Letters from Africa: Doing Business On-the-Ground

Currently on a research trip to South Africa and Angola meeting FSG clients and other international and local companies, I wanted to take a moment to share my latest insights:

Today I spoke to a seasoned and very impressive South African executive running a 22.7 billion rand turnover FMCG company out of Johannesburg. He wants to remain anonymous but here is his advice to MNCs entering Sub-Saharan Africa:

  1. Build strong partnerships: Value business relationships and continuously invest in them. Personal relationships are a key component of business success in the region.
  2. Blend corporate culture with an entrepreneurial spirit: “Seize opportunity, if it presents itself. Even if the opportunity lies outside of a company’s core business competencies.” For example, acquiring a local business in a different space will enable a company to better understand the market to then move in with the core business at a later stage.
  3. Believe in the long-term opportunity: The opportunity in individual African markets might seem quite small but, “the size of the prize might be big over a longer period of time. If you are not in the game now, it will only get more difficult.”
  4. Find the right people to run your local operations: Make sure your managers fit in from a cultural perspective, and most crucially, make sure they and their families want to be in the market, “if the wife is not happy, it does not work.”

This last point was echoed by another executive from a leading South African industrial company who shared with me this Roman analogy which reflects his company’s talent strategy:

When in Rome…

One reason why the Roman Empire grew so large and survived so long – a prodigious feat of management – is that there was no railway, car, airplane, radio, paper or telephone. Above all, no telephone. And therefore you could not maintain any illusion of direct control over a general or provincial governor. You could not feel at the back of your mind that you could ring him up, or that he could ring you, if a situation cropped up which was too much for him, or that he could fly over and sort things out if they started to get in a mess.

You appointed him, you watched his chariot and baggage train disappear over the hill in a cloud of dust and that was that. There was, therefore no question of appointing a man who was not fully trained, or not quite up to the job; you knew that everything depended upon him being the best man for the job before he set off.

And so you took great care in selecting him; but more than that you made sure that he knew all about Roman government and the Roman army before he went out.

Stay tuned for more valuable insights as I meet more companies on the ground…

 

Adapt to Nigeria’s Changing Business Environment

Nigeria is changing rapidly. The size of the economy may expand 40-60% overnight, new online sales channels are booming, and the security situation is deteriorating:

  • Rebased GDP figures, to be released later this year, are likely to make Nigeria the largest economy in Sub-Saharan Africa, surpassing South Africa. While the increased size of the economy makes the country more attractive on paper, performance targets may become harder to reach as growth rates slow because the economy is expanding from a larger base
  • Ecommerce is booming on the back of Nigeria’s large consumer base increasingly shopping online. MNCs should tap into this fast growing channel to reach consumers
  • A new militant Islamist group emerged in the North of Nigeria, changing the security situation for MNCs, as foreigners are now being targeted. Companies operating in the North have to implement strategies to mitigate risks. Companies operating in Lagos and the South are not in danger from this group

Trend #1: GDP Rebase to Impact MNCs Performance Targets

Nigeria will surpass South Africa as the continent’s largest economy when GDP is revised upwards between 40-60% in October 2013. If GDP increases by 40%, Nigeria’s economy would swell from US$275bn to US$385bn. South Africa’s economic output is US$378.9bn. New GDP figures will be calculated by using prices of goods and services from a 2008 base year. Currently, Nigeria’s GDP is calculated by using 1990 figures, which do not account for the rapid development of the services, telecoms, and entertainment industries. While the increased size of the economy makes the country more attractive on paper, performance targets may become harder to reach if they are calculated on a GDP multiplier basis. Executives must communicate changes in GDP forecasts to corporate to set expectations about performance in the Nigerian market. Companies should consider revising growth targets down to reflect revised GDP growth rates. Targets should be revised down using a new GDP growth multiplier, but not in real dollar terms.

Trend #2: Ecommerce Is Growing – Get Ahead of the Curve

Nigeria’s Ecommerce market is expanding rapidly: Online sales grew 25% in 2011 to N62.4bn, up an additional N12.5bn from N49.9bn in 2010. Total investment in the sector is estimated at N2.4bn, but this figure is expected to double by 2014 as Nigerian consumers shop more online. The trend is fueled by deepening internet penetration and an uptick in purchases made with mobile phones. In Mastercard’s 2012 online shopping behavior survey, the share of purchases made with mobile phones increased to 30.3% up from 8.0% in 2011.

Ecommerce allows companies to reach a wide consumer base, even without having a local presence in the market. It also makes buying global brands more accessible for consumers in tier 1 but also in lower tier cities.

MNCs can capitalize on growing online sales by partnering with local Ecommerce providers and by offering internet shoppers exclusive deals and differentiated products.

What you need to know when building an Ecommerce platform for Nigeria

  • Payment methods and cash-on-delivery: Despite attempts to reduce Nigeria’s reliance on cash, the economy is still very much cash-based as credit card penetration remains limited. Allow customers to pay cash on delivery alongside other payment methods
  • Human contact: Nigerians value human interaction when shopping. They like to touch, feel, and speak about the product. Have customer relations managers call customers after the item has been reserved online to make sure the customer really wants the product. Allow customers to touch and see the product on delivery
  • Online deals: Offer good online deals to highlight the appeal of online shopping and build recurring customers as Nigerians are very price sensitive and will compare prices
  • Trust: Nigerians are very suspicious of buying online considering high levels of cybercrime. Once trust is established through the steps outlined above, customers will shop online for your products with fewer reservations
  • Challenges: Nigeria’s Ecommerce industry faces various challenges including poor infrastructure, road congestions, power blackouts, the high cost of internet, and cybercrime

Trend #3: The Security Situation in the North Is a Threat to MNCs

A new militant Islamist group called Ansaru emerged in the North of Nigeria, changing the security situation for MNCs in the region for the worse. Companies operating in Nigeria’s commercial centers including Lagos and the South are not in danger from this group.

Ansaru, a more radical breakaway group of Boko Haram, came to the forefront in 2012. The movement is heavily influenced by Al-Qaeda in the Islamic Maghreb (AQIM) and motivated to fight French and Nigerian military intervention in Mali. Ansaru’s agenda is far more international than Boko Haram’s. It is being manifested for the first time with the systematic kidnapping of foreigners. Boko Haram’s grievances are primarily local and come down to skyrocketing unemployment and poverty in the North of the country (60-70+%). It primarily aims to weaken the government which it blames for the precarious economic situation. But as security forces vehemently cracked down on Boko Haram militants, weakening its leadership, the movement fractionalized, creating a more radical offshoot. Companies should monitor closely whether attacks against foreigners are increasing and prepare for insecurity in hot spot regions.

 

PODCAST: Kenya Prepares for Upcoming Elections

Aly-Khan Satchu, FSG Expert Advisor and Anna Rosenberg, Senior Analyst for Sub-Saharan Africa discuss the implications of Kenya’s imminent election and how businesses operating in the region can best prepare.

Key questions answered include:

  1. Atmosphere in Kenya preceding general elections –how high is the risk of post-electoral violence?
  2. What impact will the election have on companies currently operating in the region and what can companies do to prepare?

To listen to or download the podcast, click on this link to access the iTunes store.

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Aly KhanAly-Khan Satchu is the CEO of the East African Financial Portal http://www.rich.co.ke.  He is a banker by training and worked several years in the City of London. He worked for Credit Suisse First Boston, was a Managing Director at Sumitomo Bank, as well as at ANZ Investment Bank and Dresdner Bank. Aly Khan is originally from Kenya and returned to his home country six years ago, and today is an advisor to a number of African Governments and Investors. For the last three years, Aly-Khan has been an active Investor at the Nairobi Stock Exchange, the USE and various other African Stock markets.

 

Building Brand Equity in Ethiopia: Getting in on the Ground Floor

Ethiopia

From Addis Ababa to Mekele, my latest trip to Ethiopia provided insights for the improving investment climate, in particular for consumer goods companies. Despite the absence of international food chains, American and European personal care and household products fill the shelves of small stores in the capital and other parts of the country. Johnnie Walker brand of Scotch Whiskey is seemingly ubiquitous in bars across the country. Diageo’s other important presence in the country, the recently acquired Meta Abo brand, competes with local beers that are supported by foreign companies like St. George’s (France-based BGI Group) and Dashen (British equity firm Duet Group). This is an important trend, because foreign interest in local breweries has acted as a leading indicator of foreign investment in other African countries.

Isuzu trucks and Volkswagen Beetles are among the cars of choice on Ethiopian roads, which is partly due to the wide availability of spare parts for both vehicles. A slowly improving roadway infrastructure connecting rural areas should be a welcome sign for the future investment opportunities. Foreign investment from big players, such as mining companies and the Chinese government, is already contributing to transportation upgrades in the northeast part of Ethiopia. Anecdotally, Caterpillar tractors played a prominent role in many of these road construction projects. The northern historical circuit, which is a prominent tourist route, should benefit from increasing popularity during the next several years.

Foreign multinational companies are already lining up to support the Ethiopian government’s ambitious initiatives to improve the agricultural sector, which accounts for 85% of employment. Public spending plans are focused on improving crop yields for small farmers. Despite investor interest in supporting these projects, the government has so far prioritized partnerships with multilaterals and NGOs rather than foreign companies. While not currently viewed as major partners, foreign companies are seen as current and future customers.

Overcoming famine in the mid-1980s and significant political transformation, Ethiopia is positioning to emerge as a critical destination for doing business in Africa during the next decade. The country’s population of 85 million people is second only to Nigeria’s among African countries. Foreign investment will be critical to help the government keep pace with population growth and to upgrade infrastructure in important sectors like agriculture, healthcare, tourism, and transportation.

Historically, doing business in Ethiopia has been heavily reliant on relationships with influential politicians and those well-connected to officials. A transition to a more liberal and open business climate will be a slow process (see After Prime Minister Meles Zenawi’s Death – What’s Next for Business in Ethiopia?). In the meantime, foreign companies should continue to seek ways to enter and expand to capitalize on opportunities despite lingering operational challenges. Perhaps senior executives could start by grabbing a stool at one of the Hilton or Sheraton hotel bars, where they will find many of Addis’ business elite relaxing and drinking a Johnnie Walker scotch or a St. George beer.

The Key Trends that will shape Nigeria in 2013

Nigeria in 2013 will provide a mixed picture for investors. While the government’s 2013 budget promises to open new investment opportunities, challenges lie ahead. Renewed fuel subsidy reductions will impact consumer purchasing power while the security situation in Nigeria’s hot spot regions is likely to deteriorate.

Trend #1: The Proposed 2013 Budget Creates Investment Opportunities
The Federal Government submitted the budget proposal to the National Assembly for approval. An increase in spending means opportunities in sectors that have received budget allocations or investment incentives. Focus areas for the economy in 2013 are security, education, infrastructure and healthcare. The 2013 budget aims to create long-term macroeconomic stability through continued investment in capital expenditures, deficit reduction, and the development of non-oil revenue sources.

Trend#2: New Fuel Subsidy Reductions will Impact Consumer Purchasing Power
The government launched a new campaign to remove the fuel subsidy in the medium-term, a year after the attempted removal caused widespread protests. New plans will see the fuel subsidy gradually reduced through 2015. Consumers will be hit hardest by the fuel subsidy reduction as purchasing power for non-essential goods is likely to decrease. This comes after consumers were strained in 2012 when fuel subsidies were reduced for the first time. The initial impact of the subsidy reduction will be felt in early 2013. As a result, renewed protests are likely to hit the country once the new reductions are announced. Companies have to reach new customers to compensate for any potential decrease in consumer purchasing power.

Nigeria

Trend #3: The Security Situation is Likely to Worsen
The government allocated the lion’s share of the budget (668.51 billion Naira) to security, indicating that tackling Nigeria’s many security challenges is a key priority. However, companies should prepare for increasing insecurity in hot spot regions as violence is likely to increase if the budget is spent on recruiting more personnel into badly managed security forces that crack down brutally on dissent rather than on investing in better management and training.

Nigeria’s security challenges include bombings by Boko Haram and ethno-religious clashes in the northern and central areas, kidnapping, oil theft and piracy in the Niger Delta, and kidnappings in the Southeast. But the violence is about Nigeria’s acute social disadvantages and widening wealth gap.

  • Boko Haram: The group’s frequent attacks cannot simply be attributed to Islamist militancy, but rather longstanding socio-economic grievances and skyrocketing unemployment. The group is fighting the government which it blames for the precarious economic situation. As a result, the group wants to install Sharia law because it believes secular law is too corrupt and only religious law can establish order. The security forces’ vehement crackdowns and resulting civilian casualties contribute to an expanding base for recruitment.
  • Niger Delta: Similar to the situation with Boko Haram, unemployment and poverty is driving crime in Nigeria’s main oil producing region. In 2009 the government issued an amnesty to all militants with the failed promise to create employment. Instead, criminal activity has increased, specializing in oil theft (150,000 b/d, worth US$7bn annually) and kidnappings.

Having a contingency plan allows companies operating in these regions to manage risks and seize opportunities as they materialize.

*Editors Note: Don’t miss Anna Rosenberg’s latest article on managing distributors in sub-Saharan Africa

After Prime Minister Meles Zenawi’s Death – What’s Next for Business in Ethiopia?

After strongmen Meles Zenawi’s death, MNCs should invest time now in building relationships with influential politicians that could become the new head of state in 2015. Meles’ grip on power for the last two decades meant that business affairs were often dealt with at a personal level. He attracted FDI through personal relationships and resolved business disputes on a personal basis. Until Ethiopia transcends to a more liberal economy in the long term, personal contacts will continue to be crucial for doing business.

Meles’ economic policies combined a dominant state role with private investment by leading international and regional companies. He was responsible for the country’s rapid economic growth in recent years (8% in 2012). However, the ongoing reform agenda to liberalize the economy and privatize parastatals is likely to slow as political attention shifts to an internal power struggle as Meles’ autocratic leadership style prevented the emergence of a strong successor.

In the long term however, the implementation of economic reforms will accelerate. Ethiopia relies heavily on inbound flow of funds from donors (US$4 billion of aid annually) and investors (US$184 million in 2010). To guarantee the continued inflow of foreign direct investment, the new prime minister elected in 2015 is likely to continue many of Meles’ economic policies.

 

Regional Insecurity in Northern and Central Nigeria Impacts Local Operations

Africa

While Nigeria remains one of the most attractive long-term investment destinations in Sub-Saharan Africa, companies operating in the northern and central regions are facing operational risks resulting from increasing insecurity and revenue losses as consumers are staying at home.

Contrary to mainstream media coverage; the frequent attacks in northern and central Nigeria cannot only be linked to Islamist Group Boko Haram. The escalation of violence is born out of socio-economic grievances and longstanding tribal, ethnic, and religious animosities.

While the south is experiencing an economic boom, the northern and central areas are not. Instead they are struggling with staggering poverty levels of 60-70+%. Attacks have so far mainly targeted government officials and churches – both representatives of the wealthy south.

As violence increases, businesses divert investments southwards contributing to economic decline in northern and central Nigeria. However, companies that maintain a presence in affected regions can increase customer loyalty and gain market share by highlighting their commitment through tough times. Having a contingency plan allows companies operating in the area to manage risks and seize any opportunities as they materialize.

Some companies already see investment opportunities in affected areas. Considering the risk level relatively low compared to other dangerous areas such as the Niger Delta, Dufil Prima Foods, part of the Singapore-based Tolaram Group, recently opened a manufacturing site in the northern city of Kanu to save on transportation and distribution costs. South African telecoms provider MTN is also making major investments in radio and transmission to increase its capacity and offer improved services to customers.

A Tale of Two Regions: Southern Investment, Northern Insecurity in Nigeria

Nigeria

Nigeria is a tale of two regions as city-level opportunities in the south overshadow widespread insecurity in the north. Companies must overcome corporate HQ fears regarding operational risks to position for long-term success in Nigeria, which remains the most attractive long-term investment destination in Sub-Saharan Africa.

Last month ethnic conflict ravaged northern Nigeria, leaving 150 dead and 100 injured. This continues a troubling trend of violence in 2012. From an investment perspective, this has rattled foreign companies that are wondering if Nigeria is becoming too risky. However, halting or drastically scaling back investment plans would be a mistake for senior executives.

Much of the violence is isolated in the economically underdeveloped north. The total GDP of 7 attack locations between April 5 and May 4 is US$25 billion, which represents less than 10% of Nigeria’s economy. On the other hand, the total GDP of 7 top investment destinations in the south is US$80 billion. This represents more than 30% of Nigeria’s economy.

Nigeria’s five largest cities, all of which are located in the south, have a combined GDP exceeding US$75 billion. This is surpassed only by Angola and South Africa.  City GDP in Nigeria’s south is set to expand significantly this quarter, even if only on paper, because the government is shifting the base year for real GDP to 2009 from 1990. The result will be an overnight gain of 40% that closes the overall economy size gap between Nigeria and South Africa to only 10%.

Southern cities represent great opportunities for companies targeting emerging consumer classes, public sector projects, and other private sector companies flocking to urban areas. Companies should establish good relationships with distributors that know the southern part of the country well. Much of your sales opportunities are likely to be concentrated in this region for the foreseeable future.

Africa’s broadening horizons – Financial Times Feature

Africa

Sub-Saharan Africa’s potential for economic growth is no longer a secret.

Some estimates show Africa having as many middle class households as China by 2020.

The region is expected to set the pace for global growth over the next five years, with economic expansion averaging 6 per cent per year. China increased Africa investment by almost 60 per cent last year, while India pledged to expand trade volume to $90bn (£56bn) by 2015.

Much of this investment will be concentrated in fast-growing sub-Saharan African markets like Angola, Kenya and Nigeria. Multinational corporations are increasingly concentrating resources on these types of markets to make up for economic volatility in Europe and political uncertainty in the Middle East and North Africa.

In a survey conducted last year, 42 per cent of senior executives focused on Europe, the Middle East and Africa (Emea) revealed that they are planning to set up a direct presence in at least one sub-Saharan African country in 2012. More than one-fifth of polled executives said they plan to establish an African managing director role within two years to oversee regional operations.

Multinationals intend to capture average profit margins greater than 10 per cent and returns on capital 60-70 per cent greater than in high-growth markets like China, India and Indonesia.

If multinationals want to capitalise on all that Africa has to offer, then a fundamental shift must take place in the way that companies prioritise markets for resource allocation decisions. Africa is far too big and complex to look at as one market, or even as a portfolio of countries. Companies must look at the African opportunity as a portfolio of cities, targeting the urban areas that offer the best opportunities for their business.

To continue reading the full article, visit the Financial Times website.

Tensions in the Middle East are a Concern for Import-Dependent Markets

Middle East & Africa

Relatively high commodity prices are supporting government spending plans for most oil and gas exporters in the Middle East and Africa. If rising tensions involving Iran and Israel turns into a conflict, then commodities prices will climb to much higher levels and stoke inflation regionally. Import-dependent economies in East Africa, North Africa, and the Middle East are particularly vulnerable to commodity price spikes that undermine consumer spending power and make it difficult for SMEs to meet their financial obligations

Algeria: The export-oriented economy is exposed to eurozone volatility due to trade with European markets

Angola: Massive oil diversification budget spending continues this year, which means more opportunities for consumer goods and healthcare MNCs

Egypt: The country’s economy remains on the brink, though investors are hopeful that an IMF deal will provide short-term relief

Ghana: The economy remains strong due to government spending and natural resource riches, though new tax policies are a concern for investors

Iran: The local environment is increasingly precarious due to a combination of economic distress and covert military activity

Iraq: The country’s short- and long-term growth outlooks are positive, supported by increased oil production capacity and elevated global prices

Israel: Apple’s commitment to the Israeli technology sector demonstrates the attractiveness of the country’s tech industry right now

Kenya: Parliament’s bid to unseat the head of the central bank head is only the latest example of domestic political discord

Morocco: Government spending keeps growth positive, but the eurozone casts a long shadow as a fall in remittances impact Moroccans

Nigeria: Strong growth will not be derailed, though inflation and security risks pose challenges to the economy

Saudi Arabia: Economic fundamentals underpin a strong outlook, though MNCs should monitor regional tensions

South Africa: The budget offers opportunities for investment and tax relief to citizens, though alcohol and tobacco tax hikes will sting some MNCs

Tanzania: Inflationary growth continues to place pressure on consumers and the economy

UAE: Tighter Iran sanctions will benefit the UAE through increased oil demand, but a critical trade relationship will suffer