Africa’s Hidden Wealth of Business Opportunities

Look past the continent’s reputation for social problems, and you’ll see emerging consumers and businesses ripe for M&A, partnerships, and B2B relationships

By Harold L. Sirkin

It’s hard to feel upbeat about Africa. The continent seems perpetually mired in poverty. Some of its “leaders” rank among the most corrupt and brutal on earth. Infrastructure barely exists in many areas. Politically manipulated famine and genocide threaten some populaces. Disease runs rampant, and the ability to treat it remains rudimentary.

And forget about business. Indeed, even if you read the business and financial press carefully, every issue, front to back, you won’t find more than an occasional story about African businesses—or business in Africa. Business just doesn’t seem to be a priority in Africa.

Or does it? While most of us have trained our eyes in recent years on the rapidly developing economies and companies of China, India, Eastern Europe, and Latin America, parts of Africa also have surged.

Some African economies, thanks to economic and political reforms, are growing impressively, bringing new wealth to the region and making local companies attractive merger-and-acquisition targets. During the July-September quarter of 2010, for example, Japan’s NTT (NTT) announced plans to purchase Dimension Data, a South African-based IT powerhouse with operations in 47 countries, and Wal-Mart (WMT) made known its intention to buy a controlling share of Massmart (MMRTY), the South African operator of nine wholesale and retail chains in 14 sub-Saharan countries and the third-largest distributor of consumer goods on the continent. (Massmart shareholders approved the Wal-Mart takeover in mid-January.)

During the first 10 months of 2010, in fact, the continent saw a record $54 billion in mergers and acquisitions—an amount larger than the combined gross domestic product of Burundi, Central African Republic, Djibouti, Gambia, Guinea-Bissau, Lesotho, Liberia, Niger, Rwanda, Sierra Leone, Swaziland, Togo, and Zimbabwe.

Closer Look

Many Americans, of course, know Africa mostly from what they’ve seen in the movies: Invictus, The African Queen, Hotel Rwanda, The Last King of Scotland, Blood Diamond, and the like. But that’s like claiming to know Boston because you watch Boston Legal or have seen every episode of Cheers. To really know a place you must drill down beneath the surface to see how it’s wired.

Last summer, six of my Boston Consulting Group colleagues from our Global Advantage Practice did just that. They looked beyond the depressing stories about the latest threat of civil war in Africa and carefully observed the business of business on the continent, drilling down to the company level.

As their report, The African Challengers: Global Competitors Emerge From the Overlooked Continent, notes in its introduction, “The conventional view is that Africa—with 20 percent of the world’s land and 15 percent of its population, but just 4 percent of global GDP—has been down so long it will be hard for it to ever rebound.” This view is understandable, they noted, but out of date. Between 2000 and 2008, Africa’s overall GDP (even accounting for the many countries that are certifiable basket cases) grew by an impressive 5.3 percent per year (adjusted for purchasing power parity), compared with 4 percent globally. Over that same period most African equity markets also outperformed global indexes, sometimes by wide margins. Egypt’s stock market, for example, returned 39 percent annually, compared with 2 percent for the MSCI World Index.

Even after other regions went into a deep recessionary funk, Africa continued to grow, expanding 2 percent in 2009, while U.S. GDP declined 4 percent, the EU’s by 2.8 percent, and Latin America’s by 1.5 percent.

African Challengers

Drilling deeper, they found a large cadre of rapidly growing firms “hidden in plain view.” These companies are competing regionally and in some cases globally. They designated the top 40 of these companies, ranging in size from $350 million to some $80 billion in annual sales, the “African Challengers.”

They also found a critical mass of African economies, those of Algeria, Botswana, Egypt, Libya, Mauritius, Morocco, South Africa, and Tunisia, whose per capita GDPs exceed those of the much-heralded BRIC nations: Brazil, Russia, India, and China. They dubbed these countries, which have a combined GDP of more than $1.5 trillion, the “African Lions.” Botswana, for example, had a 2008 per capita GDP of $13,392. Mauritius had a per capita GDP of $12,079. Brazil’s, by comparison, totaled $10,296.

Nearly half of the African Challenger companies (18 of 40) made their home in South Africa. Egypt had seven and Morocco six. Not all of the Challengers had headquarters in the Lion countries, however. One Challenger, Ecobank Transnational (ETIT), resides in tiny Togo, a country of 6.5 million. With assets of $8.3 billion (2008), more than Togo’s GDP (estimated at $5.5 billion in 2008), the banking group has a presence in more African countries than any other bank in the world.

Globality’s Spread

So what does all this mean?

First, it means that the “globality” phenomenon, in which everybody from everywhere competes for everything, has spread faster and farther than anyone could have anticipated even a few years ago. “Global economy” is no longer a catchphrase. It’s a roaring reality. Even the BCG “Global Challengers,” the hottest 100 companies from the rapidly developing economies, will face challenges in the future, just as Western companies are finding themselves challenged now. Nobody is safe. The global economic free-for-all we predicted some two and a half years ago has begun. Companies with long-term growth plans will need to join the fight.

Globality’s continuing rapid advance generates not only challenges but also opportunities. Just as we have seen in Asia and Latin America, economic growth and prosperity create new consumers and B2B markets. With approximately 1 billion people, the African continent ranks second only to Asia in population. As Africans rise out of poverty, they turn into prospective customers. As the continent’s businesses prosper, they also become potential customers as well as partners, collaborators, suppliers, M&A targets, and even suitors. Between 2003 and 2008, annual revenues of the 40 African Challengers increased some 24 percent annually, compared with 11 percent for the Standard & Poor’s 500-stock index, 9 percent for the Nikkei 225 companies, and 10 percent for the DAX 30. The African Challengers also have been more profitable than most Western firms. A $1,000 investment in November 2000 in a hypothetical African Challengers Index would have grown into $9,000 by November 2009, compared with $3,030 for a similar investment in the MSCI Emerging Market Index and $920 for an S&P 500 investment. Western executives need to recognize there’s serious money to be made in Africa.

Finally, Africa’s emergence as a serious economic player—and playing field—means executives must dig deep into the cultural and political intricacies of the continent. More than Asia and Latin America, Africa constitutes a minefield of tribal rivalries, mixed signals, and potentially dangerous undercurrents. Not everyone is bent on modernizing. Many dangers lurk, including physical threats at times. But they shouldn’t preclude the continent’s rich business opportunities.

I talked earlier about drilling down. In Africa it’s a vital necessity.

Harold L. Sirkin is a Chicago-based senior partner of The Boston Consulting Group and author, with James W. Hemerling and Arindam K. Bhattacharya, of GLOBALITY: Competing with Everyone from Everywhere for Everything (Business Plus, June, 2008).