In 2010, after a decade-long commodities super cycle, a report by McKinsey Global Institute – titled Lions on the move: The progress and potential of African economies – revealed an optimistic growth story in Africa. But the recent drops in the prices of oil and other commodities have changed the picture, with the average annual growth rate for the region slowing from 5.4% between 2000 and 2010, to 3.3% between 2010 and 2015.
In light of this, McKinsey’s latest research report, Lions on the move II: Realising the potential of Africa’s economies, highlights a number of economic realities and new opportunities that businesses should be aware of.
1. Africa could double its manufacturing output by 2025
While the continent’s manufacturing sector underperforms – compared to those of other emerging regions – it has the potential to nearly double output, from US$500bn in 2015, to $930bn in 2025. This increased productivity would generate between six and 14 million jobs. Key to this would be creating a more enabling environment for manufacturers by addressing factors hindering the ability to produce and export goods.
According to the report, three-quarters of Africa’s manufacturing potential lies in African-based companies meeting local demand, considering that the continent imports one-third of its food products. The other quarter would result from an increase in exports.
2. Africa’s GDP statistics show a misleadingly negative story
The continent’s GDP, annual productivity and foreign direct investment growth rates have all slowed in recent years. However, McKinsey notes that Africa’s overall growth slowdown largely reflects economic challenges in two distinct groups of countries: “North African countries caught up in the turmoil that followed the democracy movements collectively known as the Arab Spring, and oil exporters affected by the sharp decline in oil prices”. According to the report, these two groups account for nearly three-fifths of Africa’s combined GDP.
Tunisia, Egypt and Libya were the North African countries most affected by the Arab Spring – which began in early Tunisia and spread across Arab nations 2011. As a result, these three markets did not grow at all between 2010 and 2015 – having experienced an average growth of 4.8% over the previous decade. For oil-exporting nations like Angola, Nigeria, Algeria and Sudan, growth slowed from 7.3% to 4%. Both groups also experienced a decline in productivity growth.
However, for the rest of the continent, the GDP growth rate actually increased to an average of 4.4% from 2010-2015, compared to 4.1% the previous decade.
“Since 2010, GDP growth has accelerated in around half of the largest 30 economies and decelerated in the other half. The decelerating economies include the continent’s six largest — Nigeria, Egypt, South Africa, Algeria, Morocco, and Angola — while the accelerating countries include Botswana, Cameroon, Côte d’Ivoire, Democratic Republic of Congo, Ethiopia, Gabon, Ghana, Kenya, Madagascar, Namibia, Senegal, Tanzania, and Zimbabwe.”
3. Cities are key to capturing Africa’s consumer opportunity
Household consumption is expected to grow by 3.8% per year over the next decade, from $1.4tr today to $2.1tr. To tap into this opportunity, McKinsey advises consumer-facing companies to focus expansion strategically on key, large cities.
“Per capita consumption in large cities is 79% higher than the average of these cities’ host countries. In Nairobi, Kenya, and in the Nigerian cities of Abuja, Ibadan, Lagos, and Port Harcourt, per capita consumption is more than double the national average. The top three cities in Angola and Ghana account for more than 65% of national consumption,” the report explains.
“Consumption is highly concentrated in a small number of cities—just 75 cities across Africa accounted for 44% of total consumption in 2015; this will increase to 49% of total consumption by 2025.”
4. Nigeria to account for more than 20% of African consumption by 2025
Nigeria’s current struggles with slower growth, local-currency weakness, and high inflation have placed pressure on consumers. However, McKinsey research shows that the populous West African market will account for more than 20% of African consumption in 2025. Consumer-facing companies must therefore make sure they have a “meaningful presence” in the market, along with the other emerging centres of consumption, Egypt and East Africa.
“Consumer-facing companies cannot afford to ignore the market even if the business environment is challenging.”
5. Large African companies are growing faster than global peers
According to the report, the continent has 700 large companies with an annual revenue of more than $500m each, with 400 generating more than $1bn per year. These are generally growing faster and are more profitable than their global peers – particularly within the wholesale and retail, food and agri-processing, healthcare, financial services, light manufacturing, and construction sectors.
“In addition, there appears to be significant potential for further growth given the fact that these six sectors today remain relatively fragmented: consolidation could unleash even more opportunity for corporate Africa,” notes the report.
However, Africa has only 60% of the number of large firms in other emerging regions. Furthermore, their $2bn average annual revenue is half that of large firms in Brazil, India, Mexico and Russia.
“Companies looking to grow across the continent should develop a strong position in their home market, use that as a base for expanding into markets well beyond their immediate region, adopt a long-term perspective and build the partnerships needed to sustain success over decades, and be ready to integrate what would usually be outsourced.”
6. B2B services represent a larger opportunity than consumer market
While Africa’s consumer market has made headlines over the last decade, McKinsey notes that the relatively untapped business-to-business (B2B) sector offers an even a larger opportunity. In 2015, companies in Africa spent $2.6tr on B2B – 40% of which was in Nigeria and South Africa.
According to the report, B2B demand is expected to grow by $1tr over the next decade to reach $3.5tr by 2025. Half of this is expected to be spent on materials; 16% on capital goods; and the rest on a range of services – including transportation, telecommunications and business and financial services.
“Services consumption is set to grow the quickest at 3.5% per year,” notes McKinsey.