International SMEs don’t recognise Africa’s growth potential

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DHL’s Charles Brewer: untapped potential still exists in the continent

African economies are posting strong growth rates, with sub-Saharan African growth projected to reach five percent in 2015. But the vast majority of international small and medium scale enterprises (SMEs) see very few opportunities in the region. They do not perceive Africa as a growth opportunity, despite the positive economic growth stories and growing middle class in the region.
According to an in-depth study conducted by the Economist Intelligence Unit (EIU) in May-June this year for global logistics giant DHL, about 40 per cent of both G7 and BRICM (Brazil, Russia, India China and Mexico) SMEs that are planning to trade internationally in the future believe the continent offers no growth potential, indicating that the negative impression of the region is set well before SMEs even establish offshore operations.
‘US SMEs entering Africa are spending a lot of money with inadequate infrastructure,’ Danielle Walker, director of African Affairs at the US Chamber of Commerce, told EIU. ‘There are high costs associated with deliveries waiting in stifling traffic and sitting at border crossings because of inefficient customs procedures. SMEs are purchasing back-up generators because of inconsistent power supply. Their employees likely have several mobile phones from different providers, because of unreliable network coverage,’ she bemoaned.
‘If an SME is unable to hire locally because the skill set is not readily available in market, it can be very expensive in terms of taxes to bring in an American to do the work, as South Africa is the only country in sub-Saharan Africa that has a double taxation treaty with the US,’ Walker added.
The study says that although numerous macroeconomic signs and trends point to an economic resurgence, the continent has not made significant strides in the crucial areas of technological development and infrastructure, and it continues to struggle with a host of public health challenges, From Ebola outbreaks to the AIDS epidemic.
SME doubts over Africa are linked, with the exception of South Africa, to a simple lack of information about the macroeconomic situation on the continent as a whole, as well as the details—both real and perceived—that distinguish each individual African economy and society. ‘It has to do with the number of market data points we have,’ says Peter Millar, vice-president of product marketing at Canada’s Clevest.
‘While we do see some data points coming out of Africa, we see some indicators that it would be a very long slog to actually make a profit. At some utilities in Africa, three-quarters of the power is lost, at best. It’s not actually a good and stable environment to invest in new technologies, when they don’t even have the basics down.’AFRAID OF AFRICAN OPPORTUNITY2 (1024x594)
For companies selling computer and Internet-related products and services, Africa’s problem is first and foremost technological—the continent simply lacks the necessary infrastructure to support hi-tech electronics. ‘Our products need high-speed Internet connections so it’s too early to start an African business, which needs reliable Internet connectivity, said Takuma Iwasa, chief executive officer of Cerevo, a Japanese firm that sells high-end and unique consumer electronics.
Daniel Becerra, managing director of London-based BuffaloGrid dealing in solar-powered mobile phone chargers and launched its first offering in Uganda, echoes Iwasa’s sentiments, citing corruption as an issue. ‘The concerns are certainly valid,’ Becerra says. ‘For instance, on my second trip to Uganda I met these doctors from the US and they were telling me how a container full of medicines had been stuck in customs for three months just because someone thinks he can get money from someone—so that’s the reality.’
Yet another challenge for companies trying to sell a compelling service or establish a prestigious brand in Africa is the comparative lack of disposable income, leaving consumers extremely sensitive to prices. Average income in sub- Saharan Africa was $1,624 in 2013, according to estimates from World Bank. ‘If you’re trying to sell a product in sub-Saharan Africa you’re going to struggle,’ Becerra says. ‘It’s a low income and price driven market, so you’re just going to compete on price.’
There are small islands of opportunity in Africa, nonetheless. Mauritius, about 2,000 kilometres from the southeast coast of Africa, is frequently cited as one of Africa’s top investment destinations, due to the island nation’s stable parliamentary system of governance and diverse English and French-speaking population.
In 2013-2014, Mauritius ranked ahead of all other African countries in the World Economic Forum’s global competitiveness index. Indian textile process and dyeing company, Zenitex, aspires to enter the Mauritian market ‘because of the ease of doing business there, local government support and because it is a tourism hub,’ says managing director Viral Desai.
Despite Zenitex’s optimism about Mauritius, Desai believes that in most of Africa much larger companies have the upper hand, squeezing the smaller players out of the action. ‘Large-cap companies and investors have gobbled up most of the major public sector contracts in Africa over the years,’ adds Desai. ‘They are poised to continue to be the major investors in Africa. A general impression of the African market thus makes SMEs feel that the bigger players will make it extremely difficult for them and other small investors to successfully bid on the larger contracts. Most foreign SMEs look on African countries as the territory of the larger firms.’
The EIU surveyed 480 SMEs across the world, with 40 respondents representing each of the following countries: US, UK, France, Germany, Italy, Canada, Japan, Brazil, Russia, India, China, and Mexico. In all, 20 sectors were represented, including real estate, consumer goods, financial services, information technology, manufacturing, professional services and telecom. More than half of the SMEs involved in the survey reported between $500,000 and US$5m in annual revenue, while one-third reported between $5m and $20m. A minority of respondents booked up to $70m a year.
Commenting, Charles Brewer, managing director of DHL Express Sub Saharan Africa, says that despite current challenges to attract global SME interest, the study’s findings highlight the untapped potential that still exists in the continent. ‘The fact that SMEs expect to generate up to 50 percent of revenues internationally by 2019 is a massive positive and highlights the vast opportunities for Africa from an investment and job creation perspective.’
He explains that overcoming different market environments is the biggest hurdle. The quality of a target market ́s infrastructure, the stability of its politics, administrative costs for establishing a local presence and cultural differences in doing business were all cited by the executives surveyed as factors that deterred them from entering new markets.AFRICA LEADING GROWTH2 (1024x487)
‘The unfamiliarity of foreign markets received particular attention, with 84 percent of respondents describing understanding a target market’s culture or language as important or very important in determining its attractiveness. This also explains why most SMEs often expand into markets that resemble their own. This is evident in Africa, as companies looking to expand into the continent, often make use of a “one size fits all” approach. Due to the various cultures, languages and customs on the continent, vast amounts of research need to be done into each region, and the services and products need to be specifically tailored to each country. Africa is not one country,’ says Brewer.
‘A number of multinationals and corporates have experience great success in Africa, DHL being a prime example. And the good news for SMEs is that they have the advantage of being more agile to adapt quickly and exploit the opportunities available. An entrepreneurial spirit is vital for the success of small businesses, we ourselves started out as an SME in 1969, and as they say, the rest is history. We too have focused on partnerships in Africa, and now have a retail presence of over 3500 outlets across Africa.
‘We work with thousands and thousands of SMEs across Africa and have witnessed how these businesses are able to successfully establish a presence in the region. With the support of the right partners, a well-designed supply chain, clear understanding of their competitive strengths and the right mindset, SMEs can break through any border and make the world their market,’ said Brewer.

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