Africa: Mapping new opportunities for sourcing

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Across industries, companies in mature markets look to low-cost countries (LCCs)—markets in emerging commercial regions—as a source of economical human and material resources. Companies often have a list of go-to LCCs and rarely stray from a set number of sourcing destinations. Many of the usual locations are in Asia, but as populations in these countries age, labor markets are getting tighter. Consequently, businesses are taking a fresh look at African nations.

Among the advantages of sourcing from Africa are an abundance of natural resources, low labor costs, and business-friendly trade agreements. Although doing business on the continent presents considerable challenges, and the breadth of opportunities varies by industry, companies can still reap rewards from this new sourcing frontier. Players that carefully consider which country offers the greatest potential, emphasize local presence and talent development, and employ some technological creativity can join the small but growing set of global companies that are already sourcing from Africa.

The African alternative

Part of what makes Africa a viable alternative to other markets is its economic growth trajectory. Africa is the world’s fastest-growing continental economy, and its B2B market is a major, albeit unsung, driver of this growth. In 2015, companies in Africa spent $2.6 trillion,1 which is just under one-third of the $8.5 trillion spent by Chinese companies last year and slightly more than the $2.3 trillion Indian companies spent. Over the next several years, B2B spending in Africa is expected to increase by nearly 50 percent, reaching $3.5 trillion in 2025.2 This boom in economic development is also spurring the rapid expansion of the continent’s middle class and related consumer demand.

Africa has a young, growing population and the fastest urbanization rate in the world. By 2034, the region is expected to have a larger workforce than either China or India—and so far, job creation is outpacing growth in the labor force. Accelerating technological change is unlocking new opportunities for consumers and businesses. Africa could nearly double its manufacturing output from $500 billion today to $930 billion in 2025, provided countries take decisive action to create an improved environment for manufacturers.3

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Besides economic growth, Africa has two other assets that make it appealing to companies looking for sourcing possibilities: low-cost resources and free-trade agreements promoting trade across half the continent.

Resources: Access and cost-effectiveness. The low cost of resources makes many countries in Africa a feasible sourcing alternative. As far as human resources go, Africa has a large and growing workforce. Labor costs remain relatively low (Exhibit 1). Productivity levels—particularly in Algeria, Egypt, Morocco, and South Africa—are comparable to those of popular LCCs in Asia, Eastern Europe, and South America. Already, South Africa’s productivity is more than two and a half times that of China, and it is forecast to retain this wide margin through 2030.

Labor costs in some African countries undercut those of many non-African low-cost countries.

With regard to minerals, Africa is home to the world’s largest reserves of aluminum, chromium, cobalt, diamonds, gold, manganese, phosphate, platinum-group metals, and vanadium. Sheer abundance keeps these minerals cost-competitive globally. Fossil fuels also are a significant resource category in Africa, with a major export market of coal to China. Other mineral resources can be more fully tapped as countries develop their infrastructure. Oil is a major export; it could also become more of a fuel source when countries build oil-refining capabilities. And large iron-ore reserves can be utilized when more steel mills are constructed.

When it comes to agriculture, Africa is a world-class competitor. The sector accounts for 25 percent of the region’s GDP. For example, Madagascar is the top global vanilla producer, and Ivory Coast leads globally in the production and export of cocoa beans. Nearly half the world’s production of cashews is in Africa, and more goats and sheep are exported from there than from anywhere else. Africa also contains 60 percent of the world’s unutilized but potentially productive cropland.

Trade agreements. Across the continent, governments have put in place multiple frameworks that are favorable to companies looking to do business in Africa. An array of free-trade agreements and government incentives is in place to facilitate sourcing (Exhibit 2). The Common Market for Eastern and Southern Africa (COMESA), East African Community (EAC), Greater Arab Free Trade Area, and Southern African Development Community (SADC) are up and running. There are plans to create an African Free Trade Zone, which would incorporate COMESA, EAC, and SADC members, and the Continental Free Trade Area, which is expected to have the participation of all 54 African Union countries, by 2017. These trade agreements would aid the operations of multinationals doing business in one African country while sourcing inputs from another.

Four active free-trade agreements already cover half the African continent.

Continental challenges

Despite the advantages, there’s no doubt that doing business in Africa can be challenging. Companies considering sourcing options there should pay close attention to these issues, as well as ways to overcome them (see sidebar, “On-the-continent success cases”).

Public infrastructure. Infrastructure, such as power, communications technology, and roads, is underdeveloped in much of Africa. The power grid, for example, experiences frequent outages in markets from North Africa to sub-Saharan Africa. Average Internet penetration is more than 20 percent (higher in Kenya and Morocco, lower in Ethiopia and Mozambique). Mobile phones dominate telephony, but smartphone ownership is low. Poor, and relatively few, roads make ground transportation difficult and add to export costs. International companies can offer quality logistics, but these services are expensive, and there aren’t many of these companies at present. Local players are cheaper but limited in both service quality and number.

There is, however, evidence of improvement in infrastructure across the board. China has helped fund and build railways in East Africa. Significant power-infrastructure projects are under way, and investments in inexpensive solar power may offer a realistic way forward in the energy sector. Also, the growth of ride-hailing companies might address the issue of taxi safety and reliability.

Economy. Other challenges arise from economic forces. Several African countries are struggling with high rates of inflation. High tariffs on trade with the West counter the continent’s low labor costs. The currencies of most major sub-Saharan countries have been losing value against the US dollar. Some companies that have chosen to source from Africa are hedging against this currency risk by conducting their transactions in dollars.

Some economic issues affect particular sectors. In agriculture, there is a preponderance of small producers; more than 60 percent of farms on the continent are smaller than one hectare. Mining, in contrast, is at industrial scale but with a lot of artisanal production still in place. On the consumer side of the economy, much of the continent is unbanked and with limited access to credit. Solutions here are emerging as well, with the mobile platform M-Pesa facilitating financial transactions without the need for a bank account or credit card.

Talent. While labor costs in Africa are low, the continent suffers from weak postsecondary-school enrollment: 6 percent in sub-Saharan Africa, compared with 26 percent worldwide.4 There are high rates of “brain drain”; 20,000 professionals a year leave to work outside Africa.5 The region is an attractive hub for labor-intensive industries but is unlikely to attract sectors demanding a specialized or highly technical workforce.

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Culture. A final set of challenges comes from navigating a culturally diverse continent. For example, more than 2,000 languages are spoken in Africa. In some countries, traditional local structures exist in parallel with government and public services. These are influential and, if engaged in the right way, can be a big help to multinationals.

Positioning for sourcing success

The opportunities for sourcing from Africa vary by industry. They may be more readily apparent for agriculture, automotive, and basic-materials companies, while paper companies may face unique challenges. Despite the differences, sourcing opportunities in Africa exist for every industry (Exhibit 3). For example, in recent years, some European companies have started sourcing garments from Ethiopia. That interest has now extended beyond Ethiopia to other East African countries.

Africa’s resource diversity makes sourcing an option for a wide array of industries.

Organizations thinking about sourcing partnerships with African businesses should begin laying the groundwork only after careful planning in three areas:

Long-term vision. Companies should conduct a feasibility analysis after learning as much as possible about the region and its suppliers. To develop a perspective on which country holds the biggest potential for long-term partnerships, they should consider compliance risks, partner capacity, and production speed, as well as resource quality, availability, and cost.

Local presence. Since local offices have the benefit of being able to help suppliers with capabilities, production compliance, and efficiency, companies might consider establishing on-the-ground sourcing centers. These centers would include individuals who understand the details of working in a developing economy and, more specifically, who have insights on the ins and outs of Africa. Companies interested in sourcing from Africa but not (yet) in a position to set up local operations might consider looking to an experienced procurement third party to facilitate the sourcing journey.

Talent development. Of course, hiring a team with a deep understanding of a company’s business is desirable. But when that is not possible, a company could consider introducing a talent-development program. Investing in this team in ways that clearly demonstrate to its members that they are an integral part of the organization will also go a long way toward establishing an effective, on-continent sourcing function. Companies can also use their experience from sourcing from other regions. Western textile companies, for example, have used their experts on sourcing in Asia to consult on African operations.

Companies have long looked beyond their borders for bottom-line-boosting resources. But labor and materials are getting more expensive in some of the Asian countries that companies have relied on for sourcing. African countries are emerging as sourcing alternatives across a range of industries.

Players that approach the opportunity with their eyes open to the continent’s infrastructure, political, and economic challenges may be in a position to reap the benefits of the next wave of sourcing.

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