Over the last few months, my practice has been examining new operating models for logistics sector in Africa. From air to road, sea to space, African logistics remains at infancy. Intra-city and intra-national logistics remain stymied by marginal cost challenges and lack of enabling infrastructures, even as the promise of cross-national border logistics, anchored on AfCFTA (African continental free trade agreement), may become unrealized.
If commerce runs on supply chain, frictions on logistics remain central in the lack of competitiveness and efficiency in the utilization of factors of production across African markets and territories. Specifically on trucking logistics, there are many ways stakeholders can improve margins, reduce costs for customers, and scale into more domains, to stimulate economic activities, across industrial sectors, in the continent.
In February 2020, I will be making a presentation in Addis Ababa, Ethiopia. We are examining a new framework which I have called Addis Alliance, named after the headquarters of the African Union, Addis Ababa. This Alliance will mirror the aviation’s Star Alliance where some airlines cooperate and compete simultaneously by enabling better utilization of assets based on comparative advantages on routes. For example, Delta Airlines could run routes for KLM in U.S. while KLM handles Delta customers from Europe to East Africa.
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In our thesis, all the logistics players may not have to be operating in all African countries to execute AfCFTA if better operating protocols are established on taxes, pricing, etc. For example, a Kenya-domiciled logistics company can focus on Kenya using its scarce resources to deepen capabilities and fix logistic frictions in both urban and rural areas, over expanding rapidly to South Africa. But as it does that, it finds a good partner in South Africa so that it can move cargo more optimally by using the South African partner on reverse logistics. Through this integration, overall costs will drop, and margins will improve for the players even as customers get better values. Our optimization model shows more than 37% efficiencies for partners at -/+ 15% disparity scales.
We do believe that an integrated network of alliances will help these players grow over excessive competition which will not necessarily make them better since cross-national border scale cannot wholly improve unit economics. To move a truck from Nigeria to Ghana, and return empty will be bad. But to work with a Ghanian partner who can make it possible that on reverse you have goods to carry will make everyone better. While you can operate in Nigeria and Ghana simultaneously, our data shows that most times, the nexus happens without deepening value creation in any of the countries. Interestingly, building a solid moat through scale is exceedingly difficult due to market fragmentation, and structure.
Alliances built on multi-point aggregation of partners will deliver better value not just to investors and startups, but shippers, just as Star Alliance does indeed reduce costs for flyers by reducing marginal costs for the cooperating airlines!
Logistics and Fintechs are among the areas we are spending time to understand at deeper levels for post-AfCFTA; we are available to offer thought-leadership to global clients.
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I like the forward-looking and proactive approach in play here, rather than waiting for AfCFTA to take off, and then rafts of reactionary measures and tactics will be all over the place.
Efficient utilisation of assets has always been a big issue in this part of the world, but making the logistics space in this continental commerce to function optimally will obviously improve margins for all players.
The two areas (fintechs and logistics) being focused on now are key, if we are to experience anything with semblance of seamless trade/transactions across the continent.
Nice insights.
Yes indeed, now is the time to begin to examine the frameworks instead of just waiting for AfCFTA to happen.
I left this comment on LinkedIn for someone that noted if alliance will lead to oligopoly.
Both have answered. I will add that under Star Alliance, costs of flying have dropped because companies improved their marginal costs positioning. As Francis noted, a PROTOCOL will ratify those elements making sure Alliances are not oligopolistic. I am not sure airline industry is not innovating because of alliances. What our data shows that they are saving money for customers because costs have dropped and through the web which removes information asymmetry on pricing, demand will continue to put pressure into many alliances, not just one. Yes, we expect to have alliances.
I will be in the National Assembly later this month on some elements of this, if you are in Abuja, I will be happy to invite you. I will run some simulations on how alliances can improve quality, deepen capacity, advance service and help the sector. We do think using our model, ecommerce will advance because intra-regional logistics can morph to become “a web of national postal service” since the nation cannot build one.