In light of the chronic problems in the Euro Zone, the crisis in emerging markets, and the Chinese economic downturn, the export-oriented German economy should consider alternative markets. Rather appropriately the German Engineering Federation Association (VDMA) has recently emphasized once again that Africa is awakening “from its slumber”. The Association has also expressed concern about the German economy’s continued neglect of Africa, not viewing it as a viable new market. This concern coincides with the general German perception that Africa is a continent in crisis: stricken with disease like Ebola and AIDS, and ravaged by civil wars and Islamic terror from which citizens desperately flee. To be fair these are also the headlines dominating news from Africa.
Nonetheless this perception is rather skewed. First, Africa is very diverse, rather than a single unified continent and people. Africa has a total of 54 States (close to a third of all states recognised by the UN), which could not be more different. In addition to well-governed and secure countries like Botswana and Rwanda there are also “crisis” or “failed” states where chaos reigns; the Democratic Republic of Congo (DRC) comes to mind. This means that an opinion on Africa as a single entity cannot be endorsed.
Second, Africa has more to offer than crises and dramatic headlines. The economic growth rates in the past decade were as high in Africa as any continent, out of the ten fastest growing economies in the world currently six come from Africa. Remarkably, this growth is not just commodity driven; since the beginning of the commodity bear market no significant braking effect could be observed.
This growth needs investments, especially in infrastructure. Just think of energy supply (about two thirds of Africans are still not connected to the electricity grid) and transportation; where a lack of well-developed East-West road links and good flight connections persists. If it is to succeed Africans need to better integrate into so-called Global Value Chains (GVC) for which a strong hard-infrastructure backbone is essential. This has also been recognized in the donor community, and a number of initiatives to improve infrastructure have been started. Luckily German companies are already quite well positioned in the field of energy supply, but still not at full capacity.
But what seems even more important for the long run is Africa’s growing middle class. The water supply is improving, the level of education is increasing, as well as female economic participation. Even though the Millennium Development Goals have not yet been reached many abuses have been eliminated. In fact the middle class is not only economically important, they can also contribute significantly to political stabilization.
Africa’s middle class growth is significant for the German economy as demand for European, and especially German, products is likely to manifest in the future. German products already enjoy an excellent reputation in Africa, as elsewhere on the planet. This refers to both capital goods industries as well as consumer durables; the reputation of German automobiles for example is legendary.
In addition to export potential, investment opportunities need to be considered; not only penetrating individual African markets but also to take advantage of the locational benefits of African regions. Many countries try to process raw materials within their own borders, this is where German know-how can help, especially considering that German companies have different ethical standards to, say, Chinese companies.
Of course there is competition. As mentioned, Chinese companies especially have been able to gain a foothold in Africa in recent years. However, it must not be forgotten that Chinese involvement in many regions of Africa has not been viewed with undivided enthusiasm: some investors behave harshly, too few jobs for locals are created, and the products and investment projects are often of poor quality.
It also fits into the picture that China itself is getting into difficulties. Within China, market opening and privatization efforts should be pursued but this obviously does not occur, as recently criticised by the European Chamber of Commerce. It’s here where the reforming zeal of the Chinese leadership seems to end, where economics threaten to combine with political freedoms.
China is difficult as a market and competitor, thus it will have a harder time in the future if its economic dynamism decreases. This presents risks and opportunity for the German economy at the same time.
The difficulties of Chinese enterprises in connection with the dissatisfaction of African customers, with the often cheap and poor quality goods, provides an opportunity for German workmanship as awareness of quality has increased dramatically in Africa in recent years. Germany may well enter new markets and diversify its export base.
It’s not that African markets would be easy in any way. Cultural differences, different needs, management problems, corruption and many other questions constitute high barriers. But it seems fair to say that the German exporters are experienced enough to meet these challenges.
The original article was published on the 11th September 2015 by WirtschaftsWoche, available here in German.