Sub-Saharan Africa is the last frontier in cheap labour for the world’s manufacturing needs and offers excellent potential as a frontier market investment. Rising wages in China provide an opportunity for the continent’s poorest countries to attract investment and industrialize. While the manufacturing sector appears to have the most opportunities, technology is another promising area of growth.
- Ethiopia and Tanzania emerging as textile manufacturing hubs
- Nigeria, Mozambique and Ghana leading in the automotive sector
- Kenya, birthplace of the M-pesa mobile payment service, establishing as regional hub for Information & Communication technologies.
- Improved availability of skilled labour across Sub-Saharan Africa reducing dependence on expats
- American Depository Receipts (ADRs) or ETFs are a convenient way of accessing this growth story
Africa Has Potential To Be China’s China
Africa as a manufacturing hub has been described as China’s China. As wages in China rise and the supply of cheap agricultural labour to the industrial sector dries up, demand for Africa’s workforce is on the rise. According to the UN Population Fund, Sub-Saharan African countries have a large youth cohort with half the population across fifteen countries under the age of eighteen in 2014.
Countries like Ethiopia, Tanzania and Kenya are positioning themselves at the lower end of the value chain by providing cheap, semi-skilled labour to Chinese clothing and footwear manufacturers who have been rapidly setting up factories in the region. The monthly textile wage in Ethiopia in 2014 was $21 compared to $155-$297 in China. These factories have a typical employment capacity of 20,000-50,000 workers . Former World Bank economist Justin Lin estimates that over 80 million Chinese jobs can potentially be exported to Africa.
Ethiopia and Tanzania have become especially attractive as they can grow their own cotton, which shortens production time. On the domestic demand front, a downturn in revenues from commodity exports has reduced the flow of imports and, in turn, boosted domestic industries such as the automotive sector.
The domestic auto industry in Sub-Saharan Africa was virtually non-existent till the early 2000s as cheap second-hand imports from the U.S. and Europe made local manufacturing unviable. Protectionist government policy has since drastically altered the landscape and countries like Nigeria and Mozambique are now auto assembly hubs. Not only have foreign brands set up auto assembly plants in the region, indigenous manufacturers have also entered the market.
Growing Technological Development
Nigeria’s Innoson Motors and Mozambique’s Matchedje Motors each launched their first domestically produced cars in 2014. Uganda’s Kiira Motors will start production by 2018, while Ghana’s Kantanka Automobile Company is awaiting approval for commercial release of its cars.
The region is catching up in the technology sector as well. The capitals of several East African countries have become home to technology hubs that provide training and support to software developers and entrepreneurs.
There are 90 technology hubs in Africa, according to conservative estimates from the World Bank. Being the pioneer innovating country for M-Pesa mobile payments, Kenya is now positioning itself as the regional hotspot for Information and Communication Technology outsourcing (ICT). The sector has increased its contribution to Kenya’s gross domestic product to 12% in 2014 from 9% in 2006.
Nairobi, as well, has a growing concentration of ICT companies delivering software solutions and BPO services to governments, NGOs and private companies. Tanzania, which completed two of the five phases of its national broadband backbone network in 2012, expects ICT to constitute 5% of GDP in 2015 from 2.7% in 2009.
The Emerging Talent Pool In Sub-Saharan African Countries
Hiring managers in Sub-Saharan Africa have historically faced a mismatch between their requirements for, and the availability of, skilled personnel. This challenge nullifies the advantage of a large pool of young graduates. The domestic skill gap has to be filled with expatriate talent.
Nevertheless, a 2014 survey of 300 Sub-Saharan Africa hiring managers in 23 countries by EY reported that compared to the previous year, companies are finding it easier and quicker to fill executive roles with locals rather than expatriates.
The premiums expatriates command is also dropping. For almost half of the managers surveyed, the salary commanded by the most expensive expatriate talent declined to 50% above the local salary in 2014 from 300% in 2013.
ADRs and ETFs – Convenient Way of Accessing Sub-Saharan African Equity Investments
Despite the progress in many Sub-Saharan economies, investing in them remains challenging. With low liquidity and a lack of developed capital markets, it is difficult to get targeted exposure to Kenya, Ethiopia or Ghana. ADRs and ETFs remain the most convenient ways of accessing equity investments.
Like most frontier markets, companies are mostly private and still small, albeit growing fast. Hence, it is difficult to find ADRs in sectors like textile or auto manufacturing. Some of the larger, liquid companies include MTN Group (US:MTNOY) in telecom and Naspers (US:NPSNY) in media.
Most of the Africa-focused ETFs tend to be heavily tilted toward South Africa and Nigeria, whose markets are more developed than others in Sub-Saharan Africa. That said, the Market Vectors Africa ETF (US:AFK) is one option worth exploring. The index includes companies that earn a majority of their revenue in Africa and doesn’t have a restriction on domicile. Nigeria, South Africa and Egypt account for 57% of total weight and Commercial International Bank (Egypt), Guaranty Trust Bank PLC and Nigerian Breweries PLC are the top three holdings.
Janki Sharma is a freelance economist based in Singapore and writes for Macrovue.
 Based on data available as of 19 April 2016 (Source: Factset)
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