“Agility” required for investment in Africa

“There has been a new scramble to conduct business in Africa, particularly by South African companies. The double edged sword is MTN. A lot of local companies see MTN making a lot of money north of the Limpopo and assume they can do the same,” says Kofi Amegashie, Adcock Ingram Managing Executive – Africa

What many South African companies tend to overlook, however, is the country’s insular economic history. “Numerous local companies have not had to operate in a highly competitive business environment and the reality is there is competition from every quarter on the continent. Notably, there are the Europeans, who have been in Sub Saharan Africa since colonial days and understand it pretty well, and the Asians, who are the new kids on the block. They don’t have the colonial baggage and are prepared to invest significantly in infrastructure development,” says Amegashie.

Amegashie says a there is almost a clear demarcation between pre-2000 and post-2000 Africa. “Pre-2000, 98% of the continent north of the Limpopo was largely characterised by SME and agrarian economies; conflict; poor legal rights; high levels of illiteracy (in colonial languages – an important distinction); negligible land tenure; HIV/AIDS; corruption; and non-enabling government bureaucracies – all resulting in stifled progress.”

“From around 2000, the continent began to experience a significant reduction in conflict, largely attributed to Thabo Mbeki’s efforts to bring about political stability. And with political stability comes economic stability, growth and a larger consuming middle class,” says Amegashie.

Prior to 2000, many of the continent’s growth spurts were as a result of resource booms or, as Amegashie puts it, “digging something out of the ground, putting it onto a boat and sending it to the West.”

In the five-year period between 2002 and 2007, about US$ 235 billion was added onto Africa’s GDP. “When you look at how it was split, only 24% of that growth came from natural resources. The balance was retail, banking and property. Clearly, the boom post-2000 is different.

“In 2000, there were about 160 million households in sub Saharan Africa. Of those, only about 60 million had a per capita income of US$ 5 000 or more. This is a magic number because beyond US$ 5 000, you’re no longer just surviving. These people – whether they are in Johannesburg, Nairobi or Lagos – act exactly the same. They all want consumer goods, better healthcare and to send their kids to school,” says Amegashie.

“You can’t buy data on the continent. You have to take whole lot of macroeconomic data and combine it with some of your internal data and your understanding of the markets. At Adcock Ingram, we have projected there will be about 250 million households in sub Saharan Africa by 2020. About 180 million of these will enjoy an income above the US$ 5 000 per capita mark,” says Amegashie.

These demographics favour sustainable growth. “The caveat is, however, that with increased urbanisation comes a possible creaking infrastructure. Unless governments deal with infrastructure deficits, the population growth and urbanisation could lead to the emergence of ghettos, violence and the possible equivalent of an ‘Arab Spring’,” he says.

Adcock Ingram estimates there will be a trillion dollars added to the GDP of continent by 2020. It will come from four places: the consumer sector (banking, retail, transportation and telecoms); agriculture (60% of world’s arable uncultivated land is on the African continent and food security is an escalating issue); resources (oil, gold, nickel, platinum etc); and infrastructure. “Infrastructure is the flywheel,” says Amegashie, “If you have improved infrastructure it drives a whole lot of other things in your economy.”

There is a mindset that Africa is one entity rather than a continent made up of 52 countries. “These countries are not homogenous – culturally, religion-wise or economically. At Adcock Ingram, we’ve grouped the countries according to the diversification of their economies – so at the one end of the spectrum are the diversified economies (almost 70% diversified) such as SA, the Arab countries and Botswana and at the other end are the post-conflict countries such as Sudan, Mali and the DRC,” says Amegashie.

In between are the highly undiversified economies, namely the oil exporters such as Nigeria, Libya and Gabon and the transitional economies such as Uganda, Ghana, Kenya and Tanzania. Each group has its own unique challenges, which vary from labour costs and corruption, to infrastructure and civil unrest.

Amegashie says there is no ‘one size fits all’ solution when investing north of the Limpopo. “Essentially, you have two options when you invest on the continent. The first option requires filtering all opportunities for risk. What you’ll end up with is a small number of opportunities. One thing is certain – there is always risk in business on the continent.

“The second approach is to look at opportunities, evaluate them, understand the risks and then develop mitigation strategies for those risks. You’ll have a number of opportunities, but the execution of your strategy will never be linear. And therein lies the rub. Due to the enclave economy, most companies in South Africa have grown linearly, but if they want to invest on the continent, their strategy execution cannot be linear,” says Amegashie.

With its 120-year history in South Africa, Adcock Ingram is one of the largely linear-growth companies in the country, but its approach to investing on the continent is not linear. “Our strategy is to understand the risks and have good people in place, who understand the risks and know how to operate on the continent. We’ve also developed mitigating strategies for those risks,” says Amegashie.

In Africa the soft issues are often the hardest issues. Can we build a factory in Kenya like we have here? Yes. Can we have same IT systems? Yes. Do the people have the ability or mindset to operate in a particular way? Maybe not.

Amegashie says companies don’t have to own the entire production to distribution process in one particular territory, but they must have control over the supply chain. “You can’t leave it to chance. You have to control the quality of your offering from production to distribution, including the governance aspect. You might still have a distributer, but distributers need to subscribe to the values of the parent organisation. Today the issue of transparency is paramount and you can’t espouse values and not live up to them. You can’t say, “we do this in South Africa, but – you know – if we’re in the Congo, we’ll turn a blind eye”.”

So, how do companies keep control of their supply chains? “When I joined Adcock Ingram, we were still distributor-led. What we’ve done is slowed down to go faster. We’ve said we won’t play north of the Sahara because it’s closer to Europe than the rest of Africa and the market dynamics are fundamentally different.

“We have created three hubs – the east incorporating Nairobi and Kenya; the SADEC south; the west, which we’ve hubbed on Ghana. We’re keen on getting a footprint in Nigeria because, as trite sounding as it is, you can’t win in Africa without winning in Nigeria with its population of 160 million.

“In addition, we’ve hired people with an intimate knowledge of the respective regions to head up those three hubs. They understand what we stand for and, more importantly, what we won’t stand for. Our teams in the field do all the heavy lifting. My job is to ensure I have the right people in place, be clear about what our values are and create the right enabling environment for them to be the best they can be.”