Ghana Report

StoriesOctober 13, 2022

The Advantage of the Africa Advantage by David Ofosu-Dorte, Senior Partner of AB & David Africa

The Advantage of the Africa Advantage by David Ofosu-Dorte, Senior Partner of AB and David Africa

Ghana Clifton Homes The Atlas 300x600 v1

: Written by Sandra Francisco; Published: October 13, 2022

The conversation is still on-going on why those who make an early move into any business sector, get the early mover advantage. In sum, it is believed that early movers are able to grab untapped opportunity and thereafter rein in the multiplier effect. More importantly, early movers tend to occupy a significant mindshare of patrons for a long period and this leads to a sizeable market share. It is said entrepreneurs who pioneer a sector or who make the move at a time others are hesitant, gain product or industry leadership notwithstanding initial hiccups. In a sense, the high risk of venturing into untapped sectors is directly proportional to the strategic advantage the risk taker attains.

With the exception of technology related business, the opportunity to gain an early mover advantage is rare these days in advanced countries. There is, however, one place on earth where risk takers can still find a lot of room to make the first or early move – that place is Africa. Still lagging behind in many economic sectors, the continent offers inexhaustible opportunities not ordinarily available elsewhere. Of course, it still remains a question of whether one sees Africa in terms of the old fable of “a million bare feet with no need for footwear” or “a million bare feet who need shoes”. So indeed, it is both a business problem and a mindset issue.

The Two Africas

Africa’s context is indeed unique because investor decisions may be affected by two (2) distinct “Africas”. The first, and generally known “Africa” is the one perceived from reportage in mainstream western media where the continent’s political figures are featured often alongside the perennial issues of hunger and poverty as if it represents the ecosystem of the entire continent. The “other Africa”, increasingly being spotted by many, is the Africa bursting with start-ups and youth entrepreneurs setting up microbusinesses and MSMEs cutting across clothing, food packing, FinTech, technology-based innovation to meet the yawning demand gap in multiple sectors and which has recently attracted BigTech, including Google, Facebook (Meta) and Twitter. Admittedly, most of Africa’s SMEs operate at a level far lower than required to gain economies of scale or to meet the large scale demand big corporates require if they are to be integrated into the value chain. The situation is, however, changing rapidly as businesses expand production to take advantage of the Africa Continental Free Trade Area (AfCFTA), which is expected to accelerate intra-Africa trade. Indeed, AfCFTA creates an opportunity not only for large scale multinationals, but also for MSMEs who are able to integrate into the relevant forward and backward linkages necessary for such emerging markets.

The AfCFTA

Africa’s combined GDP in terms of purchase power parity (PPP) is estimated at $6.61 trillion and the AfCFTA is projected (according to the World Bank) to boost regional income by 7% as well as add about $450b to the continent’s nominal GDP which is $3.6 trillion. As at May 2022, forty-three (43) countries had ratified the Agreement and 88% of the Rules of Origin (to be used for the Protocol of Trade in Goods) had been approved by the Council of Ministers. Another piece of good news is that the African Export-Import Bank (Afreximbank) launched the Pan-African Payment and Settlement System (PAPSS) (in January 2022), with the aim to ease cross border payments, currently a major bottleneck. PAPSS will make it easier to buy goods across Africa by making and receiving payment in local currency in real time. If PAPSS is successful, it will be a great leap over one of Africa’s infrastructure hurdles. Negotiations of the Protocol on Trade in Services are also ongoing though currently it covers only Protocols on Competition, Intellectual Property, Investment and E-Commerce.

Like all trade area pacts, the AfCFTA is expected to lead to progressive tariff elimination and a bigger market but the ringing question is this – is the AfCFTA enough reason for domestic and foreign investors to bet on Africa?

Betting on Africa

Incidentally, the start of the AfCFTA appears to have coincided with increasing calls by many influential business advisory organisations and think-tanks for investors to take a second look at the continent’s prospects and make the move now. For example, in November 2018, McKinsey published a piece titled “Rethinking the African Business Opportunity – Betting Long On Africa” in which they referenced a survey which had revealed that:

“respondents in Africa and in other regions believe that 20 years from now, its (Africa) combined GDP will be among the fastest growing in the world …”.

Similarly, the World Economic Forum (WEF) has pointed out (May 6, 2016 – 6 reasons to invest in Africa) a number of emerging advantages that make investment in Africa an imperative. The WEF publication states that the growing middle class and the fast changing preferences of the Africa consumer and the digital transformation and diversification of African economies are potential drivers of growth. The influential Brookings Institution has also drawn attention to the need for businesses to pay closer attention to Africa’s emerging opportunities, particularly the potential market size of the continent’s big and youthful population.

As a pan-African business law firm with offices and a network that assist clients in thirty-six (36) countries on the continent, ABDA is very aware of the potential being highlighted by the institutions mentioned above. Indeed, ABDA’s first quarter Africa business trend analysis affirmed the observation the firm has made over the last thirty-six (36) months – that there has been steady growth in various sectors including:

• Mobile penetration
• Digitalization
• The rapid growth of IT related enterprises
• Ethical fashion
• Integration
• Infrastructure
• Automation
• Health care and pharmaceuticals
• Agri-food
• Value addition to raw materials
• Logistics/supply chain

Recently (February 7, 2022 – 10 reasons why you should invest in Africa now), a well referenced online publication, Africa Business Insider, released an article on reasons for investing in Africa. It mentions high returns on investment, availability of raw materials, untapped markets and the acceptance of digitization.

Africa’s array of business entry points and an ever-increasing consumerism trend is buoyed by a growing middle class and youthful population eager for growth.

Some of Africa’s startups led by youth entrepreneurs have chalked significant successes, turned attention to the international stock market and raising funding from PE and venture capital entities.

The successes of the likes of Flutterwave, started by Nigerian entrepreneur, Olugbenga Agboola in 2016, which recently raised $170m from investors for its expansion and other movers like M-Pesa of Kenya and Zeepay of Ghana are classic examples. Aside the PAPSS, mobile money, dominated by telcos like MTN, has further enabled many of the continent’s informal sector enterprises to sell produce and services and participate in previously inaccessible markets.

Emerging Regional Multinationals

A cursory look at the Africa business landscape reveals a steady rise in the number of enterprises that started on the continent and have become or on the verge of becoming regional multinationals. These come in the wake of a growing list of regional multinational commercial banks including the likes of Ecobank, Stanbic and Absa with some having a presence in forty (40) countries. Even in the services sector, some services providers have adopted the Swiss verein style for cross-border operations following their clients in multinational trajectory and similar to that of the Accounting Big Four.

In its publication on the impact of Covid-19 on Africa, the AfroChampions organisation recently reported (in May, 2020) that:

“along with the potential rebalancing towards more regional value chains, COVID-19 is also expected to cause a shift from over-reliance on global manufacturing hubs towards more dispersed and diversified regional and local manufacturing”.

Perhaps, this is also reflected in the fact that even in the pre-AfCFTA period of the signing of the AfCFTA in 2018, intra-Africa trade had already crossed 16% growing from below 10% a decade earlier.

Urbanisation, Afro-Centric Demand and Covid-19

Urbanization is another trend which in itself has led to new forms of demand especially packaged food and FMCG which experienced exponential growth in online and door-to-door delivery business during the Covid-19 lockdown. Recent collation of data from multiple sources indicate that urban food imports hit $110b by 2020 and is projected to hit $150b by 2025 (AfroChampions collated figures in the Trillion Dollar Framework). Other sectors which are on the growth trajectory include fashion especially Africa urban apparel fashion. The number of Afro-centric fashion houses have increased and many are now beginning to supply clothing to the global and the Africa diaspora market.

Pharmaceuticals and healthcare have continued to trend upwards and there are indications that countries like Ghana and Nigeria are making gains in health tourism particularly from high net worth individuals on the continent. Some have attributed this to reduced frequency of travel outside Africa as a result of Covid-19 travel restrictions which has triggered demand for top end medical facilities located in Africa.

Value Addition and Manufacturing

Value addition to raw materials is another significant trend. In a recent example, the beverage giant, Diageo has reported (in July 2016) the increased use of local input for production of some of its beverages (it sources 70% of its produce locally in Africa for its brewery business). The recent opening of automobile assembly lines by Toyota, Nissan and VW are also related examples. Those seeking to enjoy the advantages of rules of origin under the AfCFTA may be eagerly watching this space.

Outlook 2022 and Beyond

Are the above facts enough to make an early move in Africa? There is not much data in Africa on consumer sentiments and pundits rely a lot on the economic outlook presented by public sector officials (which often accompany annual budget statements). Often there are information/data gaps when it comes to Africa. For businesses, this may not paint the right picture for decision making since they need to make judgment based more precise rather than global data. But that it is exactly the type of scenario that is ideal for the early mover risk takers to make a move before the opportunity becomes glaring to everyone.

The Advantage of the Africa Advantage

The type of transformation Africa seeks makes it imperative that businesses are able to spot the opportunities not yet obvious to many. Such opportunities are usually inherent in the very challenges people talk about and Africa has those challenges in abundance. In so many ways, Africa still has untapped advantage that risk takers can leverage on. Yes, the Africa’s opportunity may be latent and in such circumstance, business leaders have the dilemma of choosing between making the move now or wait until the opportunity is obvious for all.

Perhaps, the fact that Africa needs to catch up with the rest of the world is in itself an avenue for entrepreneurs to aim at gaining the early mover advantage through calculated risk taking. As the McKinsey Report mentioned above stated, in taking a bet on Africa “…. on the ground knowledge is key to capturing this business potential”. With decades on the ground, deep insights across over 30 countries backed by global experience, we at ABDA have a bullish outlook for 2022 and we believe that those who make the early move have a higher chance at taking Advantage of the Africa Advantage.

CONTACT DETAILS

WEBSITE: www.abdavid.com

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MAIN CONTACTS:
• Senior Partner: David Ofosu-Dorte - This email address is being protected from spambots. You need JavaScript enabled to view it.
• Managing Partner: Isabel Boaten - This email address is being protected from spambots. You need JavaScript enabled to view it.

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