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Why American Telecommunication Vendors Struggle to Win in Africa

09 September, 2013
ICT Africa Writer
September 7, 2013

Triggered by the liberalisation of the telecommunication industry as a result of economic structural adjustment programmes, the Millennium Development Goals (MDGs) and other factors, an information and communication technology (ICT) revolution has taken shape in Africa. The realisation that ICT is an important vehicle for sustained economic development has compelled almost all African political and industry leaders to put a concerted effort into the development of ICT in Africa.

Mobile subscriptions grew from almost nothing in 2000 to over 700 Million in 2012 and are expected to grow to 1 Billion by 2015, according to Informa Telecoms and Media. What is even more important is that many mobile subscribers will eventually upgrade to broadband and course large amounts of traffic to flow in African networks. This will in turn drive an increase in demand for backbone network infrastructure in Africa.

It is now common knowledge to most people in the ICT industry that adequate submarine cable capacity is now at the shores of Africa. There are more than 10 submarine cables reaching sub-Saharan Africa with over 30Tbps of network design capacity. A tremendous amount of work and investment is now underway to deploy terrestrial fibre optic networks that will connect African communities and countries to one another and to the submarine landing points.

According to ICT Africa estimates, at least $US16 Billion has been invested in building just the backbone networks required to support the traffic from mobile and other access networks in Africa. Most of this has been spent in countries that are early adapters, such as South Africa, Egypt, Algeria, Nigeria and Kenya. A lot more is expected to be spent in other sub-Saharan African countries where plans are under way.

Below, some of the key telecommunication market players are reviewed and views on why American optical transport network equipment vendors are failing to capture any market share in the lucrative African telecommunication market are offered.

Optical Equipment Market Share
An analysis, using data from Infonetics, shows that about half of the revenue from the supply of optical transport equipment for African backbone networks goes to Chinese vendors and another significant chunk goes to European vendors. Very few of the contracts to supply the equipment or to develop backbone networks in Africa go to American vendors. The chart below is the distribution of vendor revenue share of the Africa optical transport equipment market.
Africa Optical Transport Equipment Sources

It is almost common knowledge now that the Chinese and European vendors supply most of the other telecommunication equipment; including mobile backhaul equipment, base transceiver station equipment, and data centre equipment. Moreover, at least 60 percept of African infrastructure projects (according to ICT Africa estimates), are turnkey solution in which the vendor supplies materials, design the network, develops it and in some cases operates and maintains the network. The winners of the projects are therefore not only taking home revenue for the supply of optical transport equipment, but most of the revenues associated with all aspects of the network build.

Chinese and European Telecommunication vendors are capturing most of the business in Africa
Chinese vendors have relied very heavily on Chinese government support to enjoy a healthy market share in the telecommunication industry and other sectors in Africa. For many years, dating back from wars of liberation, the Chinese government has cultivated very good relationships with African governments, prompting African leaders to “look east” for most of their imports. Given that African governments are involved, directly or indirectly, with ICT infrastructure projects it is not surprising that with some persuasion from the Chinese government, African project owners are likely to use products from China.

The Chinese government, through the Chinese EXIM bank, has been very aggressive in offering Chinese financing for telecommunication infrastructure projects in Africa. A number of national large backbone networks in Tanzania, Kenya, Ethiopia, Ghana, Angola and other countries were developed by the Chinese, with Chinese EXIM bank financing. By 2012, trade between China and Africa was $US199 Billion, including telecommunication infrastructure. In comparison, trade between Africa and the USA in the same period was only $US72 Billion.

Telecommunication products from China have also been attractive in the African price sensitive markets because of the relatively lower cost of the products. Despite criticisms and accusations of poor quality products, poor network installation practices and unethical business practices by Chinese vendors, there is no slowing down by African operators in using Chinese products and services.

European vendors have traditionally benefited from the long standing European relationship with Africa, dating back from the days of colonialism. Siemens and Ericsson have been for a long time households names in Africa. But European vendors have been steadily losing some market share to Chinese vendors. However, Alcatel Lucent has consistently maintained a healthy share of the market, especially in French speaking Africa. France Telecom investment in telecommunication operations in Africa, such as in Senegal, Kenya, Mali and other African countries has helped Alcatel-Lucent which has close ties to France Telecom. The map below shows France Telecom’s footprint in Africa.
France Telecom Footprint in Africa

In order to promote investment by European companies and to help European vendors gain market share in Africa, many European countries have established Investment Promotion Agencies (IPAs) and developed bilateral investment treaties (BITs) and double taxation treaties (DTTs). For example, it costs 5% (or less) duty for a European company to ship a product into South Africa due to treaties that exist between Europe and South Africa. It costs 15% for an American vendor to ship into South Africa, making it more competitive for European vendors to supply products to Africa than their American competitors.

European investors and vendors have far fewer legal concerns than their American counterparts when doing business in sub-Saharan Africa because they are protected by BTIs. France has 11, the U.K. has 15, Germany has 36, The Netherlands has 20, and Belgium, as small as it is, has 9 BTIs in Africa.

The Obama administration is failing its telecommunication vendors in Africa
The US government approach to Africa has been very helpless in supporting American telecommunication vendors win business in Africa. The Obama administration has assumed a big brother role in Africa and imposed too many preconditions for doing business with Africans.

Zimbabwe is one example where a piece of legislation, the Zimbabwe Democracy and Economic Recovery Act of 2001, prevents American companies from doing business with certain individuals and companies until the government of Zimbabwe succumbs to certain US requirements. One of the requirements is the holding of free and fair elections but despite recent elections which were declared peaceful, free and fair by the Southern Africa Development Community and the African Union who observed the elections, the Americans insist that the elections did not meet their requirements. This makes the entire African continent feel belittled and not treated as an equal partner by the Obama administration.

Unlike the Chinese and Europeans who view Africa as a land of opportunity, the USA views Africa as a land of risk and very little has been done to develop the necessary BITs to support American investors and vendors wishing to do business in Africa.

The U.S. has only six BITs with Cameroon, the two Congos, Mozambique, Rwanda, and Senegal. Most of the larger sub-Saharan African countries, including South Africa, Kenya and Nigeria are not covered by any BTI.

Unlike the Chinese Exim bank that has successfully supported the winning of contracts by Chinese telecommunication vendors, American vendors have not benefited from the US EXIM bank. Of the $1.5 Billion financing for exports to sub-Saharan African countries in 2012, very little to none supported the export of telecommunication equipment. The funding supported exports of vehicles, parts, commodities, and aircraft mostly to Nigeria and South Africa. Moreover, the total expenditure by the Chinese EXIM bank in financing of exports to Africa was about four times more than that of the US EXIM bank in 2012.

Perhaps the mandate of the US EXIM bank makes it difficult for telecommunication vendors to benefit from the facility. The bank’s dual mandate is to finance projects that the private sector deems too risky and, on the other hand, lend only when there is a reasonable chance of repayment. The problem is that if the private sector has reservations about the viability of a project, it is probably too risky and the US Exim bank will not fund it. On the other hand, if a project is viable and creditworthy, then the private financial sector in Africa can be expected to finance the project, leaving the US EXIM Bank irrelevant. On the contrary, the Chinese EXIM bank finances projects that most private institutions in Africa will not finance.

We do not address The African Growth and Opportunity Act (AGOA) here because it is primarily intended to help selected African countries export natural resources to the USA and does not have any impact on US telecommunication vendors wishing to supply products to Africa.

The Obama administration has to change its attitude towards the way it deals with Africa. They have to get off the high horse, treat Africa as an equal trading partner and easy the conditions for doing business with Africa. It is very unlikely that US telecommunication vendors will catch up to the Chinese and European telecommunication vendors in Africa under the status quo.


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