investing in africa
Post on 01-Nov-2014
Embed Size (px)
- 1. Deloitte on Africa Resource-seeker or market-seeker?Are you a resource-seeker or a market-seeker? Two typologies and their implications for your Africa strategy Africa is enjoying tremendous growth and is, currently and into the foreseeable future, the preferred investment destination for investors. A number of factors bode well for Africa as an investment destination: increased stability, reforms in terms of investment climate, a critical mass of consumers, a growing young population and burgeoning middle class, large deposits of minerals, arable land for agriculture, and a significant infrastructure deficit. While the opportunities are clear, what is less clear for many is firstly, how to enter and secondly, how to manage the lifecycle of their investments in their chosen African markets.Is there a formula? And, does one size fit all? No, there is no formula. And no, one size doesnt fit all. It all depends are you a resource-seeker or a market-seeker?Foreign Direct Investment (FDI) theories suggest that companies fall into two broad categories: resourceseeking and market-seeking. Resource-seeking firms have different characteristics from market-seeking firms, and these differences, in turn, have an imapct on the market entry mode, the management of the investment during its lifecycle and even exit. This paper does not seek to provide definitive answers as to how companies should access and manage Africa opportunities but rather recognises and leverages the value of typologies. A typology is a useful and pragmatic tool for categorising and understanding the approach to be followed by organisations with similar traits and motivations. Resource-seekers are those investors looking to establish access to raw materials or other input factors while market-seeking investments are geared towards serving the host market and would typically include retail both food and clothing, Technology, Mobile and Telecommunications (TMT), entertainment and financial services. Also, in this category, by extension, would be construction firms that would typically follow the retailers in order to provide the necessary retail infrastructure. There is currently a hive of activity on the continent, with many construction firms building mixed-use developments and retail malls. Resourceseekers would typically be mining houses and Oil & Gas players accessing African markets for commodity exploration and extraction purposes. Below are some key traits classified as differences and similarities between resource-seekers and market-seekers.
2. Differences Market-seeker traits Consumer goods and services focused Volume and market size are pivotal to their decision-making process. Numbers drive sales and induce economies of scale. On this basis, regional integration is critical for market-seekers. Unlimited choice in terms of choice of markets to participate in. Market-seekers have a broader universe of options. As a starting point, any country is a potential market until it is qualified further. Vested and strong interest in political stability. Political stability strongly linked to perceptions of risk. Presence in market is a function of how well the company interfaces with the customer base and competition. Resource-seeker traits Commodities/natural resources focused Market size and regional integration are not key considerations. Limited choice in terms of markets. Resourceseekers can only consider countries with resources. Resource-seekers are known to operate in unstable environments. Presence in market is a function of a mines life and mineral availability.2 Deloitte on Africa Collection: Issue 3Similarities Both have a vested interest in infrastructure but for different reasons. Market-seekers require infrastructure to move products from the port of entry and distribute in-country. Because little beneficiation is taking place on the continent, resource-seekers typically need infrastructure only to move commodities from the mines to the ports to be shipped to their export markets. Both have a vested interest in security of energy supply. 3. Deloitte lifecycle of investment into Africa Opportunity AssessmentNo Rationale for expansionTarget countriesCountry AssessmentRegulatory EnvironmentLocal partnershipsEntry? YesEntry StrategyNo Managing StakeholdersHuman CapitalProduction/ Business ModelViable? YesEstablish Local OperationsNo PricingGrowthDistributionExit? Yes Exit StrategyThe Deloitte lifecycle of investment into Africa shows that the entry into management of investments in any African market are an iterative process with a series of decision-making points. Using this framework, resource-seekers and market-seekers will be compared and contrasted in order to understand what their considerations are at different decision points.Deloitte on Africa Collection: Issue 3 3 4. Key considerations and implications for resource-seekers and market-seekers Opportunity assessment Rationale for expansion The expansion of resource-seekers and marketseekers into Africa is motivated by different drivers. For market seekers, Africa is appealing from the perspective that there is a critical mass of consumers and market size. Africa currently has a population of 1billion people, which is set to increase to 2billion by 2050. Furthermore, Africa has a rising middle class meaning that consumers increasingly have greater income to spend. A disproportionately young population guarantees a consumer base for years to come. Moreover, with most of the Western world facing economic challenges, Africa presents significant growth. It is anticipated that Africas current middle class of 313million consumers will grow to 1.1billion by 2060. On the contrary, for resource-seekers, Africas attractiveness lies in the natural resources she is endowed with and most of which are still untapped. Africa produces more than 60 metal and mineral products and is a major producer of several of the worlds most important minerals and metals, including gold, diamonds, uranium, manganese, chromium, nickel, bauxite and cobalt. Africa hosts about 30% of the planets mineral reserves, including 40% of gold, 60% cobalt and 90% of the worlds platinum group metal (PGM) reserves. Target countries The process by which market-seekers and resourceseekers filter and select countries to enter differs greatly. Market-seekers inherently have a broader universe of options. As a starting point, any African country with a population and consumers is a potential market until it is further qualified in terms of the companies business rules and preferences. Resource-seekers, on the other hand, can only consider those countries with specified resources that are aligned to their product focus. As market-seekers seek profit via volume and economies of scale, country and market size are4 Deloitte on Africa Collection: Issue 3important considerations and, by implication, regional integration. A regional approach compensates for those countries with small populations. The East African Community (EAC), the most progressive regional bloc on the continent, is promising free movement of goods and people when it fully goes online in 2014. In light of this development, the approach increasingly being adopted by market-seekers is to manufacture in one of the EAC countries and distribute across the region. With this approach, small countries like Rwanda and Burundi become attractive but only in this context of a regional approach. Rwandas trade with other EAC states rose considerably in the period between January and August 2012 as a result of the implementation of the regional common market protocol, which facilitates the free movement of goods and services across the region. Rwandas exports within the EAC increased to US$75.7million in this period up from US$50.7million in the same period last year. On the other hand, resource-seekers have limited options targeting only those African countries whose commodities profiles are aligned with their product focus. Traditionally, resource-seekers have pursued markets such as Nigeria, Angola and Equatorial Guinea for their oil, the DRC, South Africa, Botswana, Namibia and Angola for their diamonds, and Zambia for its copper. Guinea, alone, holds the worlds largest estimated reserves of bauxite at 7.2billion tons. However, in light of recent oil and gas discoveries in Ghana and along the east coast of Africa and coal in Mozambique, countries such as Mozambique, Kenya, Uganda and Tanzania are fast becoming central in resource-seekers expansion strategies this was not the case, even three years ago. So great has been the interest that Uganda, for example, intends to offer mineral prospecting and production licences on competitive bidding rather than on first-come-first-served basis following a surge of investor interest. The point here is that resource-seekers choices are defined by nature. 5. TUNISIAGrowth of sub-Saharan Africa is projected at 5.3% in 2012. It is anticipated to pick up to 5.6% in 2013.MOROCCOLIBYAEGYPTWESTERNSAHARAALGERIAMAURITANIA CAPE VERDE ISLANDSMALINIGER SUDANBURKINA FASOGUINEASIERRA LEONEIVORY COASTLIBERIAGHANADJIBOUTI NIGERIA CENTRAL AFRICAN REPUBLICCAMEROON EQUATORIAL GUINEA GABONC BRA ONG ZAV O ILLEGUINEA-BISSAUERITREACHAD TOGO BENINGAMBIASENEGALETHIOPIASOUTH SUDANDEMOCRATIC REPUBLIC OF CONGOSOMALIAKENYAUGANDA RWANDABURUNDI CABINDAZAMBIAUEIQ50 - 200ZIMBABWE20 - 50BOTSWANA SWAZILAND10 - 201 - 10MMAD AGNAMIBIAB AM OZASCA RANGOLAMALAWIProjected Population for 2012 (millions)TANZANIALESOTHO SOUTH AFRICA0-1Source: World BankDeloitte on Africa Collection: Issue 3 5 6. Country assessment Other key considerations for determining the viability of entering a new market include the ease of doing business, political and social issues, country and business risks, language and culture barriers, legal, tax and compliance requirements, geographical proximity and logistics and existing infrastructure. Indeed, key considerations for