Hans-Ole Madsen says the main requirements for doing business in Africa are patience and commitment. Shipping volume, for now, is just a bonus.
“When you operate in the developing world, it’s unrealistic to think that everything is shiny every day,” said Madsen, vice president of business development for Africa, the Middle East and India for APM Terminals. “We are committed to Africa, and are prepared to sweat it out.”
APM Terminals certainly is expecting shiny days in Africa in the future. The company has spent some $800 million over the past decade to modernize and expand nine container terminals and several inland facilities in eight West African countries, from Liberia in the north to Angola in the south.
That makes the company one of the largest investors among operators in shipping and logistics that are looking at the growing volume of trade out of Africa, listening to comments from shippers about the direction of low-cost manufacturing and setting the groundwork for growth in sourcing of goods beyond raw materials from the continent.
Real growth in manufacturing and container shipping through sub-Saharan Africa would mark a dramatic change in a continent all but written off in much of the developed world because of the seemingly entrenched instability, civil unrest, endemic corruption and unrelenting social problems across Africa’s map.
Yet democratic rule also is spreading across the continent in once-unlikely places such as Rwanda, and that comes as retailers, manufacturers and suppliers are plotting out low-cost factory sources in the coming years. With labor costs in China and other parts of Asia rising, some experts say, more conversations about long-term plans include Africa.
“We’re actually looking at major manufacturing sites in Africa,” Tommy Liu, senior vice president for Greater China at Li & Fung Logistics, told a Journal of Commerce conference on container shipping in Shanghai this summer. “This is the last place you’ll be able to find cheap labor for the next 20 years or so.”
Africa trade with Europe is far greater than it is with the United States and U.S. exports to Africa are nearly three times the volume of imports, based on container shipping volume measured by PIERS, a sister company of The Journal of Commerce.
That export volume grew about 12 percent in 2010 over the previous year, according to PIERS, which was less than the overall growth rate for overall U.S. containerized trade.
Although many U.S. apparel importers are shifting their production out of China as Chinese wage costs escalate, Casey Chroust, executive vice president of the Retail Industry Leaders Association, said they are not looking to Africa to take advantage of lower wages costs.
“Some retailers have started sourcing a little bit out of Africa, but it hasn’t been economics that are behind it, but because of social motivations,” said Chroust, whose membership includes most of the largest U.S. retail importers. “The countries are so impoverished that a small amount can make a huge difference; they have tried to do some sourcing in Africa, but it’s not a huge trend.”
Mario Moreno, chief economist for The Journal of Commerce and PIERS, expects U.S. containerized imports from Africa to decline 6.6 percent in 2011. He expects the South African rand to decline in value against the U.S. dollar, “but this will not be sufficient to overcome declining output in South Africa and in the rest of Africa,” he said. He thinks U.S. imports from Africa will accelerate marginally in 2012 and add a modest 2.8 percent in 2013.
Moreno forecasts U.S. exports will increase 4.6 percent in 2011, in line with 4.9 percent economic growth. Export growth will slow to 2 percent in 2012, he said, even though he expects GDP growth to be 5.5 percent. He said the South African rand continues to fall against the dollar, which “will tend to reduce shipments to South Africa and to the region as a whole, but improving economic performance will compensate partially for these losses.”
The continent is a far larger trade partner with Europe, however, with perishables that include fruit and vegetables as well as cut flowers out of Kenya prime commodities.
Shipping industry officials say the improving political climate in many countries is leading new governments to focus on infrastructure development that can attract more business. That sets the stage for the long-term growth. “That’s why we got there early and continue to be part of that development and grow with the countries,” Madsen said.
In Ivory Coast, for example, where container lines stopped calling at APMT’s terminal in the Port of Abidjan to comply with sanctions against the attempted seizure of power by the president who had lost the election, normal trade resumed last spring after the failed president was ousted.
The country’s biggest containerized exports, cocoa beans, which had shifted to Ghana during the civil war of the last two years, are once again being channeled through Abidjan. “When these incidents happen, the thing to do is not think about money but think about your people,” Madsen said. ”Once they are taken care of, you try to safeguard your assets as much as you can. Thereafter, you have to wait it out.”
What is drawing companies such as APMT and the container lines that call at its African terminals are very different trade patterns than what brought them to the Far East. The lure is the growing volume of import cargo that African countries are buying to supply expanding consumer markets and the inbound machinery for construction, mining and oil production. The volume on the export leg is not made up of manufactured products that Western companies have outsourced, but rather of commodities such as cocoa beans and palm oil that are exported to Europe and the U.S. and of raw materials to feed China’s expanding industrial base.
APMT is developing ports and inland terminals in West Africa because aside from South Africa, they are the most rapidly growing markets and because the various governments have moved more quickly than East or South Africa to privatize the ports and encourage foreign port investment.
Along the way, officials say, the company has learned how to deal with issues such as corruption and the incessant demands for bribes. “If you take a firm stand against it, it becomes more recognized that companies like us don’t engage in such practice,” Madsen said.
It has also changed the culture of its workers by training them to become more conscious of the need for safety.
As the performance of West African ports improves, container lines are setting up new services, especially between Asia and Africa. “There is much more confidence and capability in managing an effective product to and from the major ports,” said Jonathan Yock, Safmarine’s cluster manager for North America. “Historical barriers of entry are also diminishing as local governments are realizing the gain from reducing the complexities and cost of doing business.”
Maersk Line, for example, operates three direct services between Asia and West Africa, and 10 loops that carry cargo from Asia, Europe and the U.S. They pick up at transshipment hubs in Algeciras and Malaga in Spain and Tangiers in Morocco. The carrier also operates two direct services between the U.S. and Africa. “The (West African) export markets are developing faster than expected this year,” said John Chang, general manager for Africa trade at Maersk Line in the U.S.
The growth in the volume of U.S. container trade with Africa is mainly on the export side, while U.S. containerized imports are stagnant or falling. They are hardly high-value goods: The main U.S. container exports to Africa are used automobiles, used clothing and resins for the manufacture of plastics.
“In our book of business, we still see that vehicles and auto products make up the main cargo flows, with oil and gas production projects making up the balance,” Safmarine’s Yock said.
U.S. imports are dominated by cocoa beans, mainly from Ivory Coast, and apparel from South Africa and Kenya. Most of the growth in U.S. exports is to counties in West Africa, where the economies are growing rapidly, especially Nigeria. “They have oil resources, which creates improved economic opportunities,” Maersk’s Chang said.
Some expect an increase in the outsourcing of production, especially of apparel, to various African locations.
“Many of our apparel importers are telling us that there is a migration from China to places like Indonesia, Bangladesh, but also to Africa,” said Bob Sappio, who retired this month as APL’s vice president of pan-American trades. “Children’s wear and women’s wear importers are looking increasingly at Africa as an opportunity to produce quality goods at a much lower cost,” he said.
But this trend is still in the very early stages and has been interrupted by political roadblocks.
For example, the U.S. used to import apparel worth $300 million a year from Madagascar under the preferential tariffs available to importers through the African Growth and Opportunities Act. But the White House revoked the AGOA preferences at the beginning of 2010 after a coup in Madagascar. Half the island’s 150 factories used to supply major U.S. retail importers, including Wal-Mart and Bloomingdale’s and sports brands such as Puma and Adidas.
Maersk’s Chang said the sourcing of apparel out of Madagascar has ceased, making Kenya the biggest source of U.S. apparel imports. Chang said Maersk Line introduced 45-foot containers into Kenya, which is the only African country with road infrastructure adequate to handle them. This could spur Kenya’s apparel exports to the U.S.
But the cost of the container trade with Kenya and other East African countries is going up because of the pirate attacks on ships around the Horn of Africa. “We have to sail faster and farther away from the Horn of Africa, which burns a lot more bunker fuel,” Chang said. “And our insurance costs are going up. Unfortunately, those costs have to be passed on to our customers.”
Maersk passes the cost to shippers in the form of a piracy risk surcharge, which it raised to $500 per 40-foot equivalent container unit this August, double the $240 per FEU it assessed in 2010. The rising cost of piracy risks probably contributes to decisions by part of apparel importers against increased outsourcing of production to East Africa.
“We are seeing less apparel imports from Africa by our members,” said Fred de la Pena, vice president of operations, at the American Import Shippers Association, which has a membership of textile, apparel and footwear importers. He said only a handful of its members import apparel from Africa, mainly Lesotho and South Africa, but “not more than 200 boxes a year, so a very small portion of our business is Africa.”
He said most of the outsourcing of apparel production to Africa is conducted by large retailers such as Liz Claiborne.