Southern exposure

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Africa is recording spectacular rates of growth and is attracting investments from many corners of the world. Will Polish companies join the race and tap the continent’s potential?

By Wojciech Rylukowski

Even though Africa saw some growth in the 1960s and 70s, its lack of technology, institutions and organizational skills caused disintegration of the young economies. A deep-rooted stereotype that conveys an image of a continent receiving international aid and exporting asylum seekers, in turn, may soon give way, as Africa is developing fast. The thriving region grew at a rate of five percent last year, beating the global average by 1.5 percentage points and is home to ten out of the 15 fastest growing economies in the world. The region attracted FDIs worth around $80 billion in 2014, with the number of new projects growing by six percent in annual terms.

The African boom, which started in the early years of the 21st century, has been attracting capital from advanced and emerging economies alike. Although China and India are still trailing the UK and the United States in terms of the value of their outward FDIs, their role is rising. After Chinese involvement in the continent grew eightfold in the years 2004-2012, the country’s Prime Minister Li Keqiang announced in 2014 that China’s total stock in African investment projects will quadruple to $100 billion by 2020. A substantial part of these projects will surely flow to resource-rich sub-Saharan countries as the times when South Africa was the top recipient of external investments are gone. Last year, it came in third with FDIs worth $4.2 billion, behind Egypt ($5.5 billion) and Mozambique ($4.9 billion). Other countries that succeed in enticing investors include Morocco, Ghana, Congo, Angola and Uganda. Although, the bulk of the investments is in the mining sector, which accounts for some 33 percent of the total FDI value, there is a visible shift away from oil and resources, to the services and manufacturing sectors.

Image:Ursus

Polish business in Africa
The presence of Polish companies in this landscape is still modest, however, it is on the increase. According to data by the Ministry of Foreign Affairs, Polish firms invested €49.4 million in 2014, which stands for 0.8 percent of the total value of Polish outward FDIs. The small scale of investments stems from a fear of allocating capital in a region associated with unrest. Nonetheless, the situation is slowly changing, partly due to the GoAfrica program carried out by the Polish Foreign Information and Investment Agency (PAIiIZ). The program’s objective is to increase the level of Polish investments and share of trade with Africa by organizing business missions, conferences and training sessions, as well as by promoting Poland as a business partner. Sławomir Majman, the head of the PAIiIZ, told WBJ Observer that Polish companies can successfully compete in the construction, food, chemical, transportation and logistics sectors in Africa. Their efforts need to be supported by the government as African business is intertwined with politics. “In the initial stage, the political umbrella seems indispensable,” said Majman. Nonetheless, he deems that the main hindrance to entering this market is a lack of information. “Polish companies were doing business in Africa in the 1980s. A lot has changed since then,” Majman asserted. That’s why one of the key activities carried out under the GoAfrica program is raising awareness among Polish companies about the continent and preparing them to venture into the region. The same applies to African partners who are invited to Poland by PAIiIZ in order to change their view of our country as a fringe European economy. Since GoAfrica’s launch in 2013, PAIiIZ has organized 40 events, including trade missions to Nigeria, South Africa, Zambia, Senegal, Ghana, Morocco and Algeria. The program proved to be successful, as Poland’s exports to Africa grew by 29 percent in 2013 and 14.5 percent in 2014. When It comes to outward FDIs, the agency expects that a surge in Polish investments will occur in 2016, but some notable projects are already being carried out. Polish chemical giant Azoty extracts calcium phosphate from deposits in Senegal; shipbuilding company Navimor is about to finalize the establishment of the Maritime Academy in Angola; Asseco signed a $10 million contract to deliver an IT system to Ethiopia’s Network Security Agency; Kulczyk Holding is the owner of a gold mine in Angola and Polpharma announced that it will set up a drug factory in Algeria.

3,000
is the number of tractors to be delivered to Ethiopia by Ursus under the $90 contract

Poles spearhead agricultural revolution
Perhaps the most spectacular Polish success in Africa is the story of tractor producer Ursus, who won a $90 million contract for the delivery of 3,000 tractors to Ethiopia and subsequently opened a production line in the African country. The legendary Polish brand had sold tractors to Algeria, Morocco, Tunisia, Congo or Ghana back in the 1970s and 80s. After the transformation, Ursus’ production plummeted and the ailing company was taken over by POL-MOT Warfama in 2011. The new owner’s concept was to win foreign markets where the mechanization of agriculture was still in its early stage by offering simple, reliable and cost-effective tractors based on a Massey Ferguson license. In an effort to win contracts, the company carried out a wide-ranging promotional campaign across the continent aimed at refreshing the memory of the brand. When asked by the WBJ Observer why he decided to invest in Ethiopia, Karol Zarajczyk, the CEO of the company said that “the African market, like any other market with potential for agriculture, is interesting from our point of view. And Ethiopia is the political center of Africa – if you succeed there, the news spreads across the continent.” Unlike large multinationals who sell over-scaled, expensive vehicles, Ursus’ tractors come at a better price and are of better quality than those offered by its Chinese competitors. The company’s comparative advantage comes from the ability to offer a product that fits the local needs. “We offer value for money, good price, we have proper technology and we are flexible, very flexible,” Zarajczyk succinctly put it. But he added, that this is not enough. Considering fierce competition from Indian and Chinese companies, you can’t come to Africa with just an end-product. “You have to propose extra value. In our case, that is technology transfer and staff training,” Zarajczyk said.

Image:Ursus

What’s in it for Africa
Since foreign investors bring capital, technology and management that allow the host economy to improve the effectiveness of the existing production process and engage in new activities, as well as to raise the country’s output, an inflow of FDIs may help lift Africa out of poverty. It is therefore crucial that investors who come to the continent develop linkages with local suppliers, transfer technology and train local staff. Ursus’ policy corresponds with these expectations. After signing the contract, the company would send tractor parts to be assembled in a factory run by state-owned The Metals and Engineering Corporation (METEC) in Adama, 90 kilometers south-east of Addis-Ababa. In May of this year, Ursus launched its own production line within the METEC facility. The opening day was attended by prominent figures including Nobel prize laureate Lech Wałęsa and Dlamini Zuma, the chairperson of the African Union Commission.
The manufacturing site employs Ethiopians only, however, there are around ten engineers on behalf of Ursus who are tutoring local engineers. According to Zarajczyk, the cooperation is smooth with one exception. “METEC is a big company that employs around 60,000 people and we are pleased with the cooperation and the level of professionalism. Our only challenge is the high staff turnover. Managers that work on our project are highly appreciated in the company’s structure and are quickly taken to work on other projects. We already have the third manager working with us, while the other two climbed up the corporate ladder.”
Apart from training the local staff, Ursus also wants to develop a chain of local suppliers. Currently, it is focusing on selling as many tractors as possible, but ultimately its target is to develop a spare parts market, where the margins offer higher profit opportunities. The manufacturer already orders castings from domestic firms and says that nothing prevents the local companies from supplying the plant with windshields, hoods, screws and the like.

Image: Ursus

The moment is now
Ursus’ presence in the African market sets an example worth following. The contract in Ethiopia gave the company a major boost since the domestic market shrunk by 70 percent y/y in 2013 due to the decision by the Agency for Restructuring and Modernisation of Agriculture (ARMiR) to curb EU subsidies for tractors, according to Zarajczyk. Ursus recorded a net loss that year, but thanks to the Ethiopian deal, it managed to bounce back. And it didn’t have to worry about funds, as the money provided to the Ethiopian party for the purchase of tractors came from an intergovernmental loan granted by Poland under the umbrella of the OECD.

Zarajczyk asserts that it is the right moment to enter the market, because the reputation of those who have been operating there for the last ten years or so is low. He further claims that the Chinese come with cheap credit, but their poor quality products often break before they serve long enough to cover their market value. When the locals cannot pay back the loan, they offer natural resources as repayment, which leads to neocolonial relations. Majman agrees with the opinion, highlighting that Poland’s advantage comes from the fact that it is not identified as former colonizer. The head of the PAIiIZ claimed that Polish companies perform well in the fields in which the Chinese firms operate and have a chance to replace them. To be successful, they would have to learn how to deal with the local administration. Unlike in Poland, business has to establish and maintain good relations with the bureaucracy to prosper. Another challenge is a different approach to time – things happen slower there. But, according to Zarajczyk, the game is worth a candle. “What happened in the last 25 years in China will happen in some African countries too,” and not appreciating the market at this moment may result in barriers that will be difficult to overcome later.

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