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Investing in Africa
 

Investing in Africa

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    Investing in Africa Investing in Africa Document Transcript

    • Deloitte on Africa Resource-seeker or market-seeker? Are you a resource-seeker or a market-seeker? Two typologies and their implications for your Africa strategy… Africa is enjoying tremendous growth and is, currently and into the foreseeable future, the preferred investment destination for investors. A number of factors bode well for Africa as an investment destination: increased stability, reforms in terms of investment climate, a critical mass of consumers, a growing young population and burgeoning middle class, large deposits of minerals, arable land for agriculture, and a significant infrastructure deficit. While the opportunities are clear, what is less clear for many is firstly, how to enter and secondly, how to manage the lifecycle of their investments in their chosen African markets. Is there a formula? And, does one size fit all? No, there is no formula. And no, one size doesn’t fit all. It all depends – are you a resource-seeker or a market-seeker? Foreign Direct Investment (FDI) theories suggest that companies fall into two broad categories: resourceseeking and market-seeking. Resource-seeking firms have different characteristics from market-seeking firms, and these differences, in turn, have an imapct on the market entry mode, the management of the investment during its lifecycle and even exit. This paper does not seek to provide definitive answers as to how companies should access and manage Africa opportunities but rather recognises and leverages the value of typologies. A typology is a useful and pragmatic tool for categorising and understanding the approach to be followed by organisations with similar traits and motivations. Resource-seekers are those investors looking to establish access to raw materials or other input factors while market-seeking investments are geared towards serving the host market and would typically include retail – both food and clothing, Technology, Mobile and Telecommunications (TMT), entertainment and financial services. Also, in this category, by extension, would be construction firms that would typically follow the retailers in order to provide the necessary retail infrastructure. There is currently a hive of activity on the continent, with many construction firms building mixed-use developments and retail malls. Resourceseekers would typically be mining houses and Oil & Gas players accessing African markets for commodity exploration and extraction purposes. Below are some key traits – classified as differences and similarities between resource-seekers and market-seekers.
    • Differences Market-seeker traits • Consumer goods and services focused • Volume and market size are pivotal to their decision-making process. Numbers drive sales and induce economies of scale. On this basis, regional integration is critical for market-seekers. • Unlimited choice in terms of choice of markets to participate in. Market-seekers have a broader universe of options. As a starting point, any country is a potential market until it is qualified further. • Vested and strong interest in political stability. Political stability strongly linked to perceptions of risk. • Presence in market is a function of how well the company interfaces with the customer base and competition. Resource-seeker traits • Commodities/natural resources focused • Market size and regional integration are not key considerations. • Limited choice in terms of markets. Resourceseekers can only consider countries with resources. • Resource-seekers are known to operate in unstable environments. • Presence in market is a function of a mine’s life and mineral availability. 2 Deloitte on Africa Collection: Issue 3 Similarities • Both have a vested interest in infrastructure but for different reasons. Market-seekers require infrastructure to move products from the port of entry and distribute in-country. Because little beneficiation is taking place on the continent, resource-seekers typically need infrastructure only to move commodities from the mines to the ports to be shipped to their export markets. • Both have a vested interest in security of energy supply.
    • Deloitte lifecycle of investment into Africa Opportunity Assessment No Rationale for expansion Target countries Country Assessment Regulatory Environment Local partnerships Entry? Yes Entry Strategy No Managing Stakeholders Human Capital Production/ Business Model Viable? Yes Establish Local Operations No Pricing Growth Distribution Exit? Yes Exit Strategy The Deloitte lifecycle of investment into Africa shows that the entry into management of investments in any African market are an iterative process with a series of decision-making points. Using this framework, resource-seekers and market-seekers will be compared and contrasted in order to understand what their considerations are at different decision points. Deloitte on Africa Collection: Issue 3 3
    • Key considerations and implications for resource-seekers and market-seekers Opportunity assessment Rationale for expansion The expansion of resource-seekers and marketseekers into Africa is motivated by different drivers. For market seekers, Africa is appealing from the perspective that there is a critical mass of consumers and market size. Africa currently has a population of 1 billion people, which is set to increase to 2 billion by 2050. Furthermore, Africa has a rising middle class meaning that consumers increasingly have greater income to spend. A disproportionately young population guarantees a consumer base for years to come. Moreover, with most of the Western world facing economic challenges, Africa presents significant growth. It is anticipated that Africa’s current middle class of 313 million consumers will grow to 1.1 billion by 2060. On the contrary, for resource-seekers, Africa’s attractiveness lies in the natural resources she is endowed with and most of which are still untapped. Africa produces more than 60 metal and mineral products and is a major producer of several of the world’s most important minerals and metals, including gold, diamonds, uranium, manganese, chromium, nickel, bauxite and cobalt. Africa hosts about 30% of the planet’s mineral reserves, including 40% of gold, 60% cobalt and 90% of the world’s platinum group metal (PGM) reserves. Target countries The process by which market-seekers and resourceseekers filter and select countries to enter differs greatly. Market-seekers inherently have a broader universe of options. As a starting point, any African country with a population and consumers is a potential market until it is further qualified in terms of the companies’ business rules and preferences. Resource-seekers, on the other hand, can only consider those countries with specified resources that are aligned to their product focus. As market-seekers seek profit via volume and economies of scale, country and market size are 4 Deloitte on Africa Collection: Issue 3 important considerations and, by implication, regional integration. A regional approach compensates for those countries with small populations. The East African Community (EAC), the most progressive regional bloc on the continent, is promising free movement of goods and people when it fully goes online in 2014. In light of this development, the approach increasingly being adopted by market-seekers is to manufacture in one of the EAC countries and distribute across the region. With this approach, small countries like Rwanda and Burundi become attractive but only in this context of a regional approach. Rwanda’s trade with other EAC states rose considerably in the period between January and August 2012 as a result of the implementation of the regional common market protocol, which facilitates the free movement of goods and services across the region. Rwanda’s exports within the EAC increased to US$75.7 million in this period up from US$50.7 million in the same period last year. On the other hand, resource-seekers have limited options targeting only those African countries whose commodities’ profiles are aligned with their product focus. Traditionally, resource-seekers have pursued markets such as Nigeria, Angola and Equatorial Guinea for their oil, the DRC, South Africa, Botswana, Namibia and Angola for their diamonds, and Zambia for its copper. Guinea, alone, holds the world’s largest estimated reserves of bauxite at 7.2 billion tons. However, in light of recent oil and gas discoveries in Ghana and along the east coast of Africa and coal in Mozambique, countries such as Mozambique, Kenya, Uganda and Tanzania are fast becoming central in resource-seekers’ expansion strategies – this was not the case, even three years ago. So great has been the interest that Uganda, for example, intends to offer mineral prospecting and production licences on competitive bidding rather than on first-come-first-served basis following a surge of investor interest. The point here is that resource-seekers’ choices are defined by nature.
    • TUNISIA Growth of sub-Saharan Africa is projected at 5.3% in 2012. It is anticipated to pick up to 5.6% in 2013. MOROCCO LIBYA EGYPT W ES TE RN SA HA RA ALGERIA MAURITANIA CAPE VERDE ISLANDS MALI NIGER SUDAN BURKINA FASO GUINEA SIERRA LEONE IVORY COAST LIBERIA GHANA DJIBOUTI NIGERIA CENTRAL AFRICAN REPUBLIC CAMEROON EQUATORIAL GUINEA GABON C BRA ONG ZAV O ILLE GUINEA-BISSAU ERITREA CHAD TOGO BENIN GAMBIA SENEGAL ETHIOPIA SOUTH SUDAN DEMOCRATIC REPUBLIC OF CONGO SOMALIA KENYA UGANDA RWANDA BURUNDI CABINDA ZAMBIA UE IQ 50 - 200 ZIMBABWE 20 - 50 BOTSWANA SWAZILAND 10 - 20 1 - 10 M MAD AG NAMIBIA B AM OZ ASCA R ANGOLA MALAWI Projected Population for 2012 (millions) TANZANIA LESOTHO SOUTH AFRICA 0-1 Source: World Bank Deloitte on Africa Collection: Issue 3 5
    • Country assessment Other key considerations for determining the viability of entering a new market include the ease of doing business, political and social issues, country and business risks, language and culture barriers, legal, tax and compliance requirements, geographical proximity and logistics and existing infrastructure. Indeed, key considerations for resource-seekers are similar to those of market-seekers although one could conclude, on the basis of historical trends, that country or business risk is not as big a consideration for resource-seekers as it is for market-seekers. In fact, the inverse is largely true. Most African countries with commodities have generally experienced conflict, and this has not deterred resource-seeking investments into territories such as Liberia and Sierra Leone. A plausible explanation for this is that resourceseekers only extract minerals in-country for production elsewhere while market-seekers, by definition, service the host country and are therefore entrenched in the local dynamics. GDP per capita and consumer spending are thus important factors for consideration for market-seekers, as these factors have a bearing product/service demand. On the contrary, resource-seekers do not follow local dynamics but rather commodity prices on various international indices and other global dynamics. 6 Deloitte on Africa Collection: Issue 3 Regulatory environment The African regulatory environment is challenging for a number of reasons for both market-seekers and resource-seekers. Firstly, there is sometimes the lack of policy clarity, which then heightens perceptions of risk. Second is the lack of policy continuity. Changes in government or even just cabinet reshuffles within the same government sometimes lead to changes in policy. This can be particularly disruptive in especially the commodities and extractive industry where investments in oil and gas and mining require a long-term outlook. Third is the lack of policy consistency. If, for example, a country has chosen to make it easy to do business, this should reflect in the time to register a new business, labour laws, the opening of a bank account, obtaining work and construction permits and so forth and requires a concerted effort across all government agencies. Policy consistency will come through in how the policy is executed, and this ultimately manifests through the investor’s experiences. There is sometimes a disconnect between the policy on paper and how it is experienced. Nonetheless, African countries continue to visibly improve their investment climates, indicating that policy is being implemented appropriately. World Bank statistics show that Morocco, Cape Verde, Sierra Leone and Burundi were among the ten economies in the world that most improved the ease of doing business in 2012, while Mauritius ranked first among African countries at No. 23 globally, followed by South Africa at No. 35, with Chile at No. 39, Rwanda at No. 45 and Tunisia at No. 46.
    • Local partnerships There are increasingly calls on the continent by African governments for the participation of local players in foreign market-seekers and resource-seekers’ deals. These calls are motivated by the need to avoid, in the case of extractive deals, the “recourse curse”. Core to this is the need to ensure that the benefits emanating from investment activity trickle down to local businesses and spread in communities. These policies, variously referred to as “Local Content” in Nigeria, Ghana and Uganda, “BEE” in South Africa and “Indigenisation” in Zimbabwe are sometimes viewed by investors as an unnecessary inconvenience. However, at the Deloitte 2012 Africa Risk Conference; focused on mitigating the risk of doing business on the continent, investors implored their peers to change their mindsets and view these sets of legislation as an opportunity to bring on board local partners and tap into those partners’ institutional memories, savoir-faire and local networks. The importance of on-the-ground knowledge was emphasised as critical. Forging local partnerships in Africa is a practical and necessary thing to do whether or not legislation necessitates it. A strategy for successful partnering must not be an after-thought; rather, it must be central to the broader country strategy. The viability of the opportunity should hinge on and be assessed on the basis of having identified a sound partner. That, in turn, rests on a rigorous due diligence process. Deloitte on Africa Collection: Issue 3 7
    • Entry strategy Managing stakeholders While market-seekers need to manage local stakeholders and relationships, resource-seekers in Africa have a greater need to do so given that mineral extraction is a highly emotive issue on the world’s poorest continent. Moreover, given that minerals are exported elsewhere for beneficiation, mineral seekers are particularly susceptible to perceptions of exploitation. There is a renewed drive to ensure that mineral resources drive the economic development of the continent and, in light of this, there will be a greater need, going forward, for extractive companies to interact with and manage governments and communities as key stakeholders. Human capital Africa’s population is disproportionally young, almost 200 million people are between the ages of 15 and 24, and by 2030 nearly one in four young people in the world will be African. Furthermore, there is a skills deficit on the continent. It is, therefore, important that both market-seekers and resourceseekers have a strategy in place for how they will develop local talent. It is not just the responsibility of governments to capacitate their people, but companies also have a social responsibility to assist with this massive challenge on the continent. In fact, it should not be a social responsibility – it should be core to the firm’s country strategy, as it determines sustainability and success in that market. According to the Africa Progress Panel, “The ultimate goal is a transparent and accountable sector generating financial firepower that will enable countries that have previously lagged behind to accelerate rapidly toward the Millennium Development Goals.” Resource-seekers therefore need a more proactive and innovate multi-pronged stakeholder strategy that speaks to community issues while continuously engaging and complying with government. To illustrate how important this is becoming, in August 2012 there were calls for the Mozambique government to renegotiate all contracts signed, followed by the Tanzanian government’s calls for an audit of 26 Oil & Gas contracts to review production agreements with firms to ensure the country got a “fairer share” in September 2012. Deloitte has for years been running a Graduate Academy which gives university graduates exposure to the world of work and better prepares them for their careers in response to the observation that graduates are not necessarily work-ready. Companies need to scale up such an internship programme when operating on the continent. While marketseekers and resource-seekers may initially fill certain vacancies with expatriates, it is important that there are skills-transfer and up-skilling programmes in place. Given the calls to ensure that FDI benefits the local citizenry, it is plausible that companies will become increasingly under pressure to demonstrate their intentions and plans to empower their local workforce. Also, there is a “new class of professionals” of young Africans in the diaspora, who are global in their worldview and outlook, having worked on Wall Street and in the City in London and are returning to Africa to settle. Companies with African growth aspirations need to tap into this human capital pool. 8 Deloitte on Africa Collection: Issue 3
    • Production/business model With market-seekers, initial entry into various African markets is typically via a distribution model with a sales force in-country in order to minimise the risk of full exposure to the market. As a result, marketseekers can gauge the market before entering fully. Having stated this, it is interesting to note that market-seekers, even where they have determined that there is a viable market, continue with a distribution model. Most multinational players on the continent typically manufacture in a few hubs on the continent and distribute to their various African markets. Sometimes manufacturing does not even take place on the continent but rather from Turkey and China where there is a cost comparative advantage. Low cost of production and a large customer base remain the two key goals for market-seekers. Market seekers are, however, not without their challenges and risks even with a “low risk” distribution model. Their challenge lies in moving consumer goods between borders on a regular basis: weekly and even daily where perishable goods are concerned. Lengthy delays at African borders remain a key challenge to doing business across borders. Also, given the need to constantly manage supply cycles and replenish shelves, this becomes a challenge that is faced on a regular basis. In responding to this challenge, there is a discernible trend towards in-country sourcing. A reputable food retailer in South Africa, rather than freighting in supplies on a regular basis has changed its operating model to one that incorporates local players into its supply chain on the condition that they adhere to strict quality standards. This ensures that the local community benefits from the investment but also ensures that prices for consumers are not unnecessarily exhorbitant by having to freight products and pay customs duties. It would appear to be a win-win and sustainable situation for all parties concerned: the investor, the local company, the customer and the government in their empowerment objectives. It makes business sense all round! Resource-seekers, on the other hand, tend to only extract on the continent and export commodities for manufacturing elsewhere. Many governments are developing strategies for domestic minerals so that the growth being realised from minerals is shared and inclusive. Mineral beneficiation is a priority for governments of resource-rich countries that would like to leverage the potential of mineral beneficiation to create local employment and drive economic growth. The aim of a beneficiation strategy is to provide a framework to convert the country’s comparative advantage it has inherited, in the form of its mineral wealth, into a national competitive advantage. Resource-seekers, however, do not like market-seekers, have the option of gauging the markets first, as they cannot avoid being physically present, from the start, in the local environment. They necessarily have to be in situ in all their chosen markets in order to extract resources. Thus, resource-seeking is capital intensive from the start, with the attendant risks arising from being heavily invested in particular countries. While, admittedly, entry into mining by the larger mining houses would usually be preceded by the junior mining houses that typically absorb some of the upfront risks and costs, the financial outlay still remains significant. Deloitte on Africa Collection: Issue 3 9
    • Establish local operations Pricing The market for market-seekers consists of Africans in Africa. While there is a growing middle class, most Africans remain at the bottom of the pyramid, and there is a need to tailor products to meet local demand and preferences at the appropriate price levels. With resource-seekers, there is limited scope to manipulate market demand. Demand for commodities is driven by a range of macro-economic environmental factors. Growth Market-seekers and resource-seekers will pursue growth differently. For market-seekers, a presence in the chosen markets and growth is a function of growing the customer base and/or further penetrating the existing customer base through product/service innovations and adaptations to local tastes so as to have a bigger share of the customer’s wallet. Thus, as the market grows, economies of scale can be achieved and profits enhanced. Adaptation requires research that is not only country-specific but also spending “a day in the life of….” consumers to understand how they view, interact with and use various branded products, what these brands represent in their lives and what the levers are for further market penetration. This implies that local knowledge and adaptation are two key differentiators – while of course still balancing this with costs and scale. With mining and Oil & Gas, presence in the market is primarily a function of the life of the mine or oil bed. Growth is therefore necessarily achieved by acquiring new mines or oilfields as resources deplete. Economies of scales, despite a portfolio of commodity investments, can nonetheless still be achieved through, for example, shared services. The Deloitte Mining Shared Services business can help resource-seekers operating on the continent realise significant cost savings. It is structured to achieve economies of scale, ensure cost efficiencies and meet delivery standards – while addressing local, onsite needs. Clients have a choice in terms of outsourcing, co-sourcing or retention of back-office activities based on the business case, business risks and/or imperatives. 10 Deloitte on Africa Collection: Issue 3 Distribution The African continent faces a significant infrastructure deficit. For resource-seekers wanting to move commodity products from the mines to the ports for export purposes, this used to be viewed as a constraint to doing business on the continent. However, there has been a shift in mind-set, and there is a clear trend of commodity players making investments into infrastructure for their own use. For investors moving onto the continent, it is important to bear in mind that such investments into adjacent sectors may be necessary, and the investment case needs to take such non-core costs into account. Conversely, market-seekers are concerned with achieving as much coverage in their chosen markets and so, in-country infrastructure is important to them. Also important are channels of distribution that do not require brick-and-mortar infrastructure and add to costs in low-margin markets. This has been evident in the banking space where mobile technology and banking systems are fusing to bring banking to the masses while reducing the cost-to-serve. Current applications of mobile telephony in banking include innovations such as M-Pesa, the mobile money transfer service and M-Kesho, the micro-lending mobile platform in Kenya. In yet another example from Kenya, farmers interact proactively with commodity exchanges and track prices with their phones so that they can make informed decisions about the right time to take their produce to market. In the future, we should expect to see more examples in other areas such as health, retailing, insurance and education. Africa has leapfrogged in this aspect, and new entrants need to think outside the box–beyond brick and mortar.
    • Exit strategy Should the need arise to exit, in the event of conflict, for example, market-seekers with only a manufacturing and distribution model have a relatively quick exit. Resource-seekers are more at risk, given the amount of capital invested. Also, given that negotiations for mining rights would have been negotiated by a previous government, in countries where there are poor institutional frameworks and rule of law, it may be difficult to ensure continuity of operations. Summary table Decision-making stage Market-seekers Resource seekers Rationale for Africa expansion • Market-driven • Resource-driven Target countries • Unlimited scope. Small countries’ or small markets can be compensated for by regional integration • Limited scope. Only those countries with certain commodities’ Country assessment • Ease of doing business • Political and social issues • Country and business risks • Language and culture barriers • Legal, regulatory, tax and compliance requirements • Geographical proximity and logistics • Existing infrastructure • Similar to market-seekers, but resource-seekers are sensitive to political instability Regulatory environment • Challenge of lack of policy clarity, lack of policy continuity and lack of policy consistency • Similar to market-seekers Local partners • Great need for local partners • Similar to market-seekers Managing stakeholders • Need to manage relevant stakeholders • Greater need than market seekers – for a broader and more proactive stakeholder engagement strategy that includes communities and governments, given the sensitivity of extracting resources Due diligence • Rigourous due diligence necessary • Similar to market seekers Human Capital • Need a plan for skills transfer and up-skilling on the job • Need a programme for assisting graduates get ready for the world of work • Need a plan for skills transfer and up-skilling on the job • Need a programme for assisting graduates get ready for the world of work Business model • Distribution model initially therefore limited risk • Challenge of moving goods across borders • In situ from the start therefore greater exposure • Challenges of moving goods from the mines to the ports Opportunity assessment Entry strategy Deloitte on Africa Collection: Issue 3 11
    • Decision-making stage Market-seekers Resource seekers Production • On the continent in selected hubs or in countries with cost comparative advantage • Beneficiation predominantly does not take place on the African continent Pricing • Pricing geared to meet GDP/capita and socio-economics of local market • Pricing determined by global dynamics and global commodity indices Growth • Presence in the chosen markets and growth is a function of growing the customer base and/or further penetrating the existing customer base • Product/service innovations and adaptations to local tastes so as to have a bigger share of the customer’s wallet • Economies of scale • Growth is achieved by acquiring new mines or oilfields as resources deplete • Standardisation and process efficiency are key and innovations such as shared services in mining can help achieve this Distribution • Mobile telephony applications key to distributing at low cost-toserve to a wide customer base • Physical infrastructure still core for product delivery • May need to invest in infrastructure to move product from mine to ports • By virtue of distribution model, low-risk exit strategy • By virtue of high upfront investments and sunk costs, high-risk exit strategy Establish local operations Exit Exit strategy 12 Deloitte on Africa Collection: Issue 3
    • Conclusion: We draw the following conclusions: • Market-seekers differ from resource-seekers in how they do business in Africa. • Doing business in Africa as a market-seeker does not differ significantly from doing business in other emerging/frontier markets as a market-seeker. • Doing business in Africa as a resource-seeker is similar to doing business in other emerging/ frontier markets as a resource-seeker. From a process perspective, there is an equal need for thoroughness in terms of market entry: due diligence, country assessment, competitor analysis and so forth. To illustrate, a market-seeker looking to enter the 1 billion Indian market would need to understand the legislative and market differences in India’s 26 regions before deciding which provinces to enter and how to sequence the entry in the same way they would approach Africa’s 1 billion market spread over 54 countries before selecting countries to enter. Admittedly, the number of countries in Africa makes the task seemingly more daunting, but the process is the same. In our view, the real challenge in accessing market or resource opportunities in Africa relates to understanding the softer issues: understanding the local dynamics, the people, their mentality, their work ethic, the culture, how to get things done, who to speak to and so forth. And this EQ, we contend, is best acquired through a local partner who, of course, must be thoroughly vetted first. In addition to EQ, there is the challenge of a lack of physical infrastructure, but with mind-sets shifting, this is not even deterring investors. And we are witnessing resource-seekers building their own railroads, roads and ports. Given Africa’s lucrative returns, this is small change... Resource-seeker or marketseeker: investment opportunities abound in Africa. Deloitte on Africa Collection: Issue 3 13
    • Contacts Anushuya Gounden Partner: Head of Africa Desk E-mail: angounden@deloitte.co.za Taki Nkhumeleni Manager: Africa Desk E-mail: tnkhumeleni@deloitte.co.za For any Africa related information, please contact zaafricadesk@deloitte.co.za References • Annan K, Momentum Rises to Lift Africa’s Resource Curse, 14 September 2012, New York Times Op-Ed • Biryabarema E, Uganda plans competitive bidding for mining licences, 1 October 2012, Reuters • Kabeera E, Rwanda Sees Growth in Regional Trade, 2 October 2012, The New Times • Kamndaya, S Tanzania: Planned review of oil deals rocks investors, 19 September 2012 • Mozambique: Former PM Calls for Renegotiation of Contracts All Africa.com, 27 August 2012 Acknowledgment for contribution by Dr Jacqueline Chimhanzi, alumnus of Deloitte 14 Deloitte on Africa Collection: Issue 3
    • Deloitte on Africa Collection: Issue 3 15
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