How is Japan Prepared for Scrambling in Africa? - NB Online

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Sumitomo Chemical Co. to build mosquito net plant in Nigeria

Article by: Nagato Ito, Mariko Kodaki, Staff Writers, Nikkei Business

26 May 2008

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How is Japan Prepared for Scrambling in Africa?

Sumitomo Chemical Co. to build mosquito net plant in Nigeria

Sumitomo Chemical Co., Ltd. will build its second plant in Nigeria for production of mosquito nets by March 2009. Leading trading company Sojitz Corp. plans to start investigating the business environment in preparation for construction of a solar-powered electricity generation plant in Botswana in southern Africa.

With the Fourth Tokyo International Conference on African Development (TICAD) scheduled to begin on May 28 in Yokohama, the potential of Africa is drawing much attention as a source of resource supply and consumption. Against such a backdrop, a number of Japanese businesses are trying to make strategic moves toward capturing business opportunities on the “sleeping continent,” this publication has learned.

World celebrities descend on mosquito net plant

There is a facility in Tanzania in eastern Africa where the world's big names are visiting one after another, including U.S. President George Bush and former soccer player Hidetoshi Nakata. That is the mosquito net factory run by Sumitomo Chemical Co. in alliance with local capital.

It happened in January 2005 at the annual general meeting of the World Economic Forum (Davos Congress) held in Switzerland. When American actress Sharon Stone offered to make a contribution, many more raised their hands for donations and a total of one million dollars flew in within only 10 minutes or so. The fund-raising was meant to buy mosquito nets from the Sumitomo plant and elsewhere. Why are mosquito nets so precious? Because the nets serve to prevent malaria from spreading in African nations. Sumitomo Chemical introduced the mosquito nets on full-scale in Africa in 2001. The company, Japan's largest in the production of source materials for insecticides, made special mosquito nets by kneading the ingredients into resin so that they are slowly released to kill mosquitoes.

The advantages of the nets were recognized by the World Health Organization, and orders increased immediately. The nets were exported from factories in China and Vietnam at first, but Sumitomo Chemical provided a Tanzania textile firm with related technology free of charge and started local production. By February 2007, the two companies had established a joint venture and built a new plant. At present, the two firms together employ 3,200 people who produce 10 million mosquito nets per year. By March 2009, the firms will advance into Nigeria in western Africa to expand on their production capacity.

Sumitomo Chemical's Executive Director Shigenori Tsuda said, “We hope to join hands with local capital to set up a production system and in the end, turn out 20 million nets a year.” What worries the executive director is that the mosquito net business is faced with fierce price competition. The net which sold for $5.6 a piece at first has dropped to $4.8, driven by inexpensive Chinese products. On the other hand, since more than 95% of the raw material is resin, higher oil prices are also beginning to squeeze profit. The company plans to reduce the use of materials by about 15% through devising better ways of knitting and cut down on costs by 15-20% through training employees to lessen the non-performing rate of products.

Executive Director Tsuda says, “Without improving our competitiveness, we can’t continue with this business. This is no longer an age in which higher-priced products can be tolerated in the name of social contribution.” The fact that the company has been making continued efforts to achieve the coexistence of social contribution and profit growth resulted in drawing celebrities from the world over. Therein lies the superiority of the Japanese firms’ African strategy.

Sojitz explores commercialization of solar batteries

Over the years, Japan's assistance to African nations tended to consist mostly of donations for humanitarian purposes. TICAD, in which the Japanese government has played a pivotal role in staging every five years since 1993 as part of a movement for canvassing, is aimed at securing votes to become a member of the U.N. Security Council. But with transformation under way in Africa, the character of this conference is going through a drastic change.

Section Chief Seiji Okada of No. 2 section of the Foreign Ministry's Middle East/African Bureau said, “the African side is more eager to get investments than fleeting funds. While making use of private funds, we'd like to give them support in such a way that they can become financially independent.” When the main constituent of support is beginning to shift from government to private sector, how should Japanese enterprises develop their business in Africa?

The charm of Africa first of all would be its resources. It is a treasury of platinum and other precious metals and underground resources such as diamonds, petroleum, nickel, cobalt, vanadium, etc. Since the prices of such resources began soaring, Africa's economic growth is accelerating. The economic growth rate in FY2007 is expected to average 5.8% for all African nations, more than twice the average growth rate (2.7%) of all OECD member nations. With high-rising prices of resources in mind, now is the time to lay the foundation for the future.

Many Japanese trading firms are already on the move. Outstanding examples are Sumitomo Corp. engaged in a venture business of developing a nickel mine in Madagascar, and Mitsubishi Corp., continuing on with its aluminum refining joint venture business in Mozambique. But also making interesting moves is Sojitz. By joining hands with a government-backed public corporation in Botswana in southern Africa, Sojitz plans to launch research aimed at commercialization of solar batteries. The plan is for Sojitz to secure enough supply of hard-to-procure silicone, a raw material for solar batteries for use by Japanese makers which in turn will produce the solar batteries. Sojitz will bring the finished batteries to Botswana and generate electricity.

Sojitz established its strategic base in Egypt in the 1920s and is regarded as a Japanese pioneer in Africa. It used to have footholds in 12 locations, which have been reduced to six because of floundering revenues. It now plans to make a comeback by engaging in an environment-related business. President Yutaka Kase of Sojitz said in his New Year's speech, “This is going to be the year of the environment and of Africa.” In March, he made a visit there and said, “Paying attention to potentialities, I expect to see new business development.”

Business chance at pyramid's bottom

The economically developing Africa can be a market where Japanese businesses can challenge new business models. For example, individual buying power may be small at present, but as a whole, it can form a huge middle-class in the future. That's the approach Ajinomoto is making. Of all the sales branches spread out in 112 countries of the world, Africa is by far the fastest growing market. Sales of the flavoring condiment in Africa expanded among women in farming villages at the rate of 30% per year during the past few years and annual sales in FY2007 exceed 10 billion yen, double the amount recorded in FY2004. Ajinomoto products are distributed by a local subsidiary in Nigeria to 11 neighboring countries. It has about 650 employees, all of them Nigerians except for six Japanese and French workers.

The history of Ajinomoto's pioneering activities in Africa dates back to the 1980s. It started out by spreading the idea of what the flavoring condiment is. Sales personnel repeated sampling sales at markets and retail stores in town, in addition to running commercials on TV and magazines. Women in farm villages, busy carrying water, raising children and working on the farm, yearn to be able to prepare large amounts of food quickly and achieve a good taste.

For use by low-income local residents, the company threw in four 3 gram packs for 5 naira (about 5 yen). It then started to sell 13 gram packs for 5 naira each, and that became a hit product selling about 2 billion packs per year. About 80% of the company's annual sales in Nigeria comes from a northern region where people in the low-income bracket live.

Gathering attention these days is a marketing theory called “Bottom of the Pyramid” (BOP), which means the social stratum at the bottom of the income pyramid has the largest growth potential. Actually practicing this theory is Ajinomoto, which provides people in the low income bracket with reasonably-priced products and rapidly expanding its business scale.

By looking at individual businesses separately, we can see that the number of enterprises trying to capture the African market is increasing. But when it comes to national activities, we can't deny that Japan falls behind the U.S., Europe and China.

Can Japan compete with China?

Japanese trading firms used to have strongholds in Africa, aiming at gaining concession rights to ODA-related businesses. But as more and more cases started requiring open bidding to win orders for supportive businesses, it became impossible to get all the orders after going through various complications, and many of the trading houses were forced to go through integration and consolidation of their bases after their businesses sank below the break-even point.

Conditions have deteriorated so far that the Japan Business Federation (JBF) submitted a report to the government last December, commenting on the government's African business support system and said, “As it stands, Japan won't be able to win competition with other countries.” Lying behind is the fact that although Japan ranked third among the advanced nations after France and the United States in 1999 in its contributions to ODA for supporting Africa, it has since been outstripped by Britain and Germany, dropping to fifth place.

Another disturbing thing is the recent moves of rapidly advancing China. It started to go full-scale with ODA for Africa in 2000. Although no precise data has been made public, calculations based on sources released by the Foreign Ministry show that China is gradually coming close to Japan in the total amount of ODA. The advance of Chinese businesses into Africa is also accelerating. Last year, the Industrial and Commercial Bank of China announced it will acquire 20% of stocks of the leading Standard Bank of South African Republic for 620 billion yen. The news drew much attention as the largest-scale overseas investment by a Chinese firm.

Japan, in an attempt to make a roll back, plans to do away with the old framework, stop the open bidding system in special fields including ecology-related businesses and adopt new types of ODA to study plans for assistance to individual businesses. Expectations are rising among the companies concerned, as people related to Sojitz have expressed hope to “be able to draw this support for our solar battery business.”

University professor Kiyoshi Kurokawa, who is involved with international relations and who serves as a special advisor to the Cabinet Office said, “While securing profit by making use of environmental technology, Japan should expand on its support to Africa and maintain local employment in dealing with China involved in resource diplomacy. While ODA is being reduced, it is necessary for Japan to concentrate on areas where Japan's past records and strength can be used and switch to a support system under which the government, private and non-government organizations (NGOs) can work in unity.”

The true worth of Japan's aid to Africa can be determined by how local businesses such as those of Sumitomo Chemical and Ajinomoto can be strengthened. Now that “Japan passing” is spreading, the government announced a plan on May 20 to double its ODA to Africa and private investments by 2012. Last year, China and the European Union also held conferences to discuss aid to Africa, and it seems that Africa is going to be in a position to choose aid-giving nations.

What will Japan be able to do for Africa by making full use of the government and people's power? Representatives of more than 50 nations gathering at the coming conference will evaluate the proposals Japan should make.

(Nagato Ito, Mariko Kodaki, Staff Writers, Nikkei Business)

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