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6 Common misconceptions about doing business in Africa

Facts and opportunities for Japanese companies

September 26, 2016

Category : ABP's insight

Author: Yukari Umemoto


We, Africa Business Partners, have talked with a lot of business persons in Japan and other areas outside of Africa as a professional firm about opportunity of African business and investment. This time around, I would like to address the common misconceptions related to doing business in Africa.


Misconception 1: Africa has a large population 

The entire African continent boasts a population of 1.2 billion people. The clear pyramid-shape of the composition suggests an ever-increasing population. The median age is around 20 years old; a young productive population with purchasing and labor power. This can be compared to Japan where the median age is 46 years old.

However, apart from the highly populated countries such as Nigeria (170 million), Ethiopia (97 million), and Egypt (90 million), the average population per country on the continent is around 16 million. This number is not large for Japanese companies that conduct business in a domestic market of 120 million people.

Some insist that the population scale is big in terms of the total number in each African community, however, in order for such a community to be considered as one market, it needs to have well-organized logistics, infrastructures, low cross-border costs such as tariffs, and integrated demands within the market. It is not the case that a community organized by governments can immediately function in business. 

National borders in Africa are said to be arbitrarily demarcated, but today, half a century since gaining independence, the differences in national characteristics, consumer behaviors, and business practices among African countries are larger than expected.
Furthermore, from a business perspective, urban and rural districts should be clearly defined and separated. The consumer behavior and needs in urban and rural areas in the same country are far more different than those between countries.

In general, villages are sparsely populated, and their distribution mechanisms are not well established. When measuring market size, we should only take into consideration people that are accessible to the market. Naturally, business plans for African markets need to be different from that of the Japanese market.


Misconception 2: Africa is a "Blue Ocean" 

Africa is referred to as "the last frontier". The phrase gives the impression that people's demands still remain untouched, yet this is not true in many cases. Once you begin a study of a business in Africa, one soon finds out that there are already similar, existing businesses in operation.

For example, take a look at the off-grid power supply in a region with insufficient electrification. The demand for electric power is high, but innumerable solar lantern companies both foreign and local are already in the business mix. The lanterns retail for about 10 to 20 dollars and are available everywhere. In this market, we cannot overcome the competition with slightly longer-lasting Japanese lanterns at a doubled or tripled price level.

I am often asked the question, "Will such a product sell well in Africa?" Even if there is demand for the product, similar ones have already been introduced into the market. All one can do is lower the price, surpass the competitors with sales power, or become a game-changer in the market.

For example, there is a service known as "M-KOPA" (meaning "borrow on a mobile" in Swahili) in rural districts in Kenya. The service sells home solar systems on an installment basis via mobile money platforms. The system has a smart meter that can control power distribution and payment through a built-in SIM card. 

When paying off the loan, one can purchase additional electronic appliances such as a Television set, and the payment is also made through mobile money. This is the game-changer that shifted the electric power service from just selling lanterns into a model that acquires all home demand for electricity, through loans.

The company selling M-KOPA carries out face-to-face business by bringing in a large number of sales staff consisting of 700 sales persons and 1,000 agents. Noticing the large sales and business potential, German and Ugandan companies have quickly entered the business. As such, in African business, the right question is not "Will such a product sell well?", but "How should this product be sold?"

China is focusing on investment in light industries in Africa in addition to the infrastructures and resources. They have 15 industrial parks on the African continent. However, China is not our only competitor in Africa. Recently, countries previously considered to be remotely related to Africa are starting to increase their presence in African business. 

For example, Viettel Group, a telecommunications group from Vietnam, has the largest market share in the mobile telecommunications business in Mozambique.

As for instant noodles in Nigeria, where they are also eaten for breakfast, the product claiming over 60% market share is the brand Indomie, produced and sold by an Indonesian company. The United States began concentrating on Africa out of a sense of rivalry with China, and Turkey has often been sending business enterprises into African nations. 

Furthermore, our competitors are not limited to foreign affiliated companies; local companies are taking the first-mover advantage in many products.


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Indomie on the shelves of a store in Nigeria (Photo: ABP)


Misconception 3: Mobile money is widely used in Africa

In Kenya, "M-PESA", a banking system using SMS on cellular phones has spread expansively. Because of this, there is an impression that cellular phones have disseminated in Africa like "leapfrog", and mobile banking is now common among people who do not have a bank account.

A number of new services through mobile money have been generated. M-KOPA as mentioned earlier is one of them. In Kenya, another very popular service is the provision of small or micro loans via mobile money, using credit information accumulated in mobile money and SMS. This is the very example of "FinTech".

However, the penetration rate varies widely among countries. More precisely, it would fair to say that such wide dissemination of mobile money can only be seen in Kenya and several countries in East Africa.

A survey published by Moody's this year reveals that the rate of mobile money account holders in each African nation is predominantly high in Kenya with nearly 60%, followed by Uganda with 35%, and Côte d'Ivoire with 25%. The rest of the continent has comparatively lower rates.

Among the five nations where our company, African Business Partners has its bases, mobile money is so common in Kenya that, if one is not using it, you would be questioned as to why. On the other hand, existing financial institution shave strong power in Nigeria, so widespread mobile money service is only used to operate bank accounts with mobiles. In Nigeria, mobile banking that enables the exchange of money using a cellular phone alone, like M-PESA, has finally begun this year.

In Côte d'Ivoire, mobile banking is operated, however, our estimate shows that the actual user rate of the service is less than 10%. Kenya has witnessed the spread of the service because so-called kiosks (small shops selling food and other basic daily necessities) have become agents to exchange mobile money and cash. 

The kiosks have daily cash incomes, so they can manage working capital with their own money without the provision of funds, and they exist even in remote rural areas, so many people can use it. In Côte d'Ivoire, however, the density of retail stores is still low, so the agent network has not developed.

Conversely, we can say that there remain enormous possibilities that the scope of mobile money, and the generation and development of services based on it, as seen in Kenya, will begin everywhere in Africa soon.


Misconception 4: Africa is too far away for Japanese companies

I have seen a list of Japanese companies operating businesses in Africa, which was made in the 1960s. On the list, an astonishing number of companies of various types, including today's large companies, can be found. 

According to the list, the business categories and products were diverse, and not limited to ODA business, ranging from consumption goods such as electric appliances, raw materials for manufacturing, to services. It can be noted that more companies owned factories in Africa back then.

I sometimes listen to older people talk about the situation at that time. As I hear more stories about Japanese companies that were zealous and eager to conduct business in Africa, while the compliance and organization management was still insufficient, I realize that Japanese companies back then were like venture companies. Such venture-like companies transformed into mature, larger ones in the 1980s.

In the 1990s, partially due to political instabilities in the part of Africa and the reduction in ODA budgets of Japan, the number of Japanese companies doing business in Africa decreased dramatically.

After World War II, Japan lost everything and many companies had to build their businesses from scratch. The domestic market had less purchasing power and maturity than it has now, so naturally, the companies were not able to survive without earning money outside Japan. 

Probably, the development level of the Japanese economy matched with that of African countries whose nations and economies were under reconstruction after independence. Similar to how Chinese products are popular in Africa now, products in the Japanese market and African market at that time might not have been so different.

There was a time when the psychological distance between Africa and Japan was much shorter. The geographical distance still remains the same. The development level and external circumstances affecting Japan have kept Africa away from their business sights.


Misconception 5: Japanese products aren't fit for the African market

Then, are today's Japanese businesses and products unfit for the Africa market? The answer is no. In fact, many Japanese products are already used widely in Africa.

For instance, machinery and equipment, or raw materials used in manufacturing. The noodle-making machinery used to produce Indomie mentioned above is made in Japan. A factory manager of Indomie in Lagos, Nigeria, said to me, "I don't want to use noodle-making machinery other than Japanese ones". 

I have been visiting many factories around Africa, and I have seen Japanese products unexpectedly often. In sewing factories, sewing machines made by JUKI, Brother Industries, or Toyota Industries are used, and zippers manufactured by YKK are also purchased.

 
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Embroidery machines made by the Japanese company Barudan, one of the biggest manufacturers of industrial embroidering machines in the world. The picture is from a factory in Kenya.Indomie on the shelves of a store in Nigeria (Photo: ABP)


In food factories, Japanese automation equipment is used, and some label printers and testing apparatuses are Japanese products. Japanese raw materials are also used for sophisticated packaging. In the construction industry, tools made by Makita are quite popular. I am often asked by hospitals to import more diagnostic imaging units made by Shimadzu or diabetes inspection equipment made by Horiba. 

When visiting major growers of export products, I always see Sakata Seed's inputs, for crops such as broccoli. It is also well known that raw materials supplied to factories of hair extensions for African women are provided by Kaneka and other Japanese chemical manufacturers.

I said earlier that competition in African markets is fierce, however, in the field of industrial mechanical equipment and materials, Japanese products hold great superiority with regards to reliability, durability, and efficiency. As such they are relatively unaffected by competition, and can be sold without the use of high sales expenses. 

In production sites where business continuity, efficiency and quality guarantees are essential, African companies prefer to use products made in Japan, even if they cost more.

Besides these quality-first products, there are a wider range of industries and products that have business potential for Japanese companies, in Africa. Moreover, for Japanese firms, which now emphasize on efficiency and operation in a stable environment, regardless of the company size, African business provides opportunities to become a company that can fight off global competition, generate revenue in emerging economies, and a chance to regain the lost entrepreneurial spirit.

Kansai Paint is a leading paint manufacturer in Japan. However, in terms of the world market share, it is just one of the companies in the second group of the market share company cluster. The company has decided to shift the emphasis of paints from automobiles to buildings in an effort to enter the first cluster. They acquired a paint manufacturer in South Africa in preparation of seizing a share of the large African market. The company says that, through the acquisition, they have gained a mindset to compete in the world as well as direct benefits of the market share. 

"Compared with when we only operated business in Asia, our perspective of the global market map has radically changed," the representative said. After all, Asia is a region that Japanese can see as an extension of Japanese market when conducting business. On the other hand, Africa has different contexts from Japan, so it is the entrance into global business in which we have to cooperate in an unfamiliar environment.

Panasonic has a policy to strengthen sales of smartphones as well as household electrical appliances in Africa. In India, the company is marketing smartphones made by a Chinese manufacturer on consignment, and the Indian president of the affiliated local company is also a board member of the parent company Panasonic, which suggests how seriously the company is engaging in business in emerging countries. 

The production system and management in Africa would not be a Japanese way. When achieving to enter into the African market, the company will have to become a strong manufacturer that can sell any kind of goods in rising nations. In Africa, the development of its manufacturing industry and entry into the world supply chains are pressing challenges. The time is coming when Japan and Africa will get closer to each other in terms of their similar business interests again.


Misconception 6: Africa's weather is hot

The area of the African Continent is 80 times the size of Japan, and the climatic regions are different and diverse. We cannot generalize, but major urban cities are often located in high places, such as Johannesburg, South Africa, and Nairobi, Kenya. As such their climatic conditions are cool throughout the year, even though some are located on the equator. I am currently l live in Nairobi where the present season in July and August is rather cold. The temperature falls to around 10 degrees Celsius in the mornings and in the evenings.

There are cold places and hot places on the continent. When visiting Africa, you need to prepare clothes suitable for the climate and take care of yourself accordingly.


Source: http://business.nikkeibp.co.jp/atcl/report/15/250027/082500005/
(The article was published at Nikkei Business Online in Japanese on August 26th, 2016)

List of Japanese Enterprises Doing Business with African Continent and Countries

Japanese companies' list doing business in Africa, edited by ABP[Detail]

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