Asian marketers' new target: The African consumer
GO YAMADA, Nikkei senior staff writer
MUMBAI -- The resource price rout has hit the African economy hard. Yet the continent continues to attract foreign capital -- and these days, a lot of the money is coming from Asia. Africa was once dominated by Western investors, due to ties forged in colonial times. But Chinese companies have muscled their way in, and Indian, Japanese and South Korean players are arriving and thriving. This intense competition is no longer just about extracting minerals and materials. It is about tapping the next big consumer market.
Vivek Karve has a clear picture of the ideal African market. The chief financial officer of India's Marico, a maker of hair and body care products and other fast-moving consumer goods, said his company targets countries with "per capita GDP under $5,000, many mom-and-pop shops, low penetration of multinationals and political stability."
Marico gained a foothold on the continent in the late 2000s by acquiring local brands in Egypt and South Africa. Using the yardsticks Karve mentioned, it has focused on building its market share in East African countries such as Kenya, Tanzania and Uganda.
Falling commodity prices are casting a shadow over African economies, but Karve expects double-digit sales growth in the region. "The African market should do well on a longer horizon," he said. Marico's strategy for achieving that includes promoting local brands familiar to African consumers, rather than pushing products that are popular in India. It uses multiple distributors to cushion itself against credit risks.
Projections support Karve's long-term assessment and show how Africa's appeal no longer stems from resources alone. The African Development Bank estimates the continent's middle-class population will grow to 1.15 billion by 2060, 3.2 times larger than in 2010. The middle-income portion of the population is seen increasing to 42%, from 34%, over the same period. Mckinsey & Company, meanwhile, predicts that Africa's overall consumer spending will surge from $860 billion in 2008 to $1.4 trillion in 2020. The number of households with discretionary income will swell to 128 million.
When it comes to tapping this burgeoning market, Indian companies appear to have substantial advantages over other foreign contenders. Aside from their historical ties from the days of the British Empire, India and Africa face common challenges, including poor infrastructure and underdeveloped credit and settlement systems.
Godrej Consumer Products, a unit of the Godrej Group conglomerate, is another Indian company expanding in Africa. In the late 2000s it made five acquisitions in South Africa and Nigeria, including makers of hair dye, hair extensions and home-use insecticides. The company plans to increase its African sales, which stood at 12 billion rupees ($179.8 million at the current rate) last fiscal year, sixfold by 2020.
In April, Godrej Consumer Products announced a deal to buy Strength of Nature, a U.S. hair care products company with sales routes in Africa and the Caribbean.
India's Bajaj Auto, known for motorcycles and three-wheelers, got the jump on its compatriots and secured a 23% share of the African motorbike market. That gives it the third-largest slice, behind Chinese and Japanese brands. Africa takes in 45% of all vehicles Bajaj exports, and over the next three or four years, the company aims to boost Africa-bound exports by 13-15%.
"Bajaj manufactures special motorcycles for Africa," said a saleswoman at a dealer in Lusaka, the capital of Zambia, where the marque debuted in June 2015. "Their suspensions have double springs for driving on rough roads."
Indian companies are also serving as bridges to Africa for investors elsewhere in Asia. Shailesh Bhandari, managing director of Indian steel and engineering company Electrotherm, was in Japan in late May to drum up investment in both Indian and African endeavors.
In a meeting at Tokyo-based IJIP Asset Management, which is helping Electrotherm procure funds, Bhandari emphasized the potential of his company's steel and electricity projects in Tanzania. "In the sub-Saharan region, the gap between steel use and production is growing rapidly," Bhandari said. "Peak power demand in Tanzania will increase from 3,000 megawatts in 2015 to 7,000MW in 2030."
Electrotherm plans to invest $282 million to build a reinforcing bar plant with annual capacity of half a million tons. The company also intends to open a $297 million, 225MW gas-based captive power plant. Africa has very low production capacity for steel products, especially rebar. That has to change if countries are to reduce imports.
FLURRY OF ACTIVITY
Of course, there is plenty of competition for African opportunities. Data from the Japan External Trade Organization shows that U.S., U.K. and France had more than $50 billion worth of outstanding direct investment in Africa as of 2014. China had $32.4 billion, while the figure for Japan was $10.5 billion.
The gap between Asian and Western rivals is expected to narrow over time, with China making up much of the ground.
About 3,000 companies from China -- Africa's largest trade partner since 2009 -- are doing business in sectors such as infrastructure, resource development and telecommunications.
An international conference titled "Chinese Enterprises Going to Africa" was held in Shanghai early in June with the aim of deepening economic cooperation. Lin Yi, vice president of the Chinese People's Association for Friendship with Foreign Countries, told the packed venue that China and Africa have a win-win relationship.
In the past, Chinese companies' Africa operations were geared toward acquiring natural resources and exporting infrastructure technology. The strategy has shifted, with a greater emphasis on encouraging economic and industrial growth. The idea is to boost purchasing power across Africa and turn the continent into a massive consumer market.
Initially, some Chinese businesses clashed with local companies and communities. Some were accused of disregarding workers' rights. But more than a decade after the first influx, the word among African businesspeople is that Chinese attitudes have improved significantly.
Some Japanese companies, meanwhile, are finding ways to apply their own strengths in Africa. Kaneka is one example. The synthetic fiber maker is capitalizing on African demand for hair extensions.
The beauty accessories are considered a must-have for 20- and 30-something women in Lusaka. Since African hair is naturally wavy, it is difficult to keep long styles tidy. The extensions offer an easy solution.
At a salon in Lusaka's Kamwala Shopping Center, a woman named Himena was getting hair extensions made with Japanese materials. "I get new extensions every month or two for a change," she said. "It costs me about $30."
Hidesuke Amachi, Kaneka's managing executive officer, said demand for hair extensions surged in Nigeria and other African countries starting around 2003, thanks to the commodities boom. Now they are everywhere: "The volume of Kanekalon, a synthetic fiber for artificial hair, supplied to African factories is about eight times as much as the volume in 2002," Amachi said.
Often, Japanese companies see Africa as a lucrative but daunting challenge -- one they would rather tackle with a partner or subsidiary that is familiar with emerging markets.
This, again, is where India comes in. Toyota Motor, Honda Motor, Nissin Foods Holdings and Hitachi all export from their factories in India to Africa. The Japanese government is actively working to help companies make inroads in India as a springboard to Africa. A couple of years ago, the Ministry of Economy, Trade and Industry compiled a list of potential Indian partner companies with strong African operations in 16 fields, including beverages, consumer goods, retail, electronic parts and auto components. Godrej Group and Marico were among them.
Nissin Foods brought its instant noodles to Kenya in October 2013. Daisuke Okabayashi, who helped establish a local unit, said the company applied what it learned in India to Africa because the two markets have similar price ranges, geographic features and logistical challenges. "Our target customers in Kenya are middle-income people and those who aspire to be," he said. "We hope that they get accustomed to the taste of instant noodles in packages and eventually become customers of our more expensive cup noodles."
Though Nissin drew on its experience in India, it took inspiration from an Indonesian rival. "Watching Indofood [Sukses Makmur] have so much success in Africa pushed us into entering this market," said Taku Yokoyama, managing director of JKUAT Nissin Foods, a joint venture between Nissin and Kenya's Jomo Kenyatta University of Agriculture and Technology.
The Indonesian company, a member of the Salim Group conglomerate, is building a factory in Morocco for its Indomie brand of chicken-flavored instant noodles. Morocco will be the sixth African nation to produce Indomie, following Nigeria, Egypt, Sudan, Kenya and Ethiopia.
To compete, Nissin sells four flavors: tomato and onion, chicken, masala and nyama choma, which is based on a Kenyan recipe. A regular pack sells for about 30 Kenyan shillings (30 cents). Nissin is not making much profit on the imports but plans to open a factory at the university to boost its returns.
Toyota Tsusho took a different route to African expansion. In 2012, it spent more than $2 billion to acquire French trader CFAO, expanding its operations to the Francophone nations of western Africa. The Japanese trading house had already pushed into English-speaking eastern African countries but concluded that "going to western Africa on our own would be too difficult," said Takashi Hattori, Toyota Tsusho's senior managing director and chief regional officer for Pan-Africa.
CFAO last year opened its large shopping center in Abidjan, the economic heart of Ivory Coast, via a joint venture with French retailer Carrefour. The plan is to open 80 more shopping centers in eight countries by 2020.
"Falling commodity prices are dealing a blow to resource-rich countries like Nigeria and Angola, and business-to-business operations are slow," Hattori said. "But sub-Saharan Africa maintains one of the world's highest growth rates. Also, electricity and other basic infrastructure has become more readily available thanks to investment by Europe and China over the past decade."
Singapore, which is always hunting for ways to compensate for its small home market, is also active.
The government organizes a biennial Africa Singapore Business Forum to help domestic companies forge connections in Africa, and to help African ones develop operations in Asia. On Aug. 24 and 25, more than 400 businesspeople and government officials will gather for the fourth edition of the forum.
Singaporean companies -- like their Japanese counterparts -- find that Africa is not their natural playing field, "so we needed a little bit of proactiveness," said G. Jayakrishnan, Middle East and Africa group director of International Enterprise Singapore, the government agency that hosts the forum.
The push is paying off. Singapore-Africa trade value increased 67% in the 10 years to 2015, reaching 11.48 billion Singaporean dollars ($8.56 billion at the current rate). Singapore's investment in Africa grew 86% from 2005 to 2014, to S$22.1 billion.
Olam International has invested to expand wheat milling in Nigeria and cocoa processing in Ivory Coast. Hyflux set up a joint venture in 2015 to provide water and power infrastructure for township development in Tanzania.
South Korea is yet another rising force. LG Electronics is spreading its TVs and mobile phones, and has found creative ways to reach more customers. Remodeled buses bearing the LG logo roam the streets of Nigeria, providing maintenance services and acting as showrooms on wheels.
LG's regional sales in fiscal 2014 reached 4.5 trillion won ($4 billion at the current rate), up more than sixfold from 2005. Although Africa accounts for less than 8% of LG's consolidated sales, a company official said the continent could offset the increasingly saturated Asian market.
Overall, foreign direct investment in Africa ballooned 2.7 times from 2004 to 2014, to $709.2 billion, according to Jetro. Still, a number of investment disincentives remain. One concern is high labor costs -- relative to, say, the developing economies of Southeast Asia.
The average monthly pay for a factory worker in Nairobi ranges from $209 to $885, according to Jetro. In Abidjan, the average is in the $161 to $410 range. In Jakarta, workers earn an average of $252 per month, while in Hanoi the figure is $173.
"The problem with manufacturing [in Africa] is that the cost of labor is high," conceded one Zambian government official. Jetro Executive Vice President Katsumi Hirano explained the main reason is "African countries have to rely on imports for most of their staple foods, exerting upward pressure on prices."
Even so, companies have big reasons to get in now. Africa's population is increasing at a rate of around 2% a year -- much faster than the global growth rate of 1%. The African Development Bank's outlook report for 2016, published in May, says the continent's average real GDP growth rate will pick up to 4.5% in 2017, after touching bottom at 3.6% in 2015 amid the commodity slump.
The prospect of fast population growth and brisk consumption should keep trade and investment flowing -- provided governments and companies can figure out how to clear the hurdles that still stand in the way.
Nikkei senior staff writer Kazuki Kagaya, deputy editor Ken Moriyasu, and staff writers Wataru Kodaka, Kentaro Ogura, Akihiro Sano and Mayuko Tani contributed to this story.