East African countries have become the investment haven in Africa

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.

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.