Over the past few years, business leaders and investors have become increasingly aware of the economic potential of Sub-Saharan Africa’s burgeoning consumer market. Currently the region is home to 1 billion people, or 13.9% of the total world population. However, it concentrates a meagre 2.2% of the global GDP. With an enormous amount of natural resources and a young population willing to learn and to work, Sub-Saharan Africa holds an immense potential for entrepreneurship and a vast but dormant untapped market.
Singapore is an increasingly interested player in the Sub-Saharan African arena. There is a growing number of Singapore companies, from small to large, drawn to the region.They venture not only to familiar South Africa, but are also attracted by the blossoming tech industry in East Africa and by the booming population in West Africa, which brings the promise of a huge untapped market.
Nigeria, in West Africa, is an example of an enormous underexplored market. Aaron Fu is a Singaporean businessman and Managing Director at MEST, a school for African entrepreneurs that only admits the crème of the crop business ideas, with the best potential to become successful start-ups. Aaron believes that the future is in Nigeria: “I have no doubt in my mind that Lagos is going to be at the heart of all the changes. It’s a very large market”. Lagos is Nigeria’s capital. Nigeria is set to become the third largest country by population globally by 2050.
But what do these Singapore companies face when they try to set foot on the African continent? What are the main challenges a successful entrant to the African market has to overcome? From small/medium businesses to large multinational companies, the concerns and obstacles these companies face while trying to succeed in Africa are quite similar.
The necessity of finding and engaging with trustworthy local partners is prevalent, only seeming to wane slightly for the big companies. For the SMEs, on the other hand, local partners become essential as these companies do not extend their business throughout the whole value chain. They usually need local distributors to store inventory and to reach the end consumers.
A business partner on the ground also helps the new entrant to better navigate local laws and deal with bureaucracy. “A local partner can be beneficial in terms of building business relations and navigating local regulations.” That is the opinion of William Tay, Executive Director at Pacific International Lines (PIL), one of the largest ship-owners in Southeast Asia. The company has operations in various African countries.
A local partner can also give a more realistic view of the market for the products the foreign company is willing to bring. “The lack of a local resource may result in difficulties such as a lack of market knowledge and time in doing business,” says Edwin Kwan, CEO and founder of Build Africa Industry, a Singapore company that invests in small businesses in Africa.
The process of searching for a good local business partner must include a thorough due diligence of its creditworthiness to avoid any potential pitfalls. But how to find a good local partner? The avenues foreign companies use to find a legitimate partner in the new market may also vary. The trust issue can be somewhat attenuated if the local partner is found through personal networks or through recommendations.
IE Singapore works as a vital link for Singapore companies that have no network in the new market. They are essential in arranging introductions to potential local partners. Reaching the African embassies in Singapore or contacting the local Chamber of Commerce in Africa are two other ways to link Singapore business executives to an African counterpart.
“IE is helping us find a partner through its Johannesburg centre and is also trying to identify more avenues for us to engage the Department of Basic Education (DBE) of South Africa. African embassies in Singapore also play a critical role in helping set up some key meetings as well”, explains Yeo Tiong Hui, assistant director at Educare, a Singapore company that provides education consultancy services and is keen to open shop on the African continent.
After securing a good local partner, the companies face a range of infrastructural issues that vary in importance from country to country, but are usually consistent across Sub-Saharan Africa. Lack of infrastructure such as roads, railways, ports and airports largely deter a fast expansion from one African country to another.
“Right now, infrastructure can be problematic in Africa. It makes things expensive and that cost has to be borne by someone. The challenge of infrastructure makes the whole logistics exercise more expensive,” explains Ranveer Chauhan, Managing Director and Chief Executive Officer of the Edible Oils and Natural Rubber Business Unit of Olam International Ltd., a Singapore company and big player in the agribusiness. It is present in 24 countries all over the African continent.
Intra-regional import tariffs and lengthy processing time also add to the cost of moving a product across an African country border. Lack of security also raises costs as insurance companies will charge more to secure cargo being transported through dangerous areas. In some cases, a product produced locally ends up costing more than a similar product imported from China.
Political instability, dealing with corruption and going through excessive red tape and bureaucracy also score high among the issues faced by the Singapore companies in some countries. Chan Chek Chee, Chairman of Asiatic Agricultural, comments on the deterrents a highly bureaucratic state can cause: “The bureaucracy is the most difficult problem to tackle. Import procedures themselves are already highly complicated. All of this makes the delivery time longer, if not late, and make the product a lot more expensive than it could be.” Asiatic Agricultural is a Singapore company that manufactures and distributes pesticides for crops and products to control parasitic diseases in livestock. The company started exporting to Africa 20 years ago.
Another concern shared by some companies is the difficulty of repatriating revenue generated in Africa. Companies create subsidiaries in Mauritius or Dubai, which have double-taxation avoidance agreements with a number of Sub-Saharan African countries. After the revenue is transferred to one of these tax havens, the company can finally remit it back to Singapore.
“Mauritius has the same tax system as Singapore, so it’s very compatible. It has 19 double-tax avoidance treaties and investment protection treaties with Sub-Saharan African countries, whereas Singapore does not. I’d recommend anyone from Singapore looking at developing a business in Africa, setting up a company there,” says Graeme Robertson, CEO and Chairman of IntraAsia. IntraAsia is a Singapore investment firm with businesses in Africa ranging from mining to agriculture, real estate and financial services.
Obtaining financing can also be difficult. African banks usually charge a high interest rate on loans, while financing through international banks have the added risk of exchange rate volatility as the loan is usually made in American dollars, but is spent in local currency.
Singapore companies seeking a foothold in Africa must be prepared to invest for the long haul. Even with the help of IE Singapore and SBF, it will undoubtedly be a challenging journey that will require good preparation and a real understanding of the new market. But the rewards can be huge.
“We see exciting times. We already have a strong presence in the continent and there are still more projects and opportunities available for us that we are willing to invest in right now. Africa is opportunity-rich”, says Ranveer Chauhan from Olam.
“Africa is going to be the place to do business. Most of the countries still don’t have factories here. The growing consumer market in Africa will create huge opportunities for companies to start producing locally. Urbanization is currently happening. A middle class with disposable income is emerging. There is a high acceptance of technology like mobile money transfers. All this is going to give rise to employable people.” That is the opinion of Abhijit Janbandhu, from MOI International in Ghana, a member of the Mewah Group, a 60-year old Singapore company specializing in edible oil and a large producer of palm oil.
By 2030, nearly two-thirds of the estimated 303 million African households will have discretionary income. This massive expansion of the consumer pool — an addition of almost 90 million consumers in just ten years – will certainly encourage many international players to invest in the region. The first entrants to this market will secure a firmer position and more chances of success.
The author, Otavio Veras, is a Research Associate of the NTU-SBF Centre for African Studies, a trilateral platform for government, business and academia to promote knowledge and expertise on Africa, established by Nanyang Technological University and the Singapore Business Federation. Otavio can be reached at firstname.lastname@example.org.