As of last week, South Africa has moved to level 2 lockdown (on a scale of 5), reflecting progress in managing the virus and allowing businesses to resume in-person operations, albeit with a set of precautions (masks, sanitizer and social distancing are today’s norms!). As the economy opens up, the team at Yoco produced this powerful video that captures the vibrancy of small business owners across South Africa. Yoco, is the largest payments company in South Africa with over 95,000 merchants – and growing!
We’ve been active over the last couple of months, doubling down on our core themes. Our financial services focus (e.g., payments) and supply chain companies are seeing tremendous growth in their businesses. We’ve increased our investments in two companies, Yoco (payments) and Lori Systems (logistics), and a third company that we will announce in the next update.
In this update, we will dive deeper into logistics and supply chains, why we have been investing in these areas, and how we believe they will play an even more important role in the future of the continent. We will also address the role of China (and others) in developing infrastructure.
A word of thanks: Our founders get to regularly speak with global peers and it’s proven a successful framework. We like to help build bridges across geographies to share collective experience from across the world to the benefit of our companies (and founders in other markets). An important component of that is our LP base, which includes a significant number of successful technology company founders and operators. Thank you for your continued support and sharing of resources and your time in assisting our founders!
Logistics in Africa and frontier markets...
The cost to move products in most African countries are amongst the most expensive per kilometer in the world. A combination of things has led to this — infrastructure gaps, regional terrain, lack of navigable waterways, fuel costs, regulation, and lack of formal systems and middlemen. The key distinction of emerging markets, and in particular Africa, is that logistics in certain product categories can make up to 75% of the cost of goods, vs. 6-7% in the US and Europe. Ocean shipping costs are among the highest globally, ranging from 1.5 to 3.5x to transport a single container via sea vs. other regions. It’s hard to build competitive economies when the movement of goods has such significant friction and cost.
Across Africa, shippers spend over $200B in trucking haulage alone, with the majority of that business handled via paper, Whatsapp and phone calls. There is little digitization of the haulage industry, and due to fragmentation (most carriers are small fleet operators), there is a correspondingly high number of middlemen — often times 2 to 3 layers of contractors who each take 5 to 10% of the transaction before the actual provider of the service is paid. Lori Systems is focused on collapsing these layers by building the continent's largest marketplace, and adding capabilities for fuel financing and insurance, as well as broader financial services relationships with carriers and shippers.
But why does logistics matter? The story of Amazon.com is instructive.
Amazon’s beginnings are interesting to study as it relates to logistics and Africa. Amazon’s e-commerce business was in part possible because of the US interstate highway system and the United States Postal Service. Amazon built a consumer-facing web platform on top of physical world infrastructure that already existed in the United States. Amazon certainly didn’t win by building the world’s most attractive site (below is a screenshot of what Amazon.com looked like in 2000 — it doesn't look a whole lot different 20 years later!).
Unlike the United States, many of our core markets are concurrently building both physical infrastructure (ports, roads and rail) and adaptable digital payments and logistics infrastructure (like API business models we discussed last month). Physical infrastructure investment has not kept up with population growth — this is where China has helped spur a boom. The amount of infrastructure being built or upgraded in Africa is truly astonishing. It’s mainly concentrated on transportation, starting with ports, where 90% of products flow to road and rail arteries to bring products into key urban centers (which are experiencing a wave of growth as people are migrating into cities). The total value of projects currently underway is approximately half a trillion dollars. To put that in perspective, the US highway interstate system was built in 1956 at a cost of about one hundred twenty billion dollars (about half a trillion today). Despite this boom in building, however, there still exists a significant infrastructure gap — and this is where new technology platforms will play an increasingly important role.
Technology is being deployed in new modes of transport
The team at Cloudline is a great example of this. They are focused on building a platform to transport significant payloads using unnamed aerial systems (UAS), at a fraction of the cost and time of traditional modes of transport. As is common with new technology that interfaces with the physical world, safety and regulation are critical. Progress is being made. Companies like Zipline are helping pave the way on aerial logistics capabilities as they are now operating in Rwanda and Ghana. We’ve been tracking the FAA (Federal Aviation Administration) who recently announced their intention to release their ‘Remote Identifications’ rules by the end of 2020. Governments appear ready to take the next important leap in creating standards and protocols for aerial vehicle safety, which to date has been the limiting factor in unlocking the UAS industry’s potential.
What is the role of China?
I tend to disagree with the common narrative of neocolonialism and China’s goal of providing so much debt that African countries will default and yield to land and asset seizures. I believe the situation is much more nuanced. China is playing an exceptional long-term game globally (not just in Africa) to build important commercial and political relationships. This in my view is what the Belt and Road initiative aims to deliver. Investing in developing economies and building ports, rail lines and roads are the beginning. Today, over 80,000 African students study in China annually, with most on full scholarships. This is up from 2,000 students 15 years ago. There is a focused effort to teach Chinese culture across Africa, and schools in Kenya and South Africa are offering Mandarin as a language. The cultural and educational efforts have shaped the economic relationships for over a decade. China overtook the US in trade with Africa in 2008, and now is a much larger trading partner than the US ($180B vs $60B). A strong and vibrant African business and consumer sector is important for global growth and bodes well for China’s long-term ambitions.
Why technology and logistics now?
There are three important and interrelated platforms that are powering tech innovation in logistics — KaiOS Technologies (and Google), Transsion, and telecom companies like MTN, Airtel and Vodacom.
KaiOS technologies is the company behind KaiOS, a mobile operating system that is focused on the 3 billion+ people who are coming online via mobile. KaiOS was built for feature phones (whereas Android powers most smartphones) and operates the KaiStore, which functions like an app store that provides near frictionless distribution — an incredibly powerful force when operating across geographies as diverse as Africa. KaiOS is now more popular than iOS in India and is growing quickly across Africa (the company has reported over 100M users in mid 2019).
Transsion, the largest manufacturer of phones sold in Africa (100M+ per year) provides businesses and consumers with access to phones at affordable prices, often less than $25 dollars. The telecom groups and tower infrastructure owners (Helios, IHS) have built and operate important infrastructure that powers internet and data connectivity. The combination is truly powerful, offering technology products and services to consumers that were inconceivable only a few years ago.
With the coming of the African free trade agreement, the potential for cross-continent technology solutions will be critical, especially as people, products and trade flows between countries. As the free trade agreement formally starts (set for January 2021; it was pushed back because of COVID), we believe we will see a heightened imperative for the products and services of Raba’s portfolio companies.
Africa Code Week: This initiative caught my eye. Africa Code Week recently announced tech/code training for 3.85 million children and 39,000 teachers that ran over 55,000+ coding workshops in 37 countries in 2019. The organization started in 2015 with 88,000 students — impressive growth and something to keep an eye on! Link here.