According to the World Bank, 35 of 47 economies in sub-Saharan Africa took at least one step in making it easier to do business in their country in 2015. Rwanda implemented a credit-scoring service; Kenya launched government-run company registration services; Madagascar strengthened minority-investor protections; and Equatorial Guinea took the registration procedure for new businesses from 16+ steps down to four, and the processing time from 120+ days to 10.
As new businesses are created and developed, and oil-based economies work to diversify in the face of low oil prices, business-to-business (B2B) opportunities throughout Africa will thrive. In their report, Lions on the Move II: Realising the Potential of Africa’s Economies, McKinsey Global Institute stated an increase in the number and size of African businesses means that, “While the consumer story has generated headlines, the relatively unsung business-to-business market represents an even larger opportunity.”
McKinsey expects B2B demand to grow by US$1tr, bringing the figure to $3.5tr by 2025. African companies spent $2.6 trillion on the B2B market in 2015 – 40% of which was in South Africa and Nigeria.
“Half of that total was spent on input materials, 16% on capital goods, and the remainder on a wide range of services, including business and financial services, transportation, and information technology and telecommunications services,” according to the report.
This spending pattern is expected to continue in the coming years, with spending on services growing fastest, at 3.5% annually.
Factors Driving the Opportunity
In the report McKinsey lists three factors that are expected to drive company spending over the coming years. The first is structural changes, and has to do mainly with the formation of new businesses and intra-Africa trade.
The report predicts that as more legislation and reforms such as Equatorial Guinea’s are put into place, productivity and the opportunity to scale and access funding across Africa will increase, and in turn, so will the demand for B2B services.
Additionally, cross-border trading within trade blocs will spur local production and services, and ultimately, once again, B2B spending on the continent.
The second factor listed by McKinsey is ‘Urbanisation and business clustering’. The appearance of more and more business clusters throughout Africa is thanks to its rapid urbanisation. According to McKinsey, these clusters, “Stimulate productivity, innovation and creation of new businesses,” in turn further increasing the need for B2B spending.
The third and final factor is changes in technology. The many pros that technology brings businesses – including lower cost, automation and digitisation – could leapfrog companies in sectors such as retail and wholesale, opening up new markets.
A great example of this is the emergence of mobile money.
But this isn’t limited to retail and wholesale. McKinsey sees the increase in demand for B2B services over an extensive array of diversified markets. Sectors like construction, with its continued boom in Africa, will need more materials and various metals; manufacturers will need various machinery as the sector expands; IT companies will need electronics and hardware; and automotive businesses will need parts, for example.
Small Business a Key Sector
According to the report, “Smaller companies with annual revenues of less than $500 million account for more than 60% of Africa’s total B2B spending. In Ethiopia and Tanzania, these smaller firms generate more than 90% of B2B spending, whereas in Kenya and Nigeria, that figure is more than 80%.”
On the other end of the spectrum, in 2015 South African firms with annual revenue of more than $500 million accounted for 93% of the country’s $600 billionn B2B market. These larger companies also made up 48% and 41% of the 2015 B2B market in Algeria and Angola respectively.
Fragmented markets such as agribusiness and construction require a wide approach in terms of sales, due the extensive resources required for each to function. Additionally, small businesses constitute the majority in Africa, and function on bespoke offerings, and targeted services and sales plans according to their needs. McKinsey recorded that last year, 90% of the B2B demand in agriculture and agri-processing originated from smaller businesses.
For local and global firms looking to cash in on the B2B opportunity in Africa in the coming years, tailored offerings that address various clients across the continent are tantamount if they wish to see profitable growth.
—Justin Probyn
