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Africa as a logistics hub? Investors will need 3 key traits to succeed, says trade group representative

Due to geopolitical tensions, more and more European companies are starting to turn their attention to the African continent. Investments in infrastructure, renewable energy, mining, agriculture, and transport are particularly desirable. The continent also has the potential to become a logistics hub.

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According to the World Investment Report 2023 of the United Nations Conference on Trade and Development (UNCTAD), foreign direct investment inflows to Africa generated $45 billion in 2022.

A leader among investors in Africa is Europe. At the top of the list of the largest global investors are Great Britain ($60 billion), France ($54 billion), and the Netherlands ($54 billion). Germany was also in the top ten with investments of $15 billion. Only in fifth place was China, with investments worth $44 billion.

Overall, investment conditions in Africa are rated as good, although the situation in the 54 African countries varies greatly.

“Relatively stable democracies such as Kenya and Zambia contrast with countries affected by military coups such as Mali and Niger. While some markets are developing dynamically and showing GDP growth rates of over 6%, such as Tanzania and Côte d’Ivoire, the economic slowdown in the main economies of South Africa and Nigeria is dragging down the overall average,” says Dr. Marcus Knupp, senior manager for Africa / Middle East at Germany Trade & Invest (GTAI).

Investments in infrastructure, renewable energy, mining, agriculture, and transport are particularly desirable

Economic diversification is therefore a topic of discussion for many governments in Africa. Important starting points are the processing of locally available raw materials in the mining and agricultural sectors, and better self-supply of Africa’s growing consumer goods markets. Both needs can be met, for example, by the food industry.

“As the world decarbonises and reduces location dependence, the processing of raw materials for batteries is becoming increasingly important. Large investments are planned in the production of green hydrogen. The latter can be not only an energy carrier but also a starting point for the development of the chemical industry,” says Knupp.

The African continent is also becoming more and more interesting for car manufacturers. The market for the automotive industry is still very small, but according to Mordor Intelligence estimates, it will increase from 1.33 million units in 2023 to 1.78 million units in 2028. Suppliers will benefit primarily from this.

“In addition to South Africa, Morocco has established itself as a location for the automotive industry in recent years. In other countries, such as Ghana and Rwanda, this has not yet progressed beyond assembling kits of parts. However, locations such as Tunisia and Botswana were able to successfully attract suppliers,” explains the expert.

AfCFTA shows little impact

The African continent is particularly attractive due to its market size and development, and in the medium term, it certainly represents an alternative to other locations such as Asia, as wage costs are relatively low. Unfortunately, the level of qualifications is also considered low.

“In the medium term, high population growth means, on the one hand, growing demand and, on the other hand, large labour potential. Many European markets, but also some Asian markets, are facing the problems of decreasing demand and growing shortage of workers,” Knupp points out.

Therefore, GTAI advises focusing on individual countries because their market potential, as well as practical regulations, including customs and import regulations, certifications, investment promotion, and currency transfers, differ significantly.

“In this respect, there is still a long way to go to the AfCFTA African Free Trade Area,” comments Knupp.

The free trade agreement was signed on March 21, 2018, and has been applied by all countries except Eritrea since January 1, 2021, but it does not have much impact on practical activities.

“African markets are considered difficult, but are attractive to those companies that establish themselves there. Investors need time, patience, and flexibility. Not everything works as expected. However, there is usually a solution at the end. Business here relies heavily on personal local contacts. They need to be nurtured and expanded. European regulations on reducing CO2 emissions and compliance with due diligence obligations in relation to supply chains may possibly require additional preliminary tests,” emphasises Knupp.

Added to this is the fact that African countries are highly dependent on several sectors and raw material exports, making them highly vulnerable to external economic shocks.

The development of the situation on global oil or copper markets therefore has serious consequences for the economies of countries such as Nigeria, Angola, the Democratic Republic of the Congo, and Zambia. Local added value generally remains low. There are not enough jobs being created for the growing population. Therefore, good information is essential, emphasises Knupp.

Colonial influences determine infrastructure

Despite all the risks and challenges, the African continent has the potential to become an important logistics centre and provide a bridge between Europe, the Middle East, and Asia.

“From a European perspective, Africa is a neighbouring continent. Transport routes, especially from North Africa, are not long. Even in western or southern Africa, there are no bottlenecks to overcome, such as straits or the Suez Canal,” notes Knupp.

While there are still gaps in infrastructure, GTAI emphasises that Africa’s population is young and open to new things, so a lower level of development, for example in communications technologies or energy supply, could be an advantage if more efficient solutions are introduced directly.

Examples include smartphone payment methods or local solar power sources. This creates scope for implementing innovative solutions and products, explains Knupp.

Transport infrastructure, including between countries on the continent, is still insufficient, despite significant investment in it over the last two decades. Transport corridors are still shaped according to colonial patterns; therefore, the location of ports, railways, and highways is often still focused on the export of raw materials and runs, for example, along the route from mines to the coast.

Modern ports are being built all over the continent. New railways, roads, and airports make transport easier, cheaper, and more predictable. However, there are still numerous gaps in the transport network, as well as in energy and water supplies.

“Positive examples with noticeable improvement, such as Morocco, Senegal, and Tanzania, contrast with countries such as South Africa, whose infrastructure has deteriorated in recent years due to lack of investment. Railway lines are out of service, and the transport of goods is largely directed to roads, the condition of which is deteriorating as a result. Overall, it can be said that improvement is noticeable in many areas, but there is still a lot to do,” Knupp concludes.

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