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WITH about one billion consumers, Africa offers opportunities that companies around the world cannot ignore, particularly in light of the low growth being experienced in many developed markets.
And as Development Bank of Southern Africa CEO Patrick Dlamini points out, inter-Africa trade – at 10-11 percent – is very low compared with markets such as Europe and this indicates that there are significant opportunities.
Moreover, Africa has a wealth of natural resources and developing those requires considerable infrastructure investment.
Standard Bank head of investment banking (Africa) Helmut Engelbrecht says Africa is becoming more interesting for investors as growth in the rest of the world continues to be slow.
“Standard Bank and other top SA corporations are doing very well in Africa. This gives investors the confidence to consider prospects on the continent, but the opportunities are not necessarily large.
“However, though opportunities look set to grow, they may not be sufficient to make a real difference to the bottom line in the next couple of years. Therefore, when investing in Africa you must take a long-term view,” he says.
He says Standard Bank began investing in the rest of Africa with a couple of key purchases back in 1989.
Marsh Africa CEO Jurie Erwee says there are infrastructure projects as well as risk mitigation and insurance opportunities in Africa.
And initially the company’s involvement in these opportunities was influenced by its clients’ cross-border ventures.
However, he stresses that the situation has since evolved and Marsh is now benefiting from local business it is itself generating in the markets it has entered.
“We have moved on from that position and there are many other in-country opportunities that have since emerged,” Erwee says.
He says this emphasises the importance of having a local, on-the-ground, presence in the markets in which investors, contractors and companies wish to be active.
Infrastructure is a primary focus in Africa, he says, as it seeks to address a huge backlog and provide the enabling foundation that can unlock the continent’s potential.
“We and many of our clients are excited about the sheer number of regional infrastructure projects that are being implemented or that are in the planning phase.
“These projects will start to address the enormous infrastructure deficit that exists in virtually every country across the region. This includes roads, rail, dams, bridges, ports, shopping malls, manufacturing and energy projects.
“These investments will attract substantial direct foreign investment in the next few years,” Erwee says.
He says another factor creating opportunities on the continent is the rise of the African middle class. These are people who want high-quality infrastructure, products and services.
“The range of opportunities is exciting, but they will not be realised overnight. Implementing projects will often be determined by the availability of local resources, and countries on the continent are subject to differing financial constraints. For example, the lower oil price is limiting the capacity of the oil exporting countries,” says Erwee.
“There may be short-term head-winds that delay some investments, but the overall picture is positive and we are seeing investments taking place in the region from China, Europe, Canada and Latin America.”
Imara Asset Management director Chris Botha says the expanding middle class in Africa is one of the opportunities that presents itself on the continent.
However, companies need to do their homework and make sure there is demand for the products they wish to sell.
For example, he points out that consumer demand for durable goods is not growing as fast as demand for food and clothing.
“Durable goods tend to be bought by employees, particularly people working for government or, to a lesser extent, mining companies. However, there is a huge informal economy in Africa and the consumers in this category are buying clothing and food,” he says.
There have also been some structural changes, according to Botha. For example, with the growth in telephony, banking is done via cellphones and, often, so is the purchase of clothing and food.
“Though there is a lack of infrastructure, cellphones have changed the consumer dynamic and this is making the sector bullish,” he says.
Erwee makes the point that with every opportunity comes risk and such events can damage a company’s operations and reputation. “Entities wishing to invest in Africa do so at their peril, unless they fully understand and manage the often unique types of risk prevalent in this geography.
“Risks can include terrorism, imminent political and regulatory changes, corruption, a lack of specific skills, trade barriers and poor infrastructure,” he says.
He says companies that want to make a serious play for the opportunities in Africa have to make sure they take the right approach in the countries in which they wish to be active.
“Being successful in Africa is not about flying in, making a short-term buck and leaving again. It takes time to build relationships and successful businesses that will provide good revenue streams in the future,” Erwee says.
He says understanding each individual market as well as the segments within those markets is crucial.
Botha says capital is often the main barrier to entry when setting up businesses elsewhere in Africa. “As a result, large companies with good access to capital tend to have less trouble establishing themselves in Africa.
“However, often the major factor is that companies have to own distribution and logistics chains,” Botha says.
He says one of the big growth areas is warehousing and a lot of companies transport goods from SA to centralised warehouses in the rest of Africa. However, “the last mile” – getting the goods from the warehouse to the consumer – is the most challenging.
“Typically, this final stretch in the distribution cycle is done by local people and often in an informal manner. For example, Coke has an interesting model under which it warehouses its products and delivery is done from the warehouse by people it sponsors. These people use bicycles with crates on the back for transport,” Botha says.
He cautions that companies planning an entry into Africa need to investigate their particular markets of interest in detail and develop innovative solutions to overcome any obstacles to trade.
“The other big mistake companies can make is assuming that all African countries are the same.
“They are not and consumer patterns differ from country to country.
“For example, in Nigeria there is a significant online consumer trend whereas in Ghana people prefer to go into stores to make their purchases,” Botha says.
He says South African companies can have an advantage over other international players moving into the continent, as local enterprises are often capable of developing a greater understanding of the region’s markets.
“Relationships are important in Africa and companies need to demonstrate they are in Africa for the long term.
“In the past, a number of companies – particularly in the mining sector, entered the market and left.
“This has resulted in some bad feelings and governments are fed up with that approach,” Botha says.
He stresses that having good local partners and ensuring local operational management are two important ways of countering negative perceptions.
In addition, successful South African companies are building strong brands in the rest of Africa and there is good brand awareness for some companies. “For example, MTN and Standard Bank sponsor local soccer events,” Botha says.
Engelbrecht says one of the most important lessons Standard Bank has learnt since it began extending its network into the rest of Africa is that every market is different and Africa cannot be treated as a homogenous continent.
“You have to look at each country separately. Some countries have some similarities and some lessons learnt in one such market may be applicable in another.
For example, Kenya and Uganda have some aspects that are common, but Tanzania, though it is also in East Africa, is different.
“The countries surrounding SA also have some commonalities, but even with our nearest neighbours you have to be very careful not to see similarities that are simply not there.
“As a result, people need to have the knowledge to know when they can draw parallels and when they cannot,” Engelbrecht says.
He points out that the various jurisdictions have different legal systems and often their laws have different roots.
For example, Mozambique’s legal system was formed originally on a foundation of old Portuguese law, much of which no longer applies in Portugal.
In addition, people need to understand the court system and the manner in which the law is enforced.
“Business is often about the culture, the degree of interaction with government and the ways business is done in particular countries,” he says.
He says though in markets such as the US relationships are important, deals are governed more by the documented agreements between the parties. The legal system and the protection it affords are fundamental.
However, in Africa the legal system often affords a lot less protection.
And if people want to make companies run around getting nowhere, they will do so, even when there are legal documents that are supposed to govern the interaction.
“As such, in Africa relationships are important and it takes time to develop trust between all the parties in a transaction,” Engelbrecht says. – Financial Mail.
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