Africa is a huge continent, comprising 55 countries, an even larger number of ecologies, and too many languages and cultures to count. It has roughly the same surface area as that of the moon, and places such as China, the USA, India, Western Europe, Japan and a few more will all fit into Africa, with a bit of land to spare.
When one talks about Africa, a lot of people are reminded of the stereotype of a dark and dangerous continent where you enter at your own risk. The reality is that Africa has so much to offer those who have gone to the trouble of getting to know it. Kellogg's very recent acquisition of 50 per cent of Multipro, a (Singapore- based) Tolaram Group subsidiary in Nigeria, is a very clear indication that there are companies that have come to realise that Africa presents a lot more than meets the eye. Having said that, one also needs to remember there are dangers too.
So let's look at what's happening in Africa, and what it represents.
Firstly, Africa's economy has been growing at high rates in recent years. Its gross domestic product (GDP) growth is expected to strengthen to 4.5 per cent in 2015 and 5 per cent in 2016. This was after a bit of sluggishness in 2013 (3.5 per cent) and 2014 (3.9 per cent), which can be attributed to a weak global economy and some African countries having somewhat severe domestic problems.
Domestic demand has continued to boost growth in many countries, while external demand has remained mostly subdued because of flagging export markets. Africa is therefore, in a way, the victim of the problems in the developed economies.
So far, African economies have been relatively resilient to the sharp fall of international commodity prices. Production of commodities has often increased despite the lower prices, and overall growth has been boosted by other sectors. Nigeria, for example, is highly dependent on oil for its export revenues (about 92 per cent), but the primary driver of its GDP is services (57 per cent).
Africa is also host to seven of the 10 fastest-growing economies going into 2015: Ethiopia, Mozambique, Tanzania, Democratic Republic of the Congo, Ghana, Zambia, and Nigeria. Interestingly, the fastest- growing economy from 2001 to 2010 was Angola. In fact, in that time span, six of the top 10 fastest-growing economies were from Africa. The continent's GDP growth rate of 5.7 per cent in the decade from 2001 was second only to Asia (7.9 per cent) and outshone Latin America's 3.3 per cent. However, Africa's growth has been off a low base.
According to the consulting firm McKinsey, Africa's combined GDP of US$1.6 trillion in 2008 will increase to US$2.6 trillion by 2020. This year will also see an estimated US$860 billion of consumer spending in Africa.
However, the future also forebodes the slowdown of the Chinese economy. Commodity export-oriented countries such as Nigeria and Angola will feel the negative effects of this phenomenon, and will need to reorientate their economies to become more manufacturing-driven.
Africa has been getting increasing amounts of foreign direct investment (FDI), not only from the West but also from countries such as China, India, Brazil, Japan, Malaysia and Turkey. Some, such as China, are interested in resources, while others get involved in other ventures, such as consumer goods. Africa needs foreign investment as its opportunities far outstrip the availability of internal funding sources.
But while Africa needs development, it is not a poor continent. It has massive discovered resources (US$82 trillion worth of oil, coal, gas, copper, platinum, diamonds and gold, among others). Currently, most of these resources get exported as commodities; very little local value-added takes place. For example, Nigeria exports its crude oil and imports refined products. It thus loses the opportunity to create jobs to reduce its vulnerability to movements in oil prices and currencies. This is, unfortunately, by no means the only example.
There are, however, countries in Africa that have chosen the path to industrialisation and manufacturing.
A shining example is Ethiopia, which is actively pursuing a strategy of transforming its economy to be less dependent on agriculture. Nigeria is also becoming a hub for the manufacturing of vehicle components for brands such as Toyota and Ford. In this way, Africa hopes to become less dependent on commodity exports. But it does not have sufficient capital or competencies for this strategy and will need support.
Africa is rich in human resources. Its population of about one billion is forecast to grow to 1.9 billion by 2050. Its middle class - defined as those who can spend US$2-20 per day - is growing by leaps and bounds. According to the African Development Bank (ADB), Africa had 370 million people in its middle class in 2014.
Standard Bank of South Africa looked at 11 countries with 50 per cent of Africa's GDP, and counted 15 million middle-class households, which is set to grow to 42.2 million households by 2030. Standard Bank defines middle class as those who can spend US$15-115 a day. Irrespective of the measure used, it is clear that Africa's middle class is growing fast.
Another important trend is urbanisation. Africa's urbanised population, currently at 40 per cent of the total (up from 36 per cent in 2010), is set to grow to 50 per cent by 2035. This provides a consolidated and concentrated market, which is easier to access and target. It also has opportunities for construction companies.
Construction projects have been moving from mining and energy to houses, office blocks, road infrastructure and malls. Cities, poorly designed in the past, are now being redesigned and new ones are being built. This phenomenon of urbanisation has led many multinational companies to target cities in their expansion strategies rather than countries.
African countries have also been innovative, particularly in the field of mobile technology and applications. In East Africa, the M-Pesa application (mobile money) is well known. Large numbers of Kenyans are using it. Vodacom, the RSA mobile telephony provider, is now rolling it out in South Africa. There are also applications in the fields of agriculture, finance and health. Innovation has enabled increasing numbers of Africans to be part of the formal financial banking systems from which they were excluded before.
Energy is another important area of activity in Africa. More than 600 million Africans do not have access to electricity. Yet Africa has a vast growth potential in renewable energy - that is, 11 terrawatts of solar power, 350 gigawatts (GW) of hydropower, 110 GW of wind power, and 15 GW of geothermal power. By 2040, it is forecast that renewables could provide over 40 per cent of all power-generation capacity.
In addition to the lack of energy infrastructure, Africa also has an inefficient generation, transmission and distribution system, which leads to high costs. For example, the average efficiency of the fleet of gas-fired power plants was 38 per cent in 2012. Had the average efficiency been equal to that of gas-fired power plants in India (46 per cent), the unused fuel could have generated 8 TWh (21 per cent) more electricity.
Water scarcity is another trend observable in Africa. While Africa has massive rivers, some 750 million people still did not have access to potable drinking water in 2012, 325 million (43 per cent) of whom live in sub-Saharan Africa. Fourteen countries in Africa are already experiencing water stress; another 11 countries are expected to join them by 2025, at which time nearly 50 per cent of Africa's predicted population of 1.45 billion people will face water stress or scarcity.
Lack of capital
Although Africa has entrepreneurs, they don't have much access to capital. There are not many venture capital providers. Among foreign VCs, NEST from Hong Kong, which has opened an office in Nairobi, is one of a few VCs interested in supporting African entrepreneurs. A small number of private equity (PE) funds are now looking at Africa, but Africa needs longer-term capital than PE funds are typically prepared to provide.
Agriculture is another area where there are problems and opportunities. Some 60-65 per cent of the world's uncultivated land is in Africa. So instead of exporting food, Africa has to import it. With the right knowledge, agricultural practices and funding, Africa has the ability to feed the world. Singaporean companies that have already seen the opportunities and are playing a major role in Africa's agriculture include Olam, Tolaram and Wilmar.
Many large MNCs have also long had an interest in Africa. These include food suppliers such as Kellogg, Procter & Gamble, Unilever and Kimberly-Clark. Last month, Kellogg purchased a stake in an African subsidiary of Tolaram Group in order to benefit from its local distribution channels and supply chain footprint. Global food retailers such as Walmart and Carrefour have also entered Africa.
It is clear that Africa represents a major source of resources such as agricultural products and commodities (notably oil and minerals). It is also clear that Africa has the potential to provide itself with all the energy it needs. But what it lacks is technology and expertise.
Africa also serves as a destination. It represents a large consumer market with a strongly growing middle class. It is also a market for technology and capacity building in areas that include agriculture, manufacturing, energy, water management and public transportation.
It is also clear that the opportunities are not only for large conglomerates, but also for small and medium-sized enterprises (SMEs), many of which do good business there. Companies have multiple entry strategies to choose from, such as greenfield operations, acquisitions, mergers, and joint ventures/partnerships.
Patience in Africa is a virtue, as is the ability to learn from one's mistakes and adapt strategies and business models if they are not initially successful. Agility and knowledge of the environment are crucial elements for success in Africa.
Published in: The Business Times, 10 October 2015