Can Africa fully open its doors to company expansion?
We have all heard talk in the industry about Africa being the latest hotspot for industry growth. The African Bank saga however, proves that while there is massive potential for growth on the continent, the economic environment which companies operate within is extremely volatile.
While many can argue that the short comings of African Bank was mainly as a result of poor leadership and bad business decisions, one cannot help but wonder if the institution would not have been less dramatic had it operated within an economic and regulatory market which is slightly more sophisticated than South Africa. This leaves companies that are thinking of expanding into the African market to proceed with caution.
Look for hidden gems
Despite this, there is growth on the continent, provided that companies know where to unearth these hidden gems. According to a report released by PriceWaterhouse Coopers (PwC), Chief Executive Officers (CEOs) around the world are increasingly recognising the untapped potential of Sub-Saharan Africa. This is driven by Africa’s unparalleled demographic edge or demographic dividend. By 2040, Africa is expected to have the biggest labour force in the world and experiencing faster economic growth than any other region.
Most major corporations are already active in at least one of the four largest cities in sub-Saharan Africa, namely Lagos, Kinshasa, Nairobi and Johannesburg. However, PwC economists believe it is the Next 10 biggest cities in sub-Saharan Africa that should also be exciting for foreign investors.
Stanley Subramoney, Strategy leader of PwC’s South Market Region, says that the population of these cities is projected to almost double by 2030, growing by around 32 million people. In fact, the latest UN projections show that by 2030 two of the Next 10, Dar es Salaam and Luanda, could have bigger populations than London currently has.
This is important for the insurance industry bearing in mind that there is a growing middle class in many of these African countries. Expansion into these countries off the back of proper customer segmentation and product development where fit-for-purpose products are designed specifically for those markets will mean that companies become relevant, and the true value of insurance is recognised by the public.
Closer interaction reduces costs
Subramoney points out that cities are the typical entry points for businesses trying to expand into new overseas markets, because they enable closer interaction with customers in a relatively small geographic space, which in turn helps to contain distribution costs.
“The report projects that economic activity in the Next 10 cities could grow around $140 billion by 2030. This is roughly equivalent to the current annual output of Hungary,” he says.
This is a conservative estimate as no premise has been made for real exchange rate appreciation despite relatively strong projected growth in these economies.
“In addition to the trends with regard to high rates of Gross domestic product (GDP) growth, rapid urbanisation and the so-called demographic edge that sub-Saharan Africa possesses is important. A number of other economic phenomena in the region are starting to appeal to the global investment community,” says Dr Roelof Botha, Economic Adviser to PwC.
The combination of urbanisation and a sustained growth in per capital incomes, which has led to demand shifts that are benefiting household consumption expenditure, means that there will be space for the insurance industry to grow in Africa. The correlation between interpersonal interaction and growth means that intermediated players will play a vital role in this growth, provided that there is an enabling regulatory environment that facilitates this growth.
Regulation importance
One must realise that expansion into Africa is not as easy as expanding into Europe or Asia. Regulation of the financial services sector in the rest of Africa, outside of Nigeria, the Democratic Republic of the Congo, Kenya and South Africa, is almost non-existent and customers will have little to no experience with any financial services related products.
The South African insurance industry is concerned about the new pieces of regulation the Financial Services Board (FSB) is hoping to introduce into the South African market, and rightly so given the pace of the implementation. However, one cannot ignore the fact that regulation has professionalised the industry and has somewhat rooted out most of the bad appleswithin the industry.
Editor’s Thoughts:
Expansion into Africa can offer companies significant opportunities for growth. Research undertaken by a top US insurer shows that Africa is becoming as important as Western Europe when it comes to short-term premium growth. So the continent does offer massive potential to companies. However, this needs to be done off the back of proper customer segmentation and products which are specifically designed for those markets. Let us know your thoughts, please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].
