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Africa: The World's Next Logistics Hot Spot

Dec. 7, 2015
While Africa offers tremendous opportunities, U.S. companies should be prepared to build the infrastructure needed to make and transport their goods.

Much like China 30 years ago, Africa possesses the key ingredients for high growth: rising urbanization and a growing middle class. This fact has not escaped the global economy as foreign direct investment (FDI) into the continent surged to $128 billion (up 136%), hitting an all-time high in 2014.

Coal, oil and gas, as well as manufacturing, were the most attractive sectors, accounting for 38% and 33%, respectively, of the total announced FDI last year, according to the Financial Times' 2015 Africa Investment Report. Other sectors receiving significant funding were telecommunications, media and technology, financial services, consumer products and retail, according to the Ernst & Young Attractiveness Survey Africa 2015.

Real estate, hospitality, and construction saw healthy investment and the agriculture sector is showing promise as well.

Western Europe and intra-African investors remain the largest sources of FDI into the continent, while investors from the U.S., France, UAE, Portugal and China were particularly active during the year, according to E&Y. Looking at the source of capital, France is the largest investor at $18.3 billion, followed by the U.S., which had the largest number of projects (97). In total, 464 foreign companies invested in Africa last year.

However, things are still a little rocky in that E&Y's 2015 survey shows that only 53% of investors believe the continent's attractiveness has improved, and that was down from 60% in 2014. Looking ahead investors are also a little less optimistic. One large barrier to investment is political risk factors, such as instability and corruption.

"In an emerging market such as Africa the challenges are complex as each country is a unique market with different economic drivers," explains Ole Trumpfheller, vice president of business development and sector head of energy & chemicals with DHL Supply Chain/Deutsche Post DHL, based in South Africa. "There are different cultures and languages as well as macroeconomic and microeconomic factors to consider. It's different than operating in more mature economies," he adds.

DHL, which has been operating in Africa for many decades, has a presence in every country and territory in Africa. "We work with our customers to find the optimal solution for locating our facilities," explains Trumpfheller. And the company uses its global perspective and resources to adapt to each country's landscape. Their supply chain is multi-country, multiple divisions and end-to-end.

The Agility Distribution Park, one of a series of logistics hubs that Agility is building across the African continent, will provide international standard logistics infrastructure to local, regional and global companies operating in Ghana.

South Africa in particular is one of the company's key growth areas. DHL is investing in both the infrastructure and assets in the region. "South Africa's exceptional geographic location as the gateway to Africa, and Nigeria's growing gross GDP" are reasons for the company's announcement in October that it will upgrade its facilities and shipment handling systems throughout the region, says Frank Appel, CEO of Deutsche Post DHL Group.

The company will invest in its Supply Chain and Global Forwarding divisions in South Africa, building a TAPA ‘A' certified warehouse, "strengthening the country's growth capabilities as the hub for distribution into the region."

Infrastructure Challenges

While South Africa is the most mature market in Africa, it has its challenges with regard to reliable electricity, which requires load shedding. Other countries are even more challenging with regard to underdeveloped infrastructure, lack of air connectivity and custom inconsistencies, which can lead to complex customs clearance processes.

These challenges, however, are not stopping logistics companies from expanding in the market. "Africa without any doubt is a huge growth opportunity from a consumer spending point of view," says Geoffrey White, CEO of Africa region at logistics firm Agility.

(White was a speaker at the recent Africa Global Business Forum in Dubai.) To serve this growing market Agility plans to build about 70 distribution hubs across the continent, with the first phase of projects in Côte d'Ivoire, Nigeria, Ghana and Angola. They are set to break ground within two years.

While sub-Saharan Africa currently spends about $6.8 billion per year on building roads, this figure needs to be increased to at least $10 billion, according to the Economist Intelligence Unit. And the World Bank estimates that sub-Saharan Africa needs $93 billion of new spending on infrastructure annually over the next 10 years.

The current lack of infrastructure means that doing business on the continent requires companies to perform tasks such as building service roads and installing power capacity. However, those investments pay off quickly. "In Africa, the market is so underserved by logistics firms that just by building the capacity the business is there," White says. "You can just absorb the natural growth that's already there."

And many companies are capitalizing on this opportunity. For example Avery Dennison announced in October that it has opened its first distribution center in Nairobi, Kenya, to serve the Eastern African region and to expand its footprint in emerging markets. "In addition to the DC, we will continue to invest in our people, to build a strong local workforce for sustainable business growth," points out Anil Sharma, general manager of Avery Dennison Materials Group for South Asia and Sub-Saharan Africa.

Chinese companies are in on the expansion as well. Aviation Industry Corporation of China recently announced it will establish three warehouses for spare parts, an aviation training center, two regional marketing offices, and two maintenance and support centers

The civilian aviation training center will be located in South Africa, while the two maintenance and product support offices will be in Tanzania and the Republic of Congo. The three warehouses will be in Kenya, Zimbabwe and the Republic of Congo.

Another Chinese company, Wuxi Suntech Power Co., announced earlier this year that it has established a storage warehouse in Cape Town as part of the its growth strategy into the burgeoning sub-Saharan African solar market. Initially capable of storing 500 kW of solar modules, the facility will be expanded to 1 MW.

Pick Your Markets Carefully

Growth is Africa is set to continue at a healthy rate and many more companies will begin to set up distribution networks. "Companies need to pick markets carefully to fit their capabilities, and know what capabilities they need to add for success in each place," observes Jorge Camarate, Strategy& Partner, a partner of PwC, which recently released a study on "Creating Value in Africa."

To best survey each country's landscape, Peter Hoijtink of Strategy& Partner suggests companies start by studying a market's wealth, measured by GDP per capita, and institutional quality measured by the World Bank Doing Business Index.

Success on the African continent is something "shareholders have been dreaming of," says Camarate.  

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