Posted in Finance Articles, Total Reads: 3097
, Published on 28 February 2012
Why Africa? There were two deals last which made headline around the world and in particular india as well. One was Bharti Airtel’s $9 billion acquisition of the African cellular assets of Kuwait’s Zain. The other was Wal-Mart’s deal to buy the South African retail chain Massmart for $4 billion. Apart from these several other major players in India and abroad are looking at acquiring businesses in Africa to tap into the Continent. FMCG players like Godrej, Dabur are looking at acquiring and entering the market there as well. Godrej acquired Nigerian personal care products maker Tura last year for $33 million as well as Hair care brands such as Rapidol from South Africa. Religare Capital Market’s acquisition of a 74% controlling stake in South African broker Noah Innovation is another indicator that financial Institutions are looking at Africa as the next big thing.
But it is not only Indian firms that are looking at aggressive acquisitions in the African continent. China is taking the first mover advantage in several key areas by ensuring that it acquires the key natural resources that it requires urgently in order to fuel it’s Economic growth. Countries like the Democratic Republic of the congo, one of the poorest countries in the world by way of per capita GDP are said to have mineral resources in excess of $24 trillion. Newly formed countries like South sudan are also oil-rich and are looking to leverage their natural resources in order to further attract investment and bring about development.
The recent uprising in Tunisia, Egypt and the ongoing crisis in Libya have shown leaders Dictators and governments alike that the people are demanding both economic as well as political reform. Couple this with furious appetite shown by emerging countries such as China, India and one can see that Africa is looking at a huge boom especially in the exploitation of natural resources. Analysts say that with a young population and vast resources most of the African countries will start on the path of Industrialization . This would increase employment thereby giving many people the income and the means to avail of some of the basic facilities such as Food, Health and education. The introduction of South Africa formally into the “BRICS” is one such sign that many countries are acknowledging the development and growing power of African Nations. These uprisings also showed that a significant population of these countries are techno-savvy and are hungry for new technology. Websites like Facebook have realized that Africa is one of their biggest growing markets. Whereas the penetration is quite low in most of these countries (mostly in single digit) the growth is shown to have doubled in the last year. This presents a huge scope of potential for companies such Facebook and Twitter.
What is the scope of opportunities?
The African Continent presents opportunities in several sectors. Most notable of them would be :
Countries such as Sudan, Libya ,Democratic Republic of Congo, South Africa are rich in oil and mineral resources. The large Multinationals are heavily investing in the Mining Sector by buying up local mining businesses or the Mines themselves.
Countries like the Ivory Coast are rich in Cocoa production and one of the worlds largest suppliers. While South Africa is the largest investment destination in the mining Sector other countries Congo are also fast catching up. This is leading to internal competition among the various countries which will help in ensuring that Policies towards development and increasing investment stay on track.
With growing employment and a young population Africa also represents a growing consumer class to most companies. Africa has the fastest growing population among all the continents today. Most of the African countries will have a large workforce as compared to the European and American Economies who are already seeing their workforces diminish. Some of the figures given below illustrate this fact.
The Flip side
China is aggressively investing in key areas such as mineral resources, infrastructure and agriculture and farming. While one view is that these huge investments will benefit the African countries another view is that only a few elite and their Chinese counterparts will get the benefit of these investments. In several cases Chinese companies import not only technology but also the man power from their own country to do the work. While official statements from them state that these are only for certain skilled jobs more and more Africans are getting uncomfortable with the explosion of Chinese on their lands.
FORWARD INTEGRATION OR EXPLOITATION OF CHEAP LABOR
An extreme case was when a BBC documentary went to Africa and found that Chinese poultry farmers were selling their poultry at lesser prices compared to their African counterparts!! These sort of activities do nothing for the benefit of the local population and in fact erode the livelihood of the farmers themselves.
Another notable aspect of Africa is the role of Aid. Economist Dambisa Moyo in her book "DEAD AID" argues that years of doling out large sums of money to poor underdeveloped African countries has lead to regression in institutional reforms and development.
ARMED MILITANTS IN NIGERIA
Countries such as Sudan, Nigeria and Ethiopia are all embroiled in internal conflicts whether they be political, social or simply a pent up frustration at the employment among the youth. In Nigeria where recent elections placed the incumbent president “Good luck “ Jonathan was re-elected back again. “Good luck”, a Christian is already facing riots and uprising in the predominantly Muslim north of the country. A country that has rich oil reserves , it will now be a challenge for the current regime to install peace and bring about a sense of law and order to help promote investments.
Further south and we come across South Africa , the only large country that has developed itself relatively without too much controversy. However here too there are talks of nationalizing the mining sector companies (most of which are owned by whites). This is bringing increasing strain on the relationships between the different races. Increasing crime rates and a populist regime intent on using the “Black sons of the soil” card is causing concerns for foreign investors.
So what’s the future like??
Looking at all sides we can safely say that Africa has still not arrived. There is a vast difference between member countries in terms of development both socially, politically and economically. Most countries are still battling with simple and easy to cure diseases like polio, malaria etc. Institutions which can promote law and order and ensure democracy runs smoothly are still to be built in several countries.
However given that growth engines of the future are going to lie in Asia there will be tremendous push for natural resources. Africa unfortunately or fortunately has plenty of it. The race has already started for acquiring them among both developed and emerging economies.
Companies must ensure that they have a long term strategy to establish business in Africa. They must also try and analyze which country they want to set up their business in and what are the political, social and economic factors there. For e.g:- Countries in the north are predominantly muslim whereas towards the south the populations are mostly animist or Christian. Accordingly strategies for marketing and product innovation must be taken.
Only time will tell if Africa can dictate its own terms and chart a path of development that is in its best interest or simply continue its history of being exploited by foreign nations.
This article has been authored by Krishna R from KJ Somaiya Institute of Management.