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Invest in Africa | Africa to Embrace Digital Economy

Released on:2020-05-14 Views:

By Huang Yunqing and Shen Ziyi

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Investment_Reference

China Investment magazine, established in 1985, is a monthly at the central government level. It publishes the Belt & Road Edition and African Edition on a monthly basis. China Investment has been commenting on the Chinese investment from a global perspective, with coverage on macro-economies, industrial analyses and case studies of business investment. In the meantime, it has taken a broad view to the global market with a focus on specific countries, regions and major international trends.

 

Introduction

African countries should seize the opportunity of the digital economy to further improve infrastructure, accelerate industrialization and modernization, and fully unleash their development potentials. In the meantime, the digital economy will enable innovative interpretation of China-Africa cooperation.

● Three areas of interest further facilitate people's life

● Development of soft and hard infrastructure lays a foundation

● Africa's digital economy faces three bottlenecks

● Africa's digital economy has a long way to go

 

African countries have been constantly exploring ways to achieve leapfrog economic development. In recent years, the application of digital technology and new business model as an important engine driving the development of digital economy in Africa has been highly expected by African leaders such as President of South Africa Matamela Cyril Ramaphosa and President of Rwanda Paul Kagame. In April 2018, the World Bank launched the Digital Economy for Africa Initiative, calling on governments, relevant enterprises and international capital to participate in the construction of digital economy in Africa, with a view to achieve "full coverage" of the digital economy in the region by 2030. Following the Initiative, Kenya, Rwanda and other countries successively announced digital transformation strategies. African countries are gradually reaching a consensus on developing the digital economy, and various new formats relying on digital technology have begun to vigorously develop in Africa. Africa is on the threshold of an important test where digital technology is stimulating business vitality, reshaping the way of living and changing consumption habits.

Three areas of interest further facilitate people's life

At present, Africa's digital economy is mainly developing in three areas of interest, namely mobile payment, e-commerce, and travel services, all of which accurately target the local people in Africa and facilitate their daily life and consumption.

As the particular highlight of financial technology (FinTech), mobile payment has been widely used to effectively ease the shortage of financial services in Africa. Limited by some objective factors such as backward infrastructure, traditional financial markets in Africa has shown a trend of sluggish development for a long time. Banking penetration and account holding rates in Africa are generally lower than those in other countries and regions, which makes room for the rapid development of mobile payment. According to the International Monetary Fund's (IMF) report, the proportion of residents trading with bank accounts is relatively low in sub-Saharan Africa, with only a 20% bank account holding rate, which is far lower than the global average. However, its holding rate of mobile payment accounts is close to 25% and the total amount of mobile payment trade accounts for 20% of GDP, outperforming other regions in terms of the coverage of mobile payment services and the proportion of active users. According to the data from the GSM Association (GSMA), 2017 saw a global daily mobile payment turnover of USD 1 billion. There were 690 million registered mobile payment users worldwide, while those in sub-Saharan Africa accounted for 49.1% of the total, which indicates that local Africans have composed an important customer group that cannot be neglected in the global mobile payment market. It is worth mentioning that the increasingly mature mobile payment system has also led to the spillover effects of positive externality in many fields. First, it provides a relatively stable basic trading framework for e-commerce, foreign trade and other relevant industries, promoting the continuous improvement of the regional business environment. Second, it has nurtured many mobile payment brands such as M-Pesa, creating numerous jobs while promoting the continuous improvement of supporting communication facilities. Third, it makes room for the development of P2P, small and micro credit, and other innovative financial products, guides the rational allocation of funds, expends financing channels for the private sector, and improves the resilience of African capital markets to a certain extent.

As for e-commerce, local e-commerce giant Jumia, which is dubbed the "Alibaba" in Africa, listed on the New York Stock Exchange in April 2019, raising funds of more than USD 200 million. Its performance aroused the concern of international capital on Africa's e-commerce industry. With the enhancement of residents' consumption ability, Africa's retail industry is experiencing an opportunity period to accelerate its development. However, the diversified consumption needs of the public are barely met due to the limited sales coverage of a small number of shopping centers and department stores only existing in major cities, as well as chaotic informal retail outlets such as open-air fairs and roadside vendors. The rise of e-commerce has effectively expanded the reach of traditional retailing in Africa, and online shopping has become a popular mode of consumption for the younger generation in Africa. E-commerce is growing at a speed far higher than the overall retail growth in the same period. According to the data from the United Nations Conference on Trade and Development (UNCTAD), Africa registered an 18% average annual growth rate of online shopping users from 2014 to 2017, becoming one of the fastest growing regions in the world. Data from Germany-based Statista show that the market scale of e-commerce in Africa reached USD 18 billion in 2019. According to McKinsey's prediction, the average annual growth rate of e-commerce in Africa is expected to reach 40% in the next decade. In 2025, e-commerce in Africa will reach a scale of USD 300 billion, accounting for 10% of total retail sales in major African markets. According to Boston Consulting Group's report, e-commerce will create about 3 million new jobs in Africa by 2025.

As to travel services, benefiting from factors such as demographic dividend and the opening-up policy, Africa has witnessed steady economic growth in recent years. Domestic and cross-border commercial activities have increased significantly in various countries, resulting in a remarkable imbalance between the progressive development and the relatively backward local public transport service system. Africa is facing the surge of travel demand, and international capital begins to focus on the African market. For example, Uber, a famous technology company, officially went into operation in Johannesburg, South Africa in August 2013. Over the six years since it entered the African market, its business has expanded to 16 major cities in 8 African countries including Nigeria, Kenya and Egypt, with a monthly average of 2.7 million active users and nearly 60,000 drivers online. To fully explore the potential of the African market, Uber not only launched motorcycles (uberBoda), low-cost vehicles (uberCHAPCHAP) and other featured products, but also plans to explore more markets including Uganda and Tanzania, which shows Africa's rising importance in Uber's global development plan. In addition to Uber, European ride-hailing giant Taxify (now renamed Bolt), Little (under Safaricom, Kenya's biggest communication operator) and other renowned enterprises are also pacing up their exploration in the African market by means such as expanding services to more countries, providing diversified services and integrating the upstream and downstream industrial chains. It is expected that when the market becomes better-developed in the future, online ride-hailing and other related services will become the key methods to shore up the weak transportation system in Africa; local people will choose transport mainly by digital means; and industries such as logistics and trade, transportation and tourism may be reshaped.

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Development of soft and hard infrastructure lays a foundation

It is internally makes sense that Africa's digital economy achieves accelerated development. Among the facilitating factors, the development of soft and hard infrastructure lays an important foundation. The first is the continuously increased Internet penetration rate. According to data from the International Telecommunication Union (ITU), the Internet usage rate in sub-Saharan Africa has increased from 7% in 2010 to 25% in 2018. The number of servers per million people increased from 3.6 in 2010 to 760.4 in 2018. Higher Internet usage rate lays a foundation for Africa's digital economic transformation. The second is the rapidly growing mobile communication. The popularization of mobile communication promotes the growth of the digital economy. GSMA reported that by the end of 2018, mobile communication users in sub-Saharan Africa reached 456 million, accounting for 44% of the total population, and that the number of Internet users would surpass 600 million by 2025. The development of mobile communication is closely related to the explosive growth of terminal devices. According to the measurement of International Data Corporation (IDC), 88.2 million smartphones were sold in Africa in 2018. The third is the improved logistics conditions. Logistics distribution is an indispensable link in e-commerce, so logistics conditions are very critical to the success in e-commerce. Logistics in African countries are largely restricted by generally underdeveloped transportation infrastructure, weak connectivity between sub-regions and lengthy and jumbled customs clearance procedures. However, with progress made in regional integration such as the construction of the Northern Corridor in East Africa, Africa's logistics transportation has been improved. In addition, with the Agreement Establishing the African Continental Free Trade Area coming into force, logistics conditions will be further improved and e-commerce development is expected to pace up.

Africa's digital economy faces three bottlenecks

Africa undergoes long process of industrialization with ups and downs, and its digital economic transformation will not accomplish at one stroke. At present, the further development of Africa's digital economy is confronted with at least three bottlenecks. The first is that communication network infrastructure is still underdeveloped and lacks strength for future iterative development. The 3G and 2G technologies remain the dominant mobile communication technologies used in African countries. By the end of 2018, 4G network coverage in Africa was only 7%, 44% lower than the global average. Limited by the underdeveloped communication network infrastructure, Africa's mobile Internet service still faces such difficult problems as high costs and slow speed. Video-based 4G application scenarios such as online education and telemedicine can hardly be implemented. The second is that digital technology is mostly applied on the consumption side and is not fully integrated with the production side. At present, the application of digital technology in Africa caters to its economy that has long been dominated by consumption but is not fully integrated with the production side. If the development of the digital economy in Africa is limited to consumption and trading, it will not help Africa's industrialization and economic independence but will encourage consumerism. In the long run, it is not conducive to the healthy and sustainable development of Africa. Future investment in Africa's digital economy should focus more on the integration with the production side, widely apply digital technology in production and manufacture, enhance production efficiency and promote industrialization through developing smart manufacturing and industrial IoT. The third is that inadequate talent reserve and insufficient innovation capacity are outstanding in Africa. Most African countries can provide only a limited level of education with their people mostly being under-educated. With difficulty in transferring demographic dividends into talent advantages, Africa particularly lacks ICT talent needed in the development of the digital economy. Africa's current digital economy is more about the transplantation and application of existing technologies and models, while endogenous innovation, self-dependent innovation and local innovation are largely restrained.

Africa's digital economy has a long way to go

The digital economy, as an important part of the fourth industrial revolution, will bring new driving forces to Africa's economic growth. African countries should seize the opportunity of the digital economy, embrace new technologies, new models and new formats with an inclusive and open mind, and give full play to their natural resources and demographic advantages to further improve infrastructure, accelerate industrialization and modernization, and fully unleash their development potentials. The digital economy will also trigger new forms of China-Africa cooperation. Currently, about 80% of Africa's backbone network infrastructure is funded and constructed by Chinese enterprises. The further development of Africa's digital economy will enable China and Africa to have complementary advantages and expand areas of bilateral cooperation, thus achieving win-win development at a higher level. Over the decades, African countries have made countless explorations in their pursuit of independent and sustainable development. Likewise, though Africa's digital economy has a promising future, there is still a long way to go. How will digital technology improve the quality and efficiency of Africa's economic growth in the future? We shall see.

Source: Investment_Reference