by Samantha Barnes
Manufacturing on the Continent
Africa is a continent of contrasts: between rich and poor, educated and illiterate, employed and unemployed, lush farmland and drought-ravaged wasteland, luxurious houses and shanty towns, and manufacturing powerhouses and roadside hawkers. Political instability, violent clashes, factionalism, extremism and kidnappings are included in the mix.
For a manufacturer seeking to expand its footprint into Africa, many challenges go hand in hand with doing business on the continent. These challenges are as much part of the business landscape as the beloved pap (cooked porridge made from maize meal ) that is a side dish to meat in African communities. Common challenges often overlooked are distribution and logistics, infrastructure, and selecting trusted and respected business partners.
Yet, there are African success stories. The flip side is that, despite Africa’s rich natural resources, too many goods are manufactured outside the continent. There is, however, good news. Africans are realising that Africa is the proverbial land of plenty. With world markets under strain and overseas economies battling with their own challenges, expanding into Africa makes good business sense.
Zandile Ratshitanga, World Bank senior communications manager for Botswana, Lesotho, Namibia, South Africa and Swaziland, paints a brighter picture of developments in Africa. She reports that foreign direct investment (FDI) in sub-Saharan Africa rose to USD45 billion in 2013, up 8% from 2012. This was driven by East and Southern Africa. In Southern Africa, 62% of inward FDI went to South Africa in 2013.
European countries are by far the biggest investors in Africa, while United States FDI in the continent has fallen. Predictably, China is consolidating its position, Zandile confirms. Meanwhile South–South FDI in Africa is on the rise, especially from the BRICS (Brazil, Russia, India, China, South Africa) countries. These investments are primarily in services and manufacturing.
Manufacturers to Look up To
Nampak, Tiger Brands, Mabeo Furniture and Aliboat are notable examples of Southern African firms investing in significant projects in Africa In a press release issued in March this year, Nampak reported that it had signed a memorandum of understanding (MoU) with a property developer for a majority stake in a proposed greenfield glass furnace in Ethiopia, some 120 kilometres north of the capital Addis Ababa.
Andre de Ruyter, Nampak CEO, says: “This project has the potential to meet significant glass demand in the fast-growing Ethiopian beer market. To date, the land for the works has been secured on a long-term lease and a source of sand has been identified. We are excited about this project and are working hard to firm up the business case.”
Defy is another name worth watching. The company celebrates 110 years in existence this year as Southern Africa’s largest manufacturer and distributor of major domestic appliances. It markets its products under the Defy and Ocean brand names . In 2012, Defy declared an annual turnover in excess of R3.5 billion and exports to various markets, including Africa and the Indian Ocean islands.
Several factors underpin the continued success of Defy, among them continuous investment in producing products that address the needs of consumers and that enhance the quality of their lives. Head of marketing at Defy, Rajan Gungiah, says: “We have invested over R500 million over the last 24 months in our plants to produce world-class differentiated products.” Another differentiator is having the local capability needed to provide rapid innovation and to consistently produce superior quality.
Maintaining a competitive edge is ongoing. “We have managed to sustain our leadership through a difficult trading environment and stronger competition from imported brands (Europe, Korea and China),” says Rajan. “Our leadership position in SA is approximately 36% (and growing) in market share and is double [that of] our nearest competitor.”
Defy has a firm foothold in Africa, selling into Namibia, Swaziland, Lesotho, Botswana, Zambia, Mozambique, Angola, Tanzania, Zimbabwe, the Democratic Republic of Congo (DRC), Malawı, and other central African countries, including the Indian Ocean islands.
Reaching the Market
Having cost-effective and reliable means of delivering to customers across Africa is always a challenge and integral to achieving success. Besides dedicated Defy branches in Namibia, Botswana and Swaziland, the company uses appointed distributors in Zambia, Mozambique, Angola, Zimbabwe, the DRC and Malawi. It is not resting on its laurels either. “We are also in the process of allocating the right resources to drive further export opportunities,” explains Rajan.
Volkswagen South Africa, although a leading automotive manufacturer, also faces similar challenges as a manufacturer in Africa. Matt Gennrich, general manager of group communications for the Volkswagen Group of South Africa, cites economies of scale (South Africa is responsible for less than 1% of the world’s automobile production), exchange rate volatility, the relatively high cost of labour, as well as labour instability and South Africa’s distance from key markets as making logistics and Volkswagen’s cost structure a challenge. However, the Volkswagen Group is very active in China, where it is a market leader.
Toyota has set itself apart from its peers on a couple of levels The high local content used in the Hilux and Corolla models makes these models compliant with the requirements of the European Free Trade Agreement with South Africa and thus eligible for importation into Europe free of duty. Toyota is the first South African vehicle manufacturer to achieve this. Both models are produced in right- and left-hand drive variants.
Toyota South Africa president and CEO Dr Johan van Zyl was quoted as saying in 2008: “This required a total transformation in the way we do business and in the way we build vehicles. Fundamental to this process was a multibillion rand investment in new facilities and technologies that overshadowed anything that the local industry had seen before. Toyota South Africa is now firmly established as the largest vehicle manufacturer on the African continent and as the largest vehicle exporter in South Africa.”
Support from ‘Big Brother’
Rajan Gungiah confirms that the main challenge for Defy is ensuring that there is a more regulated industry. Better controls and duties are required to protect the local manufacturing industry. To this end, Defy has a close relationship with the Department of Trade and Industry and has recently become a member of the South African Electrotechnical Export Council (SAEEC) in order to develop new partnerships and increase exports into Africa.
Matt Gennrich of Volkswagen South Africa confirms that the sale of new passenger cars in Africa is difficult, as many African markets allow grey imports from Volkswagen Asia. South Africa does not produce cars in South Africa that are in demand in the rest of sub-Saharan Africa, for this market tends to be dominated by pick-ups.
Lessons Learnt from a Deal That Went Belly Up
In business as in life, not everything is plain sailing. A case in point was the Tiger Brands acquisition of Dangote Flour Mills (DFM) in Nigeria in 2012. Of the R1.5 billion for a majority stake in DFM, Tiger Brands had to write off an amount of R849 million that was paid for the business, in addition to R105 million against the value of DFM’s assets.
Peter Matlare, Tiger Brands CEO, was quoted as saying earlier in 2015 that Tiger Brands had not been put off buying businesses of scale and that its rest-of-Africa strategy had been unaffected by its bad experience in Nigeria. The lesson to be learnt from this for future deals, he said, is that Tiger Brands will, earlier on, send larger management teams to its new business. It will also ‘take the keys’ of its takeover targets from day one in order to establish certainty.
He conceded that Tiger Brands had not correctly assessed the competition or Nigeria’s way of doing business. Tiger Brands is investigating ways to improve route-to-market capabilities. In South Africa (aside from its bakery business), it outsources 90% of its logistics, and, in Nigeria, may well outsource this function to one of its partners there.
Tiger Brands’ ongoing search for African growth is based on identifying new opportunities as well as less promising prospects in South Africa. This may include a regional approach where Kenya or Ethiopia could service east Africa, Cameroon could supply central Africa, and Nigeria could supply West Africa. At the end of the day, achieving business success anywhere is about doing intensive research upfront and creating mutually beneficial and enduring partnerships.
Sources: Business Day Live, 8 December 2014; SouthAfrica.info, 23 April 2015;