A couple of decades ago, companies were expanding into India in droves. More recently, China has been a hot spot for global expansion. Some say it’s now Africa’s turn. Regardless of which geography a company is considering, if it’s looking to move into a region that is unfamiliar, it is going to rely on its treasury and finance team to step up.
To get a handle on what a treasury team needs to learn, and to do, in order to support a business moving into a new emerging market, Treasury & Risk sat down with Mark Chiaviello. As head of corporate banking for Standard Bank in North America, Chiaviello has a clear view of African markets. Standard Bank was founded 150 years ago in Port Elizabeth, South Africa, and now operates in 19 African countries with headquarters in Johannesburg.
The lessons Chiaviello imparted can serve treasurers and finance teams well, regardless of which geography their organization is entering.
T&R: What are the most common surprises that a U.S.-based finance team encounters when their company is moving into Africa for the first time?
Mark Chiaviello: It depends on what countries they’re looking at, but often they’re surprised at the level of economic activity in Africa. When they go to South Africa, many people are astonished at how developed it is. When they go to Nigeria, they’re amazed at how economically vibrant it is. Or Nairobi. Nairobi is known for its tremendous traffic, sort of like L.A. In some respects, that is an indication of how well Nairobi is doing. It’s one thing to read about it, but it’s another to go and see a massive traffic jam caused because people are out and about, doing business and getting deals done.
Also, we’re starting to see the opportunity of a consumer class. Africa has a long history of being perceived as a continent for natural resources, which it still is. But it also presents an opportunity for American corporations to sell things, anything from hamburgers and chicken to locomotives.
T&R: So, are you seeing an increasing number of U.S.-based companies expressing interest in moving into Africa?
MC: For sure. Companies’ interest follows a progression that is probably very similar to how they’ve moved into other markets. First India, then China, and now Africa. It goes from internal dialogue in the executive suite to formulating a strategy, to then implementing the strategy. Implementation might first be an investment in a business—maybe sending some people to Africa or hooking up with a joint venture—before doing it themselves.
Right now a number of U.S. corporates are beyond the conversation stage, and maybe beyond the strategy stage, and into the implementation stage. One day recently, on the same day, we received calls from one of the biggest helicopter makers in the U.S. and one of the biggest pizza chains in the U.S. about moving into Africa.
T&R: What is the first thing a business needs to know when it’s looking to move into Africa?
MC: It depends on the countries the business wants to look at. In some respects, Americans can appreciate this if they buy insurance or they’re involved in the insurance market. In the U.S., you have 50 different insurance regulators. And in Africa, you have 53 different governments making regulations. As a rule, the way you do business will differ greatly from one country to another. There isn’t one solution across the whole continent, from Capetown to Cairo. There are really 53 different regimes, and treasurers going into Africa need to understand all the differences between the countries they’re going into.
T&R: OK, so what are the most important issues for the treasury and finance function to understand about each country’s local business environment? [See also 5 Questions U.S. Corporates Should Get Answered Before Expanding into Africa.]
MC: First and foremost is the rule of contract law. Then also you need to look at how vibrant the local banking system is. In a place like South Africa, the banking system is incredibly robust. In other countries, it’s still a work in progress. Some of these countries have come out of civil war in the recent past. Some are still relatively new democracies. Even though they might have had their independence for the past 50 years, they’ve just begun to really embrace democracy now. Growth in business, and a robust banking system, go hand-in-hand with democracy.
They also need to understand the exchange control regime: ‘How easy is it to move money in? And if I move money in, what boxes do I need to tick, what t’s do I need to cross, what i’s do I need to dot so that when I want to get that money out, I can do so in an efficient manner?’ You may bring an investment in and want to take profits out, or you may be looking to build an African operation with a partner, which may buy you out or may invest such that you want to take your initial capital out. Either way, you need to understand the movement of money in and out.
T&R: Where should they turn for all this information?
MC: One of the first ports of call for a U.S. corporate going into Africa should be the U.S. Department of Commerce. For companies in the energy sector, maybe the Department of Energy as well.
In addition to the U.S. government, they should talk to their partner banks. Only one U.S. bank really has a wide footprint in Africa, but other global banks rely on a partner like Standard Bank as their solution in Africa. So their global partner bank should have information as well.
And then also their peers. If they’re following a customer or client to Africa, and the customer is already there, it should have some pretty good insight into the business climate.
T&R: What are some other things your clients grapple with when they first move into Africa?
MC: The account-opening process is one. Another is the KYCs, ‘know your clients.’ As I said, each country has its own regime. One place you see this is in proof-of-residency requirements.
In the U.S. we’re quite happy to use our drivers license; that’s seen as acceptable. But in a lot of African countries, that’s not the case because drivers licenses are so easy to replicate. In certain parts of Africa, it’s normal to provide passports, utility bills, or more personal details—which our U.S. customers can get a bit anxious about, or even consider an affront. We spend a lot of time explaining these nuances and trying to find a middle ground that everybody will be happy with.
T&R: That makes sense. What about letters of credit or bank guarantees?
MC: That’s a good point. Because local risk goes beyond how you move money and what the regulations are. After a while, that becomes common knowledge, but then the issue is understanding local credit.
T&R: What are some of the unique aspects of managing counterparty credit risk in Africa?
MC: For one thing, a lot of the businesses might be family businesses. If they’re not listed on an exchange, getting credit knowledge to facilitate a letter of credit can take some time. The fact that the information is not there doesn’t necessarily imply that creditworthiness is not there; it’s just that it’s a different process.
T&R: It’s more difficult to obtain the information you need to make that decision.
MC: Exactly. But that does not imply it’s a bad credit. That’s something that is not unique to Africa. Treasurers who have dealt in other emerging markets over the years have seen the same thing.
T&R: What else should a U.S. treasury and finance team understand before their company moves into Africa?
MC: One key thing is that economic factors don’t just have a universally positive or negative effect in Africa. Like regulations, the impact of events such as changes in global commodity prices will likely vary across the continent. For example, the falling price of oil shouldn’t just be seen as a disaster for Nigeria or Angola. In places like South Africa and East African countries that are importers of oil, the falling price is good news.
Similarly, there are challenges in certain countries in Africa, but that doesn’t mean there are necessarily challenges throughout Africa. You have to evaluate them on a country-by-country basis. Ebola, for example, was a crisis—but it’s important to understand it was a crisis only for certain African countries. If you’re traveling by land, the distance between Liberia and South Africa is about twice as far as the distance from New York to L.A. So a crisis in Liberia really isn’t going to affect what you’re trying to do in Mozambique or South Africa.
That’s something we try to get across to U.S. businesses. These are very different countries, very different regions on the continent. What affects one area that gets a lot of press, and rightfully so, isn’t necessarily going to affect a consumer someplace else.