Africa and Nigeria: A Glimpse Into The New Age
Capital allocation in frontier markets have traditionally taken a small portion of emerging market portfolios, usually aimed at getting high-returns with limited risk exposure. With Brazil, Russia, India and China (BRIC) economy's stalling growth, frontier markets are increasingly perceived as an asset class in their own right.
Indexes like the MSCI Frontier Markets proportionally account for market value. There is, then, a resulting bias toward oil-rich Gulf states. Qatar, the UAE and Kuwait account for more than half of the index. Our perceived view on the potential of these economies is partial, at best. It is, therefore, critical to migrate from frontier markets as an asset class to examining underlying macro-themes. This provides a better picture of the drivers behind frontier market growth stories.
As populous, fast-growing frontier markets become richer, growth of middle classes and consumption have driven investment in infrastructure. The most valuable of the so-called BBC infrastructure stocks (banks, brewers and cement companies), are incidentally missed by the acronym: telecommunications. It represents the foundation for the digital age, which in Africa, is more like a revolution still in early days.
Mobile penetration in Africa hit 80 per cent in the first quarter of 2013 and is still growing at 4.2 per cent annually – fastest growing continent and the second largest market after Asia. Today, more than eight in 10 Africans have a mobile phone. Cost of mobile phone ownership has decreased dramatically – the average revenue per user for telecom companies has dropped 80 per cent in the period between 2001-2011. Two key factors have played a critical role: economies of scale as the basic infrastructure has been built out, and competition by privately owned telecoms.
There is still significant spare capacity for infrastructure development: 62.7 per cent of mobile connections are basic 2G voice and SMS services. From the remaining third, just about 27 per cent have access to 2.5G for low-speed data and only 11 per cent have 3G access. Although still remarkably low, data services and connection speeds are on the rise: data revenue for telecoms has grown 67 per cent in Nigeria, Kenya and South Africa in the past few years.
With such a high adoption and yet sub-optimal infrastructure, further investment in the sector represents a strong opportunity. Deployment of new submarine and terrestrial cables, rollout of mobile broadband networks, increasing affordability of data devices and macroeconomic growth constitute critical factors. These, in turn, are driving and enabling a platform for the digital revolution, predominantly in the mobile financial services, e-commerce and digital content & services for the business market.
Although mobile phone penetration in Africa is impressive, smartphone adoption is still low, accounting for just 11per cent of mobile connections at the end of 2012. The strength of infrastructure deployment and supply-push of low-cost handsets project major growth: 412 million smartphone connections by 2018 from 79 million at the end-2012. Initiatives like MTN Nigeria's device-financing program in partnership with Samsung and Standard Chartered, or Orange's engagement with Speadtrum Communications to develop low-cost handsets, show that massive commercials easily justify such exponential growth paths.
High mobile phone penetration has bred a culture of savvy users who are waiting in line for greater mobile broadband access to engage further with digital ecosystems. Informa's Telecoms & Media survey conducted in 2013 in Nigeria and South Africa shows smartphone and tablet users are carrying out an average of three e-commerce transactions per week.
The underlying highlight is Africa's leadership in mobile financial services. Relatively underdeveloped financial services created a need and thus a major opportunity for mobile money. Presence of mobile phones co-existing with absence of bank accounts has resulted in mobile to fill the gap. MTN had almost 12.1 million mobile-money customers at the end of June 2013, a YoY increase of 64.5 per cent. Airtel runs a partnership with Ecobank to offer mobile-money services across much of its African footprint. Etisalat has launched mobile-money in a number of its African operations, including Nigeria and Egypt.
As a Business Insider journalist accurately summarized this phenomenon: "To Western, 'mobile banking' is a new way of doing something old. To many Africans, it is the obvious way of doing something new" – digital adoption is enabling leap-frogging rather than catching up leveraging on the limited scalability of bricks and mortar. The bottom line behind this adoption is that the greater the need for a market, the greater the impact technological enabling can have – mobile-money services that have proved to be success stories are based on SMS systems on basic handsets.
Building digitally-enabled basic services lays the foundations for easily scalable advanced services - e-commerce, marketplaces and social media. That is why the so-called African Digital Revolution is still early days – demand pull for telecom infrastructure development and smartphone accessibility will make the growth curve steeper, as adoption and ecosystems are already in place. This is well reflected by the rise of e-commerce places: Jumia, Konga, DealDey, Gidimall and Kaymu, to name a few.
Launched in 2012, Jumia has been increasing sales in the high teens with monthly revenues in the low single digit millions. This is by no means massive. What is impressive is its community growth in terms of numbers and geographic reach. A general start-up rule is that traction is more fundamental than conversion and Jumia convincingly ticks the box: 150,000 site visits per day, registering sales in Nigeria, Morocco, Egypt and South Africa.
Is this a copy & paste of Amazon? Not at all. To meet the market opportunity, Jumia had to develop a unique value proposition meeting the particular profile of Nigerian shoppers. Educating the natural suspicion when doing financial transactions and overcoming the limitations of logistic infrastructure have been two major strategic adaptions. By owning a motorbikes fleet, logistics limitations are overcome and consumers pay cash on delivery preventing addressing fraud concerns.
The success of the Digital Revolution in lifting people out of poverty does not require any wheel reinvention. Basic missing markets have been already addressed – adoption and tech-savvy cultures are well in place, as well as the foundations for more complex digital-enabled marketplaces. Generally, the most complex aspect of building digital ecosystems is customer adoption. In Africa this demand is well in place; the ball is now on the operators' court – accessibility to better network services and cheaper smartphones will determine whether the Internet sector can contribute something more significant than the 0.8 per cent of Nigeria's GDP it currently owns.