The rise of a new Africa

Foreign Direct Investment
| The European | 3rd September 2016
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Foreign investment in Africa has traditionally focused on natural resources. The continent’s vast reserves of copper, oil, gas, diamonds, gold and platinum have contributed to its economic boom over the last fifteen years. But now investors seem ready to venture into unchartered territories: manufacturing and technology.

This June the Chan Zuckerberg Initiative (CZI), a charity created by Facebook’s founder and his wife, Priscilla Chan, to “advance human potential and promote equality in areas such as health, education, scientific research and energy”, announced its first investment. The recipient is Andela, a Nigerian startup that trains African web developers and embeds them as a team within multinationals for a fee. On top of CZI’s $24m, the company has received funding from prestigious venture capital firms such as GV (formerly Google Ventures), Spark Capital (an early Twitter investor) and Learn Capital.

It was not difficult to convince the Silicon Valley powerhouses, says Wambui Kinya, Chief Strategy Officer at Andela: “These companies are aware of the impact of technology and they can identify something impactful when they see it. If you look at the demographics in Africa there is an opportunity, because that’s where the world’s youngest labour force is located beyond China and India.” As for CZI, it is Andela’s “long-term commitment to empower human potential and promote equality”, exemplified by its training programmes targeting female developers, that won their hearts and minds according to Ms Kinya.

Growth in Africa has always been vulnerable to the whims of global commodity prices. The dramatic drop of prices lately has sparked fears that Africa’s boom may slow down. But there is a bright side too, thinks Ms Kinya: “The weakening of the commodity markets has been a blessing as long as it changes focus in foreign investment. The increasing size of the consumer market in Africa has brought investment in new industries: technology, financial services and telecoms. This has increased further the need for foreign investment in the knowledge economy, because to build these industries you need education and a growing knowledge base.”

Wambui Kinya, Chief Strategy Officer, Andela

Wambui Kinya, Chief Strategy Officer, Andela

Africa’s exponential growth over the last two decades was largely driven by Chinese demand for natural resources. As China’s economy is gradually slowing down, its investment in African infrastructure and commodities is expected to drop too. But in the long-term China’s transformation into a mature economy might prove a boon for Africa, predicts David Dollar from Brookings Institution in a recent report on China-Africa relations. As China shifts to a consumption-driven model, powered by a growing middle class and an ageing population, its foreign investment appetite will switch from natural resources to manufacturing and services, particularly in Southeast Asia and Africa. Labour costs in China are rising, Mr Dollar points out, while Africa has the demographic profile of China 35 years ago: a young and increasingly qualified population. In other words, Africa could become a 21st century China – a manufacturing powerhouse.

Ecommerce on the rise

Ecommerce is another area where investors see great potential for growth. McKinsey, a professional services firm, predicts that ecommerce revenues in Africa will grow by $75bn by 2025. One of the pioneers of this boom is Jumia Group (formerly known as Africa Internet Group), a tech-oriented conglomerate that raised more than 300m euros from foreign investors in 2015. Its foreign investor portfolio is impressive, including the French insurance company Axa, the Swedish telecoms company Millicom, Goldman Sachs, and Rocket Internet, a German start-up incubator.

The group operates 71 companies across 23 African countries. Its biggest success is Jumia, a thriving ecommerce company with presence in 7 African countries. “Foreign investment is crucial presently for opportunities that require a lot of funding,” says Fatoumata Ba, Chief Marketing Officer at Jumia. She adds: “It is a bet on the future that Africa is the next digital frontier. In 2012 we looked at the size of the population, the growing middle class in key countries such as Nigeria, Egypt and Morocco and the acute growth of internet penetration and saw potential in those markets. ”

Not everything is rosy though. A major barrier to growth is Africa’s problematic – and often abscent – infrastructure. McKinsey estimates that currently only one out of three Africans has access to the internet, although this will double by 2025, driven by an added 360 million smartphone owners. But for African startups where there is a will there is a way, says Ms Ba: “Ecommerce in Africa needs to be hybrid and adapt to the customers. For example we built a sales force called “J-Force” which allows offline populations to get access to products on our websites without having an internet connection. Our J-Force has more than 60,000 agents just in Nigeria, who act as physical intermediaries between Jumia and our end customers and try to bridge the gap with disconnected populations.”

The future is mobile

If there is a sector where the lack of infrastructure is an advantage rather than a problem, it is fintech, the niche market where financial services and digital innovation meet. A fintech boom could help Africa kick-start its own digital revolution, believes Dr Alex Vines, OBE, head of the Africa programme at Chatham House, a UK think tank: “There is innovation, particularly in East Africa. In countries like Kenya and Senegal we will see more of this, because there is a youthful population and these disruptive technologies don’t depend on previous infrastructure, which is often frustrating and unable to cope with demand from Africa’s growing middle class. It is the realities in Africa that make fintech attractive. That innovation might become globalised later on – Africa could be a laboratory for it.”

A case in point is MyBucks, a company that provides Africa’s booming middle class with virtual banking and insurance services. Based in Luxembourg and listed on the Frankfurt Stock Exchange since June, the company has strong links to the European markets, supported by investors such as Alexander Schütz, an Austrian asset manager, and Chris Rokos, a British hedge fund manager. But deep in its core it is a pan-African company, operating in eleven African countries and with a South African HQ.

The future of the African financial sector is mobile according to its Executive Director, Tim Nuy: “In Africa, landlines never really got huge traction, but over the next five years there will be over 300 million mobile phone users. So despite the lack of traditional infrastructure vis-a-vis the European and US markets, Africa has a massive leapfrog opportunity, because smartphones will replace this missing infrastructure.”

In the long-term, Africa’s technological backwardness may prove to be a boon, thinks Mr Nuy: “Adoption is quicker in Africa, and that is a function of means. I have never used my mobile phone to pay for anything in Europe, because there you pay with your card. But in Africa most people don’t have cards. So, at the end of the day, it is about usage. Right now the number of users is still small, but if smartphone ownership grows as has been forecasted over the next few years, the technology developed here will find its way to the rest of the world. No matter how many creative minds are at work, the big driver behind innovation is need, and there is a need for that technology in Africa.”

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The greater good

Africa’s nascent knowledge economy requires local talent. This is why many multinationals operating in Africa have launched CSR programmes that focus on digital skills. Last April Microsoft announced that it will offer grants to 100 NGOs in 55 countries, with a strong focus on Africa, to improve access to computer science education in underprivileged areas.

Outside help comes in various sizes and shapes. Close the Gap, a Belgian NGO, helps multinationals with a strong presence in Africa provide infrastructure and IT training opportunities to rural African communities, often donating their own underutilised equipment. An example is Arrow Electronics, a US electronics company that donated to Tuleeni Orphanage in Tanzania refurbished laptops, mobile devices and an LED flat-screen monitor, as well as a “DigiTruck”, a mobile classroom insulated to protect pupils against tropical heat and powered by rooftop solar panels.

There is a broader shift in Western corporate culture, thinks its founder Olivier Vanden Eynde: “Business leaders are more in favour of circular economy and sustainability initiatives than they were 10 years ago, but in practice it’s often a challenge to ‘walk the talk’. So we focus on companies that have a keen interest in CSR programmes – not just offering equipment but also contributing to  curriculum design, doing training and utilising their employees through volunteering and social impact programs. Employees increasingly expect their employers to be circular-minded and help alleviate poverty in regions such as Sub-Saharan Africa. So this is not a PR exercise for them, but mostly an internal programme.”

But taking a socially responsible approach in Africa can be good for business too, believes Mr Nuy from MyBucks, which has its own education-focused CSR programmes: “The people who benefit from our CSR programmes will subsequently become customers that we can include financially to build a customer base, generating value over a lifetime. We don’t do this because it’s seen as compulsory, we only do it because it’s good business and develops our operational markets. We strongly believe that we must contribute to make these markets better.”

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