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Africa
The Bengal Tiger on the Prowl
Last Updated: 2014-01-15 16:25 | Frontier Advisory
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By Simon Schaefer and Andreas Wenzel (Ko-Autor)

A rapid change in the world economy is visible: Once marginalized economies are now experiencing an increasingly rapid integration into the global economy, enabling the emergence of new actors. This trend gained momentum following the global financial crisis and the continued debt crisis in Europe. As a result, traditional European and North American corporate interests in the African continent have been retreating and are being rapidly usurped by new market entrants, not only India, but also its fellow BRICS compatriots, including Brazil, Russia, China and South Africa. BRICS-Africa trade has increased by almost 820% between 2000 and 2012 and is expected to account for one third of Africa's trade basket by 2015. In contrast to the attention that China has received in this context, the role that Indian firms are playing in Africa is a lesser known phenomenon.

Dating back to the 1st Century AD, Indian seaborne traders have been engaging in trade with East Africans, utilizing the monsoon winds. This trade corridor gave root to what is today a more than two million strong Indian diaspora living on the continent.

Traditionally, Indian business activity in Africa was premised on small-scale, family-owned trading businesses. These businesses were first started to serve Indian migrant laborer communities and then the local population. This model was replicated across Africa and allowed Indian businessmen to become thoroughly integrated into many African economies. However, such small-scale businesses are now being augmented by the new wave of corporate India's burgeoning multinationals.

India's multinationals expanding abroad

These multinationals are diverse, family-owned and highly influential in their home economy and have increasingly been flexing their muscles in the global economy. Today, firms such as Tata Group, Reliance, Mahindra & Mahindra, Bharti Airtel, Ranbaxy and Dr Reddy's are becoming household brands in the developing markets of Africa. These MNCs are developing competitive advantages in the IT, healthcare, pharmaceuticals, biotechnology and automotive sectors and are looking to build on tried and tested low-cost yet profitable models which are ideally suited for emerging African economies. While India's private firms may not have the same deep pockets and government direction as China's state-owned firms, they make up for what they lack in financial clout with the dynamism and capitalistic business savvy and acumen developed in their own emerging domestic market.

"India Inc." is well and truly in Africa and looking to solidify its presence further. It is to the benefit of Indian companies, that in contrast to Chinese diplomacy, Indian diplomacy in Africa is perceived as being more credible. India succeeds in presenting itself as a true friend and as a partner on equal footing concerned about African interests. Furthermore, India's business and investment forays into Africa are much more driven by the private sector and less state-centric as it is the case for Chinese activities on the continent.

India's large and growing domestic economy provides a strong resource base from which to expand offshore. Low labor costs, a sizeable domestic consumer market, skilled labor and India's wealthy international diaspora all contribute to a distinct competitive advantage when it comes to doing business in Africa. 

 

Drivers of the expansion

The key drivers of India Inc's continued and accelerating investment in Africa are similar to those of its fellow BRICS compatriots. Energy and food security as well as capturing a sizeable consumer market are key factors driving this engagement. In this context India is competing with China - on different terms, but with the same objectives. In addition, a key motive for India's diplomacy in Africa is lobbying for support amongst African states for a permanent seat on the United Nations Security Council.

Coupled with China, India's growth is driving global commodities demand with African states satisfying a large part of this demand. On the back of increasing domestic energy demand and rising oil prices, India's energy firms are on the international acquisition trail. Having to import 70% of its oil requirements, India is strategically vulnerable. To meet the growing demand for energy and to become less dependent on world markets, Indian firms have embarked on an aggressive energy investment drive in Africa. To date Indian companies have invested in about 25 oil producing countries on the continent. Furthermore, they are also acquiring upstream companies to secure resource assets. India has invested more than USD 2 billion in Sudan. ONGC Videsh Ltd. is partnering with other Asian companies, Petronas from Malaysia and the Chinese National Offshore Oil Company (CNOOC), in Sudan. Western nations' imposition of sanctions against Sudan created market gaps that have been filled by Asian firms, Indian included, that have business models less constrained by political forces.

India has also become increasingly active in the mining sector. Since the acquisition of a 51% stake in the Konkola Copper Mine in 2004, Indian mining company Vedanta Resources Plc has invested approximately USD 2 billion in the project, making it one of the largest foreign investors in the Zambian copper industry. Apart from Zambia, Indian companies have also invested in the mining sectors of South Africa, Mozambique and Namibia.

Growing market with huge potential

Apart from the extractive sector, Indian firms are establishing a wide commercial footprint across Africa, selling an array of products from pharmaceutical to automotive and consumer goods. These firms are taking full cognizance of the future potential purchasing power of African consumers. Total consumer spending is set to double to USD 1.4 trillion by 2020, by when nearly 130 million households are estimated to have discretionary annual income of more than USD 5,000, according to McKinsey Global Institute.

Among the most active Indian players in Africa is the Tata Group, which has diversified business interests and operations in a range of sectors. In mid 2011, Tata Motors in partnership with its subsidiary Tata Africa opened a truck plant in South Africa. Situated near Pretoria, the plant has an annual capacity of 3,650 trucks and will serve as a springboard for the Indian company into the region. Furthermore, Tata considers opening a truck assembly plant in Kenya to tap into the East African market. Another major investment by the Tata Group, through its Tata Chemicals subsidiary, has been the setting up of a 100 million US dollar soda ash facility in Kenya. The company plans to turn Kenya into a major global soda ash producer by 2015.

Consequences of the expansion

India's forays into Africa have caused bilateral trade between the subcontinent and Africa as well as investments on the continent to surge. Between 1991 and 2012, trade between India and Africa has increased from USD 967 million to USD 69.7 billion. The Indian government's ongoing commitments to Africa as a strategic partner are further reflected in the USD 70 billion trade target for 2014. Set in 2011, the target is very likely to be surpassed given the recent spike in trade f lows with the continent. Since 2005 Indian firms have acquired or invested in at least 80 African companies. In 2003, Indian investments stood at approximately USD 11 billion and now have exceeded the USD 30 billion mark, positioning India among the top 10 investors in Africa. Africa's share of India's total trade has more than doubled between 1990 and 2012 to 9% - Africa only accounts for 5.4% and 2.3% of China's and Germany's total trade respectively. These figures show the relatively greater importance of Africa trade for India compared to China. Along with China, India's commercial engagement with Africa will have long-term strategic consequences for the continent - an economic destiny that is no longer framed by European interests but from the emerging global powers from the East. It will similarly inform a change in engagement strategies for traditional partners of the continent. Clearly the futures of the emerging markets are inextricably linked. This relationship is summed up in the new adage: "If China and India grow, Africa grows."

Realignment necessary

In this context, any investment on the continent and strategies to profit from the impressive growth must comprehensively take into account the paradigm shift that is taking place and the new actors on the stage with China and India taking the lead roles. Established actors are going to have to reconsider their company strategies and approaches, in order not to lose further ground on the "Bengal Tiger".

For German politicians as well as German companies this means to not be awestruck by a lopsided focus on China's engagement in Africa, but also increasingly explore the complimentarily of Indian interests in Africa to German interests. Owning to similar approaches and shared values, realignment to India's interest is expected to be easier for German policy makers compared to an attempt to collaborate with China in Africa.

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