US Firms “Awaken” to Investment Opportunities in Africa

Over the last decade there has been a slow shift in world economic powers from West to East. The global financial crisis from 2008 is thought by some analysts to have catalyzed this shift, with India and China emerging on the forefront. This change is driving business opportunities and development globally, particularly on the African continent. Africa’s collective GDP, now measured at $1.7 trillion  is now equal to that of Brazil or Russia, making the continent one of the world’s fastest growing regions. McKinsey & Company outlines recent opportunities and progress in African economies.

  • Future economic growth will be supported by Africa’s increasing ties to the global economy. Rising demand for commodities is increasing demand around the world for Africa’s natural riches and is creating new types of partnerships with producers. Africa is also gaining greater access to international capital; total foreign capital flows into Africa rose from $15 billion in 2000 to a peak of $87 billion in 2007.
  •   Africa’s economic growth is creating substantial new business opportunities that are often overlooked by global companies. RMGI projects that at least four groups of industries: consumer-facing industries, agriculture, resources, and infrastructure-together could generate as much as $2.6 trillion in revenue annually by 2020, or $1 trillion more than today.
  •   Today the rate of return on foreign investment in Africa is higher than in any other developing region. Early entry into African economies provides opportunities to create markets, establish brands, shape industry structure, influence customer preferences, and establish long-term relationships.
  •  The rise of the African urban consumer also will fuel long-term growth. Today, 40% of Africans live in urban areas, a portion close to China’s, and continuing to expand. The number of households with discretionary income is projected to rise by 50% over the next 10 years, reaching 128 million. By 2030, the continent’s top 18 cities could have a combined spending power of $1.3 trillion.

With these figures, it is no surprise that U.S. companies are striving for a stronger footing in Africa. While most U.S. companies were focusing international expansion in Asia and Latin America, China sought opportunities in Africa. Over the years China has promoted trade and investment in Africa in exchange for favorable trade terms. China’s exports to Africa totaled approximately $54 billion in 2010, while the U.S. exports totaled $21 billion. Perhaps a barrier for U.S. companies is that many of Africa’s governments find it easier to deal with the Chinese government, as China’s trade terms and policies are less onerous.  This is illustrated by the African Growth and Opportunity Act of 2000, where the US only grants preferential trade terms to African countries that are deemed by the president to be “reforming” in such areas as supporting market-based economies, the rule of law, and protection of human rights.  Chinese policy however has no such demands, but instead sees the mutual benefits of doing business in Africa. To facilitate the process of dealing in African countries, some U.S. businesses encourage the assistance of American embassies to help with bureaucratic webs.

Nonetheless, American companies are now looking to catch up to China and grasp opportunities in Africa. The chief executive of Cummins Inc., Tim Solso, plans to quadruple the company’s sales in Africa to $1 billion in five years by investing $15 million annually in training staff and offices all over the continent. In addition, Cummins Inc. recently appointed an executive director in South Africa to oversee all African operations.  Ache Leke, a Lagos-based director of the McKinsey Global Institute, says that US companies will need to find qualified local partners, as well as send in their top executives in order to flourish. Mr. Southwick who spent eight years working for Cummins in China and Singapore, states that “Africa is far more complicated. You’re dealing with 54 countries, each with different rules, and many with unstable governments”, therefore seeking the best individuals for each position is crucial.

In the past, Africa was never a priority for Cummings Inc., and accounted for only $264 million sales in 2010, compared to about $1.3 billion in China and $13.2 billion world-wide.  Yet US firms are now “starting to wake up to the African Opportunity”, with Cummings CEO Mr. Solo realizing that there will be many obstacles ahead.  Nonetheless each challenge presents an opportunity, opportunities that remind Mr. Solo of where China and India were 10-15 years ago. As world powers are shifting and new economies emerging, we can expect to see yet another milestone in globalization, trade, and foreign investment.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s