How to Get the Tractor to Africa?
Nailing down the opportunities the African agri-food industry offers — Opinion piece
Worker feeding the mill for the husking of paddy at AEB Sarl. in Gaoua, Burkina Faso
Photo: © Rose Somda
The debate on the right strategy for agricultural mechanization in Africa has been going on for decades. It’s been hampered by reservations that mechanization could be killing much-needed jobs in due course. Other typical arguments of the debate run along the lines of “small farmers can’t afford a tractor” or “German manufacturers don’t have offers that suit the needs of the African market”. To visualize the point, presentations on the subject usually feature images of junkyards full of broken tractors.
This is one side of the story. The other is that the German government is pushing on German companies operating in Africa to get more involved, promoting cooperation with African companies especially in the agricultural sector, which is vital for most African economies. The activity mainly focuses on modernization, optimization, development or expansion of business models.
The big unknown in the debate remains the African market for agri-food products and B2B demand along the value chains. The subject agricultural mechanization from the perspective of market development for the African food industry shows clearly that the point of concern is not just farming but also modernising the value chains.
In a way, the main subject of upgrading value chains in Africa has always been raising productivity and efficiency-related aspects, from farm to fork. This one-directional perception of the entailed processes will have to change — there need to be information flows from fork to farm. The availability of market information such as on present or upcoming over or undersupply as well as consumer preferences needs to be promoted. The latter have been mostly left aside by development agencies until now. Good business decisions are based on profound data about the market.
Beyond this, development agencies should also consider collating and delivering market-related information to German manufacturers, for them to be able to recognise business opportunities. There are some information providers but they usually only relay information drawn from newspapers. GIZ is right onsite in the countries and could easily access primary market information.
Consumer goods market for foodstuffs growing rapidly
In sub-Saharan Africa, people are buying more and more processed food, convenience food as well as meat and dairy products. The growth of the markets in the region offers many opportunities for new business models to operate along the value chains or to connect farms more efficiently with urban businesses and industries. All in all, Africa has more than half of the world’s available land resources for agriculture. That is 600 million hectares, of which 80% are not used so far (FAO 2017).
The food industry is estimated to grow by 108 billion euros over the next few years. In the supply chains, a growing number of medium-sized farmers are establishing themselves — therefore called emerging farmers — and small farmers within outgrower schemes. This increase in the processing depth of agricultural products triggers investment in modern means of production. Smallholders, in particular, are benefitting from being better integrated into the supply chains. Especially when it leads to reduced uncertainty on the sales side, the risk associated with financing the operating and investment capital is lowered.
Market for adapted technology key
After decades of government and international development cooperation agencies experimenting with supply-side mechanization strategies, it is critical to have a closer look at the demand side and foster the market for adapted technologies.
The mechanization of production and packaging is remaining at low levels in many instances. And while consumers are beginning to demand better quality food and higher food safety standards, the mechanization efforts desperately need to catch up with what’s within reach today. Overall, the demand for capital goods is increasing and the market for agricultural machinery, food and packaging machinery is progressing. Building a manufacturing industry requires inputs that are reliable, available in sufficient quantity, quality and at low prices. Therefore, the need for suitable agricultural machinery for tillage, sowing and harvesting as well as storage technology is growing in the upstream area as well.
After decades of subsidization of agricultural production far away from the market, African governments are beginning to benchmark their agricultural policies against the criteria of efficiency and competitiveness of domestic production with imports and the suitability of the macroeconomic framework for investment. The key role of upstream and downstream sectors in the modernization of supply chains, which increasingly involves smallholders, is becoming more recognized.
Demand for products and services of German manufacturers on the rise
In addition to strengthened business contacts and the creation of bank guarantee mechanisms, African governments are also seeking to transfer know-how and more and more initiatives for practical vocational training are finding political support.
Paddy is raw rice with the husks still in place, as such not suitable for human consumption
Photo: © Rose Somda
Lacking skills along the value chains are a major obstacle when it comes to modernizing the agri-food sector, especially in sub-Saharan Africa. For one, entrepreneurs often lack the expertise to make informed investment decisions with regards to machinery, i.e. to pick the technology that fits their business model or to determine how much value for money there is. Therefore, simplified purchasing decisions dominate according to the level of the price. In addition, there is a lack of skilled labour, especially for workers who can efficiently manage maintenance tasks. This is one of the reasons why many entrepreneurs are reluctant to invest in high-end equipment, machines and systems.
There is also a lack of competency in the areas of operations management and management as such. As a result, entrepreneurs, especially in the informal sector, are often incapable of determining their cash flows, plan liquidity, assess investments and provide financial statements to a bank. All in all, entrepreneurs are lacking in financial literacy in order to be able to use any financial services.
Cheap doesn’t pay
Overall, manufacturers, importers and distributors of agricultural equipment, machinery and equipment for processing find difficult conditions in the markets of sub-Saharan Africa. Thanks to subsidy policies, low-cost suppliers were able to quickly establish themselves. Many companies are disappointed with the quality and performance of the technology offered and are faced with straining warranty and service related issues.
The demand for quality technology “Made in Germany” is therefore growing in the field of agricultural machinery as well as is the interest in processing plants. Despite this potential, German manufacturers are still having difficulty with entering sub-Saharan markets. There is hardly any structured information on the markets and identifying suitable local sales representatives poses a major obstacle. Long-term investments in technology, knowledge transfer and the development of trading and services structures will be necessary. Manufacturers need to develop technical skills, management skills and on-site consulting expertise on the side of their representatives, service staff and their customers. Offers from the develoPPP.de portfolio can offer suitable support options on these issues.
In addition, manufacturers are confronted with low purchasing power and lack of financing options for their customers. On the one hand, this brings about innovative business models such as the sale of services instead of machines, such as rental services (rent to rule) or lease models (rent to own). On the other hand, there has been a lack of information from clients and suppliers about existing financial services offerings so far — for example the KfW-financed Africa Agriculture Trade and Investment Fund — or via the services of the German Desks.
Cleaning seeds — The removal of dust, stones and non-germinable seeds
increases germination on the field and therefore overall productivity by 15%
Photo: © Stephan Schaberl
German manufacturers expanding their portfolio
They do this also to develop customized products for the market in sub-Saharan Africa. This causes for new collaborations with local machine makers and new production capacities for cost-effective solutions in subsidiaries in China or India. In addition, manufacturers are starting to see the potential to build assembly and manufacturing operations in sub-Saharan Africa.
The agricultural policy of African countries is already providing some impetus for the import of agricultural technology through customs and tax exemptions, as well as for the settlement of assembly and manufacturing plants. This is done through the development of industrial clusters with connections to ports and roads as well as with reliable energy and water supply. However, there is an urgent need to catch up with the training of workers, which should be oriented at market demands and the creation of conducive framework conditions.
The cooperation and financing instruments of the Federal Government of Germany for projects of German and African companies in the agri-food sector offer many opportunities to promote sustainable business models and investments on the supply and demand sides in agricultural-based value chains.
Global demand for food will increase by more than 50% by 2050 (Word Resource Institute 2019). Then, about 2.5 billion people will live in Africa and will make up one-third of the world’s population (Population Reference Bureau 2016).
An important trigger can be to design cooperations with a particular target in mind. The conduct of the EZ-Scouts Program jointly with the Agency for Economic Development and the sector project Agricultural Trade, Agribusiness, Agricultural Finance at the Agritechnica 2019 will provide a forum for successful business models of African companies as well as market entry of German manufacturers in Africa to report.
Information on new financing options via the develoPPP.de program and the Development Investment Fund for Africa for German and African companies will be presented. Entrepreneurs from Africa and Germany will have ample opportunity to get touch with one another.
Future Market Africa! — Event at AGRITECHNICA 2019
About the author
The text has been provided by Katy Schröder, EZ-Scout in Saxony-Anhalt and Thuringia