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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

A Voice of Experience from Nigeria

When American and Europeans think about emerging economies, most naturally gravitate to China, ASEAN countries like Vietnam and Cambodia, India and a handful of countries outside the region like Brazil and Russia.  But evidence is increasingly mounting that we need to broaden our horizons even more; specifically, that we need to incorporate Africa into our thinking about emerging economies.  What to make of Africa has been something I have written about here, here, here and here.  The challenges of successfully navigating Africa are many, and it was my good fortune to recently spend some time chatting with Marc Schreuder, the Principal at M2D Consulting, a company specialized in Pan-African QSR and Retail with offices based in both Lagos and South Africa.

Marc is an old hand at business in Africa in general, but Nigeria specifically.  He was instrumental in helping introduce the KFC brand to Nigeria, and has worked in Lagos with Eat “N” Go Limited, the company responsible for bringing Dominos Pizza into Lagos.  Prior to his work in Nigeria, Marc worked in Kenya running the operations for Nandos, Pizza Inn, Chicken Inn as well as 2 other QSR brands and On the Run, the convenience retail brand at the back court for Exxon Mobil.  Beyond his work in Nigeria and Kenya, he has worked in Saudi Arabia, Uganda and South Africa, always with an eye towards operations, quality, and P&L management.

I was curious to get Marc’s read on how as both an expat living in Nigeria, but also someone with a long history in Nigeria and a life lived largely in Africa writ large, what he makes of the growth story the west is hearing about Nigeria specifically.  Marc was emphatic:  “what is going on here is very exciting.  The country has changed tremendously since I first came here.  When I am gone for just a month you see major changes when you come back:  constant improvement through new roads, more visible policing with less corruption, and (some what) better power. There are lots of new buildings, a lot of high rises under construction.”

Anecdotally these are powerful observations, but many still have deep reservations about going into Nigeria, which led me to ask Marc whether it was still pre-mature for western companies to be thinking about a strategy for the country.  Marc responded, “Absolutely not.  If you look at the population in Nigeria, Lagos alone has around 14 million people, with an influx of 60,000 people a month coming into the city.  There is hay to be made by anyone who can execute.”  If that is the case I asked him, what are some of the reasons companies aren’t successful?  Marc added, “The fault a lot of people make is they come in with their own preconceived notions about what will work … some almost seem to want to re-colonize Nigeria … you have to go into the country with an open mind, know what you’ve done in the past, but adapt to local expectations.”

This begs the obvious question of which he has seen do this poorly, and who has done this localization well.  In Marc’s mind, the best example of this was a South Africa telecom company who went into Nigeria only to exit with a multi-million dollar loss.  They brought in what Marc described as “the same way of running their business as they would have done in South Africa, the same marketing campaigns, but the marketing in Nigeria is very different.”  I found the example Marc shared fascinating.  South African radio marketing for telecom is pretty traditional when compared to western radio advertising; the difference in Nigeria is that because of the atrocious traffic, radio advertisements are much longer.  Marc said that “in Nigeria, radio ads are between 3-4 minutes long, and the product is mentioned maybe twice in total.”  What do they fill up the balance of this time with?  They tell a story, one that the decision maker can relate to:  a harried mother who has “screaming kids in the car, is being shouted at by her boss, doesn’t have any cash in her purse, but thank goodness ‘Bank X’ has an ATM around the corner so she can buy food for her family.”

If marketing is different, are the motives that ultimately drive a Nigerian consumer to spend more on a western brand that much different than what we see in other emerging economies?  Based on what Marc shared, I would have to say no:  “Nigerians are highly, highly aspirational.  Up until 10-12 years ago there was no middle class.  Even now, that is a small part of the country.  They have satellite TV, so they see everything the west has to offer.  When I first opened up KFC, I would see them take pictures outside the restaurant.”  However, Marc was quick to add that this aspirational nature was not de-coupled from a sense of value.  In his mind, “For Nigerians, the value of premium versus price is critical.  If they perceive a premium, they will pay for it, but if he doesn’t he’ll buy a copy at the corner market.”

Because this aspirational feature is critical, Marc learned to pay particular attention to how his stores looked and the level of service he offered customers.  In his restaurants, “your stores have to look sexy – clean, well lit and friendly.  In Nigeria especially, customers are not used to friendliness; culturally, they tend to come across aggressive.”  For Marc, he always wanted his store employees and the store itself to reinforce the aspirational dimension of his customers.  As he put it, “They want to be seen with a big meal:  ‘I am walking into a KFC or Dominos or a Mango clothing store because I can afford it.’  That is how they want to be seen and it is who they want to be.”

Marc admitted the many challenges of developing a strategy for getting into Nigeria are real, but as he sees it the evolution of the Nigerian middle class is about 10-15 years behind what he saw happen in Kenya.  What he was very clear on, and a point I am emphatic about as well, is that thinking about an “African Strategy” is a mistake.  This was one of the issues I had with the otherwise illuminating book Africa Rising.  Specifically, trying to think about Africa as one large market is a terrible mistake.  Marc commented, “what works in South Africa won’t work in East Africa, and what works in East Africa probably won’t work in West Africa.”

In addition, businesses like Yum! Brands will need to find competent local partners.  As Marc pointed out, “Local shareholding is not a requirement by law but it is highly suggested that a local partner is involved.”  Marc was founding chairman of the Anti Counterfeiting Coalition of Nigeria and was impressed by the number of law firms that focus on IP law and protection for foreign brands. British law principles are the basis of the Nigerian legal system unlike South Africa that uses Roman Dutch law principles.

When reflecting on the government, Marc shared, “Investment strategies by Government are not clear cut and goal posts can change. However the banking sector is particularly solid with the banks that have foreign shareholding as well such as Standard Chartered and Stanbic along with some others.  The CBN policies make good sense and are rigorously enforced having a stable influence on the sector that is improving its reputation month on month.”

Towards the end of our conversation, I asked Marc to build on what he saw as the biggest challenges for a company seeking out a strategy in Nigeria.  Marc pointed to the high cost of retail space as one problem, largely because you have to pay three years ahead in order to secure a spot.  In addition, the supply of power remains a real bottleneck.  At KFC he shared that “I had two stand-by generators … that obviously has a huge impact on costs and overhead.”  In addition, water supply is problematic and transportation problems related to infrastructure (road, rail and port) are all in need of improvement.

Having said this all, these are problems that savvy companies who have been successful in other emerging economies will also recognize, and in most cases, have been able to rise above.  Many of the factors that Marc and I discussed are out business’ control:  the stability of the national government, the efficacy of the fuel subsidy reforms, violence in the country’s north are all good examples of what can’t be controlled.  But what can be controlled are the operational and strategic factors like service levels, infrastructure and brand positioning.  Ultimately staying focused on what you can control versus what you can’t is the key to success in a market like Nigeria.


You Can Never Complain About the Traffic Again …

After you read Joshua Hammer of The Atlantic‘s new article “World’s Worst Traffic Jam.”  He details a particularly bad traffic jam in Lagos.  The article talks about how it took 12 hours to go 40 miles and how, during the trip, the headlights of the car he was in were stolen by thieves who took advantage of the locked in vehicles, drivers and passengers to make off with whatever they could grab.  Hammer writes:

Lagos gridlock hasn’t always been this bad. But the city’s population has nearly doubled since the late 1990s, and a fuel subsidy has made gasoline cheap. The government repealed part of the subsidy this year, but Nigerians still pay only $2.75 a gallon, which has made owning a car—typically a broken-down, secondhand American gas guzzler—feasible for millions of people. And rapid growth in truck and oil-tanker traffic has overwhelmed Lagos’s ports, which handle 75 percent of the country’s imports. As a result, truck drivers use the expressway as a parking lot, waiting for days to return empty shipping containers or to pick up fuel and cargo, bribing police and port officials to look the other way.


His article makes for fascinating reading about what is going on in Lagos, but it also points out one of the major challenges for those who operate in emerging economies:  transportation.  I recall sitting for hours in a similar traffic jam in Shenzhen, apparently because of an accident so bad that even the Chinese police could not make their way to the scene.  That, or all the rubber necking and jockeying by Chinese truck drivers in an attempt to work around the scene had itself brought traffic to a complete stop. The clock was ticking on a flight out of China, and I was not too happy to think about the prospects for missing a flight.

The less personal aspect to this all is the need to understanding exactly how your product will get from ship to shore, from shore to rail, from rail to distribution center, and from distribution center to point of use.  Cumulatively, this is one of the first and most important issues you need to understand when exploring an emerging economy.  Defining this is not only an operational necessity, but it will give you a very good gauge on other peripheral matters:  how and when are containers staged as they leave the port?  Who speaks for what part of the many mark-ups that occur between you and your final customer?  Where are the most obvious inefficiencies exist?  Where can product potentially get sidelined?

As Hammer’s point makes clear, this is a huge problem in Nigeria.  Many companies who have had good success establishing distribution channels in countries like China are going to quickly find that expanding into other emerging economies shows how advanced China actually is in this regard.  A good friend with experience in Vietnam commented on how much of an issue this was for his company when they attempted to move a site from China to Vietnam.  All together, the role of mapping how your product gets from ship to customer is more important than many understand or appreciate.


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.


How a Reverse Brain Drain Could Help You

Last week while in London I had the opportunity to have dinner with a friend from school.  Originally from Ghana, but having lived in the UK for most of his adult life, he shared with me how many of his fellow co-workers from West Africa were re-evaluating their life in the UK.  Confronted with an uncertain and increasingly tepid domestic economy, many are looking back towards their home countries and asking themselves if now was perhaps the time to head back and begin working to build a better future for themselves.

Most, if not all, originally found themselves in the UK as a result of their parents fleeing a domestic situation that had become either economically or politically untenable.  To see their children now re-consider going back speaks volumes both to the uncertainties they see in the developed West, as well as the potential they believe their home countries now possesses.

This same phenomenon has been at work with Chinese and Indian scientists, engineers and entrepreneurs for the last several years (and in particular post 9/11 as visas became increasingly difficult to obtain).  In the case of Chinese and Indian ex-pats, many came to believe that their home countries were better places to raise capital and test new ideas than what they could find in the United States.

If West Africa contains the next group of countries that will see a similar migration, how could this “reverse brain drain” help your business?  The most important way is that it profoundly increases the likelihood that you can access managerial and business development talent that understands how western companies work, and who also appreciates how the local economy is structured (or, in the case of many markets, how its lack of structure has to be incorporated into distribution and operational strategies).

This migration makes the stakes of political reforms in countries like Nigeria especially that much more important:  if this group of repatriates can not push their home countries forwards, then they may never be able to.  However, if they are successful, these men and women will play an increasingly powerful role shaping the development of Africa’s emerging middle class, a story that could prove to be as powerful in the first part of this century as China’s similar opening was towards the end of the last.


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.


Haier’s Nigeria Distribution Map

Take a look at this map of Nigeria.  What it shows is Haier Nigeria’s distribution map for the country.  The company has 5 distribution centers and a total of 23 service outlets.  Now, contrast that to a supposedly more “sophisticated” multinational in the same space – say Electrolux and their distribution channels in the same country.  You’ll find 9 distribution outlets for Electrolux versus a total of 23 (5 of which are DCs) for Haier.  What should we make of this disparity?

Observing these differences should reinforce our understanding of the greater ease Chinese companies have navigating Africa than their American or European counterparts.  In FMCG industries, this comfort is going to translate to brand equity and market share in one of the most vibrant emerging economies around the world, Africa.

The question needs to be asked why China is so much more comfortable selling into Africa.  Partially this is because China and Africa are much more deeply intertwined economically than Africa is with America or Europe.  However, European countries have a long – if not always constructive – history working in Africa, so this does not fully explain China’s current dominance across the continent.

This circles the conversation back to what Tom Barnett has written about; namely, the idea that when a Chinese goes into an African city he sees markets, community areas, and means of commerce that remind him of his home.  He is comfortable selling into, marketing, navigating and building relationships in these chaotic and highly informal spaces.  In contrast, American and European businesses are less likely to find Africa’s markets ones they understand or are comfortable navigating.  Players from developed economies look for clean verticals, distribution channels that can be organized with clear boundaries, supervised and managed as such.

As a business, getting comfortable selling into Africa is something that needs to start now.  The role of emerging economies in general is going to be one of the few bright points for businesses anywhere, and learning to work within the unique cultural boundaries that constitute African business is a process that needs to start sooner rather than later.  This summer, Rubicon will be doing a research project in West Africa where we will be mapping the distribution channels of major white goods’ manufacturers, comparing what Chinese companies like Haier and Hisense are doing that companies like Electrolux, GE, Samsung and LG will need to follow.  This sort of basic missionary work and consumer safari is an integral step to take as you formulate how best to deploy your company’s products and services into Africa.


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.


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.



Bag of Links

For our readers’ pleasure, some relevant reading and video on the topic of what is happening in emerging economies in early 2012 follows:

From The China Observer, How Diageo is differentiating its brand of whiskey in China.

Over at the Financial Times’ superb Beyond BRICs Blog, a review of Unilever’s results from Brazil and Russia, with a note of caution from the company about what they see as headwinds in emerging economies in general.

From the same FT blog, what the British firm Burton’s Foods needs to do in order to successful launch its Wagon Wheel food line in Russia.  Hint:  localization will always matter, finding the right partners even more.

US e-Tailer Amazon.Com announces its plans for entering India via, suggesting on-line retailers might have another advantage over brick and mortar companies in India.  Does this mean a multi-brand e-Tailer can be 100% foreign owned in India, but a multi-brand traditional retailer cannot?

Pepsi’s earnings make note of double-digit growth in a variety of emerging economies, while today the company announces job cuts in what the CEO calls a “transition year” for the company.

Everyone gulps over China’s most recent rate of inflation, hoping this is explainable by the CNY celebrations.

Pay attention to Nigeria as one of the pivotal African states where multinationals are eager to see the country further stabilize, successfully deal with Islamist terrorism in Ibadan and Kano.  Watch as YUM! Brands further expands into the country.