The next growth frontier for SMEs

As growth slows in the developed economies and the Asian growth engines of China and India face greater challenges, companies are starting to look to Africa as the next frontier of growth. A young population of more than one billion presents immense opportunities that are hard to ignore.

Many corporations now view the continent as a strategic area of engagement. Sweden’s Electrolux, for instance, decided two years ago to add Africa as a key focus territory. The move follows similar strategic shifts by Asian companies like Sony, Sharp, Samsung and LG.

It makes a lot of sense for companies to add Africa to their market portfolio. We are seeing the beginning of a rapid developmental phase of an expansive region of over 30.2 million square metres. Youthful demographics further underpin expectations that this growth story is going to last many more years to come.

All this presents an invaluable opportunity for small and medium enterprises (SMEs) to develop a foundation for long lasting growth, especially if they are late into the China and India growth story. While challenging, opportunities are tremendous as Africa’s economies accelerate to catch up to the rest of the world, developing at a rate that outpaces the historical experience of more advanced economies.

For example, World Bank data shows that 24 per cent of Sub-Saharan Africa has access to electricity versus 40 per cent in other low income countries. Excluding South Africa, the entire installed power generation capacity of Sub-Saharan Africa is only 28 gigawatts, equivalent to that of a single country like Argentina! Imagine the opportunities for companies selling electronic products and power generation infrastructure as Africans demand more and more of the comfortable life.

Lessons from history

It was this growth potential that led to the establishment of Singapore-based Tri Star Electronics. The consumer electronics and office equipment distributor started operations in 1997 in countries like Angola even while the civil war was going on. Today, the firm is one of the biggest distributor of electronic products in Africa, with presence in 39 of the continent’s countries and offices in 12 of these.

Our experience over the past 17 years have shown us that Africa’s rich endowment of natural resources like oil, minerals, coal and agriculture will fuel economic development for years to come. As long as there is political stability, economic prosperity and incomes will rise and increase the purchasing power of Africans.

How this shapes the evolution of consumer demand ought to be familiar to Singapore companies, having witnessed how their own domestic markets transformed as the nation transitioned from Third World to First. A look back in history will yield many lessons on how opportunities can be tapped and markets serviced at each stage of development. So for instance, what worked in Singapore, say 20 or 30 years ago, would be a good guide to what will work in Africa today.

But Africa is not Singapore. We cannot do things exactly the same way we did in Singapore to succeed.

Africa is not homogenous

Lack of exposure and knowledge often leads many to regard Africa as a monolithic block. But in reality, its 54 countries are home to very diverse peoples, ethnicities, religions and cultures.

Africa can be divided roughly into the North, comprising the Arabic, Islamic countries like Libya and Algeria); the South, headlined by the more developed countries like South Africa and Botswana); and the Sub-Saharan, which may be further divided into west, east and central regions.

Another way of segmenting Africa is by the country’s main working language, which largely reflects its colonial history. Notwithstanding the many ethnic languages spoken, the continent may be divided into three main groups: English speaking, Francophone, and Portuguese.

Finally, groupings can be devised by the currency used for trade and business, be it the US Dollar, Euro, or a local currency like the Naira or the CFA Franc.

So business strategies cannot be homogenous when entering different parts of Africa. For example, Francophone countries have a different business culture from English speaking ones. Even within a country, business practices may differ across different parts of the country. For example, organized markets like big retail outlets and chain stores can be found in capital cities, but in upcountry towns and more rural areas, trade is conducted through disorganized and informal channels which may be more difficult to address by traditional business models. Yet these informal channels may offer greater opportunity as there may be less competition from big multinational corporations with their well-entrenched strategies and doctrines.

Political stability is back

For many years, economic development in Africa has been hampered by political instability and turmoil including civil wars in a number of countries. In the past, many African countries would see civil disorder and violence after each election, slowing down economic activity and dissuading investments for years. Any investment were short term orientated for fear of further instability at the next election.

The good news is that today, almost every general election has not resulted in any major unrest. There has definitely been no new civil wars. When the Democratic Republic of Congo held elections last year, many expected great turmoil and violence but none of that happened. This has been true of almost every country that held elections in the last few years. So Good News No. 1: Political stability is back in Africa.

Early investors have paid the ‘tuition fees’

When China first opened up its market to the world, many investors from Singapore suffered heavy losses due to unfamiliarity with business ethics and culture in China. But these failures were invaluable lessons for the next wave of investors, who have done well and prospered. This is the same in Africa today.

Many Indian, Lebanese and other Middle Eastern investors have been doing business in Africa for over 20 years. More recently, the continent has seen increasing forays by Asian investors from Taiwan, China, South Korea, Malaysia and, to some extent, Singapore. They have established workable business models that can pave the way for many more investors to venture into Africa.

Africans are also more comfortable doing business with investors from different parts of the world, including Singapore. In fact, Singaporean investors are well respected in Africa, more so than those from other parts of Asia. So Good News No. 2: The learning has been done and your learning curve will be much shorter.

Economic development is better executed

After initial difficulties, many of Africa’s leaders have learned that rapid economic development needs to be supported with proper infrastructure like utilities, transport and support services like financial systems, governance and legal structures. Many of the current crop of leaders have been exposed to the Western models of economic development and business models and are keen to transplant these ideas into their respective countries. They are no longer waiting for these critical infrastructure to develop at their own pace. Instead, they are actively seeking partnerships with other governments and private investors, often offering the latter better incentives and protection for their investment.

This is Good News No. 3: It is easier to do business in Africa today, not least as processes and procedures have become more efficient.

Better connections

Travelling to Africa used to be a risky endeavour. A paucity of African embassies in Singapore and Asia meant travel visas were hard and slow to obtain, prompting early investors to risk arrest by flying into Africa without one.

Today, many African nations have embassies in Singapore and it is easy to get a visa. Some forward looking countries like Burkina Faso have recently eliminated the need for Singaporeans to get a visa to enter the country.

In the past, flights to Africa were infrequent, indirect and long – and typically offered by less reliable airlines. But today, many airlines, including reliable carriers like Emirates and Ethiopian Airlines, have made Africa much more connected. From Singapore, there are three flights a day to Nigeria. So Good News No. 4: Africa is better connected to Singapore.

Opportunities in tackling inefficiencies

Yet how does one go about identifying viable opportunities?

Most African countries, while developing rapidly, do not yet have the same kind of efficiencies enjoyed by more developed countries. Thus opportunities can be found by identifying these inefficiencies and adapting products and services to improve these deficiencies.

Logistics, for instance, is one of the biggest nightmares in much of Africa. A company that can handle this aspect of business more efficiently than the competitor will have a strong advantage in the market place.

Another example is the rapid adoption of electronic money. Inefficient banking systems, coupled with widespread ownership of smartphones, yielded opportunities for mobile companies to establish a new revenue stream from mobile payment platforms.

The three key market tiers

Gone are the days when you can get by with offering substandard goods in Africa. A globalised world means Africans are demanding better quality products and services, and they are willing to pay more for them.

Like any society, there are different tiers of demand. The first tier comprise consumers who demand very high quality and are able to pay as much as what other rich people in other parts of the world do. High end shopping malls are not uncommon in most parts of Africa and it is not uncommon to see rich Africans buying 90-inch LED TVs for tens of thousands of dollars, even more than what most Singaporeans would pay for a TV.

The second tier is made up by a large and rapidly growing middle income class. They too demand good quality and better service, and are willing to pay a little more for them. They are willing to save up to afford a better product or service. This is an excellent segment that Singapore SMEs can address well with Singapore based brands and products.

Low income families make up the third tier of demand. They should not be underestimated as their numbers are huge, allowing for a mass market strategy where lower margins are made up by large volumes.

But beware the mistake of supplying poor quality products, which will end up as mere “one-time” deals, stymying sustainability of the business. Costs should not be cut at the expense of quality. Rather, companies ought to adapt product designs to suit the value that consumers require. Do not attempt to sell a Mercedes Benz to those who want a Tata Nano. Effort is required to redesign and adapt products for this market, but it is well worth it, given the size of the market.

Whichever spectrum of the pyramid you want to serve, quality if critical if you want to be in business in Africa for the long haul.

Base of the Pyramid (BOP)

In rural Africa, there are villages where basic necessities like water and sanitation are lacking, and incomes are extremely low. This segment can make up as much as 60 percent of the market – and in some economies, it is one of the fastest growing markets for some products. Key to succeeding here is a shrewd selection of the right products for the market.

Bangalore-based SELCO Solar has installed solar systems in some 125,000 houses in India. Two-thirds of its customers earn less than US$4 per day. Every household is charged the same flat rate for use of the electricity generated. This has worked and default rates for instalment payments are low, making this a viable business at the Base of the Pyramid.

Similarly, Tecno Telecom found great success all over Africa by selling cheap mobile phones at US$20 apiece. Since then, the Chinese phone manufacturer has worked its way up the value chain to offer high-end phones as well.

Leveraging on strong Singapore sectors

While there are opportunities in every sector, several industries here have developed particular strengths that may give them added advantage in finding success in Africa:

  • Education, especially international schools catering to the expat community and rich Africans
  • Healthcare
  • IT services in automating processes, including government processes
  • Building materials and equipment suppliers to participate in infrastructure projects
  • Hospitality, where improvement in infrastructure is much needed as foreign investment and tourism into Africa rises

Risks and challenges

With opportunities, come risk. While each country has its peculiar set of challenges, here are some of common hurdles:

a. Long lead time for financing

Many banks still see Africa as a risky place to do business and often are reluctant to provide funding support. Local financing in Africa is difficult for a foreign company and, if available, interest rates are high. Long lead times for financing ultimately translate into a need for higher financial limits and longer repayment terms.

b. Local logistics issues

The efficient port and logistics operations in Singapore and most of Asia do not yet exist in most African countries. Issues like port congestion, where goods cannot be easily cleared, result in increased charges for demurrage. Rough physical terrain in most countries makes inland logistics difficult and expensive, while causing damage and breakage of goods during transportation and handling. So these costs have to be factored in.

c. Enforceability of local laws

While laws exist in most African countries to facilitate business, implementation and enforcement are still a challenge. This can make business conflict resolution difficult and protracted. Many African countries are part of some form of economic grouping. For example, Southern Africa Development Community (SADAC) countries have preferred tax rates when goods are imported from one member country to another. But not every member country implements and recognizes this benefit, so one can end up paying tax and duties that had not been budgeted for because of the agreements.

d. Manpower

Most locals do not have the expertise or capabilities to handle your business so you have to send your own team of expats to work and live in Africa if you want to have good control of your business. However, it is quite hard to find Singaporeans willing to relocate to Africa, or even make regular business trips. It is thus crucial to consider manpower issues when planning to enter Africa.

e. Currency fluctuations

While most companies use the US Dollar or the Euro to do business with local partners, end consumers still deal in their respective local currencies. Profits in local currency terms can be wiped out immediately by currency fluctuations. There are many instances where a firm’s African partner has is unable to remit revenues collected in the local currency, because of the exchange rate loss that would be incurred when converting to US Dollars or Euros. They end up waiting until the exchange rates become favourable for them. This happens quite often.

Conclusion

Despite all the challenges, Africa is still the next frontier to explore, perhaps the last large frontier where ambitious entrepreneurs can make their fortunes. Before embarking on this journey, it is crucial to understand Africa and the local issues, and as with any investment, do the sums before jumping in. The right business models will need to be developed to suit each local market, and with a longer term view and strategy, success can be found in venturing into Africa. Now is the time for Africa.

 

 

 

NTU-SBF Centre for African Studies

 

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Singapore 639798

 

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