Thursday, 24 November 2011

Is Africa the new market for the future?

Introduction: Africa is the second largest continent and accounts for around 15% of world population. Africa has 54 sovereign states with an extremely diverse population with more than 2000 languages spoken in Africa.  Though Africa has been growing at a rate of more than 5% since past few years, it still remains the most underdeveloped and poorest inhabited continent. With its immense natural resource, bio diversity and young population, there is a huge potential for growth in Africa. In my article, I would touch upon scope of growth in the major sectors.
Agriculture: Agriculture is in a state of crisis in Africa. I believe the entire population can be seen as a potential market. On one hand are the farmers who are using farm equipments, seeds, fertilizers and on the other hand are the entire population who are consuming food grains. Since around 60% of the population is engaged in agriculture and most of them use traditional method of farming, there is a huge potential market for farm equipment sellers. Only 20% of the farmers use improved varieties of seed. It gives an immense opportunity to sell improved and genetically modified seeds in the African market.  Around 9kg of fertilizer is used per hectare in sub-Saharan Africa compared to 100kg in south Asia. Fertilizers too have huge potential market.  Since 80% of the sub-Saharan African is below poverty line and most of them are farmers, pricing would be a driving factor in sales. The other important factors in selling would be educating the customers, making them understand what they need and using right communication channels. There is also scope for B2B and institutional sales. Africa lacks irrigation facilities. Foreign companies can collaborate with the local government and the existing market players to improve the irrigation system by building dams, canals, etc. Africa imports more than $20 billion worth food grains every year. As of now, foreign players are tapping the market well. But with growth in the economy and increased productivity from agriculture due to modernisation, it will directly affect the bottom lines of foreign companies. To prevent that, I recommend that foreign companies invest heavily in agriculture in Africa and create a sustainable model. They can buy farms in Africa, use modern equipments and increase the output. It not only provides employment to thousands of people but can help company in forward integration by building food processing industry. With the global food prices increasing, it is not a challenge but an opportunity for Africa and other countries and companies to set up a profitable business in agriculture in Africa. More than half of the Africans are below 25 years and labour cost is cheap compared to developed countries and along with cheap land, it makes prudent sense for companies to venture into agriculture and allied activities.
Oil and natural resources: The dominant players in oil industries are Egypt, Libya, Algeria, Angola and Nigeria. They are the front runners only because other African countries are yet to tap their oil reserves. Though major global players have presence in Africa, I believe there is huge potential for other players to get into exploration and drilling of oil. Penetrating the African market wouldn’t be difficult since the government easily grant companies necessary permits to extract oil since it also benefits the country, gives inflow of money and creates job for thousands. African oil industry is striving hard to become a world force. There has been a rapid increase in demand for oil in Asia. With increasing global prices, it will be the most profitable business for existing as well as new players. Major players can also invest heavily in downstream industries. Setting up of plants is relatively cheap in Africa and this can be very well leveraged by them. For example, India and China won blocks in Nigeria since they are into downstream business as well. Africa will be a strategic player in near future in oil industry globally. I strongly believe that existing and new oil companies should look for opportunities in African market and not only increase their market share and revenue but also help Africa develop and thereby create a sustainable growth model.
Africa is one of the major mining areas of the world. It is in the world top position in quantity of reserves in bauxite, cobalt, diamond, phosphate, platinum, gold, uranium, vermiculite and zirconium. As per UN Economic Commission for Africa, iron ore has 20 billion ton, copper 110 million ton, bauxite 4 billion ton and uranium 502.5 thousand tons of potential. This can be an underestimate since Africa is not systematically surveyed. Nevertheless it gives an idea of untapped minerals and the opportunities for companies to tap them.  Most of the exploration is seen in gold and diamond. I am of the view that companies need to think beyond that. Though major production of all the minerals has seen an upward trend, there is still a huge potential for increase in production. Foreign companies need to create state of the class production facility and make most out of the minerals. They can also foray into forward integration. Let’s say, Tata’s foray into iron ore exploration and production. They can use those iron ore for production of steel. They can go one step ahead and use the steel for manufacture of vehicles. If they have all the three production units in Africa, they can not only manage the entire supply chain, but can also produce the final output at a cheaper cost thereby increasing the margin.
Manufacturing: Africa is the least industrialized continent. This gives an immense opportunity to foreign players to set up industries. Africa is a major producer for raw materials for variety of goods. Foreign companies can transform Africa from exporter of raw materials to exporter of manufactured goods. For example, they can be transformed from exporter of hides to exporter of leather, from exporter of cotton to exporter of textiles and from exporter of logs to exporter of plywood or furniture. Foreign investors need to look beyond industries dependent on diamond and gold. With most of the countries becoming politically stable, it is a great opportunity to set up manufacturing plants in Africa. Foreign companies need to tap the natural resources, human resources and leverage cheap land and create diversified industries. Since Africa has seen several civil wars and most of the natives are of the view that they are not benefitting from growth in Africa, it is essential for the foreign companies to build a business model that takes into account all the stakeholders. The companies should look for overall development of the masses as well. When the purchasing power of the people increases, company would have a viable local market along with exports.
Finance: Finance is an important sector for an underdeveloped continent. For every new activity and for sustaining the existing activities, government and companies need finance. With the absence of trustworthy local banks except in South Africa and Egypt, it gives a huge potential market for foreign banks. Apart from commercial lending, they can also play a major role in retail lending. They should focus on small and medium scale industries as well. I strongly recommend that since a majority of the population is under poverty line, it makes sense for the banks to create a model similar to the model created by Grameen Bank in Bangladesh. Banks should not only target at increasing profits but also create a financially inclusive model.
IT and communication: Mobile growth rate in Africa is highest in the world. But the mobile penetration is very low compared to European and American countries. In Africa, mobile penetration is just above 30% while in Europe it is more than 100% which essentially means there is 70% of potential market. Target market could very well be more than 50%. Bharati Airtel forayed into African market keeping the growth potential in mind. Mobile operators can invest in upgrading technology and providing value added service. Pricing would be an important factor. Few of the countries in Africa levy luxury tax on mobile handsets which increases the cost of acquisition for the customers. Mobile operators should lobby against such taxation laws. Another major potential market is internet users. The penetration of internet in Africa is extremely low. With African economy growing at a rate of more than 5% and standard of living increasing, internet telecommunication will be a viable business for companies. The companies need to come up with a robust and scalable infrastructure. Sooner the companies set up a strong backbone network the better for them since they would get an early mover advantage since the market is in its nascent stage.
In a nutshell, there exists huge potential market in Africa in diverse sectors. Companies need to formulate a sustainable strategy and convert the potential market to penetrated market.

Full Name: Arijit Majumdar  
College: XIMB
Contact Number: 9776062460
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