African companies and govts need to work harder to benefit from growth potential – McKinsey

15th September 2016

By: Anine Kilian

Contributing Editor Online

  

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Some of Africa’s economies have been experiencing significantly less accelerated growth than five to fifteen years ago, having started experiencing a marked slowdown as a result of lower resource prices and higher sociopolitical instability. This is despite the bulk of the continent’s countries showing improved growth rates since 2010/11, according to a new McKinsey Global Institute report, titled ‘Lions on the Move II’.

The global consulting firm notes, however, that, while the continent’s fundamentals remain strong, African governments and companies will need to work harder to make the most of its potential.

Africa’s real gross domestic product (GDP) growth was an average 3.3% a year between 2010 and 2015, which is considerably slower than the 5.4% seen from 2000 to 2010.

However, McKinsey points out that the former GDP growth average was offset by a sharp slowdown in growth among oil exporters and North African countries affected by the 2011 Arab Spring democracy movements.

“The rest of Africa posted accelerating growth at an average annual rate of 4.4% from 2010 to 2015, compared with 4.1% from 2000 to 2010,” says the report.

With this in mind, Africa, as a whole, is projected by the International Monetary Fund to be the world’s second-fastest growing economy in 2020.

This is because the continent has robust long-term economic fundamentals and, in an ageing world, it has the advantage of a young and growing population and will soon have the fastest urbanisation 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 labour force.

Meanwhile, McKinsey’s report also points out that, with Africa sitting on abundant resources, the continent could nearly double its manufacturing output from $500-billion now to $930-billion in 2025, provided countries take decisive action to create an improved environment for manufacturers.

Three-quarters of the potential could come from Africa-based companies meeting domestic demand, while the other quarter could come from more exports.

“The rewards of accelerated industrialisation would include a step-change in productivity and the creation of 6-million to 14-million stable jobs over the next decade,” the report notes.

It further highlights that spending among consumers and businesses today totals $4-trillion, with household consumption expected to grow by 3.8% a year to 2025 to reach $2.1-trillion.

“Business spending is expected to grow from $2.6-trillion in 2015 to $3.5-trillion by 2025. Tapping consumer markets will require companies to have a detailed understanding of income, geographic and category trends,” notes McKinsey, adding that those thriving in business markets will be required to offer products and develop sales forces able to target the relatively fragmented private sector.

McKinsey believes corporate Africa needs to step up its performance to make the most of these opportunities. “The continent has 400 companies with revenue of more than $1-billion a year, and these companies are growing faster, and are more profitable, in general, than their global peers,” says the firm.

It adds, however, that Africa has only 60% of the number of large firms one would expect if it were on a par with peer regions. Further, the average revenue of these firms, at $2-billion a year, is half that of large firms in Brazil, India, Mexico and Russia, for instance.

The report also points out that no African-owned company is in the Fortune 500.

McKinsey, therefore, suggests that companies looking to grow across the continent should first develop a strong position in their home market, use that as a base for expanding into markets beyond their immediate region, adopt a long-term perspective, build the partnerships needed to sustain success over decades, and be ready to integrate what would usually be outsourced.

“They should look for opportunities in six sectors that the report has highlighted – wholesale and retail, food and agriprocessing, healthcare, financial services, light manufacturing and construction – with high growth, high profitability and low consolidation, and invest in building and retaining talent,” says the firm, concluding that African governments will need to play a stronger role in “unleashing renewed dynamism” on the continent.

Edited by Samantha Herbst
Creamer Media Deputy Editor

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