Sat, Jul 11, 2015
You can use data to reliably study African market conditions. Really?
Amidst the euphoria about Africa’s growth story, many multinationals have started exploring ways of making their mark on the continent, and potentially exploiting the opportunities that the African market presents. However, most of them come in with a host of assumptions about the business conditions in Africa, and they are often wrong.
Today, The African Exponent team has decided to unearth five of these misconceptions that end up hindering business success in Africa.
1. Africa is all about natural resources and consumer spending
While it is true that for a long time, many African economies have relied almost entirely on natural resources such as oil and minerals, this trend is changing rapidly and many African economies are becoming highly diversified. For example, in Nigeria oil comprises only 11% of the total GDP. Construction, on the other hand makes up 20% of the total GDP.
As more people on the continent continue to move to urban areas, the construction industry is expected to continue growing and will capture ever larger portions of national GDPs.
Also, whereas consumption is definitely a large component of the African economy, newer sectors such as Tourism and Entertainment will continue to grow as more people join the middle income class.
2. It is very easy to succeed in Africa
Many multinationals think that African markets are not competitive. However, this is far from true. Many Asian companies, from countries like India have been in Africa for a very long time now. Such companies already have a deep understanding of African markets, and can stage very stiff competition to even the largest global multinationals. Also, home grown companies run by Africans are a force a competitive force to be reckoned with. Multinationals entering African markets therefore need to adapt their global strategies to fit the local competitive landscapes.
3. The only African country good for business is South Africa.
Many global companies establish their African headquarters in South Africa, due to the belief that the Rainbow nation offers the best business conditions in Africa. While this is true on average, new entrants into Africa should not automatically assume that this will also be true for them.
Every company should think carefully about its priorities and then pick an African country that works best for them. For example, South Africa has a more favorable political environment but this should not influence the decision of a highly-labor intensive corporation. Such business might need to consider a country like Kenya which has a stronger talent pool than any other country in Africa.
4. You can use data to reliably study African market conditions.
Data on African markets is quite scarce, and can sometimes be misleading. This is because most African economies are still largely informal, which means that even the macroeconomic data of GDP, etc may be grossly inaccurate. Many numbers that look good on paper often miss key factors like market operating conditions.
As a new potential entrant into the African market, it is important that you weigh the data at hand along with qualitative information gained from rigorous primary research.
5. The exposure to risk that investing in Africa presents in unbearable
It is true that African markets can be volatile. In recent history, events like disease outbreaks, wars and political crises have threatened entire economies. However, sometimes their effects are just overhyped. For example, many observers thought that the fall in oil prices would thoroughly destroy oil dependent African economies but many of them have been very resilient.
New entrants should identify the key market fundamentals that make them want to do business in Africa, and then develop strategies for risk management that will ensure that unexpected events don’t affect them too severely.
Are you impressed, have any concerns, or think we can improve this article? Comment below or email us.