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SOUTH AFRICA

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

Connecting Africa – Global Tech Players Gaining Foothold in the Market

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While in the past, most global tech companies have focused their attention on emerging Asian markets, such as India, Indonesia, Vietnam, etc., they have now understood the potential also offered by African markets. Africa currently stands at the brink of technical renaissance, with tech giants from the USA and China competing to establish here a strong foothold. That being said, Africa’s technological landscape is extremely complex owing to major connectivity and logistical issues, along with a limited Internet user base. Companies that wish to enter the African markets by replicating their entry and operating models from other regions cannot be assured of success. In addition to global tech firms building their ground in Africa, a host of African start-ups are increasingly finding funding from local as well as global VC and tech players.

Great potential challenged by insufficient connectivity

Boasting of a population exceeding 1.2 billion (spread across 50 countries) and being home to six of the world’s ten fastest-growing economies, Africa is increasingly seen as the final frontier by large global technology firms.

However, the African landscape presents its own set of challenges, which makes increasing tech penetration extremely complex in the market. To begin with, only about 35% of the continent’s population has access to the Internet, as compared with the global rate of 54%. Thus, Africa’s future in the technology space greatly depends on its ability to improve digital connectivity. This also stands in the way of large tech-based players that wish to gain foothold in the market.

Large players try to lay the necessary foundations

Due to this fundamental challenge, companies such as Google, Facebook, and IBM have initiated long-pronged strategies focusing on connectivity and building infrastructure across Africa. Facebook’s Free Basics program (which provides access to a few websites, including Facebook and Whatsapp, without the need to pay for mobile data) has been greatly focused on Africa, and is available in 27 African countries. With Facebook’s partnership with Airtel Africa, the company has started to strengthen its position in the continent.

Similarly, Google has launched Project Link, under which it rolled out a metro fiber network in Kampala, Uganda, with Ghana being in the pipeline. Through such efforts and investments, Google is aimed at bringing about faster and more reliable internet to the Africans.

Microsoft, which has been one of the first players to enter the African turf, is also undertaking projects to improve connectivity in Africa. The company has invested in white spaces technology, which uses unused radio spectrum to provide Wi-Fi connectivity at comparatively lower costs.

However, managing to get people online is only the first step in the long journey to develop a growing market. Companies need to understand the specific dynamics of the local markets and develop new business models that will fit well in the African market.

For instance, globally, the revenue model for several leading tech companies, such as Google and Facebook, largely depend on online advertising. However, the same model may not thrive in most African markets due to a limited digital footprint of the consumers as well as the fact that the business community in the continent continues to draw most transactions offline, using cash.

Connecting Africa – Global Technology Firms Gaining a Foothold in the Market

Players employ a range of strategies to penetrate the market

These tech giants must work closely with local businesses and achieve an in-depth understanding of the unique challenges and opportunities that the African continent presents. Therefore, these companies are increasingly focusing on looking for collaborations that will help in the development of successful and sustainable businesses in the continent.

Leading players, such as Google and Microsoft have been investing heavily in training local enterprises in digital skills to encourage businesses to go online, so that they will become potential customers for them in the future.

While this strategy has been used somewhat extensively by US-based and European companies, a few Chinese players have recently joined the bandwagon. For instance, Alibaba’s founder, Jack Ma announced a US$10 million African Young Entrepreneurs Fund on his first visit to Africa in July 2017. The scheme will help 200 budding entrepreneurs learn and develop their tech business with support from Alibaba.

The company has also been focusing on partnerships and collaborations to strengthen its position in the African market. Understanding the logistical challenges in the African continent, Alibaba has signed a wide-ranging agreement with French conglomerate, Bollore Group, which covers cloud services, digital transformation, clean energy, mobility, and logistics. The logistics part of the agreement will help Alibaba leverage on Bollore’s strong logistics network in Africa’s French-speaking nations.

Considering the importance of mobile wallets and m-payments in Africa, Alibaba has expanded its payment system, Alipay, to South Africa (through a partnership with Zapper, a South Africa-based mobile payment system) as well as Kenya (through a partnership with Equitel, a Kenya-based mobile virtual network operator). In many ways, it is applying its lessons learnt in the Chinese market with regards to payments and logistics, to better serve the African continent.

While Chinese players (such as Alibaba and Baidu) have been comparatively late in entering the African turf, they are expected to pose a tough competition to their Western counterparts as they have the advantage of coming from an emerging market themselves, with a somewhat better understanding of the challenges and complexities of a digitally backward market.

For instance, messaging app WeChat brought in by Tencent, China-based telecom player, has provided stiff competition to Whatsapp, which is owned by Facebook and is a leading player in this space. WeChat has used its experience in the Chinese market (where mobile banking is also popular just as it is across Africa) and has collaborated with Standard Chartered Bank to launch WeChat wallet. In addition, WeChat has collaborated with South Africa’s largest media company, Naspers, which has provided several value added services to its consumers (such as voting services to viewers of reality shows, which are very popular in Africa). Thus, by aligning the app to the needs and preferences of the African consumers, it has made the app into something more than just a messaging service.

While collaboration has been the go-to strategy for a majority of tech companies, a few players have preferred to enter the market by themselves. Uber, a leading peer-to-peer ridesharing company entered Africa without collaborations and is currently present in 16 countries.

While entering without forging partnerships with local entities helps a company maintain full control over its operations in the market, in some cases it may result in slower adoption of its services by the local population (as they may not be completely aligned with their preferences and needs). This can be seen in the case of Netflix, a leading player in the video streaming service, which extended its services to all 54 countries in Africa in January 2016 (the company has, however, largely focused on South Africa). Despite being a global leader, Netflix has witnessed conservative growth in the continent and expects only 500,000 subscribers across the continent by 2020.

On the other hand, Africa’s local players ShowMax and iROKO TV have gained more traction, due to better pricing, being more mobile friendly (downloading option) and having more relatable and local content, which made their offer more attractive to local populations.

Netflix, slowly understanding the complexities of the market, has now started developing local content for the South African market and working on offering Netflix in local currency. The company has also decided to collaborate with a few local and Middle-Eastern players to find a stronger foothold in the market. In November 2018, the company signed a partnership with Telkom, a South African telecommunication company, wherein Netflix will be available on Telkom’s LIT TV Box. Similarly, it partnered with Dubai-based pay-TV player, OSN, wherein OSN subscribers in North Africa and Middle East will gain access to Netflix’s content available across the region. However, while Netflix may manage to develop a broader subscriber base in South Africa and a few other more developed countries, there is a long road ahead for the company to capture the African continent as a whole, especially since its focus has been on TV-based partnerships rather than mobile (which is a more popular medium for the Internet in Africa).

On the other hand, Chinese pay-TV player, StarTimes has had a decade-long run in Africa and has more than 20 million subscribers across 30 African countries. While operating by itself, the company has strongly focused on local content and sports. It also deploys a significant marketing budget in the African market. For instance, it signed a 10-year broadcast and sponsorship deal with Uganda’s Football Association for US$7 million. To further its reach, the company also announced a project to provide 10,000 African villages with access to television.

US-based e-commerce leader, Amazon, is following a different strategy to penetrate the African markets. Following an inorganic approach, in 2017, Amazon acquired a Dubai-based e-retailer, Souq.com, which has presence in North Africa. However, the e-commerce giant is moving very slowly on the African front and is expected to invest heavily in building subsidiaries for providing logistics and warehousing as it has done in other markets, such as India. This approach to enter and operate in the African market is not widely popular, as it will require huge investment and a long gestation period.

Local tech start-ups are on the rise

While leading tech giants across the globe are spearheading the technology boom in Africa, developments are also fueled by local start-ups. As per the Disrupt Africa Tech Startups Funding Report 2017, 159 African tech start-ups received investments of about US$195 million in 2017, marking a more than 50% increase when compared to the investments received in 2016.

While South Africa, Nigeria, and Kenya remained the top three investment destinations, there is an increasing investor interest in less developed markets, such as Ghana, Egypt, and Uganda. Start-ups in the fintech space received maximum interest and investments. Moreover, international VC such as Amadeus and EchoVC as well as local African funds appear keen to invest in African start-ups. The African governments are also supporting start-up players in the tech space – a prime example being the Egyptian government launching its own fund dedicated to this objective.

African fintech start-ups, Branch and Cellulant, have been two of the most successful players in the field, raising US$70 million and US$47.5 million, respectively, in 2018. While Branch is an online micro-lending start-up, Cellulant is a digital payments solution provider. Both companies have significant presence across Africa.

EOS Perspective

Although US-based players were largely the first to enter and develop Africa’s technology market, Chinese players have also increasingly taken a deeper interest in the continent and have the advantage of coming from an emerging market themselves, therefore putting themselves in a better position to understand the challenges faced by tech players in the continent.

Most leading tech players are looking to build their presence in the African markets. Their success depends on how well they can mold their business models to tackle the local market complexities in addition to aligning their product/service offerings with the diverse needs of the local population. While partnering with a local player may enable companies to gain a better understanding of the market potential and limitations, it is equally imperative to identify and partner with the right player, who is in line with the company’s vision and has the required expertise in the field – a task challenging at times in the African markets.

While global tech companies are stirring up the African markets with the technologies and solutions they bring along, a lot is also happening in the local African tech-based start-ups scene, which is receiving an increasing amount of investment from VCs across the world. In the future, these start-ups may become potential acquisition targets for large global players or pose stiff competition to them, either across the continent or in smaller, regional markets.

It is clear that the technological wave has hit Africa, changing the continent’s face. Most African countries, being emerging economies in their formative period, offer a great potential of embracing the new technologies without the struggle of resisting to adopt the new solutions or the problem of fit with legacy systems. It is too early to announce Africa the upcoming leader in emerging technologies, considering the groundwork and investments the continent requires for that to happen, however, Africa has emerged as the next frontier for tech companies, which are causing a digital revolution in the continent as we speak.

by EOS Intelligence EOS Intelligence No Comments

Sharing Economy: Africa Finds Its Share in the Market

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The concept of sharing economy has become a global phenomenon and after capturing several markets across Northern America, Europe, and Asia, it is now finding its way in Africa. The pre-existing sharing culture in several African countries makes this business concept gain good momentum across the continent. In addition to global companies, such as Uber and Airbnb, which have witnessed exponential growth in their limited years of business in this region, there are a host of home-grown players that are offering niche and country-specific services in this space. At the same time, sharing economy business does face a great deal of challenges in Africa’s complex markets. Safety concerns as well as limited availability and use of technology are two of the largest roadblocks for a thriving sharing economy business model. Although companies seem to find their way around these issues on their corporate drawing boards, the challenges are more intense and impactful in reality. Therefore, while the concept of sharing economy is likely to boom in the continent, it remains to be seen which companies manage to best adapt to local dynamics and thrive, and which players will fail in navigating the complexity of the regional markets.

Sharing economy businesses have been growing at an accelerating rate globally with leaders such as Airbnb and Uber taking over their traditional hospitality and travel competitors and becoming the largest players in the tourism and passenger transport sectors, respectively. After gaining huge market in several mature economies, the asset-light collaborative economic model is now making its presence felt in Africa. With vast youth population and a growing middle class, several markets in the African continent offer a huge growth potential for companies operating the sharing economy model. In 2016, Airbnb alone witnessed a 95% rise in the number of house listings in the continent, which increased from about 39,500 in 2015 to 77,000 in 2016. Moreover, the number of users of its online platform reached 765,000 in 2016, witnessing a 143% y-o-y rise, and is expected to further expand to reach 1.5 million registered users by the end of 2017. Similarly, Uber, which entered Africa in 2013 through Johannesburg, has expanded into 15 cities across eight African countries in a span of just four years and has over 60,000 partnering drivers across the continent.

This remarkable growth is underpinned by a burgeoning middle class that is looking for (and increasingly can afford) convenient and reasonable solutions. Moreover, the sharing economy concept helps Africans bridge service gaps created by inadequate resources and infrastructure present in the continent. For instance, with increasing number of tourists and a limited number of high-end and mid-tier hotels or resorts, companies such as Airbnb are in a perfect position to fill such a demand-supply gap without much investment. In addition, sharing economy companies also help ease the unemployment and underemployment issues faced across several countries in Africa. The sharing economy model helps channelize a work stream for people who are unemployed or work in the informal sector, and provide them with a formalized platform where they can sell and market their services. Sharing economy is largely dominated by workers aged 18-34, which is also the age group largely affected by unemployment in Africa.

However, the key reason for the sharing economy model to have eased so well into the African lifestyle is the pre-existence of a sharing culture, which has been prevalent informally here for many years. Unlike in many developed regions, the concept of sharing economy is not new to Africa and the main task for global players entering this market was to formalize it through tech-based platforms. Therefore, despite being one of the least developed regions globally, Africa comes as a good fit to the sharing economy model. As per a survey conducted by AC Neilson in 2014, 68% of respondents in the Middle East and Africa region are willing to share their personal property for payment, while 71% are likely to rent products from others. These numbers are much higher in Africa than in Europe and North America, wherein only 54% and 52%, respectively, are willing to share their possessions for pay and even fewer (44% and 43%, respectively) are interested in renting others’ products.

While global companies are at a strong position to capitalize on this opportunity, there are a host of local players across the African subcontinent that are also looking for a share in the pie. Although these companies have come up across Africa, they are somewhat clustered in the more developed regions of South Africa, Kenya, Nigeria, and Uganda.

sharing economy africa

South Africa

Being one of the most developed economies in the subcontinent, South Africa has openly embraced the global sharing economy phenomenon and has been the entry point into the continent for several leading international players such as Uber, Airbnb, and Fon. Uber has received great acceptance in South Africa with the first 12-month growth rates in Cape Town and Johannesburg superseding the growth experienced in other cities globally, such as San Francisco, London, or Paris (during their first year of operations). Uber provided 1 million rides in 2014, which was its first year of operation in South Africa, rising to 2 million rides by the first half of 2015. The company has also created more than 2,000 jobs in the country where unemployment levels are as high as 30%. Likewise, Airbnb boasts of similar growth in the country. In 2016, about 394,000 guests used Airbnb listings for their stay in South Africa, in comparison to 38,000 guests in 2014. During that year, Airbnb’s users generated US$186 million (ZAR2.4 billion) worth of economic activity in the country, of which about US$148 million (ZAR1.9 billion) was attributed to Cape Town, Johannesburg, and Durban. Fon, an unused bandwidth sharing company, also enjoyed success in the South African market and more than doubled its community hotspots from 21,000 (at the time of its launch in 2014) to 52,000 community-generated hotspots in 2015. Taxify is another global player in the ride sharing space. Launched in 2015, Taxify is an Estonian company offering similar services as Uber. The company has managed to acquire 10% of South Africa’s ride sharing market by offering 15% lower fares compared with Uber, while providing a higher driver payout (Uber takes a 20-25% cut from drivers while Taxify takes a 15% cut).

These international players are challenged by several local companies, which, despite being much smaller in size, are competing on both price as well as local expertise. In the ride sharing market, there are several smaller domestic players, such as Zebra Cabs, Find a Lift, and Jozibear. Similarly, in the accommodation sharing market, acting as a direct competitor to Airbnb is South Africa’s local, Afristay (formerly known as Accommodation Direct). The company has applied a country-specific approach and has succeeded in providing more varied and cheaper options as compared with Airbnb in South Africa. Having a single country focus, Afristay has close to 20,000 listings across 2,000 locations in South Africa. Airbnb on the other hand has 35,000 listings in the country.

Another emerging space of sharing economy concept adoption in South Africa has been seen in the medical sector, wherein players, such as Medici and Hello Doctor, are connecting patients with medical practitioners. Hello Doctor currently services around 400,000 patients in South Africa. Medici, which launched in May 2017 has partnered with the Hello Doctor and aims at connecting rural and less developed regions to remote access medical advice and consultations.

Kenya

Owing to a burgeoning middle class as well as an increasing access to education and the Internet, Kenya is a strong market for the digital sharing economy. Airbnb witnessed significant growth in Kenya, increasing its listings in the country from 1,400 in 2015 to 4,000 in 2016. The number of guests choosing to stay in an Airbnb accommodation have also expanded three-fold during the same period. Uber has received a similar response in the country, completing 1 million rides in its first 15 months of operations (beginning 2016), and having 1,000 drivers registered with them in the beginning of 2016. However, a local Kenyan company, Little Cabs, which is owned and operated by the country’s leading telecommunication players, Safaricom in partnership with Craft Silicon, a local software firm, is a stiff competition to Uber. The company, which began operations in July 2016, managed to acquire 2,500 drivers and 90,000 active accounts by the end of the year, owing to more attractive pricing and driver-payout in comparison to Uber. Moreover, it offers several services, which have not been introduced by Uber in Kenya yet. Having the backing of the leading mobile network operator, Little Cabs is attracting customers by offering them discounted mobile recharge along with trips, free Wi-Fi for passengers, and the option to process payments using M-Pesa – Safaricom’s mobile money service, which has two-third share in mobile market in the country. However, despite a smaller fleet size and less attractive services, Uber continues to be the market leader in Kenya for now, with a revenue share of about 30% (in comparison to Little Cabs, which has a revenue share of about 10%) primarily due its global brand value and first mover advantage.

Another newcomer to the sharing economy market in the country is Lynk, which aims at connecting service providers across about 60 categories to customers in Kenya. These include services such as plumbing, beauty works, tuition, or party planning. Having started operations in 2015, the company identified and recruited about 400 workers across 60+ service categories, who provided 800+ services to paying customers within its first year of operation.

All of that being said, the sharing economy concept has not had that easy of a ride in the continent and has faced one too many challenges on its way up. The main issue challenging the success of this concept has been the limited use of smartphones, which are inherent to this business model. While the use of smartphones in today’s time is taken for granted in most economies across the globe, this is not the case in Africa. In many cases, these service providers (especially drivers) are using smartphones for the very first time in their lives. Although the youth population is expanding in the continent, elevating the demand and use of smartphones, the numbers still remain extremely low – both at the consumers’ as well as service providers’ end. In 2015, only 24% of Africans used Internet on their mobiles and e-commerce penetration was mere 2%. This makes it imminent for companies looking to excel in the sharing economy space to provide training and workshops to help service providers adapt to and embrace the smartphone technology. Companies aiming to build a stronger position in the market over their existing competitors should also look at providing cost effective and easily accessible financing for the purchase of smartphones for service providers interested in registering in their sharing apps. In the African scenario, such a move would incentivize service providers to join the company’s sharing platform, potentially choosing it over other competitors present in the market, while the company would be able to expand its supply-end of the business by growing the registered service providers’ base.

The other issue that is key to operating in Africa is safety. Since the entire concept of sharing economy is based on trust, ensuring safety becomes a very important aspect in this line of work. Considering the high number of cases of theft and vandalism as well as weak regulatory system, African customers’ trust in service providers in their region is naturally lower than the western market customers’ trust in their local service providers. This impedes the service use growth and forms one of the largest barriers for sharing economy to reach its full potential in the continent.

In the transportation segment of the sharing economy market, the issue of safety is increasingly addressed by several players. To ensure safety of passengers, drivers undergo a rigorous background check that includes a multi-level verification. Companies also undertake innovative approaches to ensure only verified drivers work under the company logo in attempt to improve safety. In one such case, Uber introduced a ‘selfie protection’ feature, in Kenya, wherein a driver is required to take a selfie in the Uber app once in a while, before accepting a ride request from a customer. In case the photo does not match the one registered with the account, the account is blocked. In a market such as Africa, while safety precautions are a necessity, if marketed correctly, they can also be a differentiating and marketing factor. Along with general information and ratings, companies can also show driver’s verification details and training credentials on their app before a consumer selects a ride. In case of other services, they can also include details of the certifications undertaken by the service provider.

In addition to this, the limited use of plastic money – which is the main form of payment in sharing economy-based businesses globally – is another speedbump in the operation of such a business model in Africa. While several ridesharing companies are tackling this issue by introducing cash payments, it remains a limiting factor for companies whose services nature leaves a limited scope for introducing cash payments option, e.g. Airbnb.

Regulatory barriers and outburst of traditional competitors is another challenge, however these issues are common for players across markets globally, though in various intensity. We have talked about it in more detail in our article in October 2016, Sharing Economy Needs Regulator Support. Companies such as Uber have had to face several regulatory roadblocks, the latest of that being a July 2017 lawsuit ruling recognizing Uber drivers as employees (instead of the company-preferred ‘driver partners’) as per South Africa’s labor laws. While the company does have plans to work around this ruling as it currently only applies to the seven drivers who filed the lawsuit, such issues have the potential to disrupt the companies’ smooth operations in the country. There have also been severe protests from traditional taxi companies and Uber has faced several safety-related problems with Uber drivers being attacked and cars being burnt in Kenya, as well as cases of smashed windscreens at railway stations in South Africa. To counter this, the company has posted security guards outside railway stations in Johannesburg for the security of the drivers.

EOS Perspective

While the concept of sharing economy seems to fit perfectly in the African lives, it does require the companies to follow a very localized approach accounting for specific regional dynamics in order to blend with the countries’ local fabric. While this gives an advantage to the local companies that better understand customer needs, it becomes difficult for them to match the scale of global leaders who have hefty marketing budgets.

Although sharing economy has largely captured the travel and passenger transport, with medical, education, and several other vocational services also seeing new businesses entering with sharing economy model, it is the crowd financing segment that might see the next boom in Africa. African region houses several dynamically emerging economies, with huge hunger for capital, and digital crowd funding platforms can help SMEs connect with potential investors, and help African start-ups with seed capital. In addition to basic investment, these platforms can also offer mentoring opportunities to small start-ups. While there already are a couple of companies, such as VC4Africa, that are operating in this space, crowd financing as a sharing economy business still has great potential to be tapped in Africa, especially beyond the Tier 1 cities of Johannesburg and Cape Town, where ideas are in abundance but there is lack investment and support.

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Originally published on EMIA on 21st December 2017.

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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.

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Local Sourcing – It’s The New Global Sourcing

Not long ago, the buzz term for the automotive world was global sourcing. OEMs aimed to standardise product offerings and pricing by producing in select emerging countries that offered low production costs. This rendered the supply chain long and complex, but equally justified in the name of cost saving. Recently, however, global sourcing seems to be on the reverse gear, with local sourcing gaining momentum among OEMs globally.

Localisation brings cost-savings across the supply chain, especially in light of climbing costs in traditionally low-cost regions. According to a study by BCG, manufacturing costs in previously low cost sourcing locations like China, Latin America and Eastern Europe that for many years attracted global vehicle manufacturers, are reaching parity with manufacturing costs in developed countries, once productivity, energy prices and currency conversions are factored in.

To continue reading, please go to the original article on Automotive World.

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A Dragon Unfurls its Wings – How China’s Economic Slowdown Is Rippling Through Emerging Markets

Almost 10 years ago, Goldman Sachs published a report, in which it predicted Chinese GDP to overtake the USA’s GDP by 2020. Today, this prognosis looks like a far-fetched dream as China has recently been riding a wild economic horse. When Chinese economy was growing, its demand for various products and services contributed to the economic growth of emerging markets across the world. The deteriorating performance of Chinese economy over the past few years appears to have started adversely affecting these markets. Will the emerging markets be able to successfully sustain in future?

China witnessed a spectacular and continued rise of its GDP during major part of last three decades. However, end of 2007 saw a turning point, and the country’s economic growth rate cooled off from 14.2% still in 2007 down to 9.6% in 2008, reaching mere 7.4% in the first quarter of 2014. This single digit growth would be more than satisfactory for a lot of economies. However, for China, which regularly recorded double digit rates, this extended period of slower growth is disappointing, with some calling it as ‘an end of an era’.

For years, China was enjoying relentless economic growth through massive investments, exemplary rise in exports, as well as abundance of labor force which was available at low wages. Due to these factors, economists started referring to China’s economic growth model as an investment-and-export driven model. This model has played a key role in driving exports also from emerging markets such as Latin America, Asia, and Middle East, as there was substantial demand for commodities from China’s end to support its domestic consumption as well as export requirements. With the weakening of foreign demand and internal consumption, China’s export demands have considerably weakened, leading to declining prices of export-related commodities and resulting in an adverse impact on emerging markets’ GDPs.

Is the Slowdown for Real?

China’s economic slowdown has not only been reflected in its modest GDP growth figures, but also in several other negative trends that have been observed. These include a continuous decline in the percentage of fixed-asset investments as a part of China’s GDP. Investments contracted from 24.8% in 2007 to 19.6% in 2013. Reduction of fixed-asset investments is likely to negatively contribute towards a country’s economic slowdown by adversely affecting sectors such as real estate, infrastructure, machinery, metals, and construction.GDP

Moreover, yuan has depreciated against US dollar (with average exchange rate of 7.9 in 2006 down to 6.26 in April 2014). In addition to this, Purchasing Managers’ Index (PMI), which is a composite index of sub-indicators (production level, new orders, supplier deliveries, inventories, and employment level), has plunged from 52.9 in 2006 to 48.3 in April 2014, below the middle value (50), thus indicating some contraction of China’s manufacturing industry. This industry contributes significantly to China’s GDP, therefore, the industry’s deterioration has a direct adverse effect on China’s economy.

This negative twist in China’s economic growth story is believed to be a result of a synergetic effect of various internal and external factors, some of which include:

  • Over-reliance on abundant supply of low-cost labor. For decades, China has based its growth on production of goods requiring high amount of cheap manual labor. However, as the economy continued growing, the demand for higher wages has increased, pumping up the labor cost. This cost is contributing to the inflation of products’ export prices, which is ultimately translating to a lower demand of Chinese goods.

  • The focus of Chinese workforce has been shifting from rural agriculture to urban manufacturing. The government has been taking steps to propel this transition in order to boost economic growth, prosperity, and industrialization. As more and more Chinese moved to urban areas, gradually, the transition has started yielding diminishing returns mainly due to saturation in the manufacturing industry.

  • Europe has also played a villainous role in China’s story. It has been one of China’s largest export markets but has recently been extending a significantly low demand for commodities and products from China. In 2007, the European Union accounted for 20.1% of all the exports from China. This percentage has fallen to 16.3% in 2012.

Chinese Leaders React

The Chinese government is in a reactive mode and has been unveiling a plethora of actions to bolster growth. The overall approach looks conservative in nature with a targeted GDP growth of 7.5% for this year, after recording a growth of 7.7% in 2013.

In an attempt to improve the situation, some of the expected financial and fiscal reforms are in the pipeline. Liberalizing bank deposit rates and relaxing entry barriers for private investment are some of the moves to be implemented by 2020. Various property measures (such as relaxing home purchase rules, providing tax subsidies, or cutting down payments) are planned to be introduced (based on local demands and conditions prevailing in a particular city) in order to balance the property market as a whole. A target of creating 10 million new jobs in Beijing has also been set for 2014. The underlying motive of all the rescue measures is strengthening the Chinese economy’s reliance on domestic consumption and services.

Influence on Emerging Markets

Undoubtedly, swing of the Chinese economy towards consumption and services is expected to considerably affect all the connected economies, several of them being emerging markets economies (EMEs). Commodity producing emerging markets such as Latin America, Middle East, parts of Africa and Asia are likely to be affected. Within this group, metal producers will probably suffer the most, as China had a significant demand for iron ore, steel, and copper during its investment boom phase. Within this subgroup, economies which are running current account deficits are forecast to be more susceptible to the ill-effects of China’s economic slowdown.

As China tilts towards domestic consumption, Latin America has started to witness a dawdling growth as the region’s growth rate dropped from an average of 4.3% in the period of 2004-2011 to 2.6% currently. For instance, as Chile depends heavily on copper exports to sustain its economic expansion, the country has been regularly reporting sluggish growth rates (5.8%, 5.9%, and 5.6% in 2010, 2011, and 2012, respectively) due to the decline in the price of copper, largely fueled by a lower demand from China. In addition to this, Brazil and Mexico are struggling to survive through falling benchmark stock indexes. The fall is mainly due to declining prices of commodities, as exports to China from Brazil and Mexico have weakened.

Middle East will probably register both positive and negative effects of China’s economic slowdown. One of the ill-effects could be reduction in oil prices, from US$140 per barrel in 2008 to approximately US$80 per barrel by the end of 2014, due to China’s lower demand of oil. On the positive side, Middle East is strengthening its position as an attractive region with long-term growth since China is being considered as a slightly less attractive option for investment by a majority of investors. This is mainly due to Middle East’s good infrastructure and accelerated development of industries such as defense, chemical, and automotive, and not only traditionally developed energy and petrochemicals.

The impact on African countries is expected to be negative primarily due to declining commodity prices. As Africa’s growth substantially depends on its exports to China, some African commodity exporters, such as Zambia, Sudan, and Angola, have started to feel the strain as China’s demand for commodities is weakening. This weakened demand has led to lower prices of commodities such as aluminum, copper, and oil, which registered a y-o-y decline by 4%, 9.5%, and 5.4%, respectively in January 2013. Zambia is likely to receive the strongest hit as copper constitutes almost 80% of the country’s total exports and reduction in copper prices could make its current account deficit to account for almost 4% of GDP in 2014.

Effect of China’s economic slowdown will vary from country to country in case of Asia. Countries such as Indonesia and Philippines, which have significant domestic demand, would be less adversely affected as they are less dependent on commodities exports to China. China’s unstable economy has spurred new investments in other growing Asian economies such as Cambodia. India is also likely to benefit from the ability to import oil at lower prices, which are pushed down by China’s weakened demand for oil. At the same time, however, export of cotton and metals such as copper and iron ore from India to China is dampened, adversely affecting India’s economy.

While EMEs have already been witnessing a lower demand from their traditional trading partners such as European Union and the USA, China’s slowdown will be an added burden to their economies.
China's Impact


It’s Touch and Go

It is rather evident that Chinese economic slowdown is having an adverse impact on emerging countries across Africa, Asia, and Latin America. One can hope that the measures taken by the Chinese leadership to curtail the slowdown will soon start taking effect and gradually lift up the economy, and in doing so, control the extent of damage spilling over many emerging countries and their economies.

In the event that the Chinese economy is unable to recover from this period of slowdown soon, it will continue to be a terrible blow to the economic ambitions of several emerging markets, especially those in Africa and parts of Asia-Pacific, which are heavily reliant on Chinese investment and trade relations.

Simultaneously to absorbing fewer production inputs imported from emerging countries, it is worth noting that China’s role in world economics might start to alter as it transforms to a consumption-led economy. This transformation is likely to slowly increase China’s appetite for imports of products and services, apart from traditional commodities-focused imports. It will be interesting to observe whether and how some of the emerging economies will attempt to satisfy this new Chinese hunger for goods extending beyond simple commodities.

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Evolving Business Needs to Pave Way for Retail Distribution Centers in South Africa

Traditionally, retail distribution in South Africa was largely in the hands of the manufacturers, who solely owned and operated the warehouses and fleet of vehicles that were used to distribute products to retail stores. Today, this system is seen as inefficient and is increasingly losing in popularity. Leading retail chains, such as Shoprite, SPAR, Pick n Pay, and Woolworths, established centralized distribution centers and implemented warehouse management technologies to cut costs and ensure that there are no disruptions in demand and supply. While online retailers have also established central warehouses, it is still to be seen if they can implement the model with equal success as online retailing supply chain is more complex.

Back in the day, it was a well stated fact in the country and also across the world that manufacturers were responsible for moving goods from their manufacturing hubs to the retailer’s back door. These manufacturers would own and operate large warehouses and vehicles for distribution, and would supply to several retailers in its coverage area. As retailers were largely at the mercy of the manufacturer’s delivery schedule, this system put significant control of the supply chain in the hands of the manufacturer. Moreover, retailers could not cater to unexpected demand spurs, which in turn hampered their business.

Over the years, several leading retail chains in South Africa have abandoned this system and worked towards gaining complete control of their supply chains. This has resulted in them establishing their own centralized distribution centers (DCs). Under this system, retailers buy in bulk and then distribute from their DCs to various outlets on a need-be basis. This has not only helped them gain autonomy over their inventory levels, but has also reduced their distribution costs as well the lead time between order and delivery time to stores. Moreover, with self-owned distribution centers, retailers have been able to re-engineer their retail stores and improve its space utilization by dedicating a minimum required area to storage and all the remaining space to sales.

Benefits of centralized retail distribution centers are not only limited to retailers, but extend both ways in the supply chain to manufacturers and end consumers as well. This model enables the manufacturers to keep inventory levels as low as they can and eliminate the risk of obsolete or over stock positions. In addition, this model empowers smaller manufacturers, who do not have the financial strength to maintain their own warehouses or large distribution fleet. Under this model, they can compete with larger manufacturers as they only have to deliver their products to the retailers’ centralized distribution centers instead of investing heavily in their own distribution network and infrastructure. At the consumer end, retailers pass on a part of the benefit accrued (in terms of savings and discounts, respectively) from the elimination of a middle man and buying in large quantities from manufacturers.

Shoprite, a leading retail chain in South Africa was one of the first to adopt the centralized distribution strategy, giving it a strong competitive advantage. The group has distribution centers in Centurion (145,000 m2), Cape Town (45,000 m2), and Durban (11,500 m2). SPAR, another major retail group operates six technologically advanced DCs across South Africa. Two other retail chains, Woolworths and Pick n Pay, also receive their stocks from self-owned DCs. Experts estimate that retailers, which follow the centralized distribution system, manage savings of about 5-7% of supply chain costs.

In addition to working wonderfully for retail stores, centralized warehouses have lent immense support to the online retail model. While e-commerce in South Africa is still in its nascent stage (with Internet penetration at around 34%), online retailing has been growing rapidly (33% year-on-year in 2013) owing to attractive pricing, as well as improved technology and online payment security. Usually, online retailers store their goods in a central warehouse. However, the delivery of large volumes of value goods within short periods gives rise to the need for more distribution points that are located close to stores. E-commerce companies undertake direct-to-customer deliveries through their own internal facilities or through outsourced partnerships. They extensively use the services of courier and express parcel (CEP) industry to distribute their goods.

Another important aspect for efficient distribution is supply chain information technology and sharing. South African retailers have invested heavily in advanced distribution and supply chain technologies, such as RFID, electronic point of sales (EPOS), and electronic data interchange (EDI) that link the physical inventory levels with the information flows to adapt quickly to changes in demand.

The introduction of RFID into the distribution system helps in attaining real-time access and updation of current store inventory levels, along with increased inventory visibility, availability of accurate sales data, and better control of the entire supply chain.

EPOS facilitates the consolidation and transmission of aggregated sales data and other information from individual retail stores to the centralized DC. Alternatively, the centralized warehouse uses EDI to share information among all its supply chain trading partners. Over and above the inventory and warehouse management solutions, retailers also use transport route planning and scheduling system that optimizes store deliveries and integrates the operations of the distribution center and the transport division.

Although it is safe to say that the evolution of centralized warehouses have benefited retailers, manufacturers, and customers alike, the ever-evolving and digitally empowered consumer is driving the need for further innovation in the way companies, especially online retailers, are managing their distribution and supply chain operations. The rise in e-commerce and its inherent challenges and opportunities is spurring the need for greater visibility across the entire supply chain. While South African retail chains are on the right track with centralized distribution centers and warehouse management technologies, only time will tell if they manage to optimize their retail industry to the levels of the developed nations.

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South Africa: Clearing the Air with Renewable Energy

South African ailing energy sector seems to have found a new lease of life in clean energy. In 2012, South Africa witnessed investment of $5.5 billion in new renewable energy projects, leaving behind some well-known usual suspects such as Brazil, France, and Spain. With the local government looking at renewable energy as a long-term answer to the country’s energy problems, we evaluate the scope for private sector involvement in developing South Africa’s energy infrastructure.

In March 2013, Eskom, the national electricity provider in South Africa, warned about the possibility of power outages during the coming winter season. As soon as the news spread, millions of South Africans were left reflecting on the energy crisis of 2008, which brought the mining and industry sectors, and thereby, the economy, to a halt.

Increasing winter demand and planned electricity network maintenance are putting pressure on the power system. In May this year, long before the peak winter season, South African power system capacity exceeded demand by just 0.17% (let’s just point out that the recommended reserve margin for a power system is 10-15%). With consumption expected to increase further during winter (June and July), Eskom will be forced to look at extreme measures to prevent scenarios similar to those of 2008. Some of such measures include power buy-backs from large consumers, and triggering of ‘interruption clauses’ included in contracts, through which Eskom can cut supply to consumers in case of tight supply situations, in return for discounts.

While these measures could help deal with the short-term spike in demand this year, the South African government is looking for alternatives to achieve long term sustainability of the country’s energy sector. Investment in clean energy (particularly renewable technologies such as wind and solar) is one of the possible solutions contributing to solving the country’s energy supply problem. While achieving energy sustainability, clean energy investments will also help South Africa adhere to its commitment to achieve a 42% cut in carbon emissions between 2011 and 2025, by reducing dependence on coal for power generation. Furthermore, renewable energy projects can come online on a shorter horizon compared with coal and nuclear power plants.

Let’s focus on clean energy

According to a 2013 report published by Bloomberg New Energy Finance, South Africa stood 9th in the world with US$5.5 billion worth of new clean energy investments in 2012 (a whopping 20,563% growth over 2011). Majority of this investment (US$4.3 billion) has gone into developing solar photovoltaic (PV) technology based power plants, with the remaining being spread across wind, concentrated solar plants, landfill, biomass and biogas, and hydro-projects.

The onset of clean energy investment projects in South Africa is correlated with the introduction of the Integrated Resource Plan (IRP) in 2010, as well as Department of Energy’s Renewable Energy Independent Power Producers Procurement (REIPPP) program in 2011. As a part of the 2010 IRP, South African government outlined its plans to increase electricity generation capacity by additional 18,500 MW by 2030. About 42% of this additional capacity is envisaged to be generated through renewable energy technologies.

Introduction of REIPPP program in 2011 facilitated private sector’s involvement in electricity generation. Through this program, the government plans to procure 3,725 MW of renewable energy from independent power producers by 2016. A significant focus has been laid on procuring power generated through onshore wind and solar PV technologies. The REIPPP program sets up a bidding system through which independent power producers can bid for power generation allocations. Electricity thus generated is purchased by Eskom on a 20-year Power Purchase Agreements (PPAs). The tariff for purchasing electricity is decided through a bidding process. Some independent producers cashed on the first mover advantage, and received tariffs as high as R2.6/KWh ($0.26/KWh) during the first phase of bidding in 2011 (more than Eskom’s electricity price). With increasing competition, these tariffs have fallen in the successive bidding rounds to as low as R0.89/KWh ($0.09/KWh).

Private sector holds the key

One possible mode of involvement is continued private sector participation in the REIPPP program, selling the generated electricity to Eskom at rates agreed in the PPAs. However, several independent power producers (IPPs) have raised concern about the attractiveness of such a system, where only a single buyer (Eskom) is present in the market.

IPPs feel that lack of certainty about feed-in-tariff structures and a single buyer model are likely to deter large scale investments from the private sector. In 2012, the South African Independent Power Producers Association put forward a proposal to set up an independent grid to challenge Eskom’s dominance of the transmission (grid) network.

In March 2013, the South African government passed the Independent System and Market Operator (ISMO) Bill, which will create an independent entity by 2014, to manage procurement of energy from Eskom’s power generation business and independent power producers. Establishing an independently operated power grid would encourage competition in the power generation sector while keeping a lid on prices.

Another possible form of investments could be in the shape of independent (off-grid) solar/wind power projects by large enterprises (particularly in mining sector) to meet part of their internal demand. Industries could reap several benefits from these independent projects. Benefits of a solar power project could include:

  • Several large energy consumers are required to operate diesel generators to meet the surplus demand from their operations. Even though the current cost of producing solar energy is higher than what is procured from Eskom, the cost is lower than that of electricity produced through diesel generators. In the short-term, solar energy projects could replace generators, as an additional input source of energy

  • The national energy regulator (NERSA) recently approved an annual 8% hike in electricity tariffs charged by Eskom till 2018. With price of solar PV panels expected to decline further, the cost of solar energy production could even be lower than Eskom’s prices 5-6 years down the line

  • Furthermore, solar power plants have an effective life of 25-30 years, greater than the typical 20 year PPAs offered by Eskom. Independent projects enable more efficient utilization of electricity generation capacity over a longer horizon, compared with the REIPPP program

Foreign investors also to step in

With the removal of subsidies on renewable power in several European countries, South Africa becomes an ideal investment location for both foreign renewable energy developers and infrastructure financing organizations.

Participation of foreign firms in the REIPPP program has increased in subsequent bidding phases. Working as a part of a consortia, several foreign developers, such as Abengoa (Spain), Gestamp Wind (Spain), SolarReserve (USA), and Chint Solar (China), have already won bids for setting up power projects, working in partnership with local developers and BBBEE partners.

International financial institutions, such as European Investment Bank and IFC (member of the World Bank Group) have also invested in several renewable energy projects being undertaken by international developers in South Africa. In 2012, European Investment Bank agreed to provide €50million ($64.9 million) for the Khi Solar One Project being undertaken by Abengoa.

So is the energy sector out of the woods?

With a power crunch looming, the mining and industry sector companies are left searching for options to keep their operations running, or risk large-scale shut-downs during the winter season. With the declining cost of setting up and generating renewable power, investment in renewable energy projects could be a sensible option to achieve sustainability of power supply, over both short and long-term.

Setting up of an independent transmission company will go a long way in reducing Eskom’s dominance over the electricity networks, urging more private sector participation in the REIPPP program. But, is this enough? Will there be further deregulation/liberalization of the renewable power generation sector to additionally boost competition in the market? The fate of private sector investments hinges on government’s willingness to risk its control over probably the most important utility system.

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