The Final Frontier: The Challenges of Doing Business in Africa – Part 3
In a continent of over 30 million km2 and with a potential customer base of over 1.1 billion people, over 50% of Africa’s population less than 20 years old. Africa is home to over 100,000 millionaires and several billionaires, with a lot more people destined to be millionaires in the coming years.
Although filled with opportunities, Africa comes with several challenges. Four are most pertinent for foreign investors:
Infrastructural challenges (Power & Transportation)
The first is lack of an adequate road network between key locations. Transportation can add up to 30% to the total cost of doing business. Currently, however, aggressive road construction projects are going on in most parts of Africa. Insufficient electric power is also being remedied on many fronts. Most recently, President Obama committed US $7 billion of public funds to be combined with another US $9 billion from the private sector under his Power Africa initiative to boost electricity.
Corruption is a fact of life that every investor in Africa must deal with. So, be prepared. Corruption comes in various forms — from Government officials seeking a bribe for services they are employed to render to sharp practices among business partners trying to get a buck or two from you. For the first time investor to Africa, these acts could be unnerving. Corruption could increase your operating costs by up to 20% and throw your financial projections into disarray. However, all challenges have solutions.
First, bear in mind that like in marriage and dance, it takes two to tango. So, if you are resolved not to give, no one can extract a bribe from you. True, there might be repercussions like needless delays, exclusion from certain transactions, and being forced to go through official bureaucratic (rather than shortcut) channels. However, if you choose to operate ethically at all times, you will be respected for your integrity in the long run. But remember that refusal to be involved in any form of bribery does not preclude you from giving a tip for good quality service, when it is deserved, just as you would do in other parts of the world.
Second, advance research and preparation help. Knowing what the official process is and what it costs help to minimize the likelihood that you will be involved in corrupt practices. Part of your research should entail getting a reputable attorney who is knowledgeable in your planned field of investment.
Third, build a strong in-country network quickly, and preferably with Africans who have lived in your country before and who understand both sides of the fence. They will be extremely helpful in helping you navigate some tricky situations. Begin your networking from your home country so you have a good head start.
Finally, the US Foreign Corrupt Practices Act and the European Anti-Corruption Law and the Foreign Corrupt Practices Act (FCPA) officially prohibit companies from engaging in bribery abroad. Their usefulness is very situation-dependent but in general, companies can use these acts to justify not engaging in unethical practices.
China is gaining inroads into Africa, in several cases edging out long-standing US and European companies.
Why is this happening? Possibly the Chinese changed the rules of the game, from seeing Africa
- as an aid destination to seeing it as a trade partner;
- as a child needing guidance with rules and regulations to seeing Africa as an adult that makes its own rules; and
- as one homogenous entity to seeing it as different countries with unique situations.
Yes, some Chinese practices in Africa and worldwide fall short in terms of fair play and business ethics. But it is also undeniable that they have worked in expanding China and Chinese business footprint in Africa.
US companies can learn a thing or two from the Chinese to beat them in their game in Africa:
- Business is a team sport.
Chinese businesses did not come to Africa alone; they came with their government support and funding. Beijing mobilizes its vast state financial resources to invest broadly in infrastructure projects across Africa and extract natural resources in return, with the added benefit of opening business opportunities for Chinese companies.US businesses can develop closer partnerships with US government agencies already in Africa. For example, agencies such as US Agency for International Development (USAID) need to provide more support to US businesses to aid them in investing in Africa.
- Change the game; Don’t play someone else’s game.
In Africa, the US and the EU are perceived as having high standards in terms of products and services, while the Chinese are perceived as the very opposite, i.e., cheap mass-market products. Given that the African market is segmented along the lines of rich and mass market, western companies should ideally target the high end of the market both for services and products.
- Wholehearted commitment required.
The Chinese are doing well in Africa because they see Africa as an integral part of their strategy, not just a fringe concern. They want to invest in everything in Africa from roads to the pen for signing the road contract. By contrast, the US directs only 1 percent its worldwide foreign direct investment to Africa, and half of that is in extractive industries. So clearly US companies need to show more commitment; you can’t win halfheartedly.
As a global outreach firm, Auerbach International is both a premier language agency and a world marketing consultancy (research, strategies, cultures and skills to penetrate overseas markets). This series on Africa presents unfamiliar ways to help you expand your business. Part 1 presented Opportunities. Part 2 presented Challenges. This part presents challenges. Companies that have done so have often reaped enormous profits because competitors are relatively scarce.