With the giants of Africa, Nigeria and South Africa, faced with a crisis at home, East African countries are increasingly becoming a suitable alternative for foreign investors and large consumer companies. Both of Africa’s largest economies have experienced growth at below 2%, hit hard by fall in global commodity prices in 2016. While East African countries’ led by Ethiopia, Kenya, Tanzania and Rwanda have been enjoying growth rates not less than 5% since then. Coca-Cola Beverages Africa (CCBA), the continent’s largest soft drinks bottler, recently announced it would invest $100 million in Kenya over the next five years to improve infrastructure and launch new products. Earlier in May, the company had also launched a $69 million new juice line at its Nairobi plant, one of its four bottling plants in Kenya. The South-African based company made its strategic move into Kenya, and the East African market when it bought Equator Bottlers, the third largest Coca-Cola bottler in Kenya in 2017. “With a population of over 45 million and a rapidly urbanising population, 72% of whom are under 30, Kenya offers opportunities for growth and investment,” Daryl Wilson, country Managing Director for Equator Bottlers, said after it was acquired by CCBA last year. Within sub-Saharan Africa, East African countries—especially Ethiopia and Kenya, and to a lesser extent Uganda and Tanzania — have seen an increase in investments from consumer goods’ companies. The region’s positive economic growth, political stability, an improved regulatory environment and a big market of over 120 million people is attracting them. Production Haven East Africa remains the fastest-growing sub-region in Africa, with an estimated growth of 5.6 percent in 2017, up from 4.9 percent in 2016. Growth is expected to remain buoyant, reaching 5.9 percent in 2018 and 6.1 percent in 2019. Strong growth is widespread in East Africa, with many countries (Djibouti, Ethiopia, Kenya, Rwanda, Tanzania and Uganda) growing 5 percent or more. According to an African Development Bank report, the industrial sector contributed about 39 percent of the region’s average real GDP growth in 2017. Last month, Bloomberg reported Nissan Motor’s plans to start assembling vehicles in Kenya supporting the government’s vision to make the country to a regional auto-manufacturing hub. In the last 18 months only, Volkswagen AG, PSA Peugeot and CNH Industrial NV have announced separate plans for their own assembly lines. Electronics maker, Samsung, was also keen on setting up an assembling plant in Kenya before it was abandoned in January, citing failure by the government to put in place mechanisms that would protect local manufacturers from cheap electronic imports. The Korean firm had in the past said it planned to build a plant that would assemble television sets, laptops and printers, which would service the East and Central African regions. Ethiopia, which recorded 8.1% production growth in 2017, has been attracting investments for its industrial sector too. Although the country has mainly concentrated on developing the agricultural sector over the years, it has been exerting efforts to develop the industrial sectors, especially the textile and apparel sector. In 2016, Foreign Direct Investment flows to Ethiopia rose by 46 per cent to $3.2 billion, propelled by investments in infrastructure and manufacturing, an indicator of its efforts paying off. Numerous companies have relocated their manufacturing plants from countries such as Turkey, India and China to Ethiopia over the past decade. European and American companies are also increasingly flocking to the rising investment magnet in East Africa. Internationally recognized apparel, textile and shoe brands have also established manufacturing plants in Ethiopia. Foreign investment in the textile industry has risen from $166.5 million in 2013/14 to 36.8 billion in 2016/17, the Ethiopian Investment Commission told Reuters. U.S. fashion giant PVH, whose brands include Calvin Klein and Tommy Hilfiger; Dubai-based Velocity Apparelz Companies, which supplies Levi’s, Zara and Under Armour; and China’s Jiangsu Sunshine Group, whose customers include Giorgio Armani and Hugo Boss have been reported to be interested in setting up factories in Ethiopia. Transsion Holdings, owner of the Chinese brand Tecno Mobile, Africa’s leading mobile device maker is also building a 280,000-square-foot factory while SanSheng Pharmaceutical, a wing of the publicly listed Chongqing Sansheng Industrial Company in China, began the first phase of production this month. Saudi investors now run over 200 investment projects in Ethiopia with the capital of $18.3 billion. Djibouti in its case has been benefitting from the influx of these brands into Ethiopia. The ports in in the country have been the major point of entry into the region. Drivers of Investment A major driver of the growth is household consumption. According to the report by the African development bank, household consumption contribution to Gross Domestic Production (GDP) is about 88 percent in Kenya and about 80 percent in Ethiopia. Another is deliberate government’s investment in infrastructure and transportation. One such example is Ethiopia’s investments in Special Economic Zones (SEZ). Industrial parks or SEZ enable investors to directly commence production in two or three month duration without bothering about the supply of land, water, electricity and other infrastructures. Countries like Kenya, Ethiopia and Tanzania have also benefitted from generally low labour costs. In a recent Working Paper by The Center for Global Development (CGD), it said the “general level of prices in Ethiopia is below the level in India and comparable to that of in Bangladesh.” Kenya and Tanzania have also been identified as countries with low wages but not as low as Ethiopia. With labor costs now rising faster in places like China, large manufacturing firms are exploring opportunities for production outside Asia. These East African countries have become a sweet spot. Challenges Challenges common to these countries include inadequate infrastructure, cumbersome customs processes, a dearth of technical and managerial talent, and low levels of social and environmental compliance. While Kenya’s economy offers a conducive business environment, bad rural roads often take a toll on vehicles distributing products. Another challenge for these countries is electricity. Inconsistent availability of power in Ethiopia and Kenya in some of the production plants has forced many to deploy generators. Even with some of the cheapest electricity in Africa, grid failure and power outages are severe issues. Manufacturing firms often have to rely on generators that are four times more expensive than grid electricity. Political unrest could unsettle investments too, and fragility of states like Somalia and Sudan in the region resulting in insecurity could constrain growth. The author is a tech and business enthusiast.
