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Cross the Rubicon

Helping Your Company Sell Into, Raise Capital From, and Find Partners in Emerging Economies

Cross the Rubicon - Helping Your Company Sell Into, Raise Capital From, and Find Partners in Emerging Economies

Africa Rising

While on my way to Singapore this weekend, I had the opportunity to finish Vijay Mahajan’s book, Africa Rising:  How 900 Million African Consumers Offer More Than You Think.  Those familiar with James McGregor’s book One Billion Customers may recognize similarities in structure and tone, but with Mahajan’s emphasis on Africa instead of China.  Within Africa Rising, there is certainly much to value; however, I also wonder if in speaking of Africa as a whole in order to capture the continent’s potential, Mahajan too easily glosses over the wide disparities that would make necessary a more discrete and country-specific analysis.  Regardless, I recommend the book for two reasons:  first, no other book I have encountered as systematically works through the best-case examples of multinationals marketing and selling to Africa’s emerging consumers and second, Mahajan’s advocacy for Africa’s potential is everything that is good and constructive about how nation’s grow and become stable.

Mahajan puts forward several ideas that I found helpful.  The first comes in his chapter titled “Africa is Richer Than You Think.”  Here he puts forward the point that “the average gross national income per capita (GNIC) across all 53 nations in 2006 was about $1,066, more than $200 above India’s.”  In addition, the GNIC shows that “12 African nations (with more than 100 million people among them) had GNICs that were greater than China’s, and 20 nations (with a combined population of 269 million) had GNICs that were greater than India’s.”  (pg. 29)  This is a very helpful way of framing what many westerners, myself included, tend to think of when we discuss Africa’s economic potential.  It is also one of the strongest rebuttals to my previous concern that Mahajan’s analysis too easily aggregates the whole of Africa when a more country-specific evaluation would be appropriate.  As Mahajan shows, even when we look at the individual countries within Africa, we can see many have more vibrant economies than are widely understood and appreciated.

Second, his discussion on what has been called the “Black Diamond”, as he puts it “an emerging middle-class segment that is driving economic growth.”  Initially coined to describe South Africa’s growing consumers, Mahajan writes “the roughly 400 million people in the middle segments of the entire African market … are a growing opportunity everywhere in Africa.”  (pg. 9)  These so-called “Black Diamonds” hold a similar potential to propel FMCG companies into new growth markets in Africa as has been recently experienced during China’s exploding middle class.  Potential versus inevitability are worth exploring as some pundits would likely argue that both Africa and China have long held the “potential” to become vibrant consumption economies, but that only one has recently been able to do so.

The third concept that I found very helpful from Africa Rising was in Chapter 4, titled “Harnessing the Hanouti:  Opportunities in Organizing the Market.”  One of the services we provide companies early into their process of developing a strategy for an emerging economy is distribution mapping.  Here, we want to identify channels to market, both the formal and informal relationships that drive these channels, and the reasons why one company is preferred over another (if, as is not always the case, a market for the good actually exists in the first place).  Mahajan’s attention to the role of doing what he calls a “consumer safari” is spot-on, and very critical regardless of whether we are talking about Africa or any other emerging economy.  He takes the idea of distribution mapping a step further, and illustrates how companies selling into Africa need to actually “organize the market” on their own.  He describes this as “finding opportunities by moving informal retailing into more formal and organized stores, transforming informal and illegal markets into formal markets, and organizing secondhand markets.”

My only misgiving about Mahajan’s analysis is the tension that must always exist between the zeal for what Africa could become versus the many challenges that could well prevent it from ever fulfilling its promise.  After all, few parts of the world have for so long bedeviled conventional logic about what could happen and what should be hoped for.  Regardless, Mahajan’s book is a super introduction into the potential Africa holds, and one that is worth reading.

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Why China Matters

One of the thinkers who has most impacted me for the good is Dr. Tom Barnett.  Made famous by his New York Times bestsellers Blueprint for Action and The Pentagon’s New Map, he is now with WikiStrat, blogs and has regular columns for Esquire Magazine.  I still remember encountering his article “Why China Matters” in Good Magazine while on a trip to Shanghai.  Since that time, I have had the distinct pleasure of interviewing Dr. Barnett and reviewing the book as part of the launch for his then-new book, Great Powers:  America and the World After Bush.  As it turned out in one of those strange “seven degrees of separation” experiences, at the time we lived about 15 minutes from one another.  A more comprehensive, holistic, truly integral thinker and gracious man you would be hard pressed to find in today’s geo-political conversation.

 

Two things have most stuck with me about Dr. Barnett’s analysis.  The first was his comment (and this is my paraphrase) that “China’s entry to the world was globalization’s tipping point.  After this, there is only further integration or war.”  Wow.  That pretty accurately captures what I have long felt – that it is unlikely an economic Cold War with China would work without escalating into a conventional conflict (which, given our current weakness and their perceived strength, is what many in DC seem to be advocates for).  Rather, we can either reform the existing rule set to make it work more efficiently and to accrue benefits more evenly across both emerging and developed economies (in particular as the former work their way up the value chain), or we can tear it down because we no longer feel it is working as we want it to.

 

The second idea that Dr. Barnett’s work seeded in my mind was this:  that China’s rise is not only a great good for them (it has, after all, alleviated chronic poverty in China), but that it also stands to benefit other parts of the world where traditional forms of aid and economic development have thus far not yielded results.  That idea has taken root in my thinking and business planning, and is, I believe, worth pointing out that Dr. Barnett’s thinking can find support from this week’s Economist cover and the topic of the magazine:  Africa Rising.  Among all the attempts to help Africa along the path towards stability and good governance, it now appears that what might help it break free of its colonial past and develop into a largely self-sufficient continent is the emergence of China, the demand China’s own domestic growth has placed on resources within Africa, and the willingness China has had to go to Africa and make investments where American and European firms – for reasons that are historical, cultural and comfort-related – have not been willing to.

 

As the articles point out, while conditions in Africa are still difficult (classic British understatement from the opening column of the Economist says it best “Optimism about Africa needs to be taken in fairly small doses”), Africa’s economy is growing, and its growth is explicitly related to China’s demand for natural resources and commodities.  Worth noting in the article are these facts:  “Over the past decade six of the world’s ten fastest-growing countries were African.  In eight of the past ten years, Africa has grown faster than East Asia, including Japan … the IMF expects Africa to grow by 6% this year and nearly 6% in 2012, about the same as Asia.”  But, the opportunity in Africa is not purely natural resource driven, tentative political reforms are progressing at least far enough that cross-border commerce, also benefiting from broad trans-African investment in infrastructure, is taking important steps forward.  Additionally, Africa is closing in on the sort of demographic sweet spot that traditionally in emerging economies has meant a “demographic dividend” for the country and its people.

 

All of this having been said, a deeper dive into the sources of FDI into Africa suggests that the countries whose firms are most comfortable navigating in, and working with, African governments and consumers are other emerging economies like China, India, Brazil and Turkey.  China in particular has created a unique state-sponsored model of investment in Africa that bundles infrastructure spending, commercial loans, and political support for critical sectors that it either wants access to (raw materials and commodities in particular) or opportunities to sell to Africa’s bottom of the pyramid (mobile telecommunications as the best example).  Right now, Africa’s economic growth is primarily commodity and raw material driven; however, smart multinationals are starting to develop early strategies for monitoring the emergence of a meaningful middle class in Africa.

 

Today, companies that can most benefit from what is happening in Africa are undoubtedly those in the raw material business (equipment manufacturers, technology providers that improve efficiency, throughput and safety, etc.) and agri-business; however, companies who have been successful selling to China and India’s emerging middle class (Unilever, P&G, Coke) will likely be ratcheting up their own analysis and investments in Africa in the hopes that the continent is at long last ready to make the transition to stable governance with an eye towards economic reform and further advancing the needs of a vibrant middle class.

 

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