At the beginning of February, Microsoft Corp. announced it would soon begin selling Windows-based mobile phones and tablet computers across Africa, for a price of between US$75 and US$100. “Africa is growing smartphone use faster than anywhere in the world,” Fernando de Sousa, the US-based company’s General Manager for Africa Initiatives, told Bloomberg in an interview. With its wealth of natural resources, an average growth rate of more than 5% in 2014 and a burgeoning middle class, which according to the McKinsey Global Institute will comprise 130 million consumers by 2020, Africa is becoming an increasingly appealing market for companies from all sectors and from all over the world.
The aggressive pursuit of economic opportunities in African countries by China and Chinese firms is, of course, well known. What is less understood, and generally less clear, is whether American businesses are also beginning to make their move. Both anecdotal evidence and data suggest they might be, but slowly and somewhat inconsistently. Additionally, the different business model on which their Chinese competitors rely continues to favor them for the foreseeable future, while the recent drop of oil and commodity prices cast a shadow on Africa’s growth potential going forward.
“It’s obvious if you visit any African city that there is a big interest from Asian companies in investing in infrastructure, mining, manufacturing, really across the board,” says Todd Moss, Senior Fellow at the Center for Global Development in Washington, DC. “The rise of this new investment has certainly caught the attention of the Americans.” According to the White House, US goods and services exports to Africa grew 40% from 2009 to 2013, reaching a record $50.2 billion in 2013. In the meantime, a 2014 report by the International Trade Administration of the US Department of Commerce estimates that the stock of US foreign direct investment to Africa has also grown at a similar pace between 2009 and 2012, though annual investment flows have actually decreased over the same period of time.
Africa’s oil and gas sector and extractive industries have traditionally channeled the largest investment by American multinationals. More recently, the financial services and the business services-information technology sectors have also been doing quite well, though infrastructure takes the cake. “Africa is going to be investing huge amounts of money in infrastructure both through the public and private sector, so that’s going to be a growth opportunity,” Moss says. On the other hand, old-style manufacturing is lagging behind, and agriculture is yielding only mixed results, with productivity still too low in many parts of the continent. As for countries, Nigeria tends to be at the top of the list for US companies because of the sheer size of its economy and rapidly growing population. “For the rest, the countries that are attracting the most attention tend to be mid-sized economies that are growing quite quickly, such as Kenya, Ethiopia, Senegal, Ivory Coast, Ghana, possibly Tanzania,” Moss says. “These are concentrated in the East or in the West, but not in Southern Africa, where South Africa is big and dominant but in low-growth mode, Zimbabwe is sort of sucking the wind out of the regional economy, and, outside of the oil and gas sector, there is a lack of traditional linkages between the US and Angola and Mozambique.”
Since many American businesses are only now starting to consider Africa a worthwhile market, the truth is numbers remain small overall, with only about 10% of US exporters active in Africa, which also represents only 1% of total US foreign direct investment. “US companies have been slow to respond to changing conditions in Africa,” says Moss. “Many Americans, including people in the business community, still think of it as a poor continent that is not doing very well, even if the reality is that Africa has gone through a remarkable transition over the last 10-15 years and now displays high growth rates and improving governance and security.” However, a few storied corporations, like Coca-Cola and General Electric (GE), have actually been there more than a century.
“We opened our first African office in Johannesburg, South Africa, in 1898,” says Nigeria-based Patricia Obozuwa, Director of Corporate Communications for GE Africa. “GE’s footprint in sub-Saharan Africa now consists of over 2,350 employees, revenues of over $3.2 billion and operations in about 25 countries, with our headquarters in Nairobi, Kenya. Our work is very much driven by Africa’s demand for infrastructure. We are a provider of technology solutions and equipment in the healthcare, aviation, rail transportation, power generation, water and oil and gas industries.”
To encourage more American firms to follow in the footsteps of the likes of GE, the US Government has recently designed a series of programs to highlight the increasing opportunities in Africa and provide support to those who want to do business there. In August of 2014, for example, US President Barack Obama convened the first US-Africa Business Forum in Washington, a high-level meeting between US political and business leaders and their counterparts from countries across Africa. At the forum, American CEOs pledged $14 billion in new investment in the continent. In the summer of 2013, the White House had also launched a mixed business and development initiative called Power Africa, a commitment by the US Government to leverage $7 billion to expand, with the help of private companies, access to electricity in Africa’s poorest countries. “The US government wants to maximize opportunities for the US economy and for American investors,” says Moss, “and to ensure that the right policies and tools are in place so that there is a level playing field for American companies in Africa.”
Regardless of how effective they might turn out to be, these initiatives should not be confused with, nor are really comparable to, the type of support coming from Chinese firms: these are normally state-owned enterprises or, at the very least, private enterprises which benefit from strong state backing from their government in Beijing. Because of the unique conditions in which they operate, therefore, they are more willing and better equipped to sacrifice short-term shareholder value for the sake of their long-term goals. “Their advantage is that they come in at a scale that others cannot,” says Moss. “To give you an example, if a Western multinational wants to bid on an oil block, it will bid on the oil block as a stand-alone project, whereas a Chinese company can come in with a package deal, where it will offer to do the oil block, but also a pipeline, a port, an industrial zone, a power plant and a highway. And maybe it all comes with its own financing. That model can be quite attractive to African governments that are trying to do a lot of things at the same time.”
In the face of what remains a difficult place to do business, with many African countries still plagued by corruption, bureaucratic red tape, political instability if not outright insecurity, and inadequate infrastructure, US companies can only ask so much of the government in Washington and can stretch their own business model only so far. But they do have a unique advantage: they can draw from the pool of knowledge and experience of multinationals like General Electric. Obozuwa highlights a few crucial lessons. “It is extremely difficult to do business in Africa today without understanding not only current events but also the history of the political, tribal, and business makeup in each of the 54 unique African countries,” she says. “So you must have a significant amount of local employees, especially at the leadership level.” It is equally important to develop local partners, which can help at many levels, including on the distribution, financing and technology fronts. Western multinationals must also be patient with the process of doing business in Africa, which sometimes can be lengthy and convoluted, and stick to the promises made, so that local authorities gain trust in them. Finally, a party interested in opening up shop in an African country should be willing to help develop the local workforce, investing in the next generation of Africans.
Going forward, the big question is how lower oil and commodity prices will impact US, as well as Chinese, companies working in Africa and whether it will undermine the continent’s growth or present it with the opportunity to disengage from the oil and gas and mining sectors and develop other more sustainable industries. In this respect, one thing to watch, says Moss of the Center for Global Development, is future investment flows to countries like Rwanda and Ethiopia, which have been among the fastest growing economies though they have no real extractives to speak of. GE’s Obozuwa is optimistic: “We believe in Africa’s potential,” she says. “With the continent’s rapid economic growth, expanding consumer base and high returns on FDI, the potential benefits far outweigh the risk.”