Winning in Africa: From Trading Posts to Ecosystems

Winning in Africa: From Trading Posts to Ecosystems

          
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Winning in Africa: From Trading Posts to Ecosystems

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    Many of today’s executives came of age in the 1980s and 1990s, when media reports about Africa focused on the devastation wrought by drought, communicable diseases, and poverty. Unless they worked for a nongovernmental organization (NGO) or relief organization, the world’s business leaders did not include Africa on their itinerary or agenda.

    Those years represented Africa’s “lost decades.” Fortunately, they are unrepresentative of the continent’s past and future. Africa has always been rich in natural resources and produced bountiful supplies of food. In fact, Africa entered the postcolonial era with a running start over many other emerging markets and held onto that lead for at least 20 years. By 1980, Africa’s annual per capita GDP of $708 was nearly three times the size of India’s $230 and almost four times the size of China’s $186 (in constant 2000 dollars).

    Africa lost this lead for reasons both within and outside of its control. Among other factors, weak governance, autocratic leaders, ethnic conflict, and widespread nationalization of private enterprises stifled entrepreneurial zeal and slowed forward momentum. When food and commodity prices plunged in the late 1970s and 1980s, so too did many African economies. Africa’s small farms were less able to withstand the decline in prices than larger, more efficient, government-subsidized operations elsewhere. Despite high population growth, the continent’s share of global agricultural production dropped. A similar thing happened to Africa’s natural-resource industries, which remained focused on upstream extraction rather than local manufacturing and value addition. This left them exposed to low commodity prices in the 1980s and 1990s.

    As a result of these developments, capital and the best and the brightest fled the continent, and foreign investment dried up. Debt service as a percentage of GDP rose from less than 2 percent in the mid-1970s to more than 6 percent by 1985. Inbound migration during the 1960s morphed into outbound migration by the 1980s. Per capita GDP stayed flat during the lost decades. By 1996, measured by per capita GDP, China had surpassed Africa.

    By the end of the lost decades, Africa’s postcolonial hope and promise had vanished. Small groups of elites controlled both political and economic power in many nations, and nearly all of them struggled to meet the basic health, educational, infrastructure, and environmental needs of their people. Africa was a marginal player in the global economy.

    A Trading-Post Economy

    During the lost decades, many multinationals retreated entirely from Africa or scaled back their business. A select group of consumer goods and natural-resource companies remained, served by another small group of infrastructure, industrial equipment, and logistics providers.

    Consumer companies mostly focused on the top of the market. They sold Western goods, largely without modification or local adaptation, to elites and expatriates. They minimized their investment in Africa by building their business model around low volume and high margins and by shipping goods into Africa rather than sourcing and manufacturing locally. They tended to send expats—and not necessarily the best ones—to run their local businesses.

    Natural-resource multinationals also tended to follow a strategy that minimized their involvement and presence on the continent. They extracted metals, minerals, and oil to sell to customers outside of Africa, ignoring domestic markets. Most of their senior managers were expats, and they hired local employees for low-skilled work that was often dangerous. Rather than create value on the continent by, say, cutting and finishing diamonds, they shipped raw resources abroad.

    Even prior to the lost decades, Africa was a distant outpost that often did not receive adequate management attention, investment, or organizational support. While production capabilities and a consumer class began to emerge in other emerging markets, Africa remained a trading post. Finished goods arrived to satisfy a happy few in selected ports and urban centers. Raw materials—and most of the value generated from doing business in Africa—left the continent. This was the state of play at the turn of the century.

    A New Dawn

    Fast forward to this decade. Since 2000, Africa’s GDP has been growing 2 to 3 percentage points faster than global GDP, helping the continent regain lost ground. Annual GDP growth is now starting to approach postcolonial levels. (See Exhibit 1.)

    exhibit

    Foreign companies are returning and moving in. In 2013, Barclays Bank increased its stake in Absa Group of South Africa and rebranded the entity as Barclays Africa Group. Philips, which had reduced its presence in Africa from 35 nations to just 5 during the lost decades, has been expanding across the continent by building its direct presence in key markets like Kenya and Nigeria and by starting to design products tailored for the African market.

    The consumer giants that elected to stay in Africa are experiencing double-digit growth. Samsung, for example, has set a goal of $10 billion in African sales by 2015. The company is also committed to training 10,000 African engineers and technicians by 2015 in order to develop the capabilities required to succeed.

    Meanwhile, many large companies from other emerging markets have stamped their ambition on Africa. Chinese telecom-equipment suppliers Huawei and ZTE both have a presence in more than 50 African nations and generate more than 10 percent of their revenues from the continent. India’s Bajaj Boxer is the best-selling motorcycle in Africa, which accounts for more than 40 percent of Bajaj’s exports.

    Skeptics like to dismiss Africa’s resurgence as a reflection of rising commodity prices. In fact, Africa started growing before the global run-up in commodity prices. Further, economies not dependent on oil or mining revenues, such as Ethiopia, Ghana, Morocco, and Kenya, have also been growing. At least five factors in addition to commodity prices have powered Africa’s rebirth. (See Exhibit 2.)

    exhibit

    Capital Flows. Capital flight had a draining effect on Africa during the 1980s and ‘90s, with nearly as much money flowing out of the continent as arriving in the form of investment, aid, and debt relief. During the mid- to late 1980s and the 1990s, the equivalent of 1 percent of Africa’s GDP left the continent. Now the equivalent of 11 percent of GDP is flowing into the continent.

    The tide began to turn at the end of the 1990s. Contributing to the reversal were improvements in the economic and political climate as well as the 1996 debt-relief plan for poor nations instituted by the International Monetary Fund and World Bank. Since 2007, annual inflows of foreign direct investment have reached at least $45 billion annually, compared with less than $10 billion annually during the lost decades. The investments are coming from the West but also increasingly from China, India, and Brazil.

    In 2012, the Economist Intelligence Unit interviewed 158 large money managers about their planned African investments over the next five years. It found that fewer than one in ten money managers are investing more than 3 percent of assets under management in Africa today, while nearly eight out of ten will be doing so in five years.

    At the same time, Africans living abroad are sending money back home. In most years, these remittances are nearly equal in size to foreign direct investments, and in some years they exceed them. Finally, while savings rates in Africa still lag those in China and India, they have risen modestly and now exceed those of the U.S. and the European Union. In 2010, African savings exceeded $170 billion, up from $109 billion in 2000.

    Labor. While most of the developed world is growing older, Africa will have a young workforce for decades to come. Shortly after 2030, more than 60 percent of Africans will be of working age. By 2040, Africa will have a larger working-age population than China or India, and by 2060, it will have a larger percentage of people of working age than any other continent.

    Africa will reap the benefits of this so-called demographic dividend about ten years after Asia does. The benefits are multifaceted. The continent’s large working-age population will supply labor to companies but also free up capital that, in older economies, is being soaked up by the elderly in the form of social spending. In coming decades, a smaller share of Africans will be enrolled in school as more and more people enter the workforce. This transition will also lessen the social-spending burden.

    Africa’s workforce is not just young and growing but also better educated than ever before. In Angola, for example, the number of students enrolled in primary school has tripled since 2001, and the enrollment rate has hit 80 percent. The share of young people of secondary-school age who are in school rose to 40 percent in 2010 from just 25 percent in 2000. Across the continent, adult literacy rose from 57 to 63 percent during the same period.

    Connectivity. The rapid rise in mobile and Internet connectivity in Africa is helping the continent’s economies modernize. Unshackled by legacy infrastructure or embedded commercial interests, they are leapfrogging their developed-market counterparts by taking advantage of the latest waves of innovation, leveraging technology to address their most urgent development needs.

    Africa is the fastest-growing mobile phone market in the world. Penetration jumped from less than 2 percent in 2000 to more than 60 percent in 2011. Between 2012 and 2016, mobile connections in Africa are projected to grow at an annual rate of 21 percent. Mobile phones are increasingly helping Africans run businesses; find jobs; pay bills; learn, share, and connect; and deposit, withdraw, and transfer money. East African farmers share best practices in order to increase crop yields, and a not-for-profit organization in Ghana is using an SMS platform to fight the spread of counterfeit medication. Internet usage is growing, too, albeit less quickly. Google is working to make the Internet local by providing translation for many of the continent’s more than 2,000 languages.

    Mobile and Internet access has had a greater effect on productivity and economic growth than elsewhere because the continent started from such a small base of fixed-line usage. For example, one-third of Kenya’s GDP now flows through the M-Pesa mobile-payments systems created by Safaricom, a telecom operator. Internet access has also been instrumental in the spread of democracy and greater government openness.

    At the same time, African transportation and utility networks are also improving. Private-sector infrastructure investments nearly tripled between 2000 and 2010, and electricity generation has nearly doubled. The African Union’s Programme for Infrastructure Development in Africa, launched in 2010, is prioritizing a series of ambitious infrastructure-development projects for the continent.

    Governance and Stability. Recent events in a few countries notwithstanding, Africa is a less risky and more predictable place to do business as the continent increasingly benefits from peaceful political transitions. In 2011, for the first time in history, a majority of African nations were governed by democratically elected leaders. Between 1991 and 1995, Africa endured 35 coups and attempted coups. Between 2006 and 2010, that number had dropped to 14.

    Free elections are on the rise. While elections do not ensure robust participatory democracy, they are a step in the right direction. “In the past decade or so, Angolans stopped fighting after half a million people died, and Chad lapsed into peace after four civil wars,” The Economist wrote in a recent cover story. This reduction in violence has made investors and companies more willing to invest.

    Governments are not just becoming more democratic. They are also becoming more competent and more oriented toward the private sector. A number of today’s African leaders and their cabinets have private- and development-sector experience. Policies such as privatization are increasingly driven by dispassionate analysis and logic.

    Surging Domestic Demand

    These forces have promoted the development of more diversified and sustainable national economies and an emerging consumer class. Between 2001 and 2011, the number of Africans with more than $2,700 in annual income—the threshold for discretionary spending in emerging markets—expanded from 104 million to 184 million. By 2017, that number will likely have risen to 257 million. These consumers tend to be forward looking, fascinated by technology, and enamored of brands.

    In fact, 88 percent of Africans are optimistic about the future, compared with 72 percent in China, India, and Brazil and 48 percent in mature economies, according to BCG’s survey of 10,000 consumers in eight African countries. (See “2013 Africa Consumer Sentiment Survey,” below.) According to the same survey, 47 percent of African consumers aspire to “trading up” in mobile electronics. Two-thirds reported that brands reflect their identity, values, and sense of belonging, compared with just 34 percent of Chinese, Indian, and Brazilian respondents and only 24 percent of respondents in mature markets.

    2013 AFRICA CONSUMER SENTIMENT SURVEY

    For more than ten years, BCG has conducted an annual Global Consumer Sentiment Survey to gather information on consumer behaviors and trends across many countries. In 2013, for the first time, BCG added several African countries to the survey, enabling comparisons across the continent and with other emerging markets, such as China, India, and Brazil, as well as with mature markets. Altogether, the global survey reached 40,000 consumers in 25 countries and was conducted in 20 languages.

    In Africa, we surveyed nearly 10,000 urban consumers in eight countries: Algeria, Angola, Egypt, Ghana, Kenya, Morocco, Nigeria, and South Africa. Respondents represented a mix of consumers of different ages and different income and education levels. The survey explored topics related to income, spending, and budgeting; technology, mobile, and Internet usage; preferred retail-shopping locations; and banking habits.

    Additionally, the survey assessed planned expenditures, trading up and down, brand preferences, and shopping behaviors in 20 product categories: automobiles; baby and toddler products; beauty care; beer; breakfast cereals and foods; chocolate and candy; clothing, footwear, and accessories; coffee and tea; consumer electronics; hair care products; health care; home appliances; insurance; mobile phones and devices; packaged food; restaurants and out-of-home eating; snacks; soft drinks and other nonalcoholic beverages; spirits and other alcoholic beverages; and wine.

    Furthermore, 40 percent of Africans live in cities—compared with 30 percent in India. Since city dwellers spend more than rural residents, a wide range of industries are expected to benefit from urbanization.

    These trends suggest that a sizable portion of Africa’s population will soon be generating the discretionary income required to purchase more than just the bare necessities.

    But the job is not yet done. Infrastructure still needs to be built. Corruption and autocracy have not yet been eliminated. Not all public leaders have embraced free enterprise. And NGOs and relief agencies have plenty of work left to do. Still, Africa has a stronger economic foundation than ever before and is better able to withstand commodity shocks and other external jolts.

    It Takes an Ecosystem

    Companies have a great opportunity to benefit from Africa’s rebirth by conducting their business on the continent in a new way. They must abandon the old model of shipping in finished goods and shipping out resources and profits. Instead, they must prepare to actively engage and commit to a rapidly maturing continent. In the words of former U.S. Secretary of State Hillary Clinton, businesses need to craft “sustainable partnerships in Africa that add value rather than extract it.” They must treat Africa as an ecosystem, not just a trading post.