They Build What They Need

In the 1990s, Chrysler introduced the concept of the extended enterprise—an enterprise in which the pieces of the operation are interdependent, but owned independently. The interaction of an electricity provider and a manufacturer is a textbook example of the extended enterprise. That is, if the textbook is a U.S. or European one.

In Africa, the extended enterprise needs to be rethought. Vimal Shah explains:

We have all of these companies buying into Africa. There is so much interest. The problem is, most non-African operators don’t know how to operate here. Why? Because here an executive operating a company has got to know about the water, the power, the labor, where the people will stay, security, etc. If I was operating in the U.S., all of those would be a given. Where will labor stay? It’s a given. Power? It never goes off. Water supply? It’s always constant. Security, you don’t even have to worry about it. It is the state’s concern, it is not my concern. Here you’ve got to do these things yourself. Your organizational capabilities have to be different in Africa.

Building your own infrastructure can seem an insurmountable obstacle to operating profitably. To be sure, it carries risks and costs that are not typical in more developed markets. Mo Ibrahim describes the challenges, but also the opportunities of building your own infrastructure, and of being first mover in a growth market:

We often had to deal with building telecom backbones to achieve connectivity. We had to build our own microwave networks, satellite base stations, generators, etc. That was tough because it meant that we had to bring forward a higher level of investment, so our initial capital expenditure was high relative to industry standard. But it was offset by the market potential, and we were able to do it sequentially, starting in the capital city and then moving out. Besides, owning the elements of that infrastructure in the long term actually became profitable because instead of leasing it from the government, we eventually leased out the lines and the capacity to other players. In the end, that’s proven not a bad investment at all.

There is probably no greater proponent of rethinking the extended enterprise, nor a better example of it, than Vimal Shah and his company, Bidco. That company’s story of vertical integration provides insight on why it wins and how it happens.

From Bidco’s inception, management had a vision of going “from the soil to the frying pan.” They were kept from realizing their vision in early years, as the company was small and access to the inputs for their commodities was difficult. Vimal commented:

If you are in the consumer end of the business alone, you make your money on the branding and the formulations. That might work if the top of the (economic) pyramid is large. Here, the top is very, very small. It’s going to grow, but it is going to grow slowly and the middle class has been and is going to grow faster. We looked at it and found selling to that middle we could make a 10 percent premium on our brand. That means the rest of the value has to be gotten from other parts of the chain. So that is where we’ve gone.

We began with processing soybean, sunflower, and corn, which are locally produced here by small farmers. It is uneconomical to have a plantation for soybean or sunflower. So we built a processing facility for those, and guaranteed the markets and money for five thousand farmers so they would grow more.

With that experience in place, Bidco’s leadership wanted to advance further up the value chain into growing, and also expand to a core product—palm oil. Because palm is a plantation crop, it meant a revolution in Bidco’s business model. “To achieve commercial returns in palm, you can’t do ten acres or even one thousand acres, ” Vimal explained. “We looked at it globally and found you needed ten thousand hectares (about twenty-five thousand acres). So we began to look around.” Vimal eventually found that much space in neighboring Uganda. It was not without a struggle on his part and the government’s:

The government of Uganda was advertising in Newsweek and Time, looking for somebody to invest upstream in palm oil and palm planting—the full agriculture side. When we met with them, they were offering a five thousand-hectare plantation site with thirty-five hundred hectares reserved for outgrowers (small farmers supplementing the plantation’s production) to support as a poverty-alleviation program. We said no, it’s not economical, and we lost the bid to some guy who didn’t know what it would take to succeed. He never got off the ground.

Two years later, they came to us and said, “Are you still interested? ” By then, we had partnered with [Malaysian agribusiness] Wilmar, who were already in the plantation business. Wilmar asked, “Ten thousand hectares is viable but what’s the growth opportunity? ” So we told the government this time that we wanted thirty thousand hectares (seventy-five thousand acres) of commercial plantation.

Though it was six times the acreage the Ugandan government originally planned to approve, the government had spent two years failing with an operator who did not have the vision or experience to succeed at scale. “So, ” Vimal concludes, “they agreed. We got to work, laying the infrastructure, clearing the land, putting in all the housing, recruiting and training personnel, and building the processing plant. Today we have a fantastic product.” As of January 2013, Bidco had twenty thousand acres under cultivation in plantation and another three thousand in outgrower cultivation, and is producing palm oil for the East African market. Bidco now looks at all expansion opportunities through the lens of backward integration. The company has deployed its competencies in Arabica coffee and cut flowers, and is currently examining opportunities for backward integration in cereals.

There is some caution to be expressed with regard to building what you need. Most of Africa is only now developing a robust processing and manufacturing sector, and progress is uneven. As figure 5–2 shows, African industrial production as a portion of GDP hovers between 5 percent and 15 percent, depending on region and year. That is far lower than even other emerging market regions.

Figure 5–2: Contribution of manufacturing as a % of GDP, 1970–2008

Source: UN Conference on Trade and Development, Economic Development in Africa Report, July 2011.

As a result, governments press for development of processing plants, distribution networks, and other parts of the value chain. Sometimes the encouragement is stated as a requirement, and sometimes the expectation is for more than is commercially viable. Aidan Heavey has negotiated with government on extending his company’s operations beyond the elements that are typically core to his business. In Uganda, the government asked the Tullow-led consortium to build not just an oil production and transport operation, but also a refining facility. In Aidan’s view, the two parties need to find a middle ground, one that may not be based solely on commercial concerns:

Every oil company wants to export everything: what makes the most commercial sense is to pipe straight to the Indian Ocean, 1, 200 kilometers away, and sell the oil. That’s the extreme position you would take as an oil company. However, the government wants a refinery because they’re landlocked and strategically they really do need to be independent of another country’s refinery. We experienced that firsthand three years ago. The port of Mombasa (Kenya) was closed because of troubles and it prompted a fuel shortage in Uganda. That’s why the government is saying they would like a refinery running up to 150, 000 barrels per day. We can’t get financing for that. We fully understand the strategic requirement, and therefore we think the compromise here is to adjust the development plan to supply a strategic local refinery of 25, 000 barrels per day.

Tullow’s negotiation with government points to the significant value placed on an extended enterprise, not just by the company, but by other key stakeholders.

They Are Resilient

Nobody succeeds in Africa in a straight line. The minefield of frustration is vast, and I have met hardly anyone successful in Africa who has not endured endless obstacles.

For the most part, these are the everyday obstacles of life with semi-functioning systems. I spoke with a young Nigerian who had returned to the United States from a summer at home, wondering if she had what it takes to succeed in Africa. “It’s a hustle, ” she said, recalling her last job, in Lagos. “Just getting up every day to hustle, not just for business, but for phone, for power, to get from place A to B, is hard.” Born and raised in Nigeria, she was no stranger to its pace. But advancing through it, piercing the veil of frustration to build a business, she found daunting. Yet it’s precisely that veil that creates a high barrier to entry. Once it’s overcome, few follow.

Resilience extends to barriers far greater than the everyday nuisance. Ken Njoroge attributes his success directly to the resilience he learned growing up poor. Really poor, frontier poor. “I think I had engrained in me a mind-set that, despite the odds, you need to get it done. Whether it was not having the money for schoolbooks, or working through school, or working on the Cellulant project for years before it made money, just sticking to it is most of the difference.”

Funke Opeke sees resilience in the face of frontier-market obstacles as a key differentiator among her potential business partners. She described the resilience of her Chinese business partners in the face of government obstructions that sometimes frustrate Western executives (including, on occasion, Funke, herself an alumna of Verizon):

For the American businessperson, the degree of frustration must take getting used to. They would think, “We’re bringing you money and we’re prepared to make this investment, why aren’t you clearing the roadblocks for us to help you make it work? ” A lot of American companies would just view it as a serious mess and give up. The Chinese come from a newly emerging economy, so they may be more used to dealing with some of those obstacles, and have seen more hardship and so they are more persistent in light of those obstacles.

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