While there are many factors that have contributed to Africa’s growth story, the emergence of China in the world economy and its engagement with the continent has, and will continue to play, a fundamental role in Africa’s re-emergence on the world stage. China has exercised a two-pronged approach – trade and investment – throughout its decades-long engagement with the continent. Between 2000 and 2008, China’s GDP expanded at an annual rate of 10 percent. Meanwhile, its annual demand for industrial raw materials has witnessed its own impressive boom. During this period, China accounted for two-thirds of the world’s entire growth in demand for steel and aluminium, and virtually all growth for copper and nickel. This rapid growth in China’s natural resource consumption not only contributed to a surge in commodity prices but also created a windfall in trade between China and Africa, a major supplier of raw materials.

In addition to external demand, a number of internal growth engines – Africa’s ongoing urbanisation process, an expanding labour force, and the rise of the middle-class – have been driving this trend. According to a new report from the African Development Bank, Africa’s middle class has tripled in size over the last 30 years and now numbers 313 million people, or more than 34 percent of the continent’s population. Today, 40 percent of the continent’s one billion people live in urban areas, compared to just 28 percent in the 1980s. A large number of Fortune 500 companies have already identified the opportunity.

Lessons for Western Business

One of the key challenges international companies face when searching for opportunities in Africa is where to start. While the specifics of the market size and growth, channels to market, industry structure, government regulations, etc. will affect a company’s final decision, it is important first to gather relevant intelligence regarding a country’s macro environment. This allows for the clustering, prioritising and validating of regions, sub regions and countries.

With this goal in mind, The Beijing Axis recently performed a comparative evaluation of the macro environment at three levels, namely socio-political/governance, macro-economic and business environment. Ten factors across three categories were selected to assess the overall attractiveness of each country. They were Voice and Accountability, Political Stability, Government Effectiveness, Regulatory Quality, Rule of Law and Control of Corruption, GDP Size, GDP Growth and Economic Growth Outlook and Ease of Doing Business. Some of the findings are as follows (see chart above):

• African economies exhibit impressive GDP growth rates – entire regions have doubled or even tripled the size of their economies during the past decade
• On the basis of the analysis, countries in the Southern region have performed better due to their better governance structures and business environment
• Mauritius, Botswana, Namibia, Cape Verde and South Africa emerge as the most attractive markets
• African countries ranked from 16 to 30 are small economies dealing with various socio-political issues
• African countries ranked from 31 onwards are very small economies with underdeveloped governance structures
• In order for Africa to continue to prosper, it needs to improve its socio-political stability, rule of law and business environment. For the moment, Africa’s under performance in these areas are hindering further economic growth

Africa is a continent and does not function as one single market. At the same time, while the overall opportunity may remain attractive (eg. the size of Africa’s consumption markets equals that of India), the market size and growth of a single market may not be that appealing yet. An integral understanding of Africa’s regional trade blocs can help identify available market entry opportunities. Africa’s ongoing regional integration efforts, which potentially offer larger markets, fewer barriers and greater economies of scale, should provide bigger returns on investment. Regional leaders such as Ghana in the west, Kenya in the east, and South Africa in the south serve as strong base markets from which to expand into surrounding regional markets. Whereas it may be impossible to set up shop in each country, having a base in the regional stronghold is a feasible and increasingly attractive strategy that MNCs can adopt.

The challenges ahead

Understanding and being able to navigate the African continent’s diversity is key. Some of the critical success factors are:

• First conduct a thorough market scoping exercise – Understanding where to start (and why), are key tasks that companies often ignore. Macro factors such as political stability, ease of doing business or rule of law can be deal breakers. Understanding and managing these risks are extremely important
• Market intelligence is essential but one cannot entirely rely on data – Decisions cannot be entirely based on desk research. Field research and on-the-ground work are key differentiators in successful market entry strategies
• Collaborative strategies work – Find support in people who have an intimate understanding of the local market and have the right connections at both the corporate and government levels. Finding a local partner often helps companies to navigate the red tape and significantly reduce transactional costs involved in organic growth

• Find the right channel to market – China’s increasing involvement in Africa presents an opportunity for many companies. Chinese partners can play the role of a financier, client or supplier. By partnering with the right Chinese company, one can protect against new entrants at home or enter into new markets
• Position yourself in the long run – Do not expect immediate results. A long-term commitment is fundamental in a successful Africa strategy. The real opportunity is still to come

Knowing and understanding how to navigate these obstacles are some of the factors that have allowed successful international companies – many of them Chinese, to profit from the continent’s high profit margins across a range of sectors. Doing business in Africa requires both flexibility and a long term strategic approach. There will be challenges ahead, but the overall opportunity remains in the continent’s long-term potential.

 

Javier Cuñat serves as an Associate Director at The Beijing Axis, a China-focused international advisory and procurement firm, and is currently participating in the Tsinghua-INSEAD EMBA Programme. He can be reached at [email protected].