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Leveraging mutual business opportunities

Editor's Note:

The chapter is part of a briefing book ‘India and Africa: Forging A Strategic Partnership’ edited by Dr. Subir Gokarn, Dr. WPS Sidhu and Shruti Godbole. 

Over the last 15 years, there has been a signif­icant change in the “ease of  doing business” in Africa. Globally educated and exposed business and political leaders and bureaucrats have set processes in place, bringing peace, economic reforms, which have made many African countries easier places to do business than other faster growing Asian countries – resulting in a projected average growth of about 5% over the next decade, making it second only to emerging Asia.

I would like to share my views regarding the opportunities and challenges of doing busi­ness in Africa and how India should approach Africa.

Why Africa

  • The last decade has seen improved mac­roeconomic stability across Africa, visible through large drops in inflation, government debt and exchange rate volatility-all encouraging signs for global Analysis and research suggest that the next two decades could see further improvement in macroeco­nomic and political stability providing the nec­essary impetus to economic development.
  • Many African nations have instituted business-friendly reforms including telecom deregulation, tax cuts, power sector reform, land rights and others, encouraging MN Cs to invest and participate more in this growth story. Such reforms are expected to continue unfolding across the continent over the next
  • Encouraged by higher returns on FDI compared to other emerging economies, pri­vate foreign capital flows to  Africa have risen sharply since 2005 and will continue to in­ crease across several sectors notably resourc­es, manufacturing and service oriented sectors such as information technology, communica­tions, tourism, etc.
  • Africa has more cities (more than so) whose population exceeds 1 million compared to India, and this number is expected to double by In fact, Africa and China share similar levels of urbanisation. By 2025, Africa is ex­pected to be 47 per cent urbanised as com­pared to 40 per cent in 2013.
  • Consumer spending is expected to increase by USD 2 trillion by 2025 driven by an 80 per cent increase in middle class households to around 190 million.
  • Africa has a significant and under-explored share of global mineral reserves, e.g., Plati­num Group Metals such as diamonds, bauxite, phosphate, etc., which will feed future glob­al demand and hence be a key growth Africa would also continue to benefit from oil and gas.
  • Almost 60 per cent of the world’s uncultivated arable cropland is in Africa, attracting significant FDI. Simultaneously, there exists huge potential of at least 30 to 50 per cent upside across Africa by improving
Hurdles for business in Africa:
  1. Fragmented opportunity: Each country in Africa is unique and differs across demo­graphic profile, stage of development
  2. Managing unfamiliar risk: The  lack of well-structured regulations creates an uncertain investment environment; there is political in­stability; in some countries managing “global risk” is still a new terrain for Indian companies
  3. Many nascent categories: Since Africa is still evolving, companies will need to shape/build themselves if they want to be early entrants to the market
  4. Infrastructure bottlenecks: Infrastructure development has not been able to keep pace with business needs
  5. Managing brands: This is a critical challenge as African consumers are highly brand con­scious; need dedicated effort to develop pres­ence of own brand in Africa
  6. Maturity of financial services:Financial in­struments are still evolving; access to finance for individuals and enterprises is low in many countries due to low penetration of banks
  7. Managing talent deficit: Local talent is lim­ited; investors need to bring their own people across hierarchies in the initial years till the lo­cal talent is nurtured

Suggested Success Factors for Indian Companies in Africa

Africa poses multiple challenges to Indian companies looking to invest there. Challenges in Africa are inherent to any emerging market and include a fragmented opportunity with un­familiar risks, infrastructure bottlenecks, lack of talent and a nascent financial services sector. Apart from the sector specific  initiatives, Indi­an companies will need to adopt 10 common imperatives identified by studying successful and unsuccessful MNC businesses in Africa.

  1. Prioritise early – Identify sectors and countries
  2. Embrace fabric – Understand local nu­ances and adapt business models Africa is one continent with 55 different coun­tries, each with its own culture, customs and behaviours; as in lndia McDonald’s launched products to suit Indian likes – do so in Africa.
  3. Don’t expect a smooth ride – Customise approach based on continuous learning – but persevere.
  4. Choose distribution channels carefully – Understand and control the route to market for success in such a fragmented This is a challenge which Indian companies have mastered on the home turf, and must now face in a geographically larger context. (Avoid shortcuts). Bajaj Auto have exports of US$ 600m by selecting the right distribution partners.
  5. Build brands aggressively – In Africa, high trust in brands.
  6. Think long term – Companies must be willing to invest for the long term, spend effort on setting up the business’ roots in the coun­try, and only then achieve success.
  7. Involve locals  and  insiders  as  partners This is necessary to get local insights, benefit from regulatory know how and develop relationships. The ultimate aim must be to become the insider.
  8. Partner with local governments – Gov­ernments in most African nations play an important role in business development, and partnering with them is crucial to creating op­portunities.
  9. Invest in building local talent – Given the relative lack of local talent, developing talent will play a critical part in scaling up any busi­ness, and must be invested in proactively.

Why India:

India is advantageously poised to partner Afri­ca’s growth and development. India needs to be a constructive, transparent partner.

1

India

  • Manufacturing – low cost
  • Technology
  • Skills
  • Infrastructure development
  • Trusted partner
  • India’s experience of operating in similar government and capital strained conditions – of great value to Africa

GCC & Japan

  • Low cost capital as: Equity/ Debt

2

3

Indian Govt. ———————— Indian Private Sector
           I                      +                             I
African Govts.                              African Private Sector

India should have a CEO for Africa:

African countries like to deal with strong gov­ernment-to- government initiatives and mul­tiple companies participating in a more coordinated manner. The Indian gov­ernment needs to play a key role if Indian in­dustry is to succeed in Africa.

Role of CEO

Author

The Indian government and its various agen­cies could support the CEO-led approach through:

  • Arrange funding from low cost countries (like Japan/GCC) for large projects where In­dian cost of funds is a disadvantage.
  • Streamlining financing, providing financial incentives to Indian companies investing in Africa.
  • Early-stage loans from   institutions like the EXIM Bank.
  • Increase the Sovereign Fund limit to US$ 20 b to back the Indian companies.
  • Continually engage with governments and businesses – relationships are given great val­ue in Africa.
  • Proactively surface opportunities through sector and country studies.
  • Start dialogue of transacting business in lo­cal and Indian currency with pilot markets.
  • Build an open consortia of interested companies in advance
  • Drawing from its own development ex­perience, India’s approach may not be con­ceived as a donor-recipient or a patron-client relationship but as a partnership of equals, strengthening cooperation and bringing mutual economic benefits.
  • Platforms for skill development and educa­tion – offering scholarship.

This approach could be developed and tested for 3 pilot countries in Africa: Tanzania, Nigeria and Ghana.

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