Executive Summary

Sourcing products and services from Africa is an option that makes sense to more and more firms, both international and African, each year. Though the spikes in inward direct investment during the global financial crisis were temporary, the longer term trend of increasing flows into Africa is set to persist (see chart, below). As companies expand their supply chains into the continent, inward investment into sub-Saharan Africa is expected to grow by more than a third from 2015 to 2019, while investment into North Africa is set to rise by nearly 70% in the same period.

Pull factors include cheap labour – unskilled wages in East Africa are approximately a tenth of those in China – and abundant raw materials. A global trend towards shorter, simpler supply chains also makes the region particularly attractive for European firms. African governments are increasingly carving out a role for the private sector in their development and industrialisation strategies, and are introducing incentives such as duty-free exports and cheap land leases in target sectors. Infrastructure improvements to pave the way for further investments are in full swing, particularly in coastal areas, and the difficulties associated with exporting from African ports are diminishing slowly but surely. Large cities such as Nairobi and Lagos are also gaining access to broadband Internet, supporting a nascent services outsourcing sector.

Perhaps most importantly, an African middle class is emerging. Though affluent consumers with significant disposable income still represent a relatively small fraction of most African national populations, a combination of rapid wealth creation and urbanisation, particularly in regional hubs, is starting to catch the eye of some in the international business community. As a consumer market, the continent is likely to represent one ofthe biggest growth opportunities in coming decades, and this is starting to factor into the decisions of firms when they choose to establish or expand local production bases. Some firms are already wholeheartedly pursuing the local market, while others currently exporting from Africa are starting to explore opportunities throughout the continent.

The Economist Intelligence Unit (EIU) expects Sub-Saharan Africa’s GDP per head to grow by an average yearly rate of 2.1% over the 2015-2019 period (inclusive). Yet wealth creation will progress much faster in the most vibrant and diversified African economies, such as those in East Africa working to develop a manufacturing and services base . Relying on imports to service the growing demand for consumer goods is neither desirable to locally-based firms, who wish to have cheap, responsive supply chains; nor to consumers, who pay a premium for imports; nor to governments, who wish to capture more added value in the domestic economy.

And yet Africa, long exploited for its raw materials and flooded with cheap consumer goods from Asia, remains a largely overlooked destination for manufacturing and services. Many companies remain daunted by a prospect they view as risky. Data indicating rising inward investment flows, improving infrastructure and a rising middle class take time to overpower lingering impressions of dirt roads, impoverished populations, political violence, red tape and entrenched corruption. In many parts of Africa these impressions unfortunately still hold true. Forty out of 47 African economies were ranked in the bottom half of the World Bank’s 2014 global ”Ease of doing business” scoreboard. But Africa is a very large, diverse continent. Even at a sub-national level, some areas may be mired in conflict while others experience an economic boom. Nigeria – with Boko Haram causing ongoing troubles in the north-east, but Lagos in the south-west seeing growth in banking, retail, manufacturing and even a film industry – is just one such example.

The companies featured in these case studies all have one thing in common: a long-term vision of Africa, not simply as a source of minerals or market for imported goods, but as a vibrant, well-functioning environment for manufacturing and services. They want to get in early on the action. Rather than waiting around for local suppliers to reach a certain standard, they are committed to facilitating local partners to climb the value chain.

This report explores how established domestic and multinational firms have addressed the challenges of managing and developing their supply chains in African countries. The hurdles facing UK-based manufacturer of quality leather goods, Pittards, as it looks to expand its manufacturing presence in Ethiopia, demonstrate the need to actively engage with local suppliers to improve quality. Cafédirect, an ethical hot drinks brand based in the UK, is grappling with the impact of climate change and urbanisation on the long-term viability of tea, coffee and cocoa farming in Africa.

Multi-national conglomerate GE is establishing a regional manufacturing and services hub in Nigeria. In the process of developing a local supplier base, as well as providing access to training and finance, it is encouraging its global suppliers to invest in local partners. Services outsourcing firm Digital Divide Data (DDD), also based in the US, similarly offers opportunities for African talent to connect into global value chains. Finally, Kenyan retail multinational, Nakumatt, is growing its footprint across East Africa as fast as the infrastructure and customer base allows.

Key findings

• Misunderstanding of Africa as a manufacturing and services environment is still rife. Many people underestimate the range of activities that can be carried out, yet those who do decide to invest in Africa are prone to underestimate the effort required to ensure a reliable supply of good quality products.

• The tendency of the international business community to underestimate Africa as a manufacturing and services location has been a competitive advantage for the early movers featured in this report. But as interest in the region grows, time may be running out to benefit from the early-mover advantage.

• Investors with existing international client and supplier networks have an advantage over local competitors, in that they are able to take on more risk when launching operations in Africa, where the client and supplier bases are still emerging.

• The firms interviewed do not view localisation policies – at least where these are well designed and implemented – as a hindrance, as such policies are aligned with their own strategies to move up the value chain in Africa.

• Africa’s advantages as a source of agriculturally-produced raw materials are eroding, as land is lost to climate change and agricultural labour is lost to urbanisation. Buyers may therefore need to help introduce new methods and technologies to improve yield and quality, and to mitigate the impact of climate change, to ensure sustainable supply in the long term.

• Lack of finance is still a major constraint for smaller businesses and farmers. In order to help suppliers scale up their operations and access new equipment – which is beneficial to both supplier and buyer – some firms create supplier financing mechanisms, act as guarantors for their partners, or commit to paying premiums for higher-quality products.

• Intra-African trade remains well below potential, and this is a source of frustration for companies wishing to extend supply chains beyond or among the coastal nations.

• Wages are incrementally rising as African economies develop, and other costs (notably oil) are also set to go up. As the cost advantage compared to Asia gradually diminishes, gains in productivity and value- added will become more important over the coming five to ten years.

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This report from The Economist Intelligence Unit is part of the Growth Crossings series.