CHAPTER 2

THE BIG FIVE

GROWTH TRENDS WITH A TWIST

By now, we hope we’ve convinced you that Africa is a key market to watch. But we’ve also made it clear that the lions of African business are outpacing their slower rivals, and sometimes eating them for lunch. The companies that turn Africa’s opportunity into successful enterprises have a common starting point: their insight into the long-term growth trends under way across the continent.

Consider the example of digital payments. By some estimates, cash is used for more than 99 percent of payments in African countries such as Ethiopia and Nigeria; by contrast, digital channels account for more than half of all transactions in many European countries.¹ Cautious investors might see that gap as a barrier to growth—when economies are heavily cash-based, that hampers commerce, financial-services penetration, and credit issuance. But bolder thinkers see the transformative growth opportunity waiting to be unlocked. One such trend-spotter is Mitchell Elegbe, a Nigerian engineer and entrepreneur. In 2002, he founded a company called Interswitch, with the mission to “connect Nigeria to the digital world.” It has grown rapidly to become one of Africa’s leading digital-payments providers: in 2017 it processed $38 billion in transaction value.

Today, Nigerian consumers and businesses make more than 300 million digital transactions a month across a suite of Interswitch-enabled channels. Backed by two leading private equity firms, UK-based Helios and US-based TA Associates, Interswitch plans to list on the London and Lagos stock exchanges in 2019. It could raise as much as $1 billion in its initial public offering.²

Elegbe told us how, back in 2002, he had observed his fellow Nigerians carrying piles of cash with them to pay for everything from groceries to cell phone airtime to utility bills. Debit and credit cards were a rarity, as were point-of-sale (POS) machines. ATMs, too, were few and far between, and each could be used only by customers of one bank, as Nigeria lacked the infrastructure for interbank ATM connectivity. The result was that people spent hours in banks queuing for cash, or simply kept it under the mattress to avoid the hassle.

Elegbe spotted a big unmet need and started Interswitch in order to address it. In its early years, the company built the first interbank transaction switching and payment processing infrastructure in Nigeria, which enabled interbank ATM sharing as well as the first real-time POS system. Its Paydirect platform revolutionized revenue collection for governments and large companies, while its online payment gateway, Webpay, opened the way for e-commerce in Nigeria. In 2008 it launched Verve, today Nigeria’s most widely used card brand. The next year it introduced Quickteller, an online payment platform that is accessible via a wide variety of digital and physical channels; today the platform has more than 15 million users. A more recent innovation is Paycode, which enables cardless transactions such as ATM withdrawals and POS payments, using a digital token. Interswitch is also helping unleash contactless payments in Africa: it is upgrading its systems to allow consumers to scan “quick response” barcodes from their cell phones.

In Elegbe’s words, Interswitch’s role is to “facilitate forms of exchange that are secure, convenient and consistent.” Yet Elegbe sees many more opportunities to find digital solutions to Africans’ daily challenges and grow his business. In 2017 Interswitch unveiled a bold five-year strategy to broaden its service offering both to businesses and to consumers and to expand its footprint in African countries beyond Nigeria. One key thrust of that strategy is to build up Interswitch’s “financial inclusion” business, which helps banks, merchants, and mobile networks deliver digital-payment services to Africans who do not have bank accounts. There is plenty of room for that particular business to grow: in Nigeria alone, an estimated 55 million adults, more than half the total, fall into that category.³

Interswitch has identified a growth trend hidden in Africa’s underdevelopment. As the continent’s populations grow in size and spending power and large and small businesses multiply and expand, demand for digital solutions and infrastructure is exploding. Some basic solutions, like ATMs and POS machines, are widespread in the West but relatively scarce in Africa. Others, like Quickteller, are new solutions or adaptations that need to be “made in Africa.” As Elegbe told us: “If the problem has already been solved, your business won’t achieve sustainable growth. We sought out an opportunity with long-term growth potential, and then worked assiduously to realize that opportunity by providing people and businesses with full control over their finances.”

As our global executive survey shows, businesses around the world are keenly aware of the opportunity presented by Africa’s megatrends (see figure 2-1). But you need to parse those trends carefully, like Elegbe did, if you are to spot solvable problems with long-term growth potential. Our survey suggests that executives with on-the-ground experience often do a better job of identifying those opportunities. We asked respondents how many African nations they had visited for business or personal reasons. Among those who had visited multiple countries, more than three-quarters expected rapid economic growth in Africa over the coming decades. But only half of those who had never been to Africa thought the same.

Do local business executives see something that their global peers are missing? To help you find out, we’d like to invite you back onto the Land Rover to take a tour of what we call Africa’s big five: powerful long-term growth trends that are awesome to behold, but that can be just as elusive and unpredictable as any beast in the wild. Here are those five big trends—and their twists:

1. A fast-growing, rapidly urbanizing population with rising spending power—but with average incomes still low by Western standards and high levels of economic inequality

2. A trillion-dollar opportunity to industrialize Africa, both to meet rising domestic demand and to create a bridgehead in global export markets—provided manufacturers can overcome a myriad of barriers ranging from power outages to trade barriers to productivity challenges 

3. A big push by governments and the private sector to close Africa’s infrastructure gaps, including those in electricity, transport, and water—although it will be a huge challenge to resolve the massive backlog

4. Continued resource abundance in agriculture, mining, and oil and gas, with the prospect of rising innovation and investment in these sectors unlocking new food production, energy, and wealth for Africa—but, just like manufacturers, companies in these sectors must overcome steep barriers to realize that potential

5. Rapid adoption of mobile and digital technologies that could leapfrog Africa past many obstacles to growth—provided companies can marshal the investment funding and technical talent needed to overcome historic underdevelopment and achieve scale

TREND 1: A FAST-GROWING, URBANIZING POPULATION WITH BIG UNMET NEEDS

We believe that rising demand from African consumers and enterprises is one of the world’s largest but least understood business opportunities. One factor driving that demand is sheer numbers. The continent will account for one-fifth of humanity by 2025, and will see its population double by the middle of this century. That will make it one of the only regions on earth with an expanding labor force and expanding group of consumers.

Already, between 2010 and 2015, Africa’s working-age population increased by fourteen percentage points compared with nine percentage points in India and only one percentage point in China. In 2034, the continent is expected to have a larger working-age population than China or India, at 1.1 billion people. Africa’s growing labor force makes the continent unusual in a broadly aging world. An expanding working-age population is associated with strong rates of GDP growth and offers a potential demographic dividend.⁴ As Donald Kaberuka, past president of the African Development Bank (AfDB), told us: “The businesses that look properly at these long-term megatrends will be the winners. And the most important of those long-term trends are around demographics. Whether you’re providing health care, housing, education, or infrastructure for growing cities, that is where the business opportunities will lie.”

Indeed, Africa is in the midst of an historic shift from a rural, agriculture-based economy to a diversified urban economy. More than 80 percent of its population growth over the next few decades will occur in cities, making it the fastest-urbanizing region in the world. By 2030, Africa will have seventeen cities with more than 5 million inhabitants each—up from only six in 2015. Some, like Addis Ababa and Nairobi, will be familiar names to global companies. Others, like Ibadan and Kano in Nigeria, and Ouagadougou in Burkina Faso, are less likely to be on corporate radar screens. Western investors will have an even harder time identifying the dozens of midsize cities across the continent: by 2030, there will be eighty-nine African cities with populations of 1 million or more (figure 2-2).⁵

Knowing your way around Africa’s fast-growing cities is critical if your business is to participate in the continent’s growth. Throughout history, income has risen in tandem with urbanization and industrialization. That was true in eighteenth-century England and Europe, nineteenth-century America, and twentieth-century Japan, and it’s true now in China, India, Africa, and other emerging markets. People are leaving their farms behind, getting more productive jobs, and learning new skills in cities—and raising their income by a factor of two or more. As they do so, they provide the consumption, labor, and entrepreneurial spirit to support the emergence of an increasingly sophisticated and profitable business sector. The difference is that today this process happens much more quickly. In 1975, only 25 percent of Africans lived in cities; by 2015, that share had risen to 40 percent. Around 2037, Africa will have shifted to a majority-urban population.⁶

Paul Collier, professor of economics and public policy at Oxford University’s Blavatnik School of Government, is one of the foremost experts on urbanization in Africa and the developing world.⁷ As he pointed out to us, “Between now and 2050, Africa’s urban population will triple—so two-thirds of Africa’s urban space has yet to be built. That’s the vital struggle: to get the coming two-thirds better than the existing third.” Collier worries that Africa’s urbanization is producing “congested sprawl,” and that, without better connectivity and clearer land rights, the continent risks losing out on the productivity gains that other urbanizing regions have achieved. But he points to a few fast-growing African cities, including Addis Ababa in Ethiopia and Kigali in Rwanda, that are investing ahead of the curve in infrastructure, and showing the way to others.

Collier is also cautiously optimistic about Lagos. With as many as 21 million people, Nigeria’s commercial capital is Africa’s largest city and is often seen as an urban-planning nightmare. “If you visit Lagos for the first time, the chances are you’ll be horrified,” he said. “But if you’ve been going there for forty years, as I have, it’s a remarkable improvement on what it was.” Collier credits three successive, democratically elected governors of Lagos state. Over a period of eighteen years, they have boosted the city’s tax base, built much-needed roads and bridges, and brought greater order to the metropolis after its neglect under military rule in the 1980s and 1990s. As Collier put it, the task facing Lagos’s government is to “retrofit from disaster.” It’s a huge challenge, but, he notes, “certainly the government of the moment understands the problem. In many respects, Lagos is Africa’s most important city of the future. If Lagos can be got right, that’s a huge success for the continent.”

Akinwunmi Ambode, the governor of Lagos State, told us about his bold plans to make Lagos a better city. His vision is to double the city region’s GDP, and he is pushing major infrastructure, educational, and health-care advances—including installing streetlights on a large scale, building a rail- and waterway-based mass transit network, expanding vocational training, and developing new public health facilities. He is also finding imaginative ways to close Lagos’s multibillion-dollar infrastructure gap, including use of public–private partnerships.

A $4 TRILLION MARKET—BUT CAN YOU SERVE IT PROFITABLY?

Africa’s fast-growing, urbanizing population already represents a sizeable market—and it’s only getting more attractive. We estimate that private consumption in Africa rose from $860 billion in 2008 to $1.4 trillion in 2015—significantly higher than that of India, which has a similar population size. We forecast that it could reach $2.1 trillion by 2025.⁸ The business-to-business market represents an even larger opportunity. In 2015, companies in Africa spent some $2.6 trillion building factories, buying equipment and services, and gearing up to serve customers across the continent. We expect annual spending by African businesses to reach $3.5 trillion by 2025.

Which companies are best positioned to benefit from this trend? African consumers surveyed by McKinsey say that clothes, appliances, and gadgets are the top items they plan to purchase next.⁹ There is also rapid growth in spending on discretionary categories such as soft drinks, alcoholic beverages, and meat.

Zambeef, a Zambia-based food company that does everything from raising cattle, hogs, and poultry to manning supermarket meat departments, has ridden this wave to great effect. Zambeef has grown from a staff of sixty in 1994 to over seven thousand today, selling steaks and chops to higher-income supermarket shoppers in sub-Saharan Africa and beef liver, chicken feet, and other inexpensive cuts to small shops catering to lower-income customers. Since there is no cold-chain logistics in Zambia, or indeed most of Africa, Zambeef runs its own fleet of refrigerated delivery trucks. It controls the entire value chain, even producing its own animal feed. After its livestock are slaughtered for market, a Zambeef subsidiary tans the hides, turning some of them into shoes. The company’s revenues climbed from $160 million in 2010 to $220 million in 2016.¹⁰

Just as organizations like Zambeef have experienced rapid growth, however, some international consumer goods firms have struggled to achieve profitability in Africa. In 2015, for example, Swiss-based foods company Nestlé announced it was scaling back its African business. One of its executives was quoted as saying: “We thought this would be the next Asia, but we have realized the middle class in the region is extremely small . . . urbanization is usually very good for manufacturers, but in this case many people are literally living in slums, so they have nothing to spend.”¹¹

What’s the true picture? We find that more than 50 million African households—around 30 percent of the total—already have incomes above $5,000 a year. This may sound low by Western standards, but it’s the level at which people typically begin spending more than half their income on discretionary items. We expect that number to exceed 70 million households by 2025. The number of “global consumer” households—those earning $20,000 or more—is also growing, and is likely to top 10 million by 2025. Of course, a dollar in Africa stretches much further than it does in the West. If we apply purchasing power parity (PPP) to Africa’s consumer numbers, the opportunity looks even more favorable. By this measure, more than 70 percent of African households will have discretionary income by 2025, and more than a quarter will be global consumers. Affluent consumers, mostly concentrated in the North African countries and South Africa, are also on the rise.

AFRICA’S DISPARITIES, AND HOW TO NAVIGATE THEM

Hidden in all these numbers are extreme disparities in income and wealth. Kenya’s capital, Nairobi, clearly shows those extremes. On the one hand, there’s Karen, a serene neighborhood ten miles from downtown, where stately homes tucked inside lush gardens sell for upward of $1 million. But Nairobi is also home to Kibera, the largest slum in Africa, whose seven hundred thousand inhabitants have little electricity, limited water, and only crude sanitation facilities. Kibera is often the first stop for Kenyans moving to the city from remote rural villages.

These two neighborhoods are a reminder of Africa’s high degree of income inequality. Companies seeking to tap the African consumer opportunity must understand the residents of Karen and Kibera alike and make explicit choices about which slice of the market to serve, with which products and services, at what price points. They must also be ready to compete with the informal vendors who command some 70 percent of Kenya’s consumer spending. Take a walk round Nairobi’s bustling streets and you’ll see those entrepreneurs in all their variety. One sidewalk might serve as an informal shoe store, with a dozen merchants ready to haggle with bargain-hunting passersby. Another might be a food market selling freshly prepared meals for less than a dollar, from ugali (cornmeal) to spicy beef stew. Fittingly for a place whose nickname is “the green city in the sun,” some of Nairobi’s roadsides are home to bountiful informal nurseries selling a dazzling array of flowering plants.

That said, there is clearly a place for modern commerce in cities like Nairobi—and not just to serve consumers who live in places like Karen. The city is home to dozens of shopping malls built both by local developers and by international investors from South Africa, China, and elsewhere. Global supermarket chain Carrefour opened three major stores in 2016 and 2017, Botswana-based Choppies has also built a presence in Nairobi, and South Africa–based Shoprite announced in 2017 that it too was entering the Kenyan market. Meanwhile, e-commerce sites such as Jumia and Kilimall are doing brisk business, selling everything from tee shirts to toasters, while the city’s “Silicon Savannah” tech ecosystem is spawning startups like MyDawa (“my medicine” in Swahili), which delivers prescription drugs and other wellness products to 150 secure pickup points across Nairobi.

Companies seeking to serve African consumers must also take into account the fact that the continent’s households—like their societies—are in a state of transition. Many emerging or middle-income consumers must support family members, or save or invest to guard against economic volatility. For example, a thirty-three-year-old Kenyan who works in a bank earns enough to buy appliances such as a fridge and a television. But he is also helping pay for his younger siblings’ education, and he has invested in a small farm. Companies that help such young Africans to save and invest for the future, rather than just seeing them as consumers, are more likely to build sustainable businesses.

The key is to take a longer-term view on Africa’s consumers. To gauge who those will be and what they will buy, it’s worth reviewing the experience of other emerging markets. One of us (Georges) moved to China in 1999 and spent seven years helping global and local companies understand and serve that country’s rapidly rising consumer market. As Chinese consumers urbanized and earned steadily higher incomes, the products they bought followed a distinct development curve—one that brought new opportunities for companies in many different sectors. Initially, consumers’ spending was concentrated on food and essentials such as bicycles. As their incomes rose, they increased their spending on furniture, and then on televisions, mobile phones, appliances, and fashion. Finally, as they entered the affluent bracket, they began purchasing cars, apartments, and houses as well as services such as private health care.

That provides a useful lesson for companies in Africa: focus not just on what consumers are buying today, but on what they will be looking at five or ten years from now.

TREND 2: AFRICA’S COMING INDUSTRIAL REVOLUTION

Hawassa, 170 miles south of Addis Ababa in the Great Rift Valley of central Ethiopia, is a modestly popular tourist town with a population of 350,000. Local and even foreign visitors come to stroll the cobblestone paths along Lake Awassa, the smallest of the Great Rift lakes, which boasts its own pod of hippopotamus. Tourists can rent bikes for the picturesque twenty-eight-mile ride around the lake.

Lately, however, Hawassa has been host to another kind of visitor. Three miles from the lakefront sprawls the Hawassa Industrial Park. Phase 1, which opened in 2017, is a grid of thirty-seven giant red and gray metal sheds covering two hundred and forty-seven acres.¹² Inside, workers at airy workstations churn out shirts, jackets, and socks for labels such as Tommy Hilfiger and Calvin Klein—as well as garment companies from China, Hong Kong, and India—at machines that run mostly on renewable hydroelectric power. They are part of a wave of investment that is making Ethiopia a significant manufacturing exporter: its apparel exports increased nearly sevenfold between 2010 and 2015.

Hawassa is the showcase project of the Ethiopian government’s vision of establishing “dirt-to-shirt” textile hubs. Rather than trying to retrofit a modern industrial plant onto aging legacy infrastructure, this industrial park started with a greenfield location, carefully chosen and ambitiously developed. Hawassa is close to the country’s cotton fields in the Awash Valley. Visitors from Addis Ababa can reach the park in under an hour via a forty-minute flight into its new airport. A highway linking Hawassa with the capital is nearing completion, and a rail line to the Port of Djibouti is being extended to speed finished goods to the export market. Even the local university is expanding to better train workers for the new industry.

Over the past decade, some manufacturing sectors have become internationally competitive and achieved rapid growth. In addition to Ethiopia’s apparel exports, the automotive sectors in Morocco and South Africa increased exports and Egypt increased exports of chemicals and electrical machinery. These examples suggest that some African countries have the opportunity to grow competitive manufacturing exports on a much larger scale than is the case today—and to take on production from “Factory China” as that country’s labor costs rise.¹³ In addition, Africa currently imports much of what it consumes, representing an even bigger opportunity to expand local industry, particularly given the fast-growing demand from local consumer and B2B markets.

In our Lions on the Move research, we calculated that Africa has an opportunity to double its manufacturing output to nearly $1 trillion by 2025.¹⁴ We see major opportunities to meet growing local demand for “global innovation” products such as automobiles and chemicals, as well as for processed goods such as food and beverages, and resource-intensive manufacturing such as cement and petroleum (figure 2-3). Indeed, three-quarters of the growth opportunity in manufacturing lies in meeting intra-African demand and substituting imports. The remaining one-quarter would come from accelerating growth in niche manufacturing exports.

A doubling of Africa’s manufacturing output would be a win for both business and societies. We estimate it would result in the creation of 6 million to 14 million stable jobs directly in the manufacturing sector by 2025, increasing the number of stable jobs in Africa by as much as 11 percent.¹⁵

HOW AFRICAN MANUFACTURERS CAN SUBSTITUTE IMPORTS

As brewers and beverage companies have ramped up production across Africa, they have had to import much of their packaging. That created an opportunity for GZ Industries (GZI) to build Nigeria’s first aluminum-can manufacturing plant in 2010, in Ogun State near Lagos. GZI, founded by a group of private investors and subsequently backed by several local and international private equity firms, sank millions into the 430,000-square-mile plant—which boasts state-of-the-art equipment imported from Europe and the United States.

Danladi Verheijen, managing director of Verod Capital Management, GZI’s early backer, told us: “We saw a massive opportunity. It just made no sense to import aluminum cans from across the ocean. There was significant existing demand, supply chains were already developed, and the benefits were obvious for our customers like Nigerian Breweries (owned by Heineken), Guinness, and Coca-Cola.” GZI’s first plant quickly reached its production capacity of 1.2 billion cans a year, leading the company to open a second plant in Abia State in southeastern Nigeria in 2014. GZI plans to expand across Africa, including establishing a plant in South Africa, where it will go head-to-head with Nampak, currently the largest can manufacturer in Africa.¹⁶

Of course, manufacturing even a relatively simple product such as aluminium cans is often a challenging undertaking; barriers ranging from power shortages to bureaucratic impediments to skills gaps drive up costs and risk. Yet, as many manufacturers have demonstrated, those that can adapt their business models to cope with these barriers can find wide-open opportunities. In fact, many of today’s successful African manufacturers—including the Dangote Group—started life as importers, but later realized that with their intimate knowledge of the market, the savings achievable by cutting out shipping and tariff costs would more than justify their investment in local manufacturing plants. In many cases—like that of Ethiopia’s Hawassa hub—industrial policies put in place by African governments have created incentives that have supported those investments.

The experience of Chinese-owned manufacturing firms in Africa shines a spotlight on the opportunity of import substitution. A McKinsey research project found that Chinese companies already handle an estimated 12 percent of Africa’s industrial production. This share suggests a replication of some of China’s manufacturing might in Africa, with Chinese manufacturing executives increasingly drawn to Africa’s relatively high margins for a range of manufactured goods.

Many of the Chinese manufacturers we interviewed said they were hoping to replicate their success in China, where their factories employed widely available low-cost labor. In Africa, they are moving faster, as they have found ready local markets where they can substitute expensive imports with their own products. Indeed, unlike in China, Chinese factories in Africa are largely serving domestic markets; 93 percent of the revenues of manufacturers we spoke to came from local or regional sales. Among the firms we looked at, more than half reported that they had taken three years or less to make back their initial investment. For example, a manufacturer in Kenya said, “I expect to make back my investment in less than a year because the prevailing market price is so high for my product.”¹⁷

We estimate that African manufacturers—both local and foreign—could more than double their sales to intra-African markets by 2025, increasing their annual revenue by $326 billion.¹⁸ Import substitution makes up a large proportion of that opportunity: Africa imports a large percentage of goods in many categories that could be produced more easily and more cheaply locally. For example, it imports one-third of the food, beverages, and other processed goods it consumes—and two-thirds of its supply of advanced manufacturing products such as cars and machinery.

FROM AFRICA TO THE WORLD: THE EXPORT OPPORTUNITY

Can Africa be a large-scale exporter of advanced manufacturing goods such as automobiles? If you have doubts, take a look at Morocco. The North African nation’s automotive industry multiplied its export revenue by a factor of 12, from $0.4 billion in 2004 to $5 billion in 2015, an annual growth rate of 26 percent. The automotive sector alone added sixty-seven thousand jobs between 2004 and 2015. French automakers Renault and Peugeot have together invested more than $2 billion to create assembly capacity for 650,000 cars and 200,000 engines a year. Morocco has also attracted an ecosystem of global automotive suppliers including Delphi/Aptiv, Linamar, and Simoldes. It has also achieved notable export-led growth in other segments such as aerospace. Morocco has leveraged two distinct advantages: its proximity to large European markets and labor costs that are around one-third those of even the lowest-cost European countries. Morocco’s government adopted a series of industrial acceleration plans to explicitly build on these advantages to power rapid industrialization.¹⁹

Morocco’s success is one indicator of the opportunity to leverage Africa’s relatively low costs and its proximity to major markets to build successful export businesses of both goods and services. Previous McKinsey research estimated that African firms could increase their export revenue by more than $100 billion by 2025.²⁰ Three-quarters of this would come from exports in advanced manufacturing products such as cars and chemicals. But there is also a real opportunity to increase exports of labor-intensive goods, such as apparel, and space to scale up both Africa’s service exports and tourism offerings.²¹ Labor-intensive products, in particular, offer an opportunity for countries with traditionally small manufacturing bases to industrialize their economies while also creating significant numbers of jobs. For example, Vietnam and Bangladesh added 3.7 million and 5.2 million manufacturing jobs, respectively, between 2000 and 2014, many of them related to labor-intensive exports.

Companies making labor-intensive goods in Africa have the opportunity to capitalize on the shift in manufacturing jobs away from China, whose advantage, based in part on low labor costs, is fast eroding: average Chinese hourly wages have risen from $0.43 in 2000 to $2.88 in 2013, an annual increase of 16 percent.²² In many of Africa’s low-income manufacturing nations, labor costs are closer to China’s in 2000. Some countries have already translated this advantage into rapid growth in labor-intensive manufacturing exports. Tanzania, for instance, has achieved annual growth in such exports of 9 percent since 2004; Ethiopia’s labor-intensive manufacturing exports have grown at 12 percent a year.²³

As our colleague Irene Yuan Sun argues, these African countries are already providing proof of a theory in development economics called the flying geese paradigm, which posits that “manufacturing companies act like migrating geese, flying from country to country as costs and demand change.”²⁴ According to this analogy, factories from a leading country are forced by labor-price pressures to invest in a follower country, helping it accumulate ownership and move up the technology curve. This movement shifts the bulk of economic activity in the follower country from low-productivity agriculture and informal services to high-productivity manufacturing. The follower country eventually becomes a leading country, spawning companies in search of new production locations. The paradigm offers a convincing model of how Asian economies developed—in a chain from Japan to the Asian Tigers to China. It also suggests that with the right policies and long-term vision, Africa could become the next global manufacturing hub, not just of clothing and processed food but also of cars, machinery, chemicals, and other advanced manufactures.

OVERCOMING OBSTACLES TO MANUFACTURING GROWTH

Brooks Washington, founder of investment company Roha, is so confident of Africa’s potential for industrialization that he has made the development of manufacturing plants a core focus of his business. Yet Washington is quick to emphasize the risks involved, including getting access to suitable land and sufficient capital, complying with local regulations, and ensuring sufficient power supply. Indeed, his firm exists to help local and global partners and investors manage and mitigate such risks. His advice to manufacturers looking to expand in Africa is: “Have a vision and a plan for the long term. There will be tough times; what’s important is that you survive them and stay focused on the long-term prize.”

Vera Songwe, executive secretary of the United Nations Economic Commission for Africa, is also concerned about the barriers to industrialization and economic diversification, and she is committed to helping solve them. “We’re seeing more and more companies coming in to Africa and wanting to set up manufacturing industries,” she told us. “But many struggle to get land: it takes a long time to get the necessary permits, especially if you’re trying to find land to build new facilities. Some companies spend six months trying to understand which agency is responsible for releasing land for industry. I think this is going to be the big bottleneck: if you’re coming in to set up productive capacities, you need space—most often in semi-urban areas.” Songwe also sees access to reliable, competitive, stable electricity supply as a “big, big constraint” to industrialization. To unlock Africa’s industrialization opportunity and build successful manufacturing businesses, companies will often need to work together with governments and local development agencies to put these basics for manufacturing in place.

Manufacturing hubs such as Hawassa are one effective solution. Songwe emphasizes that such hubs are not a substitute for comprehensive, business-enabling reforms by African countries—but she believes that “industrial zones and specialized regions are very important in some cases.” One advantage is that they make it possible for private energy providers to invest in large-scale electrification. She told us, “An energy investor can come in and say, ‘I will provide energy for seven or eight companies.’” That, in turn, frees manufacturers to focus on their core business.

Songwe points to another critical challenge for Africa’s industrialists: skills. “In most industrial sectors, it’s not easy to find a ready-to-go, skilled labor force,” she said. She stresses that both private-sector firms and national governments must “make a big commitment to training and upgrading labor to meet the market’s needs.” Ideally, manufacturers should partner with governments to design and deliver targeted vocational training programs to build industry-relevant skills, as the auto manufacturers in Morocco have done. Within their businesses, many African manufacturers will need to embrace performance improvements and enhanced management training if they are to compete on a global stage.

TREND 3: AFRICA’S INFRASTRUCTURE GAP—AND THE BIG PUSH TO CLOSE IT

In 2017, Jack Ma, founder of Chinese e-commerce giant Alibaba, spoke to an audience of young entrepreneurs in Nairobi. Reflecting on his own experience in building a business in China, he said: “If the government does not have a solution to any problem, it is an opportunity. If people complain, it is an opportunity.”²⁵ We recommend that businesses adopt that mindset when it comes to Africa’s big infrastructure gaps.

The continent trails the BRIC countries (Brazil, Russia, India, and China) in key measures including electric power consumption per capita, rail density, and road density (figure 2-4). Dr. Akinwumi Adesina, president of the AfDB, puts electrification at the “very top of the list” of priorities for business development in Africa: “The major challenge that so many companies face in Africa is lack of electricity, which drives up the cost of doing business,” he told us. Energy is like blood in the life of an economy—it is the key to getting businesses to work, whether you’re in the banking sector, the agricultural sector, or mining sector, and whether you’re a large company or a small or medium-size enterprise.”

The power gap is much more pronounced in some countries than in others. South Africa and the North African nations are relatively well supplied with electricity, but electricity consumption per person in Ethiopia, Kenya, and Nigeria is less than one-tenth that of the BRICs. In Mali, a typical household uses less electricity in a year than a Londoner uses to boil a kettle each day.²⁶ And nearly 600 million people in sub-Saharan Africa lack access to electricity altogether—with the result that whole communities literally live half their lives in the dark. The electric power gap imposes high costs on businesses too. Among the executives we surveyed, one-third said their companies generate their own electrical power or have backup generators on-site. Mobile phone provider MTN is one. In many of the countries it operates in, it runs a generator at every one of its base stations. Because by some measures, generator-based power costs three to six times what grid consumers pay across the world, it costs the company a reported $22 million a year in Nigeria alone.²⁷

Companies doing business in Africa must face the electricity gap head on—not just generating their own power, but also finding ways to serve power-starved customers and to work with governments, development institutions, and other businesses to ramp up the continent’s power supply. Harvard Business School professor Clayton Christensen neatly summarizes the outlook needed: “The recognition that 600 million people in Africa don’t have access to electricity should be a spur to innovation, not a flag of caution.”²⁸ If there is one company that embodies that can-do approach, it is M-Kopa. In just a few years, the Kenya-based startup has sold solar-power kits to hundreds of thousands of mostly rural households. (We explore its story in detail in part 2.)

More such initiatives are needed: McKinsey forecasts that Africa’s demand for electricity will quadruple between 2010 and 2040. By then, sub-Saharan Africa alone will require as much electricity as India and Latin America combined did in 2010, and there is a big question mark about whether governments, utilities, and the private sector can manage the massive build-out of capacity needed to meet that demand.²⁹

AFRICA’S RISING INFRASTRUCTURE SPEND

There is no shortage of effort to close Africa’s infrastructure gaps. The continent’s spending on infrastructure amounted to $80 billion in 2015—more than double the annual average in the first six years of this century. The rising spend has come from African governments, international development institutions, and private investors. Increasingly, it has come from China’s state-linked institutions, which in 2015 contributed more than one-quarter of total infrastructure investment in Africa. Chinese infrastructure commitments grew at an average annual rate of 16 percent from 2012 to 2015 and have supported many of Africa’s most ambitious infrastructure developments; Chinese contractors account for nearly half of Africa’s international engineering, procurement, and construction (EPC) market.

Increased investment is already making a difference in people’s daily lives. One example is the state-of-the-art Mombasa-Nairobi Standard Gauge Railway in Kenya, opened in 2017, cutting travel time between the cities in half. The Exim Bank of China financed more than 90 percent of the $3.6 billion project. Many more such projects are needed, however. As a share of GDP, infrastructure investment in Africa has remained at around 3.5 percent since 2000—but MGI estimates that this will need to rise to 4.5 percent if the continent is to close its infrastructure gap. In absolute terms, this means doubling annual investment in African infrastructure to $150 billion by 2025. Based on benchmark levels of spending, Africa’s annual investment in power infrastructure will need to rise from $33 billion to around $55 billion in 2025, while annual investment in transport infrastructure will need to increase from $20 billion in 2015 to around $45 billion in 2025. Major additional investment will also be needed in water and telecoms infrastructure.³⁰

A BIG ROLE FOR THE PRIVATE SECTOR

The private sector can play a critical role in delivering new infrastructure. Consider GE, which in recent years has ramped up its presence in the continent, established a regional headquarters in Nairobi, and signed “country-to-company” agreements with several African governments. Its agreement with Nigeria supports the financing, design, and building of vital infrastructure, including developing ten thousand megawatts of power-generation capacity, upgrading airports, modernizing and expanding the national railway corporation’s locomotives, and constructing public hospitals and diagnostic centers. After Nigeria privatized some of its power generation assets, GE also worked with the new owners to ramp up power production.³¹

Jay Ireland, president and CEO of GE Africa, describes this approach as “an umbrella agreement matching our capabilities as a company with the issues the country was facing, including putting more power on the grid, strengthening logistics, and improving health-care outcomes.” The agreements are “a two-way street, with accountability on both sides,” Ireland told us. While GE committed to deliver the outcomes in the agreement, those outcomes depended on Nigeria’s long-term commitment to infrastructure development and its willingness to step in to solve bottlenecks. Besides supplying turbines and other equipment to help build the electrical grid in Africa, GE has also built a large-scale distributed power business, in which companies are able to generate their own power at the point of use.

Tidjane Thiam, CEO of Credit Suisse, believes such private-sector investments and innovations could be catalytic for infrastructure development in Africa. As a one-time chair of the G20 High Level Panel for Infrastructure Investment, he should know. He gives the example of toll bridges, which he helped pioneer as Minister of Planning and Development of Côte d’Ivoire in the 1990s. “At the time, people said there was no way it would work, but it often takes just one successful example to prove a concept,” he told us. Today there are many privately financed toll bridges and toll roads in operation or construction across the continent. Companies investing in infrastructure in Africa must be ready to be “pioneers at the frontier of development,” Thiam said; if those pioneers are smart about managing risk, they will reap rich rewards down the line. “In infrastructure development, most of the risk is in the early stages. Once you’ve built the asset, be it a power plant or a factory, the risk goes down by multiples.” He added that targeted interventions by multilateral institutions can do much to mitigate the early-stage risk in infrastructure projects.

One such intervention, by the AfDB, is the creation of Africa50, an infrastructure investment platform focusing on high-impact national and regional projects in the energy, transport, information technology, and water sectors.³² “Our goal is also to tap long-term savings from within and outside Africa by helping create an asset class attractive to institutional investors,” said CEO Alain Ebobissé. “We are doing this by increasing the number of viable, bankable private and PPP projects . . . as well as by investing in later-stage private and PPP projects.” The purpose, he said, is to “contribute to the development of Africa’s infrastructure as quickly and broadly as possible.”³³

The AfDB is driving a broader campaign to “light up and power Africa” as the first in its “High 5” strategic priorities. It has committed $12 billion to energy projects between 2017 and 2022, and hopes to attract a further $45 billion to $50 billion in private sector investment.³⁴ The Power Africa program launched by US president Barack Obama in June 2013 has also enlisted the private sector in the electrification effort. As of 2017, it had leveraged more than $40 billion in commitments from the private sector to add nearly seven thousand megawatts in generating capacity across the continent.³⁵

THE CHALLENGE OF SPRAWL: BUILDING BETTER AFRICAN CITIES

Beyond electricity, Africa faces other serious infrastructure gaps. For example, nearly a third of African households lack access to running water, and issues with reliable water supply are a challenge for many businesses too. And more than a fifth of respondents to our survey cited unreliable logistics and transportation infrastructure as one of the most serious barriers to operating a business in Africa. This affects their employees as well: while a few cities, such as Addis Ababa, have state-of-the-art rail and bus systems, transport networks in many of Africa’s burgeoning cities are hugely inadequate to commuters’ needs. Two of Africa’s largest cities—Johannesburg and Nairobi—have been included in a global index of the top five most painful cities for commuters.³⁶ Given our own experience in Lagos’s traffic jams, we would add it to the list.

As mentioned earlier, urbanization expert Paul Collier believes that “congested sprawl” is one of the greatest risks to Africa’s economic development. As he told us, “In a modern economy, you need three different types of connectivity to enable scale and specialization. You need firms to connect to workers. You need firms to connect to customers. And you need firms to connect to each other. That high degree of connectivity takes place in a well-functioning city.” But many African cities, he warned, “are not urbanizing in a form that achieves connectivity.” As a result, “individual firms just avoid the place altogether . . . or those firms become very dispersed around the city.”

African cities need to design and deliver efficient mass transit systems to reduce the daily commute and increase business connectivity. McKinsey estimates that investing in better public transportation, alongside strategies to densify urban development, could give back more than one week a year to Africa’s urban commuters.³⁷ To support healthy urbanization more broadly, Africa’s urban managers also need to plan in a concerted way to avoid the pitfalls of unmanaged urbanization and ensure that urban growth translates into sustainable economic development. That includes encouraging densification rather than urban sprawl, especially informal urban sprawl.³⁸

INFRASTRUCTURE FOR LEARNING AND HEALTH

Beyond core infrastructure, there are also many areas where companies are partnering with African governments to strengthen the provision of basic services. In Liberia, Bridge International Academies is the main partner in a government pilot scheme that involves state-funded private operators running public primary schools. The government established the program in an effort to transform the performance of the country’s school system: in 2013, none of Liberia’s twenty-five thousand school-leavers passed the university entrance exam.

There are also opportunities for innovative partnerships in health care. In Kenya, GE secured a $230 million PPP contract to supply diagnostic equipment, such as ultrasound and electrocardiograph machines, to ninety-eight state hospitals, and to equip eleven intensive care units. The contract, signed in 2015, obliges GE to keep the machines in working order at least 95 percent of the time. GE employs a staff of nearly one hundred field engineers to deliver on this promise. The company reports that its health-care business makes good margins in Africa, and it considers its Kenyan model exportable to other countries.³⁹

TREND 4: AFRICA’S UNTAPPED RESOURCE WEALTH—AND NEW INNOVATIONS TO UNLEASH IT

Africa has long been known for its resource abundance. It is blessed with vast tracts of arable land, and climatic conditions in many parts of the continent are highly conducive to agriculture. The continent’s endowment of mineral resources—which are still underexplored and underexploited—is just as rich. To date, though, Africa has struggled to translate these resources into shared wealth and sustained economic developments. New innovations and investments promise to change that picture.

TURNING AFRICA INTO THE BREADBASKET OF THE WORLD: OPPORTUNITIES IN AGRICULTURE

The productivity of Africa’s farming sector, which is dominated by smallholders, has long lagged that of other regions. Nigeria, for example, has as many as 30 million smallholders, producing more than 90 percent of the country’s farm output. They are typically subsistence farmers who grow only enough for their own needs. As a result, although Nigeria has more than 80 million acres of arable land, it relies heavily on imported food. Its food import bill, according to the United Nations, is about $6 billion a year.

That has prompted a coalition of entrepreneurs, development institutions, and governments across the continent to work together to unlock a “green revolution” in Africa. Consider the example of Nigeria-based Babban Gona (“great farm” in Hausa), a social enterprise serving networks of smallholder farmers. Its members receive development and training, credit, agricultural inputs, marketing support, and other key services. Since its founding in 2010, Babban Gona has enlisted more than twenty thousand farmers, who have on average more than doubled their yields and increased their net income to 3.5 times that of the average farmer. Participating smallholder farmers, who are typically considered a high credit risk, have a 99.9 percent repayment rate on credit obtained via the program.⁴⁰

Babban Gona’s founder is a Nigerian-American, Kola Masha, managing director of impact investment company Doreo Partners. His goal is to enlist 1 million farmers in the program by 2025, providing livelihoods for 5 million people. That will not only boost Nigeria’s food production, but will also help tackle the challenge of youth unemployment in a country with a large and fast-growing population. Says Masha: “We urgently need to create as many jobs as the entire population of Germany.”⁴¹

Smallholder-focused programs like Babban Gona are being launched across the continent, while large-scale commercial farms are also boosting their scale and output. Between them, they could banish famine for Africa, turn the continent into a major agricultural exporter, and build powerful businesses all along the agriculture value chain—from fertilizers to farming, and from agri-technology to food processing. The prize will be shared by hundreds of millions of people, as agriculture is still by far the biggest source of employment in Africa.

African agriculture is attracting the attention of an increasingly global set of investors as well. One of them is Mitsui, the Japanese trading house, which announced in 2017 that it would pay some $265 million for a 30 percent stake in ETG, an African firm that is one of the world’s largest traders of cashew nuts, pulses, and sesame seeds. Mitsui said its investment reflected the “major potential for growth in the African market.”⁴²

Such investments point to a big opportunity for agribusinesses able to innovate and apply best practices and technology to Africa’s farm economy. The size of the opportunity is extraordinary. For example, McKinsey analyzed the potential to increase Africa’s production of cereals, including rice, maize, millet, sorghum, and wheat. We found that the continent could more than quadruple its cereal production, principally by improving yields. That would take cereal production from 189 million tons in 2016 to more than 900 million tons in the future—enough to feed Africa’s growing population and export to other regions. Africa could truly become the breadbasket of the world. At 2017 prices, this expanded production would be worth around $100 billion a year in additional income for African farmers. The upside in other crops could be just as dramatic.

Part of the opportunity lies in shifting African agriculture to higher-value crops. Kenya, for example, has tripled its horticulture exports to $700 million annually through such efforts. If we assume that higher-value products could replace 20 percent of Africa’s low-value crops (such as cereal grains), agricultural production could rise by $140 billion annually by 2030. This shift would raise the incomes of Africa’s millions of smallholder farmers. Morocco has already made great progress in this area: it is converting eleven hundred square miles of land from cereal to citrus-fruit and tomato cultivation, among other high-value crops.⁴³

Private-sector companies and investment funds, which are already pouring serious money into African agriculture, have a central role to play in increasing the resources available to ignite and sustain a green revolution. Private-sector firms, both large and small, will also be at the heart of efforts to transform African agriculture on several key dimensions.

The first is to unlock technological breakthroughs. In particular, innovations are needed in developing new crop varietals, such as drought-tolerant maize, that would have high returns on investment and could sustainably raise small farmers from poverty. Cacao provides a good example. With global demand for chocolate forecast to grow steadily, food companies have sought to improve yields in West Africa, source of 70 percent of the world’s cacao. Mars, the US-based food manufacturing giant, turned to genetics. Using its production base in Côte d’Ivoire, Mars publicly released the cacao tree genome that the company’s agricultural research department mapped in partnership with the US Department of Agriculture and IBM in 2010. Not long after, Ivorian researchers released a quick-growing, more resilient variety named cacao Mercedes. Many local farmers are now selling more and better-quality beans, contributing to a 30 percent increase in Côte d’Ivoire’s cacao production between 2012 and 2016.

Commercialization of such small-scale farming is a critical step, as 85 percent of Africa’s farms occupy fewer than five acres—compared with only 11 percent in Brazil, for example. New industry models, like those of Babban Gona, can improve access to markets and help groups of small farmers raise their productivity.

Last, but not least, there is a critical need to scale up access to funding for Africa’s farmers. By some estimates, sub-Saharan Africa alone requires additional annual investments of as much as $50 billion in its agriculture sector. African agriculture therefore needs business models that can significantly increase the level of investment from the private and public sectors, as well as donors—and translate that investment into impact. In Nigeria, for example, more than twenty banks worked with the government to design a $500 million risk-sharing facility to support lending to small and medium-sized agricultural businesses and producers.⁴⁴ Babban Gona is another innovation in agricultural financing: it is demonstrating that smallholder farmers are a viable target for investment and is helping to attract new capital to the sector.

RISING UP: NEW SOURCES OF GROWTH IN OIL AND GAS

In oil and gas, Africa is rich in high-potential regions, many of which remain unexplored. For example, the Rovuma Basin off the coast of Mozambique contains an estimated 180 trillion cubic feet of offshore gas—enough to supply Germany, the United Kingdom, France, and Italy for nearly two decades.⁴⁵

When oil and gas prices began to fall sharply in 2014, there were questions about when and whether the world’s oil majors would begin developing the field. That changed in June 2017, when Italy’s Eni led a group that signed off on a $7 billion investment in a plant that, when complete, will export some 3.4 million tons a year of liquefied natural gas from Mozambique.⁴⁶ Eni’s CEO, Claudio Descalzi, told us that the company is also setting its sights on selling more gas to African customers: “Africa represents 15 percent of the world’s population, but uses 3 or 4 percent of worldwide energy. It has a lot of energy resources, but it doesn’t have access to energy. That makes it a wonderful market.”

We agree: McKinsey estimates that the domestic gas market in Africa will grow by 9 percent a year to 2025, propelled by the demands of power utilities, feedstock-based industries such as fertilizer, and captive generation. Even based on conservative per capita usage and growth, the continent could use up to 70 percent of its own gas. African countries could move away from the traditional extract-and-export model to one that makes better use of their resources on the continent.

Total, the France-based oil major, has made supplying Africa’s growing markets a key pillar of its strategy—hence its focus on building the largest retail distribution network on the continent. It has also made a point of integrating into the forty-four African countries it operates in and ensuring it is a good corporate citizen. “Our mindset is to be very localized and part of the local context and community,” said Patrick Pouyanné, its chairman and CEO. “Even our expatriate staff are expected to have multiyear life experiences with their families in our local markets, as opposed to operating on a rotation basis.” Total is also investing heavily in building local talent and in raising its operational standards to global levels. “We work with technically advanced processes and hazardous materials,” Pouyanné told us, “So we have a responsibility to operate in every geography with the same high global standards, and to help propagate these standards in our communities.” For example, the company has undertaken an extensive safety campaign to reduce fuel truck accidents and is proud of the zero-fatalities record it has achieved in recent years.

There are plenty of opportunities for other companies. Africa offers some of the world’s most exciting hydrocarbon plays for oil-and-gas operators and investors alike. The continent is rich in unexplored, high-potential regions, including deepwater oil and onshore and offshore gas resources, which have gained particular notice.⁴⁷ Even in a global environment where oil and gas opportunities abound and there is much competition for capital, Africa is a continent to watch, both for its abundant resources and for the large unmet energy needs of its economies.

MINING: UNEARTHING AFRICA’S POTENTIAL

Along with oil and gas reserves, Africa also contains the world’s largest reserves of vanadium, diamonds, manganese, phosphate, platinum-group metals, cobalt, aluminum, chromium, and gold. Only a fraction of Africa’s subsoil assets has been discovered—as little as one-fifth the level of OECD countries, by some estimates.⁴⁸

In January 2018, a UK-based mining company, Gem Diamonds, announced that it had recovered the fifth-largest diamond so far discovered—a 910-carat stone worth around $40 million—from its Letšeng mine in the Southern African nation of Lesotho. It wasn’t a one-off find: since acquiring Letšeng in 2006, Gem Diamonds has discovered around sixty diamonds of more than one hundred carats each, including five of the twenty largest gem-quality diamonds ever recovered.⁴⁹

That is a handy reminder of the spectacular riches hidden under Africa’s soil. Eleven of its countries, especially in Southern and West Africa, rank among the top ten sources for at least one major mineral. The continent delivers some of the best value in the world for every dollar spent on exploration. Even so, mining has not been the consistent engine of economic development that people in many countries have hoped for. Nor, to date, has Africa attracted a share of global mining investment commensurate with its share of global resources. Of the five largest global diversified mining companies, only one has a major share of its production in Africa. Even outside well-publicized conflict zones, many African countries have been thought to pose high political and economic risks for investors. Moreover, infrastructure problems often hinder development: many bulk mineral deposits require multibillion-dollar investments in rail and port facilities to allow ore or semiprocessed minerals to reach their markets.

This combination of abundant resources and risk-wary investors has opened the way for entrepreneurial junior mining companies such as Gem Diamonds, as well as local African champions, to step up their role in developing the continent’s resources. These players have been quick to spot global and African demand trends and ramp up their operations on the continent.

One such trend is the soaring demand for cobalt, a key component in electric-vehicle batteries. The volatile Democratic Republic of the Congo contains the world’s largest cobalt reserves, and several junior mining companies have invested in exploration and production there. One of them, UK-based Sula Iron and Gold, announced in 2018 that it was changing its name to African Battery Metals to focus on the cobalt opportunity.⁵⁰

Another mining trend is related to Africa’s green revolution. Advances in Africa’s agricultural production are increasing demand for fertilizers, for which phosphates, a mining commodity, are a key ingredient. Africa’s current use of fertilizers, at twenty-six pounds per acre, is only one-quarter of the world average. One company responding to that demand is Morocco-based OCP, which has grown to become a global leader in phosphate mining and fertilizer production. It has made Africa its major growth market; in 2016, it increased its exports to the rest of the continent by 70 percent year-on-year.⁵¹

These examples underline the fact that, although Africa’s economies have diversified significantly over the past two decades, mining remains a critically important sector in many countries. It is Africa’s second-largest export industry, and accounts for 10 percent of the continent’s GDP and foreign direct investment (FDI) inflows.⁵² We expect demand for most of the major mined commodities to continue to grow over the next ten to twenty years. This provides ample opportunities for mining companies willing to act boldly and ride that wave of growth.

That said, the operating environment remains risky in many African countries. Mining companies can play their part in working with governments to improve it. One key step is to strengthen their “social license to operate” by investing in local communities, such as by microfinancing local enterprises or supporting educational institutions. For example, South Africa–based Randgold Resources established Community Development Committees (CDC) that enlist local leaders in community engagement. Each CDC manages a budget tied to a mine’s production level and invests the budget in local development. In Mali, Randgold’s investment in community development, including potable water and local agribusinesses, helped it to avoid being affected by the national strikes that hit other mining operations in 2014.⁵³

TREND 5: RAPID ADOPTION OF DIGITAL AND MOBILE—AND THE LEAPFROG OPPORTUNITY

Technology adoption is a megatrend that could accelerate each of the trends we’ve highlighted in this chapter. In agriculture, for example, technology firms can lead the way in developing digital solutions that give farmers access to expertise and information on everything from weather, crop selection, and pest control to management and finance. They can also improve access to markets, generating better prices for produce. Other digital startups are helping farmers measure and analyze soil data so they can apply the right fertilizer and optimally irrigate their farms, and bringing them farming advice, weather forecasts, and financial tips.

Sara Menker, CEO of Gro Intelligence, envisages that these and other digital innovations will accelerate the commercialization of agriculture in Africa. “Even a small-scale farmer can start to produce specialty crops for the beauty industry rather than just corn to eat, for example,” she told us. “On a per-acre basis, that will increase their income by multiples.” Data-driven solutions can also help governments and private infrastructure investors focus new projects on where they’re most needed. “If government can identify the hotspots of agricultural production, they can commit to building roads in those regions,” Menker said.

There is much more room for such innovations. Sacha Poignonnec, CEO of Jumia, told us he was disappointed that the African technology sector remains much smaller than it could be, in part because it is underfunded. He hopes to see breakthrough growth in agricultural technology and solar power in particular: “Those are both areas where Africa has acute needs, and where technology has huge potential.”

Jumia itself is proof that African technology firms can achieve real scale and attract the funding they need to do so. The company was launched by Rocket Internet, Germany’s leading digital incubator, in 2012. Four years later it had become Africa’s first technology “unicorn,” with a valuation of over $1 billion. That was thanks in part to investments worth hundreds of millions of dollars from global firms such as Goldman Sachs, insurance company AXA, and mobile operators MTN and Orange. Today Jumia’s marketplace platform offers consumers a vast range of products, from shoes to cell phones to generators, along with online services such as hotel bookings and restaurant deliveries.

Poignonnec told us that in most of the thirteen African countries Jumia operates in, about half its sales are to customers outside large cities, where access to formal retail is particularly limited. But Jumia is betting on rapid sales growth from urban and rural customers alike as e-commerce penetration ramps up. To encourage these habits, Jumia has created the JForce sales program, which has salespeople going door to door with Wi-Fi-connected tablets, taking orders from customers who lack internet access. “It allows agents to become entrepreneurs,” Poignonnec said, “effectively operating their own online retail business right from home.” Jumia has also created its own logistics service to fulfill its e-commerce orders; in 2017 it delivered 8 million packages. And it has built an in-house payment platform to help African consumers gain trust in online payments.

Research by McKinsey has demonstrated that internet-related services are a powerful catalyst for economic growth and social development.⁵⁴ In China, India, and Brazil, for example, the internet contributed more than 10 percent of total GDP growth over a recent five-year period, and its impact is accelerating. Our colleagues have found that an increase in a country’s internet maturity correlates with a sizable increase in real per capita GDP.⁵⁵ As countries go online, they realize efficiencies in the delivery of public services and the operations of large and small businesses alike.

The benefits of internet-driven productivity gains are not limited to web-based companies: among small and medium-sized enterprises (SMEs), 75 percent of the economic impact of the internet has accrued to companies that are not pure internet players. In a global survey of forty-eight hundred SMEs, McKinsey found that across all sectors, companies utilizing web technologies grew more than twice as fast as those with a minimal online presence, generating more revenue through exports and creating more jobs. The internet also creates tremendous value for consumers. Online prices are, on average, around 10 percent lower than offline prices as a result of the transparency provided by search tools, generating tens of billions of dollars of consumer surplus in the nations with the widest internet use.⁵⁶

Africa’s internet penetration, however, lags behind other regions. Only 28 percent of the continent’s 1 billion people were online in 2016—half the rate of the rest of the world. But that is changing fast: sub-Saharan Africa saw the world’s fastest rate of new broadband connections between 2008 and 2015, at 34 percent per annum.⁵⁷ As noted earlier, mobile data traffic across Africa is expected to increase sevenfold between 2017 and 2022.⁵⁸

To support this digital boom, major infrastructure expansions—from upgrading and installing submarine cables and backbone networks to various experiments to get rural and peri-urban Africa online—are under way. Several of the world’s major technology companies, including Microsoft, Google, and Facebook, are investing in last-mile connectivity across the continent.⁵⁹ E-commerce in Africa is growing quickly: online retailers in Nigeria, for example, have experienced a doubling of revenue each year since 2010.⁶⁰

Even in parts of Africa where internet access is still patchy or nonexistent, digital technology is changing the business landscape. Take electronic payments: there are already 122 million active users of mobile financial services in sub-Saharan Africa alone—more than in any other region of the world. More than one in ten sub-Saharan Africans has a mobile money account (figure 2-5). This number could grow exponentially if the rest of the continent follows the lead of East Africa, where virtually every adult holds a mobile money account.⁶¹

The economic impact of this acceleration could be proportionately greater in Africa than in other regions because the continent is in the relatively early stages of adoption of digital technologies. McKinsey’s research shows that if Africa’s businesses and governments harness the full economic potential of the internet, it could add $300 billion to the continent’s GDP by 2025. The story of mobile telephony in Africa shows this projection is not far-fetched: cell phones have already had an outsized effect in Africa, connecting people who previously had little or no access to telecommunications due to the scarcity of fixed-line infrastructure.

Not only are innovative business models emerging across many of the largest sectors of Africa’s economies, but existing companies are streamlining processes, speeding up transactions, tightening supply-chain management, and accessing wider markets. New tools are available to make a leap forward in the quality and availability of health care, education, and public services. If Africa accelerates its adoption of digital and mobile technologies, it will realize major productivity gains, which in turn will translate into higher living standards and greater business opportunities across the continent.

Africa is changing fast. Its cities are growing upward and outward at a remarkable pace, its young population is enthusiastically buying brands and adopting new technologies, and those same technologies are opening the way for breakthrough solutions to long-standing challenges ranging from electric power to education. None of these trends is linear, and each comes with its fair share of twists—but if you can figure out a strategy to ride one or more of them, you could build a very fast-growing business in Africa. How will you do it? In part 2 of this book we share our own views—and those of some of the continent’s most successful businesspeople—on what it takes to win in Africa.