Multinational corporations have targeted Africa as a destination for their investments for quite a while.
The latest investments include American multinational food manufacturer Kellogg acquiring a 50 per cent stake in Nigeria’s Multipro, whose core business is selling instant noodles. Other big corporations that have gone into Africa include SABMiller, the world’s second-largest beer brewer, Unilever, Procter & Gamble, Walmart, Carrefour, Toyota and Ford.
Singapore is also represented on the African continent, with almost 60 companies such as Olam, Tolaram and Wilmar (agricultural companies), Indorama (petrochemicals) and PIL (shipping) having a presence there.
For all of them, Africa represents a huge market of more than one billion consumers, with very few competitors, and these companies want to be among the first to venture into the continent and grab the growing opportunities.
Africa is an immense continent. Geographically, the vast swathes of savannah, desert and rainforest encompass roughly the same surface area as the moon. China, the United States, India, Western Europe and Japan would all fit into Africa, with land to spare.
Encompassing 55 countries, the continent’s tapestry of languages, cultures, religions and political systems create a rich diversity that is unfortunately too often diluted by broad generalisations and stereotypes that still paint Africa as a dark and dangerous continent.
What makes Africa attractive to businesses now? The key is Africa’s rapid urbanisation rate and growing middle class, which is creating huge demands for consumer goods and services.
Currently, about 40 per cent of Africa is urbanised, and this figure is expected to grow to 50 per cent over the next few years. The rise of African megacities such as Johannesburg, Lagos and Nairobi make for huge markets in their own right.
It is these cities that contain a significant portion of the middle class who are also driving up demand for luxury goods. For a lot of Africans, brands help define their identity.
At the same time, there is an underdeveloped formal retail sector, which makes the continent an important and new growth destination for multinational companies such as Kellogg and its competitors. Malls, conspicuously absent until quite recently, are now sprouting.
Other than consumer companies, businesses that can offer Africa food, energy and water resources, which the continent sorely lacks, will do well.
For instance, despite the abundance of agricultural land available, Africans frequently suffer from famine, and Africa is a net importer of food. Companies that have the capacity to transfer skills and competence, as well as financing options to the farmers of Africa, are highly sought after.
Singaporean companies that have tapped into this opportunity include Olam, Tolaram and Wilmar. Feeding Africa is a daunting task and Africa can use all the support it can get.
Potable water is also highly in demand. Not only is water scarce, but it is also frequently not suitable for human consumption. Entities that can help Africa solve its water issues are likely to prosper.
As for energy, more than 600 million Africans are without electricity. It will take decades to serve this large group of people. In order to deal with the relatively high capital costs associated with energy supply (frequently unaffordable for most energy users in Africa), African telecommunications companies are using platforms such as M-Pesa to empower users to pay an affordable monthly operating cost instead of a high up-front capital cost. Asian companies that can provide affordable renewable energy alternatives to grid-based electricity will generate high returns.
Yet there remains many daunting challenges, especially in supply management, due to the lack of infrastructure such as proper roads and transportation.
There are also a lot of trade barriers. It has been said that it is easier for African firms to do business with Europe than with each other, with intra-Africa trade at only 12 per cent of the continent’s total trade.
For instance, due to import permit requirements, a cargo truck that seeks to cross borders may need to fill up to 1,600 documents.
The recently announced Tripartite Free Trade Area (TFTA), however, brings hope to businesses. It will integrate three economic communities: the East African Community, the Common Market for Eastern and Southern Africa, and the Southern African Development Community, providing free-trade access to 626 million consumers across 27 countries.
It is also expected to increase the level of intra-African trade to 30 per cent. Companies that are entrenched in Africa at the time when the TFTA is ratified — hopefully by 2017 — will be in a very advantageous position to do business in Africa.
Other risks in the rest of Africa include the lack of suitable real estate‚ currency volatility and corruption. These risks are known risks, however, and can be managed. Foreign companies have adopted entry strategies such as partnerships to get access to local knowledge and networks.
Africa is the last investment frontier left in the world. There are risks involved, but the quantum of opportunities far outweighs them. The reality is that the investor must understand Africa, identify the risks and take the necessary steps to mitigate them. For the savvy investor, the returns will be huge.
Published in: TODAY, 9 November 2015