Note: Proportion of the population aged from 15 to 65 in the total population. Source: United Nations Population Prospects

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1 Chapter 4 Challenge of exploring the new frontier of emerging countries [The key point of Part II, Chapter 4] In Asian emerging countries, especially China, the working-age population is starting to decline. In the medium to long term, the center of growth is expected to shift to Africa and India, among other countries and regions, where the progress of the aging of society coupled with a low birthrate is slow, so it is necessary to secure business footholds there (Figure II-4-1-1). Figure II Estimates of the proportion of the working-age population for major regions Africa East Asia South Asia Latin America 75% 70% 65% 60% 55% 50% Note: Proportion of the population aged from 15 to 65 in the total population. Source: United Nations Population Prospects Section 1 Africa 1. Current status of the African market as a whole (1) Future potential as a market Africa, with its abundant reserves of natural resources and a population of one billion people, is a region with promising potential which is similar in size to India. In the future, while the population growth in developing countries in Asia and other regions will slow down, the population in Africa is projected to continue to grow steadily, surpassing 2 billion people by 2050, according to a certain forecast (Figure II-4-1-2). In the past five years, the economic growth rate in Africa has stayed at around 5% (Figure II-4-1-3), so a huge African economic zone can be expected to be formed in the future. As for natural resources, Africa has reserves of crude oil and natural gas and is producing these resources in addition to such mineral resources as platinum, chrome and copper (Table II-4-1-4). Not only is it expected that Africa s abundant reserves of a wide variety of natural resources will be exported to various foreign countries, but the presence of such resources is also expected to be favorable for the 620

2 region in attracting industries in the future as a business location. Figure II Population projections for major regions (Thousand) Africa Asia Europe North America Source: World Population Prospect (UNPD) Figure II Changes in the growth rate of real GDP in Arica (%) (Year) Source: IMF WEO (April 2016) 621

3 Table II Africa s share in the world s natural resources production and reserves Source: Mineral Commodity Summaries 2016, Uranium 2014 (OECD/ NEA-IAEA) and World Nuclear Association As described above, Africa is attracting attention from countries around the world as the last frontier on earth that is brimming with potential, so it is one of the regions which Japan must consider cultivating and capturing as a market in a strategic manner. On the other hand, the following challenges lie ahead for future economic development of Africa and expansion of trade with and investment from Japan. Therefore, it is important to consider what actions to take in the future while taking account of the challenges. (2) Challenges for the market (A) Numerous countries with a small market size In Africa, there are a total of 54 countries. Of them, the top five economies (Nigeria, South Africa, Egypt, Algeria and Angola) together account for around 60% of the overall GDP of Africa as a whole (approximately 2.5 trillion dollars), while many other countries with a small market size make up the rest (Figure II-4-1-5). In Africa, there are several regional economic communities, including the Economic Community of West African States (ECOWAS), the East African Community (EAC) and the Southern African Development Community (SADC), and economic integration in each region is proceeding. 622

4 Figure II Countries economic size as shares in African economy Uganda 1.12% Cote d'ivoire 1.37% Ghana 1.57% Tunisia 1.98% Ethiopia 2.23% Zambia 1.08% DRC 1.46% Libya 1.67% Tanzania 1.95% Gabon 0.74% Mozambique 0.68% Others 11.06% Nigeria 23.32% South Africa 14.22% Kenya 2.48% Sudan 3.04% Morocco 4.47% Angola 5.25% Algeria 8.67% Egypt 11.64% Source: IMF World Economic Outlook Database (October 2015) As indicated above, when considering advancing into Africa as a market, it is important to see the market by viewing: A) countries with a fairly large economic size as individual countries; B) small countries not on an individual basis but as part of a regional group comprised of neighboring countries; and C) the whole of Africa as a market similar in population size to India. (B) Industrial diversification A breakdown of sub-saharan Africa s GDP by industrial sector shows that the share of the manufacturing industry is not large and has been on a downtrend since the 1980s (Figure II-4-1-6). As this region also depends mostly on imports for the supply of products and intermediate goods, prices are high. The labor cost level in the manufacturing industry is higher in most of sub-saharan Africa than in Asian countries (Table II-4-1-7), making it difficult for the region to expect investments from external countries as an industrial location under the present circumstances. The major challenge for future economic development is creating jobs amid the growth in the working-age population. Instead of depending on the resource industry, which does not create jobs despite generating profits, it is important to promote industrial diversification so that industries that require labor, such as the manufacturing industry, can achieve development. 623

5 Figure II Breakdown of sub-saharan Africa s GDP by industrial sector Source: Japan External Trade Organization Figure II Labor cost levels in major Asian and African countries (2014) Country Labor cost in the manufacturing industry (USD) Yangon (Myanmar) 127 Hanoi (Vietnam) 173 New Delhi (India) 369 Shanghai (China) 474 <Africa> Abidjan (Cote d Ivoire) Nairobi (Kenya) Johannesburg (South Africa) 728 Source: Japan External Trade Organization (C) Underdevelopment of infrastructure The underdevelopment of basic infrastructure essential to urbanization and industrial development, including electric power facilities, waterworks, ports and roads, is pushing up costs. The electricity 624

6 access rate and the tap water diffusion rate in sub-saharan Africa are low (Figure II ). In addition, railway transportation is underdeveloped, and land transportation is also afflicted with such problems as lagging road improvement and paving of roads. Resource development in inland areas also faces logistical problems, so it is an urgent task to develop such basic infrastructure. Figure II Tap water diffusion rate by region Source: Ministry of Land, Infrastructure, Transport and Tourism, based on Global Water Market 2012 (3) Other countries trade with and investment in Africa As was already mentioned, Africa is attracting attention from countries around the world as the last frontier on earth that is brimming with potential. Regarding investment in particular, Europe, the United States and China are actively increasing investments in Africa, leaving Japan far behind. France, the United States and the United Kingdom all have outstanding balances of direct investments in Africa around five times as large as that of Japan (Figure II-4-1-9). In particular, China is actively making investments in infrastructure projects, including road and railway building and construction of ports and industrial zones, and awareness of the presence of China is growing in Africa. In contrast, in the case of Japan, its presence in Africa still has room for further growth compared with its presence in Asia and other regions. Business locations established by Japanese companies in Africa account for less than 1% of the total number of business locations established by them around the world (the number of business locations established by Japanese companies in the Asia-Pacific region accounts for more than 70% of the total) (Figure II ). In the future, it will be important for Japan to gradually increase its presence in Africa in fields where it is competitive by boldly advancing into the region through mergers and acquisitions (M&A), among other measures. 625

7 Figure II Balances of direct investments in Africa by country (USD M) 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 France US UK China Japan Germany ROK Source: Presentation material at the Seminar on Business and Investment in Africa on March 3, 2016 (JETRO) Figure II Number of business locations established by Japanese companies (as of October 2014) 60,000 50,000 40,000 30,000 20,000 10,000 0 Asia and Oceania North America Europe and former Soviet Union Latin America Middle East Africa Source: "Statistics on the Japanese National Residing Overseas" (Ministry of Foreign Affairs) As for trade, China has been recording remarkable growth in both imports from and exports to Africa since Especially, countries dependent on exports of resources such as crude oil and minerals tend 626

8 to depend heavily on trade with China. Although exports from Africa to the United States continued to grow significantly up until a certain point in time, export items were mostly resources, and subsequently, exports to the United States declined rapidly as a result of the shale gas revolution. European and Japanese trade with Africa has not grown much. In particular, the value of Japanese trade with Africa is lower than the value of European trade. Many African countries have high export dependency on resources, and governments of some of those countries are in a severe fiscal position due to the recent slump in resource prices and the slowdown of the Chinese economy. Thus, it will be necessary in the future to pay attention not only to resource prices but also to the Chinese economy, among other factors. 2. Current status of individual markets in Africa In Africa, the economic situation differs significantly from region to region, with different regions having an advantage in different industrial sectors. For example, in Nigeria, which has the largest population and GDP in Africa, demand for housing is growing and creating housing-related market opportunities. South Africa, which has a high industrial level, is facing a shortage of electricity, providing market opportunities related to renewable energy (Figure II ). As indicated above, when analyzing Africa as a market, it is necessary to take account of regional characteristics. Figure II Market opportunities in major African countries The industries are shown in descending order of potential level. Items in red letters are information updated after the field survey. 627

9 Source: Basic Survey on Economic Partnership among African Regional Communities (a survey commissioned by METI) (PricewaterhouseCoopers Aarata LLC) (1) Four-wheel vehicles and motorcycles The current size of the African market for four-wheel vehicles is 1.6 million units (new vehicles, 2014). The market is expected to expand in line with future economic development. Currently, Japanese companies are engaging in manufacturing and assembly in South Africa, Nigeria and Egypt, but they have little presence in other parts of Africa. As some manufacturers are importing products from India, which is somewhat similar to South Africa geographically and economically, business activities are being conducted with an eye to the possible formation of an economic area including ASEAN and India. In the future, it will become important to establish production facilities and capture markets not only in South Africa but also in other regions with high potential. The size of the African market for motorcycles is 4.5 million units, small compared with the Indian market (20 million units). In Nigeria, whose motorcycle market has a certain size, Japanese companies are engaging in assembly. However, as many low-price motorcycles made in India and China are available in the market, differentiation is essential. As the market is expected to expand in the future, it will be important for Japanese manufacturers to pursue differentiation from foreign competitors through product development tailored to the local needs in terms of durability, fuel efficiency and loading capacity, among other factors, while curbing costs through local production. (2) Consumer goods, services, etc. Consumer goods and services companies which have successfully advanced into the African market are expanding their shares through active risk-taking activities, including M&A and the establishment of local subsidiaries. Regarding consumer goods, it is important to conduct business in a manner suited to the local circumstances, and it is also necessary to explore forming alliances with local companies with existing customer bases and distribution networks. In many cases, there are well-established business practices, so it is important to implement business activities (administration, product development and sales) while making use of M&A and other measures in light of the local situation. (3) Infrastructure While Japanese infrastructure technologies have a high level of quality, they tend to feature overly high standards compared with the local infrastructure needs. Regarding simple facilities for which differentiation is difficult in particular, Chinese and other foreign companies have price competitiveness in some cases. In the future, it will be necessary for Japanese companies to identify sectors where they have a comparative advantage and select sectors for investment. For example, in the geothermal sector, Japan is competitive as shown by its global share of 70% concerning turbines used for geothermal power generation. In Kenya, many geothermal development projects are ongoing, and development is also expected in the neighboring regions as well. In addition, Japan can achieve differentiation in the market for advanced infrastructure, including new urban transportation systems (the yurikamome system) and 628

10 seawater desalination systems, by taking advantage of its cutting-edge technology, so this may be a promising sector in the future. (3) Resource development Although Africa is rich in natural resources, it has become difficult to recover investments in some cases due to resource price falls in recent years. In other cases, foreign companies are put at a disadvantage by revisions made by local governments to laws and institutional systems. There are also cases where a labor dispute is raised by local employees or where a protest movement is launched by local residents who do not directly benefit from resource development. It is necessary to conduct activities that lead to local job creation and technology transfers while building relationships of trust with local residents. (5) Agriculture In Africa, demand for foods is expected to continue to grow in line with the population growth. However, as agricultural productivity is not high, there is dependence on imports for supply of foods in many cases. Meanwhile, Japan has a high level of agricultural technology, so it may consider entering the African market in the form of supporting the improvement of labor productivity that Africa is seeking. For example, Africa also depends on imports for the supply of agricultural fertilizers in many cases, while some Japanese companies are moving to build fertilizer factories in the region in anticipation of future growth in demand there. Localization of fertilizer production is expected to lead to the enhancement of the agricultural industry s competitiveness and a decline in food prices, so it is important for Japanese companies to enter the African market in a way that will lead to the improvement of local capability in terms of productivity. (6) Healthcare In African countries, where the population is expected to grow, the healthcare sector will grow significantly as a market in the future. Meanwhile, the challenge for the moment is fighting against infectious diseases and reducing the maternal and infant mortality rates. As a result, healthcare is more in the nature of assistance by the World Health Organization and official development assistance (ODA) than business. The market for magnetic resonance imaging (MRI) and computerized tomography (CT), in which Japanese companies excel, is still small, and there is a shortage of personnel capable of handling advanced equipment. In the future, it will be important to consider demonstrating the appeal of examination appliances in which Japan is superior, such as MRI and CT appliances, to relevant organizations by combining hardware sales with intellectual support: such as supporting training of personnel capable of handling such appliances, in addition to developing low-price products tailored to the needs of user countries. If Africa ceases to depend on ODA and African governments and private hospitals become able to procure medical appliances with their own funds, business opportunities are expected to increase further. (7) ICT 629

11 In Africa, there are strong needs for information and communication technology (ICT) in the field of public safety from the perspective of the fight against terrorism and crime. The use of ICT to make airports and ports more advanced contributes to efficiency improvement of the movements of goods and people. On the other hand, as the African market is small compared with the Asian market, it is difficult to introduce systems that require high initial costs. Japanese companies have an advantage in the field of biometric identification systems, including facial and fingerprint recognition systems, and in some cases, Japanese companies have participated in national personal identification systems in Africa countries. 3.Future Direction of the African market Although the African market is facing various challenges, it has high potential, which means there is ample chance for Japanese companies to capture the market. On the other hand, as was mentioned earlier, there are many small countries in Africa, so instead of focusing on individual countries markets, it is necessary to look at broader geographical regions. In regional communities such as ECOWAS and EAC, there are initiatives to achieve economic integration, including a customs union and currency integration, at the regional level, and attention needs to be paid to those communities activities. It is important for Japan to accelerate the conclusion of investment treaties with priority countries in Africa (investment treaties have already been concluded with Egypt and Mozambique) in consideration of their future potential and consider providing support for the development of trade rules between African countries on a community-by-community basis. It is also necessary to have a broader perspective and consider expanding exports to Africa from ASEAN and India, for example, with an eye to the creation of a broader economic area that includes Asia. From the medium- to long-term perspective, it is important to achieve industrial diversification, which will help to avoid the effects resource price movements. To that end, it is important to develop the manufacturing industry and promote a break with a monoculture economy as represented by the economy of a resource-exporting country through the development of urban and logistics infrastructure and human resources and a curb on labor cost. It is also necessary to take measures to make improvements that form the foundation of a break with a monoculture economy, including productivity improvement in the fields of food and agriculture and improvement in health and sanitation made through countermeasures against infectious diseases, for example. It is important for Japan to support promotion of investment using a network of JETRO offices, for example, in order to achieve industrial diversification while promoting resource development investment, infrastructure development and agricultural development through the use of ODA and government-affiliated financial institutions. When Japanese companies expand into Africa, they are expected to achieve business expansion with an eye to possible cooperation with third-country companies from India and Europe, as many Indian and European companies have already advanced into Africa. Regarding the details of the progress in debates at international conferences such as TICAD, refer to Part III, Chapter 2, Section