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Avoiding the common pitfalls in African expansion

The rate at which local organisations have ventured into Africa has to date remained slower than that of their European and Chinese counterparts. However more and more South African companies are realising the importance of expanding into Africa as part of their growth strategy

The rate at which local organisations have ventured into Africa has to date remained slower than that of their European and Chinese counterparts. However more and more South African companies are realising the importance of expanding into Africa as part of their growth strategy. Whilst this certainly makes business sense, Theodore Josias, Head Africa Expansion at SizweNtsalubaGobodo says there are a number of common pitfalls both local and global organisations seem to fall prey to when setting up an operation in Africa.

"A number of South African companies have failed in their African expansion bids or are paying a very high price for entering into territories. In these instances many failed to understand that simply transplanting products and services that work well within the South African context, do not necessarily mean they will be successful in other territories.

"A full on-the-ground investigation is therefore essential in order to truly understand the culture and preference of the populations in the various territories as opposed to just the population size, income per capita and growth rate. Failure to do this could spell disaster for any company intent on creating an African footprint,” he comments.

Here Josias stresses the importance of doing adequate homework upfront. "Organisations often fail to realise that unlike Europe, Africa is not a homogenous continent with different cultures, languages and regimes country to country, the lessons learnt in one particular country are not necessary applicable to others.

"For instance organisations need to ensure they understand not only the macro-environmental barriers to entry, but also the basic micro-environmental factors such as tax regimes, exchange controls, work permits in terms of quotas for expatriates, and business licence requirements.

"Not doing the research often sees organisations making the same common mistakes such as not declaring importation of capital equipment properly and not being able to repatriate funds due to the capital investment or funding of operations not having been made through the right channels,” he explains.

However when it comes to doing the homework, Josias says this also needs to be conducted at a higher level in terms of how the investment and shareholding is structured, whether the operations should be undertaken in a branch or subsidiary or even a representative office, be it an South African or international investment.

"When investing or expanding in Africa, organisations often opt for an intermediary vehicle with a more tax effective structure such as Mauritius, Seychelles, or British Virgin Islands for example. Here naturally the organisation will have to consider local withholding taxes and the double tax treaties between countries.

"Expanding organisations also need to keep in in mind the type of operation they anticipate as activities under a representative office are often restricted where only business development functionality is permitted as opposed to revenue generating functionality,” he elaborates.

And whilst organisations often have a clear strategy as to how they will go to market, Josias says having a pre-planned exit strategy is another aspect that is often overlooked.

"Planning and thought needs to be given as to whether you will be starting an organisation from scratch or through joint venture partners with the aim of knowledge and technology sharing. If the latter, adequate due diligence will need to be conducted with regards to perspective business partners.

"When it comes to the exit strategy on the other hand, organisations should be aware of what their end-game is. For instance at what stage when it comes to on-the-ground-operations, tax efficiency, double agreements, exchange controls is it time to begin exiting,” he explains.

Another aspect Josias says organisations expanding into Africa should be aware of is underestimating the time it takes to set-up and conduct business on the continent.

"Organisations should also understand that they need to ensure they have the right people or advisors in place to assist with certain logistical and legislative requirements.

"And in addition to having the necessary support organisations would do well to heed the cultural nuances inherent in conducting business in each respective African country where it is important to be respectful of business partners and local business practices,” he says.

Back office and operational considerations are additional areas that Josias says are not given much thought when it comes to setting up in a new territory.

"Monthly accounting, processing payrolls, payments to employees, in-country payroll taxes together with the often myriad of social security contributions can be an overwhelming challenge, particularly if organisations are operating across more than one country.

"Here organisations need to be aware of the various local statutory accounting requirements. For example in Franco and Lusophone countries companies must adopt the local chart of accounts in local currency, and in in most countries payroll taxes and social security payments have to be conducted in-country as EFTs are not accepted.

"It is for this reason that many organisations opt to outsource this function to reliable business referral partners as it may be more efficient and cost effective to do so, at least initially,” he adds.

And while the challenges are numerous, for Josias so are the opportunities. "A huge advantage across the continent is the fact that developing nations are able to leapfrog over old technology, replacing it with cutting edge industry best-practices.

"The continuing incline in the uptake of mobile and increasing internet penetration provide particularly exciting opportunities for organisations considering African expansion,” he concludes.