Doing business in Africa is an international trend, and one that the Cape business community can, and should, consider. It can be daunting for business people and there are many real and perceived challenges to doing business in Africa. CBN interviewed Jacyntha Twynam, Head of Research at Wesgro to look at the opportunities in East Africa particularly, and what to be mindful of when doing business in the continent.
“East Africa presently offers a huge amount of business opportunities, it has a large – and growing population – and a sizeable economy of about US$131bn that has grown at a rate of 5% pa,” says Twynam.
The region is a net importer that imports around US$800bn with a trade deficit of US$500bn. This indicates a huge trade opportunity for other countries. Countries such as Tanzania and Ethiopia’s economies exceed US$24bn, to put this into perspective, South Africa’s economy is sitting at US$600bn and the Western Cape weighs in at US$60bn. So although the individual countries economies are not large in themselves, the region is significant as a whole.
With strong road linkages across the different countries, trans-national companies tend to look at the EA region as a singular, rather than at the individual countries. This is also true of African trans-national companies, based in the likes of South Africa, Kenya and Nigeria.
The Western Cape already has strong trade-links with EA with over 60% of the province’s exports going to EA. These exports are predominantly made up of wine, condiments, fruit juices, manufactured iron and steel products, and Twynam says that these volumes are large, and growing.
There are also strong links between the growth that EA is seeing and the most active sectors in the Western Cape. The Western Cape has very active in construction, machinery, agriculture, technologies and chemicals; these are all sectors that support the EA.
“Many African countries are still in a growth curve in terms of the economic development and will be requiring a lot of infrastructure and building,” says Twynam.
There are a number of construction projects specifically in Tanzania and Kenya.
“We need to recognise that that is a precursor to opportunities that will be unlocked in the short- to medium-term. In the long-term – with infrastructure projects coming to maturity – many more projects will be unlocked.”
As construction continues – and we see a lot of retailers moving into different spaces in Kenya, Tanzania and Ethiopia – those construction projects will need supplies, and that’s where the Western Cape can play a very strong role.
Machinery, especially agri-processing machinery, is a significant sector.
“We see a lot of trade in agri-processing machinery with the Western Cape exporting into the African continent. It is also surprising to see the volumes of food and beverage preparation machinery that is being exported into that market,” remarks Twynam.
The exports also extend to construction machinery including crushers and machinery for washing different types of cements.
Zambia, Tanzania and Kenya are seeing high growth levels in the agricultural sector. There is a lot of interest in agri-processing and value-adds as a result; and there is a lot of technology driving this sector.
“But the problem is there are a lot of companies in that sector in those countries. Although they have the production capability, there are also significant financing constraints. So although there is a role to play for companies interested in taking this opportunity further, I would recommend proceeding with caution and making sure that you do your homework. A lot of investigation needs to be done first.”
This is a sector that really offers great opportunities for South Africans. Technology is really big in EA and businesses in EA are using technology to fast-track growth in certain sectors. Kenya is leading the charge in this sector.
As an example, it is using a lot of software and IT in its power sector, for both generation and distribution. This is bringing the sector up to international standards and fast-tracking growth.
“This is a space South Africa should be watching.”
EA is importing large volumes of chemicals for both the agricultural sector (pesticides, etc.) as well as for construction processes.
Gaps in the market
Twynam says that although there is a growing demand for electrical components in the region, especially for communications, software and IT solutions, available trade data suggests that the Western Cape (and the rest of South Africa in fact) is not equipped to provide the necessary solutions yet.
Textiles and clothing are other areas where the Western Cape is simply not producing the goods to service the growing demand in EA. However, as the consumer market grows in EA and the population with disposable income grows, the larger South African retailers are moving into those markets.
It seems that we can provide the retail support, if not the actual products themselves. How to enter the EA market
“Be strategic when assessing your method of market entry,” says Twynam.
Most South African companies that have a footprint in EA export directly to enter the market, although some have used foreign direct investment to gain entry.
“It’s important for companies to assess where they want to be and how they are going to achieve that. Having said that, it is also important to bear the value chain in mind – particularly for EA market. Look into the value chain and ask yourself: how does your company see itself and where would you place your company in those value chains?”
Also remember that local companies setting up in EA also need suppliers. Your company may not find it beneficial to go into EA itself, but it could still be advantageous to feed into the African market through companies that already have a footprint in EA.
Doing business in Africa can be daunting for any businessperson. There are many real challenges, but also many perceived dangers that may not be as big a stumbling block as you may imagine.
The general rule when approaching any new market is to proceed with caution.
Payment, when doing business with any other country, but perhaps especially across Africa, is a concern. South African companies working in EA say that finding a reputable buyer is imperative. This can be tricky, and it takes time to build relationships with businesses.
In the meantime protecting oneself by using reliable payment methods is the first step, and the second is to be sure you have the correct insurances in place, including credit risk insurance.
“It is really risky for small and medium sized companies if these precautionary measures aren’t in place and things go wrong. For instance, what would happen if there was a port strike while you have a container full of perishables waiting to be unloaded?”
In fact infrastructure is currently an issue in EA. The ports can get extremely congested, coupled with port strikes and rising costs. This infrastructure is currently under construction, so there is an end game.
“If the goods don’t arrive on time, buyers may not accept the shipment, leaving the supplier to deal with costly repercussions.”
Another key area to investigate is the actual consumer. It is easy to assume that because we are South African, consumers across Africa share our predilections. According to Twynam, this is not the case.
“East Africans have unique requirements and anyone wanting to enter the market must take the time to investigate what consumers want, and how it should be packaged.”
It is also key to support local EA businesses in your supply-chain. Buyers want to know where the goods come from and you will be in a much stronger position if you support local businesses.
Lastly, be mindful of cultural differences. Business culture can differ greatly from region to region, different formalities need to be adhered to and it is worth doing your homework before starting negotiations.
According to Twynam, the main reason local businesses shy away from doing business in EA is that they don’t know what to expect. There is also the perception that the infrastructure is poor to non-existent, making it difficult to move money in these countries and that there is no legal system to enforce contracts.
“That is not the case. There is a lot of movement in those markets. We know infrastructure is being built. We also have our own banks in those countries already. If the environment was that unstable, our big companies would not be moving into these areas.”
“Businesses should not be afraid of looking at doing business in EA; but international trade is not the space to be a cowboy.”
The key is balance; be aware that all international transactions have an element of risk, do your research and build relationships.
By Jenni McCann