An anticipated increase in demand for goods and services within Africa has the potential to give innovative companies with turnovers of between R300 million and R1.2 billion the opportunity to expand beyond the limits of their own borders.
Investment between Africa’s regions will also be a crucial driver of financial integration, which at the moment remains too limited.
The latest African Economic Outlook (AEO) 2016 notes banks operating in Africa account for about one-third of Africa’s total value of trade finance, estimated at USD 320 billion. However only 19% of bank trade finance is devoted to intra-African trade and this is not uniformly distributed across Africa. The key is to be able to benefit from strong consumer demand and financial services have a crucial role to play in facilitating this development.
Investment a key role
While the opportunities are immense, bringing down trade costs remains a major hurdle. It is estimated for example that intra-African trade costs are around 50% higher than in East Asia, and are the highest of intra-regional costs in any developing region. The result of these high costs is that Africa has integrated with the rest of the world faster than with itself.
However, from a financing perspective, significant green shoots are taking root. Foreign direct investment into Africa has risen from about USD 10 billion in 2000 to about USD 55 billion in 2015, with investment within Africa playing a key role in this expansion – led by South Africa, Nigeria and Kenya in sectors like banking, retail and telecommunications.
Manufacturing a good driver
With the right commitment and foundations in place so many markets in Africa can become dominant players. For example, only 5% of Africa’s imported cereals come from other African countries. In Europe, by comparison trade between nations typically accounts for more than 50% of all transactions.
Africa’s total exports comprise 80% raw commodities and 20% manufacturing. In contrast, 60% of intra-Africa trade is manufactured products, against 40% for primary commodities. The AEO report rightly points out that manufacturing is a good driver of productive employment and would push Africa further up the global value chain.
By 2050, Africa’s population will rise to over 2 billion people, representing 25% of the world’s population, against 15% today. Both cities and rural areas will grow fast and their interactions will intensify and jobs will need to be created for the youth entering the labour market.
A strong position
The key for businesses is to have the right processes in place to manage the disruptive nature of all of these changes. A more agile, versatile and innovative approach will be needed to doing business.Entrenching a Pan-African mindset to business will take time – but it needs to happen. If businesses are to take full advantage of these opportunities, the region needs more companies that develop true scale.
According to McKinsey’s recent Lions on the Move report, the vast majority of Africa’s 100 top companies built growth by developing a strong position in their home market first – only 14 started with Pan-African strategies. Nearly half of the 100 major firms have remained focused on their home market even as they have grown in scale, while the rest have steadily expanded into regional or pan-African markets. Not surprisingly, almost all the companies that have remained focused on their home market are based in Africa’s biggest economies.
Build scale quickly
The points is that multinationals usually build Pan-African business and the experience of multinationals demonstrates that Pan-African presence takes time to develop, requiring a long-term vision and a step-by-step approach. Most of the large multinationals operating in Africa have been on the continent for more than 25 years, according to the report, and most are present in more than ten countries, and their longevity and geographic footprint are closely correlated to their revenue base.
It has been found that companies that have moved from domestic to regional strategies have used their “first mover advantage” to build scale quickly at home and then use that as the basis for moving aggressively into other markets. Yet a meaningful presence in one or more of Africa’s largest markets is an essential part of a successful Pan-African growth strategy.
Meet domestic demand
Despite recent shocks and challenges, Africa’s household consumption and business spending are both growing strongly, offering companies a $5.6 trillion opportunity by 2025, according to McKinsey.
While Africa’s manufacturing sector today underperforms those of other emerging economies, output could expand to nearly $1 trillion in 2025 if Africa’s manufacturers were to produce more to meet domestic demand from consumers and businesses, and work with governments to address factors hindering their ability to produce and export goods.
It is time for companies and governments, as well as the financial sector, to play a greater role in ensuring more economies can benefit from intra-African trade – the future for Africa shines very brightly if they do.