Exclusive: Is Africa The Hottest Growth Market In The World? This CEO Thinks So
Deep value investor Tim Melvin spoke exclusively with China regarding the future direction of business operations for his company.
TM: You spent a lot of time in the last couple of years in Africa overseeing the projects, doing the negotiations, and basically getting the company up and running over there. Now the economists that I've been talking to recently tell me that they expect to see GDP growth throughout the African region of about 67 percent annually for the next 20 years. That's kind of like China over the last 20 years, sounds potentially very exciting.
Do you see that as likely? I mean, can they grow at that rate for sustained amount of time?
RC: Yes, I believe so and if you look at some of the smaller economies, Africa will probably grow at much faster rates. When you don't have much of a GDP, a high percentage is not hard to achieve, but yeah, I think you'll see those, on the places we've been.
The U.S. tends to be behind the Chinese and Europe as far as investing in Africa. But I think there's a lot of people that are seeing that it is the next frontier, and it's the place for them. As long as you find good local partners on the ground, it's a place that you can be very successful in business.
TM: Now, let's bring in our timeframe even a little bit shorter, say, the next three to five years. What type of housing market growth do you see throughout the region?
RC: Well, I can tell you this: In Kenya, just Kenya alone, they have a shortage now of probably two million houses which is growing by 3,000 annually. Now their housing ministry, which we work with very closely, has a plan to do 3,000 houses over the next four years. I told the housing minister we do not view a competition in these markets as a problem because the demand is just so significant.
In Ghana there's a demand of 1.5 million houses. Nigeria has a ton, somewhere between to 12 to 16 million houses, Uganda has a demand of two million houses growing to eight by 2020. So we feel that the market is limitless.
Our first engagements in Africa were mainly with the government so we felt like they just moved too slow for us. In January of 2014, we changed tactics and started working directly with the local developers, builders and companies that had a financial interest in using the technology like ours. Just to give you an example, the first 15 months of production for our Kenya facility is already committed. That would be about one production line will put out about 3,000 houses a year. And for that one production line we have commitments of about 3,400 units which will translate into about $15 to $17 million of revenue for each of our production lines. Each of our factories are designed to ramp up the production line. We have a plan by 2020 to have 10 factories there.
TM: Wow! So there's really plenty of demand and need for them. From your time on the ground, what sectors of the African economy besides housing do you think are attractive investments for the next five to 10 years, let's say?
RC: I think, everything, quite frankly. Anything related to infrastructure; power, roads, alternative sources of power, housing is a huge, huge one because of the demand. Agricultural businesses have a wide open opportunity, communication technology. It's such a wide open market, it's sort of refreshing. You just have to have the persistence and awareness to go there and realize that you're not going to have deal in three months or six months.
We've now been in and out of Africa coming up in three years and we're just really starting our first fields there. We felt that the persistence and the continued investment is about to pay off. We think that once it starts to pay off it will be limitless for us. We really do.
TM: Now, speaking of infrastructure, that's a huge concern when you're investing in a frontier market like Africa. How was the infrastructure there; the electric plants, the grid, transportation services, how was all that in the parts of Africa you're doing business in?
RC: Well, different places are different. The urban areas are nowhere near adequate. In Uganda I believe there's only 12 percent of the people have electricity there so, you know, it's a pretty huge demand. At the same time, they don't have the same power requirements that we have in the U.S., but all the money is going towards infrastructure in these countries right now.
The one thing that I've found that is really sort of interesting is unlike in the western world or in the U.S., say, a developer or a builder is going to come in and build a housing project. Here they will be required to come in and get all that infrastructure in place first before the houses will ever get built. Over there in the more remote, the rural type areas or outskirts of the areas, the governments don't necessarily have the money to build the infrastructure. They will tell the developer, the builder, or the owners of these wards flats of lands that want to build houses build 500 houses with any structure.
So, you know, it sort of works in reverse in a lot of cases.
Stay tuned for the third part of this three-part series where Richard China discusses the African beer market and his final thoughts on U.S. investment in Africa.
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