Africa: The Next Big Thing?

The world is discovering Africa. By Africa, I mean sub-Saharan Africa. The North African countries from Morocco to Egypt are generally lumped together with the Middle Eastern countries with which they share much closer ethnic, religious, and economic ties. I am writing about the other 870 million people who live on the continent.

I wrote in this blog last year about reports on Africa published by BCG and McKinsey, which – belatedly, in my view – had just jumped on the Africa bandwagon. McKinsey devoted much of The McKinsey Quarterly of June 2010 to a cover story and associated articles on “Africa's Growth Story” . Noting the rapid growth of Africa's population, its relative abundance of arable land, its rapid urbanization, growing domestic markets, and a higher rate of return on investment than other regions, the McKinsey survey concluded that “Global executives and investors cannot afford to ignore this. A strategy for Africa must be part of their long-term planning. The time for businesses to act on those plans is now.” In April 2011, renowned investor Mark Mobius wrote about Africa on his blog, saying, “I believe the opportunities for the development of Africa's markets are appealing primarily because of the strong growth numbers now emerging out of the continent. Africa is expected to grow more than 7% annually in the next 20 years, due to an improving investment environment, better economic management and China's rising demand for Africa's resources.” He went on to tout Nigeria as “one of the frontier markets that I like.”

But before you rush off to invest in Africa, remember that Charles de Gaulle once said, “Brazil is the country of the future, and it always will be.” It may not be long before people start to say similar things about Africa.

Let me be clear. I am a strong believer in Africa, having spent much of the past 25 years living and working in places as varied as Botswana, Senegal, Nigeria, and Sudan. I have previously written in this space that by 2050, and maybe sooner, Nigeria will be a more important player in the world economy than Russia. Africa does represent tremendous opportunities, but Africa is sure to bring disappointment to many investors, just as Brazil – and also China – has done on numerous occasions.

It is not just about the risks in Africa, since in many cases African risk may be overpriced, which creates additional opportunities for investors who know what they are doing. It is more about the challenges of doing business in a continent in which more than 70% of the population lives on less than two dollars a day. Any businesses looking to serve this population will need to adopt different new and non-traditional ways of doing business. There remain plenty of traditional business and investment opportunities in Africa, mainly in the mining and energy sectors that still receive the bulk of foreign direct investment, and also in big infrastructure projects now typically financed by a combination of public and private capital. But you'd be missing a lot if you assumed that natural resources are the whole story. According to a 2011 report by the World Bank,  “Between 2000 and 2008 less than one third of Sub-Saharan African GDP growth was due to natural resources, with the bulk reflecting the rapid expansion of wholesale and retail trade, transportation, telecommunications, and manufacturing.” It turns out that 870 million consumers, with a total purchasing power of over a trillion dollars, are worth paying attention to.

A few caveats are in order. Africa has 53 countries (soon to become 54, as Southern Sudan gains its independence on July 9). Some of them are tiny. Seychelles, an archipelago in the Indian Ocean, has 455 square kilometers of land area (about the same as San Jose, California), and 90,000 people. Some are huge. Nigeria has 150 million people. Sudan, until next month the largest landmass on the continent, covers 2.5 million square kilometers, more than six times bigger than California. Some are shockingly poor (Zimbabwe has a per capita GDP of $500) and some are fairly or even very wealthy. Equatorial Guinea, flush with oil revenues, has a per capita GDP in excess of $30,000, though in most measures of human well-being it ranks about the same as Tajikistan or Nicaragua. Which brings up another point. Some countries suffer under staggeringly corrupt and dictatorial governments, while others are governed reasonably well. Some countries remain too poor, too corrupt, or too chaotic for all but the most specialized investment opportunities. A single strategy for Africa makes even less sense than a single strategy for Europe encompassing Norway, Greece, and Albania.

All of this means that almost anything you can say about Africa is equally true and equally false, depending on location and context. Companies looking at business opportunities in Africa can't use a shotgun approach. They have to choose their markets carefully and tailor their strategies to the peculiarities of each one. Many very large African and international companies, some of them present on the continent for a hundred years or more and others that hardly existed before the 1980s, have created successful business models that make sense in Africa. We don't hear much about the ones that failed to do so.

Monitor Group last month released a report Promise and Progress: Market-based Solutions to Poverty in Africa, which distills the results of 16 months of research into “initiatives that use the market economy to engage low-income people as customers, offering them socially beneficial products at prices they can afford, or as business associates – suppliers, agents, or distributors – providing them with improved incomes.” The report is a companion piece to a 2009 report addressing the same issues in India.

The market-based solutions (MBS) that Monitor highlights are intended to meet the needs of the poor, but in ways that make a profit for the solutions providers, whether they are micro-enterprises or multinationals. Typically, they are based on value and supply chains that involve both. Some use leading-edge technology for things like mobile phone-based payments systems, often for people without bank accounts. Others are relatively low-tech. Monitor cites the example of Voltic, Ghana's leading bottled water producer, which introduced a new brand, packaging, and distribution system targeted at the poor, which enables informal street traders to sell 500-ml sachets of pure water for three cents apiece. Though Voltic employs only 450 people directly, its distribution chain has created an estimated 9,000 jobs. The business proved so successful that brewing behemoth SABMiller bought it in 2008.

My own experience and research show that many old-line companies, including the big breweries such as Heineken and Guinness, as well as Coca-Cola, have developed new products for local markets and mastered lower-cost production and extensive distribution systems that engage independent wholesalers, retailers, and street vendors in networks that provide both products and income to millions of people.

Africa may be poor, but close to half of all Africans over the age of 15 have a cell phone. Companies like Vodaphone and Celtel and MTN pioneered business models would never have been tried in developed markets, but which have proven immensely profitable.  Bharti Airtel last year paid $8.3 billion to acquire the African operations of Zain, a Kuwaiti company that acquired Celtel in 2007. MTN Nigeria, part of the South African MTN Group, which owns cellular operators in 22 African and Middle Eastern countries, recorded some $5 billion in revenues and $1.25 billion in net profits in 2010. They did not do this by selling iPhones and expensive data plans.

The takeaway message here is that profit-making companies, not donor and charitable organizations, are the key to improving Africans' lives. In 2009 Africa received about $48 billion in official development assistance. That's a lot of money, but it amounts to only 4% or so of the continent's GNP. Although a lot of it is wasted, it is still  useful,  mainly to the extent that it improves conditions for private business by improving infrastructure and education and removing administrative and regulatory barriers to investment. Aid alone cannot do the job.

This is far too big a topic to cover in a single blog post, and indeed Monitor has produced a 236-page book, which I am still reading. Look for future posts expanding on these, and related, themes.