Korean FDI gains momentum in Africa

A dual strategy key to getting upper hand in the cutthroat market

By Kang Ye-won

In the last decade, Africa surged as one of the most alluring markets for global investors, spurring interest from emerging countries like China and India and rejuvenating its appeal from traditional Western multinationals.

South Korea, too, has expanded its presence in the continent, becoming the third largest trading partner from the emerging markets after China and India with African countries.

But Korea is still under the radar in terms of its direct investment.

“Korea’s entry and participation in the continent has been more cautious than many others,” said Michael Lalor, a lead partner with Ernst & Young in South Africa, in an interview with Business Focus on Oct. 26.

Direct investment refers to “putting down its roots in the continent and creating jobs,” which is more important in the long haul than simply exporting finished goods, Lalor said.

From 2003 to 2010, South Korea’s foreign direct investment in Africa was $3 billion, which lagged behind Malaysia, Indonesia and Singapore, according to an Ernst & Young’s report. China recorded nearly $41 billion and India followed close with $32 billion.

Over the last few months, Korean investors gained some momentum in Africa with its investment, mostly in consumer-based businesses, Lalor said, that coincided with President Lee Myung-bak’s visit this July to nations including South Africa, Democratic Republic of Congo and Ethiopia.

Samsung Electronics has developed locally customized electronics in Kenya where inconsistent power is common. As a pioneer launch, the company introduced LCD/LED TVs that are designed to power through sporadic outages and solar-powered laptop and cell phones this year.

But when it comes to the size and scale of their investments, China and India, backed with deep pockets and government support, have advanced further ahead of other emerging markets.

Most recently, the Chinese mining giant Jinchuan Group won a $1.1 billion takeover of Metorex, South Africa’s cobalt and copper producer, in a drive for Africa metals growth. Last year, India’s largest wireless carrier, Bharti Airtel, sealed a $9 billion deal to purchase the African operations of Zain telecommunications.

To get its foot in the door, Korea should cooperate with the Asian powerhouses China and India, said Kim Hwa-nyeon with Samsung Economic Research Institute.

When advancing into Africa’s rare earth metal industry, Japan would be a suitable partner because the country has a similar industrial structure to that of Korea, Kim added.

“Korean companies will need to make thorough preparations and devise meticulous strategies, lest they lose more valuable time in gaining a foothold in Africa,” he said, in a research memo.

What’s driving interest in Africa?

Foreign direct investment grew fivefold to $55 billion in the past 10 years; six African countries made the top 10 list of the world’s fastest-growing economies in the past 10 years, which included Angola, Nigeria, Ethiopia, Chad, Mozambique and Rwanda, said Lalor with Ernst & Young.

A key drive growth is abundant natural resources based on the sheer size of the land. Its land mass is larger than the U.S., Europe, China and India combined, Lalor said.

“Africa is still an ‘underexplored’ or almost ‘unexploited’ territory (in terms of resources),” he said.

Especially mining, and oil and gas production is expected to attract further investment, Lalor added.

As of 2010, Africa accounted for more than 12 percent of global oil production and nearly 7 percent of gas production, Kim wrote in a research memo.

Beyond resources, African consumers have become more affluent in many markets with a substantial growing middle class and consumer-based businesses have driven economic sustainability.

Consumer goods giants such as Unilever, Diageo and British American Tobacco as well as banks like Barclays, Citibank and BNP Paribahs are among the prominent players who have set their strategic growth markets in Africa, Lalor said.

Wal-Mart, the world’s largest retailer by sales, recently acquired South Africa’s major retailer, Massmart, which signals the next wave of U.S. investment.

“The interest is coming from all sides,” he said.

Investment strategy for Korea

As rising powerhouses from Asia have joined the competition across the continent, they brought new investment patterns compared to traditional Western multinationals, said Michael Bosman, also with Ernst & Young.

Chinese investors often make barter deals with African countries in government-to-government engagement. In return for access to natural resources on the continent, Chinese companies would build infrastructure. China has had an advantage in access to funding supported by its state-run financial institutions, according to Bosman.

On the other hand, Indian investment has been successful, led by high profile private companies like Bharti Airtel, similar to the commercial-driven, Western investment style.

Since Korea has a “narrow window”in competition, it should adopt an integrated strategy in developing its direct investment, Bosman said.

While staying on commercial routes, it could adopt the Chinese way of government-to-government engagement, which would provide wider access to financial resources.

Kim with Samsung Economic Research Institute, too, recommended Korea to focus on business-to-government projects such as building roads and ports and fostering IT venture.

At the same time, investments driven by political ties expose a company to risks, Bosman said. In Zambia’s latest presidential election, many voters reflected the hostility toward Chinese investors, seen as exploitative of the country’s natural resources and local jobs.

To avoid such consequence, investors should consider long-term factors like corporate governance and the socio-economic impact on the African nations such as creating local opportunities.

Korean investors currently present in the continent say a major challenge is poor infrastructure and unclear logistics. One of Korea’s leading pharmaceutical firms, LG Life Sciences is currently selling its U.S.-FDA approved antibiotic, Fative in South Africa and northern countries through local companies and a third channel like the World Health Organization, said S. Imtiaz Ali, a manager with LG Life Sciences.

“Logistics is, by far, the biggest problem,” Ali said, in a phone interview. Transportation is the most important factor in distribution of its drugs, but poor infrastructure such as roads, bridges and rail lines in African countries are the main hindrance to the company’s business launching in countries like Nigeria and Uganda.

“For now, we just have to wait until the countries develop more,” he said.