July 6, 2011

Is Africa a multinational's opportunity or one better served by SMEs?

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. ~ Seeking Alpha on Africa by Chip Krakoff
This paragraph from a blogpost on an investment oriented website caught my attention for a number of reasons. Chief among those is the challenging opportunity that can already be sensed in Sub Saharan Africa for a variety of industries and investments (if the Chinese and the Indian activity is anything to go by) but more relevant to me was the description of the challenge.

What we have here is an emerging market population which can be described as 'base of the pyramid or bottom of the pyramid' as defined by various important players to be those who live on $2 a day or less. But it is highly unlikely that if asked they would perceive themselves to be at the bottom of anything, much less a socio economic hierarchy based on an absolute dollar figure that may or may not be contextually relevant in terms of local purchasing power and whether this population is rural or urban. Africa does not have a history of stratification or hierarchy internal to cultures or regions in the manner of the Asian nations.

On the other hand, this emergent African middle class consumer (remember, the AfDB's categorization of the African middle class includes the largest segment as those who have between $2 to $4 a day to spend) has to overcome challenging odds to be taken seriously as a demanding customer in his/her own right. The informal economy is primarily cash based, has few financial tools available and incomes tend to be irregular and in varying amounts from multiple sources. This uncertainty leads to the prepaid or pay as you go (based on cash available on hand at time of purchase) payment plans becoming most preferred by the population.

There is indeed an opportunity here but it will be neither one focused on uplifting the poor or alleviating poverty as its primary goal, that is, all the diversions of classifying this as a BoP market. Samsung has aggressively put the African customer's needs first, at least in the media, with events and alliances emphasizing African design for African markets. Indian consumer product companies are acquiring local brands as well as introducing their own product lines while the Chinese footprint is well exemplified by Huawei the telcom equipment maker diversifying into affordable smartphones. But does all this activity imply a gold rush?

Krakoff's earlier post on Africa and its opportunities as an emerging market asks a valid question:
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.
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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.
While there may not be any first mover advantage in rushing in blindly without a landscape map of the opportunities or an understanding of the different operating environment much less the regional specifics of this vast continent, neither is this the Chinese market used in the example and brand building opportunities do exist for companies who are able to hit the right notes well in time to establish a reputation.