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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

Porsche in Nigeria

Late last week, Porsche announced that it was expanding into Nigeria with a new dealership to open in the capital city of Lagos.  What caught my eye reading this was not necessarily Porsche’s plans (although if you wonder how successful Porsche is going to be given Lagos’ reputation for gridlock, you’re not alone).  Rather, what I found interesting was the comment by Michael Wagner, Porsche’s Manager for Africa:  “The Nigerian market is in a league of its own. We see Nigerians’ spending power outstripping that of their South African counterparts.”

In case that surprises you, Jim O’Neill’s comments to the Guardian about his views of the South African economy may come as a shock.  O’Neill was made famous by his coining the BRIC term.  According to the Guardian, “He is also bearish about South Africa’s growth prospects over the next five years. Gross domestic product (GDP) growth has been revised down from 3.2% to about 2.7% for this year, 3.6% in 2013 and 4.2% in 2014. Comparatively, the rest of Africa is expected to grow on average by about 7% over the short to medium term, according to the International Monetary Fund (IMF). China and India, on the other hand, are expected to power ahead with between 7% and 10% growth.”  He went on to share “South Africa is already losing out on investment to other rising economic stars on the continent. Countries such as Nigeria carry more power now … Just look at what is happening in the African Union. South Africa can’t claim any more, apart from its sound fiscal and financial systems, to be the superpower on the continent.”

Whether or not Nigeria can rise to meet the challenge of becoming a legitimate emerging economy will have much to do with whether it can quell the violence in its northern regions, and the next set of economic reforms the country badly needs to finalize.  Regardless, moves like that Porsche recently announced suggest that multinationals believe Nigeria holds the potential to make this transition to a sustainable emerging economy, and they are positioning their businesses with the goal of accessing the Nigerian consumer in mind.


When the Bottom of the Pyramid Sells to Itself

Many are familiar with C.K. Prahalad’s famous “bottom of the pyramid” framework.  He defined it as a group of the world’s poorest – estimated at some 2.5 billion people – who represented one of the most exciting and, he believed, important market segments to learn how to market and sell to.  The idea he put forward represents both a great opportunity for the next wave of globalization by providing goods and services to the poor, thereby alleviating chronic health and welfare matters, while also opening up new markets for companies from established economies to sell into.

Bottom of the pyramid strategies have ranged from one of the most famous – Hindustan Unilever’s development of personal hygiene products for the Indian consumer market – to those less well known, but even more impactful – such as GE Healthcare’s portable ultrasound technologies.  To my knowledge, most – if not all – of the case studies put forward about bottom of the pyramid strategies assume we are talking about a multinational selling into an emerging economy.  But is this missing another even more interesting phenomenon taking place at the bottom of the pyramid?

Yesterday’s Financial Times had an absolutely fascinating article by Terence McNamee about how China’s bottom of the pyramid entrepreneurs are selling to their counterparts within Africa’s bottom of the pyramid market.  McNamee points out that the most common story about China’s SOEs extracting resources from China, and making investments into the continent largely as a by-product of this strategy, is accurate but incomplete when it comes to understanding how deeply inter-connected these two economies have become.

Even in a country with as low a barrier to entry for entrepreneurs as that of China, he writes:

Most Chinese traders arrived in Africa in the past 10 years after failing to find work in China’s hyper-competitive job market. The poorest and least educated of China’s diaspora, they have forged their own pathways in the continent through family and village networks. They do not care about geopolitics or that China’s trade with Africa exceeded $150bn in 2011. What matters is that the barriers to entering Africa’s market are low enough for them to compete, even with few skills, little capital and often no experience of trading.


What these Chinese traders do have, as McNamee shares, is an awareness that if they cannot make it in Africa, they really have no where else to go.  He shares:

Chinese traders also know that if they don’t make it in Africa, they have nowhere else to go. Nearly all plan to return to China eventually or resettle somewhere other than Africa, once they have earned enough money. The education is too poor for their children, the medical care too meagre. And they find African ways and values simply too alien. So they seal themselves off from the societies around them as best they can. The only way to prevent relations from worsening is for China to stop pretending that they don’t exist. Traders do not live in secure compounds and their legal status is often unclear. Since they are not employed by a state-owned firm, Chinese embassies will not intervene on their behalf or pressure African governments to do more to protect them. This may have to change. The most important drama in the China-Africa relationship is playing out on the African street, not in say the oilfields of South Sudan. It is here where most Africans encounter the Chinese presence in Africa and decide whether it is good or bad.


The geo-political implications to this are for another day (but I would again remind those who want to read more about this that Tom Barnett has written extensively about China’s neo-colonialism problems in Africa and saw much of this happening some time ago).  What is worth pointing out is how deep the inter-connections between China and Africa is becoming as not only Beijing’s SOEs pursue a strategy for how to win and commercialize business opportunities in Africa, but as China’s most driven and focused small entrepreneurs do the same thing.  Whether American and European businesses – large or small – can match this same level of determination, grit and focus and out-compete China in Africa is not going to be purely a matter played out between oil and gas companies, but in the strategies individual entrepreneurs and SMEs pull together over the course of the coming years.


More Bad News for Nigeria

Last Sunday’s terrorist attacks in Kano, Nigeria underscored the delicate condition of Africa’s most important emerging economy.  President Goodluck Jonathan needs to show his own people and the international community that his government can respond to these terrorist attacks in a way that does not spread the violence, but instead contains it, thereby allowing Nigeria to continue to develop economically. As the largest market in Africa, Nigeria has much to lose if the violence spreads, or even should sporadic but effective violence continue, the latter illustrating Jonathan’s inability to provide a safe and secure environment for multinationals within which they can operate.

The Africa Report writes today, “It is too early to write off the Jonathan government, but it is struggling with political baggage that is holding up progress on energy policy and may completely derail it. The bold predictions last year of a period of high growth, economic reform and rising incomes sustained by strong demand for Nigeria’s oil and gas are now being rewritten, even by some of the more bullish banks and analysts. Renaissance Capital has cut its forecast for 2012 growth to 6.8 percent, its lowest level for three years. It predicts inflation could rise by as much as 3 percent due to the partial ending of the fuel subsidy.”

What is this fuel subsidy and why is it so integral to Nigeria’s development as an emerging economy?  Originally designed as a means of signaling to outside investors that Nigeria was ready for FDI into its energy sector, the fuel subsidy will hit the average Nigerian consumer – already struggling to find work and deal with inflation – and reduce their discretionary income significantly.  Nigeria’s fuel subsidy accounts for almost 1/3 of the country’s entire budget; only by opening to FDI will its energy costs go down and the country be able to redirect investment away from fuel into much needed public infrastructure. But entrenched interests are not eager to see the fuel subsidy go away.

At its core, the fuel subsidy is about corruption.  Consequently, Nigeria’s ability to push the fuel subsidy through will require political will that has been found lacking during most of the country’s recent history.  Perversely, the violence in northern Nigeria feeds into the desire of corrupt politicians to maintain the status quo by making it more difficult for the Jonathan administration to marshal its resources around an effective anti-corruption political strategy.

Nigeria is already home to many American and European multinationals who need access to the country’s various natural resources; however, the more exciting potential is the one companies like YUM! Brands are chasing in their early efforts to expand into Nigeria.  If Nigeria is to develop, it will need to create a stable and safe environment where FMCG and industrial companies can securely deploy staff and expend business development resources.  Should Nigeria be unable to do this, the country may well ride out the current boom in commodities to find that it never realized its long term potential of developing the first vibrant middle class in Africa.  What a shame that would be.


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.


Take Your Technology to Africa

This week has been jam-packed with a truly wonderful set of CleanTech meetings coordinated by the Trade Development Alliance of Greater Seattle.  Composed of an interesting group of angel investors, trade specialists and entrepreneurs, our group has had a first-rate exposure to what is happening in China for the CleanTech market. Over the next several posts, I will try to draw out some of the top-level insights that struck me about what we saw and heard.

Earlier this week, we had a good meeting with Prudent Energy, manufacturers of VRB (Vanadium Redox Batteries).  Originally technology developed in Vancouver, the company’s IP was sold to a Chinese business where it has taken on new life, due in no small part to China’s voracious appetite for new technologies that will allow it to create, store and disperse energy.  The technology itself is quite interesting (the electrolyte offers almost unlimited charge and discharge capabilities, can sit idle for long periods without energy loss, but is not particularly energy dense, meaning it requires larger and larger spaces for increased storage capacity).  But, what I found even more interesting was some of the applications Prudent had been able to find; specifically, their installations in Nigeria with Safaricom and in Kenya with Winafrique.

The problem Prudent solved in both Nigeria and Kenya was one that does not face developed nations:  how to get power to telecom towers in remote parts of the country.  In Africa, where mobile phone adoption has grown exponentially over the last decade, getting power to these telecom stations has become a critical infrastructure engineering challenge.  The solution Prudent offers is simple and elegant in its own right; what is equally laudatory is finding this application in the first place.  I found myself wondering how comfortable Western businesses are finding these sort of opportunities in undeveloped economies like those in central and western Africa?

How we as businesses engage in the sort of early-stage missionary activity like that which opened Prudent to opportunities in Africa remains something every management team should be considering.  How can your company free up the time to let someone in your organization wander?  Who is willing to do this sort of tip-of-the-spear work?  Many businesses in the west are extremely efficient – something that Chinese business cannot say – but in their pursuit of efficiency they have lost touch with their more entrepreneurial roots.  A successful future for your business means finding a way to get re-acquainted with the spirit of wandering and exploration that likely helped found your company.  Looking at Prudent Energy, a formerly Canadian company that is now based in China, I see much of this willingness to wander and explore, something that holds a critical lesson for American business as well.


Bag of Links

From the last week, news and notes from around the web about companies working to develop strategies for working within, selling into and finding partners in emerging economies:

The always superb ChinaLawBlog asks whether the FT’s Beyond Brics’ Blog was right suggesting if Vietnam might be a viable alternative to manufacturing in China, but instead focused on smaller, more nimble manufacturing than China’s mega-scale factories are capable of.  We’ve asked similar questions about Vietnam, but instead we’ve asked if Vietnam might actually be coming to an end as a hedge to rising manufacturing costs in China.

Via Frontier and the Beyond Brics’ Blog again, a good overview on the various cities in Africa that FMCG companies are most interested in.  Frontier notes that because the African Union is headquartered in Addis Ababa which might mean very good things for companies early into this city, not just for the city’s 2.7m consumers, or the opportunities to be an early entrant into the Ethiopian market, but possibly the ability to leverage relationships and influence from the African Union into broader parts of Africa.

Reuters notes that Haier flat panel screens have now replaced the formerly Japanese manufactured screens in Beijing’s Great Hall of the People.  And again, Haier is trotted out as the best example of China’s outbound brands which means, well, that Chinese outbound brands are much more likely to find success at home than abroad until they get more serious about developing brand building competencies.

Joel over at The China Observer has a good overview  of Tesco, Walmart and Carrefour’s China strategies.  Well worth the time to view his slide deck.

Even as more signs of India’s need to increase spending on healthcare mount, the budget speech from the finance minister leaves it unclear as to whether the country will follow-through on its commitment to do this.

Across Africa, ongoing worries about commodity prices and the policies of local governments troubles producers, as the Africa Report notes.

If CLSA is right, it’s time to get serious thinking about SouthEast Asia’s luxury market, given demographics and investment trends suggest this region is fertile ground for the next round of Asian millionaires to be minted.



Africa’s Hopes for a Middle Class

Today China announced that its projected growth for 2012 is going to fall below the 8% economists have long projected is necessary to absorb the millions of new entrants to the country’s workforce.  If the economy is not able to do this, the prevailing wisdom is that the credibility of the Chinese government will be hurt, and that broad domestic social instability could result.  In advance of this summer’s planned leadership transition, this announcement has many people leery about the country’s economy in the short-term.  That would obviously be bad enough, but while working on some research for an upcoming project in Africa today, it struck me how China’s slowdown might impact other vulnerable emerging economies who have recently found a semblance of strength by leveraging their natural resources to satisfy China’s burgeoning demands.  The best example of this is undoubtedly in Africa.

As G. Pascal Zachary points out in his superb article “Africa’s Amazing Rise and What it Can Teach the World” at The Atlantic magazine, “In the past ten years from 2000 to 2010, six of the world’s ten fastest-growing countries were in sub-Saharan Africa:  Angola, Nigeria, Ethiopia, Chad, Mozambique, and Rwanda.  In eight of the past ten years, sub-Saharan Africa has grown faster than Asia, according to The Economist.  In 2012, the International Monetary Fund expects Africa to grow at a rate of 6%, about the same as Asia.”  Why is this?  Zachary points to a handful of reasons:  African political leaders and creative entrepreneurs finding a way out of the “development trap” and, to my earlier point, the massive injection of economic activity – including infrastructure building – related to China’s interest in Africa.

Say what we may about China’s involvement in Africa, it is undeniable that China’s role in Africa has been positive in many ways.  China has not been as willing as the west to use money to buy off African politicians; rather, China would prefer to put together a plan that coordinates what it wants (extraction of key natural resources) in exchange for key infrastructure build-outs, which of course will be handled by Chinese companies and, in many cases, by workers provided from China.  This has resulted in Africa seeing infrastructure getting built out where previously cronyism would have diverted the money to Swiss bank accounts (not to say the latter of course no longer occurs).  Admittedly a lot of things have impacted Africa during this period – only one of which is China’s presence – but it would be a mistake to look past the good things China’s involvement has done for the people of Africa.

The folks over at the African Development Bank published a report recently called “Africa in 50 Years’ Time” which projects that the continent’s GDP could increase from $1.7 trillion in 2010 to $15 trillion in 2060.  As anyone with an appreciation of Africa’s political instability knows, these sort of projections are prone to error; however, the underlying trends the report points to are good.  As examples, on demographics (per The Africa Report, “working age population will triple between 2005 and 2060”), urbanization (The Economist projects that by 2030 urban dwellers will increase from 1/3 the total currently to ½), and the impact of key new technologies on Africa’s ability to power and feed itself (look at seed varieties designed for the African climate and ground conditions as well as the role of solar power in meeting Africa’s growing power needs).

Africa is too big to think about as one monolith, but the point that these various reports all illuminate is that parts of the country have found a real basis of stability.  With the right political leadership, various countries like Ghana and Nigeria are positioned to become meaningful emerging economies in their own right.  These are markets that are highly fragmented and ones where early entrants will need patience and fortitude to build winning strategies; however, if successful, these companies will likely find the opportunity to tap into one of the most exciting growth opportunities since China opened to outsiders in the 80s.


More Bad News For Nigeria

Last week saw two events which continue to spell trouble for Nigeria’s middle class.  The first was another bombing in Kano, a struggling city in northern Nigeria, where only one month earlier another bombing killed 185 people.  The second was the announcement by the government that “absolute poverty” was on the increase in the country, a reality underscored by the high rates of inflation Nigerian consumers are feeling as the cost of electricity goes up and the government removes a fuel subsidy.  All of this underscores the difficulties the country must face if it is to evolve from an economy predicated on natural resource extraction to a viable economy with equal parts’ focus on natural resources, manufacturing, and service.  The early trends which suggest the country’s middle class is developing are certainly threatened by these events.


Bag of Links

Interesting news and tidbits from around the world related to strategy evolution by companies leading the way in emerging economies:

WalMart announces it is increasing its stake in Yihaodian, positioning the American retailer to take advantage of China’s growing e-commerce market.

India revised its last quarter’s GDP growth upwards, but economists in the know point out the country is significantly under-investing in its infrastructure, something that could threaten the country’s future growth.

Things in Vietnam look a little, well, “icky” if Ho Chi Minh City’s property market is any indication.

High-end auction house Sotheby’s follows other luxury goods companies and moves in-land within China, announcing a stop in Chengdu for 2011.

The WSJ’s coverage of why wealthy Chinese want to leave China makes for great reading and should cast some light on questions about the inevitability of China’s rise.

Trying to parallel the success of luxury goods’ companies who are successful in China, Adidas announced its plans to develop more “fashion forward” designs for the domestic Chinese market.

Ongoing violence in Kano, Nigeria casts suspicions about whether the government can provide enough security and stability to ensure the country’s promised middle class continues to develop.



Wikistrat Looks at China’s Involvement with Africa

You will need a little more than half an hour (or, if you are like me a tad longer as you pause the video and scribble down notes) to view Dr. Tom Barnett’s recent Wikistrat simulation on the strategic implications of China’s engagement with, and policy towards, Africa.  Wikistrat is an innovative cloud based platform that brings together subject matter experts in a collaborative fashion to pull apart a particular strategic question.  The video shows the results from one such engagement.

The presentation notes that while China’s trade with Africa still only amounts to 1/3 of the EU’s overall trade with Africa, China-Africa trade already is greater than US-Africa trade.  The reasons for China’s growing presence in China have been written about most recently by the Economist, as well as in the superb book China Safari.  Most important are Africa’s natural resources (oil in particular, but a host of materials vital for China’s building boom as well), and the potential to increase Africa’s agricultural output as a way of addressing China’s mid-term inability to feed itself.  But Africa is also growing in importance as a potential market for FMCG, pharma, and other non-natural resource based businesses.  In particular, Chinese firms see in Africa a consumer market that in many ways looks more like their own, a realization which is causing many Chinese consumer products and small appliance companies to get serious about developing Africa as a potential market for their products.

Dr. Barnett several years ago made a prediction that I imagine some rolled their eyes at, if for no other reason than it seemed outlandish at the time.  He suggested that as China’s presence in Africa grew, they would be greeted as a new colonial power, admittedly different in form and context, but none-the-less viewed as an outside power interested only in extracting resources from lowly Africa.  This would ultimately, as he saw it, create situations where African extremists would target Chinese operations in Africa, kidnap workers, etc.  It is worth noting this is precisely what has been happening, with a handful of other people asking the question, as Stan Abrams did earlier this week, what the world would think if China were to drop its equivalent of a Navy SEAL Team into Africa to get its people out.

            The video presentation of the Wikistrat analysis shows that for now at least, the areas of Africa where there are minerals and oils do not overlap with the high conflict areas; however, Dr. Barnett believes this is only a matter of time and is something that will need to be taken into consideration when projecting how China’s influence in Africa will evolve.

One additional point that I very much agree with:  given the wide availability of very low priced labor in other parts of Southeast Asia, the Wikistrat simulation suggests that it is unlikely Africa will become a source for low-cost labor led by Chinese firms moving production from China to the African continent.  I whole-heartedly agree, absent the question of whether China finds it politically problematic to facilitate the transfer of low-wage production into Southeast Asia and instead views Africa as an easier venue for its companies.  Absent this possibility, which I grant is a long-shot, the conclusion one comes to about Africa’s future is that the onus is on this generation of Africa’s political leadership to use the boom brought to them by China’s push for natural resources as a vehicle for building sustainable political institutions, reforming and modernizing their educational systems, and choosing smart infrastructure investments.  Each of these has been absent in past generations of Africa’s leadership, something that has kept Africa’s potential divorced from reality.