Q&A: McKinsey Africa chairman on how to conduct business in Africa

SHARM EL SHEIKH, Egypt — Though multinational companies have long included Africa in their emerging market portfolios, misperceptions continue to overshadow the opportunities that exist for expanding businesses on the continent. Unemployment and underemployment were cited as the chief concern for 22 of 34 sub-Saharan countries surveyed in the World Economic Forum’s 2018 Regional Risks for Doing Business report. But with a working-age population that will more than double by 2050, according to United Nations estimates, Africa could see vast new economic opportunities. And while supplying adequate work for the growing youth population will be critical to the economic growth of the continent, a new book urges businesses to acknowledge the economic transformation already taking place in Africa and the need to view the continent from a new perspective. Devex sat down with Acha Leke, McKinsey & Company’s Africa chairman and co-author of “Africa’s Business Revolution: How to Succeed in the World’s Next Big Growth Market,” to learn his top tips on how to conduct business in Africa. Whether one is running an African company looking to spread to a new market, or an international firm looking to help the continent develop, benefitting from Africa’s growth requires a long-term game plan, he explained. “At the center of it all, we found that the companies that succeeded are the ones not in Africa just to make money.” --— Acha Leke, Africa chairman, McKinsey & Company Leke also described proximity to the market as a defining element, which can determine a business’ ability to make informed strategic decisions, as well as improve its market intelligence, distribution management, and relationships with local partners and governments. The conversation has been edited for length and clarity. When it comes to attracting investments to Africa, what can businesses do to succeed in Africa? What it takes to build a profitable, sustainable businesses in Africa is built on the [experiences gained from] more than 3,000 projects in Africa and more than 10 reports on sectors, countries, and women. We surveyed 1,000 executives globally to understand their experience in Africa and, more importantly, we did in-depth interviews with 40 CEOs. From that, we distilled four essential strategies at the center of which is this commitment of doing well by doing good. 1) Map your Africa strategy: Where do you want to play? Which countries and which cities do you want to be in? You need to be very clear on that aspiration, on how you will gain scale, and the ecosystem — who you are going to work with to build your business. 2) Innovate in your business model: whether on the product side, services side or in the business model side. 3) Build resilience: Because there are 54 countries, you will always have setbacks, so it’s very important to build resilience whether it means diversifying across countries or even diversifying across industries. A long-term perspective is critical because you are going to hit bumps. We did a survey across multinationals in Africa and the ones that perform the best are the ones that are in more countries and have been here longer. Figure out which parts of the value chain you want to control. 4) Talent: We did a lot of research to learn what companies are doing to build talent, whether vocational talent, setting up their own corporate academies, or just spending time grooming people. Imagine that some CEOs spend up to one-third of their time developing talent, or unlocking the power of women because they know that there is a huge trade-off within. At the center of it all, we found that the companies that succeeded are the ones not in Africa just to make money. They are here to solve a problem and make a difference, but on the back end of it, they make money. The result of that today is that there are 440 companies today in Africa that make more than a billion dollars in revenue. Let's talk more about innovation’s role in doing business in Africa. How do you think innovation is accepted or not in terms of innovative companies, or small- to medium-sized enterprises, seeking financing? There are certain issues around misperception that businesses always face. There are a number of challenges that businesses will face: everything from financing to the regulatory environment to reaching the customer. But I also feel like when the media talks about Africa, they focus on the challenges. These negative stories, while important to report, create an overly negative perception of the continent. “Africa needs investments across every asset class.” --— We focus on the story that explains how Africa’s GDP has tripled in the last 20 years, where literacy rates have increased, poverty rates decreased. For all these challenges, we’ve realized that the people are really successful are the ones who have found ways to overcome these challenges and adopted a change of mindset. Let’s address this idea head on: risk versus reality. What do you see as the international views of Africa today in terms of risk compared to the realities on the ground? Are the risks exaggerated or are they realities that businesses need to face? The perception of Africa has improved tremendously over the past 10-15 years. There is still a big difference between the perception out there and realities on the ground. We surveyed 1,000 executives that have African experience and those who work on the ground and have offices on the ground have a much better idea of what the challenges are and have a better sense for how to overcome the challenges than those who just sit behind a desk and look at numbers. We found that the reason that African companies are more profitable than their peers around the world is because of two things: When you are on the ground and you figure out how to get your business model to work — [and] it’s so much more complicated on the continent — that it’s hard for others to replicate. It may take you some time to figure it out, what you need to insource or outsource, but it becomes hard for others to replicate it. It creates an advantage for you. Also, there’s this dynamic of those that really understand the continent have a disproportionate advantage compared to those who base their strategies on perception. Talk to me about the role of private equity and sovereign wealth in financing the development of the continent. There is more than $1 billion in this space, where do you see the opportunities and how can businesses tap more into these funds? There is a huge potential to invest in Africa. Africa needs investments across every asset class. When you look at infrastructure today, we invest about $70 billion per year. Twenty years ago, we invested about $40 billion, but we need to invest $150 billion. So we’ve progressed but there’s a long way to go, and we can say that everywhere. Private equity firms over the last 10 years have been growing, but the reality is that investments have not done great for PE firms when you look at the risk-adjusted returns, which dip into the single digits. So some firms are saying, “if we are going to do all this work in Africa to get less returns than in the United States, why bother?” But what you don’t find is that everyone who set up a PE firm can raise money and show their success. I think we will start seeing a “winner takes all” game. Those that perform well are the ones who will be able to raise a lot of money, and those who do not will struggle. I always say that I’ve never seen a really good business that has not been able to raise money, because capital is chasing opportunities. If you have the right story, the right investors, you’ll find the money. You will find more and more and, generally, the theme that PE firms are really leveraging is the concept of the African consumer: They are young, the region is fast-growing, and urbanizing. If you project 10-15 years, and combine population growth with disposable income, what you get is an exponential growth in demand, and that is what you are seeing in Africa and that’s what a lot of the firms are banking on.