This is the third of a series of posts on how companies can benefit from China’s Belt and Road Initiative and the second post focused on Africa. To read the first post, click here. To read the second post, click here. The goal of these posts is to help companies better understand what China is doing with its Belt and Road Initiative so that they can benefit from utilizing Chinese-funded or Chinese-built infrastructure as a springboard to their own growth. This and other posts will focus on general enabling environments, including legal frameworks for doing business in these countries. This post is presented in a Q&A format with David Baxter, my longtime friend and PPP (Public Private Partnerships) expert, who is based in Washington, D.C.
Does Africa present a viable alternative to companies that want to move manufacturing from China?
Many products manufactured in China could be manufactured in Africa. Textiles, shoes, and glassware could easily be produced in Africa. The key is to find partners in countries that have created an enabling environment, meaning that the country is stable for foreign competitive and transparent investment. Companies should focus on the ease of starting up business indices, which vary from country to country. Many Southeast Asian countries are no longer inexpensive labor markets, but there are still inexpensive labor markets in many regional hubs in Africa. These hubs contain skilled people seeking jobs and a rapidly growing middle class. These African countries present great opportunities to build a sustainable market base. Some US companies have been in Africa for over a hundred years. Companies like Coke, Ford, and IBM know about Africa’s potential and have done well there, and their market penetration strategies should be emulated.
Which African nations are most welcoming to Chinese development projects? Are these same countries also welcoming to U.S. and European companies?
Poorer countries like Mozambique, Somalia, and Sudan are some of those that have welcomed China. More developed African nations have been pushing back against China. African countries with strong anti-corruption policies and competitive and transparent procurement practices are more interested in doing business with Western companies. Chinese companies typically want handshake deals; they often do not want transparency or competition. Countries with good legal frameworks and enabling environments (e.g. South Africa and Ghana) have great potential and present a better chance for Western companies to compete because deals are not being made behind closed doors. Studying and utilizing the World Bank’s ease of doing business index will be helpful in selecting good markets to enter. Countries with strong contract enforcement and less strict controls on repatriation of profits will be more attractive to Western companies. Many African countries have laws with strict profit remittance controls. These restrictions do not bother the Chinese companies because they generally do not remit money back to China; they remit raw goods to their home country instead.
What most concerns you regarding the current state of African development?
Africa’s public sector funding gap is its biggest challenge. Countries have significant needs, such as hospitals, schools, road, bridges, but they do not have the funds to build them. Sectors such as healthcare, education, water, wastewater disposal, energy, and transportation are already a big focus. These generally enhance the sustainable development goals of the UN and require business partners that support sustainability and resilience. There is great potential for Western companies with responsible market policies. The current Chinese and Indian consumer markets will be dwarfed by the end of this century by Africa’s domestic market demands. This demand, supported by a movement to develop free trade zones, will enhance African development objectives by encouraging these countries to work together, integrate their economies, and share resources in sub-Saharan Africa.
How important are the geopolitics of Africa to current and future business prospects in Africa?
Pan-African identity is continually evolving. The countries and markets may be inclusive or exclusive. It is important to pay attention to how different regional blocks or customs unions develop. Will they collaborate or will they compete with each other? Which foreign companies will gain footholds in these post-colonial regions? The Chinese are present across Africa. So are the French in Francophone West Africa. Former British colonies (Commonwealth countries) comprise their own geopolitical unit, as do the Lusophone colonies (colonized by the Portuguese) and the Saharan African blocks. The African Free Trade Zone has not developed yet because of the disparate geopolitical aspirations among these regions. The rule of law is significant due to the starkly different legal structures present. For instance, some countries operate under the “Napoleonic code” (French Colonies). Others operate under Roman/Dutch law, like South Africa and its immediate neighbors. Then you have the English common law, along with the legal philosophies and practices. Similarly aligned countries are well positioned to do business across borders, but there are still complexities in procuring large transnational infrastructure. Overall political stability is a significant factor. Look at East Africa – the Somalia/Somaliland split is problematic and needs to be resolved. The Democratic Republic of the Congo and the Central African Republic essentially do not even exist as functioning states. Their boundaries were drawn by foreign powers in Berlin a hundred years ago, and these regions are facing difficult issues centered around the different ethnicities of their people. The typical Western company will be better off to focus on the African countries that have had multiple successful democratic elections resulting in progressive leaders who provide political and economic stability.
What does Africa need that foreign companies can provide?
Africans need Western innovation and new technology. Western companies need partners in countries that have a strong rule of law to protect these valuable business investments in infrastructure.
What does Africa have that foreign companies need?
Africa’s burgeoning middle class makes for a large and growing consumer market, and the rapidly increasing number of well-educated Africans needing employment make for a strong workforce. Africa can provide both skilled and semi-skilled labor to meet most any company’s needs.
Can you give examples of industries in which Africa is doing well and in which it will likely emerge as a global leader?
Africa currently excels at producing basic essentials, such as textiles and shoes. Vehicle manufacturing is growing. Japanese and German companies established large auto manufacturing facilities in South Africa years ago, and Africa now exports Toyota, Nissan, and Mercedes-Benz vehicles to their countries of origin. Petrochemicals will be big for a long time. Tanzania and Mozambique recently discovered oil and gas reserves. In Uganda and Kenya’s Rift Valley they have been developing numerous renewables: geothermal, solar, wind, and hydroelectric energy. Africa’s ports are important for its import and export economies, including for landlocked countries. Africa has the most landlocked countries in the world, and the growing transportation infrastructure that can unlock those countries will be important. Unfortunately, Africa’s airline industry is problematic and has a long way to go.
What should foreign companies consider when making their first foray into Africa to do business?
You need reputable local partners. It is difficult to get into certain countries without them. I am not talking about “fixers” or “facilitators” who will lead your company toward a path of corruption. Do not assume Africa doesn’t have skilled people. South Africans are highly skilled. Namibia is very advanced; Rwanda is quickly becoming the IT hub of Africa. Reach back into the African diaspora for assistance from people who live in your home country — people like me. Do not hire foreigners who know little about the complexities of Africa. For example, the Nigerian expat communities in the U.S. and in Europe are enormous and can offer much. There is a large Ethiopian community here in D.C. and in various other cities in the United States and Europe. Many of these Africans have come to the U.S. and other Western countries and become trained as professionals, and many are looking for opportunities to invest their time and money in their home countries in Africa. They are looking to collaborate with U.S. companies in those future opportunities. Western companies have largely ignored the opportunities that members of the African diaspora offer.
Africa is ready to do business with the world.
The World Bank’s 2019 rankings for ease of doing business can be found here, with the following African countries in the top 100:
84. South Africa
In our future posts we will look at additional world regions and zoom in on promising markets with strong enabling environments and rule of law that provide businesses with a sufficient level of certainty to move forward in developing relationships in those countries as alternatives to China.