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Investment views

Leapfrogging technologies in Africa

2 August 2018

By Peter Baird - Managing Principal, Africa Private Equity and Palesa Lekganyane - CA Trainee, Alternatives

 

Leapfrogging technologies in Africa

Significant private equity returns can be made in Africa in the next ten years, particularly by investing in the formation of new industries that are enabled by complementary leapfrogging technologies. These industry-formation opportunities are supported by durable macroeconomic factors that create secular tailwinds (which are occasionally subject to commodity-driven setbacks such as those experienced in 2014-2016) and should drive good economic growth for the next decade or more. These factors include rapid urbanisation, Africa’s demographic dividend, declining risk premiums and the ‘rise of the Indian Ocean’. This article discusses the characteristics of ‘leapfrog-ready’ industries, specific leapfrogging technologies in Africa and the factors creating macroeconomic tailwinds.

Leapfrogging technologies typically take hold in emerging markets when underdeveloped industries adopt next-generation technologies (and skip intermediate-generation technologies). This process is accelerated by the absence of legacy infrastructure characterised by intermediate-generation technology.

Industries that are most likely to be leapfrogged have some combination of the following characteristics:

  • High fixed costs and low marginal costs (leading to a capital expenditure trap)
  • Market penetration which is lower than that of developed markets
  • Public sector provisioning, which is characterised by slow roll-out, poor quality and corrupt/ politicised activities
  • Convergence of multiple technologies is taking place

As economies modernise, well-run local businesses can emerge as national or regional champions in developing industries (for example, MTN Nigeria, IHS Towers and Safaricom in telecommunications). Telecommunications, however, are the first catalyst in a set of linked technologies.

There are three distinct phases in the evolution of leapfrogging technologies in Africa. The first phase took place from 2000-2015, during which time the major mobile network operators and telecommunications infrastructure providers grew up. The increased usage of cellular communication and the emergence of smart phones in particular, propelled Africa to become a world leader in the mobile money industry.1 The success of mobile telephony is so significant in the African context that it is expected to serve as a basis for most technological developments going forward.

The second phase started between 2010 and 2015, and is still under way. Mobile telephony and mobile payments combine with additional technologies to significantly disrupt established (if inefficient) industries. The growth of solar home systems was catalysed by the availability of cheaper PV solar panels (a result of improved technology) and mobile payments which enable consumers to acquire solar home systems, regardless of whether they dwell in urban or rural settings, on a pay-as-you-go basis. In the education sector, mobile devices and data, massive open online courses and mobile payments improve accessibility to distance education and enhance the quality of proximate learning through the delivery of richer learning material such that formal education is no longer limited to the knowledge of educators.

In 2020 and beyond, the third wave of leapfrogging technologies is expected to take hold. Big data (largely gathered through smart phones) is set to make a significant impact and to enable machine learning. An increase in computing power will see, for example, consumer targeting, credit scoring and micro-financing becoming less administrative and easier to process. The transport and logistics sector will also be subject to transformation as autonomous airships and drones, driverless technologies as well as GPS and cellular telephony create efficiencies that impact industries across the board. A remarkable, very early example of this is already evident in Rwanda, where drones are used to rapidly transport blood to clinics, which would not readily hold such resources otherwise, thus empowering healthcare professionals to perform life-saving procedures. The emergence of these complementary technologies is more feasible when the underlying African economies are growing. Accordingly, the megatrends which will create macroeconomic tailwinds in Africa are important for the overall narrative.

Urbanisation and the demographic dividend

At present, Africa has 57 cities with a population greater than one million. Asia, Latin America and Europe have 275, 69 and 54 cities of equivalent size respectively.2 Africa lags behind Asia and Latin America in terms of the proportion of the population that is urbanised (42% of the African population is urbanised whilst 80% of Latin America and 49% of Asia is urbanised).3 However, this is changing: by 2045 Africa will not only have the largest urbanised population, but it will also be home to the youngest population in the world.4 The implications are that Africa will host a greater urban workforce, which is significantly more productive and engaged in the formal economy. Urban households will also consume more services and manufactured goods; reinforce democratic governance and economic reform; and increase trade which ultimately creates the ideal environment for the employment of leapfrogging technology to meet the population’s growing needs.

‘Rise of the Indian Ocean’

Both China and India have identified the Indian Ocean Rim as a medium-term strategic sphere of influence, and are investing heavily in infrastructure and economic development on the East Coast of Africa. This influx of foreign direct investment has gone well beyond mineral extraction. It encompasses market development, agricultural trade, and mergers and acquisitions which boost African business and facilitate the employment of leapfrogging technologies as the scale of enterprises expands and the needs of businesses grow. It is important to note that this relationship between Africa and the Far East lends a channel through which Africa can learn about and adopt existing leapfrogging technologies, alongside the employment of its own innovations.

Political reform and reduced political risk

Finally, Africa is at its most stable since World War II. This is demonstrated by the higher percentage of democratic governments and multiple peaceful transitions from long-standing oppressive governments in recent years. This stability has encouraged increased foreign direct investment, the reopening of sovereign debt and multilateral capital sources, and a lower average cost of capital, all of which support economic development and lay the foundation for African industries to adopt leapfrogging technologies and thus drive growth.

In conclusion, complementary leapfrogging technologies will enable industries to bypass constraints that have historically inhibited their growth. With a track record in mobile telephony that confirms Africa’s responsiveness to leapfrogging technologies, it can be deduced that Africa is ripe for continued development and investment. Durable macroeconomic megatrends such as rapid urbanisation, Africa’s demographic dividend, declining risk premiums, and the ‘rise of the Indian Ocean’ further deem Africa an attractive market for investment as these factors create a tailwind for leapfrogging technology.

 


Important information

1 Chironga, M., de Grandis, H., Zouaoui, Y. (2017). Mobile financial services in Africa: Winning the battle for the customer. Available at: https://www.mckinsey.com/industries/financial-services/our-insights/mobile-financial-services-in-africa-winning-the-battle-for-the-customer.

22016. The World’s Cities 2016. First ed. (pdf). United Nations Economic & Social Affairs. Available at: http://www.un.org/en/development/desa/population/publications/pdf/urbanization/the_worlds_cities_in_2016_data_booklet.pdf.

3 2018. World Urbanization Prospects 2018: Annual Percentage of Population at Mid-Year Residing in Urban Areas. Available at: https://esa.un.org/unpd/wpp/publications/Files/WPP2017_KeyFindings.pdf.

4 Bughun, J. Chironga, M. Desvaux, G. Ermias, T. Jacobson, P. Kassiri, O. Leke, A. Lund, S.Lions on the Move II: Realizing the Potential of Africa’s Economies, McKinsey & Company, September 2016.

All information and opinions provided are of a general nature and are not intended to address the circumstances of any particular individual or entity. We are not acting and do not purport to act in any way as an advisor or in a fiduciary capacity. No one should act upon such information or opinion without appropriate professional advice after a thorough examination of a particular situation. We endeavour to provide accurate and timely information but we make no representation or warranty, express or implied, with respect to the correctness, accuracy or completeness of the information and opinions. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. This is not a recommendation to buy, sell or hold securities.

We do not undertake to update, modify or amend the information on a frequent basis or to advise any person if such information subsequently becomes inaccurate. Any representation or opinion is provided for information purposes only. This is the copyright of Investec and its contents may not be re-used without Investec’s prior permission. Investec Asset Management is an authorised Financial Services Provider. Issued by Investec Asset Management, August 2018.

 

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