KEY LESSONS ON PRICIPLES OF MARKET ENTRY STARTEGIES IN AFRICA

By Edwin N. Kimani*

The African market is very promising for investment. With an economic growth of 4% which is higher than
the global average, Foreign Direct Investment in the continent surely could realize good returns on
investment. However, not all have found it fun investing in Africa. Some subsidiaries of multinational
investments have found Africa to be their graveyard. Serendipitously, some firms have collapsed while
their peers or competitors have thrived in the same environment.
Examples can be drawn in the Chinese investment in Kenya. Many would consider that Chinese investment
in Africa to be very successful, as it is state backed and based on the Belt and Road Initiative. A closer
analysis of their investment in Africa outside the Belt and Road Initiatives reveals a different story all
together. Foton East Africa ltd, a Chinese motor assembly and dealer upon opening shop in Kenya collapsed
shortly. Unlike its competitors such as Yamaha Motors, Toyota Kenya Ltd and other indigenous motor
assemblies such as Simba Motors and Mobius Motors, Foton East Africa had a hard time adapting to the
market. The firm blamed its woes on the regulatory regime, debt and competition. Others too, have had
very publicized failures. These include MTN in Nigeria, South Africa and Uganda as well as the Abraaj
Group East Africa, a Private Equity Firm with its head office in Dubai UAE.
Despite their failures, many more have shown an interest in the African Market as shown in the graphs
below on Foreign Direct Investments. Global funds too, such as Private Equity have also shown a great
interest in Africa, more specifically, sub-Sahara Africa which has about 212 private equity investment firms
with 298 offices based across 27 sub-Saharan African markets.
Research from Asoko Insight and Africa Capital Digest has also shown that there are at least ten firms,
defined by funds under management (FUM) exceeding $1 billion. They include Actis, African Capital
Alliance, African Infrastructure Investment Managers (AIIM), Brait, Development Partners International
(DPI), Emerging Capital Partners (EPC), Harith General Partners, Helios Investment Partners, Investec
Asset Managements and Old Mutual Capital.
The next range, with FUM between $500 million and $1 billion, includes eight firms, followed by the $100
million to $500 million range, which includes 63 firms. 71 firms are documented with FUM of less than
$100 million, and the remaining firms include investors with unknown fund sizes or with non-fund-based
capital structures. South Africa is the market leader with 40% of the PE offices located there, followed by
Kenya with 14% and Nigeria with 13%. Aside from Mauritius and Ghana, all other countries have less than
10 Private Equity offices in operation. Clearly, Africa, more specifically, Sub-Sahara Africa has a spark for
attracting investment.

Figure 1: African FDI inflows, by sub region, 2010–2017

(Billions of dollars)

Figure 2: The top investor economies in Africa, 2011 and 2016

(Billions of dollars)

Source: UNCTAD, World Investment Report 2018

Data from Asoko Insight

In light of the various success and failures from various investments in Africa, what does one need to
observe prior to taking a dive into the African Market? Here are some five principles to guide investment
entry into Africa.

1. Country Identification
Just as they say that the world is your oyster, so is Africa. Any investor could choose any country that to
their assessment, could be receptive to their products and present viable returns on investment. However,
not all African countries could work for a particular investments. To further explain this, a country with a
small middle class could not be the best market for luxury goods and investments on high tech products.
With low levels of education and disposable income, it would be unlikely that high tech innovations would
be ideal for that particular country.
In Africa, any investor can choose any country to invest in. To make a proper decision, one needs to conduct
country identification – which means that you undertake a general overview of potential new markets. There
might be a simple match in countries – for example two countries might share a similar heritage e.g. Kenya
and Uganda, a similar language e.g. the East African region, or even a similar culture, political ideology or
religion e.g. Kenya and South Sudan. But, South Sudan cannot be an alternative to Kenya due to labor and
the risks associated with its internal security/political challenges and economic embargos. While making
identifying a country, factors to consider are, but not limited to:
i. Key figures
This are

 Development of population
 Development of GDP
 Development of GDP per capita

ii. Legal and Regulatory regime

This include

 Possible legal forms

 Conditions for profit repatriation
 Conditions for sales (e.g. local production)
 Operations risks
 Local Content restrictions
 Taxes

iii. Infrastructure
 Traffic infrastructure
 Telecommunications infrastructure
 Health care system
 Housing
 Working space (Offices)
The above may not be complete, but internal factors such as the ones above and security, repatriation of
funds, foreign exchange controls as well as external factors such as geopolitical risks and opportunities are
important to factor in while engaging in country identification.

2. Identify Competitors and Potential Partner

The story of Foton East Africa is quite relatable in this sense. Interestingly, even after the collapse of Foton
East Africa and a few other Chinese firms, Peugeot, a French car maker and TATA Africa Holdings
(Kenya) Limited, an Indian multinational conglomerate holding company headquartered in Mumbai,
opened shop in Kenya and are now flourishing. With the collapse of Abraaj Capital in East Africa, private
equity firms such as LeapFrog Investment are raising $700 million (KSh70.7 billion) to in high impact
projects such as healthcare and financial services in countries such as Kenya.
In making an entry into a market, identifying entities offering similar products is important as it informs
you of the availability of the market, and how to navigate in light of existing competition. Possible partners
are equally, if not more, important. A distributor and marketer could be of help in market penetration.
As a late arrival into a market, the best strategies that ensure penetration into a market are:
 i. Strategic pricing
By pricing products at a lower price than the pioneer's, a new market entrant can attract customers who
would not have otherwise purchased such a product. This has the effect expanding the total market. Reduced
prices on products can also induce the pioneer's customers to switch.
ii. Improve a product or service, with focus on a niche market.
Companies can compete by being innovative in the market. The enhanced product can compete directly
with existing products. It can also, or alternatively, be positioned to attract a smaller or more specialized
segment of the existing market. In addition, the improved product or service can sometimes attract new
customers that are not the current target for the existing product or service.
In Africa, more specifically Kenya, alternative financing has been a burning issue. Interest rate caps on
banks have denied SMEs the right to credit for growth. Venture Capitalists and FinTech firms have joined
the market and are now issuing credit to those ordinarily denied by banks as they are viewed as risks in
light of the interest rate caps. So big has FinTech become that they now rival big banks. Offering such
services to a niche market of SMEs could place a firm in firm competition with big banks without worrying
about their bigger and more developed financial infrastructure.
iii. Develop new channels of distribution to better penetrate existing markets or access new
markets.

3. Market Intelligence
Market intelligence is “an ongoing, holistic knowledge of all aspects of the marketplace.” It provides a
high-level view by analyzing many different business areas including competitors, products, market
dynamics, and customer insights. These four areas cover a range of specific factors, such as:
 Corporate strategy, acquisitions, and executive teams
 Pricing, promotions, and cost structure
 Market size, segments, forecasts, and trends
 Brand loyalty, product concerns, and satisfaction rates

Because market intelligence takes a broad perspective — tracking both competitors and the overall state of
the industry — it can provide valuable insight that improves a company’s business model and shapes its
strategic direction.
Market intelligence can answer a variety of important business questions. Consider the following examples:
 What are the strengths and weaknesses of our competitors?
 Is there intense competition in our market?
 What is the optimal price point for different products?
 How does our company's performance compare to current industry benchmarks?
 What are the primary drivers of value in our market?

Market intelligence has the potential to answer these kinds of strategic questions because it is based
on multiple sources of data — including primary and secondary sources — which provide context and
create a more balanced, accurate view of the market.
 4. Understanding the ecosystem/community
Prior to market entry, understanding the ecosystem and communities that the business targets and surrounds
the set-up is important. This could be very important in acquiring the social licenses to operate. To
understand social licenses in the African context, let me indulge you in the oil and gas industry in Africa.
With the discovery of hydrocarbons around Africa, conflict sparked and mineral money was used to
purchase arms that led to the death of civilians. Civilians on the other hand viewed the multi-national oil
companies as sources and/or agents of the conflict as they appeared to directly or indirectly fund the conflict.
The perception of these companies was tarnished in the communities they invested in. the above factors
coupled with the resource curse and oil paradox, the multi-national oil companies found no social
acceptance. Today, the narrative is changing. Tullow Oil Plc in Kenya, has invested in several programs
aimed at engaging the communities around it and empowering it. This, among other ways, is how to get
gauge and understand the ecosystem in order to get social licenses to operate.
Therefore, social license, refers to the ongoing acceptance of a company or industry's standard business
practices and operating procedures by its stakeholders. Understanding the community, helps you gauge
their literacy, structure, cultural setting, language which guides the investor get the necessary social
licenses.
The guiding factors to consider in helping you understand the ecosystem and the community are:

 Political system
 Ethnic and religious groups
 Languages
 Demographic structure
 Cultural distance
 Political risks

5. Identify a working market entry strategy

This is the last principle to guide you in making an entry into the African. Africa is diverse, thus diverse
legal, political, economic and other societal factors inform an investor that some strategies may not
collectively work on all countries. Once an investor selected an attractive market, it’ll want to determine
the appropriate level of organic investment vs. expanding through a series of acquisitions (or some
combination of the two). If one has complementary infrastructure or sales channels in place, it might want
to consider an organic approach to growth. The key steps here are to develop the business plan, case for
investment, and implementation work plan, including owners, timelines, tasks, and key milestones to enter.
It is a matter of judicial notice that certain African countries have limited infrastructure, but provide
opportunities for investment. Therefore, if one is entering an entirely new market, with limited core assets
to leverage, one could consider a joint venture/partnership or acquisition. These options require target
identification, prioritization, due diligence, deal negotiation and close. Prior findings can be leveraged to
identify the appropriate mix of market entry options that is linked to the business's core competencies,
assets, and overall strategy.
Today, Chinese investment in Africa is becoming more clearly defined after the Belt and Road Initiative
policy was launched thus clearly defining what projects fell under the initiative. It also became apparent
that the state backed model approach to Africa may not work for private investment and thus a new and
better informed approach was necessary.
*The writer is a Lawyer and the managing partner at Avikele Services, a professional services firm, he is also a
member of the East African Law Society and the Kenya Law Society.

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