Why Formal Trade in Africa lags, while Informal Prospers

A local market in Accra. ©EnterpriseAfrik

 While Africa’s trade with the rest of the world – such as with China and India – has been on the rise in recent years, trade between African countries still lags, especially when compared to other regions in the world. 

In an article published last month by Dr Álvaro Sobrinho, a leading business figure in Angola and chairman of emerging bank Banco Valor, intra-Africa trade today is at roughly 12%, around half the share 15 years ago. This compares to Europe where trade between regional borders is estimated at 70%, and Asia at 50%.

It has been argued that one reason behind low intra-regional trade in Africa is poor transport and logistics infrastructure, and the resulting high cost to transport goods. However, according to Edward George, head of soft commodities research at Ecobank, while formal trade flows between African nations might lag, informal intra-regional trade is more advanced than one might expect.

“I was just recently in Nigeria talking to rice traders – 1.5m tons of rice goes into Benin and then makes its way across the border into Nigeria, through Benin or Niger, basically to avoid taxes. So that is, you know, half the country’s consumption of rice,” George told an audience at the Africa Trade Finance Week in Cape Town last week.

“So informal flows are extraordinarily developed and actually very good at getting to market.”

Why does formal trade lag?

The potential for regional trade not being adequately captured can be seen in Ghana’s exports to Côte d’Ivoire.

According to George, Ghana’s official exports to Côte d’Ivoire last year were less than 1% of its total exports. Considering that Côte d’Ivoire is Ghana’s largest neighbouring economy, this is a meager percentage.

He added that a large reason for this is that the two countries have different legal and monetary systems, currencies and languages.

Ngozi Okonkwo, chief legal officer at Oando, agrees. “I can say, from my experience, one major challenge that we have had is trading with countries that have very stringent requirements. It is understandable that there are local content type laws in most countries in Africa but sometimes it can be a challenge trying to work within the framework of those laws, especially where it would not be [giving] opportunities to make the quantum of investments that you would want to make and have the degree of control that somebody would want to have in that country.”

She added that the language barrier between English and French-speaking countries is a particular challenge.

“It’s a lot easier when you speak the same language … and we need to understand the local language in some of the countries because that is where the trust is built, if you are speaking the same language. If you don’t speak the same language then clearly there is a significant complication involved and you have to rely on interpreters; it’s just not the same,” continued Okonkwo.

“And then, sometimes between the two trading companies, one will have to sort of make more concessions than the other because you can’t have two different applicable laws in the same contract. It has to be one law. These are different issues that keep coming up.”

George added that the East African Community has been successful in terms of this integration of laws and regulations, alongside the Southern African Customs Union.

“So the models are out there. I think the real key is how do we get the CFA franc zone and the West African monetary zone to be doing more trade together,” highlighted George. “That’s the biggest headache.

Source: How We Made It in Africa

7 Business Success Strategies in Africa

Africa, with a number of countries seeing considerable growth in GDP, is increasingly mentioned  in the media as a destination for investors and multinational companies. The continent’s urbanising population and growing consumer spending power is an attractive draw-card.
 

According to Sarah Boumphrey, head of countries and consumers research at Euromonitor International, sub-Saharan Africa is home to 12% of the world’s population. Furthermore, 20% of the world’s youth aged between 0-14 years live in sub-Saharan Africa.

However, the continent has 54 diverse countries, each with its own unique set of challenges, and it has been repeatedly said by investors interviewed by How we made it in Africa that companies cannot copy and paste their business model from elsewhere in the world into Africa. The environments are just too diverse, and operating in Africa requires different strategies to doing business in Europe or the US, for example.
In a video interview, Boumphrey highlighted a number of strategies that foreign multinational companies should consider for market success in Africa.

“Sub-Saharan Africa is a complex and fragmented market, but there are a minimum of seven strategies to success that any business should consider,” she said.

1. Do your research before entering the market
“First of all, gaining a thorough understanding of the market is crucial, and this includes understanding your competitors, suppliers, consumers and the operating environment,” highlighted Boumphrey.
Hakeem Ogunniran, managing director at UPDC, a property development company in the residential and commercial real estate markets of Nigeria, told How we made it in Africa that it was important for global companies entering Nigeria to spend some time in the country first to get to know the market.
“I think that is why South African companies are more successful in Africa than European companies. European companies listen to CNN, and they do beautiful analyses in their office in Europe to make decisions. For Shoprite (a South African-based food retailer), they leave Johannesburg and go to Nigeria to see everything themselves,” said Ogunniran.

2. Design products for Africa
“Secondly, design appropriate products, not cheap products,” advised Boumphrey.
“So Samsung, for instance, has a built-for-Africa range of products which includes a mobile phone with dual sim capability so that consumers can switch sims to get a better signal.”
 
3. Have your own logistics division
Many African countries lack quality logistics and transport infrastructure.
“Distribution is a major challenge so many companies take care of their own logistics,” said Boumphrey. “PZ Cussons, the UK-based consumer goods company which is extremely successful in Africa, attributes a large part of the success to its wide network of depots and factories.”

4. Look at a payment strategy
“Think carefully about [payment] strategy because many consumers are unbanked,” she continued.
For example, Boumphrey pointed out that internet-based companies such as retailer Jumia are successful in Nigeria as it offers options such as pay on delivery, where consumers can also pay in cash. Tunde Kehinde, co founder of Jumia Nigeria, told How we made it in Africa the strategy was also employed because the company faced the challenge of getting Nigerians to trust the use of online credit card payments.

5. Think about pricing strategies
“A pricing strategy is also crucial,” said Boumphrey. “Income inequality is massive across the region, with average per capita spending in Burundi coming in at around US$175 per capita, compared to over $9,000 in the Seychelles.”

6. Educating your consumers should be a marketing strategy
“Branding and advertising strategies are crucial and often have to go hand in hand as education,” suggested Boumphrey. “Unilever, through its Lifebuoy soap brand, has managed to do this through launching a hand washing campaign across emerging markets, including Africa.”

7. Partner with local companies
“And finally, thinking about market strategy, partnering with local companies is also crucial,” she added.
This strategy has been by far the most widely cited by investors and heads of multinational companies operating in Africa. Partnering with a local firm can be hugely helpful towards a company’s expansion into an African country as local partners can provide insight into the local consumer behaviour, have the valuable local networks in place for business, and have the operating or legislative know-how.
For example, Fusion Capital is a business financing and private equity house with a focus on the East African market. Mwijage Bishota, executive director and head of Fusion Capital’s Tanzanian operations, told How we made it in Africa that the approval process in the real estate market in Tanzania can be typically tedious. However, he said a way his firm usually mitigates this difficulty is by working with established local businesses, such as architectural companies, which can help to quicken the process. “Because they have been in the market for some time they have got that understanding [and] they have built the relationships within the various approving institutions.”
“Many companies thinking of entering the region for the first time or enlarging their footprint could do a lot worse than learning from others,” concluded Boumphrey.