What exactly is the reality of doing business in Africa? Is the business environment filled with only crisis and conflicts or are there possibilities that could get even bigger with the rate of urbanisation, rising incomes and increasingly better governance practices on the continent? That is, is the glass-half-full or half-empty?
In the book, Africa’s Business Revolution, coauthored by McKinsey partners Acha Leke, Georges Desvaux and McKinsey alumnus Mutsa Chironga, there’s deliberate advocacy for the need to start seeing Africa with a new pair of eyes – to see a half-full glass.
In an interview with Mckinsey Quarterly, they questioned the negative sentiments, answered some of the lingering questions at the lips of skeptical business leaders considering Africa as an investment destination and gave some strategies for achieving growth in a continent that has its own fair share of political and business risks.
Perception of risk versus Reality
Africa gets a lot of negative coverage, which tends to distort reality when looking in from the outside. Especially when international news media outlets treat Africa as one country instead of 54 different countries, with unique challenges and opportunities.
“There’s a big difference between the perception of risk versus the reality on the ground. A lot of clients who are not based on the continent tend to read the news and the sensational headlines you hear,” Acha Leke stated.
Now, as an example, did you know we had up to 400 companies with over a billion dollars of revenue in Africa? That’s what I thought. Most business executives in and outside of Africa predicted way less than 400 when they have posed the question of how many companies in Africa have over a billion dollars in revenue. Acha Leke confirmed that only two people got the number right. One of them is Aliko Dangote, the world’s richest black man.
Fundamentals that underpin the opportunities in Africa
Africa’s population edge
One of the factors that favour the continent is the young population. Georges Desvaux says it was like China 25 years ago. “When you go to a city like Lagos, you think you are in China 25 years ago,” he said.
However, one advantage Africa has over 25-years-ago China, is the availability of technology. Georges Desvaux explains that the continent can leapfrog “in many places with technology and that opens up a lot more opportunities that people may not have seen at this stage.”
Aside from these, Acha Leke also points out their findings showed there’d been an increase in disposable income on the continent as a result of GDP growth.
“If you think of the continent today, it’s young, it’s fast growing, and it’s urbanising,” Acha Leke spoke assuredly about the continent.
Risks and Challenges
The uncertainties in Africa are well-known. A large portion is political risks. Combining a growth and risk perspective, Acha Leke identified three categories of countries on the continent.
1 – Quite stable and fast growing
“…that tends to be the East African and the francophone African countries. So the Rwandas and the Ethiopias of the world, but also you see some countries like Cote d’Ivoire, Morocco, countries like that.”
2 – Vulnerable growers
These countries are still growing despite being exposed to shocks, especially a plunge in commodity prices. The oil shocks have affected places like Nigeria and Angola.
3 – Stragglers
These are countries that have struggled to grow over the past years. Places like South Africa are plagued with a political crisis, and the economy has stagnated due to collapsing public institutions.
However, to succeed in any of these countries, companies must be ready to play the long game and diversify risks.
Playing the long game
Georges Desvaux warns about the need to build resilience for the long run. The African business landscape is still pretty immature, and investors must take a long-range perspective. It’s about managing the present risks and building systems and processes to ensure the business can overcome future challenges.
“Africa is going to be the next pillar of growth because of demographics, because of the natural resources, because of urbanisation. And so what you need to do is you need to build the resilience that enables you to manage the risks.”
Strategies for conquering Africa
Acha Leke and Georges Desvaux identified four elements that will help companies build a strong business strategy in Africa:
- Map an Africa strategy
- Innovate a business model that leverages technology to drive down costs
- Build resilience for the long-term and carefully choose where to play in the value chain. Georges Desvaux gave an example of Jumia. How the e-commerce giant has had to create and control the “last mile” (distribution channels) to provide the right service level and the safety of goods.
- Build an African-oriented talent base that understands the taste of African consumers
China’s influence on Africa
Chinese companies, according to Acha Leke, account for about 12 percent of the total $500 billion of products manufactured in Africa. Also, out of the 10,000 Chinese companies operating in Africa, about 85 percent of them is private.
“These are Chinese companies like the ceramic tile manufacturer based in Angola, in Kenya, in Cameroon, in Senegal, manufacturing locally about 12 percent of Africa’s full production,” in the words of Acha Leke.
Georges Desvaux thinks most of these Chinese firms are misunderstood. He believes these Chinese entrepreneurs have genuine reasons to come and plug the demand gap on the continent, debunking the myths often propagated by some in the media.
Barriers to business in Africa
Infrastructure is the elephant in the room in Africa. “Infrastructure gets in the way, whether it’s power, or it’s roads, or it’s airports, ports, across any asset class,” Acha Leke explains.
However, the amount the continent spends on infrastructure has improved over the years. According to Acha Leke, we are spending $80 billion a year on infrastructure, and that is up from $40 billion. Although, the continent will need to raise that figure to $150 billion every year to fix the infrastructural deficits.
Ease of doing business
Many African countries have done poorly in the rankings over the years with only a few improvements in some countries. There are still many difficulties with registering a company, paying taxes, access to electricity and permit for construction projects.
However, in the last World Bank Doing Business 2018: Reforming to Create Jobs report Nigeria, Malawi, and Zambia were among the top 10 improvers, based on reforms undertaken. There’s been a gradual shift towards a friendlier business environment on the continent.
Africa has the lowest intra-regional trade in the world. Paul Kagame, Chairman of the African Union Chairman, has worked hard to ratify the African Continental Trade deal, which has been signed by most countries on the continent except Nigeria, the continent’s largest economy. Nonetheless, the major hindrance to regional trade in Africa is still infrastructure, especially finance and transportation.
These obstacles are all valid, but each company looking to invest in Africa would have to deal with each different depending on the line of business. To hear the whole of this fascinating interview on doing business in Africa, please visit the McKinsey website.