Business

Economies of scale and diversity

Lyal White

The differing nature of regional economies means a one-size-fits-all approach cannot work, writes Lyal White.

Nigeria and its capital, Lagos, is a prime example of the so-called demographic dividend that Africa holds. (Lyal White)

Africa’s attractiveness as an investment destination is undeniable. But although the promise of substantial returns is evident, what still confounds many investors is how to make smart strategic decisions on the ground and capture the burgeoning opportunities in the rich patchwork of markets that make up the diverse continent.

After Asia, Africa has the fastest regional economic growth in the world. At about $2-trillion, the collective African economy is larger than either Russia or India and it is expected to double by 2025.

The continent’s new-found appeal is underpinned by population dynamics, or what economists call Africa’s “demographic dividend”, which refers to the rapidly growing young population that is increasingly urbanised. More than 60% of the African population is younger than 30 and migrating to cities such as Lagos and Nairobi faster than ever before. Such growth and modernisation bodes well for a nascent consumer and labour market that is expected to drive growth and productivity for years to come.

But despite Africa’s bullish outlook, investment decisions cannot be based on data from a spreadsheet. It is crucial for investors to match statistics with geography, sociopolitical and cultural insights and on-the-ground experience.

Deciphering the business environment is far more complicated than it seems. The reality is often complex and culturally nuanced. Managers require a new set of tools and a shift in mindset from conventional business to cope with these high-energy, potentially lucrative but ever-changing operating environments.

Regional grouping
One thing is certain: there is no single template or remotely similar approach to doing business in Africa. One size does not fit all, even among countries that share a common language or regional grouping.

A good example of such divergence is between East African regional leader Kenya and West African powerhouse Nigeria, two of the continent’s most sought-after destinations for investors. Both are growing at an impressive rate on the back of increasing levels of foreign capital and they demonstrate progressive developments in national management and governance that reflect a keen commitment to strong institutions.

The economy of Nigeria, which has 158-million people, has been growing at 7% for the past eight years and will soon be the largest in Africa, taking the title from South Africa as early as 2016. The increasing diversification of Nigeria’s economy was demonstrated by strong growth outside the oil sector in 2011 in areas such as telecoms, construction, retail and real estate.

Kenya is driving an ambitious agenda of innovation-led growth and has positioned itself as a service ­provider and potential gateway between Africa and Asia. The country is openly competing with other economies on the continent to host the African headquarters of foreign multinationals and General Electric was the most recent foreign firm to choose Nairobi as its sub-Saharan hub, following consumer giants Nestlé, Coca-Cola and Diageo.

Both Kenya and Nigeria are Anglophone countries with increasingly progressive institutions and, by African standards, relatively strong political regimes. They share many socioeconomic and demographic attributes and are similarly plagued by ethnic challenges and high levels of corruption.

Scale
But the market dynamics in Kenya and Nigeria are vastly different, which is most evident in the development and access to low-income consumers. Kenya’s ideas on how to access this base of the pyramid has largely been driven by an encompassing development imperative, whereas Nigeria’s is motivated by a staunchly competitive consumer-driven rationale.

Another contrast between the two is scale. Although Kenya is among the largest economies in Africa, it is the size of Uruguay. Such economic realities have pushed Kenya to overcome this potential irrelevance through improved connectedness, driving East African regional integration and positioning itself as a hub between East Asia and Africa. This is of less concern to Nigeria, which has the size and numbers and much grander pan-African or even global ambitions.

Kenya’s rising connectedness extends to a growing consensus and coherent agenda between the government and private sector. Imbued with an innate entrepreneurial flair, Kenyans tend to use their articulate and educated disposition to build networks and drive enterprise-led development. Locals insist it works simply because it is the “uniquely Kenyan way” of doing things.

One example of this is an agricultural insurance initiative for rural subsistence farmers from insurance group UAP. It is called Kilimo Salama, Swahili for “safe farming”. This model of Kenyan best practice embodies distinctive qualities of innovation for broad-based development and building economies of scale with local partners.

Because 80% of rural Kenyans depend on agriculture for their employment and income, the system insures farm inputs against drought and excessive rain, using weather stations to measure conditions. The product covers defined shared weather risks – if a weather station shows loss, then all insured farmers are paid, irrespective of on-farm loss. The system is partnered with mobile payment system M-Pesa and Safaricom telecommunications to provide a complete package to the farmer. A reliable indicator of the scheme’s success has been its astounding growth rate. Kilimo Salama began in 2009 with 200 members; today it covers 65 000 farmers.

Highly competitive

In Nigeria it is the raw ambition and entrepreneurial grit of the people that distinguish them from the rest. The country is a highly competitive, consumer-based society, typified by dynamic entrepreneurs such as Aliko Dangote, head of the Dangote Group.

Dangote, the richest man in Nigeria and in 76th position on the Forbes list of billionaires, is said to have a net worth of $11.2-billion. His group owns cement plants, sugar refineries and flour-milling and salt-processing facilities.

The scale and unashamed ambition of the Nigerian economy sets it apart. But although youthful demographics may bode well for the country’s future consumer spending, there are still more than 100-million people living in poverty – a harsh reality check when engaging this market.

In an investment environment that can change quickly, a nimble and detailed assessment of conditions is essential. Models of best practice at the base of the pyramid in Kenya may not work in Nigeria and consumer products thriving in Nigeria do not automatically appeal to Kenyan tastes.

It is important for investors to realise that Africa is not a single homo-genous entity. It is not even enough at times to separate it into regions or countries. Consumer behaviour in Africa is stratified and localised. Crucially, best practices and models of success for enterprise development are culturally relevant and often ideas cannot be transferred or exported from one country to the next.

Dr Lyal White is the director of the Centre for Dynamic Markets at the Gordon Institute of Business ­Science in Johannesburg

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