Analysis: Africa: opportunities for logistics firms
Africa continues to be a highly lucrative market for the Middle East’s logistics industry. Strong performance on the Africa-Europe and Africa-Asia lanes in particular, has seen a rise in the number of logistics companies keen to win business in the continent. But breaking into the African logistics market is by no means straightforward. Impeded by political instability, failing transport infrastructure and unnecessarily complex border and customs controls, many logistics firms are simply put off venturing into this unpredictable territory. But for those who do, the potential for growth is enormous.
For global logistics firm Agility, there are many driving factors which make Africa more attractive for logistics operators. “As well as freight forwarding increasing on the back of growing trade volumes, there is a growing population and a consumer class which increasingly wants finished goods and products from Asia,” says Sylvain Kluba, chief operating officer Middle East & Africa (and area SVP Saudi Arabia & Africa) at Agility. “There is also a fast-growing demand for the vast raw commodities available in Africa.” He points to statistics from the UN Commission for Africa, which place 54% of the world’s platinum production, 78% of diamond and 20% of gold output as coming from the continent. Africa also has more than half of the world’s fertile land and vast oil and gas, agricultural and mineral resources.
In order to manage the trade of these commodities, local organisations are increasingly turning to the professionals to outsource their warehousing and wider logistics operations. “The outsourced logistics market has really started to emerge in Africa. Companies recognise the opportunity to focus on core competencies, reduce operating costs and better serve customers through the use of third party logistics service providers,” says Kluba. Since 2006, Agility itself has invested US$70 million in developing capabilities and assets in its established operations throughout the continent. Many of the company’s African customers use its strategically-located Dubai hub to import from Asia, store, consolidate goods and distribute to Africa.
GAC Logistics is another global logistics firm that has attracted business from the African continent. “Africa’s underdeveloped manufacturing sector has traditionally meant that almost all consumer commodities have had to be imported, making the region a lucrative market for logistics providers,” says Lars Bergstrom, group vice-president, Middle East at GAC. He has found that many multinational companies with distribution operations in Africa have moved their warehousing operations from Europe to the Middle East. This has enabled them to cut warehousing costs and take advantage of the fact that many companies now have their regional or global headquarters in Dubai. “The proximity of Middle East free zones to Africa, and the ease of conducting business transactions in Dubai in particular, have resulted in export growth into the African market,” says Bergstrom. “The increased investment in infrastructure in East Africa and the entry of major Middle East-based airlines into the region are also good indicators of growth still to come.”
When it comes to air cargo, the Middle Eastern airlines have been reaping huge dividends from their freight operations to and from Africa. Saudia Cargo, for example, has pursued an aggressive expansion programme in Africa which has seen the introduction of operations in Johannesburg, Lagos, Nairobi, N’Djamena and Kano – all in the past two years. Peter Scholten, VP cargo commercial at Saudia Cargo, believes that the carrier’s strategic location between Asia/the Far East and Africa makes it perfectly placed to handle this fast-growing market. “In order to make optimum use of our aircraft, our work does not end here. We fly from Asia to Africa and then onwards to Europe,” he says. “Certain routes have proved to be so successful that we have even increased our frequencies in order to meet demand.” Saudia Cargo’s African network now boasts a total of 114 flights per week to 11 online destinations and another nine via its Lagos hub. There are also major plans in the pipeline to expand into East and West Africa.
Emirates’ freight division has also seen substantial growth in throughput of imports and exports for the African continent, clocking an impressive 45% rise last year, compared to 2011. “We are receiving more and more enquiries, not only about the sectors we serve online but also about offline sectors which we shall continue to explore as our Africa reach expands,” says Ram Menen, Emirates divisional senior vice president for cargo.
As Africa is a large market predominantly exporting perishables bound mainly for Middle East and European markets, Menen and Scholten both believe that air cargo has a distinct advantage over other transport methods. Air cargo provides the speed needed to ensure fresh produce reaches its destination in pristine condition. With no reliance on Africa’s poor road infrastructure, using air transport also allows access to landlocked countries such as Chad. “In order to get to N’Djamena by road, for example, it would be necessary to go via Djibouti, which is a long and challenging route,” explains Scholten. “Although far more expensive than road transport, flying is a very safe option which offers numerous advantages such as speed, reliability and security.”
But in the absence of modernised airport infrastructure, there is a real danger of air cargo becoming over-stretched as demand continues to outstrip handling capacity.
This list of challenges may well make the most ambitious of logistics firms turn its back on the continent. Having worked in the field for so long, Agility’s Kluba knows these challenges only too well. He has faced political risk, weak corporate governance, regulation instability, macroeconomic volatility and the lack of IT infrastructure as obstacles to good logistics practice in Africa. But Kluba is positive that change is around the corner. “Some African countries in recent year have established political stability, improved governance and transparency and are becoming increasingly open to regional and global integration,” he says. “This has attracted global investors seeking growth opportunities beyond the depressed Western markets of Europe and North America.”
As well as South Africa, Kluba believes that in West Africa, Nigeria and Angola, with their combined population of over 182 million, growing middle class and rich natural resources show enormous potential. They also provide the much-needed link to the landlocked countries of central Africa. West Africa is home to some of the world’s fastest emerging economies, boasting some of the highest annual GDP rates seen anywhere in recent years. “It’s growing middle class population has a voracious appetite for consumer goods, which is driving growing imports to countries like Ghana,” says GAC’s Bergstrom. East African countries such as Kenya also remain popular.
Operating in Africa for more than 22 years, Swift Freight (now part of the DSV group) has thrived because of its heavy focus on the provision of freight logistics solutions specific to these vast and promising markets. Warren Erfmann, CEO of DSV Swift Freight accepts that doing business in Africa is unlike any other place in the world. But the situation is clearly improving. “Although corporate governance has always been a concern, more countries are now taking a hard stance on unscrupulous activities,” he says. “The lack of proper transport infrastructure has made it difficult to do business in certain parts of Africa, but with China and India investing so heavily in this sector, it will definitely improve.”
But when demand for logistics services rises, so does competition. With so much potential on the African horizon, are the existing logistics operators worried about future competition? Agility’s Kluba isn’t anticipating many new entrants from Europe. “These remain higher-risk markets and high levels of investment are required,” he says. “Barriers to entry are significant and are a major deterrent to new entrants. While there are signs of improvement across the continent, he adds, Africa’s roads and basic infrastructure still require further development and contribute to increased costs of distribution.
GAC’s Bergstrom agrees. “The lucrative freight margins in the African sector have sparked greater focus on this trade route, but it’s the niche players that continue to dominate the trade,” he says. “Competition from European logistics operators may grow but there are still constraints imposed by entry, exit, language barriers and the lack of customs and trade regimes.” Instead, both Kluba and Bergstrom are more concerned with keeping a close eye on the growing number of mid-sized local logistics operators keen to capitalise on their home market. “The African market has traditionally been fragmented with a large number of small logistics service providers,” says Kluba. “However, a number of mid-sized logistics firms are beginning to emerge. They come with the ability to navigate the complexities of the local market, and demonstrate a greater adherence to international best practice and growing skilled work forces.” Competition from home-grown logistics providers should not be underestimated, adds Bergstrom, particularly as the insistence of keeping business local through local content rules appears to be on the rise.
There are many factors to consider for any logistic operator wishing to do business in the African continent. For those who are willing to enter the continent with an awareness of its limitations, however, the market could prove to be very lucrative.
Top African Countries
We ask some of the region’s operators which countries are leading the way when it comes to logistics business in Africa.
Lars Bergstrom, group vice-president Middle East at GAC
South Africa has always been a strong market for GAC, but the company is also seeing growing demand from Nigeria, Ghana, Angola, Congo, Kenya and Tanzania
Sylvain Kluba, chief operating officer Middle East & Africa (and area SVP Saudi Arabia & Africa) at Agility
In spite of some challenges it is facing, South Africa plays an important role in the region’s logistics landscape. In West Africa, Nigeria and Angola are also upcoming countries. Agility’s operation in Kenya covers the East African Community (EAC) nations of Burundi, Rwanda and Tanzania together with Malawi, Zambia, and the South-Eastern regions of the Democratic Republic of the Congo and South Sudan.
Warren Erfmann, CEO at DSV Swift Freight
The more mature markets/countries in Africa as well as those with the best growth rates are dictating the demand for logistics companies. Countries that spring to mind in this category are Angola, Mozambique, Kenya, Ethiopia, Tanzania, Zambia, DRC, Ghana and Nigeria.
Peter Scholten, VP cargo commercial at Saudia Cargo
Nigeria, South Africa and Kenya are the three leading countries in terms of demand for air cargo operations in Africa. We have a strong presence in all of these markets, with several weekly flights to and from the key cities within these regions.