business growth

Middle East and Africa: Attracting Growth Opportunities through Business Partnerships

Africa’s rising is well documented and the contribution as well as prospect of Sub-Saharan Africa excites the imagination of many. During the last decade, Sub-Saharan Africa (SSA) was home to six of the world’s ten fastest-growing economies. During the next five years, the region’s GDP is expected to grow 30 percent faster than that of the rest of the world. And, during the next 35 years, the continent will account for more than half of the world’s population growth. More than 200 million Africans (20 per cent of the total population) are aged between 15 and 24, and that demography is expected to grow to 320 million by 2030. These younger Africans form a large share of the rising Middle Class and seek to access a wider choice of food, consumer goods, entertainment and increased connectivity.

These trade-growth opportunities give Sub-Saharan African countries a more prominent role on the world stage, and provide trade opportunities for governments and businesses to forge meaningful economic partnerships that can provide capacity and skills for the local economy, in addition to the traditional benefits of investments that deliver sustainable and inclusive growth.

To tap into trade-growth opportunities, Sub-Saharan Africa (SSA) needs to diversify in several ways; it needs to become less dependent on the stagnating markets of its traditional OECD trading partners in the developed world. At the same time, it needs to lower its dependence on the export of commodities vulnerable to price shocks.

According to a 2012 International Trade Center (ITC) study, Africa’s Trade Potential: Export Opportunities in Growth Markets, the reorientation of SSA exports away from stagnating OECD markets towards the Middle East and China in particular, has already begun. Trade between Western Africa and Asia, for instance, is forecast to increase by 14{e32d7daa565f9bf32d828c42743fea8435775013c3d41fc99d4af4877068cdf0} annually over the next decade, significantly outpacing the overall growth in world trade. But, since the large majority of SSA products destined for Middle East and China are commodities, a reorientation to growth markets is by itself not sufficient to achieve future sustainability. There is need to improve on the export of value-added products. Herein lies a huge opportunity for Middle East countries and businesses to partner Sub-Saharan Africa countries and businesses in the value addition process of many base commodities thereby industrializing Sub-Saharan Africa and rewarding investment decisions.

Many growth sectors exist for trade and business partnership between businesses in Sub-Saharan Africa and Middle East but we examine the possibilities for three (3) of them; Agriculture, Consumer Goods and Mining.

Perhaps, the most fundamental point is that Africa’s growth story is hardly limited to the extractive industries. As many as 200 million Africans are estimated to have entered the consumer goods market by 2015. Banking and telecommunications are growing rapidly too, and infrastructure expenditures are rising significantly faster in Africa than in the world as a whole. Not that the growth of the extractive industries won’t be impressive. The continent has more than one-quarter of the world’s arable land. Eleven of its countries rank among the top ten sources for at least one major mineral. Africa produced up-to 13 percent of global oil by 2015, up from 9 percent in 1998. For many companies, this is a future worth investing in.

Agriculture: Abundant Opportunities

Agriculture represents an abundant trade and business partnership opportunity for governments and businesses in Sub-Saharan Africa and the Middle East.

More than fifty percent of the food consumed in the Middle East is imported, making it the largest food importing region in the world. High rates of population growth combined with severely constrained water and land resources suggest that this dependence on imports will increase or remain at current levels for the foreseeable future. Whereas more than one-quarter of the world’s arable land lies in Africa, it generates only 10 percent of global agricultural output. So there is huge potential for growth in a sector now expanding only moderately, at a rate of 2 to 5 percent a year.

According to McKinsey report, Four main challenges inhibit the faster growth of agricultural output in Africa.

  1. Fragmentation. With 85 percent of Africa’s farms occupying less than two hectares, production is highly fragmented. In Brazil, Germany, and the United States, for example, only 11 percent or less of farms operate on this scale. Therefore, new industry models that allow small farms to gain some of the benefits of scale are required.
  2. Interdependence and complexity. A successful agricultural system requires reliable access to financing, as well as high-quality seeds, fertilizer, and water. Other essentials include access to robust markets that could absorb the higher level of agricultural output, a solid postharvest value chain for the output of farmers, and programs to train them in best practices so that they can raise productivity.
  3. Under-investment. To make the agricultural system work better, experts estimate, sub-Saharan Africa alone requires additional annual investments of as much as $50 billion. African agriculture therefore needs business models that can significantly increase the level of investment from the private and public sectors, as well as donors.
  4. Enabling conditions. A successful agricultural transformation requires some basics to be in place—transportation and other kinds of infrastructure, stable business and economic conditions, and trained business and scientific talent. Many African countries are making great strides in laying the groundwork, but others are lagging behind.

These challenges represent partnership opportunities for businesses in the Middle East to leverage the availability of large expanse of arable land in Sub-Saharan Africa to address the looming food crisis in the region while Sub-Saharan Africa accesses finance and expertise in irrigation farming to increase agricultural output through dry season farming, address youth unemployment and attain self-sufficiency in food supply.

Consumer goods: Two Hundred Million New Customers

 Natural Resources are not Sub-Saharan Africa’s only driver of growth. Underlying it, the African consumer is on the rise. From 2005 to 2008, consumer spending across the continent increased at a compound annual rate of 16 percent, more than twice the GDP growth rate. GDP per capita rose in all but two countries. Many consumers have moved from the destitute level of income (less than $1,000 a year) to the basic-needs ($1,000 to $5,000) or middle-income (up to $25,000) levels.

In Nigeria, for example, the collective buying power of households earning $1,000 to $5,000 a year doubled from 2000 to 2007, reaching $20 billion. Nearly seven million additional households have enough discretionary income to take their place as consumers.

This evolution is critically important to consumer-facing businesses, from fast-moving consumer goods manufacturers to banks to telecommunications companies: when people begin earning money at the basic-needs level, they start buying and consuming goods and services. Additionally, we have observed that most consumer categories exhibit an S-curve growth pattern: in other words, when a country achieves a basic level of income, growth rates accelerate three- to fourfold. While the exact inflection point differs among categories, many of them are just entering this phase of accelerated growth. The enormous expansion of mobile telephony in Africa provides clear evidence of this phenomenon.

According to McKinsey Reports, despite the recent global slowdown in economic expansion, GDP per capita in Sub-Saharan Africa should continue on its positive trajectory of a 4.5 percent compound annual growth rate (CAGR) until 2015. That would mean a more than 35 percent increase in spending power. Combined with strong population growth (2 percent) and continued urbanization (3 percent), this increase leads us to estimate that 221 million basic-needs consumers will entered the market in  2015. As a result, the number of attractive or highly attractive national markets—with more than ten million consumers and gross national income exceeding $10 billion a year—increased to 26 in 2014, from 19 in 2008.

Many local and multinational consumer companies are already thriving in Africa and delivering handsome returns to their shareholders. Middle East companies interested in Africa’s rising consumers can partner local consumer companies with local know-how to expand operations within the region or establish global consumer brands with a wide range of tailored and very affordable products.

To succeed, consumer companies must address five major challenges, some familiar to businesses operating in other emerging market; heterogeneous market structure, low affordability levels, undeveloped distribution networks, nascent categories and talent shortages.

Mining: Unearthing Africa’s Potential

Africa’s mining sector presents a paradox: although the continent is strongly endowed with mineral resources, mining has not been the consistent engine of economic development that people in many countries have hoped for. Nor, to date, has Africa attracted a share of global mining investment commensurate with its share of global resources.

The future is bright for mining in the Middle East and Africa. In the Middle East, industry participants cite the fact that much of the land has not been explored using modern techniques and equipment. In Africa, over 30 percent of the world’s global mineral reserves are found, yet less than 5 percent of the total global mineral exploration and extraction budget is invested in the continent. The potential for a burgeoning mining industry across these two emerging regions is immense. In Africa, infrastructure building is critical for the continued growth of the mining sector. Reports suggest that African governments are at present unable to meet demand for key infrastructure including rail, ports and energy projects. In response, private participation and investment is being actively encouraged and sought after.

The opportunities for mining, resources and infrastructure companies are impressive, however there are also many obstacles, and governments, as part of the quest to diversify and capitalise upon their mineral rich countries, are realising the need for modern, open and transparent regulatory frameworks.

Reports by leading global advisories suggest that majority of the investment from most Middle East firms and individuals in the mining industry have so far focused on international opportunities. Sub-Saharan businesses in the mining industry can leverage this opportunity and look to the Middle East for investment in the mining sector.

In all, Africa needs to build its capacity to trade competitively in today’s global economy. Thus Sub-Saharan African Countries need to diversify their trade relationships toward Middle East markets, export higher added value products, simplify customs procedure and invest in trade infrastructure such as (roads, railways, airports, seaports etc.). In doing this, both emerging markets will unlock mutually beneficial opportunities for mutual rewards.

 

References

International Trade Center (ITC) study, Africa’s Trade Potential: Export Opportunities in Growth Markets (Technical Paper)

http://www.mckinsey.com/insights/economic_studies/africas_path_to_growth_sector_by_sector

Aibiz Solutions Limited has specialist business advisors available to help investors and business managers identify needs and opportunities to grow their business and support market research activities. We provide advice, information, referrals and connections to any business seeking support on their growth journey.

 

If you are a business or investor seeking advice and support to help you enter or expand in the African Market, Aibiz Solutions combines her local experience of the African business environment, access to relationships and partnerships as well as global business knowledge to ease the launch of your venture. Our professional service covers end-to-end business solutions for best results as well as setup of Legal entity and securing Government approvals.

 

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