"Gold Rush" in the technological development of Africa

Africa is approaching some serious events. On this point, it seems, there is already not explicitly expressed, prudent agreement in some investment communities. Last year was marked by the emergence of a multitude of technology start-up centers across the continent from Lagos and Kigali to Agadir. The model of American technical entrepreneurship seems to be beginning to flare up under the sky of the Silicon Sahara.

As the attention of American venture capital focuses on African entrepreneurs, it turns out that many questions still have no answer. Will Africa be the place where the next global technology "gold rush" will break out? Can these markets remain stable enough to grow new Internet companies worth billions of dollars? Does Africa have what it takes to reproduce Silicon Valley? The answer is a clear "Yes." African technology has a great future.
But to understand the rising star for Africa, you must first understand why the road to Africa goes through China.

Encierro or running from the bulls in Chinese: a roller coaster of the Chinese economy

Looking back, it is absolutely clear that the Chinese credit crunch and collapse of the Shanghai Stock Exchange index should not have come as a surprise to anyone. Since the beginning of the 90s of the last century, the Chinese economy has constantly, year after year, grown at a fantastic pace - from 8 to 16 percent (dropping only once to 7 percent during the global financial crisis). This was mainly due to the fact that the West began to transfer to China - due to the lower cost of labor in China - its traditional production and attract Chinese artists.
The Chinese middle class gained exceptional profits as a result and grew at that time tremendously, as production created new material values ​​for the developing agricultural economy. It seemed inevitable that the process would end at some point — although it was completely unclear when this roulette wheel would stop.

Credit squeeze, slower growth and discounted construction loans all challenged stable, harmonious China.
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The first warning signs appeared in 2013-14, when reports of Chinese “ghost towns” began to leak in the media.

Developers were deeply in debt because of loans obtained mainly from state municipalities for the construction of ambitious megacities in which the next wave of the urbanized Chinese middle class was supposed to settle. However, a problem arose: this next wave did not come.

As information about defaults in construction began to flow upwards, the People's Bank of China probably became aware that growth might slow down - for the first time in several decades. Meanwhile, the United States and - to a lesser extent - Europe slowly but steadily recovered from their recession.

Harmony and stability are the main values ​​in the policy of Chinese President Xi Jinping - and in the overall value system of China as a whole - and are honored in the same way as in America, freedom and equality. Credit squeezing, slowing growth and impaired construction loans all challenged a stable, harmonious China and threatened the newly emerging middle class who wanted to return their capital. Therefore, the Chinese Communist Party has sent small investors to a new class of assets: public stocks on the Shanghai Stock Exchange.

From mid-2014 to mid-2015, the Chinese stock market became an investment sensation, having doubled in value in less than a year. It seemed that the Communist Party of China had solved the problem of what to do with the surplus of funds accumulated by the middle class - but in June 2015 this market collapsed impressively.

And here again sounded warning "bells". Companies, such as, for example, Shanghai Duolun Industry, were renamed, declaring themselves "technological", and made outlandish statements that their domain names alone cost hundreds of millions. Then I concluded - frankly, being not sufficiently informed - a cheeky bet, putting on the collapse of the Shanghai index. A number of bear investors and I won, but many millions of Chinese, alas, no.

Now that the Chinese stock market is entering the third phase of a fall in less than half a year, dropping by more than 20 percent, Chinese small investors are looking for an attractive asset class to invest their capital.

But why does this matter to Africa? While for the first time China collected the unexpected fruits of its significant growth and dealt with the investment challenges of the “free” market within its borders, it, without attracting everyone’s attention, consistently expanded its investments also outside the country.

The Tale of the Chinese Patron and the African Worker

War, famine, malaria, tribalism, the Ebola virus, oppressive poverty - these are common representations of a Westerner, appearing in the imagination at the mention of Central and West Africa - the territory south of the Sahara desert. Since the end of the last world war, such images reflected, unfortunately, the conditions of some unstable African republics. Under the influence of motives stretching from charity and profits to the "white man's holy duty", the Western world in the past half century has poured a sea of ​​money into the African continent to fight these evils.

However, in the past decade, China has quietly but steadily increased its foreign direct investment (FDI) in Africa based on its dizzying economic growth. For five years - only from 2003 to 2008 - the average annual growth rate (CAGR) of Chinese investment in Africa was 105 percent - from $ 75 million in 2003 to $ 5.5 billion in 2008. The same happened with imports / exports between China and Africa, which grew from 10 billion dollars in 2003 to more than 50 billion dollars in 2008.

Why does China invest so much in Africa?

In contrast to Western investments, China’s insatiable attraction to Africa’s labor and material resources is directed not only to countries with proper government administration. The only two selection criteria for Chinese investment in this continent are stability and profitability. This allowed China, whose share in FDI in Africa is still only 3 percent, to seize the lion’s share in some of the major markets of FDI recipients, for example, in countries such as Sudan, the Democratic Republic of Congo and Nigeria, which are positioned very low in the world democracy rating. Zimbabwe, which has long been a thorn in the face of the Western world, recently made the yuan its official currency, which actually turns this country into an economic vassal of China.

And this new direct investment stream still leaves unanswered the big question of the West: Why does China invest so much in Africa? A common opinion believes that Chinese investors want to get African resources - for example, the mining industry - as a kind of “fuel” for China’s huge industrial sector. However, the facts say something else: China is in no hurry to move its industrial sector and service sector to Africa. Indeed, 38 percent of China’s FDI to Africa comes from manufacturing and construction, and 20 percent comes from finance and business services.

But why does this matter to Africa? Most likely, this means that over the past two decades, as the Chinese middle class grew and became richer and as Western standards for factory labor became more stringent, Chinese goods gradually became more expensive. Proof of this is that China has consistently devalued the yuan in recent years to keep its exports low. But at some point, prices will eventually “squeeze” manufacturers, and China will have to find cheaper manufacturers in order for its companies to be competitive. And then - welcome to Africa!

Chinese investments in Africa show no signs of slowing down, despite difficulties with loans and developments on the Chinese stock exchange. If all this continues this way, Africa could become a new “world factory” in the next 10–20 years, and the African middle class could be pulled out of agrarian poverty as quickly as it happened in China in the last 20 years. Why don't Chinese investment go on? Compared to the boom and slowdown in Chinese debt and stock markets, the African FDI market looks remarkably stable.

As long as China, as the Medici family in Italy during the Renaissance, continues to be the patron of the entrepreneurial producers and builders of Africa, both sides will make money on this, and the African middle class will grow.

From the "blue collar" - to the "white collar" and business neckline: Africa goes forward ...

Silicon Valley is already fed up, it is saturated with capital. At the very least, it seems that some of its largest investors are looking to the west impatiently. In the past few years, Sequoia, Matrix, Tiger Global Management and other venture capital firms and investment funds have been pulled into capturing territory for Chinese Internet startups. They faced rather fierce competition from Chinese investors, such as Tencent and Alibaba. China is viewed as a “conquering market” for mega-stars, such as Uber or WhatsApp.

Two factors stimulated all this foreign investment activity: an increasingly saturated venture capital market and private investment for American technology and the prospect of developing economies such as China and Brazil (another important point of investment for American venture capital). The growth of China’s middle class has led to a mature, stable business environment that supports entrepreneurs like Jack Ma, the creator of Alibaba, at the foundation and successful development of startups.

"Africa in the near future could be the next platform for huge investments."
- The World Bank

In the next 20 years, Africa will follow the familiar path. As an increasing number of manufacturing and service companies come to more and more stable African economies to conduct their foreign operations, the African middle class will grow. And as it grows and the wealth and stability of the business environment increases, entrepreneurs will emerge on the emerging scene of African technology startups.

It is important to note here the tempting temptation to over-average Africa. The Western world tends to think of Africa as a kind of single entity, whereas even nearby countries, for example, Egypt and Rwanda, in fact, differ from each other more than Luxembourg from Turkey. Some will welcome the possibility of technological development; many are not.

But the first signs are encouraging. Literacy and education levels are rising rapidly. Research shows that entrepreneurship is the best growth driver on this continent. The Rwandan government announced the creation of a $ 100 million venture fund for technology entrepreneurship in the country. Djibouti is developing rapidly, intending to become the Singapore of East Africa. However, mobile communication is still far from realizing its full potential. And at the same time, the World Bank states that “Africa may be the next platform for giant investments in the near future.”

It is tempting to look down on all this a little and characterize these entrepreneurs as “African solutions for African problems”, considering them only as incubators for a social enterprise. People from the West, hearing about these startups, paint themselves images of mosquito nets, clean water systems, cheap lighting and vaccines against malaria. However, in reality, these companies are fighting for the same markets in order to distribute the same products as Western firms, but with new tactics.

It cannot be said about her that she does not yet give an unclear, but impressive opportunity to collect what KK Prahalad calls "wealth on the basis of the pyramid." Excellent knowledge of local conditions allows entrepreneurs to create new services that - in the understanding of the representative of the West - do not even make sense; for example, the repeatedly ridiculed application “Yo!”, which is smugly - and correctly - said Mark Andriessen, enjoys great success in Bangladesh.

Just look at China to get confirmation of extremely tough local competition. Didi Kuaidi has 7 million daily visits to China against 1 million from Uber - in the market, which, as Uber has repeatedly stressed, is the most important. You can look at Alibaba, which challenged the monolithic supremacy of Amazon’s online company in online sales, and also covered payment affiliates (Alipay and ANT Financial), streaming music (Xia Mi) and news (South China Morning Post). ). Tencent's WeChat with its 650 million users versus 900 million from WhatsApp could be an example.

As emerging-market support structures grow in emerging markets, they gain access to resources that have supported Silicon Valley for 30 years and directly compete with its start-ups. Let us listen to the words of the Andela center, an educational startup in Nigeria, supported by the American venture capital firm Spark Capital: “Genius is evenly distributed in the world, opportunities are not.”

And this is just the beginning.

Write this article prompted conversations by Daniel Zuckerman, Mo Elbibani and Robert Tavs. This article and the opinions expressed therein are entirely my own and are not related to or belong to my employer or other associates.