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Lessons from Singapore companies in Sub-Saharan Africa
OVER the past few years, business leaders and investors have become increasingly aware of the economic potential of Sub-Saharan Africa's burgeoning consumer market. Currently, the region is home to one billion people, or almost 14 per cent of the total world population. However, it accounts for a meagre 2.2 per cent of global gross domestic product (GDP).
With an enormous amount of natural resources and a young population willing to learn and to work, Sub-Saharan Africa holds immense potential for entrepreneurship and a vast but untapped market.
Singapore is an increasingly keen player in the Sub-Saharan African arena. A growing number of Singapore companies, big and small, have been drawn to the region. They have ventured not only to familiar South Africa, but are also attracted by the blossoming tech industry in East Africa and by the booming population in West Africa, which offers the promise of a huge untapped market.
Nigeria, in West Africa, is an example of an enormous underexplored market. Aaron Fu is a Singaporean businessman and managing director at MEST, a school for African entrepreneurs that only admits the cream of the crop business ideas with the best potential to become successful startups.
Mr Fu believes that the future is in Nigeria, saying: "I have no doubt in my mind that Lagos is going to be at the heart of all the changes. It's a very large market." Lagos is Nigeria's economic capital. Nigeria is set to become the third largest country by population globally by 2050.
But what do these Singapore companies face when they try to set foot on the African continent? What are the main challenges that a successful entrant to the African market has to overcome? The companies - from small and medium enterprises (SMEs) to large multinationals - all face similar concerns and obstacles while trying to succeed in Africa.
The need to find and engage with trustworthy local partners is prevalent, even for the big companies. But for SMEs, local partners become essential as these firms do not extend their business throughout the whole value chain. They usually need local distributors to store inventory and to reach the end consumers.
A business partner on the ground also helps the new entrant to better navigate local laws and deal with bureaucracy. "A local partner can be beneficial in terms of building business relations and navigating local regulations," said William Tay, executive director at Pacific International Lines (PIL), one of the largest ship-owners in South-east Asia. The company has operations in various African countries.
A local partner can also give a more realistic view of the market for the foreign company's products. "The lack of a local resource may result in difficulties such as a lack of market knowledge and increased time in doing business," said Edwin Kwan, CEO and founder of Build Africa Industry, a Singapore company that invests in small businesses in Africa.
The process of searching for a good local business partner must include a thorough due diligence of its creditworthiness to avoid any potential pitfalls. But how to find a good local partner? The means to do so vary. The trust issue can be somewhat attenuated if the local partner is found through personal networks or through recommendations.
IE Singapore works as a vital link for Singapore companies that have no network in the new market. They are essential in arranging introductions to potential local partners. Singapore business executives seeking to link up with an African counterpart may also turn to the African embassies in Singapore or the local Chamber of Commerce in Africa.
"IE is helping us find a partner through its Johannesburg centre, and is also trying to identify more avenues for us to engage the Department of Basic Education (DBE) of South Africa. African embassies in Singapore also play a critical role in helping set up some key meetings as well", said Yeo Tiong Hui, assistant director at Educare, a Singapore company that provides education consultancy services and is keen to set up shop on the African continent.
After securing a good local partner, the companies face a range of infrastructure issues that vary in importance from country to country, but are usually consistent across Sub-Saharan Africa. Lack of infrastructure such as roads, railways, ports and airports largely deter a fast expansion from one African country to another.
"Right now, infrastructure can be problematic in Africa. It makes things expensive, and that cost has to be borne by someone. The challenge of infrastructure makes the whole logistics exercise more expensive," said Ranveer Chauhan, managing director and chief executive officer of the Edible Oils and Natural Rubber business unit of Olam International Ltd, a Singapore company and big player in the agribusiness sector. It is present in 24 countries across the African continent.
Intra-regional import tariffs and lengthy processing time also add to the cost of moving a product across an African country border. Lack of security also raises costs as insurance companies will charge more to secure cargo being transported through dangerous areas. In some cases, a product produced locally in Africa ends up costing more than a similar product imported from China.
Political instability, dealing with corruption and going through excessive red tape and bureaucracy also score high among the issues faced by Singapore companies in Africa.
Chan Chek Chee, chairman of Asiatic Agricultural, pointed to the deterrents that a highly bureaucratic state can cause: "The bureaucracy is the most difficult problem to tackle. Import procedures themselves are already highly complicated. All of this makes the delivery time longer, if not late, and makes the product a lot more expensive than it could be."
Asiatic Agricultural is a Singapore company that manufactures and distributes pesticides for crops and products to control parasitic diseases in livestock. The company started exporting to Africa 20 years ago.
Another concern shared by some companies is the difficulty of repatriating revenue generated in Africa. Companies create subsidiaries in Mauritius or Dubai, which have double-taxation avoidance agreements with a number of Sub-Saharan African countries. After the revenue is transferred to one of these places, the company can finally remit it back to Singapore.
"Mauritius has the same tax system as Singapore, so it's very compatible. It has 19 double-tax avoidance treaties and investment protection treaties with Sub-Saharan African countries, whereas Singapore does not.
"I'd recommend anyone from Singapore looking at developing a business in Africa to set up a company there," said Graeme Robertson, CEO and chairman of IntraAsia. IntraAsia is a Singapore investment firm with businesses in Africa ranging from mining to agriculture, real estate and financial services.
Obtaining financing can also be difficult. African banks usually charge a high interest rate on loans. Obtaining financing from international banks has the added risk of exchange rate volatility as the loan is usually made in American dollars, but is spent in local currency.
Singapore companies seeking a foothold in Africa must be prepared to invest for the long haul. Even with the help of IE Singapore and the Singapore Business Federation (SBF), it will undoubtedly be a challenging journey that will require good preparation and a real understanding of the new market. But the rewards can be huge.
"We see exciting times. We already have a strong presence in the continent, and there are still more projects and opportunities available for us that we are willing to invest in right now. Africa is opportunity-rich", said Olam's Mr Chauhan.
Abhijit Janbandhu, from MOI International in Ghana, said: "Africa is going to be the place to do business. Most of the countries still don't have factories here. The growing consumer market in Africa will create huge opportunities for companies to start producing locally.
"Urbanisation is currently happening. A middle class with disposable income is emerging. There is a high acceptance of technology like mobile money transfers. All this is going to give rise to employable people."
MOI International is a member of the Mewah Group, a 60-year-old Singapore company specialising in edible oil, and a large producer of palm oil.
By 2030, nearly two-thirds of the estimated 303 million African households will have discretionary income.
This massive expansion of the consumer pool - an addition of almost 90 million consumers in just 10 years - will certainly encourage many international players to invest in the region. The first entrants to this market will secure a firmer position and more chances of success.
- The writer is a research associate of the NTU-SBF Centre for African Studies, a trilateral platform for government, business and academia to promote knowledge and expertise on Africa, established by Nanyang Technological University and the Singapore Business Federation. He can be reached at firstname.lastname@example.org