The African Continental Free Trade Area (AfCFTA) agreement is set to unlock the continent’s growth potential by connecting over 1.3 billion people across 55 countries; with a combined Gross Domestic Product (GDP) of USD3.4 trillion. According to the World Bank, its implementation could boost Africa’s exports by USD560 billion, increase incomes by USD450 billion, and improve wages for skilled and unskilled laborers by 9.8% & 10.3% respectively; as well as largely promote trade opportunities for women by 2035.
Small to Medium Enterprises (SMEs) account for about 80% of the businesses and create more than 50% of employment opportunities in their respective economies across the continent. The SMEs are poised to benefit largely from the AfCFTA pact as it pushes for trade liberalization among African nations. The agreement aims to reduce all trade costs by eliminating tariffs on 90% of goods and services and create a single market with free movement of goods and services. The continental free trade area will enhance Africa’s capacity toto integrate further into global supply chains from a competitive positioning.
However, despite the AfCFTA promising SMEs exponential growth potential, its realization may be curtailed by the inherent barriers to trade. Tariff and non-tariff barriers to trade have over the years adversely impacted intra African trade; which is estimated to be at 17% compared to Asia’s and Europe’s intra-continent trade which stand at 59% and 68% respectively.
Fragmented markets, high tariffs, poor transport infrastructure, excessive border bureaucracy and stringent government regulations protecting individual markets from regional competitors are among the major trade barriers that have made it extremely difficult and costly for African countries to trade amongst themselves. Yet, increasing intra-African trade is key to Africa’s long-term economic growth.
The trade barriers notwithstanding, SMEs can still prepare themselves to take advantage of opportunities that AfCFTA will present by being export ready. Export markets will offer SMEs in Africa the opportunity to conquer new markets, expand their customer base, grow their revenues and increase their brand visibility.
Exporting involves sending goods across international borders and receiving payment from foreign buyers, financing, logistics, product standards and packaging. Being export ready is very crucial as the core areas of the business; products, production capacity, financial resources and exporting skills are involved. In their first attempt to export, most SMEs will struggle to succeed because exporting is equated to a new business venture that will often face high risks and challenges in its operations.
It is therefore paramount for SMEs in Africa that seek to tap into the intra-Africa export market to have a diligent export plan way in advance. This export planning will involve the following key steps:
- Developing an export mindset in the business
Having the right mindset in the enterprise is key to realizing the exporting opportunities. SMEs must prepare themselves mentally to handle the opportunities and challenges that come along with the intricate business of exporting. The management team needs to be on board with the export plan as leadership is key in steering the venture. The exporting mindset is built on identified export opportunities from market research and resources available in the enterprises to venture into the new market.
Once the exporting mindset is established the enterprise can know what to expect in the new export business line; the next step should be to build up the determination of the company’s management and staff to overcome exporting challenges, and prepare a solid export plan.
2. Developing a comprehensive export strategy that meets the needs of the target market
SMEs can start working on an export strategy once their management teams have agreed to pursue the venture. The export strategy should be informed by the product they want to export and the customer segment in their target export market. It should also outline the enterprise’s vision, goals and actions to develop the exports with indications of potential markets and revenue.
From their market research, SMEs should tell if their products appeal or serve the needs of the target market and the access requirements such as technical, health and safety standards. There may be modifications and adaptations that SMEs would need to make on their products to suit the preferences of consumers in their target market, particularly in packaging and labeling.
In terms of product volumes, the SMEs should estimate the amounts they would need to export and their fully loaded costs inclusive of transport, insurance, certification costs among others. They should also assess the investment required to boost their production capacity to meet the demand from their target markets. Finally, the SMEs need to develop an optimum pricing strategy that is both competitive and generates sustainable profit margins for the business.
When developing an export strategy, SMEs are likely to run into a number of problems which include:
- Their products not being appealing to the export market despite thriving domestically
- Poor packaging, handling and storage services which may make their products not suitable for cross border trade
- Requirement to have export licenses and permits which may be difficult to obtain or prohibitively expensive
- Their products may fail to meet the technical or safety standards and requirements of the export market because of different standards across the countries
- Insufficient production capacity to support the export driven expansion
To counter such challenges, SMEs need to research the market access conditions for their target market at the export planning stage; before they start implementation. This will help them to identify the necessary standards, requirements and modifications they should meet, as well as the documentation they need for the exporting process; and acquire them in good time.
3. Financing an export plan
Exporting is a major decision for SMEs, as it is costly and the enterprises may not be able to marshal enough resources to fund the process. From the export strategy developed, the enterprises should then develop a comprehensive budget that includes the following activities:
- Research and consultancy: The SMEs must invest in research and advice in mapping out export markets. The information collated from the research will be useful in making important market selection decisions.
- In-market visits: While secondary data about the export markets is good, SMEs should set aside funds to facilitate visits to the target market before committing to it. Having a personal feel about the conditions “on the ground” is a perfect way to tell if the product will take off in that market.
- Product adaptations: From the in-market visits, SMEs may find out that they need to modify their product to fit the requirements of their target market. The enterprise should allocate budgets for this product adaptations.
- Promotions: With existing players in the market, SMEs should be willing to spend money to promote their products in the export market through advertising, making sales visits to potential buyers and participating in trade fairs among other products promotional methods.
- Increasing stock holdings: Since exporting is a whole new venture and the SMEs must be able to meet the large orders from the export markets, they will need to increase their production capacity to meet the needs of their customers on time.
- Fund attractive payment terms: Buyers in the export market are often willing to engage with companies offering them attractive payment terms (such as 90 days credit). However, for most SMEs their liquidity positions can not allow them to offer such credit terms; hence they need to have access to trade finance to keep them afloat as they sell on credit.
With a detailed budget outlining the above, export oriented SMEs can then approach financial institutions like banks for financial support; with right documentations and plans to support their funding requests.
4. Accessing exporting skills
Most SMEs fall short of exporting skills, hence the need to invest in these skills whether in-house or through service providers before embarking on their export business. Fundamental export skills should focus on the following 4 core areas:
- Market development: SMEs need skills in market research, market selection, understanding market entry strategies and market conditions.
- International logistics: SMEs need to understand international transport players, documents required, how to work with international freight service providers, as well as the costs associated with the process.
- International payments: Understanding the international payment methods such as letters of credit, managing payment risks and navigating foreign exchange controls.
- Compliance: SMEs need to understand export documents required for their trade and how to complete them. Such documents relate to customs declarations, standards requirements relating to product testing and certification, rules of origin requirements among others.
SMEs must be willing to invest the time and resources to take up an export venture and enjoy the opportunities that it brings along. Addressing the four problems aforementioned is very important towards the journey of being export ready, and SMEs must ensure they get it right. Like a new business venture, exports oriented SMEs must be ready to go all in if they meet all market standards. Alternatively, they can wait it out as they build their internal capacity and garner resources to take up the opportunity in the future.
In the meantime, SMEs should join government funded export promotion organizations or chambers of commerce to access subsidized services on exporting. These organizations help in identifying opportunities and provide advice and support in export readiness.
Author: Fie-Consult