AFRICAN E-COMMERCE SPECIAL: THE LONG LEAP FROM HYPE TO REALITY
22 March 2002
E-commerce has been seen as digital opportunity for Africa by a wide range of organisations. The reality has proved to be a little more intractable. In this African e-commerce special, three contributors seek to offer what little is already known about what exists and to identify how Africa can make the long leap forward from hype to reality.
Russell Southwood looks at who might buy using e-commerce and at the potential cost base. Murieki Mureithi summarises what information there is in recent surveys and Barry Coetzee of eCompany argues for a regional approach to the structural issues.
E-commerce refers to all online transactions. There’s a considerable "alphabet soup" of acronyms but two have most relevance in the African context. B2C stands for "business to consumer" and applies to any organisation that sells its products to consumers over the internet for their own use. B2B is when businesses buy things from each other online, supplying each other with goods and services. Online transactions happen mainly on the internet but can also involve e-mail, WAP-enabled phones, SMS text messaging and internet-enabled televisions. There is an enormous amount of hype about e-commerce in Africa. Everyone’s talking about it: donors, business people and governments. There was recently a supplement in a regional African magazine about e-commerce of some considerable number of pages that made no mention of anyone actually doing it in the countries it covered. The reason? Hardly anyone was doing it there (see Muriuki Mureithi’s article below).
So what can e-commerce deliver for African SMEs? It has the potential to bring them new customers and to create closer relationships (online) with those customers. It holds the promise of better operating margins and cheaper marketing. It can change perceptions about how people think they can buy things, both within and outside the continent.
The goods supplied through an e-commerce site can be placed on a spectrum from those that are more or less virtual (for example, a booking) to those which are physical (for example, a fridge). The pioneers of African e-commerce will need to find goods that reflect the realities in their different countries. This will tend to favour the more virtual end of the spectrum.
In B2C terms, this would include tickets (for example something like the UK budget airline easyjet), bookings (especially for hotels, credit and value transfers (banks, stock exchange shares) and high-value, small size goods (for example, CDs and books through Amazon). The defining feature of these transactions is that the customer makes limited choices at the prices shown on the site. Rather different from Africa’s outdoor markets where price flexibility is the key.
In B2B terms, the transactions are used to address purchasing and supply chain issues. These need negotiated pricing and variability of product supplied. They also require that the computer systems of different companies will be capable of working together. As you might guess, this has made little progress in Africa.
The potential customers will have access to the internet. So what are the sizes of these user markets? The following are estimates for different countries: South Africa (2m+ users), Cote D’Ivoire (40,000 users) Kenya (20-30,000 dial-up), Senegal (11,000 dial-up), Mali & Niger (5,000 users) 500,000 ATM users in Kenya. You will notice that with some of the countries estimates of users were given and with others numbers of dial-up subscribers. Estimates vary but because some dial-up accounts are cyber-cafes the total number of users may be anywhere between 5-7 times the dial-up subscription total. It will not surprise you to know that the large markets are South Africa, Egypt and the Maghreb countries and Nigeria with mid-size markets in places like Cote d’Ivoire, Senegal and Kenya. Users are by their very nature affluent, high-earners if they have an individual connection. Cyber-café users are young, aspirational and ambitious: they will almost certainly become the next generation in power in Africa within 10 years so you should start paying attention to them now.
Who are the key groups in terms of value? Tourists and past visitors (buying in hard currency). The African diaspora (buying in hard currency),the millions of Africans now living all over the world. For example: In Ghana it is estimated they send US$500 million a year back home in goods and cash. Most of Ghana Mall’s customers come from USA, Germany and Belgium. Finally Internet, mobile and ATM users in African countries (buying in local currency). As an external point of comparison, worldwide online buyers have gone from 10 to 15% in 2001. By contrast, Africa’s e-buyers are both tiny in number and value.
It’s important to point out the difference between specialist and consumer markets. Most e-markets in Africa are so small that they are almost by definition specialist markets: small numbers of people looking for very particular goods and services. Even the diaspora markets remain quite small in terms of numbers of actual rather than potential buyers. In these circumstances businesses will need to build outwards from existing, known markets rather than simply plunge into new markets. E-marketing in this context is very similar to specialist direct mail: the business can be judged on what the size of its list of buyers is.
Recent work by Boston Consulting based on the US market identifies a couple key points. Right at the top of online purchases by value is hardware and software, books, travel and music and videos: in other words, mostly virtual or small-value/small-size items. It also did a cost comparison between the business costs of a web commerce companies, shops selling the same goods and mail order companies. The mail order companies beat the web companies every time. Why? Because they have the fulfilment systems and have been in business longer than web companies. Volume equals lower costs unless you have specialist products.
Very few stand-alone e-commerce operations make profits in the developed world so it is hard to see how they would in Africa. They have very high start-up investment costs and therefore would be very high-risk. The wise e-commerce entrepreneur will form strategic alliances and partnerships with existing suppliers and build the business slowly. Existing suppliers may experiment with e-commerce as part of a broader mix of selling methods: either to get much-needed experience or to attract hard currency sales.
A few examples of existing operations may be useful. There are several airline ticket booking sites, most notably Flysaa.com and Kulula.com, the latter a partnership between British Airways and a budget South African carrier. There are many small craft selling operations. E-Shop in Ghana has just launched and the largest single operation is PeopleLink that is based in the USA. E-Souk started in Morocco and now operates from overseas. Esokoni is a B2B site being developed in Kenya amongst a group of suppliers by Symphony Software. Send to Africa and Ghana Mall both offer the diaspora from Ghana the opportunity to send their relatives back home goods that have been purchased in the country itself: electrical goods for example. A similar site exists in Ethiopia. Send to Africa has recently been put on hold because of the difficulties of maintaining competitive margins.
There are a number of retail sites in South Africa which are very little different from their European and US counterparts: Kalahari.com is a good example. Whilst there has been a tremendous number of e-company closures in South Africa, those who survive the current downturn look set to survive beyond it. E-enablement software provider, e-company has 700 merchant accounts: 40% are online, half of which are small users. Its software handles 370,000 transactions a month and this number has been growing at 5% per month for two years.
The most difficult part of the whole process is financial trust &SHY; payment and security. This is the single most difficult factor to overcome even amongst diaspora buyers. It will be important to have merchant accounts that offer vis and mastercard so that buyers have the security these brands provide. One South African operator has calculated that online transactions have cut fraud by 50%.
Several factors make it hard for Africa to compete at an international level in this field. There Impact of currency exchange on margins (for example, E-dinar charges 5-6% of transactions). The charge per transaction are high because Africa does such a low volume of transactions. Verisign charges 2.4% on the value of the transaction, PayPal 2.9% + 30 cents per transaction. Many countries are not approved for merchant accounts.
The bit you cannot do virtually is the actual delivery of physical goods. There are tremendous difficulties but we should not exaggerate them. For example in Ghana, BKB or DHL will deliver anywhere in Accra in 24 hours, in Central Ghana in two days and to the northern provinces in 4 days. DHL will also deliver to most of Kenya’s major towns in 24 hours. Delivery generally accounts for about 10% of transaction costs. International delivery is far harder bit not impossible. The e-commerce business needs to be able to have the products it advertises available. For things like crafts, they need to be of reasonably consistent quality and they need to be in your warehouse or storage area shortly after the order arrives. One e-commerce operation has 30 suppliers (most of whom sell through shops) for a relatively small number of goods offered because stock often runs out. Suppliers are not computerised so it is hard to track stock levels.
There are going to be new opportunities for e-commerce but its growth will be tentative and slow. However the prizes will go to those who accumulate operational knowledge now as the size of the user base expands. New opportunities include: cyber cafes operating as merchant account holders (a customer gives them the cash and they order on their behalf), portal owners operating as merchant account holders (they offer transaction services to web site operators and pay them an income minus costs) and smart cards. There are already ATM rechargeable cards for mobile phones and there are internet charge cards in Africa. Why can’t these units that have value be used as a currency for online transactions at special outlets with merchant accounts?
Is e-commerce in Africa a "for real" possibility? In analysing market developments in Africa over the last year we have been consistently surprised by the speed with which the private sector is making things happen across in the field of ICTs. However there are major structural problems to overcome - like transaction costs - and even the limited African consumer sector that exists is not highly service-oriented. Whereas in the UK it was viewed as a major achievement that the web could offer home delivery of pizza and a video, African consumers have much less money and much lower expectations. The first wave (outside of South Africa) must surely be international hard currency buyers like tourists and the diaspora.
SURVEYS IDENTIFY STRUCTURAL OBSTACLES BUT POINT TO GROWTH
Is there e-commerce in Africa or is this a hype that evaporated with the demise of dot.com craze? UNECA (www.uneca.org) working with IDRC (www.idrc.ca ) among others believed e-commerce is critical to Africa entry to the information society and in 2000/2001 commissioned a survey - Pan African E-commerce Mission - to investigate the status of e-commerce in Africa. A detailed survey was carried out by experts in twelve countries in Africa selected to represent all regions in continent.
The writer of the article coordinated the survey for Eastern African region. Key issues to be addressed were the presence or otherwise of a supportive environment of the development of the e-commerce &SHY; government awareness and indeed policy and strategies to champion e-commerce at national level, availability of requisite legal and hard infrastructure to support e-commerce, availability of human resources and finally research capacity to localise and in the long run build local research capacity. The output of the survey was presented at e-Forum organised by AITEC (www.aitec.com) in Nairobi Kenya in March 2001. In the same year, BMI-Technowledge (www.bmi-co.za) published a detailed survey on e-commerce in East Africa. The survey is the first to attempt to quantify the volume of the e-commerce in East Africa and identify the entry points for entrepreneurs in the emerging e-commerce in East Africa.
Key outcomes of the surveys were as follows:
- That the governments need to act on their responsibility to create an economic, legal regulatory environment that will enable and foster the growth of e-commerce within their national economies. As a first step, the governments should develop and publicise an e-commerce agenda accompanied by a timetable for the action. This long-term vision will reduce uncertainty and reduce risks for the entrepreneurship in e-commerce.
- There was negligible e-commerce taking place in the East Africa but the level of awareness was increasing by the day and requisite support infrastructure was expanding. By 2004 a significant volume of e-commerce was projected on b2c and b2b to slightly over US$_ Bn. B2b was projected to contribute 75% of the e-commerce trade in Kenya and 43% in the region.
- Market adoption has to take into account and assuage the concerns of the generation gap of key stakeholders. Those who produce products for sale are in a different generation from those driving e-commerce. The greatest challenge is to engage traders in e-commerce who sees e-commerce is technology driven.
- Critical lack of the infrastructure (telecommunications and internet, online payment e-fulfilment etc) inhibits domestic e-commerce. International e-commerce particularly in service industries leads and indeed had the largest level of investment. Most websites are static being no more than a hard copy company brochure.
- More resources and skills have to be invested to build the web as a business channel.
An e-commerce transaction is the end product of a system that has to be looped by various entrepreneurs in an enabling environment. The region presents opportunities to complete the loop and exploit e commerce by overcoming the numerous challenges
The author Muriuki Mureithi can be contacted on: firstname.lastname@example.org
AVOIDING DIGITAL DIVIDE SUICIDE - LOOKING FOR LOCAL SOLUTIONS
Since its inception some 5 years ago, e-commerce has proved to be a highly successful and profitable venture for a number of companies. With the global potential of e-commerce growing, African countries stand to gain considerably from sustainable e-commerce solutions, considering that a number of products and services available in Africa remain unique to the continent, and the effective facilitation of cross-border trading could substantially stimulate local African economies. However, this is not happening now, and many wonder if it ever will.
In Africa, the penetration of advanced telecommunications to the general public is limited by a lack of education, low per-capita income and rigid regulatory environments. Growth opportunities in the African market abound, however the level of risk inherent in the market remains high. Much of the risk factor lies on the regulatory front, with a future that is uncertain at best, despite the regulators’ best efforts. Other risks are competitive, directly linked to telecommunications service provider monopolies.
Legislation is also a key issue. In some countries, specifically South Africa and Tanzania, too much legislation with regard to multi-currency pricing and selling of goods in an international marketplace makes it less attractive for merchants to explore e-commerce opportunities. It also makes it more difficult to acquire transactions offshore. However, too little legislation with regard to tax, fraud and moral issues such as gambling, pornography, etc. makes the e-commerce environment exploitable and less attractive to both merchants and consumers alike.
The perception in Africa that e-commerce is riddled with fraud also poses a major threat to the success of e-commerce. This view is all too often supported by anti-fraud hardware and software suppliers, as well as the various media, who use this hype to sell their products and services. This makes the situation appear far worse than it actually is. In addition, the perception of Africa as corrupt and fraud ridden in general has an effect on international scoring systems, which position Africa as a high-risk continent.
The various regional rules that govern card associations are also a hindrance to e-commerce in Africa. First-World solutions and their associated costs are applied in Third-World Africa, causing astronomical costs for e-commerce products and services that could be available at reduced rates. In this regard, Africa lacks a powerful voice to express concern and deal effectively with the issue.
International competition is also very strong in the e-commerce arena, and most First-World players have had valuable experience over the years. This, together with the fact that First-World players have had access to the best technology and service providers of e-commerce solutions for the past 10 years, puts Africa at a major disadvantage.
And finally there is the issue of fulfilment distances and costs. Logistically it is more difficult to move products around in Africa, and once converted into the currency of a product’s destination country, the cost of delivery is much higher for African countries. Getting the product to the consumer is therefore an expensive exercise.
These issues all point to the fact that Africa is facing digital divide suicide. The continent’s low line penetration has had a knock-on effect on the elements of e-commerce, and led to higher infrastructure costs, which have led to higher bandwidth costs. These, in turn, have meant higher access costs for the people who have the lowest average income on the planet. In effect, ICT access costs less for the most affluent of people in the world, and is most expensive for the poorest, and the difference is getting bigger. In October 1997 the difference in Internet hosts between North America and Africa was 267:1, in October 2000 it was 540:1.
Those who are privileged enough to have access to the technology generally acquire and use it more easily and effectively. This means that, on an exponential basis, they become more privileged. African nations, however, spend more money on importing technology to reinforce this "privilege" than they do on supporting their own domestic technology initiatives.
To add to this frustration, all protocols, standards and rules followed in e-commerce today have been set by private organizations and multi-national companies, none of which include a meaningful voice for Africa. This could be attributed to the fact that only 5% of the world’s secure servers are found in Africa, of which 90% are in South Africa, but whatever the reason, Africa is poised for certain digital divide suicide. The reasons: most technology implemented is imported and paid for in a non-African currency, requires ongoing support (in a non-African currency) and is generally inappropriate for this continents infrastructure and scale.
In addition, taxes placed on e-commerce infrastructure, such as computers, are very high, and this discourages purchases. This coupled with the general high cost of telephony throughout Africa discourages e-commerce trading and keeps it out of reach for the majority of its citizens.
In Africa the majority of telecommunications service providers are state owned, and these same states decide on the taxation legislation that governs imports of IT and e-commerce infrastructure. In this regard, current pricing and legislation should be recognized as a threat to e-commerce, and should be adjusted accordingly. State owned telecommunication service providers could make up for the loss with state subsidies, and in so doing, encourage and support e-commerce participation and inevitably, its growth.
Africa could also look to South Africa for sustainable results as South Africa has its very own sustainable e-commerce solutions, and in the B2C environment, there are no non-South African players.
The reasons for this are:
- International systems cannot compete on price - local systems are developed and supported in local currencies.
- International systems are not appropriate for the infrastructure &SHY; local systems are more robust.
- International systems are not appropriate for the market - local systems focus on meeting specific local requirements.
- Local solutions meet the international standards and requirements for both Visa and Mastercard, and all banks in general.
Because South African e-commerce solutions serve the specific South African e-commerce environment, they improve service and profit levels. In addition, e-commerce solutions are created to meet the specific needs of South African merchants, and the fact that they are priced in Rands, makes them an attractive option for the rest of Africa.
For ten years now, organisations worldwide have been realizing the benefits of e-commerce and it has proved to be a highly effective way of doing business both across international boundaries as well as within their own borders.
Africa needs to start realising the value that e-commerce can add to its economy. The fact that there are a number of small towns and communities existing in isolation, each with their own unique products and services, means that e-commerce can position them in the global market without them having to physically move. Now is the time for Africa to start tapping into this unique and valuable form of trade and start experiencing the benefits it has to offer.
However, African countries will continue to isolate themselves in the international e-commerce arena if they don’t realize the importance of investing in appropriate, affordable technology. They must look for opportunities to create the environment, and invest locally for long-term sustainability. The more they depend on First-World solutions, the longer it will take them to develop sustainable e-commerce solutions, and will eventually prevent e-commerce trading to take place at all.
The author Barry Coeetze can be contacted on: BarryC@ecompany.co.za