Why You Should be Doing Business in Africa
~By Ben Wright, CEO Velocity Global
I had the good fortune to participate in the largest US-sponsored trade mission to Africa last week. Aside from our keen interest in supporting trade globally, our clients are clearly making Africa the next destination for their expansion and so the timing was perfect. As is often the case when I travel to our global operations it was time to reflect on what is driving this African Resurgence. For this piece, I’m going to focus on three main topics – why you need to be doing business in Africa today, where to start when entering the continent, as well as how to expand once you’ve made your initial entry.
Why you need to be doing business in Africa today:
Historically, the growth opportunities were centered in established financial hubs like London, Hong Kong, Sao Paolo, etc; but that trend does not apply any longer. In the next 10 years, more than half of the world’s GDP growth will take place in cities in developing nations. In fact, 25% of the world’s GDP growth in the next 10 years is expected to come from emerging African countries, according to a study by the McKinsey Global Institute.
Africa is the only content that is actually getting younger. In Sub-Saharan Africa specifically, 40% of the population is 15 years old or younger. And with the proliferation of cell phones, this new generation is digitally connected for the first time. Plus, Electronic banking through platforms like M-Pesa mean buyers can transact like never before.
- Africa has the largest growing middle class in the world.
- The rate of return on foreign investment in Africa is higher than any other developing region.
- In the last decade, 6 of the 10 fastest growing countries were in Africa
Need we say more?
Where to start?
Nothing beats a local footprint, but sometimes entering a new region means you need a beach-head. Barring other factors specific to your business, we would suggest you look at South Africa, Mauritius, Tunisia or Morocco.
South Africa is the gateway into Africa. The financial centers are well established, the access to talent is second to none, and you can get anywhere quickly out of Johannesburg’s OR Tambo airport. The World Economic Foru 2015 Global Competitiveness Index was just released and South Africa is in the top 50 (second only to Mauritius for sub-Saharan Africa), jumping 7 places from last year’s rankings. However, if you are going to set up a legal entity prepared for new laws around BEE rankings . Also, note the complexities that it brings to structuring your company; if you want to get government contracts or at least be competitive with private business opportunities.
Mauritius is the place to go if you are taking a competitive tax structure into account. As a low tax jurisdiction, many companies choose Mauritius as a place to put their regional holding company. Plus the tropical island can’t be beat for corporate board meetings! There are many local firms that specialize in setting up the right corporate structure.
If your business is concentrated in North Africa, Morocco is one of the fastest growing countries from a global connectedness perspective. This is important because countries are familiar with doing business with Moroccan companies. They will also consider your presence there a strong foothold in the region.
One other alternative is Tunisia. You may recall that Tunisia led off the Arab Spring revolution in 2011 and the changes have been truly astounding from a global business perspective. A renewed focus on education has led to a highly prepared workforce that excels in multi-lingual abilities. In fact, colleges require graduates to be fluent in 5 languages. Most are fluent in 10 or more.
How to further expand:
20 years ago, half of all exports were between developed countries. Today, such transactions account for only a quarter of all goods flows globally. This means that emerging markets are trading with one another like never before. In Africa, this economic cooperation is critical to the success of the region generally. So you’ll find that once you start having success in Senegal you’ll more easily be able to access Guinea; sales in Kenya can lead to the next market in Rwanda.
Once you have an established track record of success and build your local team beyond the first half dozen employees it’s time to think about setting up your local subsidiary; until then starting with a light footprint when entering less-developed markets is the only way to go. Staying agile in the beginning is critical so you can adjust as economic or geopolitical factors change. China has invested significantly in Africa over the last 15 years. Serious disruptions to the Chinese economy would greatly challenge economies like Guinea; who is pegging their future growth plans on China’s demand for their natural resources. Further, political unrest in Northern Africa, outbreaks like the Ebola in West Africa, and outright chaos in the Central African Republic could bring certain countries’ economies (and in certain cases their neighbors’) to a grinding halt.
Unless you are setting up a tax structure in Mauritius, for all situations you should utilize a Foreign Subsidiary as a Service (FSaaS) model as the vehicle to get you into country fast with the greatest flexibility. Global volatility is on the rise. You need an approach that matches the increased speed at which critical factors change.
I recommend a great read for any executive increasingly facing a global platform for their business: No Ordinary Disruption: The Four Global Forces Breaking all the Trends by Richard Dobbs and other members of the McKinsey Global Institute. There are many valuable insights throughout his book. I was profoundly struck by the absolute requirement that companies become more agile with their international approach.
Growth is often explosive in these emerging markets, with sudden bursts of 70 to 100 percent expansion possible in certain product categories. Leaders must learn to reallocate resources to these new-growth markets with speed and at scale. While simultaneously managing risk and diversity at an entirely new level. The companies that will succeed in the race for these extraordinarily diverse emerging markets will most likely share four traits:
- They will think of the next opportunity in terms of cities and urban clusters, not regions or countries, and reallocate their capital and talent accordingly.
- They will customize and price products to meet local tastes and needs and will build faster, lower-cost supply chains and innovative business models in order to be cost competitive and deliver price points across a broad spectrum.
- They will design and control multi-channel routes to market and rethink their brand and marketing and sales strategies.
- They will overhaul organizational structures, talent strategy, and operating practices to reflect the new shift.
“Going Global” doesn’t mean the same thing today that it did for our predecessors. Market disruptions (both positive and negative) happen in the blink of an eye. Technological advancements allow for unprecedented growth opportunities tomorrow in markets you may not be thinking about today. Africa is the shining example of this. Now I’m not saying you should scrap your plans to go battle with all of your competitors in long-established mega-cities around the globe, but why not double-down in a market where you have first mover advantage? With the advent of an incredibly fast and agile market entry like FSaaS, you can test it out without having to invest significant capital. It’s time to open yourself up to new ways of tapping global markets… and Africa may be just the ticket.