6. Case Examples
CPG Co.: Making Business Work in Africa’s Harsh Environment
Doing business across the African continent is as fraught with complexity for multinational companies like CPG Co. as it is filled with opportunity. In Nigeria, Ivory Coast, Kenya and Zimbabwe, the company struggles against an adverse business environment that elevates its risks and a patchy infrastructure that undermines operational efficiency. These barriers limit Africa’s integration into global supply chains and the breadth of goods available to African people.
Companies like CPG Co., a consumer packaged-goods producer, that hope to capitalize on Africa’s strong growth potential must be prepared to encounter an adverse business environment that gives rise to a wide range of problems that makes it difficult for them to operate. Unstable politics within and among African nations have riven the continent with a wide range of internal conflicts that pose a significant threat to industry. Civil unrest in Nigeria, for example, has brought CPG Co.’s business to a temporary halt in the past.
Political risks raise costs and complicate financing
National policies in the region lack continuity, further heightening uncertainties CPG Co. faces during and immediately following elections. When Kenya held elections recently, for example, CPG Co. stockpiled between two and three times its normal level of inventories, a precaution that proved prudent when the highly contested election outcome was followed by violence and a civil political crisis. Following Zambia’s 2011 presidential election, a switch in the party in power paired with political and economic mismanagement has had heavy implications for businesses.
Africa’s often disruptive political environment increases personal safety and security concerns that lead many companies to decide not to enter problematic markets. For those that do, crime rate and theft across the transport chain drive up operating costs. Though less dangerous, endemic corruption further burdens operations. So-called “soft corruption” in the form of bribes paid to officials at borders and ports in order to speed up the shipment process has a negative impact in the form of severe delays on companies like CPG Co. that refuse to pay. The World Bank has estimated that corruption can absorb some 3% of revenues for business in Africa, roughly equivalent to what they pay in security costs72 (see figure).
Risks and uncertainties scramble the company’s willingness and ability to arrange financing. In the historically highly unstable markets of Zimbabwe and Malawi, CPG Co. withholds credit and insists on ending each month in a positive cash-flow position. The company’s reliance on its ability to generate cash limits its growth, curtails investment and inhibits ongoing operations in both countries. When cash collections needed to keep the business running lag, CPG Co. has been forced to suspend operations – in one instance stalling production in a country for some four to five weeks.
Not surprisingly, perceived instability and deep uncertainties in high-risk countries are a major influence on corporate investment decisions and have major consequences for country competitiveness. For example, CPG Co. has lost € 6 million (US$ 7.9 million) because of currency depreciation in one instance alone, an important factor in its decision not to tie up capital in the country affected. But CPG Co. is open to re-evaluating investment decisions when policies warrant, as it is doing in response to the recent relative stability enjoyed by Zimbabwe. Any change, however, will require that the investment have a rapid payback period in order to mitigate the still extraordinarily high risk of committing capital there.
In African countries characterized by a moderate risk environment, CPG Co. applies its more general global criteria on investment decisions and focuses specifically on the risk to cash flow. For an investment to get a green light, its expected return on investment (ROI) and payback period must be on par with global standards – typically, an ROI of between 25% and 50% with a payback period of less than four years, depending on the investment. In some cases, the business need for making the investment may influence CPG Co.’s decision to proceed. For example, the company decided to invest in a warehouse in Nigeria despite a slight lower ROI and longer payback period because the lack of logistics services in the country made having one urgent.
Depending upon the country and degree of risk it presents, CPG Co. weighs three different investment options for building its market presence. The first approach, importing finished goods, requires no investment and exposes CPG Co. to the least risk, but it results in the most expensive landed unit costs. One factor that drives up costs is the need to import three to four months’ worth of stock with the attendant freight, clearance and duty expenses. The second approach, manufacturing goods locally through third-party contractors, requires minimal investment, but it exposes CPG Co. to greater risk than importing does. Local contract manufacturers lack the scale necessary to maximize production efficiencies, resulting in higher overhead costs per unit. The final approach, producing goods onshore, carries the highest risk. Heavy investment is needed to build capacity, but controlling production results in the lowest cost finished goods. As scale ramps up, unit costs fall.
Poor infrastructure hobbles operations
The poor quality of infrastructure across Africa slows the movement of goods through the supply chain and cuts off access to some regions. Ports operate beyond capacity at most African harbours. At Mombasa, Kenya, the main port for all of East African trade, docking and unloading can stretch out from five to 14 days. Lagging telecommunications infrastructure makes it difficult to track containers, rendering operations and planning cumbersome and time consuming. As a result, vessels departing from Mombasa sometimes depart half-empty due to poor tracking infrastructure that leaves containers “lost” within the system. Finally, weak road and rail infrastructure make it difficult to reach many inland markets. The less efficient transport means that raw materials shipped to African destinations will face higher overall logistics costs than other destinations with fewer barriers (see figure). The inaccessibility and high cost to reach some markets requires CPG Co. and other large shippers to set up additional regional plants to cover the geography and to carry excess inventories at each node of the supply chain.
Source: Private Sector Development blog, World Bank.