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.
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.”
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.
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.
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 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.
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.
Not all of these opportunities are investable at the moment. Of the big companies mentioned, MTN is the closest to a pure African play, though its operations in Syria, Yemen, and Iran may give pause to some investors. African ETFs are an option, but few focus exclusively on sub-Saharan Africa. Market Vectors Africa Index (NYSEARCA:AFK) is heavily weighted in minerals, banks, and telecoms, and in South Africa and Egypt. It is down about 11% year to date, but that partly reflects nervousness about Egypt.It is up about 9% since this time last year. The SPDR S&P Emerging Middle East and Africa (NYSEARCA:GAF) is also heavy on financials, mining and telecoms, as well as on South Africa, but it counts big pan African retailer Shoprite (OTCPK:SRHGY) among its top 10 holdings. GAF is down about 9% year to date, but it is up nearly 18% over the past year.
Disclosure: I am long AFK.