The Rise & Rise Of Africa’s Consumer Market

While the traditional view of Africa has been as a source of valuable natural resources, it is quietly but rapidly becoming a significant market for technology-based consumer products.

At one time, the African market was considered a ‘dumping ground’ for surplus products from the developed nations. Not any longer. The African consumer is making specific demands – good quality combined with affordable prices and products tailored to its environments. As this Cover Story illustrates, manufacturing companies that can fulfil these criteria are making fortunes and expanding at breakneck pace. The competition for the hearts, minds and pockets of the growing numbers of African consumers is hotting up and local manufacturers are also riding the wave. Asia is well ahead in the race at the moment but the West is battling to retain its traditional position as number one. Who will emerge victorious?

Kevin Rollins, the former President and CEO of Dell, once famously said, “Consumer electronics is a challenging one”. Africa, the world’s poorest but fastest-developing continent, may well represent the industry’s greatest conundrum yet.

Africa’s technology-based consumer goods market gleams with promise and business is booming. However, operating within the sector, whether from a sale or manufacturing perspective, is also spiked with perplexities. The success of companies operating in the sector increasingly hinges on their ability to respond effectively to the complex particularities of the continent and the localised demands of its consumers. Evidence suggests that Asian consumer-technology firms have woken up to the challenge, Western companies are struggling to keep up and African companies have their work cut out.

To say that the spectacular growth of the consumer goods market in Africa is both the cause and reflection of a socio-economic revolution in the region is no exaggeration. The continent was home to more than 1bn consumers in 2010 and this figure is projected to reach 1.3bn by 2030. Consumer expenditure is also mushrooming: it was worth $600bn in 2010, representing 8% of consumer spending in the emerging markets. It will be worth as much as $1 trillion by 2020.

Crucially, much of this growth is being driven by the African consumer’s inflating appetite for technology-based consumer products. Spending on technology goods, from mobile handsets and gadgets to refrigerators, washing machines and cars, is rocketing in the region. In South Africa alone, the consumer electronics market is projected to be worth $9.4bn in 2012, and this will increase to $13.6bn by 2016. The average South African spends $940 per year on electronics, more than the average Indian. Relative to their average annual income, South Africans also spend more on these goods than their European, American and Japanese counterparts.

Nigeria has also recently collared much attention due to its mushrooming consumer technology market and with good reason – as Africa’s most populous country, it comprises half of the region’s total consumer spending. Moreover, Nigerians have displayed a conspicuously strong appetite for a range of hi-tech goods, from smartphones to televisions. Growth figures for individual sectors are impressive – the retail sales for electronics and household appliances in the country increased by 22% and 11% respectively between 2003 and 2008, and growth curves are steepening.  It is true that there is currently a lot of focus on the growth in the uptake of these products in the biggest markets, South Africa and Nigeria. “Further research needs to be conducted to select additional growth markets,” explains Parham Gohari, a Strategy Consultant at Deloitte.

What is driving the boom?

Despite the lack of empirical research into the consumer technology market in other areas of Africa, there are clear indications that other countries are rapidly becoming more prominent markets: “What is interesting is that half of Africa’s consumer spending market is in Nigeria. Yet, DR Congo and Angola are also growing strongly, along with French-speaking West Africa, especially Senegal. Ghana is also important and, to the East, you have Kenya, a rapidly growing market,” says Grant Hatch, Head of Strategy and Products for Accenture’s South Africa branch.

East Africa is an increasingly lucrative destination for these goods. Shipments of PCs to East Africa surged by 76% last year. In Kenya, mobile handset sales have increased 200% since 2009. Ethiopia is also showing powerful signs that it will soon emerge as a significant market for consumer electronics. Market leader in the African home appliances market, Samsung, has recently taken a particular interest in the country; it is undertaking a feasibility study with a view to setting up an assembly plant and intends to open up several retail centres across the country. The February issue of African Business discussed how innovative local companies are seeking to profit from Ethiopia’s mobile market, which is set to rise to 30m in the next three years.

Further south, Angola is showing signs of thriving demand for consumer technology. Sales figures for mobile handsets, televisions and PCs are flourishing. The car industry is also rocketing – sales growth for new vehicles is expected to increase by around 23% between 2011 and 2015.

Trend spotters have highlighted that improving sales figures can be discerned in less-obvious countries as well. The success of the mobile phone industry in Somalia is a famous example. At least one mobile phone per family is the norm (constituting 1.5m mobile phone users), offering a significant opportunity to handset producers.

The sources of these technology-based goods are both global and local. A sizeable proportion of goods are exported by American and European companies, from Dell computers to Bosch appliances.

Asian companies are also making impressive inroads into the continent; China has been a high-profile player in recent years, provoking both awe and vituperation from Western onlookers. A large proportion of its exports to the continent, worth more than $60bn a year, are technology-based manufactured products (communications equipment and electronic machinery account for almost 40% of China’s exports). Japan and South Korea are also important exporters of technology-based goods.

From a domestic perspective, the manufacturing of goods in Africa is equally taking off. South Africa is far ahead of its other regional counterparts but manufacturing centres are also cropping up in other African countries, including Nigeria and Ethiopia.

Such a rapid burgeoning of the consumer technology market is being driven by a number of powerful and positive long-term trends. Firstly, dramatically transforming demographics: rapid population increase is causing the consumer goods market to increase exponentially – the continent’s population is now over 1bn and will reach 2bn by 2050. “The massive growth of the consumer market is driving demand for many technology-based consumer products,” says Hatch of Accenture.

Africa is also undergoing rapid urbanisation – just under half of the population now lives in cities and this will reach almost 70% in the next 10 years. Such a development is important for the consumer industry because city dwellers tend to have larger incomes. The dense concentration of people in cities also improves customer access to products and provides companies with more opportunities to market their goods.

Thirdly, Africans are getting wealthier: poverty levels have been declining since in the 1980s. Observers have been enthralled in recent years by the steady rise of Africa’s middle class and the birth of the Afropolitans (cosmopolitan Africans with disposable incomes and a desire for consumer goods). These Africans, possessing both the means and desire to purchase technology-based goods in particular, are driving demand at a dizzying pace.

Fourthly, Africa is simply becoming an easier place to do business: trade regulations have eased and business environments have improved, due in part to enhanced political stability and fewer wars on the continent.

Technology product firms that shied away from the continent in the past, preferring to concentrate on safer bets such as India or the Far East, are now turning their attention to Africa as the new frontier market.

Other developments have also been flagged as important catalysts in the growth of technology-based consumer spending. A crucial one has been falling prices: “The costs of a lot of technology products have been declining for some time, so products are more affordable to the consumer,” says Hatch.

Intricate dynamics of growth

Nonetheless, experts argue that macro-level trends offer only a limited insight into what is driving the consumer technology market in Africa. A closer look at the sale of particular types of products in Africa delivers a fascinating insight into the intricate dynamics driving consumption.

The mobile phone market is commonly seized as a case in point. Handset sales are currently booming in Africa, which is now home to 500m mobile phone subscribers. But, interestingly, it is not just population growth and rising incomes that are fuelling demand.

It is also, ironically, shortcomings in Africa’s communications infrastructure that have spurred on the uptake of mobile handsets. Because of high set-up costs, Africa is significantly behind in terms of fixed-line phone connections (only 2.8% of people having such land-line connections). “Africa, traditionally, has had a poor fixed-line telecommunications infrastructure. However, wireless and mobile communications have allowed the continent to leap-frog legacy technologies and provide a solution that is widely available and increasingly more affordable,” says Brad Brockhaug, the Vice-President of the sales division for Nokia Africa.

Moreover, in a country where disposable incomes are still low, even if they are rising, smartphones are so popular because they offer a cost-effective way to access the internet without having to buy a computer. “For many Africans, their first experience of the internet will be from a mobile handset and not from a PC,” explains Brockhaug.

Experts also point out that the particular evolution of individual product markets is being shaped by the unique requirements and preferences of the African market.

A factor of fundamental importance to the African consumer has been price – there is a strong demand for competitively costed technology goods. In the computer industry, the demand for low-cost goods has created room for companies that are willing to offer them. The success of computer companies from the UAE offering hardware, software and computer accessories has been a surprising development in the industry. Companies such as Microsim, Datacare and Hatta Computers are working to carve out a role for themselves as suppliers of low-cost computer equipment to East and Southern Africa. In the mobile phone sector, companies such as Nokia and Safaricom have vied to become market leaders in the production of affordable devices on the continent, selling handsets for under $20.

Moreover, although smartphones are increasingly popular (in South Africa, smartphones are estimated to reach penetration levels of 80% by 2014), affordability, rather than just strong branding and aspirational marketing, has proven key to cracking the African market. Thus, mobile smartphone companies such as Nokia, BlackBerry and Huawei, whose handsets are amongst the cheapest in the smartphone market, have flourished in Africa.

In contrast, iPhone, whose phones are priced at the higher end of the market, was reported in August to only have a 4% stake in South Africa’s smartphone market. “If one looks at affordability, the very high-end smartphones of $500 plus are still beyond the grasp of many African consumers. However, the aspiration and desire for the functionality available on smartphones still exists. From a Nokia perspective, we think the lines between smartphones and what is often referred to as feature phones is being blurred more and more,” says Brockhaug of Nokia.

Observers have also highlighted how other particularities of the African market are sparking the development of innovative technology-based products, specially tailored for the region.

In the computer market, Samsung has developed a solar-powered laptop and introduced it into the Kenyan market in the autumn of 2011 – in a continent where electricity supply is often intermittent but sunshine is available in abundance, the model is proving to be a popular alternative. Samsung’s household items for Africa, such as TVs and air conditioners, are also protected in the event of power cuts and humidity.

Furthermore, in the automotive market, which has traditionally been dominated by low-cost, low-functionality cars and high-cost, high-functionality cars, a slow revolution is discernible.

Industry experts have noted that manufacturers are displaying an increasing commitment to offering a new range of models which are somewhere in the middle: sturdy enough to withstand Africa’s rugged terrain but not so overly luxurious that they are unaffordable. The enhanced interest in the motorcycle industry and tailoring motorcycles to the African market is a further development, which reflects the particular popularity of motorbikes in a developing region, where roads are more easily navigable with small vehicles and motorbikes are generally a more affordable option than cars.

Second-hand technology in jeopardy

Commentators have also pointed out that, in parallel to the expansion of the market for new consumer-based products and increased innovation within the sector, the second-hand electronics market is in decline in many African countries.

Controversially, this phenomenon is not necessarily a reflection of diminishing demands – experts assert that in a region where the budgets of lower- and middle-income individuals are squeezed, low-cost but good-quality second-hand products will always hold some attraction. Rather, African governments are making conscious decisions to clamp down on the import of such products into Africa in a bid to address the problem of e-waste in their countries.

The outright ban on the import of second-hand electronics in Uganda has effectively killed the industry in the country and, in turn, had catastrophic consequences for many local retailers selling such products. It has been reported that 80% of the country’s ICT enterprises have closed or relocated since the law was implemented.

With various individuals and groups, including several UK waste electrical and electronic equipment (WEEE) firms, calling for bans to be applied in countries like Nigeria and Ghana until their recycling infrastructure is up to scratch, such bans may be on the horizon in other countries as well soon.

Opportunity to boost African manufacturing?

With the demand for technology-based goods rising, the question of whether Africa’s domestic market for these products can stimulate further growth in Africa’s manufacturing industries is becoming being more and more relevant.

Africa’s manufacturing industry has, traditionally, at best, suffered scepticism and, at worst, been the object of derision in the face of observers. Undeniably, the continent has a long way to go if it is to rival other manufacturing powerhouses in the developing world. Currently, Africa only produces 1% of the world’s manufactured goods and, on average, manufactured goods only make up 14% of total production.

Nonetheless, the production of technology-based manufactured goods in Africa is experiencing a boom. Since 2000, the proportion of medium and high-technology manufacturing value added goods (MVA: goods such as computers, cars and household appliances) being produced in the region has risen from less than a quarter to almost 30%.

The manufacturing of these products is steadily expanding in South Africa and Nigeria. Other countries are also showing encouraging potential in this area. “Large countries such as Nigeria and Ethiopia would especially have the potential to engage in technology-based consumer goods manufacturing,” says Hinh Dinh, a Lead Economist for Operations and Strategy at the World Bank.

As a result, experts are making exciting projections about the growth of manufacturing technology-based consumer goods on the continent. William Hickey, CEO of the American packaging firm Sealed Air, recently went as far as to claim that Africa will take China’s place as the world’s biggest manufacturing hub by 2050.

Certainly, low labour costs in the region and global shifts are working in Africa’s favour – as countries like China, which have dominated entry-level technology-based manufacturing, move towards higher-level manufacturing and labour costs in these countries increase, some say that Africa will emerge as an ideal replacement for labour-intensive manufacturing.

This, coupled with Africa’s abundance of natural resources, provides the continent with ideal circumstances in which to boost technology-based manufacturing: “Countries in sub-Saharan Africa have a comparative advantage in low real wages and abundant natural resources. Assuming other constraints can be relaxed, there is opportunity for some countries to excel in light manufacturing,” says the World Bank’s Dinh.

Optimistic experts also claim that Africa’s increasing population offers new opportunities for manufacturing: “The domestic market is also growing rapidly, which could also boost demand for such production if goods can be produced for exports or for import replacement,” Dinh adds.

The trend of multinationals opening up manufacturing plants in Africa is consequently on the up. The car market can be taken as a case in point. The South African car production industry has been established for some years and is significant, employing around 360,000 people. The South African government regards the car industry as fundamental to successful diversification of the South African economy and the bolstering of the manufacturing sector as a whole. It has set the ambitious target of ramping up vehicle production to 1.2m units by 2020 as part of its new Motor Industry Development Programme for 2013.

The increased investment that multinational automotive firms are putting into their manufacturing plants in South Africa suggests that such high ambitions may also be realisable. Mercedes has already committed to doubling C-Class production to 95,000 units by 2014. Ford is also ramping up production of its vehicles from 80,000 to 110,000 per year. Engine production is similarly being increased from 80,000 to 120,000.

This year, it is projected that vehicle production should reach a record-breaking 655,200, with 366,200 being exported, including to neighbouring African countries.

Automotive companies are taking increasing interest in countries beyond South Africa. For example, Honda announced last month that it plans to open a new production plant in Dar es Salaam, Tanzania, to assemble and sell vehicles to the East African market.

Manufacturing of other consumer electronic goods in Africa is also on the increase. Asian firms have displayed a strong appetite for investing in production centres on the continent to save on shipping costs and take advantage of the competitive wages and cheap land prices in Africa.

The Chinese consumer electronics group Hisense is a powerful example. It has been manufacturing products for the local market in Africa since it set up its first factory in the region in South Africa in 1995. It expanded to set up plants in Egypt and Algeria in 2003 and 2009 and now plans to open a factory in Nigeria in partnership with local firm Airflow Engineering Works in 2013, with a view to serving the West African market. Other Asian firms such as Samsung are also following similar paths.

The healthy interest of multinationals in investing in manufacturing in Africa has prompted people to raise questions about the extent to which there is space for local African manufacturing companies to compete. Some experts, such as Dinh from the World Bank, are optimistic:

“Certainly there is scope for both types of companies (local companies as well as large, FDI-invested companies) to grow. Small companies should aim at getting sub-contracts from large companies while forming associations and trade groups to get the right and cheapest inputs (from both domestic and external markets) as well as to market products abroad,” he explains.

Clearing obstacles to growth

It is, nonetheless, clear that all companies, both small and multinational, face a number of formidable challenges in Africa: “There are basically six obstacles : the costs and quality of inputs, access to industrial land, access to finance, lack of entrepreneurial skills (both technical and managerial), worker skills and trade logistics,” says Dinh. “However, we also find that these obstacles vary by country, by sub-sector and by firm size, so that a more sensible approach to industrialisation in Africa would be to identify the constraints particular to a country and sub-sector in order to target policies to enhance private investment and create jobs,” he adds.

Specific industries do indeed face particular constraints. The car production industry is a popularly cited example. Challenges to expansion of manufacturing vehicles in Africa include supply chain problems; inadequate patronage of local auto products; low tariff protection; power shortages; and inadequate investment.

Experts have made calls for African governments to do more to assist these firms as a result. “Governments could also be catalysts in the process of small manufacturers integrating with large companies – they would need to help in making land, finance and other inputs more accessible to smaller manufacturers,” says Dinh. “For example, for small producers it is difficult to access credit because they lack collateral. By opening the door to such opportunities, local manufacturers would have the ability to grow, something that is very difficult for them to do right now,” he adds.

Some observers are, nonetheless, sceptical that local manufacturing firms will ever be able to compete in an increasingly tough market. “If you look at the demand for low-end technology goods, the problem is that it is not an area which African manufacturers are well known for. African firms lack the skills and technology,” says Hatch of Accenture.

“Asian companies have been able to use Western technology to create these products at a lower price and I don’t see how African companies could compete. Maybe they could compete in terms of non-technology consumer goods, but I am sceptical that they could break into this area,” he adds.

Such a view is shared in other circles. “African manufacturing companies are finding it more difficult to compete with low-cost production from the likes of China,” says Gohari of Deloitte.

The rise of the Asian Tigers in Africa

Although the potential for manufacturing in Africa to take off is championed by some, experts agree that goods manufactured abroad will dominate the market for the foreseeable future. Important shifts are happening in the latter area, reflecting transforming global consumer technology manufacturing trends, which have caught the world’s attention.

By far the most crucial is the increased competition between established Western manufacturers of technology-based goods, such as Europe and the US, and Asian rivals, with the former, overall, struggling to keep up.

“Europe and the US can no longer compete with their Asian rivals on the consumer electronics level. Asian companies are going to completely dominate this area for the future,” says Hatch of Accenture. Gohari at Deloitte agrees: “Korean and Chinese companies are significantly ahead and have demonstrated a larger appetite. This would be followed by EU.”

There are, evidently, however, important exceptions to the rule. Large Western firms are still leading suppliers in all of the key sectors of the consumer technology industry in Africa (white goods, cars, computers and so on). American IT firms are also still leaders in the computer market: US multinational, Hewlett Packard, is expanding fast on the continent and opening operations in several different countries, from DR Congo to Senegal. Dell has a 10% share of the African computer market. Nokia is the leading mobile phone company in South Africa and its competitively priced phones will make them difficult to undercut in the future. BlackBerry, of Canada, is also a major player in the smartphone market. In the household appliances sector, the German company Bosch generated revenue of nearly $200m in 2010.

However, in general, the outlook for Western companies in Africa is certainly far from rosy. Growth in EU export levels to Africa has been lacklustre in recent years. Moreover, exports to Africa fell by almost 10% in 2009 following the global downturn (from €119bn to €107bn). Trade is only now starting to recover to pre-crisis levels. In addition, although exports to Africa from the US have grown from $11bn in 2000 to $30bn last year, they lag behind China quite significantly.

Of the Asian tigers, it is China’s dramatic successes in this sector which has grabbed headlines. “The market is being increasingly dominated by the Chinese now because of the low-cost-price consumer electronics that they offer,” explains Grant.

Indeed, China’s exports of technology-based goods to the continent have burgeoned. Between 1995 and 2008, exports rose by 23% per year. Export levels reached $60bn overall in 2012, with electronics accounting for around 18% of this.

Chinese technology-based consumer product companies such as Huawei, TCL, Hisense, ZTE and Xiamen Overseas Chinese Electronic Co having been working in Africa since the 1990s, steadily accumulating experience of the market and strengthening their brands amongst consumers. They now have solid strategies for tapping into the continent’s markets and are reaping the benefits.

Huawei, a telecommunications product manufacturer, is a particularly impressive success story. Since first entering the market in 1998, the Shenzhen-based firm has invested more than $1.5bn in Africa, and generated about $2bn per year in revenues. Its presence in Africa is increasing at a rate of 125% a year. The company distributes across the entire continent via its 32 representative offices, and employs 2,500 people. The multinational is now a top provider of CDMA/GSM equipment in the region.

Moreover, Huawei has its sights set on filling a potentially lucrative gap in a very competitive market by producing low-cost smartphones. It has experienced particular success in this arena through the launch of its Ideos model, a smartphone with a retail price of around $100. After introducing the product to the Kenyan market, Huawei had sold more than 60,000 units by June 2011, representing nearly half of all smartphone sales in the country.

It now has plans to launch the product in other African countries. ZTE, another Chinese telecommunications company, has had similar success, shipping tens of millions of handsets to the continent every year. Africa represents more than 12% of its annual revenue.

In the computing industry, China has also thrown down the gauntlet to more established firms. Lenovo, which originates from Hong Kong and manufactures computing products such as PCs, mobiles and laptops, has struck gold in Africa recently. The firm has expanded its market share in South Africa to 11.3% and has big plans for further growth. Furthermore, although South Africa is still its biggest market, it has opened regional hubs in West Africa and East Africa, and plans to open smaller local offices for individual countries. It therefore comes as no surprise that the company regards Africa to be the most lucrative emerging market for its products.

Finally, China is also rivalling other firms in the household appliance sector. Hisense is a high-profile example. Sales growth has increased by 140% in South Africa alone. Its success in the refrigeration industry in South Africa is typical of its achievements in other product sectors – the firm’s market share of the refrigeration industry increased from 2% in December 2010 to 10% in September 2011, making it the fourth-largest supplier of fridges in the country.

China’s dramatic entry into the technology market in Africa has been controversial, especially in view of the questionable quality of some of its low-cost consumer electronics goods which are flooding African countries.

African governments and Chinese ambassadors to various African countries have come under increasing pressure from local consumers to enforce regulations and trading standards more strictly. Both parties have responded by blaming underhand Chinese and African businessmen for smuggling in low-quality products.

“The PRC government recognises that some exports are of poor quality. Many Chinese goods are brought to Africa by private Chinese or African entrepreneurs whom the PRC government does not control,” said Lu Shaye, Director-General of the PRC’s Department of African Affairs. “We have to explore the deep-rooted cause for this phenomenon Why are there so many poor-quality Chinese products in Africa? I think the first reason is that Africa’s consumption level and ability is not very high, and people love cheap products,” he added

Other contributing factors, which both Lu Shaye and other commentators cite, leave some Africans, to a certain extent, culpable. For example, some argue that African businessmen involved in the importing and sale of Chinese products place orders for the lowest possible price for goods and Chinese manufacturers duly sacrifice a degree of product quality to produce goods which are still profitable at the agreed price.

In addition, critics contend that the departments of African governments responsible for checking the quality of imports are failing to regulate effectively and coordinate well enough with their Chinese counterparts.

China is, nonetheless, not the only Asian tiger on the prowl in the African technology market. Japan has also ramped up its exports of technology-based products to the continent.

Between 2002 and 2010, the growth of Japan’s exports to Africa increased 28% to reach $12bn. Consumer electronics make up a sizeable proportion of growth in this market. Companies such as Sony, Casio, Sharp and Fuji are all doing well in the African market and their ambitions are strong: Sony has been opening stores in several African countries, including, most recently, Zimbabwe and is committed to its strategy to become the leader in Africa’s consumer electronic market. Casio’s sales strategy on the continent is also paying off and it is now the leader in the South African camera market.

In addition, Japanese automotive companies, although they have not experienced the same success in the more challenging car market, have displayed a willingness to commit to the long haul and get their sales and product formulae right in order to break into (or break open) the African market properly.

Toyota reported slow growth in the sales of vehicles in 2011 for its South Africa branch (15% year on year) but emphasised that the trend is positive and they are determined to progress on the continent. Honda has also experienced slow growth, with most of its sales being concentrated in Nigeria, but has plans to expand, most recently, by targeting the Tanzanian market.

Finally, South Korea has recently displayed a keenness to make further inroads into Africa, as the region currently only accounts for 3.3% of its exports. Its technology-based consumer product exports include televisions and mobile phones. By far its biggest player is Samsung, which is experiencing impressive growth on the continent. Within the past year, its sales have surged and it has doubled its local staff in South Africa. The company is projecting to increase its Africa-based profits five times to over $10bn by 2015.

The fact that the key to the African market seems to be to offer good-quality but low-priced goods means that, theoretically, there is room for other emerging manufacturing countries willing to offer low-priced products to make inroads into the continent. However, with the East Asian companies at the top of their game at the moment, any newcomers would have their work cut out.

As African markets get bigger and disposable incomes rise, the region’s hunger for technology-based consumer products shows little sign of abating. The continent is likely to attract more technology companies as the uptake of technology goods increases in coming years. African consumers will benefit from a greater choice of goods, tailored to their needs at competitive prices. The African manufacturing sector may also experience healthy growth. In terms of multinational company profit lines, however, it seems Asian firms are best positioned to take advantage in the long term.