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The Nigerian market is growing: a sales woman in Lagos
Africa’s share in German foreign trade is a mere two percent. Most mittelstand companies prefer to invest in Asia. Experts say that one reason is that Germans demand high levels of security and transparency. Control Risks, a British consultancy, assesses business environments around the world. According to its data, the number of risky countries is indeed particularly high in Africa.
There are exceptions, however. Senegal, Botswana and Ghana are examples. High growth rates, moreover, look attractive in South Africa and the oil-rich countries of Angola and Nigeria. The German-African Business Association Afrika-Verein der Deutschen Wirtschaft (AV) also advises SME managers to consider Kenya, Mozambique, Zambia or Tanzania. In its view, many companies are unaware of African opportunities that arise thanks to regional integration. Bruno Wenn, AV vice-chairman, says German managers only tend to see “a huge continent, fragmented in 54 sovereign nations and an equal amount of mostly small markets”. The recent AV document paints a more nuanced picture, focussing on eleven promising countries. The paper argues there is progress in many places, including in the “fight against
The AV study admits, however, that German companies cannot rely on contacts in former colonies in the way their British or French competitors do. There are structural handicaps too. “German energy firms are hardly active in Africa, because our utilities were always controlled by municipal governments,” says Wenn, whose main job is chief executive at DEG (Deutsche Investitions- und Entwicklungsgesellschaft), the branch of KfW Banking Group that promotes the private sector in developing countries. Wenn does not deny, of course, that Africa has yet to develop a manufacturing sector that might import high-quality machines and tools from Germany.
Cement for Namibia
Pioneers who have made it south of the Sahara say that, to succeed in Africa, one needs local partners. It took the Ulm-based Schwenk Group less than two years to set up a cement plant in Namibia. Today, its Namibian subsidiary Ohorongo is employing 300 persons. Another 2000 jobs depend on the new factory.
Construction took 22 months; production started in February. Gerhard Hirth, Schwenk’s chief executive, says: “What mattered was sound financing – 40 % of the capital invested was our own – along with determination and reliable data.” There were considerable bureaucratic and legal challenges, he reports, so the contract on funding for the cement plant was 800 pages long.
Business is not easy. Just when the plant started operating in Otavi, its future suddenly looked doubtful because cheap cement from China was flooding the Namibian market. Cement Prices dropped to below 50 % of what Schwenk had to charge. “It is impossible to compensate for such a difference simply by selling more,” Hirth argues. “We invested € 250 million and were suddenly confronted with Chinese dumping prices.” He insists that his company is not trying to exploit a monopoly on cement and that its prices reflect the conditions in regional markets.
In the meantime, the Namibian government has stepped in. It granted the cement plant “infant industry protection” and began charging taxes and duties on imported cement. These measures, of course, serve to protect jobs. After discussing matters with government officials from the ministries of finance and industry, Hirth expects such protection to last for “six to eight years” and to be “phased out slowly”. He is confident things will go well in the long run: “I don’t believe China will be able to ignore environmental issues and climate protection forever, and the government will not want to control rising energy costs with subsidies either.”
Heiko Schwiderowski of the DIHK, the umbrella organisation of Germany’s chambers of commerce and industry, admits that German SMEs tend to struggle to keep up with Chinese competitors in Africa. An important reason, he argues, is the Chinese government’s preparedness to invest a lot of money. Unlike their Asian competitors, German companies cannot do deals in which they build infrastructure in exchange for oil or other natural resources. As Schwiderowski explains, they cannot accept payments in kind; they need money.
Supply chains are another important issue, says Tilman Altenburg of the German Development Institute (DIE/GDI). Companies in developing countries have to become part of the supply chains of major multinational corporations, otherwise they have “few export opportunities”, he explains. Currently, the US-based retail giant WalMart is testing whether the purchasing power of South Africa’s middle classes has risen high enough for WalMart to enter the market. The management of the local Shoprite supermarkets thus has reason to worry about tougher competition.
Metro, the German wholesale and retail giant, is not interested in Africa so far. The corporate headquarters in Düsseldorf does not indicate a specific reason, but only points out that the priority was to expand in Asia and eastern Europe. Würth, the world market leader in screw production, takes the same approach.
Others are more enterprising however. Hansgrohe, a manufacturer of faucets and other bathroom fixtures, is selling its products to African airports, hotels and banks. The management took interest in Africa 25 years ago. Today it argues that, from 2025 on, at least 50 % of 870 million Africans will live in urban areas. Hansgrohe’s sales in South Africa ammounted to € 15 million last year. The figure makes this German SME the second strongest company in its market segment in South Africa.
DIHK expert Schwiderowski says Germany’s Federal Government should support SMEs’ international business the way that other governments of rich nations do. He considers Hermes insurances a promising start. This governmental facility allows German companies to cover risks in foreign trade, but only to some extent. “If there was more Hermes support,” Schwiderowski says, “more German firms would engage in African business”.