Business Today

Africa is the next big frontier for Indian companies

The gradual economic emancipation of Africa will be a big opportunity for Indian business.

Sugan Palanee        Last Updated: May 10, 2011  | 16:56 IST

The global investment paradigm is shifting from "should one invest in Africa" to "managing the risk of not being in Africa". With South Africa, now part of the BRICS group of countries, India is more than well positioned to take advantage of the array of opportunities on offer in Africa, a continent with a population of one billion, which include several thousands of Indian immigrants. Indian businesses are using the expatriate Indian network to tap the business opportunities in Africa.
 

Sugan Palanee, Senior Managing Partner, Ernst & Young, Africa
Africa appeals to potential investors for a host of reasons, as demonstrated by numerous studies. Not surprisingly, natural resources have been the catalyst for Africa's growth. The continent has the widest range of minerals, from gold, platinum and diamond to chrome, coal, cassiterite and coltan.

The continent has grown steadily at about 5.6 per cent between 2001 and 2008, thanks to a combination of structural economic and political reforms, stable macroeconomic conditions and increased foreign direct investment, or FDI, inflows - which quadrupled from just over $50 billion in 2003 to over $200 billion in 2008 - mainly from emerging economies.

At the World Economic Forum, discussions revolved around how 40 African multinational corporations, labelled together as African Challengers, outperformed the Nikkei 225, DAX 30 and the S&P 500 on revenue and profit margins from 2003 to 2008. The African Challengers came from sectors in which Africa is least developed. The largest proportion of these fast growing companies are in information and communications technology, financial services and logistics, besides mining and natural resources. In short, where there are challenges in Africa, there are also investment opportunities - and not just in natural resources.

Where most people see problems, the African Challengers saw opportunity. For example, even in Africa's largest economy, South Africa, at least 40 per cent of the population has no access to banking. In Nigeria and Kenya - the powerhouses of west and east Africa, respectively - the figure is much higher, over 70 per cent. So, in Kenya, for instance, Safaricom, as Vodafone is known there, developed an innovative product to distribute banking services, called M-Pesa, which enabled customers without bank accounts to pay for goods and services using their cell phones. The service has since been introduced in South Africa and Tanzania.

With less than 5 per cent of Africa's population having access to the Internet, innovative investors took full advantage of the lacuna to grow multinational mobile communication brands such as Celtel, which was taken over by Zain. Bharti Airtel subsequently bought the Africa operations of Zain. Another African success story is South African mobile phone operator MTN, which grew into a pan-Middle East and Africa player. Kenya Airways, Ethiopian Airlines, RwandaAir and Air Namibia are growing airlines, purchasing several aircraft and introducing new routes among African countries, and between Africa and Europe.

Other sectors ready for investment in Africa include infrastructure, energy, agriculture, real estate, tourism, construction, education and health care services. Infrastructure alone - in particular road and rail construction - is expected to attract billions of dollars per annum over the next 10 years to enable Africa to catch up. In agriculture, poor food security in Africa has seen many companies investing in innovative farming technologies and agro-processing. For instance, Rwanda benefited from the collaboration with Starbucks to assist coffee farmers.

The poor infrastructure in some of the African countries has meant an increasing preference for value-adding investments - that is, investment that brings benefits to the locals as opposed to extraction and export of raw material. However, countries such as China have successfully increased their presence in Africa through a careful alignment of their own interests with the challenges facing African governments. Most of China's FDI in Africa is led by state-owned enterprises, and involve an exchange of infrastructure development in return for mineral rights. In some instances, however, China has been criticised for violating labour laws in some of the countries in which it has made investments. For instance, some rail infrastructure partnerships in Namibia were stalled due to disagreements over the treatment of workers and/or the failure of China to develop skills among the locals. Similar challenges were faced by Chinese oil companies in Nigeria.
 
For all its challenges, Africa presents the most sustainable economic outlook for the future. It is not surprising, therefore, that Ernst & Young's Africa Attractiveness Survey (March 2011) found that the continent's improved business environment had made it more attractive in the past three years.

These are some of the many reasons why it is important for growing businesses to be in Africa. Whereas China came into Africa via government intervention and led by state-owned enterprises, Indian private sector giants like Bharti Airtel, HCL and the Tata group have begun exploring opportunities in Africa proving the receptiveness of Africa to foreign investors. Things can only get better as the Indian government steps up trade relations with Africa.
 
What has worked in India must certainly work in Africa. It is a continent with a large population, spread over arable land, with little or no infrastructure, much like India was 20 years ago. A billion people slowly being economically emancipated, will be a big business opportunity - just as the India growth story over the last couple of decades provided a big opportunity for Indian entrepreneurs and corporates.

(The author is Senior Managing Partner, Ernst & Young, Africa)


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