Article africa the next big market

Africa the next big market?

Africa? Are you serious? Is typical response I got from people in the developed world to the question of where then next big growth market lies? One would imagine that most multinationals have an answer to the question. I spent the last 3 months conducting a study interviewing more than 60 major companies in Africa. Some companies have a clear strategy now and others like my own company are just now in the process of building one. My assignment was clear, to assess the market and build an Africa strategy based on our product offering and its relevance to the market. During the 3 month process my own view on Africa changed from one of being a skeptic to a full on believer that Africa market is now emerging and will be an important global market in the next 5-10 years. Why do I have such confidence in the potential of this market? I depend on what I would like to call “muscle memory”.

I have had the great fortune of living and working in emerging markets from 1996-2010 living in China and from 2010-2014 living in India. I have found that the macro-economic numbers are never real indicators of the inflection of underlying growth. In my experience the true indicators are the business sentiment and that level entrepreneurial activity. To understand this you really need to go into the market and meet people, the internet with all of its power, consulting companies with their staffs are no match for what can be learned by connecting with people on the ground.

Why is Africa attracting so much attention from the major Mulit-National Companies (MNC’s)? The number one factor is the size and demographics of the population. Of the 2.37 billion increase in population expected worldwide by 2050, Africa alone will contribute 54%. In 2015 the African continent grew by 30 million and by the year 2050, annual increases will exceed 42 million people per year. Most of the opportunities that MNC’s are chasing are related to consumable products aimed at the young population. Another factor to consider is the immense land mass of Africa. When I presented my findings our business leaders in our US headquarters marveled at the graphical map showing that US, Mexico, China, India and Eastern and Western Europe and Japan all fitting within the land mass of Africa.

The young African population is gravitating towards the large urban centers for work. They are increasingly connected, even simple street vendors are connected to the internet through their mobile devices. One story that I heard in Nigeria was that soft drink and beer sales were flat for the first time in history due to the introduction of pay as you go SIM cards. People with little disposable income chose to be connected and will forgo some of the non-necessary items in favor of their internet connection. In the African urban centers entrepreneurialism is going viral. On my visit to Nairobi Kenya, one afternoon I was hosted by 2 impeccably dressed young local professionals from the building and construction

space where we participate with a plumbing product. They had set an appointment with me for our interview over lunch. We were on our way to a major hotel but I asked that we try a “local� restaurant.

They were reluctant but did eventually agree to take me to one of their local favorites. They warned me saying that only recently these restaurants had moved from street vendor type to sit down restaurants.

As we turned in I started to wonder if I was being too adventurous trying street food in a new country but was soon soothed by the nicely set patio tables arranged under the thatched roof. There was silverware set on the table but my hosts told me that the fish, vegetables and sweet potato are usually eaten with your hands, ok why not. Delicious! We washed our hands at the end of the meal and thinking that the restaurant would not take credit cards I reached in my pocket for cash to pay. While I was doing this one of my hosts began texting on his phone. He said sorry, the bill is paid. What I had just seen was him paying by SMS through the M-Pesa system. I noticed later that most places take this type of cashless payment (17 million accounts set up in Kenya). Africa is certainly entrepreneurial and moving quickly but not copying the Western approach directly. Instead they are adapting the technology to their needs, this was a key learning.

What areas are growing the fastest? Certainly any areas around consumption as well as natural resource extraction.

Due to the lack of infrastructure the ability to move goods to and from the major urban centers has hampered growth. Port capacity is set to increase by more than 50% across Africa by 2020. Projects planned or underway include Kribi (Cameroon), Abidjan (Ivory Coast), Lekki, Lome, Badagry (Nigeria), Tema (Ghana), Durban (South Africa), Lamu (Kenya) and Bagamoyo (Tanzania). Most of these projects include road and or rail links to bring the goods inland.

Construction is a high growth area due to the emergence of the huge urban centers of Africa. 2- 3 years back the projects we were working for with our plumbing product in Kenya were typically low-rise and

stand-alone houses. The plumbing projects we are now working on are almost all multi-story apartment buildings. In Nigeria the government is building a new modern city called Eko Atlantic. It is being called an African Manhattan. The site is located on land reclaimed from the sea in the Victoria Island part of Lagos. From my hotel window I could see an army of cement mixers lined up in front of Lafarge and Dangote mixing plants located on the site. Electricity will be there on site from day one however across the bridge in Lagos proper many of the houses lack electricity. An entrepreneur that I met in Lagos who is a leader in the coffee and ice cream business expects a change soon in the electrification of the houses in Lagos. He currently only targets large hotels and businesses, he has started to experiment with popsicles that he feels will sell well once the typical houses have electricity available 24/7.

Personal care and home care are especially strong markets across Africa. In an interesting contrast to my experience in India these markets are dominated by the local players rather than the MNC’s. In casual discussions the topic of the share of wallet in Africa that goes to personal care was described as enormous. Products such as hair relaxer particularly have found a large market and there is a clear need for less toxic products in this space. Other items such as well as hair extensions, perfume, cosmetics are all in high demand. Through my visit to the major multinational companies such as Unilever and P&G I could see they have set-up multiple manufacturing sites in Africa but are only selling a small slice of their normal portfolio and have difficulty attracting a significant share in the mass market due price. In this market as well as in food, flexible packaging is a fast growing market. In my visit to South Africa I met companies that produce inks for the expanding flexible packaging market. They are loyal users of our very technical hyper-dispersants used in producing flexographic printing inks. It was surprising to see such high tech products used for the mass market but they were needed do to the demand for vibrant colors together with a very low thickness of ink coating to reduce the cost. These high tech products allowed them to reduce the overall coating cost and thus make their coatings relevant to the market.

Their entries are not without peril. I talked to one South African entrepreneur in this space who lost 3 million US$ in his investment to establish ink production in Nigeria. I asked if he had the money back would he invest instead in his home country of South Africa or perhaps the linked markets in India. He said no I would go back to Nigeria but do it differently this time, this shows the powerful draw of the growing markets in Africa.

Food Packaging is a natural for an urban population that has moved to the city away from their extended family. Young professional’s value time so shopping and cooking is reduced by the presence of fast food or packaged foods. This same trend is there with transportation as people move to their jobs or back to the villages on holiday. Feeding the mass population is a concern in general and this is despite the large quantity available arable land. 50% of the world’s uncultivated arable land is in Africa, however of the land currently under cultivation only 4% is irrigated. So in every link of the food supply chain there is opportunity.

Oil and Gas and Mining are traditional businesses in Africa but these sectors have been hurt by falling oil and commodity prices. Even with the drastic change in fortune I found the people that I was talking to still very confident about the future for the most part. An exception was Tunisia. It is not major oil production country but it is an oasis of calm between the two major North African oil producers Libya and Algeria. Tunisia specialized in providing the industrial and consumer items to these two vast neighbors. The mood is dampened by the loss in productivity during the “Arab Spring”, the oil price slump and in-stability in Libya. Currency is also heavily effected in Nigeria due to the decline in the

foreign currency generating machine that has emerged in Nigeria in the last 10 years. The official fixed rate of the Nigerian Naira differs from the black market rate by 50-70%. As incredible as this hurdle is business finds a way to get done, traders adjust to the new reality and growth continues like an unstoppable force.

There are 54 countries in Africa, I sat in a conference where consecutive speakers quoted different numbers of countries it is that dynamic. The challenge to new comers in the market is how to choose where to go first. In my survey of over 60 companies the answer was amazingly consistent. All companies look at Africa in 5 pieces, North, South, East, West and Central Africa. Most companies are not yet having a strategy for Central Africa so we can look instead at the other 4. North Africa is a significant in economic terms, on the basis of GDP/Capita tops these countries top the list most at over 5000 US$/capita. Trade between North Africa however is surprisingly small and most trade is aligned “North / South” with connections in Europe and to the South in Sub-Saharan Africa. Morocco is the exception as it is positioning itself as a center for African trade and many MNC’s are using Casablanca Morocco as their North African headquarters. South Africa is the most developed economy and most closely reflects typical Western markets. Johannesburg is the economic center where most of the large businesses are headquartered. The drawbacks for South Africa are the low economic growth as the economy matures and an internal focus on issues within the country (like the Black Economic Empowerment or BEE policy) that does not allow them to break their out of date view of the Africa paradigm. I was told by many in South Africa that their country is the “spring board to Africa” but when I dug deeper regarding the percent of their sales in the rest of Africa I received numbers of less than 10% of revenues coming from African exports. When I queried marketing folks further on this they reported that due to the difficulties in doing business in Africa they would rather fight for additional share in their home market than invest in geographic expansion. I would say look at South Africa on its own merits very positive as an attractive developed market but not as a center for African trade.

Clearly the largest future growth will come from the East and West African areas. East African Community comprises 6 countries, a population of more than 170 million and open borders for trade (Burundi, Kenya, Rwanda, South Sudan, Tanzania, and Uganda.). The economic center being Nairobi; a relatively well developed city with improving infrastructure and new rail links to the major port at Mombasa. The ease of doing business such as currency convertibility, repatriation of profits and ability for foreign companies to have 100% equity stake are all attractive. To get closer to the market, some MNC’s are using Nairobi as their African headquarters. This is generally a move from the traditional approach of using South Africa as their main African HQ. There is much talk in Kenya about the emerging market in Ethiopia where the infrastructure and power improvements together with a population of 100 million make this an attractive country to expand towards. It is still difficult to do business in Ethiopia due to regulatory and currency controls but that has not stopped major MNC’s from setting up shop in Ethiopia directly.

In the West (perhaps we could use the phrase “wild west”) lies the biggest economy in Africa, Nigeria with Lagos at its economic epicenter. What Nigeria lacks in the way of currency convertibility, organized business structure and chaotic roads it fully makes up for with its large population (>170 million and growing) and entrepreneurial spirt. I often asked the question of others in Africa, if you were going to choose one country to be in out of the 54 which would it be? Again and again it came back Nigeria is a market that you must have a presence for the future. Everywhere I traveled in Africa I was met with a comforting warm friendliness and hospitality. Nigeria was even more so. Judging from my experience in

Asia, South Asia, Western Europe and the US, I would say there is a bigger importance placed on relationships in business than in the other parts of the world. Coming in as a senior executive of an MNC company gave me access to business connections that our people on the ground would have great difficulty to make. Being there on a consistent basis is important in cementing relationships and driving business forward.

Corruption is certainly the “elephant in the room” when it comes to doing business in Africa. It can range from petty corruption in facilitation of documentation for movement of goods through the ports to a grander scale when dealing in large government projects. Corruption is no doubt a hindrance to growth in all the countries of Africa. On the other hand in my discussions with MNC’s doing business in Africa they assured me that it while it may be difficult it is possible thrive in the market sticking to a policy of zero tolerance when it comes to corruption. It seems that there is an understanding in the marketplace that due to legislation such as the Foreign Corrupt Practices Act that western companies cannot engage in bribes or other forms of corruption.

One of my greatest learnings was that crafting an Africa strategy is an individual exercise. Despite the many inputs from the companies that I visited it still comes down to matching the opportunities emerging in Africa with the offering that your company can bring to the table. There is no one size fits all approach. For the strategy development I did for my own company this meant going business unit by business unit and identifying the ideal focus opportunities and the country or region of Africa to go first.

Are you currently doing enough? One way to check is your percentage of sales going to Africa, in general I would say 4-8% of your global revenue should currently be in Africa. Is it too late to start now?

I would say it is not too late … yet. Africans are brand conscious and are well connected to the internet of things. Establishing a presence and reputation in the market will be key to capturing the future growth. This may not seem evident now but from my experience I would say if you do little to nothing now, you will look back with regret 10 years from now on the opportunity you missed. The road is bumpy for sure. I heard one joking quote from a business leader “you go into Africa with a lot of money and come out with a lot of experience”. This does not have to be the case. The key is to have your own people on the ground, get the senior executives into the region, and adapt your product offering to what is really needed in the African market rather than just selling what you have off the shelf. Yes it is an investment and perhaps a distraction of focus. But as China and India mature it will be our efforts in developing the Africa market that will be showing up as the growth driver in our future income statements. My final advice to others following in our footsteps would be to narrow your effort. Use product fit and geographic targeting as a way to increase your initial impact and then expand from there as the market grows, and it will grow!

Mr. Timothy Earl Madden is Managing Director for Lubrizol LifeSciences and TPU divisions in the EMEAI region. Berkshire Hathaway bought Lubrizol in 2011 and since then the company has continued to expand its global leadership in application specific specialty chemicals. Timothy has been based in Barcelona for the last 2 years leading the restructuring of the LifeSicences commercial structure and the M&A integration of the Merquinsa TPU business. He is currently focused on preparing an Africa growth strategy for the company before moving back to US sometime later this year. Timothy has extensive experience in establishing and growing businesses in the developing regions of the world. Prior to Barcelona he spent 4 ½ years in India building the business infrastructure and establishing a plant in Gujarat India. Before that he lived 14 years in Asia Pacific building business

infrastructure, M&A and establishing plants in Malaysia, Korea and China. In addition to the time with Lubrizol, he has held senior management roles in a PE owned company called Noveon (AEA Investors), and also with BF Goodrich and Dow Chemical. He is active in sports, particularly in triathlon and bicycling and is active in a charity that his wife Silvia founded in Marrakech. Contact info: maddent0725@gmail.com