When two leading strategy consulting firms, each of which prides itself on rigorously independent analytical thinking, release reports in the same week on roughly the same topic, there are only two possible conclusions: either they have been afflicted by the same kind of groupthink that led those famously independent Wall Street firms over the precipice of subprime mortgages, or they are onto a real and important phenomenon. I suspect a bit of both.
On June 2, Boston Consulting Group (BCG) released a report “The African Challengers: Global Competitors Emerge from the Overlooked Continent.” That same week, the McKinsey Quarterly, the journal of McKinsey & Company consultants, released its summer issue with a cover story and several additional articles devoted to “Africa’s Growth Story.” Having spent much of my career in Africa, and having written fairly extensively in this blog and elsewhere about both the promise and the frustrations of the continent, I am gratified to see an alternative take on Africa to what many call the “CNN Effect,” which focuses on poverty, starvation, and armed conflict to the exclusion of almost everything else. Still, it’s not clear that these reports fully meet the test of truth, originality, and relevance.
With respect to originality, both McKinsey and BCG are a dollar short and a day late. In May 2007, Stephen Jennings, the billionaire founder of Renaissance Capital, who made his fortune investing in Russia after the breakup of the Soviet Union, said, “If Russia was a once-in-a-lifetime opportunity, sub-Saharan Africa is a second once-in-a-lifetime opportunity.” Starting his first African operation in 2006, Jennings has put his money where his mouth is, establishing offices in Lagos, Nairobi, Harare, Accra, and Johannesburg, launching the $1 billion Africa Renaissance Fund, buying up African brokerage houses in several countries, and participating in scores of African mergers, acquisitions, and IPOs, most of them worth at least several hundred million dollars.
Also in 2007, Goldman Sachs, whose analyst Jim O’Neill coined the term “BRIC” in 2001, released a report “BRICs and Beyond,” which identified what it called the “Next 11,” large population countries, at least some of which could soon rival the G-7 countries in economic importance. Nigeria, the report predicted, could become the 10th or 11th biggest economy in the world by 2050, ahead of France, South Korea, Canada, and Italy, and just behind Japan, the U.K., and Germany. Though Goldman Sachs doesn’t agree, I have stated several times that by 2050 Nigeria is likely to have overtaken Russia as well.
Being first isn’t the only thing that matters, of course. Half a dozen people developed versions of the incandescent light bulb well before Thomas Edison, but without Edison their inventions might have remained an uncommercialized curiosity.
But do these reports tell us anything that is true, non-obvious, and useful? Let’s start with BCG’s report, whose scope is narrower than McKinsey’s. BCG examined 600 companies in Africa to come up with a list of 40 “Challenger” companies from countries it inevitably dubbed “the African Lions.” The Lions comprise Algeria, Botswana, Egypt, Libya, Mauritius, Morocco, South Africa, and Tunisia. I have always had a problem with the BRICs construct – there seems to be much more that divides than unites the four countries – but BCG’s grouping makes even less sense. “Great diversity exists among both the African Lions and the BRIC countries,” says the report, “but the development model for all of them rests on similar pillars: political stability, rule of law, property rights, access to capital, and public investment in education, health, and social services.” Really?
China, Russia, Algeria, and Libya may be long on political stability, but they come up woefully short on property rights and rule of law. Inconveniently for BCG, five of the 40 Challengers don’t even come from the Lion countries since BCG’s criteria for lionhood somehow weren’t elastic enough to allow them to include Angola, Nigeria, and Togo in the group. The exclusion of Nigeria, the continent’s largest country by population and second-largest by GDP, is particularly hard to explain, since according to the Heritage Foundation’s Index of Economic Freedom it scores well above Libya and China and the same as Algeria and Russia on property rights and better than all but China on corruption.
McKinsey’s analysis is altogether a more serious effort than BCG’s. It makes some true, if not terribly original, points, one of which is that as important as natural resources are to African economies, much of the economic growth in recent years has come from other sectors, including transport, distribution, telecommunications, manufacturing, and agriculture. McKinsey correctly attributes this growth not only to commodity price booms but also to better macroeconomic management, the sale of many state-owned enterprises, trade liberalization, and more business-friendly policies and regulations. The McKinsey report highlights Nigeria as “an example of an African oil exporter that has begun the transition to a more diversified economy. Natural resources accounted for just 35 percent of Nigeria’s growth since 2000, and manufacturing and services are growing rapidly.”
The McKinsey report also highlights 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, concludes 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.”
McKinsey’s analysts do have a point. It would be reckless to ignore Africa’s growing importance as a market and a source of much of what the world needs, but does that really mean that investors must act now? There’s no evidence that the first foreign companies to invest in China made any more money than those who waited to learn from their mistakes, and some evidence they actually fared worse. And does it mean that a single strategy for Africa, which consists of 53 countries instead of one (54 if you include Western Sahara, which is claimed by Morocco), makes any sense? McKinsey identifies several different groups among African countries – diversified economies, oil exporters, transition economies, and pre-transition economies – but provides precious little guidance to the corporate, institutional, or individual investor trying to make sense of it all.
If the ongoing crisis in the eurozone teaches us anything, it is that even countries that share a common market and a common currency are very different and offer the investor very different opportunities and risks. Germany and Greece were never very much like each other, but the chasm between them is now especially wide, with the spread between yields on German and Greek sovereign bonds rising to 8.5% this week. They, however, are as peas in a pod next to the differences between, say, South Africa and Equatorial Guinea or Egypt and Angola.
Africa does not represent a single investment opportunity any more than Europe or emerging markets or the BRICs. There is a Facebook group called “Africa is a Continent not a Country, and no I Can’t Speak African,” which sums it up nicely. Both BCG and McKinsey grossly oversimplify matters. If these publications are any indication of the kind of advice these firms offer their paying customers, any company or investor trying to figure out how to approach Africa should probably look for a different set of advisers.
Disclosure: No positions