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April 1 | east africa investment | 568 views | 0 Comments

This article was written for people in the Western Cape that are looking towards East Africa for business opportunities, but the article makes some relevant points and raises some clear challenges for anyone around the world looking towards East Africa for business opportunities. 

By: Jenni McCann

Doing business in Africa is an interna­tional trend, and one that the Cape busi­ness community can, and should, consider. It can be daunting for business people and there are many real and perceived challenges to doing business in Africa. CBN inter­viewed Jacyntha Twy­nam, Head of Research at Wesgro to look at the opportunities in East Africa par­ticularly, and what to be mindful of when doing business in the continent.

“East Africa present­ly offers a huge amount of business opportuni­ties, it has a large – and growing population – and a sizeable economy of about US$131bn that has grown at a rate of 5% pa,” says Twynam.

The region is a net importer that imports around US$800bn with a trade deficit of US$500bn. This in­dicates a huge trade opportunity for other countries. Countries such as Tanzania and Ethiopia’s economies exceed US$24bn, to put this into perspective, South Africa’s economy is sitting at US$600bn and the Western Cape weighs in at US$60bn. So although the indi­vidual countries econo­mies are not large in themselves, the region is significant as a whole.

With strong road linkages across the dif­ferent countries, trans-national companies tend to look at the EA region as a singular, rather than at the indi­vidual countries. This is also true of African trans-national compa­nies, based in the likes of South Africa, Kenya and Nigeria.

The Western Cape already has strong trade-links with EA with over 60% of the province’s exports going to EA. These exports are predomi­nantly made up of wine, condiments, fruit juic­es, manufactured iron and steel products, and Twynam says that these volumes are large, and growing.

There are also strong links between the growth that EA is see­ing and the most active sectors in the Western Cape. The Western Cape has very active in construction, machin­ery, agriculture, tech­nologies and chemicals; these are all sectors that support the EA.

Construction

“Many African countries are still in a growth curve in terms of the economic de­velopment and will be requiring a lot of infra­structure and building,” says Twynam.

There are a num­ber of construction projects specifically in Tanzania and Kenya.

“We need to recog­nise that that is a pre­cursor to opportunities that will be unlocked in the short- to medium-term. In the long-term – with infrastructure proj­ects coming to maturity – many more projects will be unlocked.”

As construction con­tinues – and we see a lot of retailers moving into different spaces in Kenya, Tanzania and Ethiopia – those construction projects will need supplies, and that’s where the West­ern Cape can play a very strong role.

Machinery

Machinery, espe­cially agri-process­ing machinery, is a significant sector.

“We see a lot of trade in agri-processing ma­chinery with the West­ern Cape exporting into the African continent. It is also surprising to see the volumes of food and beverage prepa­ration machinery that is being exported into that market,” remarks Twynam.

The exports also ex­tend to construction machinery including crushers and machinery for washing different types of cements.

Agriculture

Zambia, Tanzania and Kenya are seeing high growth levels in the agricultural sector. There is a lot of inter­est in agri-processing and value-adds as a result; and there is a lot of technology driving this sector.

“But the problem is there are a lot of com­panies in that sector in those countries. Al­though they have the production capabil­ity, there are also sig­nificant financing con­straints. So although there is a role to play for companies interest­ed in taking this oppor­tunity further, I would recommend proceeding with caution and mak­ing sure that you do your homework. A lot of investigation needs to be done first.”

Technology

This is a sector that really offers great op­portunities for South Africans. Technology is really big in EA and businesses in EA are using technology to fast-track growth in certain sectors. Kenya is leading the charge in this sector.

As an example, it is using a lot of software and IT in its power sec­tor, for both generation and distribution. This is bringing the sec­tor up to international standards and fast-tracking growth.

“This is a space South Africa should be watching.”

Chemicals

EA is importing large volumes of chemicals for both the agricul­tural sector (pesticides, etc.) as well as for con­struction processes.

Gaps in the market

Twynam says that al­though there is a grow­ing demand for electri­cal components in the region, especially for communications, soft­ware and IT solutions, available trade data suggests that the West­ern Cape (and the rest of South Africa in fact) is not equipped to pro­vide the necessary solu­tions yet.

Textiles and clothing are other areas where the Western Cape is simply not producing the goods to service the growing demand in EA. However, as the con­sumer market grows in EA and the population with disposable income grows, the larger South African retailers are moving into those mar­kets.

It seems that we can provide the retail sup­port, if not the actual products themselves. How to enter the EA market

“Be strategic when assessing your meth­od of market entry,” says Twynam.

Most South African companies that have a footprint in EA ex­port directly to enter the market, although some have used for­eign direct investment to gain entry.

“It’s important for companies to assess where they want to be and how they are going to achieve that. Hav­ing said that, it is also important to bear the value chain in mind – particularly for EA market. Look into the value chain and ask yourself: how does your company see itself and where would you place your company in those value chains?”

Also remember that local companies setting up in EA also need sup­pliers. Your company may not find it ben­eficial to go into EA it­self, but it could still be advantageous to feed into the African market through companies that already have a footprint in EA.

Challenges

Doing business in Africa can be daunting for any businessperson. There are many real challenges, but also many perceived dan­gers that may not be as big a stumbling block as you may imagine.

The general rule when approaching any new market is to pro­ceed with caution.

Payment, when doing business with any other country, but perhaps especially across Africa, is a concern. South Af­rican companies work­ing in EA say that find­ing a reputable buyer is imperative. This can be tricky, and it takes time to build relationships with businesses.

In the meantime protecting oneself by using reliable payment methods is the first step, and the second is to be sure you have the correct insurances in place, including credit risk insurance.

“It is really risky for small and medium sized companies if these pre­cautionary measures aren’t in place and things go wrong. For instance, what would happen if there was a port strike while you have a container full of perishables waiting to be unloaded?”

In fact infrastruc­ture is currently an is­sue in EA. The ports can get extremely con­gested, coupled with port strikes and rising costs. This infrastruc­ture is currently under construction, so there is an end game.

“If the goods don’t arrive on time, buy­ers may not accept the shipment, leaving the supplier to deal with costly repercussions.”

Another key area to investigate is the actual consumer. It is easy to assume that because we are South African, con­sumers across Africa share our predilections. According to Twynam, this is not the case.

“East Africans have unique requirements and anyone wanting to enter the market must take the time to inves­tigate what consumers want, and how it should be packaged.”

It is also key to sup­port local EA busi­nesses in your supply-chain. Buyers want to know where the goods come from and you will be in a much stronger position if you support local businesses.

Lastly, be mindful of cultural differences. Business culture can differ greatly from re­gion to region, differ­ent formalities need to be adhered to and it is worth doing your homework before start­ing negotiations.

Perceived challenges

According to Twy­nam, the main reason local businesses shy away from doing busi­ness in EA is that they don’t know what to expect. There is also the perception that the infrastructure is poor to non-existent, mak­ing it difficult to move money in these coun­tries and that there is no legal system to enforce contracts.

“That is not the case. There is a lot of move­ment in those markets. We know infrastructure is being built. We also have our own banks in those countries already. If the environment was that unstable, our big companies would not be moving into these areas.”

“Businesses should not be afraid of look­ing at doing business in EA; but international trade is not the space to be a cowboy.”

The key is balance; be aware that all inter­national transactions have an element of risk, do your research and build relationships.

Cited Source: http://www.cbn.co.za/videos/item/2847-business-opportunities-for-the-western-cape-in-east-africa
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