year in Africa over the next few years, given the continent’s infrastructure needs.15 The World Bank estimates that sub-Saharan Africa needs to spend $93 billion a year on infrastructure over the next decade.16

New market, new business model

The complexity of Africa often requires turning conventional thinking on its head, as illustrated by South Africa-based Shoprite, the largest food retailer on the continent. Shoprite has expanded from eight supermarkets in Capetown in 1979 to 1,500 stores in 16 African countries today, thanks in large part to an automated supply chain that leverages centralized procurement—resulting in reduced costs and improved service levels.17

Gerhard Fritz, Divisional Manager for the Shoprite Group of companies, says, “What works in other parts of the world may not work in Africa. People in Africa have a proud heritage; they don’t take kindly to others coming in and telling them what to do. Our perspective is to think of every business as local. For example, Shoprite in Nigeria is a Nigerian business. We run and compete as a Nigerian business; we follow the local culture in every part of the company.”18

Indeed, despite high food and fuel prices, consumers in Africa continue to spend; the growing middle class has boosted consumption, residential construction, and private investment.19

Brimacombe notes the importance of understanding local participation, saying it’s “part and parcel of working with subdistributors and sub-subdistributors.”20 Sometimes, the route to market is a 150-pound man hefting a 100-pound bag of rice on his shoulders; other times, a makeshift delivery cart consists of a bicycle balancing buckets of chocolate paste that Tiger produces in Cameroon as a spread for bread.

Understanding on-the-ground sensibilities allowed SABMiller to compete more effectively on price terms with locally made products. While the South African brewer competes with global brands in many parts of the rest of the world, in Africa, the biggest source of competition is inexpensive home brews. So SABMiller makes competitively priced beers from locally sourced cassava (a local root) in Mozambique and sorghum in Uganda.21

The role of regional economic communities

Sometimes, that requires significantly innovating traditional business models, according to Neil Brimacombe, executive director at consumer packaged goods company Tiger Brands. A keynote speaker at PwC’s 14th Annual Africa Tax and Business Symposium in Nairobi, Kenya, Brimacombe said African consumers, despite their income levels, “still have aspirations to buy and enjoy certain brands. The consumer class is expected to top 300 million by 2025. So making those brands affordable to them in everyday, on-the-go options is compelling.”

One potentially effective path to navigating some of the challenges and complexities of Africa (especially the small size of most of the national markets on the continent and the fact that many African countries are landlocked) is via regional economic communities (RECs). Many of these have established free trade areas—where tariffs on internal trade among members are at, or close to, zero—and some have even established customs unions, where all members of a free trade area also put in place uniform tariffs on imports coming from outside a REC.

Three of these RECs—the Common Market for Eastern and Southern Africa (COMESA), Eastern African Community (EAC), and Southern African Development Community (SADC)—have begun to take their cooperation a step further: They have established the Tripartite Free Trade Area agreement spanning 26 African countries from Cape Town to Cairo, although the initiative is still in the implementation process.

In West Africa, the Economic Community of West African States (ECOWAS) has helped secure much-needed infrastructure and telecommunications as well as diplomatic progress, brokering peace in many of the region’s unstable economies. In Ghana, the Tema Free Zone has attracted more than 200 companies, including Nestlé and L’Oréal.

One of the most effective trading blocs, the EAC has formally established a common market, which has reduced barriers to investment and increased regional trade 50 percent by guaranteeing free movement of labor, capital, goods, and services among its member countries of Burundi, Kenya, Rwanda, Tanzania, and Uganda.

Figure3:Talent shortages curb innovation, market opportunities

Many companies investing in Africa traditionally have set up hubs in larger markets, like Nigeria and South Africa, and manage regional operations from there. From these hub markets, they can leverage shared services and better source local talent. However, companies coming to Africa are now increasingly also being well served by engaging with RECs to build scale among otherwise smaller markets. They are also building relationships with the RECs’ constituent individual governments to gain support and secure incentives for meaningful policies such as job creation, tax reform, and education.

Nurturing skilled talent

Talent shortages represent another reality in Africa: A third of the CEOs in PwC’s 15th Annual Global CEO Survey said a shortage of talent curbed innovation or stifled a market opportunity. And almost half said talent costs climbed higher than expected. (See Figure 3.) Recruitment and retention of skilled middle managers was particularly challenging for 67 percent of CEOs. (See Figure 4.)

Figure 4: The hole in the middle: CEOs in Africa face a talent gap in middle management

In response, some companies actively train the next generation’s workforce. In Kenya, mobile telecommunications provider Safaricom partners with Strathmore University to teach consumer insight and project viability. Safaricom also offers secondments to university lecturers in this two-way partnership of knowledge and skills.22
Meanwhile, Tullow Oil, a UK-based energy company, received 2,818 applicants to a call for interested students in Uganda to pursue industry-related graduate degrees at UK and French universities; 20 made the final cut. As part of the Tullow Group Scholarship Scheme, the company offers up to 110 fully paid scholarships in Ghana, Uganda, Kenya, Ethiopia, Gabon, Mauritania, and Côte d’Ivoire.23
“We proactively engage and build relationships with local people in countries in which we operate,” said Rosalind Kainyah, Tullow’s Vice President of External Affairs and Corporate Social Responsibility.24 In Ghana, for example, Tullow listed on the domestic stock exchange to ensure that local financial institutions and residents can participate in the company’s success. Tullow’s success has been impressive: The company has opened three new oil basins in five years in sub-Saharan Africa after rigorous analysis of local seismic activity.

After 25 years in Africa, Tullow has proven that it does not expect immediate success. The optimal approach, said Kainyah, is to “take a long-term perspective and don’t expect overnight wins.” She added, “African markets are no different from any other developing markets and carry with them huge opportunities for investment. Every country in Africa is different—each with its own government, infrastructure, politics, markets, and opportunities. As with investment anywhere else, it is important to do the research to find what matches your business the best.”

Not without risk

As with all emerging markets—and even some advanced countries, as the current global financial crisis demonstrated—doing business in Africa is not without risk. Cautionary tales abound of companies stymied on the continent by myriad regulations, corrupt behavior, unilateral changes in tax policies, new cross-border restrictions, high transportation costs, power grid outages, and poor distribution channels.

To this end, Chris Okeke, CEO of Nigerian Starch Mills Ltd., notes: “Money is a problem, seeds are a problem, infrastructure is a problem, input and output markets don’t exist and where they do, they’re primordial.” Okeke advocates patience along with “chipping away slowly” at the challenges.25

In fact, more than half the CEOs in Africa surveyed by PwC said they wish they had more time to spend managing risk.26 A joint report by the World Economic Forum, the World Bank, and the African Development Bank lists the top three challenges in sub-Saharan Africa as access to financing, corruption, and inadequate infrastructure.27

The Export-Import Bank, the US Trade and Development Agency, and the Overseas Private Investment Corporation are among the various US governmental agencies that can help companies secure financing. The Export-Import Bank has already provided a record $1.5 billion for exports to sub- Saharan Africa in the first three quarters of 2012, exceeding the total $1.4 billion provided in 2011. Demand for machinery, vehicles, parts, commodities, and aircraft fueled this growth; Nigeria and South Africa were the top markets.28

More efficient government goes a long way toward eliminating—or at least reducing—corruption. Bitange Ndemo, Permanent Secretary in Kenya’s Ministry of Information and Communications, agrees, saying internal efficiencies in government reduce costs, creating a more productive environment for labor, thus reducing corruption. So does holding those responsible accountable for their actions.29 As democracy continues to spread across the continent and with it, the various mechanisms of governance, corruption is likely to abate.

As in other geographies, risk is a routine part of the business environment in Africa. As Jay Ireland, President and CEO of GE Africa, remarks, “Be it violence, political turmoil, or economic instability, there is always some risk somewhere and you just have to deal with it.”30 GE uses a “flag-planting” approach to Africa. Says Ireland, “Flag planting is a process that we’ve done historically,” referring to gradually establishing a local presence in a particular region over the long term. “What we do is go in with a few people, scout out what’s there, and eventually you put in an investment and more people, resources, facilities, and really become part of the local infrastructure.”31

Balancing opportunities and risk

Ireland and other CEOs agree that properly managed, the risks of doing business in Africa are worth the rewards. They advocate striking the right balance between risk and reward. Shane Govender, Group Executive, Head of Tax, at mobile telephone services provider Vodacom, agrees.

Says Govender, “How do we repatriate our profits? How do we deal with exchange control issues? And withholding taxes?” Headquartered in South Africa, Vodacom serves more than 45 million customers in South Africa, Lesotho, Mozambique, Tanzania, and the Democratic Republic of Congo. Govender adds, “The IMF has said that seven of the 10 fastest-growing economies in the next five years will be in Africa—so the rewards are great.”32

Indeed, mobile phone penetration is exploding in Africa, from 2 percent of the population in 2000 to 28 percent in 2009 to a projected 70 percent in 2013.33 And M-Pesa, Vodacom’s widely used mobile money platform—invented in Kenya—allows users to deposit, withdraw, and transfer money with a mobile device. M-Pesa continues to gain ground not only in Africa but also in the rest of the world: In a remarkable example of reverse innovation, it is now penetrating the US and EU markets.

Despite the tremendous opportunities, Govender offers a cautionary note. He says, “There are also challenges. The regulations we face are massive. Realistically, we have to balance the reward with the risk.”34

Companies cannot do business in Africa without taking into account the risks of inadequate infrastructure—and their attendant costs. In many parts of the continent, for example, where the power grid is unreliable, companies generate their own electricity to keep their plants running.

“We have expensive systems infrastructure that needs to keep running and that needs to be protected from power fluctuations,” says Nasim Devji, Group CEO of the Diamond Trust Banks in East Africa. “It is costly to have backup generators and backup servers but for us the costs of planning for this are low compared to the severe impact that system downtime would have on our business and customers. Therefore, we accept energy costs as a reality of doing business in our markets and build backup capability to ensure business continuity.”35

The time is today

Much of the world has been slow to recognize the substantial economic progress in Africa. However, a significant number of African countries began focusing on economic fundamentals two decades ago. Their policymakers implemented more sustainable fiscal policies, controlled inflation, and managed their debt.

Some went further: They divested from private-sector activity, opened up historically public-dominated sectors like telecommunications, and reduced public-sector borrowing from banks, which was crowding out private investment.36

Granted, as with most emerging markets, reform is needed across the continent—in many cases, the implementation of very significant reforms is urgent.

Today, Africa is a complex and diverse continent requiring deep layers of insight. Its potential is unmistakable: a decade of sustained growth with several more to come. In the years ahead, agribusiness, financial services, consumer goods, infrastructure, and telecommunications will continue to power growth and employment.

New products and services will require new ways of configuration to suit the distinctive needs of a young, increasingly more urban population—a population that aspires to consume more sophisticated products and services.

Companies must be prepared to invest time, resources, and talent in a rigorous, consistent approach in order to succeed. However, the rewards can be significant. Opportunities abound for first-mover advantage.

1 United Nations Conference on Trade and Development, World Investment Report 2012: Towards a New Generation of Investment Policies.

2 Calestous Juma, “Africa’s New Engine,” Finance & Development, December 2011.

3 “The Sun Shines Bright,” The Economist, December 3, 2011.

4 Charles Kenny, “Get an MBA, Save the World,” Foreign Policy, May-June 2012.

5 Ann MacDougall, telephone interview with View magazine, October 30, 2012.

6 Ian Birrell, “Bob Geldof’s Obsession with Aid Hurt Africa. But Now Trade is Healing the Scars,” The Independent, May 28, 2012.

7 PwC, 16th Annual Global CEO Survey, 2013.

8 PwC, 15th Annual Global CEO Survey, 2012.

9 John Arlidge, “The Lion Kings,” The Sunday Times, February 26, 2012.

10 The World Bank and the International Finance Corporation, Doing Business 2012: Doing Business in a More Transparent World.

11 Harry Broadman, “China and India Go To Africa,” Foreign Affairs, March/April 2008.

12 “India, Africa Set Trade Target of $90 billion by 2015,” The Economic Times (India), March 17, 2012.

13 “China Trade, Investment Grows in Africa,” Voice of America, August 1, 2012.

14 PwC, 15th Annual Global CEO Survey, 2012.

15 Tom Nevin, “Profile: Jeff Immelt,” African Business, March 2012.

16 Vivien Foster and Cecilia Briceño-Garmendia, Editors, “Africa’s Infrastructure: A Time for Transformation,” Agence Française de Développement and The World Bank, 2010.

17 Cedric Bra, “Shoprite Grows Despite Strong Competition,” Euromonitor International podcast, http://blog.euromonitor.com/2012/04/shoprite.html, April 3, 2012.

18 Gerhard Fritz, telephone interview with View magazine, October 30, 2012.

19 African Development Bank, OECD Development Center, United Nations Development Program, United Nations Economic Commission for Africa, African Economic Outlook 2012.

20 Neil Brimacombe, presentation at the 14th Annual PwC Africa Tax and Business Symposium, Nairobi, Kenya, September 18-21, 2011.

21 Carolyn Miller, “Brewing a Better Beer for Africa,” CNN Money, June 24, 2011.

22 PwC, The Africa Business Agenda, July 2012.

23 Paul Tentena, “Tullow Bolsters Oil Production Capacity,” East African Business Week, September 4, 2012.

24 Rosalind Kainyah, e-mail interview with View magazine, October 26, 2012.

25 PwC, The Africa Business Agenda, July 2011.

26 PwC, The Africa Business Agenda, July 2012.

27 World Economic Forum, the World Bank, and the African Development Bank, The Africa Competitiveness Report 2011.

28 “Ex-Im Bank Approves Record $1.5 Billion in Financing of US Exports to Sub-Saharan Africa in First Three Quarters of FY 2012,” Ex-Im Bank press release, August 9, 2012.

29 PwC, The Africa Business Agenda, July 2012.

30 Ibid.

31 Jay Ireland, GE Global Growth and Operations, Investor Meeting, March 7, 2012.

32 Shane Govender, video interview with David Lermer, PwC global tax leader for Africa, September 20, 2011.

33 Peter Diamandis and Steven Kotler, “Age of Abundance,” Discover, April 2012.

34 Shane Govender, video interview with David Lermer, PwC Global Tax Leader for Africa, September 20, 2011.

35 PwC, The Africa Business Agenda, July 2011.

36 World Economic Forum, the World Bank, and the African Development Bank, The Africa Competitiveness Report 2011.

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