Japan expands its trade and investment in Africa

Japan is seeking to diversify the range of its trade partners in Africa and encouraging SMEs and startups to invest in the continent, as Neil Ford reports.

On the back of the Tokyo International Conference on African Development (TICAD), Japanese cumulative FDI in Africa increased from $3.9bn in 2007 to $10bn in 2016.

The big challenge will be diversifying the range of the country’s trade partners in Africa beyond the handful of countries that currently dominate Japanese trade relations with the continent – South Africa, Morocco, Kenya, Egypt, Ghana and Nigeria.

In 2017, Japan exported goods worth $7.5bn to Africa, including $2.5bn to South Africa, and imported $8.3bn, of which 57% came from South Africa, including iron ore and platinum.

The two biggest sectors for Japanese investment in Africa are mining and hydrocarbons, particularly in Mozambique, where Mitsui & Co has invested billions of yen in coal and gas projects.

Such investment is backed by the Japan Oil, Gas and Metals National Corporation (JOGMEC), which works to ensure “a stable supply of natural resources to Japan”.

Although commodity investments have become more uncertain since the commodity price downturn of 2014-17, they are still likely to lead the way on Japanese investment in Africa for the foreseeable future.

The most important Japanese exports to Africa over the past decade have been motor vehicles. Toyota and Nissan dominate the roads from Cairo to Cape Town. Japanese electronic goods, particularly TVs are also hugely popular in the continent.

There is also a thriving business in quality second-hand cars, particularly in the countries of Anglophone Africa, which like Japan use right-hand drive vehicles.

In addition, Japan has been the biggest Asian project finance sponsor in Africa over the past five years. M&A activity by Japanese firms in Africa has generally been fairly limited, although Nippon Telegraph and Telephone bought South Africa’s Dimension Data for $3.2bn in 2014.

Tokyo is encouraging the expansion of Japanese SMEs and startups in Africa (see below), but the number of big Japanese firms investing in Africa is also increasing, from NTT in the IT sector to Kansai Paint in the paint and coatings sector.

Toyota Tsusho Corporation has one of the most comprehensive networks on the continent, with a sales network covering 53 African countries and a variety of sectors in addition to the automotive industry.

Japanese firms still tend to be reluctant to invest in a region where they have little experience.

As Katsumi Hirano, executive vice president of the Japan External Trade Organisation (JETRO), told the African Law & Business website in March: “[Japan] enjoyed a long historical economic relationship with our neighbour nation countries. So [Japanese companies] see much more potential still in the Asian region. That is one reason why the Japanese commitment in Africa is so low”.

However in the run-up to TICAD 7 more and more Japanese companies are becoming interested in Africa. The Japan Business Council for Africa has been created as a platform for the private sector.

Made for Africa products

The number of Japanese companies operating in Africa has increased from 520 in 2010 to 796 in 2017, but the Japanese government hopes to greatly increase that figure in the near future.

“There are, of course, Japanese companies that have built up robust business foundations in Africa,” said Hirano in a recent article published by the Association of Japanese Institutes of Strategic Studies. “A distinctive feature of these companies is that they have secured human resources through aggressive M&A. The problem lies in the small number of such global Japanese companies.”

He said that while the number of global Japanese companies dropped off after the resource boom came to an end, “the outcomes of up to 1,000 new investments made in Africa each year greatly impact the level of presence of companies from around the world, and this is where the investment efforts of Japanese companies are vulnerable.” As a result, Tokyo is encouraging Japanese SMEs and startups to invest in Africa.

Some ventures have been launched as development projects with donor support but with the expectation that they will operate commercially in the longer term. For instance, Nippon Biodiesel Fuel, a Japanese startup, last year launched AgriNet in parts of Asia and Africa to connect farmers with banks and a wide range of stakeholders in the agribusiness sector. Farming villages in Mozambique can also secure financing through the website.

The UN’s World Food Programme is investing $3.5m in the project in Mozambique over three years but Nippon Biodiesel expects the venture to be operating commercially after that time.

Farmers within a single village can also band together to sell their crops via the AgriNet platform, once they have established themselves as reliable partners on the website.

Microfinance providers can supply the data needed to establish a potential client’s creditworthiness. Payments are made by money mobile and it is hoped that the income of participating farmers will increase by at least $1,000 a year.

Japanese energy startup WASSHA provides off-grid electricity through solar PV kiosks operated by local partners that allow solar lamps, mobile phones, tablets and radios, among other devices, to be charged for those without access to electricity at home.

The kiosks are equipped with a PV panel, battery, the WASSHA power device with USB ports and a smart phone as a controller. Customers can buy power through mobile money, meaning that no physical money actually changes hands, while agents lease rather than buy kiosks and the associated technology, removing the need for upfront investment.

WASSHA’s technology allows agents to check all transactions, including sales and customer information, via remote management, while the level of charge in the kiosk battery can also be monitored remotely.

Yamaha Motor has developed a water purification system following research and development in Africa and Asia over a decade. The Yamaha Clean Water Supply System requires no replaceable filters, high power consumption or maintenance by skills technicians.

Water is stored in a pre-treatment tank where silt, mud and other debris are removed. A chlorine solution disinfects the water, before metals and bacteria are removed by sand filtration and a microbial biofilm.

The system is already being used in Angola, Cameroon, Democratic Republic of the Congo, Republic of Congo and Ghana. Some of the villages with the system are able to sell their surplus potable water to neighbouring villages.

Major infrastructure projects

At TICAD VI, Tokyo committed to supporting $30bn in public private investment in infrastructure between 2016 and 2018.

Infrastructure projects funded by Japanese aid and undertaken by Japanese companies generally have a reputation for the high quality of the construction and engineering work undertaken.

The transport sector in particular has benefitted from this injection of capital. Last October, the new $140m bridge over the Nile was completed in Jinja, Uganda, with lending from the Japan International Cooperation Agency (JICA).

The bridge is located on the main highway that links inland countries of East Africa such as Uganda, Rwanda, Burundi and eastern Democratic Republic of Congo with the Port of Mombasa in Kenya. Ensuring the bridge’s construction had long been a priority for the government of Uganda, as a lack of capacity on the existing Nalubaale Bridge had caused congestion. 

At the opening ceremony, Yutaka Fukase, the chief representative of the JICA Uganda office said that JICA had emphasised safety, the environment and social concerns on the construction project.

A large slice of infrastructure funding has been directed at the port sector. JICA has financed the construction of new container terminals at the ports of Nacala in Mozambique and Mombasa in Kenya in the form of both loans and grants. Japanese interest in Mozambique is partly driven by demand for coal and so port development has been complemented by financing for the associated coal railway.

Two Japanese companies, Penta-Ocean Construction Co Ltd and Toa Corporation, have been awarded a series of contracts to develop the Port of Nacala, including one for Y25.6bn ($232m) last year to dredge the access channel, reclaim land for the new container terminal and provide rail access. Nacala is reputed to have the deepest natural harbour anywhere on the east coast of Africa.

Japanese interest in Southern African coal increased after the 2011 Fukushima nuclear disaster saw nuclear power production fall and coal imports rise as demand for thermal power production increased.

Mozambique is doubly of interest because it will become a globally important liquefied natural gas (LNG) exporter within five years: aside from nuclear power, coal and LNG are the bedrock of the Japanese generation mix.

In 2013, Japan’s Ministry of Economy, Trade and Industry identified Mozambique as one of its most important potential energy suppliers. Apart from the power sector, Brazilian firm Vale’s Moatize mine supplies Nippon Steel & Sumitomo Metal with coking coal for steel production. 

Investing in the full food chain

There has been a succession of big agribusiness investments by Japanese companies in Africa over the past few years, often by buying stakes in established operators. They have been attracted by Africa’s increasing population and particularly the growing number of middle class people. In 2015, Mitsubishi bought a 20% stake in agri-trader Olam International for $1.1bn. The Singapore-based firm, which trades in a wide variety of commodities, including rice, coffee and cocoa, selected Mitsubishi in a competitive bidding process because it hoped that the Japanese company’s processing and manufacturing operations would dovetail with its trading network.

Japan’s Sanyo Foods took a 25.5% stake in Olam’s instant noodles business in 2013, then 25% equity in Olam’s packaged foods business for $187.5m the following year. Its packaged foods operations cover a wide range of goods, including fruit juices, biscuits, tomato puree and seasonings. The two companies are seeking to make use of their respective distribution networks.

In particular, Olam and Sanyo are seeking to build market share in Nigeria. Mahadevan Ramanarayanan, Olam’s president and global head of packaged foods, said: “With Sanyo’s noodle expertise this meant we could grow the instant noodles business at a much faster rate, bringing out new flavours and new products. In particular, we focused on developing flavours that corresponded to well-loved Nigerian local dishes, coming up with innovative formats in the noodle cake and also how we could make the product more convenient given the Nigerian and Sub-Saharan context. “

In March 2018, Mitsui & Co bought a 30% stake in Dubai-based ETG, which trades in agricultural produce, fertilisers, seeds and agricultural chemicals, predominately in East Africa but also more generally on the continent. The $265m acquisition will allow Mitsui to market seeds and fertiliser specifically designed for local soil conditions, as well as its irrigation systems. ETG also has storage, processing and manufacturing operations in 36 countries. Mitsui is attempting to position itself as one of the biggest players in the global agricultural commodity trading sector. It has already bought a 50% stake in US soy company Bluegrass Farms and taken over global vegetable seed firm Top Seeds 2010.

In the same way, Toyota Tsusho completed its first fertiliser blending plant in Kenya in 2016 to produce a balanced blended fertiliser designed for Kenyan soil types to avoid low harvests and the acidification of farmland. Toyota Tsusho Fertilizer Africa worked with Moi University and several NGOs to produce what is now called Baraka Fertilizer. The factory in Eldoret, in western Kenya, is designed to reduce the 600,000 tonnes of fertiliser that the country imports every year, as well as boosting agricultural production. It is now also developing specific fertilisers for sugar cane and legumes, and is seeking to expand its operations in Uganda and Tanzania.

A first for Sumitomo in Africa

Sumitomo Corporation has invested in its first independent power producer (IPP) in Africa – the 350 MW Kpone IPP in Ghana’s biggest port city, Tema. When completed, Kpone will be a combined cycle gas turbine plant accounting for about 10% of total Ghanaian power production, but it could also run on diesel or fuel oil. Ghana’s economy has grown rapidly over the past decade and more generating capacity is needed to ensure that domestic and industrial power supplies are maintained.

Total project costs are put at $903m, although this figure could include transmission infrastructure, out of which the private sector is contributing $685m, including $447m in the form of debt. Sumitomo was the second biggest equity investor with $69.7m, alongside partners Cenpower Holdings, the Africa Finance Corporation, Mercury Power and FMO, which is the Dutch development agency.

Funding for the project also came from two facilities managed by the multi-donor Private Infrastructure Development Group (PIDG): InfraCo Africa and The Emerging Africa Infrastructure Fund (EAIF), plus the Technical Assistance Facility (TAF) Cenpower Generation Company is the special purpose vehicle set up to develop the project. In a statement, Cenpower said: “It will be amongst Ghana’s most fuel efficient thermal power stations and once in production, the power plant will become a critical base load component in meeting Ghana’s growing electricity demand.”

Construction of what will be the first licensed IPP in Ghana began in 2015 and was originally scheduled for completion in 2017 but a dispute with Group Five Power Projects, which was awarded the engineering, procurement and construction (EPC) contract and claims over contaminated fuel have held up development. The EPC contract was eventually cancelled in December 2018. All output from the plant is to be sold to the Electricity Company of Ghana for nationwide distribution.

At the other end of the scale, Sumitomo Corporation Africa bought an unspecified stake in M-Kopa, a “pay-as-you-go” solar PV business in December 2018. Customer pay a small weekly fee via mobile phone in return for a solar panel, battery and charging connections to provide electricity for light bulbs, mobile phones, radios and laptops. Larger systems can even power fridges and TVs. Electricity has been provided to millions of people living off-grid in rural areas or city suburbs that are unconnected to their national grids, particularly in East Africa.