Africa is home to some of the fastest-growing economies and consumer markets in the world, and in recent years Africa’s household consumption has grown faster than its gross domestic product (GDP) —and has even outpaced the global average GDP growth rate. Considering the increasing affluence, population growth, urbanisation rates, and rapid spread of access to the Internet and mobile phones on the continent, Africa’s burgeoning economies present exciting opportunities for expansion in a range of sectors. However, the African business landscape can present unique challenges that are not often encountered outside of the continent and can make it challenging doing business in Africa.
Both large and small businesses are critical to Africa’s economic growth as they are key drivers of growth locally, regionally and internationally, and in turn provide a significant portion of the local population’s income. And, given the current rate of globalisation, the growth potential is unimaginable. Despite this, there are risks of doing business in Africa, and a large number of business owners report that they encounter obstacles that are almost entirely unique to Africa, these obstacles range from lack of financing to shortages of skilled labour. The risks of doing business in Africa must be addressed effectively if Africa is to fulfil its full potential. By 2050, Africa, which already has the world’s youngest population, is expected to quadruple; a consequence of this will be an increase in demand for work as well as solid and sustainable income sources.
However, it is not all about challenges and obstacles when it comes to doing business in Africa. For instance, a common misconception is that Africa’s future economic growth is solely dependant on sectors such as oil and gas, but this is not the case. Customer-facing industries such as fast-moving consumer goods (FMCG) are booming, thanks to a burgeoning middle class, youth population and mass urbanisation. Furthermore because of its rapid growth, the population is disproportionately young and low-income, making for a quite shrewd clientele! When you have a few dollars to spend each day, you want to maximise the value you receive for your money.
To successfully access Africa’s significant economic opportunities, businesses must establish creative business models and robust strategies that are specific to their target market. Companies must be aware of the potential challenges and issues so that they can factor them into their business models whilst developing their innovative initiatives. Even though obstacles will vary among the continent’s 54 countries, here are some of the most common issues that we’ve encountered when doing business in Africa.
Key Challenges of Doing Business in Africa
A Price-sensitive Market (with little market data)
Although Africa has a growing GDP and the total addressable size of the market is $2.35 Trillion (2020), the reality is that the purchasing power of the average consumer in Africa is still relatively low, with Sub-Sahara Africa’s GDP per capita of $2,461 (2019). This is significantly lower in comparison to the world average GDP per capita of $11,417 (2019).
With a large base of consumers that have become even more price-sensitive, companies tend to allocate more resource to marketing so that they can connect directly with a small base of consumers that have the ability to pay for their products.
This problem is exacerbated by the scarcity of market data, information and technology tools to aid companies in locating and understanding their African clients. To overcome these challenges companies must allocate additional resources to obtain data and market insights they require in order to serve their consumer base.
Finding skilled labour
The bi-annual Africa’s Pulse report released by the World Bank in 2017 showed that firms increasingly rate workforce skills as the most binding constraint to their business in Africa.
The skills gap in Africa’s labour market is still very high. Although there are a large number of young people on the continent (60% of the population is below the age of 25), finding skilled talent is a major challenge for companies looking to scale their operations.
In a lot of African countries there is a misalignment in schooling and training programs, and obvious weaknesses in the higher educational systems that do not align skills with the labour market. Education budgets are not prioritised, and education can be guilty of focusing on theoretical capability over practical ability, which doesn’t transfer well to the world of work. In light of this, Africa has a young, highly educated and eager population that when given the right training and guidance are capable of exceeding at any task or job that they are assigned.
Many companies that have been successful in Africa have recognised that they can gain a competitive advantage by focusing on meeting labour demands and skills requirements of their industry/sectors by offering on-the-job training, and support to their employees.
Some businesses are also actively seeking to adapt and improve their existing internal knowledge base by establishing programs to share skills and experience across generations. For smaller businesses in Africa an approach could be to encourage and support staff in gaining skills that the company sees a demand for in the near future. For example, skill sets like data analytics and programming can be encouraged amongst staff that have the potential and are willing to learn. In a nutshell, businesses both large and small must begin to reconsider their talent acquisition and development strategy.
A widespread lack of access to electricity in Africa is another major challenge for businesses. This lack of consistent access to electricity limits modern economic activities, provision of public services, and quality of life. Africa’s access to electricity significantly lags compared to the world, and there are significant regional and country variations in access to electricity within the continent. Africa’s current average 43 percent access rate to electricity is half of the global access rate of 87 percent.
The insufficient supply of electricity can significantly increase the operational cost of businesses that sometimes have to develop self-sufficient solutions to stay operational and can significantly increase their overheads.
In the coming years, it will be critical to harness other sources of energy, such as solar and biofuels, to supply businesses with the fundamental infrastructure they require, rather than creating a typical electric grid, particularly in remote areas. Businesses should begin to look at renewable energy alternatives and look at how they can be funded individually or collectively.
Supply chain challenges
Moving around in Africa can be a logistical challenge. The weak infrastructure, and the multiple challenges involved in moving between countries are a major cause of disruption in a business’ supply chain. Not only can it difficult to get goods efficiently to the end customer, but it can also be challenging for people to meet up to facilitate business transactions and deals in a region where face-to-face meetings are prioritised in order to build trust.
Because transportation is one of the major barriers in many African countries, manufacturers have devised creative ways to transport their goods. For instance, Coca-Cola in Africa has a “small army of entrepreneurs” who take over where trucking ends by walking or biking products the last mile to their delivery destination. It is important for businesses to find innovative approaches to distribution challenges that they face, and partner with local service providers.
Tough government policies and difficult regulatory landscape
62.5% of the last quartile of the World Bank’s Ease of Doing Business Index is occupied by African countries due to the ever changing and challenging regulatory landscape on the continent. Across the continent, it can be quite challenging to start a business, enforce contracts, register new property, get regulatory permits, and protect investors. Although African countries have shown significant progress in improving the ease of doing business, more can be done to make Africa even more competitive on the global stage.
With a changing and ever-evolving landscape, along with policies that frequently change, it can be difficult for businesses to build consistent long-term plans. This inherently increases the cost of doing business in Africa. Businesses need to come together and become more strategic and proactive in their dealings with the government by being unified in disseminating their challenges to government, as enables policy makers to create policy’s that consider the needs of the private sector.
The high cost of securing capital and moving it around
The cost of capital to start and run a business in Africa is high relative to other regions. Banks loans often come with high-interest rates due to the perceived risks of doing business in Africa. Repaying these high-interest rates limits a companies ability to reinvest in the business to fuel growth. That is the reason a lot of businesses in Africa cannot reach significant scale to expand globally. Banks keep these rates high because they lack the resources to accurately prove company or individuals creditworthiness.
Fintech in Africa has helped the continent overcome many of these challenges, from aiding financial inclusion to prompting investors to invest in start-ups gradually but steadily in the continent. With the advent of fintech, businesses in Africa are now able to access financing at a more equitable rate, and with less onerous terms and conditions placed on them.
To make progress in this area, these challenges must be overcome if Africa is to achieve its growth goals in the next decade. Businesses that innovate to assist individuals and other businesses in overcoming these challenges will achieve huge success in Africa. What the continent can do for itself to create and capitalise on the commercial prospects it provides is to continue to invest in infrastructure; thus far, investment levels are on pace, despite infrastructure lag.
To create more jobs, many African countries must focus on supporting the formation of more large and medium-sized businesses. To do this, education systems that are currently geared on producing civil employees must be modified. Schooling should incorporate more career and technical education skills, and nurture entrepreneurial ideals.
On a final note, multinational corporations must respond to Africa’s actual reality. Doing business in Africa is unlike doing business anywhere else. You are unlikely to succeed if you approach the situation from a European or American perspective. Opportunities exist if you can adapt and have a patient strategy.