Business in Africa

Corruption, erratic judicial systems, crime - many entrepreneurs from industrialized countries see Africa as the lost continent and too insecure to set up a business there. Yet, Africa does offer plenty of business opportunities: While the economy in Europe is hardly growing or even stagnating, some African countries have double-digit growth rates. Looking at the whole continent, the World Bank is expecting a growth rate of more than five percent this year. Another advantage in Africa is the abundance of natural resources in many countries.

Deficits create demand

The big need for development in many areas, such as infrastructure, also creates opportunities for business. Across Africa, some 80 percent of people have no access to electricity, more than 40 percent lack access to drinking water, roads are often in bad condition. Senegal-born Ababacar Seck from the engineering agency Pecher, a consultancy for water, sewage treatment and infrastructure projects, says "There are many deficits. But where there are deficits, there is big demand, too."

Funding is often a problem, however. There's simply not enough investment, says Hartmut Sieper from consulting agency, Trans Africa Invest. "If you have funds and invest them wisely, you can benefit from a number of niches and gaps in the African market, which are not filled for the simple reason that there's a lack of money."

Risk higher, but manageable

Risk is slightly higher when doing business in Africa than in Europe, admits Heinz Rittmann from Germany's Association of Construction Companies (BGV). "But your chances are higher too because the yield is higher." In Germany, Rittmann says, building companies often have to budgetize. "And they will never get the same yields as they would in Africa." Machines and construction material tend to be more expensive in Africa than in Europe, but wages for workers there are of course a lot lower.

In addition, the higher risk for companies is manageable, according to Rittmann, if they follow some rules: When it's the first time for a company doing business in Africa, they should only apply for solid financial tenders and not take part in local calls for tenders. "It has to be a safe investment. In general, our companies have some reservations towards doing business in Africa. So it's important that we bridge this gap between the negative image and reality," he says.

A safe investment is guaranteed, according to Rittmann, if tender calls are backed by financial institutions, such as the World Bank, the European Investment Bank, or the German Bank for Reconstruction. Hartmut Sieper, from consulting firm Trans Africa Invest, has another reason why the risk can be more predictable than entrepreneurs think: "In some projects and in some countries, an investment can quite possibly and realistically break even within the first or second year." This limits the risk to a fairly short time frame.

Tough competition

High yields and rich deposits of natural resources have meant that other nations are already doing business in Africa, of course, and they can be tough competition for European investors. Chinese companies, for instance, often have it easier in comparison to German firms, says Rittmann, because they will easily get funding guarantees from the Bank of China without having to fill out complicated applications, as is the case in Germany.where the application process simply takes much too long, says Rittmann.

Yet, German companies can still win against Chinese firms, says Rittmann, "when we offer technical alternatives. Our strength is that our entrepreneurs can think outside the box, and so they can make suggestions how to do something better than how it's described in the tender call."

Help build a market

When a Chinese firm gets a tender, they will bring everything they need – funds, workers and machines to Africa with them. This means that local firms don't benefit and local people don't get jobs. "The Europeans have to make sure that the African middle class can grow further", says Ababacar Seck from the Pecher engineering agency, "so that Africans get into a position where they can afford expensive goods from Europe, above all from Germany."

The African continent is not yet a big consumer market. But the middle class is growing, according to Germany Trade and Invest, an agency which compiles information on foreign trade for the German Economics Ministry. According to its latest figures, some 60 million households in Africa already have more than 3,000 US dollars a year, and in three years' time, this number is expected to grow to some 100 million households.

Author: Insa Wrede / nh
Editor: Gregg Benzow