The East African (Nairobi)

24 July 2011

Kenya: Nairobi, Africa's New Headquarters for Multinational Firms

Nairobi — Nairobi is fast becoming the African home of choice for multinational companies, especially those in the services sector, looking to grow their presence on the continent.

Pfizer, the US-based pharmaceutical company, PricewaterhouseCoopers, and Posterscope, an outdoor advertising firm, have in the past seven days unveiled plans to establish a regional hub, recruit staff and set up shop respectively in Kenya's capital city last week.

In the past one year, global heavyweights in the service industry such as IBM, Google, PwC, advertising agency WPP, Bharti Airtel, Nokia/Siemens, Huawei, Procter & Gamble, Biersdoff, Barclays and Stanchart have announced plans to either set up regional hubs or transform their local operations to serve sub-Sahara Africa.

Several factors work to the benefit of Kenya and the other East African states too. First, the formation of a Common Market is helping create a strong internal market with a population of 130 million and a middle class estimated at 30 million consumers. With South Sudan, which has a population of 8.4 million, expressing interest in joining the EAC, and Kenya opening up its northern frontier through the Lamu Corridor to serve Ethiopia, which has a population of 84 million, the region now boasts a potentially connected internal market of 240 million people. This is way above the 150 million mark that experts say a country or a bloc needs to be a major world power.

The second factor is the peace dividend that has come with the ending of most of the civil wars in the Great Lakes. This is making the region a safe bet to invest in. The peace dividend has seen homegrown African multinationals such as Ecobank, Stanbic, UBA, MTN, KCB and Equity pursuing a more aggressive expansion strategy in these markets, which are similar to their home markets. Global multinationals too, like Pfizer and IBM, are smelling opportunity in the region.

Pfizer sells mostly antibiotics, cough syrups and anti-fungals. The drugs are finding a ready market as the East African population grows -- at an estimated 3.5 per cent in 2011.

"The hub will serve as a legitimate supply system of products, bringing us closer to the market and reducing the total accumulated cost per product," said country director for Nigeria and the East Africa region Enrico Liggeri when launching Pfizer's hub last week. Kenya's healthcare industry has attracted private equity investments that have helped some of the insurance service providers and hospitals expand.

In 2009, IBM opened an office in Nairobi to meet the increased demand from clients in both the private and public sector in East Africa and across the region.

The clincher for IBM, which previously had little interest in sub-Saharan Africa, was winning a multimillion-dollar contract to manage Airtel's IT infrastructure across 16 African markets. IBM is expected to hire 2,000 workers to serve its continental business. Airtel too wants to have the hub of its African operations in Kenya and is currently planning to put up a headquarters in the city.

Another factor that is acting in the region's favour is the massive investment that EAC governments have put in to build fibre-optic cables, which has boosted Internet speeds and connection levels.

Unlike in manufacturing - where cheap power, water and raw materials are key - the global services industry thrives on extensive and reliable airline connections, a comfortable but affordable location, fast Internet connections and a deep pool of skilled talent.

Operational centre

This is why international firms are looking to make Nairobi the fulcrum of their continent-wide operations as they race to be part of Africa's growth story. One of the biggest pluses for Nairobi is its central location on the continent. This hugely favours the national carrier, Kenya Airways.

South African Airways, a key competitor, is disadvantaged by the longer distances it must fly to cover the rest of Africa. Indeed, KQ has a bold, if not overly ambitious, target of flying to every African capital city by 2013. If it hits this target, business executives will find it much easier to reach any part of the continent from Nairobi.

This will mean better revenues for KQ because Africa remains its most lucrative market, where it enjoys healthy margins and little competition. It generated about half of its $953 million revenues in Africa in the financial year ended March 2011.

It also means that the majority of business executives traversing the continent will find their way back to Nairobi, the airline's main hub. The airline's expansion has already created a demand for scarce hotel rooms, which according to a report released by Mercer, a human-resource consulting firm, is among the highest in the world. The growing demand for accommodation and conference facilities has encouraged global hotel chains to set up in Nairobi to plug the supply deficit. Rezidor Hotel Group, owners of the Radission brand, are putting up a hotel in Nairobi, joining about 10 other local hotels coming up.

Investigations by The EastAfrican show at least 2,500 new bed capacity will be created in the next year in Nairobi alone. Kenya is also stepping up its efforts to improve infrastructure, with the ongoing road works, which will make it easier to travel within the capital city. Other infrastructure projects supporting the business environment in Nairobi include the laying of infra-red cables allowing for faster Internet connectivity.

The services industry needs fast Internet connectivity because it allows for Internet banking and easier communication such as web conferencing with the Western world.

Multinational firms like Google are also finding it easier to recruit in Nairobi where many say there is a deep and broad pool of talent from banking to technology.

"It seemed to be the easiest place to get the talent that we needed," said Joe Mucheru, Google "lead" for sub-Saharan Africa on why the technology company first set up in Kenya before spreading to other Sub-Saharan countries.

Talent is a big concern for the multinationals and the existence of a strong mobile technology applications innovation hub that has produced products like M-Pesa and the various Google map based apps is working in Kenya's favour.

"We are still way ahead -- relative to the rest of sub-Saharan Africa -- in terms of graduates being produced every year," said Gitau Githongo, a Nairobi based economist. "This means that you will find good quality staff if you are setting up here."

However, not every Kenyan graduate is lucky enough to get a nice job immediately after graduating, and there is evidence that a good number of these potential employees are not well qualified and employers have to spend a lot of money retraining. The level of unemployment for mass unskilled labour remains as high as in other East African nations.

Additional reporting Jeremiah Kiplangat

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