Case Study: Where do I Launch My Business in Africa

(By Eugene Soltes)

Benard, everyone is going to tell you to go to the big markets like Nigeria, South Africa, or Kenya. There’s still money to be made there, no doubt, but it’s also tremendously competitive. Malawi, Rwanda, Mozambique — they are low-hanging fruit by comparison. Sure, you’re going to face some significant challenges — labor problems this month, infrastructure ones the next. But you’re ambitious! Don’t you want to be a leader and put back into the country what it gave you?

Benard Kenani spotted his uncle as soon as he walked into the hotel lobby. Uncle Michael was sitting at a corner table with two other men, also in suits, both of whom were laughing at one of his jokes. That was typical of Michael, a successful executive in Nigeria, whose affable disposition was widely admired. He quickly stood up when he saw his nephew.

“Welcome to Lagos!” he shouted across the room. He proudly introduced Benard to the others, referring to him as “one of Nigeria’s up-and-coming entrepreneurs.”

Right after the men left, Benard corrected his uncle. “You know I haven’t decided if Nigeria is the place to start my business yet.”

Michael shrugged off the comment. “What matters to me most is that you’re finally going out on your own, achimwene. It’s what you’ve always wanted. ”

Michael, like Benard, had been born and raised in Lilongwe, the capital of Malawi. Like many talented Malawians, he had left the country as a young man to seek opportunities elsewhere, settling in Nigeria a decade ago. He now ran a thriving manufacturing enterprise.

Benard had left Malawi, too, after winning a scholarship to study in the UK, where he’d completed both his university degree in economics and an MBA. But he’d been drawn back to Africa by the burgeoning opportunities there and a desire to be closer to home. After six years as a manager at a packaging company in Kenya, he now felt that he had enough experience to start his own business. His uncle, along with several other friends and family members, had committed to investing in it.

Benard was in Lagos to see his uncle and seek advice about where to establish himself. Though Benard had an ambitious vision of someday running a venture that spanned the continent, he knew he needed to focus on one country at the start.

“But you’re seriously considering Nigeria, right?” Michael said.

“Yes, of course.” Benard nodded as he opened his laptop. “The market is competitive, but my research suggests that there are still opportunities in some specialty packaging markets. I’ve run some projections.”

Michael interrupted Benard, closing his computer. “You just need to look around! The BBC, the New York Times, the Economist — the whole world is talking about how fast Nigeria is growing. We’re on the cusp of joining the G20. If you want to be on the forefront of Africa’s growth right now, Nigeria is the place to be.”

“I agree. There are many factors that make it an attractive market. If everything continues at this pace, I’m confident that I can be profitable in the next year or two,” Benard said. “But I’m also worried.”

He saw the puzzled look on Michael’s face as he continued, “The political environment makes me nervous. And I’ve been reading a lot recently about growing instability and how that could threaten the country’s prosperity.”

“Sure, those are risks, but you’re going to find risks everywhere. You also need to think about the upside of basing yourself in Africa’s largest economy. Where else are you considering?” Michael asked, quickly adding, “Wait…don’t tell me Malawi.”

Benard gave his uncle a nervous smile. He knew this was coming.

“Benard, when did you become so sentimental? Your vision is so much bigger!”

“With the expertise I can bring to the business, within a year I’ll be the number one packaging manufacturer there —”

Michael quickly stopped him. “But what does that matter? Number one in Malawi?”

“That’s just the start. Malawi will give me a base to launch into other east African markets — Zambia, Mozambique, Rwanda, even Tanzania — and then move into other businesses. I don’t want to be stuck in one place. I want to build across markets to achieve scale. ”

The apprehension on Michael’s face made Benard realize he should try a different approach. “Abambo, remember when you started out here in Nigeria, it wasn’t such an enormous economy. As the country has grown, so has your business. There are other smaller African economies poised for growth, and I can be a part of it. I already have a potential business partner in Lilongwe that can help get me started.”

“If that’s what you’re concerned about,” Michael interjected, “I can line you up with three potential partners here tomorrow. Just say the word.” He asked Benard when he expected to make a decision.

“Soon,” Benard said. He explained that he had told his boss that he would be leaving to start a new venture and had taken the week off to finalize his plans for it.

“I will support your business no matter what you decide,” Michael said. “But you need to think about where the money is now. That’s where you want to be.”

The Potential of Malawi

The following day, Benard flew to Lilongwe. He was eager to meet with Amara Desta, his potential business partner in Malawi. She had inherited a small packaging business from her father. Because she’d been preoccupied with several other successful entrepreneurial ventures, however, she’d done little to develop it. For the past year, Amara had been looking for ways to divest the business, ideally by finding someone to buy a majority stake from her. Benard’s father had introduced them during his last visit home.

“I simply haven’t had the time to put into the business,” Amara explained as she showed Benard around the manufacturing facility. Indeed, many of the machines were outdated, and several were no longer functioning. “Luckily, we’re still in the enviable position of often having more orders than we can fill. Your father probably mentioned that our customers are primarily tobacco producers.”

Tobacco accounted for more than 70% of Malawi’s exports, and tobacco packaging offered some of the most attractive margins among the products sold by Benard’s current employer in Kenya. If he just made a few equipment purchases and built off Amara’s existing relationships, he could get started right away. But he also realized that it was risky to set up a business where almost all the demand would come from one sector.

“You must enjoy being back home,” Amara said.

“Yes, I would love to spend more time here,” Benard responded, thinking about his childhood in Lilongwe. His family, as well as many of his friends, were still nearby. “Attractive as it is on the personal side, I want to make this decision objectively, based on the economics.”

“Malawi has more to offer than most people think,” Amara noted as she proudly rattled off a list of the country’s recent improvements to him as if he were a visitor, not a native. Though the 10 years Benard had been away from Malawi hadn’t felt long, he understood why those who’d stayed now treated him like an outsider.

“And the demand is there,” Amara continued. “The tobacco growers would love to buy packaging in country. Right now, the costs to import packaging are exorbitant. Producing domestically would dramatically lower them, and we’d quickly capture much of the market. We’re perfectly situated for later expansion into other markets in east Africa too, if that’s of interest to you.”

Benard agreed to be in touch with Amara in the coming week and excused himself to go meet his father, Kwende, for lunch.

Kwende was eager to hear about Benard’s meeting with Amara. “There’s lots of potential there, right?” Kwende asked enthusiastically. “It seems like a good partnership. You both bring such assets to the table.”

“It’s true. But, abambo, I know you want me here, and I think that’s clouding your judgment.”

“Listen, I’m not as successful as your uncle Michael, but I’ve been looking into this. Start in Malawi, and after you’ve succeeded here move into other countries. Focusing on one of the bigger markets like Nigeria and Kenya may seem safer now, but that can always change. By diversifying into several smaller markets, you’ll still have a business if there is political or economic upheaval in one place.”

“I’ve thought about that. In fact, the woman I spoke to in Rwanda argued the same thing.” Benard had been in touch with the head of the Rwanda Development Board, a government agency that was providing incentives for small-business owners as part of its postgenocide rebuilding efforts. She’d made several compelling arguments for establishing the business there, including a growing economy and reduced bureaucracy.

“She’s right. While some of these other markets might be less lucrative today, as they continue to grow, so too will your business.”

“Uncle Michael also raised the issue about a skilled labor shortage here,” Benard said. “It looks like Amara has struggled with that. I need to be sure I can hire people with the appropriate skills. If I can’t find my employees locally, it’s going to dramatically increase costs.”

“Benard, everyone is going to tell you to go to the big markets like Nigeria, South Africa, or Kenya. There’s still money to be made there, no doubt, but it’s also tremendously competitive. Malawi, Rwanda, Mozambique — they are low-hanging fruit by comparison. Sure, you’re going to face some significant challenges — labor problems this month, infrastructure ones the next. But you’re ambitious! Don’t you want to be a leader and put back into the country what it gave you?”

Back in Nairobi

One week later in Kenya, Benard knocked on his boss’s office door. After inviting Benard in, Peter Agambu, the CEO of the company, quickly got to the point. “I’m sorry that you’re going to be leaving us to go out on your own. Have you decided where you’ll be setting up your business?”

“I met with my uncle in Nigeria and a potential partner in Malawi. There are attractive opportunities in both markets. I also spoke with a government agency in Rwanda, and they’ve set up a ‘one-stop shop’ to help new businesses get all their permits. It’s now one of the easiest places to set up a business on the whole continent. So there are many options, but it’s hard to see the clear front-runner.”

“For me it was easy,” Peter replied confidently. “Kenya was a big market, and I’m originally from Nairobi, so I knew the place well. I just had to learn about packaging.”

Peter had hired Benard right out of business school and had been his mentor ever since. In Peter’s view, entrepreneurs needed to focus on one country to succeed in the African marketplace. Africa was so culturally and politically diverse that a business that spanned multiple markets would need a huge centralized infrastructure. “Dreaming of a successful pan-African business is just that — a dream,” he’d once told Benard.

Benard recognized the challenges. There were unquestionably significant hurdles associated with expanding into multiple markets. Countries in Africa might be geographically close, but differences in language, culture, and political systems often made them seem much farther apart. Even getting from one place to another was difficult. Countries that were practically neighbors might involve several plane connections, and travel could consume an entire day.

Still, Benard believed Africa was changing and that many smaller markets that had historically been overlooked by ambitious entrepreneurs like himself were now among the most attractive.

“I bet your uncle encouraged you to strongly consider Nigeria,” Peter said. “There’s certainly a lot of excitement about its growth and potential. Even those of us outside Nigeria are now talking about it. While you might be fighting for a smaller piece of market share, it can still be very profitable to be a relatively small player in a big market.”

“That’s certainly true,” Benard replied. “But there’s no reason I can’t build a profitable business by launching in a smaller market. Of course, the trouble is, if I start off there, I’ll need to expand into other countries to gain scale, and I’ll be creating exactly the type of business you always cautioned against, because it’ll be difficult to manage.”

“My strategy was my strategy, Benard. What’s yours?”

Question: Should Benard begin his new packaging business in Nigeria or Malawi?

(Source: HBR)

“Opinion pieces of this sort published on RISE Networks are those of the original authors and do not in anyway represent the thoughts, beliefs and ideas of RISE Networks.”

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