Asia should buy into Africa's growth

By Charles Roxburgh, Arend van Wamelen, and Susan Lund

Sectors beyond natural resources are profitable and prime for further advances by Asian companies and investors, suggest Charles Roxburgh, Arend van Wamelen, and Susan Lund in a column for Forbes.com.

While Asia's tiger economies continue to set the pace for global GDP growth, they will increasingly cross paths with Africa's lions. Africa's collective GDP rose at a 4.9 percent annual rate from 2000 through 2008, making it the third-fastest-growing economic region in the world after emerging Asia and the Middle East.

And although Asian companies and investors have focused largely on Africa's natural resources, a new report from the McKinsey Global Institute (MGI) shows they should consider the continent's many other significant business opportunities as well.

In our report, "Lions on the move: The progress and potential of African economies," we project that at least four groups of industries on the continent could together generate as much as $2.6 trillion in annual revenue by 2020, or $1 trillion more than today.

The biggest business opportunity of the four lies in consumer goods and services, followed by natural resources, agriculture, and infrastructure.

These projections reflect the strength of Africa's economies today and their solid long-term prospects. Africa's GDP rose twice as fast from 2000 through 2008 as it did in the preceding two decades. The continent's combined economic output, valued at $1.6 trillion in 2008, is now roughly equal to Brazil's or Russia's. And several factors suggest this economic momentum can be sustained.

To start, Africa's growth acceleration was broadly based, resulting from more than the global commodity boom. All sectors contributed, including finance, retail, agriculture, and telecommunications. Rising revenues from oil, minerals, and other natural resources accounted for just 24 percent of growth during the period. Fortunes improved across the continent, with GDP rising more rapidly in 27 of its 30 largest economies, both in countries with significant resource exports and in those without.

Key to the growth surge were government reforms that created greater political stability, improved the macroeconomic environment, and fostered a healthier business environment. For example, several countries halted their deadly conflicts. Policymakers also reduced inflation, cut budget deficits, lowered trade barriers, cut taxes, privatized companies, and liberalized many sectors, such as banking.

As a result, a dynamic African business sector is emerging. The continent has more than 1,400 publicly listed companies. It boasts more than 100 companies with revenue greater than $1 billion. Telecom firms have signed up more than 316 million new mobile-phone subscribers in Africa since 2000—more than the total US population. Banking and retail are flourishing as household incomes climb. Construction is booming as new cities rise.

Africa's future economic growth is also likely to be supported by several long-term trends. Among these is the rising global demand for commodities. This demand is growing fastest in the world's emerging economies, particularly in Asia and the Middle East. Despite long-standing commercial ties with Europe, Africa now conducts half its total trade with developing economic regions (so-called south-south exchanges).

Asia's economies together accounted for 28 percent of Africa's total trade in 2008, more than double their share in 1990 and now equal to Europe's share. But there is a potential for this trade flow to grow even larger.

China has emerged as a major driver of Africa's resource sector growth. China boosted its purchases of Africa's oil, from 1 percent of Africa's total petroleum exports in 1995 to 13 percent in 2008. Thus, China was the single largest contributor to Africa's oil export growth during this period, measured by volume, accounting for 37 percent. If current trends continue, China could overtake Europe as Africa's second-largest oil export market by 2020.

The outlook for further growth in Africa's resource sectors remains promising. We estimate the total value of annual production could grow steadily at between 2 percent and 4 percent a year, to $540 billion by 2020.

However, China and other Asian players should look beyond resources and recognize that an even larger future business opportunity lies in serving Africa's rising urban consumer. Today, 40 percent of Africans live in cities, a portion that is close to China's and continuing to expand. As in other developing economies, urbanization in Africa is creating jobs, boosting productivity, and lifting incomes. The number of households with discretionary income is projected to grow by 50 percent over the next 10 years, reaching 128 million.

Africa's household spending totaled $860 billion in 2008, more than that of India or Russia. The continent's consumer markets are already growing two to three times faster than those in Organization for Economic Co-operation and Development (OECD) countries and could be worth $1.4 trillion in annual revenue by 2020.

Asian companies have started entering Africa's consumer market. Among the most notable is the Industrial and Commercial Bank of China, which spent $5.5 billion in 2007 to acquire a 20 percent stake in Africa's Standard Bank. The deal was hailed at the time as a symbolically significant demonstration of China's growing business commitment to the continent.

Africa's new commercial vibrancy is also creating many other business opportunities. With 60 percent of the world's uncultivated arable land and low crop yields, Africa is ripe for a "green revolution" similar to those that have increased agricultural production in Asia and Brazil. And urbanization is increasing demand for new roads, rail systems, clean water, power generation, and other infrastructure.

To be sure, there remain risks to growth in any individual country. However, if recent trends continue, Africa will play an increasingly important role in the global economy. By 2040, Africa will be home to one in five of the planet's young people and will have the world's largest working-age population. Asian executives and investors cannot afford to ignore Africa's immense economic potential beyond its resource wealth.

Charles Roxburgh is the London-based director of the McKinsey Global Institute. Susan Lund is MGI's director of research, based in Washington, D.C. Arend van Wamelen is a principal in McKinsey's Johannesburg Office.

This article originally ran in Forbes.com.

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