Putting Africa into perspective

There is a well-known story about two shoe salesmen from rival companies in a Western country who were sent to Africa to find new markets for their products. We can assume that they went to the same country, spent the same amount of time and used the same methodology to conduct their market assessment. Yet they arrived at two different conclusions.

Salesman One:

Disaster! There is no market for us. Nobody here wears shoes!

Salesman Two:

Glorious opportunity. There is a huge market for us. Nobody here wears shoes!

This story illustrates the dilemma that local, regional and global players face when they embark on a quest to do business in Africa.

Doing business in Africa is all about perspective and whether you choose to view Africa as a disaster or a glorious opportunity

My objective is to open your eyes to the possibilities. I will leave you with three key messages:

• The African opportunity has been grossly underestimated
• Doing business in Africa is challenging but also hugely rewarding
• The African context matters

The African opportunity has been grossly underestimated

Most African economies are bifurcated with a formal sector that is captured in economic data and an informal sector that is not.

Officially, Africa’s combined GDP ranges between $2.2 – 2.6 trillion. However, a 2016 study published in the International Economic Journal estimated that there is an additional 43% of GDP that is produced in the informal sector, which means Africa’s GDP is in already in excess of $3 trillion.

Officially, intra-Africa trade ranges between 16-18%. However, the Informal Cross Border Trade (ICBT) data paints a different picture. Africa has eight regional economic communities that pre-date the newly launched African Continental Free Trade Area (AfCFTA) and already had free movement of people and informally, untaxed movement of goods. AfDB research data estimated ICBT in the Southern African Development Community at 30-40%. In EAC, data showed that Uganda’s ICBT was 86% of official exports to five neighbouring countries. ICBT is mainly in food and agricultural products.

Bottom line: investors need to ensure that they have the full picture.

Doing business in Africa is challenging but also hugely rewarding

Doing business in Africa is not for the faint-hearted. The World Bank’s Doing Business 2020 report clearly articulates some of the challenges investors face on the continent:

• Starting a business: it takes the equivalent of 84 days to start a business in Eritrea compared to just 2.5 days in Togo, 4 days in Rwanda and 6 days in Mauritius
• Getting electricity: there are 8 different steps in Cote d’Ivoire and Sierra Leone compared to just 3 in Kenya, Mauritius and Togo. The quickest place to get electricity is Rwanda at 30 days while it can take 482 days (one year four months) in Liberia
• Property Rights: Nigeria is an interesting case study when it comes to registering property. There are 12 different procedures which take 92 days and cost 11.3% of the property value. WhileRwanda has just 3 procedures which take 7 days and costs 0.1% of the property value
• Trading across border: the cost to export (border compliance) in the DRC is over $2k and takes 192 days compared to $143 and 19 days in Kenya. This could explain why the informal cross border trade between DRC and Zambia, Uganda and Tanzania is booming
• Contracts: Africa as a whole fails miserably when it comes to the enforcement of contracts. The quickest countries are South Sudan at 228 days and Rwanda at 230 days while the longest is 5 years in Guinea Bissau

Yet despite all these headaches, the Overseas Development Institute (ODI) in the UK revealed that British companies made more profits in Africa than in any other region and urged companies to view Africa as a business opportunity not charity. High risk, high reward.

The African context matters

The buzz on the New York Stock Exchange trading floor is not replicated in stock exchanges or many corporate offices across Africa. That buzz is heard and felt on the streets of Lagos, Lusaka or Luanda. The streets are where the majority of business across Africa gets done.

The first shoe salesman would look at the photo of people selling goods on unpaved streets surrounded by peeling buildings and see poverty.

While the second salesman would see the opportunity amidst the chaos: the need for portable stalls that are easy to assemble, smaller cars to navigate the busy streets better, low-cost satellite or cable tv, low-cost energy options to given power shortages while an enterprising consultant would engage the local council about introducing a building code and health & safety measures.

Africa is ripe with opportunity. The biggest mistake investors make is not taking Africa for what it is and opening their eyes to the possibilities.

© 2021 Muloongo Muchelemba. All Rights Reserved