As global markets falter and stall, Africa presents some lucrative expansion opportunities. A growing GDP and an increasingly sophisticated consumer market make the continent attractive – for intra- as well as extra- African trade. But doing business in Africa is not without its complexities. In this article we examine the opportunities created by growing regional integration as well as looking at some practical advice for companies considering African expansion.
Bronwen Kausch, Associate, PeaceSystems
In June this year African leaders signed an historic free trade agreement which creates a 26-country common market.
The Tripartite Free Trade Area (TFTA) is the result of more than two decades of negotiations beginning with the Abuja treaty in 1991, which aimed to establish the combined African Economic Community (AEC) in six phases over 34 years. The aim was to create a continent-wide economic union with a common currency, full mobility of factors of production and free trade among all countries.
As Fabian Wallen points out in his paper Globalization Protectionism and Economic Growth: Strategic Trade Policy Choices for a Prosperous Sub-Saharan Africa, there remains a significant disparity between intra-regional trade in Africa and that of Europe and North America.
In his paper, Wallen comments: “Even though there are a number of regional trade agreements in SSA, trade between the different regions is hampered by relatively high tariffs and other trade barriers, and trade within the regions is often restricted by a variety of non-tariff barriers. As a consequence, the region’s intra-trade, as a share of total exports, amounts to only 17 percent, which can be compared with over 60 percent in the European Union and 50 percent in the NAFTA-region.”
The Barclays’ Africa Trade Index for 2015, shows that countries from Southern and East Africa dominate on intra-African connectivity, with each region having four countries in the top 10 on this measure. According to the report, these regions are benefitting from growing and better connected consumer markets and supply chains, which will increasingly be facilitated by the implementation of ongoing and planned transport and logistics infrastructure development.
The need to create an environment which would boost trade between African states was clear. The ease of doing business between African states would also create an attractive investment destination and encourage foreign companies to take the leap and invest in the continent.
Michael Lalor, Director at Ernst & Young, believes the need for regional integration in Africa is critical for the economic future of the continent.
“Currently, many African markets are too small and there is too much fragmentation. We need cohesion to create the critical mass required to boost Africa’s global trade clout,” Lalor explains.
“If one looks at the old colonial agenda, we saw foreign countries using Africa to provide raw material for their own production. There was no need for dominant, globally competitive economies because production was happening elsewhere. The developmental agenda of Africa today is very different. Working with this new agenda, the TFTA has been set up to establish manufacturing hubs and the development of production value chains across the continent. This is critical to the future of Africa, but requires more than simply opening the borders between states.”
In its Africa Attractiveness report, Ernst & Young holds up the East African Community (EAC) as a good example of how integration and cooperation can make a difference.
Having established its own customs union in 2005, followed by a common market in 2010, good progress is being made toward implementing the free movement of labor, capital goods and services. What this means is that instead of five separate countries that offer no real critical mass, you have a market of close to 150 million people, a combined GDP approaching US$100b and an economic growth rate in excess of 6% over the past decade. These key numbers would put the EAC in the same sort of category as Bangladesh and Vietnam, both listed among Goldman Sachs’ ‘Next 11’ – those countries, after the BRIC economies, with the highest potential of becoming the world’s largest economies in the 21st century. (E&Y Africa Attractiveness Survey 2012)
The need for more comprehensive harmonization referred to by Lalor is supported by research conducted by the Trade Law Centre (Tralac) which found that if there was just a 20% decrease in the costs associated with transit delays, the benefits to the continent could amount to $30.5-billion
However, Tralac points out that the steps required to do this could be taken by countries unilaterally, or simply with improved co-ordination, rather than the lengthy processes associated with free trade agreement negotiations.
Tralac uses Zimbabwe as an example, where their research estimated that it would gain almost $1-billion from a reduction in transit times, and “much, but not all, of these transit costs are under Zimbabwe’s own control”.
While the big multilateral negotiations drag on, there seems to be a fair amount of action on bilateral agreements, which has brought about benefits while countries wait for full integration.
“The reality is that while there has been very little progress at the multilateral level of trade negotiations (in the context of the Doha Development Round that was launched in November 2001), there have been numerous initiatives to negotiate regional trade agreements; and Africa is no exception. In the absence of a first-best multilateral governance solution, this is a pragmatic means of addressing trade policy/strategy issues. The important issue for me – is what is on the agenda,” comments Trudi Hartzenberg, Executive Director of Tralac.
While it can be argued that the journey to reach full integration of the current eight Regional Economic Regions is more or less on track, there are varying opinions on both the progress and the efficacy of trade blocs in general.
The Association of South East Asian Nations (ASEAN) Free trade agreement seems to have delivered results. According to the organization’s reported statistics, intra-ASEAN trade increased with annual growth rate averaging 10.5%, as compared to either overall ASEAN trade (by 9.2%) or extra-ASEAN trade (by 8.9%) during the period 1993-2013. The share of intra-ASEAN trade accounted for 25% of the region’s total GDP in 2013. The latest moves to bring the ASEAN group closer to China in a host of bilateral agreements has also given local economists cause for increased optimism.
However, the international and social media has, more recently, been awash with open and hostile criticism of the Trans-Pacific Partnership (TPP). The global agreement has come under heavy criticism from within the US and even non-signatories who believe that multilateral agreements such as these reduces democratic control and entrenches power with the large multinationals. Issues around intellectual property and dispute resolution mechanisms are also causing significant concern in the open access and Occupy circles.
Practical advice for African expansion
Agreements not withstanding, the outlook for African trade growth still remains robust. Investors, both African and international, would do well to concentrate on practicalities when expanding into African, understanding the unique requirements of trade on the continent, and focusing on opportunities as a result of this uniqueness.
Ernst & Young’s Lalor advises that companies looking to expand into the African continent should rely on partnerships to expand, rather than simply importing a product into the new regions.
“There should be some kind of ‘feet on the ground’ model which can be achieved through partnerships with local players. Companies need to think about what they can offer in the value chain. Smaller companies in particular should be looking at how they can add value to bigger players and, through partnerships, insert themselves into the value chain,” says Lalor.
Companies should also not think they can move into a new region without being mindful of the communities in which they operate.
“Successful and sustainable expansion will be achieved by investing back into the communities into which you are expanding. By setting up local manufacturing operations, you can hire local skills and embed yourself into the fabric of the local society and economy. There needs to be a hybrid between the traditional hub-and-spoke model and a feet-on-the-ground approach. Success in Africa is all about creating shared value.”
Investors should also carefully consider other socio-economic factors such as infrastructure, local tax regimes, consumer understanding, legislative issues and the legal environment.
The latter can cause significant uncertainty and companies should take care to ensure they make use of internationally recognized mediation and arbitration clauses in all their contracts.
This is particularly important for smaller companies which cannot afford the time, costs and uncertainty of a protracted dispute in a foreign country and with an unfamiliar legal landscape.
Evidence has shown that in Italy just a 75% mediation success rate can save 860 days (more than two years) of management time and over €7 000 per dispute, this would be just as relevant in Africa, and even more important for smaller companies wishing to enter new regions.
Finding the uniquely African opportunities
Looking at opportunities, the Barclays report is particularly upbeat about the rise of consumer spending in Africa, creating bigger markets for international companies.
“The growth potential for UK and other international producers across Sub-Saharan Africa is considerable. Consumer spending totaled around USD$1trn (£630bn) in 2014 and could grow by a CAGR of around 4-5% over the next five to 10 years”
The report also points to one of the more exciting growth opportunities in Africa – the tech industry in general and the mobile applications space in particular.
Global IT analysts, Gartner Inc., recently held their 2015 African Symposium in Cape Town and attendees heard that Africa was ideally positioned to leapfrog its western cousins, precisely because they had less legacy business and technology infrastructure.
According to the company, 3D printing is making up for the lack of skills and traditional manufacturing capacity. Work in the health sector has seen remarkable uses of 3D printing, from prosthetic limbs in Uganda to medical prototypes in Kenya, technology is enabling new business opportunities for African entrepreneurs.
The fact that Africa has such a large number of small and micro businesses can also be turned to its advantage with aggregated digital business models such as the airbnb and Uber models highlighted by Gartner as potential African growth areas.
With a relatively weak regulatory environment, Gartner has also pointed to drone technology as a means for economic growth on the continent. Bad roads, a reasonably uncongested airspace and vast distances make drones ideal to deliver anything from medical supplies, to consumer goods.
Turning to tech to deliver new products in new ways is going to set companies apart in the new African market space and smart companies would do well to ensure they fully explore the opportunities.
Collaboration and networking the key to African markets
Evidence for African growth opportunities abounds, but many companies are still wary of the risk associated with the unknown. However, as the global markets falter and stall, many companies will be inclined to press forward on their expansion plans.
Despite the fact that full regional integration is still some years off, the smart business leader will be taking advantage of what opportunities already exist. It is clear that the best way to move into these territories is with the support of people on the ground.
Chamber Trade Sweden has built an extensive network of business membership organizations in Africa. Chambers of commerce and other member organizations are ideally positioned to supply new investors with a ready-made network of legitimate and credible companies with whom they can partner and use as service providers and resellers and into whose existing value chains they can slot in.
While Africa may be rising as one of the best investment destinations, hooking into credible business networks will significantly lower risk and increase sustainable growth opportunities.
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