Into Africa with prospects of growing demand

The “Africa rising” narrative has been replaced by a more complex picture, as African economies experience growing pains and social unrest, but there are still huge opportunities for companies willing to take risks. Pete Guest reports


Cabo Verde is a tiny market, an archipelago nation off the west coast of Africa with a $2-billion economy built on fishing, tourism and a nascent textile manufacturing sector. For Charles Brewer, who heads the sub-Saharan Africa operations for the global logistics company DHL, it provides a case study of how multinationals often miss the latent demand in many of the region’s markets, which are fragmented and sometimes weakly linked to each other and the global economy.

“We didn’t have a flight going out there because the volumes didn’t warrant it,” Mr Brewer says. “Those planes have very large payloads and they cost a lot of money.” Even so, the company took a gamble on the route, assigning a 737 once a week to bring freight in and out of the country.

“I now have enough experience here to know that if you build it, they will come,” Mr Brewer adds. “We said, let’s do it and see what happens, and manage the risk accordingly. We put the aircraft in and in two weeks it was full.”

Most of the customers on the route had not previously been trading with Cabo Verde, but had taken advantage of a new air link to expand their businesses opportunistically. “One of the delights of working in Africa is that you have to be very nimble, very dynamic,” Mr Brewer says.

DHL is among a very exclusive club of companies with a presence in every single market, but it is a company that has built its business in part because of the region’s inefficient infrastructure, fixing the logistical problems of other enterprises.

Sub-Saharan Africa, with 49 distinct countries, each with their own cultures, laws and regulatory idiosyncrasies, and each at different levels of economic and political development, can be a very challenging region to crack.

RAPID GROWTH RATE

Since the turn of the millennium, sub-Saharan African economies have, almost without exception, been growing at a rapid rate. On aggregate, the region’s gross domestic product growth has outpaced the global average every year since 2001. Driven by higher commodity prices and greater political stability, the region’s economies expanded, creating a new rush of investor interest. While natural resources underpinned most of the boom, rising wealth in societies and urbanisation also prompted investment in financial services and consumer goods.

In 1980, 28 per cent of Africans lived in cities; in 2010 that was 40 per cent. By 2030, more than half the continent’s population will be in urban areas, driving an enormous demand for retail goods, real estate and services.

The McKinsey Global Institute forecasts that in 2030 the combined spending power of Africa’s 18 largest cities will reach $1.3 trillion. Standard Bank research puts the total size of the African middle class, earning between $5,500 and $42,000 a year, at around 15 million households, growing to 22 million by 2030.

The promise of greater regional co-operation and economic integration between economic blocs also drove multinational companies to look deeper at sub-Saharan Africa. Tiny Rwanda, one of the most business-friendly countries on the continent, according to the World Bank, has an $8-billion economy and a population of 11 million, making it hard to justify a major investment. The East African Community, of which Rwanda is a member, has a population of 145 million and a GDP of $110 billion. The removal of barriers between these countries, which trade far more with the rest of the world than each other, would create huge market opportunities for multinationals and local businesses.

All of these trends have fed into a new positivity about sub-Saharan Africa and into a narrative of “Africa rising” that has gradually replaced the pessimism of the 1990s.

Over the last few years, however, the picture has become more clouded and the story more complex. For many of the genuinely positive trends, there are countervailing concerns.

Economic growth has not always translated into resilience and social services

In some cases, the same trends that drive commercial interest can cause social tension, in particular demographics. East African economies are falling behind, as population growth outpaces wealth creation. Low income households make up 92 per cent of the population in Kenya, 96 per cent in Uganda, 97 per cent in Tanzania and 99 per cent in Ethiopia, which has consistently been one of the fastest growing economies on the continent over the last ten years.

“If you take GDP per capita over the past decade, some countries, such as the Central African Republic, even Benin and Gabon, Guinea-Bissau, Madagascar, Liberia and Swaziland, experienced virtually no growth,” says Amadou Sy, senior fellow in the Africa Growth Initiative at the US Brookings Institution. “The growth engine did not really align with the location of the poor in Africa.”

SOCIAL DISCONTENT

While the Ebola outbreak in the Mano River region of West Africa has affected only a small fraction of the continent, it has highlighted a weakness that is common to many African economies. Economic growth has not always translated into resilience and social services. Likewise, the rise of terrorist groups, such as Boko Haram in Nigeria and Al Shabaab in East Africa, has its roots in social and political marginalisation in growing economies.

Suresh Kana, PWC’s senior partner for Africa, says the weakness of institutions means when problems happen, the consequences can be amplified.

“These are very young democracies and that’s why they’re fragile – things go wrong,” he says. “When an event or an incident strikes, it becomes very stark here because the institutions are not set up to deal with them in a sophisticated way.”

But Mr Kana is still optimistic about the investment prospects for Africa’s key markets. He takes the example of Nigeria, the continent’s largest economy, with a population of 170 million people and an economy that is still heavily dependent on energy exports. Falling hydrocarbon prices have weakened Nigeria’s prospects at a point when it is fighting a draining conflict with Boko Haram, and grappling with providing commercial and social infrastructure.

“The national grid in Nigeria provides less than 15 per cent of the country’s needs.  The rest of it is all running on generators and batteries,” he says. This makes it a challenging place to do business, but also a place where providing basic services could be a massive opportunity.

Echoing Mr Brewer’s notion that taking risks and pre-empting demand is a prerequisite for breaking into frontier markets, Mr Kana cites the example of the South African mobile operator MTN, which went into Nigeria in 1997 when the country was still under the military dictatorship of Sani Abacha, and when the market for mobile telephony barely existed. Today, 75 per cent of Nigerians own a mobile phone and MTN is the biggest player in the country.