In just two decades, Africa’s position on the global stage has undergone a serious transformation. Many African countries have grown at strong rates, with the continent boasting six of the world’s 12 fastest-growing economies. This diverse continent is home to countless companies that are on the cusp of becoming regional leaders and many will soon play a central role in the global business ecosystem.
In this environment, it’s not difficult to see why foreign countries, especially China, are heavily investing in opportunities throughout Africa. The People’s Republic is now Africa’s largest trading partner and continues to pour money, through aid and loans on favourable terms, into the region.
For example, from 2013 to 2017, the East African nation of Kenya saw its trade volume with China grow by 59% to total US$5.2 billion.
Sparking Western interest
Western nations are falling behind China in the new scramble for Africa and risk becoming increasingly irrelevant to African companies and countries if they don’t make meaningful efforts to engage the continent.
So why has China overtaken the West in Africa? “Western companies pursue high profit and are more aware of the risks in Africa. In comparison, Chinese firms can live with lower profit, they are more willing to take various kinds of security and business risks.
Additionally, the Chinese have more experience in a developing market as they went through the process recently,” says Professor Tang Xiaoyang, Deputy Director and Resident Scholar, Carnegie-Tsinghua Center for Global Policy in Washington DC.
Government policies across the Western world are increasingly focused on improving trade and cooperation between individual Western businesses and their African counterparts.
The European Union announced in 2018 that it plans to provide €40 billion (US$45 billion) in funding to African countries in its next budget, with the EU also offering financial risk guarantees to boost investment from private investors.
Some African countries have been negatively impacted by volatile commodity prices in recent years, but future economic forecasts speak for themselves. According to the UN’s predictions, the 10 fastest-growing cities from 2018 to 2035 will be in Africa.
If rich Western countries can position themselves in African markets now, they will be able to establish vital distribution channels and connections to be better prepared for the continent’s prosperous future.
Local African companies only stand to benefit from partnering successfully with foreign firms. Doing so will give foreign companies a foothold in compelling African markets and allow them to quickly get up to speed with the unique regulatory and operating environments found in the African region. Every African nation requires a different approach and strategy; as local business conditions can differ dramatically.
Landlocked Ethiopia, in the Horn of Africa, is expected to be the fastest-growing country in sub-Saharan Africa in 2019, with an 8.7% growth rate.
It may be clear that there are exciting investment opportunities throughout Africa but continuing challenges threaten the continent’s prospects.
From rising debt levels and high unemployment rates to historically weak institutions, potential investors should be aware of the particular risks they face when entering the region, especially as African markets remain highly fragmented.
“There continues to be relatively high barriers to intra-continental trade, which have worked to reduce efficiency and productivity growth as well as prevent infant industries from graduating to higher levels of maturity. African economies still need to do more to ease intra-continental trade,” explains Tony Idugboe, VP Head of Investments for Itanna, a Nigerian-based start-up accelerator.
As Africa’s economy continues to thrive, it’s the middle and upper classes in countries such as Nigeria, South Africa and Kenya that are growing. This, alongside increasing access to luxury brands, is creating the perfect storm for high-end retailers. According to market research provider Euromonitor, sales of luxury goods on the continent are set to grow by 5.6% this year, to total US$5.2 billion in 2019.
Unstable commodity prices have reduced the spending power of some entry-level luxury consumers, meaning the more affordable luxury goods may have a harder time in getting sold. But Africa still has the second-fastest regional growth rate for these goods, behind only the Middle East.
“The UHNWI luxury market, however, remains relatively unaffected as their net worth allows them to operate mostly outside economic trends – they can purchase what they want, when they want,” explains Jeremy Nel, managing director of South African-based luxury marketing firm Luxury Brands.
Even a decade ago, the presence of brands like Burberry, Prada and Gucci in African countries was extremely rare, and while designer labels are not as common in this continent as they are in London or New York, newly minted millionaires are driving demand for high-status products.
According to the UN’s predictions, the 10 fastest-growing cities from 2018 to 2035 will be in Africa.
Investors need to consider the long-term potential of African markets, including the luxury sector, as the true potential of this growing continent will take a number of years to be fully realised.
Source: CEO Magazine