Forget Asia — businesses that dare to venture into Africa are poised to reap the rewards

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Michael Zahra, chief executive of Drone Delivery Canada Corp., made a calculated bet last fall that he could grow his business in a market where few Canadian companies have dared to venture.

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He set his sights on Africa, more specifically, Kenya, a country of more than 48 million people that averaged economic growth of about six per cent between 2010 and 2019, according to the International Monetary Fund.

Vaughan, Ont.-based Drone Delivery builds drones, develops the software that controls them, and supplies hangars where customers can park their remote-controlled aircraft. Since the start of the year, the six-year-old company has brought in revenue of about $250,000, all of it from Canada.

Zahra intends to change that. His growth strategy heavily relies on international sales and Africa is among the first places where he’s put down a marker, a decision that might hint at a shift in Canada’s thinking about a continent that imports a quarter-trillion-dollars worth of goods.

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A year ago, the company signed a letter of intent with Astral Aviation Ltd., a Nairobi-based cargo airliner that flies to 50 destinations in Africa. It was one of Zahra’s first forays outside North America.

Together with Astral Aviation, Zahra will seek out clients that could benefit from Drone Delivery’s services and work with the Kenyan aviation authority to give expert insight on drone regulations, which are still being written in many countries because the technology is so new. The tie-up with Astral hasn’t yielded any sales yet, but he’s confident the business will come eventually.

“These are massive markets with sophisticated business environments, sophisticated economic environments, huge populations, definite commercial and social needs,” he said in an interview.

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International trade has received little attention on the campaign trail, but the policy books suggest that the next government could take an interest in Africa, a part of the world that Ottawa has mostly ignored for the better part of two decades.

The Liberal platform states the party would develop a strategy of “economic co-operation” to support the recently ratified African Continental Free Trade Agreement (AfCFTA), increase infrastructure investment and expand partnerships in research and innovation.

Conservatives say they would partly reorient Canadian supply chains to Africa and “fully engage” with the 54 members of AfCFTA, “particularly in infrastructure, energy transition, technology, minerals, and food security partnerships.” They also plan to pursue an intelligence-sharing partnership with the African Union and establish “strategic outlooks” with a select few countries.

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The New Democratic Party hasn’t made any mention of trade with Africa.

Recent history suggests there is reason to doubt Ottawa’s commitment to Africa, but acknowledgement of the continent’s potential is a start.

These are massive markets with sophisticated business environments, sophisticated economic environments, huge populations, definite commercial and social needs

Michael Zahra, chief executive, Drone Delivery Canada

Canada risks missing out on a wealth of opportunities if companies and governments don’t get serious about a continent where the average age is 19.7 and the per-capita gross domestic product is only US$1,483.80, said Dan Ciuriak, a consultant who was formerly the deputy chief economist at the federal trade department.

Between 2001 and 2018, Africa imported US$250-billion worth of goods, but, so far, the European Union and China are reaping the rewards of that expansion, supplying US$140 billion and US$100 billion of those imports, respectively, Ciuriak said.

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“Canada went from $1 billion exports (in 2001) to more than $3 billion (in 2018), which is great in terms of percentage growth, but it was peanuts in terms of the share of the overall pie,” he said. “We did miss out on the big story in the last 20 years and by ignoring it, we risk losing out on the next wave as well.”

Canada calls itself a “trading nation,” but that has historically meant sending stuff to the United States, the destination of about 70 per cent of Canadian exports. Companies and diplomats that do work up the courage to look beyond North America tend to first look at Asia, which has emerged as the main engine of the global economy.

A recent report by Export Development Canada (EDC) analyzed historic trade data to determine future growth opportunities around the world. Current trade volumes didn’t leave the authors with much reason to encourage exporters to consider Africa. EDC grouped Africa with the Middle East and predicted the region’s share of Canadian exports would remain flat in the years ahead.

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The report also predicted that the share of exports destined to Asia and Oceania would climb to 17 per cent of the total in 2030, from 12 per cent in 2019.

Asia became a central focus for Prime Minister Justin Trudeau’s government as it tried to diversify the country’s trade portfolio, especially after the COVID-19 pandemic disrupted global supply chains. The issue, however, is that many other countries, such as the U.S., are also chasing the region after realizing the economic toll of relying on China’s supply chains and manufacturing.

“I always say, ‘Think about where people are not going,’” Ciuriak said.

Pursuing the Asia-Pacific is worthwhile, but Australia, which tends to sell the same goods and services as Canada, will likely have better luck because of its proximity to the region’s fast-growing economies.

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“We’re going to some place where everyone’s lined up,” Ciuriak said. “Take a number.”

In 2019, two per cent of Canada’s merchandise exports went to Africa and the Middle East and the EDC report predicts that will grow to a measly 2.1 per cent in nine years. That’s nothing to get excited about.

But Ciuriak said the report doesn’t account for upcoming structural changes to African economies, which boosts the potential for Canadian businesses.

The AfCFTA would integrate 1.3 billion people across the continent, making trade easier to conduct. The middle class in sub-Saharan Africa will grow 86 per cent to 212 million people by 2030, creating a bigger cohort of consumers, according to a report by Ciuriak. The population of working-age residents is set to balloon from 700 million to one billion by the same year, expanding the labour market.

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Meena Aier, a senior research economist at EDC and author of its report, acknowledged that her models don’t account for such structural changes because to do so would require speculating. The aim of the study was to provide a “more stable scenario” of what could happen if exporters continued to behave as they have in the past.

“The opportunities are there, but have we made full use of it?,” Aier said. “The data says we have not.”

To be sure, navigating the continent of 54 countries can be difficult for any business. The region is prone to political conflict, many countries are vulnerable to pressures created by climate pressures, and poverty remains extreme. The army staged a coup in Guinea at the beginning of September; drought is currently plaguing the southern continent; and less than four per cent of Africans are fully vaccinated against COVID-19.

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Yet Drone Delivery looked past the negative headlines, recognizing the opportunity that lay there.

“The African market is not homogenous,” Zahra said. “Every country is very different from culture, language and from an economic and political point of view.”

But by partnering with Astral Aviation to get local expertise, he’s expecting to find a variety of customers that will use his drones.

“(Kenya) has the potential to significantly accelerate the operations and the success of the business,” he said. The continent “is just a massive, massive market.”

The absence of a clear Africa strategy over the past two decades might have kept some businesses from taking a chance on Africa.

Emerging from the 2008 financial crisis, former prime minister Stephen Harper shifted his strategic trade plan away from Africa, closing trade commissions to free up resources for a push into Europe, the U.S., Brazil, India and China, said Omar Allam, former deputy director for Africa at the federal trade department. Harper and officials also made very few trips to the continent, which created distance between Canada and African countries.

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On the flip side, Trudeau and his officials visited more often, but they didn’t have a concrete trade strategy such as Harper’s Global Markets Action Plan, Allam said.

“It’s very much an ad hoc approach,” Allam, who now heads his own international trade consultancy, said of both governments’ dealings with Africa. “Canada has a lot to offer African economies … but we need a clear strategy and the right boots on the ground.”

Canada has a lot to offer African economies … but we need a clear strategy and the right boots on the ground

Omar Allam

If a Conservative or Liberal government makes good on its election promise to pick up the pace in Africa, it will find itself in China’s shadow. The country has a huge head start and has made a point of investing in Africa in order to secure the natural resources it needs to power its massive growth.

In 2019, China spent US$44.3 billion in foreign direct investment stock in Africa, according to Johns Hopkins School of Advanced International Studies, while Canada spent $10.7 billion.

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That investment has paid dividends for Chinese firms, as Canadian business owner Carmine Colarocchio can attest.

Colarocchio heads InControl Systems Inc., a 35-year old company based in Markham, Ont., that manufactures, integrates and supplies commercial fire protection systems. His dealings are primarily in the oil and gas and power-generation sectors, but he also sells gear to fertilizer, pharmaceutical and steel plants.

About 80 per cent of InControl Systems’ revenues come from exports, with most of the demand coming from the Middle East due to a steady stream of oil projects. It has completed projects and supplied systems primarily in North African countries, but has incurred difficulty in sub-Saharan countries.

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Part of the issue with demand from the continent is a lack of robust fire safety protocols that aren’t standardized across jurisdictions or borders. On top of that, Colarocchio said he can’t compete with other foreign firms whose governments have heavily invested in the region.

“If the Canadian government was making more investments there, then it would be easier for us to be involved in the projects to supply fire systems,” he said.

Even though InControl Systems subscribes to national databases that notify businesses of upcoming projects, such as a power plant or refinery, it’s not uncommon in his experience for the Gabonese government, for example, to award the contract to a Chinese firm.

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“The chances of me getting that Chinese construction firm to allow us to bid and be successful and win the project is pretty slim,” Colarocchio said. “They’re going to use Chinese products.”

Aier and Ciuriak said venturing into African countries means playing the long game both for companies and government, especially given the short-term gains in Asian emerging markets that many countries are currently fixated on. Indeed, Zahra hopes to get his first drone off Kenyan ground sometime next year.

“The downfall in not addressing (Africa) is that you miss out on being in markets that are booming, that are growing,” he said.

Financial Post

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