Africa: A Crucible for Creativity

Idea in Brief The Context African markets present a multitude of challenges. For example, in some cases the infrastructure won’t support business growth, while in others potential employees lack access to good public education. The Possibilities Hundreds of companies have achieved high levels of growth and profitability nonetheless—often by seeing the potential in those challenges. The Focus Tremendous innovation is emerging in six areas: financial services, infrastructure development, manufacturing, food production, affordable consumer products, and education. How many companies in Africa earn annual revenues of $1 billion or more? Most global executives we speak with guess there are fewer than a hundred. Many answer “zero.” The reality? Four hundred such companies exist—and they are, on average, both faster growing and more profitable than their global peers. We have advised many of these companies as they have spread rapidly across Africa and beyond, and we’ve observed an unexpected side effect of this growth burst: Africa has become an important test lab for global innovation. If you can build a product, a service, or a business model that’s cost-effective and robust enough to succeed in Africa, chances are it will be competitive in many other regions of the world. We don’t mean to minimize the challenges of doing business in Africa (challenges of which successful entrepreneurs are well aware). Inadequate infrastructure may mean that companies need to build their own supply chains, for example, and inadequate public education may mean they need to train workers in basic skills and mindsets. But as we shall see, those challenges also provide opportunities for value creation. To help global executives and entrepreneurs pinpoint the Africa-born innovations they can learn from, partner with, or invest in, we have sketched a taxonomy of six innovation types, which we describe in the following pages. Technology is the golden thread running throughout: More than perhaps any other region, Africa is piloting digitally enabled breakthroughs that can aid companies in surmounting entrenched barriers and unlocking exponential progress. Low- and High-Tech Moves Toward Financial Inclusion In emerging economies, 2 billion individuals and 200 million businesses lack access to savings and credit, and many of those with access pay dearly for a modest range of products. The problem is by no means limited to the developing world. In the United States, one in 14 households—some 9 million in all—lacks a checking or savings account, often for reasons of affordability. Another 24 million are underbanked: Although they have accounts, they also resort to costly financial products and services outside the banking system, such as payday loans. To serve excluded households—and to do so in a profitable, sustainable way—banks and other firms must use technology-based solutions and low-tech work-arounds. African companies provide compelling examples of both. Consider Equity Bank, born of a small building society in Kenya in 2004. By 2017 it had more than 12 million clients across East Africa, more than $5 billion in assets, and reported pretax profits of $270 million. James Mwangi, the founding CEO, told us that the bank’s very purpose is “to solve a social problem: lack of access to financial services.” That problem is deeply personal for him. “I grew up in a rural area, and my mother didn’t have a bank account,” he said. “The nearest bank branch was 50 kilometers away, and the minimum opening balance was equivalent to several years of her earnings.” Kenyans’ response was to keep their money under the mattress. Fewer than one in 10 Kenyan adults had a bank account at the turn of the 21st century. Today, thanks in large measure to Equity Bank’s innovations, two-thirds do. “We knew we had to address the needs of people like my mother,” Mwangi said. Well before cell phone–based banking came along, Equity Bank introduced what it called mobile banking: mini bank branches that fit in the back of a Land Rover and were driven from village to village. The bank’s best-known innovation, though, is its agency banking model: It has accredited more than 30,000 small retail outlets across the country as bank agents, able to accept deposits and dispense cash. Alongside these low-tech innovations, Equity Bank has harnessed the exponential growth in mobile telephony in Africa. In 2000 the entire sub-Saharan region had fewer telephone lines than the island of Manhattan. By 2016 there were more than 700 million mobile phone connections across the continent—roughly one for every adult. Cell phones have transformed Africans’ lives in important ways, such as by replacing cash transactions with instant and secure mobile payments. There are now 122 million active mobile money accounts in sub-Saharan Africa—more than in any other region of the world. That growth enabled Equity Bank to move beyond Land Rovers and create true mobile banking via its Equitel cell-phone banking application, launched in 2015. Equitel now handles the vast majority of the bank’s cash transactions and loan disbursements, helping to make the bank extremely cost-efficient. New Partnerships for Infrastructure Development Both developed and developing countries have glaring gaps in transportation, power, and water infrastructure and in “soft” infrastructure such as health care facilities. Our McKinsey colleagues estimate that the global gap between current and required infrastructure spending is $350 billion a year; unless it is closed, growth will slow and fast-growing cities will come under enormous strain. Nowhere is the gap bigger than in Africa; for instance, nearly 600 million people there lack access to electricity. The deficit has spurred some bold public-private collaborations that could serve as a model for other regions. A case in point: the “company to country” agreements between GE and various African governments. These represent a new frontier in the company’s approach to public-sector clients. For example, GE’s agreement with Nigeria supports the financing, design, and building of vital infrastructure, with projects including the development of 10,000 megawatts of power generation capacity, upgrades to airports, the modernization and expansion of the national railway corporation’s locomotives, and the construction of public hospitals and diagnostic centers. Jay Ireland, the recently retired president and CEO of GE Africa, describes the approach as “an umbrella agreement matching our capabilities as a company with the issues the country was facing, including putting more power on the grid, strengthening logistics, and improving health care outcomes.” Other African innovators are harnessing mobile money, along with advances in solar power and battery storage, to leapfrog the continent’s gaps in electric power generation. One example is Kenya-based M-KOPA, which provides affordable solar-powered electricity generation and storage solutions to households that lack access to the grid—and finances payment over a 12-month period via mobile money accounts. Since its founding, in 2011, M-KOPA has sold more than 600,000 household kits and garnered investments from multinationals including Japan’s Mitsui. Another example is Uganda-based Fenix, which has sold 140,000 solar power kits, also enabled by mobile money. In late 2017 Fenix was acquired by Engie, a major global energy company based in France, as part of a drive to use digital technologies to provide 20 million people around the world with decarbonized, decentralized energy by 2020. Smart Approaches to Industrialization Manufacturing represents another class of African innovations relevant to other regions seeking to build or revitalize their industrial base to meet local demand and create stable jobs. One pioneer is Nigeria’s Aliko Dangote, whose Dangote Industries achieved the seemingly impossible task of building large-scale manufacturing businesses when the country was plagued by chronic power outages, exchange rate volatility, and other impediments, including underdeveloped local supply chains and shortages of technical skills. “We knew that everyone who had tried industrialization in Nigeria had gone out of business,” Dangote told us. So he built a shock-proof manufacturing model that included vertical integration, on-site power generation, robust engagement with the government, and an internal manufacturing academy. Today his group produces pasta, sugar, salt, flour, plastics, and cement in large volumes, and it will soon add refined petroleum and fertilizers—all commodities that Nigeria has historically imported. The company has created 30,000 jobs and made Dangote Africa’s richest person. Africa is also home to a growing group of innovative industries, from car making to chemicals, that meld the latest technologies with the continent’s labor force advantages to meet both African and global demand. An analysis by the McKinsey Global Institute suggests enormous potential to increase the production of such “global innovations,” which could enable Africa to double its manufacturing output in a decade. In Morocco, for example, the automotive industry has multiplied its export revenue by a factor of 12, taking it from $0.4 billion in 2004 to $5 billion in 2015, and added 67,000 jobs during that time. The French automakers Renault and Peugeot have together invested more than $2 billion to create assembly capacity for 650,000 cars and 200,000 engines. Morocco has also built industries in aerospace and other advanced sectors. In these high-tech African industries, companies make use of both automation and skilled labor. That makes sense: In Morocco, for example, labor costs are about one-third those in even the lowest-cost European countries. And Africa’s labor force is expanding fast; by 2034 it will surpass China’s and India’s. By 2050 the continent’s working-age population will exceed 1.5 billion. New Models of Food Production More than 800 million people worldwide—11% of the global population—are affected by hunger. The vast majority are in the developing world, with 520 million in Asia and 240 million in Africa. But hunger also besets many low-income households in rich nations, including more than 40 million people in the United States. The UN has set a goal of banishing hunger by 2030. To achieve that, the agricultural sector will need to step up innovations in technology and management to improve yields, and food companies will have to create affordable, nutritious foods and reconfigure distribution systems to get those foods onto the tables of people who need them. Africa is home to exciting innovations in all these arenas. Consider Babban Gona (in Hausa, “great farm”), a Nigerian social enterprise serving networks of smallholders. Its members receive development and training, credit, agricultural inputs, marketing support, and other key services. Since its founding, in 2010, Babban Gona has enlisted more than 20,000 Nigerian farmers, who have, on average, more than doubled their yields and increased their net income to triple the national average. Participating smallholders, who are typically considered a high credit risk, have a 99.9% repayment rate on credit obtained through the program. Babban Gona’s founder, Kola Masha, aims to enlist one million farmers in the program by 2025, thus providing livelihoods for 5 million people. Other smallholder-focused programs are being launched across the continent, and large commercial farms are also boosting their scale and output. Together these efforts could banish famine in Africa forever. Our analysis shows that the yield increases facilitated by Babban Gona, if replicated across the continent, would be enough to feed Africa’s growing population and export to other regions. Africa’s “green revolution” is being accelerated by a new breed of tech entrepreneur. One such is Sara Menker, an Ethiopia-born former Wall Street commodities trader. She realized that farmers and investors lacked the information needed to choose crops and markets, manage weather and other risks, and identify where and when to invest in infrastructure. So she created Gro Intelligence, which she describes as “a Wikipedia for agriculture, but with a very deep analytical engine built on top of it.” With offices in Nairobi and New York, the company has clients ranging from some of the world’s largest sovereign-wealth and hedge funds to individual commodity traders in Africa and around the globe. Other digital start-ups are providing farming advice, weather forecasts, and financial tips and helping farmers measure and analyze soil data so that they can apply the right fertilizer and optimally irrigate their farms. Affordable, Accessible Consumer Products Growing more food is a key step in banishing hunger, but it’s just as important that ordinary people have access to nutritious, affordable meals. Readers of this magazine may be familiar with Indomie noodles—one of Nigeria’s most successful consumer products (see “Africa’s New Generation of Innovators,” HBR, January–February 2017). Sold in single-serving packets for the equivalent of less than 20 cents, the noodles can be cooked in under three minutes and combined with an egg to produce a nutritious meal. Dufil Prima Foods introduced them to Nigeria in 1988. They took off, and the company soon shifted from importing to manufacturing locally. CEO Deepak Singhal told us, “We created a food that was relevant for Nigeria. And in 10 to 15 years we became a household name.” Dufil has also driven fundamental innovation in getting Indomie noodles to consumers throughout Nigeria. It has a “feet on the street” distribution network of more than 1,000 vehicles, including motorcycles, trucks, and three-wheelers. When distributors can’t go any farther by vehicle, they continue on foot. That was a critical innovation, because the company’s route to consumers was through thousands of small, often informal outlets rather than an organized supermarket network. Dufil’s distribution approach has garnered global attention: In 2015 Kellogg invested $450 million to acquire a 50% stake in the West African sales and distribution arm of Indomie’s parent company, Tolaram Africa, and in 2018 it ponied up $420 million more for a stake in Tolaram’s food-manufacturing business. Again, innovations in Africa’s consumer sector are being accelerated by bold moves from tech entrepreneurs. An example is the e-commerce start-up Jumia. Launched in 2012, it now has more than 2 million active customers in 13 African countries, and sales are doubling each year. Although Jumia has yet to deliver fully on its business model—or to make a profit—it has attracted hundreds of millions of dollars in investment from Goldman Sachs and others. Sacha Poignonnec, Jumia’s France-born co-CEO, points out that Africa has 60,000 people for each formal retail outlet, whereas the United States has only about 400 people per store. He told us, “In the U.S., e-commerce is slowly changing centuries-old shopping habits. Here it is creating habits. People are making their first big buys, such as smartphones, and their first online purchases simultaneously.” To encourage these habits, Jumia created the JForce sales program, in which agents go door-to-door with Wi-Fi–connected tablets, taking orders from customers who lack internet access. “It allows agents to become entrepreneurs,” Poignonnec said, “effectively operating their own online retail business right from home.” In addition, Jumia created a logistics service to fulfill its e-commerce orders; in 2017 it delivered 8 million packages, many of them to remote rural areas. And it built an in-house payment platform to help African consumers gain trust in online payments. These innovations could help Africa bypass costly brick-and-mortar retail and go directly to an e-commerce model that brings consumers greater choice and lower prices wherever they live. Future-Focused Capability Building With so many young people entering Africa’s workforce, innovations in education and skills development are essential. They are also globally relevant: More than 75 million young people worldwide are unemployed, while many companies can’t find people with the skills needed for entry-level jobs. This happens in part because many education systems don’t provide either the technical or the behavioral skills needed to succeed and adapt in the rapidly changing world of work. One African solution to the youth skills gap is Generation Kenya, a nonprofit with 180 local employer partners, which operates 37 training locations across the country. Each offers immersive “boot camp” programs lasting six to eight weeks, aimed at building job readiness in areas such as retail and financial sales, customer service, and apparel manufacturing. The programs not only teach relevant technical skills; they also use role-playing and team exercises to impart behavioral and mindset skills such as punctuality and resilience. By 2017 more than 8,000 young Kenyans had gone through a Generation program, with 89% of them finding formal employment within three months of graduation—heartening evidence that smart development programs can quickly equip young people, wherever they are, to become high-performing employees in modern businesses. (Disclosure: Generation, today a global nonprofit, was founded by McKinsey, and we continue to support it, alongside philanthropic groups such as USAID.) Other African education innovations are decidedly high-tech. GetSmarter is a South African start-up that offers online certification courses to students around the world, supported by remote tutors and coaches. In 2017 it was acquired by the U.S.-based ed-tech company 2U for $103 million. Another example is the African Leadership University, or ALU. Its campuses in Mauritius and Rwanda empower students to manage their own education using technology, peer-to-peer learning, and four-month internships with partner companies, enabling ALU to get by with a small teaching staff. Founder Fred Swaniker is a Stanford-educated Ghanaian who set about creating a business model for higher education from scratch. “Our university produces talent that competes with students from Harvard and Stanford,” he told us. “But we do it using one-tenth of the real estate and at one-tenth to one-twentieth of the cost.” How to Scale and Sustain Innovation In our consulting work we’ve watched a diverse cohort of entrepreneurial and corporate innovators in Africa and beyond create remarkable businesses on the continent. Although those innovators differ widely in geographic reach and sector focus, they all see challenges as a spur to innovation and unmet market demand as room for growth. They have honed mindsets and practices that companies in other markets could profitably apply to their own growth strategies. That should start with a granular, empathetic understanding of potential customers’ needs—recall what M-KOPA did for people who lacked electricity and what Indomie noodles did for consumers seeking cheap, nutritious, and convenient meals. It also means rethinking the business model to truly engage with customers, as Equity Bank did through its agency banking model and its innovations in cell phone banking. These examples point to an additional activity needed for success: harnessing technology in imaginative ways, including to drive down costs and price points. We’ve also observed that successful African innovators, far from being starry-eyed, are more aware than anyone else of the barriers to success and that they build long-term resilience into their business models. Dufil’s Deepak Singhal says that it takes a “lion’s heart” to succeed in a market like Africa. “We have our own logistics company, our own raw material, our own plants, and our own packaging facilities,” he told us. “Controlling our supply chain is very important.” In a global survey of executives, we found that such steps were closely correlated with reported growth and profitability in Africa. Given the world’s increased volatility—in politics, markets, trade, and even weather—innovative firms everywhere would do well to consider such approaches. Companies also need to take a firm stand against another tough barrier to business: corruption, which remains widespread in Africa. We advise clients to stick to their values no matter what. We faced a test of that principle ourselves in South Africa, where we briefly explored partnering with a local firm to support Eskom, the national electricity utility, only to learn that the firm was owned by a questionable character linked to a national corruption scandal. Although we terminated the discussions, we learned hard lessons from the experience, including how critical it is to deeply understand the context of any potential engagement and the actors involved. What motivates Africa’s innovators to get out of bed each morning, navigate this complex terrain, and keep building their businesses? What they have in common, in our experience, is a deeper purpose. When faced with Africa’s high levels of poverty and its gaps in infrastructure, education, and health care, they don’t see only barriers to business; they see human issues they feel responsible for addressing. Take Strive Masiyiwa, the chairman of the pan-African telecom, media, and technology company Econet Group. There is no doubting his business ambitions: He is the major shareholder in the fast-growing Liquid Telecom, Africa’s largest broadband infrastructure and data services company. But Masiyiwa has put equal energy into philanthropic initiatives; for example, he has used his wealth to provide scholarships to more than 250,000 young Africans. “To be successful, you need to be more than a businessman; you need to be a responsible citizen,” he told us. “If you see a problem, think about how you can solve a piece of it.” He added, “The exciting part is asking ‘What is the root cause of this problem? What can we do to address that root cause?’” Graça Machel, an international human rights advocate (and the chancellor of ALU), points to business’s responsibility to help meet the UN’s Sustainable Development Goals. “Those goals are an ambitious universal call to end poverty, protect the environment, and ensure that all members of our global family enjoy peace and prosperity,” she told us. “They require that we leave no one behind.” Machel sees an opportunity for the private sector to partner in poverty eradication efforts and collaborate with the public sector and civil society to drive job creation on a massive scale. That will “require a change in mindset in all of us,” she said. “Entire industries and leaders themselves have to meaningfully transform—it can no longer be business as usual.” Her late husband Nelson Mandela would have agreed. As he famously wrote, “There is no passion to be found playing small—in settling for a life that is less than the one you are capable of living.” CONCLUSION Humankind has never before had such resources, knowledge, and technology at its disposal—yet it is a long way from translating those advances into decent livelihoods and dignified lives for all the world’s people. We believe that innovation by businesses large and small can play a central role in solving the world’s greatest challenges and ushering in an era of shared abundance. Addressing the deprivation that is still widespread in Africa will be an important step toward that goal. But the challenges Africa is known for are present to a surprising degree in every other region of the globe. That makes the innovations born in the African test lab critically important for the rest of the world.

Africa: A Crucible for Creativity

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