A Closer Look at the “Huge Opportunity” in Africa cited in HBR

Place Corporate Office Here (Lagos, Nigeria)

Place Corporate Office Here (Lagos, Nigeria)

In the most recent issue of Harvard Business Review, Jonathan Berman of Dalberg offers “Seven Reasons Why Africa’s Time is Now“.  His reasons are as follows:

  1. It’s a huge market opportunity
  2. It’s increasingly stable
  3. Intra-African trade is in its infancy
  4. It will soon have the largest workforce
  5. Twenty percent of government spending goes toward education
  6. Mobile is exploding
  7. It contains most of the world’s uncultivated cropland

At 30,000 feet, many of Berman’s claims seem to compelling.  In fact, three years ago, after reading McKinsey Global Institute’s report, Lions on the Move (June 2010), I made the decision to explore economic opportunities in Sub-Saharan Africa.  Oddly enough, the smart folks at McKinsey provide similar reasons to take a better look at Africa:

  • Africa’s growth acceleration resulted from more than a resource boom
  • Africa’s future growth will be supported by external trends such as the global race for commodities, Africa’s increased access to international capital, and its ability to forge new types of economic partnerships with foreign investors
  • Long-term growth will be lifted by internal social and demographic trends particularly Africa’s growing labor force, urbanization, and the related rise of middle-class consumers

After living and working here since April 2011, I believe the reality is not nearly as attractive as the rationale.

First, 55 countries constitute Africa and 49 countries fall under Sub-Saharan Africa (SSA).  The market opportunity is spread unevenly across this heterogeneous group of countries.  In order to capture the entire 1+ billion population in Africa, a company would need to set up several regional offices in some of these countries.

Upon closer examination, there are maybe 10 countries in SSA that are attractive places to set up an office because most countries are too small.

  • Countries with population of < 3 million: 15 (Chicago has a population of 2.7 million)
  • Countries with population between 3 and 12 million: 15 (Mexico City and Sao Paolo have populations of 8.8 million and 11.3 million, respectively)
  • Countries with population between 12 and 25 million: 13 (Shanghai has a population of 23.5 million)

Drawing lines is always arbitrary.  Nonetheless, I think 25 million is a reasonable one because a) I live in Ghana (population 25.4 million), b) devoting resources to a country with a population of a medium-sized world city seems like a waste.

According to the 2012 CIA World Factbook, the nine largest countries by population have a total of 580 million people.  The countries with the largest populations, and arguably, the largest economic opportunities are:

Population

When you look at the largest countries, however, the opportunity narrows because not all countries are created equal.  If you exclude South Africa (SA) which has limited growth opportunities because in many respects SA is a first world country (per capita income of $11,600) and if you exclude the Democratic Republic of Congo (DRC) which has a per capita income of $500, then you are left with a population 455 million.

Per Capita

Dollars per Day

From the Dollars per Day chart, you’ll notice that the countries with the highest per capita income are Nigeria, Sudan, and Ghana.  Unfortunately, both Nigeria and Sudan are “kinda” dangerous for foreigners.

  • The US has a standing warning for travellers to Sudan citing the threat of terrorism.  The warning basically says, “Don’t go!” and if you must, then “Don’t go outside.”
Sudan - It's the Africa from the news

Sudan – It’s the Africa from the news

  • Nigeria is known for terrorism/civil war, kidnapping, robberies.  Of course, if you’re Nigerian, you can probably figure it out

Removing Sudan and Nigeria reduces the target market to 245 million.  Unfortunately, you cannot throw out Nigeria as a potential market.  Something like 20-25 percent of all Africans are Nigerian. Let’s say you keep Nigeria because you can hire local employees but who are you going to have work in Sudan?  Without Sudan, the target population would drop to 420 million.

Four hundred twenty million is nothing to sneeze at.  Nonetheless, your company is going to confront several issues:

  • Develop an understanding of the political, social, cultural, and economic dynamics of seven countries.  (I’ve summed up a Pandora’s Box of issues in a single sentence.)
  • Geography: these seven countries are mostly located along an East-West axis across Africa: Nigeria and Ghana in the West; DRC in the middle; Tanzania, Kenya, Ethiopia, Uganda in the East.  Where are you going to open your regional office(s)?
  • “Red tape”: If you’re not an American nor American company, e.g. the Chinese, then think of all the bureaucrats you’re going to have to bribe.
  • Language: The good news is that most of the countries are English-speaking; the bad is that for many Africans, English is not their first language.  Nigeria has four main languages; Ghana has at least four.  In West Africa, many of the countries that border Nigeria and Ghana are French-speaking.  The complexity only mounts!

Let’s take a step back and compare this “huge opportunity” with the story of the last 15 years: the B(R)ICs.  (I’m tossing out Russia because it doesn’t really count.)  China, India, and Brazil have populations of 1.35 billion, 1.24 billion, and 198 million, respectively.

With respect to China and India, a multinational can work toward resolving the four issues cited above for an economic punch three times the size of the 420 million African opportunity.  Even with Brazil, you only have to handle one socio-economic, political, cultural wahalla, speak Portugese, bribe one set of politicians, and set up an office in Sao Paolo to get half of the “huge African opportunity”.

I applaud Berman for shining a spotlight on the economic opportunity in Africa.  Unfortunately, the fragmented and politically heterogeneous climate of the continent makes the opportunity a whole lot more complicated than the one offered by the BRICs.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: