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NIGERIA

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by EOS Intelligence EOS Intelligence No Comments

Nigerian Power Woes Cripple Businesses

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Achieving efficient generation and distribution of electricity in Nigeria has over the years remained a sore point and a major threat to growth of the economy. Poor electricity supply has serious consequences for the businesses in the country, with several existing companies struggling to maintain profitability and new players shying away from entering the market. The government has undertaken several measures, including transferring majority of the power infrastructure from government to private hands, however, it has not managed to improve the situation. Ambitious policies and agreements with multinational energy companies might just be the key to solve Nigeria’s energy problems.

Nigeria is considered most abundant in natural reserves and is the largest economy in Sub-Saharan Africa. The country has the potential to generate about 11,000-12,000 MW of electric power from existing plants. Despite this, Nigeria is only able to generate about 4,000 MW on most days, which is less than one-third of what is required to provide for its more than 190 million citizens.

According to a 2014 World Bank survey, about 27% of Nigerian businesses identified electricity as the main hurdle in doing business. Also, IMF estimated per capita electricity production in Nigeria to be less than 25% of that of the Sub-Saharan Africa average. The gap between the electricity generation capacity and demand in the country is a result of poorly maintained electricity generation facilities and very little investment in new power plants as well as an outdated transmission and distribution infrastructure.

Government action or lack thereof

Nigeria’s power sector has suffered from mismanagement and corruption for many years. Since Nigeria’s independence from the British rule in 1960, the government set up a heavily subsidized grid, which was subject to high level of corruption and was never able to generate enough profits to finance new power plants or upgrade the transmission and distribution network to meet the needs of the growing population. In addition to its inability to upgrade, the electricity sector suffers from a huge range of issues, ranging from leakages in power transmission and distribution, to lack of maintenance, to theft and vandalism.

In an effort to combat the country’s energy poverty, the government liberalized the power sector in the early 2001 in hope to attract foreign investments. However, the plan didn’t work as expected. Instead, privatization increased corruption as the political members tried to appoint political allies and family members to head the new distribution companies.

According to a 2018 publication by the Istituto Affari Internazionali, an Italian non-profit think tank, Nigeria has been steadily generating 4,000 MW/h since 2005, with no increase in output over the past decade. This is costing the Nigerian economy a great deal as businesses and industries suffer due to regular power outages. Moreover, as per a 2018 estimate by A2EI (a Berlin-based collaborative R&D platform in the solar off-grid industry), Nigerians spend NGN4.3 billion (US$12 million) annually on small gasoline generators, of which NGN2.9 billion (US$ 8 million) is spent on fuel.

Nigerian Power Woes Cripple Businesses by EOS Intelligence

Nigeria’s energy poverty affecting businesses across industries and sizes

Manufacturing and trading industry

Poor electricity supply is affecting the manufacturing industry in an immense way. A typical Nigerian factory experiences power outage or voltage fluctuations approximately eight to ten times a week, with each power outage lasting about two hours. This adds to the cost of production through lost material, damaged products, and restarting the factory equipment. This makes the manufacturing business unattractive to investors since the overhead costs are high, return is low, and the business environment is largely uncertain.

To combat the power issue, companies depend on diesel generators for power backup, however, this significantly adds to the cost of the product, which in turn affects the competitiveness of the business since whatever is produced in the country is more expensive when compared with production costs in other regions.

In addition to electricity shortage, prices and availability of fuel for operating the generators also impact businesses. While small business generators are powered by price-capped gasoline, the larger generators that power big businesses, apartment complexes, and big homes can only be run on diesel, which in turn is volatile with regards to pricing and supply.

According to a market intelligence firm based in Lagos, SBM Intelligence, diesel is among the top three cost heads for many Nigerian firms. Moreover, with the price of diesel also being volatile, many businesses operate with a constant risk of increasing overhead cost, which may result in reduction in output, downsizing, or even business closure. This was seen in May 2015 when Nigeria was hit by fuel scarcity, which caused many traders and businesses to shut shop as they could not afford diesel for their generators.

One business sector most impacted by Nigeria’s energy poverty is the perishable food sector. Nigeria’s fuel scarcity in 2015, caused the loss of approximately NGN10 million (US$27,000) worth of food items. Similarly, as per members of the Ajeromi Frozen Foods Market Association in Lagos, a severe bout of power outage in March 2016 resulted in the decay (and thereby loss) of frozen food worth NGN20 million (US$55,000) in just five days.

Apart from this, small businesses are also severely impacted by Nigeria’s power shortage. Most small shops cannot afford complete generator back up and therefore suffer with limited working hours and sub-par working conditions. For the ones that can afford a generator, the cost of it is very high, squeezing out profits from their already limited setup. For instance, a small tailor shop with a daily income of about NGN4,000 (US$11) spends close to NGN3,000 (US$8.2) daily on fueling their generator to keep the business going, highlighting the disproportionately high cost of electricity to run a small business in the country.

According to a market intelligence firm based in Lagos, SBM Intelligence, diesel is among the top three cost heads for many Nigerian firms. Moreover, with the price of diesel also being volatile, many businesses operate with a constant risk of increasing overhead cost, which may result in reduction in output, downsizing, or even business closure.

Technology sector

Nigeria’s tech industry accords for approximately 14% of the Nigeria’s GDP in 2019 and is poised to be the next frontier for growth. However, constant power outages have become a serious problem for the booming sector. Most tech companies operate around the clock to provide a 24*7 service to their customers, however, in Nigeria, most app companies operate for only 8-9 hours a day as they cannot sustain generator costs for the entire 24 hours. This impacts the quality of service provided.

As per Chris Oyeniyi, owner of a smartphone app called KariGo, electricity cost (including generator cost) on a monthly basis is about US$800 for the bare minimum number of operating hours. The same electricity bill would be around US$100 if the public power grid was dependable. This hampers growth for tech start-ups, which have to allocate significant amount of their funds towards power supply instead of using them for expanding, both in terms of scale and staff.

In an attempt to overcome this challenge, several technology start-ups prefer to work in co-working spaces that allow them to pool their electricity bills. This concept is becoming very popular in the country, however, despite this, generator costs remain very high to provide around the clock services.

In addition to the high costs, technology firms also operate with a constant risk of losing all their digital work (that is not backed up) or hampering important software updates in case of a sudden blackout.

According to a survey of 93 Nigerian tech start-ups by the Center for Global Development conducted in 2019, 57% of start-ups found power outages to be one of the biggest challenges for their business. Moreover, one-third of the firms surveyed reported losing more than 20% of their sales due to power outages.

Other sectors

Just like the manufacturing and technology sector, most of the other industries are also impacted by irregular power supply and thereby rely on large generators to run their operations. This puts additional cost pressures on the business.

In 2019, Temi Popoola, the West Africa chief executive of investment bank Renaissance Capital, stated that diesel accounts for approximately 20-30% of banks’ operating expenses in Nigeria, which is significantly higher compared with other developing countries.

The telecom sector is also vulnerable to the power outages faced by the country. In 2015, MTN, a telecom giant, stated that it spends approximately NGN8 billion (US$22 million) annually on diesel to keep its network online. This is a huge cost and accounts for about 60% of its operating costs. Due to such heavy operating costs, the company is forced to focus more on sustaining its day-to-day activities rather than investing in any other area such as expanding its network.

The road ahead

Currently there does not seem to be any light at the end of the tunnel for Nigeria’s power woes. With high level of corruption paralyzing the sector and limited amount of new private investment, the sector is in a state of limbo.

Moreover, there are constant disagreements between the Nigerian Bulk Electricity Trading Company (NBET) and the private power generating companies, which further impact electricity supply. Recently, in September 2019, another issue came into the light, when NBET directed all thermal electricity generation companies (GenCos) to pay an administrative charge. To oppose this, the GenCos have threatened to shut down power production and supply and argued that there is no policy directive to that effect by the Nigerian Electricity Regulatory Commission (NERC). The two sides have not managed to reach any consensus as of now. However, such additional charges will further put financial pressure on already struggling GenCos, who have largely failed to improve their generation levels due to lack of capital for maintenance and operation. This will further negatively impact the already dismal grid supply levels.

Nigeria is dealing with another legal dispute over a hydro power project with a proposed capacity of 3,050 MW. In 2003, the Nigerian government awarded the build-operate-transfer (BOT) contract to a local company, Sunrise Power and Transmission Company Limited (SPTCL) and followed it up with signing a general project execution agreement with the company in November 2012. However, simultaneously, the government also awarded the bid to execute the hydro project to a JV between China Gezhouba Group Corporation of China (CGGCC) and China Geo-Engineering Group Corporation (CGGC) in 2006.

Moreover, in 2017, it signed another engineering, procurement and construction (EPC) contract with Sinohhydro Corporation of China, CGGCC and CGGC to form a joint venture but excluded SPTCL from the agreement. Following this SPTCL filed a legal suit against the federal government and its Chinese partners at the International Chamber of Commerce (ICC) in Paris for breaching the contract. The government risks approximately US$2.3 million in fines in this legal tussle. Moreover, the Chinese government refused to provide the required funding for the project (US$5.8 billion) until the legal dispute is settled. Thus, the project is on hold until any legal solution is reached.

However, that being said, the Nigerian government is ambitiously trying to revive the country’s electricity sector. In 2017, the government developed a National Renewable Energy and Energy Efficiency Plan, under which it aims to achieve 30,000 MW electricity by 2030, with renewable energy accounting for 30% of the overall energy mix (9,000 MW). The government plans to adopt ‘The Sustainable Energy for All Action Agenda’ (SE4ALL), which is a UN initiative to support sustainable energy in Africa, with targets of 90% Nigerians having access to electricity by 2030.

To this effect, in May 2019, Central Bank of Nigeria announced the disbursement of NGN120.2 billion (US$330 million) to different distribution companies, power generating companies, service providers, and gas companies in order to improve their liquidity situation. Furthermore, in 2018, the government secured a loan of US$485 million from the World Bank to upgrade the country’s electricity transmission network and infrastructure and is currently in talks about a US$2.5 billion additional loan to uplift the power sector.

The government has also signed a six year power deal with the German energy giant Siemens, with an aim to generate a minimum of 25,000 MW of electricity by 2025. As a part of this deal, Siemens will work alongside the Transmission Company of Nigeria to achieve 7,000 MW and 11,000 MW of reliable power supply by 2021 and 2023, respectively. Thus in addition to building new generation capacity, the government is also focusing on improving supply from the existing grids, which has been stagnant at around 4,000 MW over more than a decade.

Moreover, the country’s energy sector is receiving significant support from international bodies such as PowerAfrica, which is a wing of the United States Agency for International Development (USAID). Over the past few years, PowerAfrica has been assisting the government in agreements on solar projects that help Nigeria in diversifying its energy mix. In 2015, PowerAfrica supported Nigeria’s first private IPP Project (the Azura Edo Project) to reach financial close in 2015. It also assisted it in securing a US$50 million investment by the Overseas Private Investment Corporation (OPIC). The Azura plant (the first project initiated by Azura power) became operational in 2018 with 461 MW capacity. It is the first phase of the 1,500 MW IPP (Independent Power Project) facility that is being developed in Nigeria. In December 2019, Africa50 (a pan-Africa infrastructure investment platform) expressed its plans to invest in the Azura power plant.

Growing private investments, international support, and supportive government policies as well as investment may just lift up the Nigerian electricity sector, which has been in dire need for reform over several decades.

In 2017, the Nigerian government developed a National Renewable Energy and Energy Efficiency Plan, under which it aims to achieve 30,000 MW electricity by 2030, with renewable energy accounting for 30% of the overall energy mix (9,000 MW).

EOS Perspective

As per the International Centre for Investigative Reporting (ICIR), the Nigerian government has spent approximately NGN1.164 trillion (US$3.2 billion) on the power sector during 2011-2018 without any significant improvement in energy supply. Poor power supply has been crippling the country for many decades now.

Large businesses, especially in the technology sector, could help boost the economy but like any other business, they require electricity to run successfully. Nigeria lacks the basic business environment at the moment. Moreover, ongoing issues with the private generation players further hamper the sectors growth and performance.

Recently, the government has made several moves in the right direction (especially with regards to investment in renewable energy sources), but it is too early to comment if they could solve Nigeria’s decades-long energy problem. Moreover, the real issue is not about investment levels or government policies, but about the implementation of these initiatives. As seen previously at the time of privatization of the sector, the government failed to uplift the sector as it was plagued by corruption, favoritism, and bureaucracy.

Similarly, the government adopted a policy in 2010 called Vision 20:20, wherein it aimed to be featured in the top 20 economies globally by 2020. Within the power sector, Vision 20:20 aimed to increase generation capacity to 20,000 MW by 2015 and 35,000 MW by 2020. However, it failed to make significant investments or incentivize private players to invest in the sector and failed miserably in its goals. If the same is repeated now, the result will not be very different.

The government’s plans can only be implemented if there is substantial transformation of the entire sector, with the private sector participating equally in the upliftment. The government needs to provide significant financial incentives for new power projects and must also restructure the distribution companies to improve liquidity. Lastly it must counter the corruption and bureaucracy seeped into the sector and ensure that generating companies receive complete and timely cost-reflective tariff from the government. While these measures are difficult to achieve, they are the only way the sector can see any respite in the coming years.

Africa’s Fintech Market
by EOS Intelligence EOS Intelligence No Comments

Africa’s Fintech Market Striding into New Product Segments

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Fintech is certainly not a new concept in the African region. More than that: Africa has been a global leader in mobile money transfer services for some time. The market continues to evolve and the regional fintech players are now moving beyond just basic payment services to offer extended services, such as credit scoring, agricultural finance, etc. With Africa being significantly unbanked and still lacking financial infrastructure, fintech industry is at a unique position to bridge the gap between consumer needs and available financial solutions.

The African subcontinent is much behind many economies when it comes to financial inclusion and banking infrastructure owing to low levels of investment, under-developed infrastructure, and low financial literacy ratio. As per World Bank estimates, only about 20% of the population in the sub-Saharan African region have a bank account as compared with 92% of the population in advanced economies and 38% in low-middle income economies.

Related reading: Fintech Paving the Way for Financial Inclusion in Indonesia

This gap in the formal banking footprint has been largely plugged by the fintech sector in Africa, especially with regards to mobile payments. While in the developed economies, the fintech sector focuses on disrupting the incumbent banking system by offering better services and lower costs, in Africa it has the advantage of building and developing financial infrastructure. This is clear in the uptake of mobile fintech by the African population, making Africa a global leader in mobile payments and money transfers.

While in the developed economies, the fintech sector focuses on disrupting the incumbent banking system by offering better services and lower costs, in Africa it has the advantage of building and developing financial infrastructure.

However, mobile payments have simply been the first phase in the development of digital finance in Africa. The penetration and mass acceptance of mobile wallets have opened doors for the next phase of digital financial services in Africa. These include lending and insurance, agricultural finance, and wealth management.

Moreover, owing to the success achieved by mobile wallets, global investors are keenly investing in fintech start-ups that are innovating in the sector. For instance, Venture capital firm, Village Capital, partnered with Paypal to set up a program named Fintech Africa 2018. The program aims to support start-ups across Kenya, Nigeria, South Africa, Ghana, Uganda, Rwanda, and Tanzania, which provide financial services beyond mobile payments (especially in the field of insurtech, alternative credit scoring, and fintech solutions for agriculture, energy, education, and health).

Africa’s Fintech Market Striding into New Product Segments

Agricultural finance

Agriculture is the livelihood of more than half of Africa’s workforce, however, due to limited access to finance and technologies, most farmers operate much below their potential capabilities. Due to this, Africa homes about 60% of the world’s non-cultivated tillable land.

However, in recent years, several established fintech players as well as start-ups have built solutions to provide financial support to the region’s agricultural sector.

In late 2018, Africa’s leading mobile wallet company, Cellulant, launched Agrikore, a blockchain-based digital-payment, contracting, and marketplace system that connects small farmers with large commercial customers. The company started its operations from Nigeria and is expected to commence business in Kenya in the second half of 2019.

Under their business model, when a large commercial order is placed on the platform, it is automatically broken into smaller quantities and shared with farmers on the platform (based on their capacity and proximity). Once the farmer accepts the order for the set quantity offered to him, the platform connects the farmer with registered transporters, quality inspectors, etc., who all log their activities on the blockchain and are paid through Cellulant’s digital wallets. All this is done on a blockchain to ensure transparency.

Related reading: Connecting Africa – Global Tech Players Gaining a Foothold in the Market

Another Nigeria-based company, Farmcrowdy, has been revolutionizing financing in Nigeria’s local agriculture sector by connecting small-scale farmers with farm sponsors (from Nigeria as well as other regions), who invest in farm cycles. Farmers benefit by receiving advice and training on best agriculture practices in addition to the financial support. Sponsors and farmers receive a pre-set percentage of the profits on the harvest in that cycle. In December 2017, the company received US$1 million seed investment from a group of venture capitalists including Cox Enterprises, Techstars Ventures, Social Capital, Hallett Capital, and Right-Side Capital, as well as five angel investors.

In addition to these, there are several other players, such as Kenya-based Twiga Foods (that connects rural farmers to urban retailers in an informal market), Kenya-based Tulaa (that provides famers with access to inputs such as seeds and fertilizers, as well as to finance, and markets through an m-commerce marketplace), Kenya-based, FarmDrive (that helps small farmers access credit from local banks through the use of data analytics), etc.

While most ventures in this space are currently based in Nigeria and Kenya, the sector is expected to grow significantly in the near future and is likely to expand into other parts of Africa as well.

In terms of expected trends in services development, with growing number of solutions and in turn apps, it is likely that consumers will tilt towards all-inclusive offerings, i.e. apps that provide solutions across the entire agricultural value chain.

Alternative credit scoring and lending

Large number of Africans have limited access to finance and formal lending options. Since there is a limited number of bank accounts in use, most people do not have a formal credit history and the cost of credit risk assessment remains high. Due to this, large portion of the population resorts to peer-to-peer lending or loans from Savings and Credit Cooperative Organizations (SACCOs), usually at rates higher than the market rate.

Fintech sector has been working towards reducing the cost of credit risk assessment through the use of big data and machine learning. It uses information about a person’s mobile phone usage, payment data, and several other such parameters, which are available in abundance, to calculate credit score for the individual.

Several companies, such as Branch International, have been following a similar model, wherein, through their app, they analyze the information on customer’s phone to assess their credit worthiness. On similar lines, Tala (which currently operates in Kenya), collates about 10,000 data points on a customer’s mobile phone to determine the user’s credit score.

Fintech sector has been working towards reducing the cost of credit risk assessment through the use of big data and machine learning. It uses information about a person’s mobile phone usage, payment data, and several other such parameters, which are available in abundance, to calculate credit score for the individual.

Other business models include a crowdfunding platform, on which individuals from across the world can offer small loans to local African entrepreneurs. Kiva, a global crowd lending platform, has been partnering with several companies across Africa over the past decade (such as Zoona for Zambia and Malawi in 2012) for providing financial support to entrepreneurs. Kiva vets the entrepreneurs eligible for the loan and the loan is repaid over a period of time. Post that lenders can either withdraw the amount or retain it with the company to support another entrepreneur.

Currently, about 20% of all fintech start-ups in Africa are focusing on lending solutions, with investors backing them with significant amount of funding. This is primarily due to a growing demand for financing in Africa. Moreover, limited barriers with regards to regulations for digital lending start-ups also make it easy for companies to enter this space and test the market before investing large sums of money or entering into a partnership with a bank.

This may change in the long run, however, with regulators increasingly monitoring this growing sector. For instance, in March 2018, the Kenyan government published a draft bill under which digital lenders will be licensed by a new Financial Markets Conduct Authority and lenders will be bound by interest rate caps that are set by the authority.

Insurance and wealth management

Apart from agriculture financing and credit scoring and lending, there are several digital start-ups in the space of insurance and wealth management. There are limited traditional solutions for insurance and wealth management in Africa, a fact that presents significant potential for growth in these categories.

South Africa’s Pineapple Insurance is a leading player in the insurtech space. The company operates as a decentralized peer-to-peer insurance company wherein members take a picture of the product they want to insure and the company uses artificial intelligence to calculate an appropriate premium. The premium is stored in the member’s Pineapple wallet and when a claim is paid out, a proportionate amount is withdrawn from the wallets of all the members in that category. Moreover, members can withdraw unused premium deposits at the end of every year making the process completely transparent.

In addition to Pineapple Insurance, there are several other companies that are making waves in the insurtech sector. These include, South-Africa based Naked Insurance (which uses artificial intelligence to offer low cost car insurance), Kenya-based GrassRoots Bim (which leverages mobile technology to develop insurance solutions for the mass market), and Tanzania-based Jamii Africa (which offers mobile micro-health insurance for the informal sector). Companies such as Piggybank.ng in Nigeria and Uplus in Rwanda, also provide digital solutions for savings and wealth management.

Apart from these fintech solutions, a lot of innovations are also taking place in the payments space. Several companies are working towards extending the reach of Africa’s mobile payment solutions. For example, a leading Kenyan mobile payment company, DPO Group, partnered with MasterCard to launch a virtual card that can be topped with mobile money by the end of 2019. The card has a 16-digit number, an expiry date, and a security code similar to a debit card, thereby facilitating transactions beyond Kenya, with rest of the word as well.

EOS Perspective

There is an immense opportunity in the fintech space in Africa at the moment. Most start-ups are currently operating in Kenya, South Africa, and Nigeria, and are expected to move to other parts of the continent once they have achieved certain scalability and outside investment. Having said that, foreign investors are also keenly observing movement in this space and are on the lookout for fresh concepts that have the capability to build new offerings as well disrupt existing financial solutions.

At the same time, with the industry being relatively new, many of its aspects remain unknown, a fact that increases risk of investing in the sector. Currently, a lot of these solutions depend heavily on data (especially through mobile usage). However, there are increasing regulations regarding data privacy across the globe and over the course of time, this trend is also expected to reach Africa.

Moreover, direct regulations regarding the fintech sector may also impact the business of several new players. Currently the companies are evolving fast and the regulators are playing catch-up, however, once the industry becomes seasoned, clear regulations are expected to ensure safety of the money involved. Fintech companies are also vulnerable to risks arising from online fraud, hacking, data breaches, etc., and regulations are extremely important to keep these in check as well.

While the sector enjoys limited scrutiny at the moment, entry and operations may not be as simplistic in the long run as they seem now. Despite this, the sector is expected to prosper and witness further innovation that will drive it into new territories to satisfy the currently unmet financial needs of the African population.

by EOS Intelligence EOS Intelligence No Comments

Affordable Auto Financing – The Key to New Passenger Vehicle Sales in Nigeria

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Since the announcement of the National Automotive Industry Plan in 2013, the Nigerian automotive industry has witnessed an increased interest from several global automakers. As a result of the Plan as well as recent reforms made by the Nigerian government, PwC predicts Nigeria has a chance of becoming Africa’s auto manufacturing hub by 2050. However, the passenger vehicles market in Nigeria remains heavily dominated by imported second-hand cars, mainly due to the various industry challenges, including lack of access to auto financing. Could affordable auto financing schemes drive growth in Nigeria’s new passenger vehicles market?

This post formed a mainstay of a broader coverage article titled
‘Affordable auto financing essential for OEM success in Africa’, contributed by EOS Intelligence to ‘Guide to the automotive world in 2017’, Automotive World’s annual publication covering a gamut of articles by leading global automotive industry analysts and consultants. The report was published in January 2015.

Nigeria’s new passenger vehicle sales are far behind sales in countries such as Egypt, Algeria, and Morocco, despite the fact that Nigeria is the most populous country in Africa. With a giant share of nearly 80%, Tokunbo vehicles (local name for imported used vehicles) heavily dominate the Nigerian passenger vehicles market.

Although there is a plethora of industry challenges that range from lack of cohesive government policies to poor infrastructure, one of the major growth constraints at present is the lack of affordable auto financing. Due to the limited accessibility and expensive financing options, new vehicles remain out of the reach for most Nigerians.

Nigeria Affordable Auto Financing

Nigeria Affordable Auto Financing

Currently, the cost of auto financing in Nigeria is exorbitant. Amid current economic environment and credit criteria, only a small segment of the population can obtain auto loans. Therefore, most Nigerians either buy used cars or save money over period of time to buy new vehicle for cash, stalling the new vehicle sales – retail customers accounted for less than one-third of all new cars sold in 2015.

This shows how lack of financing options is holding growth in a market segment with the highest growth potential. According to Lagos Business School’s research, an affordable vehicle finance scheme could boost Nigeria’s annual new vehicles sales to one million from 56,000 units at present.

Nigeria Affordable Auto Financing

Nigeria Affordable Auto Financing

EOS Perspective

Although the National Automotive Industry Plan and recent government reforms managed to attract some FDI in recent years, the Nigerian passenger vehicles industry still remains heavily reliant on imported used cars. As the government plans to curb the country’s auto imports, as a first step, the industry stakeholders should plan policies that can make new vehicle ownership more attractive to mass consumers.

The current credit facilities offered by banks are unattractive to many consumers due to cost and credit terms. In order to fuel growth in local vehicle manufacturing and new vehicle sales, the industry, along with the help of CBN, should develop more affordable vehicle credit purchase schemes targeted at the mass middle class population.

Further, as majority of consumers simply have little or no credit history, the current lending models are not going take the industry growth any further. By leveraging on alternative credit data such as payment data from utility and telecom companies, lenders should look beyond credit scores to segment a new customer base of creditworthy consumers.

For vehicle manufacturers and dealers, there is a tremendous opportunity to move up the value chain by setting up in-house financing with the help of the right partners. By offering innovative auto finance solutions, they can push the demand for new vehicles, especially among millennial and emerging middle class first-time buyers.

Whether Nigeria is capable of becoming the next auto manufacturing hub for Africa, only time will tell, but with better financing options, it can surely boost new car sales and help the local automotive industry to progress.

by EOS Intelligence EOS Intelligence No Comments

Refurbished Smartphones – the Future of High-end Devices in Emerging Markets

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An anticipated slowdown in the global smartphone sales forecast for 2016 due to lack of new first-time buyers in large markets such as the USA, China, and Europe, has been alarming for large players who have turned their focus to other emerging markets. To fit the expectations and financial capabilities of price-sensitive consumers in these markets, companies are lining up to sell refurbished smartphones as a strategic move to increase sales volume. However, competition – primarily from new smartphones – in these markets is still fierce, due to some smartphone makers (such as Chinese mobile phone manufacturer Tecno Mobile) reaching consumers with more economic devices. Are second-hand smartphones capable of outshining new devices in emerging markets?

The global smartphone market has been witnessing a slowdown in sales during 2016 in comparison to previous years, partially because some markets, such as the USA, China, and Europe have become saturated (in large part with mid-range and high-end models, such as Apple’s iPhone and Samsung’s Galaxy). Therefore, to avoid a decrease in sales and a subsequent loss in profits, smartphone makers are readjusting their strategies to focus on marketing economic second-hand sets in developing countries.

Refurbished Smartphones - Market Growth

 

 

According to a 2016 Deloitte report, refurbished smartphones global sales volume is expected to increase from 56 million units sold in 2014 to 120 million in 2017, growing at a CAGR of 29%. Large part of this growth is likely to occur in emerging markets, such as India, South Africa, or Nigeria, which is a sound reason for large players to venture into these geographies.

Most smartphone buyers in these markets are highly price-sensitive and frequently precede their phone purchasing decisions with intensive online research to get a good understanding of options that are available to them based on their financial capabilities. These consumers are likely to prioritize price over features and appearance of a smartphone. Therefore, refurbished devices from well-known brands, such as Samsung or Apple, need to offer satisfying functionalities yet be available at affordable price in order to be attractive for buyers in these emerging economies.

Refurbished Smartphones - India, South Africa, Nigeria

Refurbished smartphones hit obstacles across the markets

Emerging markets, despite their favorable dynamics that should at least in theory offer a great environment for refurbished phones sales to skyrocket, are not easy to navigate through, especially for high-end devices makers.

Some markets are becoming protective of their local manufacturing sectors, and introduce regulations that make it difficult to import smartphones, especially refurbished ones. India is one such case. In 2014, the Indian government rolled out the Make in India program, with the idea to promote local manufacturing in 25 sectors of various industries, one of them being electronic devices (including smartphones).

Coincidentally, two years later, when Apple initiated efforts to start importing and selling its refurbished smartphones as a way to increase the iPhone’s market share in the country, these efforts were unsuccessful. The Indian government rejected Apple’s plan, justifying its decision with a concern about the electronic waste increase caused by a deluge of refurbished smartphones entering the country. As a result, the refurbished version of Apple’s iPhone is currently sold only by online commercial platforms (e.g. Amazon, Snapdeal) from vendors that are not always official company retail stores. This could fuel sales in a parallel market, not necessarily benefiting either India’s local manufacturing or Apple.

In case of South Africa and Nigeria, both markets share similarities in terms of advantages as well as potential barriers for refurbished smartphone sales volume to grow. Nigeria’s GDP contracted by 2.06% in the second quarter of 2016, causing wary consumers to maintain their old phones or purchase very economic options due to decreasing disposable income. In South Africa, consumers are also highly price-sensitive with a very limited brand consciousness.

The rapid level of smartphone adoption registered in both markets is seen mainly in handsets with retail price of US$150 or less in South Africa and US$100 or less in Nigeria. Therefore, refurbished high-end models may dazzle local consumers, but low-cost devices can be expected to represent an obstacle for brands such as Samsung or Apple, as these smartphone makers are likely to sell their refurbished devices for half the original price which is still above the consumer-accepted purchase price in these two markets.

EOS Perspective

In case of India, the recent rejection of Apple’s plan to import and sell refurbished smartphones is an indicator that similar issues might be faced by other large players willing to do the same in the future. However, as one of the world’s largest smartphone markets, India is likely to continue building a strong sense of brand loyalty among consumers, especially towards Samsung’s and Apple’s brands in general (smartphones and beyond), and consumers will demand access to these brands (Samsung and Apple already held a 44% and a 27.3% market shares, respectively, in 2016).

The risk of India’s market being flooded with refurbished smartphones sold in a parallel market or online commercial platforms without proper regulation by authorities could result in lost control over excessive e-waste in the country, without necessarily driving local production of competitive products. Consequently, India’s government might have to consider the possibility of allowing large manufacturers to import factory-certified second-hand smartphones into the country, perhaps under the condition of refurbishing the devices in India.

In Nigeria and South Africa, the consumer price sensitivity and limited brand loyalty seem to be the most pressing issues for large players such as Apple or Samsung intending to sell their refurbished phones. In both markets, the rivalry is rather fierce, mainly due to a relatively strong presence of smaller regional manufacturers and large Chinese companies (e.g. Xiaomi) that offer affordable smart devices. While consumers in these markets are willing to spend up to US$100-150 for a device, in most cases they lack brand loyalty.

Apple or Samsung are likely to be negatively affected by this when launching their refurbished high-end handsets at half of the device’s original retail price, which in most likelihood would still be above the price consumers in these markets can and are willing to spend. As a result, large players may have to set their eyes on a long-term horizon, and slowly build the brand loyalty sense in local consumers and temporarily relinquish on large profits in order to enter these markets and settle among their potential customers.

by EOS Intelligence EOS Intelligence No Comments

Looking for Luxury Accommodation? It’s Time for Nigeria

Over the years, Nigeria has become Africa’s epicenter of economic growth and hub for investments in the hospitality sector. Nigeria’s hospitality market is the most developed in Africa, however, it is far from mature and still has an immense development potential — it is this trait that is constantly enticing international hoteliers to establish their presence across Nigeria. Leading hotel brands are forging ahead with ambitious growth strategies to fill the supply gap. Consequently, Nigeria is speeding its way to become Africa’s powerhouse with an estimated US$1.1 billion revenue from the hotel business by 2018 — gearing up to increase the number of hotel rooms from 8,400 in 2013 to 24,000 in 2018.

Disposable income is rising across the middle and high income consumers in Nigeria, which has kindled the desire for luxury accommodation and fine dining experiences. This growing demand, along with the constant government support and investments in the sector are driving the hotel industry in Nigeria.

The country is endowed with several tourist attractions that encourage international tourism, however, many of these places are still untapped and Nigeria also lacks modern infrastructure. Consequently, the hospitality industry is driven mainly by business customers and inbound travelers.

Slide1 - What Factors Are Driving the Hospitality Market in Nigeria

The number of hotels is higher in Nigeria’s political capital – Abuja, and the country’s commercial center – Lagos. Besides the prime locations, hoteliers can focus on the secondary markets, which have potential due to a high demand for quality accommodation as well as a growing influx of business and leisure travelers.

Slide2 - Which Nigerian Cities Can Be The Potential Upcoming Hotel Sites

Nigeria has several international hotel brands operating in the country while many others are devising strategies to enter the market. International hoteliers such as Fairmount, Marriott, Starwood, Sheraton, etc., have started expanding their businesses in Nigeria.

Slide3 - Hotel Development Projects in Pipeline

Other Upcoming Branded Hotels in Abuja and Lagos

EOS Perspective

Undoubtedly, Nigeria has become an hoteliers’ hotspot for investment and the yearning for luxury hospitality services among Nigerians is bolstering the market. Also, the government is endeavoring to support the tourism industry — in 2014, Nigerian Tourism Development Corporation (NTDC), developed an identity campaign titled ‘Fascinating Nigeria’. A website was launched to showcase Nigeria’s attractions and cultural highlights. The website also provides a list of quality and luxury accommodations across Nigeria. NTDC is planning to set up tourism desks at airports to attract visitors by giving out cultural festival calendars, accommodation brochures, etc.

Besides such efforts, hotel chains can focus to build accommodations to attract corporate customers, as the Nigerian hospitality market is currently dominated by business travelers. Hotels providing space to hold conferences, conventions, events, and business meetings are likely to be preferred by these travelers. Also, corporate discounts and tie-ups with business houses — including various airlines, as crew members are mostly accommodated in luxury hotels — are expected to yield high returns for hoteliers. Apart from business travelers, luxury properties are preferred by local communities (middle to high income consumers) for social gatherings. Hence, efforts to improve fine dining, lounging, and other services may lure customers.

It is definitely time for Nigeria as several prominent international hotel brands are battling for a slice of opportunity to enter or expand business in the rapidly growing hospitality market. Let’s see how many of them will sustain and succeed in the race to build luxury empires in Nigeria.

by EOS Intelligence EOS Intelligence No Comments

Is Non-Oil Sector the New Champion of the Nigerian Economy?

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The 1970s’ oil discovery transformed Nigeria from a largely agro-economy to a more oil-dominated one. Over the last several decades, oil played a significant role in Nigeria’s positive growth story, and its emergence as one of the key economic hubs in Africa. Interestingly, however, the last few years have seen a revival of non-oil sectors, such as agriculture, once the key economic driver of the country. What does this ‘change’ mean for Nigeria and how does oil fit into the bigger picture?

Post Nigeria’s independence in 1960, the country’s economy was primarily agrarian, with mainstay products such as cocoa, rubber, palm oil and kernels, groundnut, and cotton; the agriculture sector accounted for 60% and 75% of the country’s GDP and total employment, respectively. During the 1970s, the Nigerian government undertook various measures to exploit the naturally available oil reserves, such as extending oil exploration rights to foreign companies in Niger Delta’s offshore and onshore areas, to tune the economy to one which is oil-centered (petroleum revenue share of the total federal revenue increased from 26% in 1970 to 70% in 1977). The oil-centered Nigerian economy reached its peak in 2008 when oil accounted for about 83% of the country’s total revenue. In recent years, the oil sector has been experiencing a decline with its share in total revenue falling to 75% in 2012, largely due to a stagnant crude-oil production at 2 million barrels per day (mbpd) (2.3 mbpd in 2012 and 2.2 mbpd in 2013). A steep fall has also been observed in crude-oil exports to the USA (Nigeria’s main oil export market), which contracted by 11 percentage points in a single year, falling from 16% of Nigeria’s total oil exports in 2012 to 5% in 2013.

Upon closer introspection of the reasons for the declining dominance of oil in Nigeria, various factors come to surface. One of the main reasons is the delay in the approval of the Petroleum Industry Bill (PIB), which aims to ensure the management of petroleum resources according to the principles of good governance, transparency, and sustainable development; this delay has been stalling further investments in the oil sector. Perpetual oil thefts, pipeline vandalism, weak investment in upstream activities, and insignificant discoveries of new oil reservoirs have also hampered the growth of this sector. As a result, oil giants have been selling off their stakes in various onshore as well as offshore blocks. For instance, Shell sold 45% of their interest in OML 40 onshore block to Elcrest Nigeria Limited (an independent oil and gas company) and Petrobras (a Brazilian multinational energy corporation) is planning to auction its 8% and 20% stakes in Agbami oil block and offshore Akpo project, respectively.

So, where does this leave the Nigerian economy?

Apart from the unsatisfactory performance of the oil sector, Nigeria’s economic environment faces risks from security challenges prevailing in the northeastern part of the country, conflicts related to resource control in the Niger Delta region, and high levels of corruption (case in point being the suspension of Nigeria’s central bank’s governor over misconduct and irregularities).

Nigeria Government Policies

In the midst of all these challenges, the non-oil sector (described as a sector which is not directly or indirectly linked to oil and gas, and include sectors such as agriculture, telecommunication, tourism, healthcare, and financial services) is emerging as the new champion of the Nigerian economy.

This is mainly due to various policies adopted by the government in the light of the looming oil sector, along with the complementary effect of factors such as increase in private consumption and FDI.

 

FDI in NigeriaIn addition to government policies, FDI has played a key role in nurturing the non-oil sector. Nigeria has experienced a compounded annual growth of 20% in the number of Greenfield FDI projects from 2007 to 2013; 50% (total number of projects being 306) of these projects were service-oriented. The telecom sector particularly witnessed strong growth by attracting 24% of all FDI projects, while coal, oil, and natural gas received only 8% of foreign direct investment during 2007-2013.

Private consumption (forecast to reach US$231.2 billion in 2014) has also fuelled the growth of the Nigerian non-oil sector. The largest consumer market in Africa, Nigeria’s consumer spending (an indicator of private consumption) has increased from US$94.3 billion in 2007 to US$309.9 billion in 2013.

The cumulative effect of all these factors has proven exceptionally positive for the non-oil sector. This is evident from the increase in percentage share of the sector in the Nigerian GDP. Agriculture remains the largest contributor, among both oil and non-oil sectors, with a share of 22% in GDP, in 2013. Other non-oil sectors such as manufacturing (GDP share increased from 4% in 2010 to 6.8% in 2013), construction (GDP share increased from 1% in 2010 to 3.1% in 2013), wholesale and retail trade (GDP share increased from 13% in 2010 to 17% in 2013), transport and communication (GDP share increased from 3% in 2010 to 12.2% in 2013) have also strengthened their position in Nigeria’s growth story.

Moreover, non-oil sector’s contribution to government revenue has improved from US$154.3 million in 2000 to US$3,018.2 million in 2011, which is a significant increase. A growth has also been observed in non-oil exports, which have increased from 1.28% in 2000 to 3.59% in 2010, in terms of percentage contribution towards total exports.

The Nigerian non-oil sector has also been attracting a number of investments in recent years, for instance:

  • July 2014: Procter & Gamble, a multinational consumer goods company, announced the construction of a new manufacturing plant worth US$250 million, in Nigeria’s Ogun state. The manufacturing plant is expected to employ 750 Nigerians and offer opportunities to 300 SMEs

  • February 2013: Indorama, a global chemical producer, launched a Greenfield urea fertilizer project worth US$1.2 billion, in Nigeria’s Port Harcourt. The project claims to support Nigerian and West African requirements for affordable fertilizers

 

Apart from giving credit to an increase in private consumption, investments in the non-oil sector must also be attributed to the measures undertaken by the Nigerian government. To showcase the attractiveness of the Nigerian economy, the government undertook a GDP rebasing exercise (GDP calculations are now performed on 2010 year’s figures instead of 1990’s). The exercise led to a better coverage of the informal sector, addition of new industries, and increase in the contribution factor of sectors such as service, manufacturing, and construction.

According to the National Bureau of Statistics, Nigeria’s GDP is valued at US$498.9 billion as compared with US$263.7 billion, prior to rebasing, in 2013. In spite of several criticisms around the authenticity of figures, rebasing of the GDP gave a strong competitive edge to Nigeria, among other emerging and developing economies, by showcasing a high GDP to allure investments. Additionally, implementation of the government’s Industrial Revolution Plan is expected to continue driving the country’s manufacturing sector. Since regular and ample power supply is a critical issue in Nigeria, the plan has implemented reforms in the power sector which aims to facilitate a continuous power supply, thereby, supporting the manufacturing sector by reducing power generation related costs and encouraging further investments.

 

Final Words

While the oil sector did well to provide Nigeria with a strong foundation and help build basic infrastructure to support a long-term growth potential, the rekindling of the non-oil sector is likely to strengthen Nigeria’s growth story and help it attract much needed foreign investments to create a balanced economy.

The approval of the PIB, post 2015 elections, might improve the oil sector performance, which should go hand-in-hand with non-oil sector development, making Nigeria an attractive market for global investors. It will be important that the Nigerian government undertake continuous reforms in both sectors to ensure the emergence of a strong economy, able to compete with the more established emerging markets of the world.

by EOS Intelligence EOS Intelligence 1 Comment

Africa is Ready For You. Are You Ready For Africa?

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For decades, Africa was associated with poverty and helplessness rather than business opportunities and thriving markets. But the reality is evolving, and companies from across industries are increasingly including the African continent in their investment plans. Global FMCG players too have started to set their eyes on this untapped goldmine of opportunities. However, the market is much more complex than its thriving counterparts in Asia and companies must get hold of the market dynamics before entering or they stand the risk of getting their hands burnt.

Some two decades ago, it became apparent to the leading international FMCG companies that many of their core developed markets in the USA and Europe were no longer able to provide sustainable growth, which made them extend their business focus to include developing markets in Asia. While these economies will continue to still generate significant returns for quite some time, many global FMCG giants are already exploring new growth avenues and are turning their eyes towards the African continent. Growing middle class (already accounting for more than one-third of the continent’s total population, it is expected to hit 1 billion people by 2060), paired with accelerating economic growth, large youth population, overall poverty decline, and urbanization trends are the key factors underpinning Africa’s position as the next frontier in the global FMCG arena.

This has already spurred investment activity amongst leading FMCG players. By 2016, Unilever and P&G plan to invest US$113 million and US$175 million, respectively, to expand their manufacturing facilities in the continent. While these facilities are to be developed mostly in South Africa, they are expected to cater to developing markets across eastern and southern regions. Godrej, a relatively smaller India-based company, has taken up the inorganic route to tap this market, by acquiring Darling group, a pan-African hair care company.

Despite luring growth potential offered by the continent, the African markets are much thornier to penetrate than it seems. A shaky political and regulatory environment acts as one of the largest roadblocks. The continent has witnessed 10 coup d’états since 2000 and has been subject to countless changes in business policies resulting from unstable governments. Further, inefficient distribution networks, inadequate business infrastructure, as well as complex and inhomogeneous marketplace housing 53 countries, 2,000 dialects, and countless cultural groups, all cause African consumer markets difficult to navigate through.

Notwithstanding the challenges, the potential offered by the African continent overweighs. Companies, however, must mould their strategies and offerings to the realities of African markets in order to succeed. Here are a few pointers to consider:

  • Bring affordability and quality to the same side of the coin: Contrary to popular perception, the middle-class African consumer attaches much importance to quality and brands. Companies that have long followed the strategy of selling poor-quality products in this market cannot sustain for long. Having said that, affordability still stays as an important factor for the middle-class Africans. To deal with this, companies can look at offering good quality products in smaller packaging, to ensure low unit price. For several years, African consumers have gotten used to buying smaller quantities that could fit their limited budgets.

  • Discard the one-size-fits-all approach: On a continent with 53 nations, companies looking to enter African markets with blanket approach are likely to fail. While South Africa is relatively more developed and has slower growth, markets such as Nigeria and Kenya are developing at a rapid pace, and thus their dynamics differ. Consumer shopping behaviors and patterns also vary. Sub-Saharan nations, in comparison to North African consumers, tend to exhibit more brand loyalty and are more conservative in trying new things. North African countries also present stronger desire for international brands. Thus, it is most critical for international players to identify the characteristics of a particular market that they plan to enter.

  • Locate the right partners: Informal trade dominates African markets making distribution a daunting task. However, this challenge can be turned into an opportunity for companies to improve their competitive edge and bypass the lack of sufficient distribution and retail facilities. In rural areas of Nigeria and Kenya, Unilever has replicated its Indian direct-to-consumer distribution scheme, wherein a host of individuals undertake direct selling to consumers in their communities. Similarly, other companies have posted sales executives with each sub-distributor to manage inventory and brand image. Distribution costs are high in Africa but bearing them is not optional.

  • Move beyond traditional media: TV and print remain a popular and trusted media for advertising to urban consumers. However, owing to their low penetration in rural regions, they have limited impact on rural consumers. This brings forth the need to reach mass consumers through in-store marketing. Over the coming years, companies can also look into mobile advertising as surveys reveal that the number of Africans having access to mobile phones is already higher than those with access to electricity. Mobile penetration in the Sub-Saharan Africa stood at 57.1% in 2012 and is expected to reach 75.4% in 2016. This promises a gamut of mobile marketing opportunities for consumer companies.

  • Deal with infrastructural woes and innovate to compensate: Power outages, poor transportation, and limited access to cold storage facilities make public infrastructure undependable for businesses. Thus, companies must be open to invest in own power generators and water tanks. Innovations at the product end may also help overcome infrastructural limitations. For instance, Promasidor, an African food company, uses vegetable fat instead of animal fat to extend its milk powder’s shelf life when stored without refrigeration. While spending on infrastructure heavily increases costs, it can provide companies with a competitive advantage in the longer run.

  • Invest in personnel management and grow new talent: The fear for personal safety among foreign nationals and lack of skilled professionals within Africa makes recruitment a challenging task, especially for mid- and top-level management. Tapping into African diaspora located throughout the world comes across as a win-win solution. Moreover, providing training and management courses to local graduates allows addressing personnel needs over long term.


The African market can be a goldmine for FMCG players, if entered cautiously. However, the same can become a landmine, if proper investments and planning are not undertaken. Despite the present challenges, increasing number of companies will be looking into Africa, however only few will have the skill set to translate this opportunity into a great success.

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