Issue 9 February - May 2002by Duncan Bonnett

Africa’s most populous country finally made it onto the radar screens of South African exporters last year, with several large deals helping to demystify a potentially lucrative market. A snapshot of exports to Nigeria reveals further potential to develop this market.

Nigeria has long been regarded with a good deal of mistrust and scepticism by South African companies. As South Africa emerged from the isolation era, business deals into Africa were generally regarded warily; a combination of a lack of knowledge of both the potential to develop markets and African business customs leading many in South Africa to concentrate on traditional markets in Europe and North America.

South Africa’s rapid integration into the global economy, and the country’s position as a logical gateway into much of sub-Saharan Africa soon forced a rethink, and the countries of Southern and East Africa have rapidly assumed an important role in South Africa’s export development. However, in West Africa only Ghana appeared to offer any attraction for South African exporters. The return to civilian rule in Nigeria, the growing political ties between South African and Nigeria, and the opening up of that economy has led many to reevaluate this position.

A lesson that should have been learned from recent global events is that exporters should not rely too heavily on continued growth into the world’s largest markets. The US economy is struggling to shake off the effects of recent events, and Euroland and Japan are likewise struggling with sluggish domestic growth. Exports into Africa have grown steadily in recent years despite global events, as many African economies are not subject to the same global financial pressures that South Africa is. It would make sense then, to investigate Nigeria—warts and all—as the step in growing African business.

South Africa’s recent interest in Nigeria has been dominated by MTN’s acquisition of a cellular license for around US$285 million.This high-profile investment in Nigeria will undoubtedly act as a spur for other companies more reticent to tackle Africa’s largest market. It is an important signal from one of South Africa’s foremost companies that Nigeria is open for business. Allied to this is the fact that South African parastatals such as Eskom, SAA and Transnet are showing increased interest in the country, and one begins to see a picture of a maturing of attitudes towards Nigeria. This is further reinforced by the involvement of the Protea group of hotels in developments in Nigeria, expected to top the US$8 million level, and Dutch brewer Heineken’s decision to invest up to US$700 million in the next three years.

These are impressive figures, but they do not tell the whole story. Trade between South Africa and Nigeria has been increasing steadily for the last six years, initially off a very low base, but now reaching nearly R2 billion. Since 1997 the balance of trade has been decisively in Nigeria’s favour—almost exclusively as a result of exports of oil from that country to South Africa. The table above illustrates the development of trade, with 1997 being the first year of significant bilateral trade. Total trade has grown by in excess of 100%, with South African exports to Nigeria showing impressive growth of roughly 250% over the last four years.


PIE CHART


Although the growth is off a low base, and exports to 2000 had yet to reach the R1billion a year level, there are encouraging signs when the composition of exports is analysed. As is the case with many African countries, our exports to Nigeria are dominated by manufactured or value-added goods. Africa is an important destination for South African manufacturers, and the chart below illustrates just how receptive Nigeria is to South African manufactured goods. 96% of all South African exports to Nigeria are manufactured goods—well above the roughly 25% level for exports as a whole. This is an important point, because Nigeria, like Angola, has relied almost solely on oil for development, largely at the expense of other industries. Thus most non-food consumer goods and most industrial inputs and machinery are imported. As Nigeria attempts to establish a more broad-based economy, opportunities to export machinery and equipment will doubtless grow as well. A casual glance at South Africa’s exports to Mozambique, Zambia and Tanzania in recent years reinforces this point as exports of mining and industrial machinery and inputs have risen sharply from South Africa as these countries expand and rehabilitate these sectors.

Exports of machinery, mechanical appliances and electrical equipment have grown particularly well, and now account for 22% of South Africa’s exports to Nigeria, up from only 10% a few years ago. As major South African companies invest further in Nigeria’s privatisation process and industrial development, it can be expected that these figures will rise even further.

The expansion of South African supermarket chains and fast foods franchises should also see more South African food and beverage products entering the market—an exciting prospect with roughly 120 million potential consumers. Exports of prepared foods and beverages already top R100 million, and it is logical to expect this figure to rise further. Nigeria is also one of the few countries in Africa that has a substantial upper income consumer group, and sales of luxury consumer goods should be further assessed.

Nigeria is entering a crucial political and social transition period, with the country frequently making headlines for all the wrong reasons, as expressions of newfound freedoms often turn violent. After decades of repressive military rule, invariably accompanied by massive levels of corruption and mismanagement, ethnic and religious tensions have become more prevalent in recent times as Nigeria’s restive population seeks the dividend of democracy. The government is faced with a huge social backlog in terms of housing, healthcare, education, and most pressing of all, employment. This is particularly so in the oil-rich Delta region, with local communities have seen almost none of the benefits of oil production.

Thus the government of Nigeria is faced with a situation not dissimilar to that which South Africa faced in 1994, and South African companies should be actively seeking opportunities in these fields. The Nigerian federal government has committed roughly US$2 billion to the reconstruction and upgrading of the region as a matter of urgency, and companies involved in infrastructure and social development should be able to take advantage of this.

The telecommunications industry is, as alluded to above, at the beginning phase of a rapid expansion. Not only is the government committed to developing the cellular sector, but fixed line development is a priority area as well as Nigeria seeks to overcome obstacles to the creation of a viable business infrastructure. Anecdotal evidence from visitors returning from Lagos suggest that e-commerce will become a rapidly expanding sector once the telecommunications industry begins to develop. There are thus good opportunities for South African ICT equipment and service providers, and some local and international companies based in South Africa are already taking advantage of this.

The message is thus clear: the political imperative to develop Nigeria, and particularly the southern Delta region, should give the necessary impetus to a range of large projects and developments across the nation. Exporters suffering from the fallout of the World Trade Centre debacle and events in Zimbabwe should look to a market beginning to flex its muscles. In addition, the privatisation of key assets and restructuring of the economy will provide good opportunities for a range of service and goods suppliers from South Africa - many of whom will have gained good experience in South Africa and neighbouring countries. This should not be taken as a call to rush headlong into Nigeria—it is still a difficult market to operate in without the necessary knowledge and support, but should serve to reassure companies contemplating the Nigerian market that this is an opportune time to investigate it seriously.

Author's Contact Details
Author: Duncan Bonnett
Tel: +27 11 728 5878
Fax: +27 11 728 7555
Email: dbonnett@icon.co.za
Website: www.mbendi.co.za/whitehouse