Africa is emerging as a promising destination for businesses.
The attractiveness of the African market is driven by trends such as a youthful and growing population that’s rapidly urbanizing, a focus on economic diversification and industrialization, imperative to close the infrastructural gap, and the increase in mobile connectivity.
Although these are all promising opportunities and the reason why Africa holds the fastest-growing economies over the next decade, these opportunities spur from the current reality and challenges that businesses have to overcome on the continent.
The current business landscape is improving but Africa has the most countries (30 countries) in the last percentile (48 countries) of the World Bank’s Ease of Doing Business Index compared to any other region.
Companies have to develop innovative business models and resilient strategies to capture these promising growth opportunities in Africa. To build out these strategies, companies have to be aware of the challenges that exist to be able to factor it into their business model.
Although challenges will differ across the 54 nations on the continent, here are highlights of the main challenges that exist for businesses in Africa.
A Price-sensitive Market (with little market data)
Although Africa has a growing GDP and the total addressable size of the market is $2.19 Trillion (2017), the reality is that the purchasing power of the average consumer in Africa is still very low, with Sub-Sahara Africa’s GDP per capita of $1,573 (2017).
This is significantly lower in comparison to the world average GDP per capita of $10,721 (2017).
With a large base of consumers that have become even more price-sensitive, companies spend more money on marketing to connect with a small base of consumers that have the willingness to pay for their products.
This difficulty is compounded with the dearth of market data and information resources that could help companies locate and understand their customers in Africa. Companies have to spend the extra resources to source extract the market insights they need to find and serve their customer base.
Finding Skilled labor
The skill gap in Africa’s labor market is still very high. Although there is a large number of young people on the continent (60% of the population is below the age of 25), finding skilled talent is a major challenge for companies looking to scale their operations.
In a lot of Africa countries, the education budget is not prioritized and most schools churn out graduates that are good theoretically but lack the technical and practical knowledge.
There is also a lack of soft intangible skills such as problem-solving, communication, and leadership skills which are very important to ignite high-growth productivity.
Companies end up wasting a lot of time to find quality talent or spend more money training the talent that they can find. Both cases can be detrimental to business growth.
A widespread lack of access to electricity in Africa is another major challenge for businesses. This lack of access to electricity primarily constrains modern economic activities, provision of public services, and quality of life.
Africa electricity access significantly lags compared to the world and the variation within the continent. Its current average 43 percent access rate to electricity is half of the global access rate of 87 percent.
The insufficient supply of electricity can significantly increase the operational cost of businesses that sometimes have to develop self-sufficient solutions to stay operational, reducing their competitiveness in a global economy.
Supply chain challenges
Moving around in Africa could be a logistical nightmare. The substandard road infrastructure and the multiple challenges and barriers involved in moving move between countries are a major cause for disruption in a business’ supply chain.
Not only is it difficult to get goods efficiently to the end customer, but it is also quite challenging for people to meet up to facilitate business transactions and deals in a region where face-to-face meetings are prioritized to build trust.
The infrastructural gap imposes a bottleneck that individual companies cannot solve, so they have to find ways around this issue. The solution always eats into a business’s profit.
Tough government policies and difficult regulatory landscape
The main reason why 62.5% of the last quartile of the World Bank’s Ease of Doing Business Index is occupied by Africa countries is because of the challenging regulatory landscape on the continent.
Across the continent, it is quite challenging to start a business, enforce contracts, register new property, get regulatory permits, and protect investors.
Although African countries have shown significant progress in improving the ease of doing business, businesses still have to jump through multiple administrative hoops to get to their business goals.
With a changing and ever-evolving landscape, along with unfavorable government policies that change frequently, it is hard for businesses to build consistent strategic plans. This inherently increases the cost of doing business in Africa.
The high cost of securing capital and moving it around
The cost of capital to start and run a business in Africa is high relative to other regions.
Banks give out loans that come with high-interest rates. Repaying these high-interest rates limit the amount of capital a company has to put back into the business to fuel growth.
That is the reason a lot of businesses in Africa cannot reach significant scale to expand globally. Banks keep these rate high because they lack the resources to prove a company’s creditworthiness.
To make the region reach its growth goals in the next decade, these challenges have to be solved and businesses that innovate to help individuals and other companies overcome these challenges will be boosting the economic impact of the continent – on its path to hit its growth goals.