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Opportunities in Africa

The U.S. needs to play catch up in the race for a foothold in Africa.

First there was China. Then there was India. Now it is Africa emerging as this decade’s great uncharted frontier for business. With its abundant natural resources, affordable labor and growing middle-class consumer market, “the hopeless continent,” as it was dubbed by The Economist in 2000, is fast becoming a formidable player on the world stage.

Between 2000 and 2008, Africa’s annual GDP grew by an impressive 5.3 percent, compared with 4 percent globally, and its equity markets have outperformed global indexes, according to a 2010 report by the Boston Consulting Group. Last year when established economies were shrinking, Africa’s was expanding. And since 1998, revenues of the continent’s 500 largest companies, excluding banks, have grown at an average of 8.3 percent a year. Despite poverty, political unrest and the AIDS pandemic, there are signs that Africa’s growth is sustainable. The continent’s inflation rate has declined from 22 percent in the 1990s to just 8 percent since 2000, and foreign direct investment has been pouring in, rising from $10 billion in 2000 to $88 billion in 2008.

But in the oft-called “neocolonial” race for a foothold in Africa, the U.S. lags badly behind China and India, which have been making huge investments in infrastructure projects. Mired in misinformation and worn stereotypes, the U.S. has hung back and risks losing significant competitive ground, agreed CEOs gathered for a discussion on Opportunities in Africa held in partnership with the Corporate Council on Africa, a nonprofit that works to strengthen commercial relationships between the U.S. and African nations.

Rich Potential

Over the next five years, Africa’s economic and social trends will prove favorable for numerous U.S. business sectors, said Robert C. Perry, vice president for international programs at the Corporate Council. “You have an emerging middle class representative of the U.S. 40 or 50 years ago, that will have disposable income to spend. So companies in the consumer goods sector will find a market,” he said.

Infrastructure companies will also find friendly reception from African governments looking to meet their development needs. So far, Chinese companies have been winning the most foreign contracts. “The Chinese government has made a commitment to use their vast resources and dollar holdings to essentially build huge power plants and huge infrastructure projects, in return for mineral rights,” noted Bill Hickey, CEO of Sealed Air.

Still, U.S. manufacturers willing to invest the time and resources will find fertile soil, said Bill Killeen, CEO of Acrow, which manufactures steel bridges in the U.S. for export to Africa: “The opportunity for a company like mine is off the charts,” he said. “In some places we’re doing very large projects; in others, very small. But I look at it this way: Every bridge we put in there helps people travel back and forth, whether to medical clinics, to a job, or to help a truck carrying cocoa beans along a road without breaking its axles.”

The IT infrastructure investments made recently, with miles of broadband cable laid on the east coast of Africa and miles more planned for the west coast in the next 12 to 24 months, will further drive down costs for IT providers, said Perry. As a result of the 2009 connection in Kenya, companies using IT applications for call centers are now competitive with call centers in Bangalore. “Not so much because of the changes in wage rates, but the drastic drop in communication cost,” noted Perry. “And they are two to four hours closer to the U.S. market.”

Cell phones on the continent are nearly ubiquitous, even in the poorest regions, and manufacturers have worked hard to adapt their products to local markets. The usual model of selling long-term contracts to credit-worthy customers, doesn’t work in Africa, noted David Reisner, cofounder of the Nano Group. “So the folks who have been successful in emerging markets with cell phones changed the model by selling pay-as-you-go phones.”

What’s more, financial products that regulation might make prohibitively expensive in the U.S. begin to look more lucrative in a developing nation. “We’re not in the health insurance business in the U.S. because of the difficult regulatory environment,” said C. Robert Henrikson, chairman, president and CEO of MetLife, who noted that there may be an opportunity to partner with local African governments. “They don’t want to have to develop social safety nets for their population, and they’d like somebody to be able to handle that in some way in the private sector. So we probably don’t need some of the infrastructure everybody else needs, but we do need a banking system, for example.”

To be sure, challenges abound for those pursuing the African market. For starters, infrastructure is still a work in progress. “You can build a factory and supply the people, but you can’t get the product to the port,” said Hickey. “So we can grow the tomatoes in Western Kenya but they rot before they get to Nairobi.” For a company like McDonald’s, which has been successful in more-developed South Africa but more cautious about stepping into less-developed regions, that sort of supply chain seamlessness is a requirement. “We have to have infrastructure and there has to be the economy to be able to support our business,” said Jan Fields, president of the global franchise McDonald’s USA.

Even when companies have physical access, they can find themselves stymied by language and culture barriers. For example, providing equipment and supplies to local farmers or merchants doesn’t mean they will take full advantage of them.

“We go in and give people computers,” Perry explained. “We come back a year later, and nobody has ever used them or they ran out of paper and that was that. So it’s not just the supply of the equipment, but getting them to accept the systems, supply chain and maintenance essential for long-term operations.”

Success in the region also means getting a handle on the maze of tribal law governing most of the continent. “The national constitution does not override tribal law,” said Hickey of Sealed Air, which discovered that Kenya contained multiple disparate tribes, languages and customs. “You can go 100 miles in the same country and the rules are different. Business is complex enough without having to change your model every 100 miles.”

Political instability and corruption are also prevalent, and vary widely by country. “You might think one country is highly stable, but within three months, there’s a huge problem there,” said Sandra E. Peterson, CEO of Bayer CropScience. “It’s completely unpredictable and that’s a huge issue.”

Honing a Strategy

Cultural differences and language barriers notwithstanding, ultimately business is business and CEOs will find more similarities than differences between the African continent and the U.S., noted Hugh Grant, CEO of Monsanto. “The conversation around where are we going to be a year from now and how do we define success and what do I need you to do—that’s business,” he said. “It applies in new markets everywhere.”

And, as is the case with most emerging markets, one of the best ways to get a toehold is to spend time identifying potential strategic partners who can help navigate the unfamiliar territory. “Wherever you start, you almost de facto find yourself in a partnership because everything you touch needs other people to get involved,” said Grant, who noted that business isn’t always adept at that, however well intentioned. “A lot of what I’ve seen in Africa’s success is usually linked to partners and outreach.”

That means investing the time to gain the trust of allies and governments, and finding those you can trust as well. Lockheed Martin earned goodwill and established a presence by creating numerous jobs for local Africans, rather than by simply relocating employees from the U.S. “NGOs are some of our new best friends because we’re educating Africans on complex equipment, machinery and they can do it in their own country. It becomes an advantage for us competitively,” said William E. Soule, vice president of business development. Lockheed Martin has also had a zero tolerance policy with regard to corruption, making sure it does not run afoul of the Foreign Corrupt Practices Act. “And we’ve been very honest [with the governments we work with]. At the first sign of anything going on, we put our hand in the air, and we’ll leave,” added Soule.

Perry noted that when a government makes a request that is on the ethical borderline, a company providing a valuable product can often persuade them to play above board. “If someone is just out to pocket the money, you’ll probably lose that contract,” he said, “but you’ll keep your reputation.”

Novus International has found a training model that helps it have more confidence in the local talent it hires. In addition to sponsoring African scientists to spend time with the company in the U.S., they will also bring people who work with local farmers back stateside for training in St. Louis. “We make sure that those we hire to work in country will come out to us and that again will build our confidence and trust,” said CEO Thad Simons. “It really goes back to that: knowing who you’re dealing with and setting expectations in a reasonable way.”

That last bit is crucial, added Killeen. “Africa has great potential, but don’t think you’re going to enter the continent and make great profits quickly.” He noted that Acrow is just beginning to reap the fruit of seeds sown 10 years ago. “You need to make a long-term commitment.”

The U.S., albeit late to the party, has a distinct and unusual advantage in the region. “The U.S. was never there, they didn’t have that colonial image so there’s a lot of goodwill toward the U.S.,” said Monsanto’s Grant. “If there was ever an opportunity, I think it’s now.”

About C.J. Prince