Tips for buying product packaging from China

Imagine Apple selling iPhones in ziploc bags instead of the glossy cartons we are used to. It wouldn’t be the same thing. Well designed and high quality packaging adds plenty of value to your product. In this article we will explain what you need to think about when buying product packaging from a Chinese supplier – including design options, materials, warning labels and marking requirements.

“Do I need to find a packaging supplier on my own?”

No. While few Chinese suppliers are manufacturing product packaging in-house, most have established relationships with sub-contractors specialised in packaging and printing. Therefore, you don’t need to bother with locating a product packaging supplier by yourself. However, In case the suppliers sub-contractor is not able to provide a satisfying product packaging, you may still source one on your own.

That said, it comes with certain complications. The packaging must still be delivered to the final assembly supplier. Unless you have a reliable partner in China, I don’t suggest you attempt to manage such a transaction.

Product packaging design

When buying product packaging from China, you basically have two options. You either use an existing product packaging, or you design one on your own:

Option #1: Custom designed product packaging

This approach is somewhat complicated. First of all, you must design the packaging according to the product shape and dimensions. Never rely on your supplier to make final adjustments to your packaging design. Chinese suppliers are accustomed to a “make to order” approach, and simply forward clients product packaging designs to their sub-contractors. Unless you have previous experience designing product packaging, you may want to get help from a professional. If you decide to do it yourself, keep track of the following specifications:

• Material (e.g. PVC plastic)
• Lock type
• Surface lamination (e.g. glossy)
• Thickness
• Outer dimensions
• Inner dimensions
• Printing (e.g. Silk screen printing and Offset printing)
• Pantone colors

Customized product packaging also requires additional tooling. Tooling costs are always paid by the buyer, but varies depending on the type of tooling. That said, product packaging tooling costs are usually quite low, and rarely adds up to more than a few hundred dollars.

Option #2: Using a factory designed product packaging

Using an existing product packaging design comes with two benefits. First of all, the packaging design is already tested and based on your products design and dimensions. That’s quite a bit of time and money saved right there. Secondly, the tooling is already paid for by the supplier, or its sub-contractor, and can be used free of charge.

Even if you do decide to use a factory design, you can still add your own touch by customising the layout. The layout must of course be based on the packaging design and dimensions, but most suppliers can provide you with a digital template.

Labelling requirements

Product packaging design is not all about posh artwork. Importers in worldwide need to ensure that the product packaging is labelled according applicable labeling regulations. In many cases, labeling requirements are part of a safety standards, such as CE (Europe) and CPSIA (United States).

Failing to comply with the applicable labeling requirements may result in a forced recall, or even a lawsuit. Keep reading and I’ll explain why.

Warning labels

Certain legal acts and directives requires the importer to attach a warning label to the product packaging, in case a product contains a regulated substance. In the case of California Proposition 65, which regulates hundreds of substances in consumer products sold in California, such a warning label shall include one or more of the following sentences:

WARNING: This product contains a chemical known to the State of California to cause cancer.

WARNING: This product contains a chemical known to the State of California to cause birth defects or other reproductive harm.

WARNING: This product contains a chemical known to the State of California to cause cancer and birth defects or other reproductive harm.

Such labels are certainly not going to make your product fly off the shelves faster. The only way to avoid warning labels is by verifying, through laboratory testing, that the regulated substances are within the legal limits. While California Proposition 65 is only relevant to business based in, or selling to consumers based in, California – similar warning labeling requirements are also outlined in the Federal Hazardous Substances Act (FHSA).

In the European Union, warning labels are not as common as in the United States. A logic explanation is that the EU decided to outright ban or strictly regulate substances under the REACH directive. Essentially, you need to ensure compliance or you are not allowed to sell the item at all – with or without a warning label. In South Africa, the law pays specific attention to the wording of labels and how products are advertised. The objective is to create an equal platform for all products by stating, for instance, having only facts and not confusing the consumer by word of implication.

Marking requirements

Certain directives, including the CE directive in the European Union and FCC in the United States, require the product packaging to contain graphical symbols.

Country of origin

Consumers have the legal right to know where a product has been made, before they make a purchase. If the country of origin (e.g. Made in China) printed on the product unit, is not visible through the product packaging, the country of origin must also be printed on product packaging.

Minimum Order Quantity

The Minimum Order Quantity, or MOQ, for customised product packaging (layout and/or design) is usually no less than 1000 pcs. The packaging MOQ is not controlled by the manufacturer, but the print and product packaging sub-contractor. This may cause certain complications when the product quantity is lower than the packaging quantity. While it’s hard, mostly not possible, to make the sub-contractor to cut the MOQ requirement – most suppliers still agree to store excessive product packaging for future orders.

Thereby, you can order a product packaging volume that exceeds the actual number of items made for your first order, without wasting money on excessive inventory. That said, make sure your supplier keeps your product packaging in a dry and clean storage area. Make that a clause in the sales contract.

Product packaging regulations

While labeling requirements concerns the item inside the packaging, there are also directives and legal acts specifically regulating packaging design, mechanical properties and substances. In the United States, the Poison Prevention Packaging Act (PPPA) regulates packaging for household items that may be harmful to children.

Most packaging regulations require the importer to ensure compliance with one or more ASTM (United States) or EN ISO (European Union) standards. Contact us today, if you want to know more about how we can help you ensure compliance when importing from China.

This article was originally published here. We re-published with permission from our content partner, ChinaImportal, an e-commerce platform that assists businesses looking to import products from China.

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Meet the Nigerian fashion designer building Africa's Hermès

By Mfonobong Nsehe

From Goldman Sachs to launching her own fast-growing high-end fashion start-up, Nigerian entrepreneur is looking to tap into Africa's growing luxury goods market.

Kunmi Otitoju, a 30-year-old Nigerian fashion designer and entrepreneur, holds two Computer Science degrees – a Bachelor of Science degree with first-class honors from Howard University and a Master of Science degree from Virginia Tech.

But her first love was Fine Art. As a high school student in Lagos, she won the Fine Arts prize at school every year for 3 years. Having moved to the U.S. when she was 17, and then to Europe at the age of 25, Otitoju found herself deeply enmeshed in western culture. Keen on preserving her Nigerian identity and eager to propagate facets of Nigerian culture, she conceived the idea of lining high-quality leather bags with Aso-oke fabric, a hand-loomed cloth woven by Nigeria’s Yoruba people.

In 2011, after stints at Goldman Sachs and a few other international corporations, Otitoju established Minku, a fast-growing high-end Afro-centric brand that produces luxury bags, wallets and other fashion accessories for men and women by subtly blending Aso-oke into contemporary Spanish leathers to present a transcontinental finish.

All Minku’s products are hand-made at a workshop in Barcelona, Spain, but they are sold at high-end stores in Nigeria and on the company’s website.

Otitoju recently spoke to me about her journey, her future plans, and the state of luxury goods in Africa.

Why Aso-Oke?

For me, Aso-Oke is luxury. It is hand-woven, the weaving is dense, in the imperfection of the weaving lies evidence of the human touch, and it comes in sophisticated colours and patterns. What is luxury afterall? For me, it is the finest aspects of one’s culture, distilled, packaged, presented to, and accepted by the rest of the world. For example, Italy has leather and coffee as some of the finest aspects of its culture, and that is evident with the luxury companies out of Italy. Same with Switzerland and watches. Africa was a bit late to the branded luxury game, but we are catching up. Aso-oke lets me contribute to this in a small way.

Are you expanding into other goods and services?

Yes. We now offer a personalization service that lets our clients customize a purchase with their name/initials/message embossed onto the leather. It is a nice way to personalize one’s Minku bag, or just to include a message that is a reminder of love or a feeder of good vibes.

In our latest collection, I introduce bracelets for men. Men’s bracelets have gained wide acceptance among males, from surfers in Cape Town to investment bankers in New Jersey. I personally buy into the idea of a man wearing a beaded bracelet — it tells a story of travel and daring, and it alludes to an open mind. So combining precious metals — 18kt gold, sterling silver — with powder glass beads hand-made by the Nupe people of Nigeria, I created a collection of men’s bracelets. Each bracelet comes in an Aso-Oke lined watersnake leather drawstring pouch of varying designs. The pouches double as key-chains.

You have been running Minku for three years now. How is it received?

Minku has been well received. Like any other entrepreneur, I have had some discouraging moments. But many good opportunities have also arisen, sometimes unexpectedly, and it is those that have helped Minku to grow. So I work hard on product and marketing, but I have also learned that serendipity is part of entrepreneurship.

Are there any specific experiences that shaped your resolve to be an entrepreneur?

My parents have been entrepreneurs for most of my life, so I had exposure to the idea of becoming one, quite early on. In 2010, I was accepted to Stanford University to study product design under the Stanford Mechanical Engineering Masters program. This was a dream come true for me because I love Formula 1 and I wanted to study how to design faster cars (I still do; I love working with constraints, and Formula 1 car design provides constraint sets that fascinate me). However, I had just moved to Barcelona less than a year earlier, and did not yet want to leave.

So, I had a hard question to answer: if I didn’t go to Stanford, could I still do good design, at a level similar to if I was a Stanford Product Design grad? I was not sure, but I decided to try. I think a lot of the courage to set out and start Minku came from desperately wanting the answer to that question to be a ‘yes’.

What do you think about the luxury market in Africa?

I think there is a fast-growing market for African-made luxury goods in Africa. Building this market to last will take a paradigm shift as to why it’s as cool to own a leather bag designed by a Nigerian or Kenyan luxury house as it is to own one from an Italian powerhouse. But it also takes much product/service refinement on the part of African designers and manufacturers. Recently, African designers have been hitting the mark on product refinement, even with local production. This has been producing results, and needs to continue. International gatherings like the 2012 IHT Luxury Conference also help to focus on Africa’s capacity for luxury creation and consumption. I like the idea of Africa as a destination for handmade luxury.

As a person running a business, what are some skills or attributes that you have found to be indispensable?

As a person running a business, I have found that optimism has helped me get far. If you combine an optimistic disposition with research and hard work, you can do great things.

As a creator of quality leather goods, what are some skills or attributes that you have found to be indispensable?

The main skill for me is creativity. I will go meta and say that an indispensable skill has been knowing how to get myself into my best creative mode.

Where do you see Minku in 5 years?

I try not to plan ahead much, because there are too many factors beyond my control. At the moment, growth for Minku is centered on making the most desirable products I can conceive. I am working with unusual materials: Aso-oke from Nigeria, and leather. So there is already some novelty there, but I am interested in seeing just how much excitement I can wring out of people, both men and women, on the mundane topic of bags. So much of my current focus is on that.

I belong to the generation where the most successful social network was started out of a dorm room, so for me, having a small atelier for working and an online storefront has not been unusual, and I am lucky that this model has been well-received. In five years, I would love to have a flagship store for Minku, perhaps in Lagos or New York City.

This article was first published by Forbes here

Mfonobong Nsehe travels across Africa, helping Forbes to chronicle the stories of successful African enterprises and entrepreneurs.

Private equity navigates regulatory headwinds

Chief executive officer of tax and management services firm Intercontinental Trust Limited, Ben Lim, gives insight on private equity growth in Africa and the evolution of regulatory environments to make investing more efficient.

With your 15-year history in Mauritius, how have you have built your business, and how has Mauritius evolved to be a gateway for investment into Africa?

Today we see Mauritius as the key financial centre for Africa, and indeed African private equity, having seen a real shift in the investment flows from other emerging markets to Africa in recent years. To provide some context, in the early 90s, I witnessed the emergence of Asia, particularly China and India, through investments passing through Mauritius, and our business was heavily weighted towards those regions. When the financial crisis emerged in 2008, we saw a significant change in investment flows, and we re-focused our business from Asia to Africa. Mauritius on the whole seemed to follow this shift. 80% of all investment companies in Mauritius pre-2008 were Asia-bound, and post-2008, 70% of all investment companies in Mauritius are now Africa-bound. It makes sense; although an island, we form part of Africa, we are a member of the African Union, Southern African Development Community (SADC) and Common Market for Eastern and Southern Africa (COMESA), and we are building the skills and intermediary businesses that so many of the businesses in Africa need as they grow.

Our business largely serves the private equity fund managers in South Africa, we have a strong foothold in this market. Interestingly since around 2009, these managers have sought to look for investible opportunities beyond their home market, to other countries in Southern Africa and even further afield to other countries in sub-Saharan Africa.

We see this as an increasing trend as well as a general pick-up in the number of fund managers and activity in some of the larger economies of Africa, such as Kenya. East Africa, we believe, is a real private equity growth region of the future. 

How have the regulatory environments in Africa evolved to be more conducive to PE funds and their ever increasing pool of global investors?

If we look at East Africa specifically, I think there are still a number of tax systems that can be inefficient for international investors investing directly in those countries. For example, in Tanzania, the tax system lifts the corporate veil and taxes the beneficial holder, which can result in double taxation exposure for a non-domestic investor. Mauritius is in the process of negotiating a Double Tax Agreement (DTA) with Tanzania to alleviate investors in funds domiciled in Mauritius of this double exposure, as well as other nations, including Algeria, Lesotho, Malawi and Togo. The government of Kenya is about to introduce capital gains tax, which had previously been absent from the tax system, and which can be a significant return drain for private equity investors. While this tax is on the horizon, Mauritius has ratified a DTA with Kenya that is awaiting enforcement. Once enforced, this will significantly benefit Mauritius-domiciled funds investing in Kenya.

One country which has structurally morphed into an attractive region for private sector investment is Rwanda. The government has put in place a number of structural enhancements to consolidate the socio-economic recovery and to generate sustainable and equitable growth and poverty reduction. Further, Rwanda's government has signed a DTA with Mauritius which is awaiting ratification. Rwanda recently ranked second of all African countries in the World Bank Group's Ease of Doing Business Index, behind Mauritius which ranks number one, and ahead of South Africa in third place.

Overall, Mauritius has worked very hard towards increasing efficiency and reducing risk for those investing in Africa, on a relative basis. The below table provides a snapshot of how investing in Africa via Mauritius can benefit investors.

Investor Promotion and Protection Agreements (IPPAs), mentioned in the table can provide comfort to investors who are investing in countries where there are risks of nationalisation or expropriation. The IPPAs encourage and protect investments by virtue of measures to minimise any deprivation of investments, and in the worst case scenario, any deprivation of investments will have to be justly compensated. IPPAs with Mauritius exist with Burundi, Madagascar, Mozambique, Senegal, South Africa, and Tanzania, with a further 14 IPPAs awaiting ratification, including Kenya and Rwanda.

Given the current trends, it is likely that Africa will finally emerge from its history to position itself as one the most affluent and developed regions of the world, developing at a much faster rate than one would have predicted only a couple of decades ago. We are confident that Mauritius will remain the preferred hub as a gateway for investments in African private equity and venture capital markets. 

Intercontinental Trust Limited operates in Kenya, Seychelles, Singapore, and South Africa. The firm serves Africa-focused private equity funds with targeted capital commitments of approximately US$ 5.5-billion. 

Article sourced from Frontier's content partner, African Private Equity and Venture Capital Association 

Importing brand-name products from China. Shortcut or dead end?

Found a factory in China that makes a brand-name product and plan to buy directly from them? Read this article to find out why this is a terrible plan.

By Fredrik Grönkvist

Why bother with creating your own brand when you can free ride on one that’s already well established? Many naive importers assume that importing brand-name products from China is a short cut to success. It couldn’t be further away from the truth. In this article we explain why it’s not possible and how an attempt to import branded products can ruin your business.

You’re not going to outsmart Steve Jobs

We receive many enquiries every week from small businesses looking for anything from Apple iPhones and iPads to Sandisk Memory Sticks and brand-name apparel. While many of these products are manufactured in China, large corporations like Apple maintain tight grip on their supply chain.

Considering the amount of money these companies put into development and marketing, do you think it makes sense for them to allow third-party importers to purchase their products for rock bottom prices just to dump the prices? The factories which produce branded products are legally bound to only sell to the owners of the brand or licensed distributors. So, unless you are a licensed distributor (a costly and difficult venture) you can't access these products.

The same thing can also be said about Chinese brands such as Huawei or Xiaomi. Huawei is a market player in Europe and America. They have huge resources to manage distribution on their own. Xiaomi has yet to launch their products internationally. However, their products are manufactured for the Chinese market and thus not compliant with European and American product safety directives, such as CE and CPSIA.

“What about night shift production?”

There are plenty of stories about contract manufacturers of brand-name products running night shift production. The products are “essentially the same” as the original since they are produced in the very same factory. But that’s not the only benefit – the prices are so low that even a small order can generate a decent return on investment. Sounds too good to be true? It is! Let me ask you something. If tech giant Sony is struggling to make a worthwhile profit in the TV industry, why would you think you can? There’s no “night shift production” in China. It’s a fairy tale told by scammers to lure naive business owners. Besides, even if it  existed it wouldn’t be legal. Why? Because parallel importing is illegal in most developed markets.

There is only one way to buy brand-name products: purchase them from the official distributor in your country or market. However, if this comes as news to you, then I honestly doubt that you are ready for such a business venture. Companies such as Samsung and Apple are, and can afford to be, picky about who they do business with.

China retail prices are usually higher than in the US and Europe

Guess what, an iPhone 5S costs up to 25% more in China compared to the USA. Sounds strange? It’s not. The difference between rich and poor in China is huge. It doesn’t make sense for companies to cut their prices. Those who can afford it will buy regardless of price. Well, almost. Either way, the average Zhou won’t be able to afford an iPhone even if Apple lowered the price with one or two hundred dollars. In other words, forget about importing brand-name products from China.

Counterfeit products, payment frauds and confiscated cargo

Those who attempt to import brand-name products from China are in general very inexperienced. In other words, they are easy targets for scammers. Thus, it should not come as a surprise that this industry, if it can be called that, is completely infested with scammers. While some of them won’t hide the fact that they are trading with fake products, other claims to supply authentic brand name products for amazing prices.

There are only three possible outcomes when importing “brand-name” products. You either receive fake goods or the scammer takes your money and runs. Well, you might say receiving the fake goods is at least something. No, it is a big problem because it is illegal to import fake goods for a commercial purpose (as in actually selling them). 

Apart from violating IP laws, counterfeit items are NEVER compliant with many juridisctions' product regulations and directives. Considering that fake products are often manufactured by criminal syndicates, this should hardly come as a surprise. Non-compliance with product certification standards (i.e. CE, REACH and CPSIA) can be just as disastrous as getting caught importing fake products.

Ensuring compliance with regulations in your country or market is critical. Importing non-compliant items is illegal and may result in having your items refused entry by the customs authorities – or even major fines in case someone is injured or property is damaged. There are several reported incidents involving fake products, phone chargers in particular, causing serious injury or even death.

Create your own brand

I hope have convinced you to not even consider importing branded products from China. Forget about free riding on other companies' names. If you are serious about importing products from China you should create your own brand. While it’s no short cut, branding a product ads a ton of value. Branding a “Made in China” product is easy. Most suppliers can offer a custom logo or product packing layout for a low cost.

This article is re-published with permission from Frontier's content partner, ChinaImportal, an e-commerce platform that assists businesses looking to import products from China.

Top 10 African cities of the future

By 2040, Africa will experience faster economic growth than any other region and is expected to have the biggest labour force in the world, according to PwC’s latest Global Economy Watch, which puts the spotlight on the largest cities in sub-Saharan Africa.

As companies around the world look to exploit the widely reported untapped potential on the continent, the question now is, where can one focus if they want to expand their activities in sub-Saharan Africa (SSA)?

Most major corporations are already active in at least one of the four largest cities in SSA – Lagos, Kinshasa, Nairobi and Johannesburg. But, according to PwC economists, it is the ‘Next 10’ biggest cities in the region that should be exciting foreign investors. The population of these cities is projected to almost double by 2030, growing by around 32 million people.

Next 10 biggest cities

1. Dar es Salaam (Tanzania)
2. Luanda (Angola)
3. Khartoum (Sudan)
4. Abidjan (Cote d'Ivoire)
5. Nairobi (Kenya)
6. Kano (Nigeria)
7. Dakar (Senegal)
8. Ouagadougou (Burkina Faso)
9. Addis Ababa (Ethiopia)
10. Ibadan (Nigeria)

Top 3 cities

1. Lagos (Nigeria)
2. Kinshasa (DRC)
3. Johannesburg (South Africa)

The latest UN projections show that by 2030 two of the ‘Next 10’ – Dar es Salaam and Luanda – could have bigger populations than London has now.

Cities are the typical entry points for businesses trying to expand into new overseas markets, because they enable closer interaction with customers in a relatively small geographic space, which in turn helps contain distribution costs.

One of the key factors that drive economic growth is the number of people of working age. PwC expects a bigger and younger urban population to be associated with strong GDP growth. The firm’s analysis shows that economic activity in the ‘Next 10’ cities could grow to about $140-billion by 2030. “This is roughly equivalent to the current annual output of Hungary,’ says Stanley Subramoney, Strategy leader of PwC’s South Market Region

This is a comparatively conservative estimate by PwC that assumes no real exchange rate appreciation despite relatively strong projected growth in these SSA economies.

More people, bigger business opportunities

One of the key factors that drive economic growth is the number of people of working age. PwC expects a bigger and younger urban population to be associated with strong GDP growth. Several trends are responsible for the increasing appeal of the region to international investors. These include high GDP growth rates, rapid urbanisation and the “demographic edge”. Other economic factors are the big new discoveries of natural reasons, substantial investment in infrastructure, sustained growth in per capital incomes and the growing ability of countries to raise project financing on international capital markets.

The three big hurdles 

There are however three problems that could slow the pace at which the ‘Next 10’ biggest cities in sub-Saharan Africa grow, says the report. These are issues that African countries have been trying to tackle for many decades with limited success:

Low quality of 'hard' infrastructure like highways, airports and trains, which increases the cost of doing business, eats away at business profits and discourages investment.

Inadequate 'soft' infrastructure like schools and universities, which could lead to a persistent skills gap that hampers long-term business growth.

Growing pains stemming from the inability of regulators and policymakers to manage effectively a larger and more complex economic system as growth proceeds. These problems could, for example, lead to credit or property bubbles as a result of rapid economic growth, or a failure to tackle issues relating to corruption and excessive bureaucracy that deter international investment.

Looking ahead

The challenges that policy makers face is to convert Africa’s demographic dividend into economic reality by overcoming these hurdles. “History suggests this will not be a quick or easy process. Investors should form their own plans to mitigate these problems by supporting infrastructure skills and development programmes,” says Stanley.

Source: APO

What are the prospects for South African banks?

The fallout from ill-fated unsecured lender African Bank continues. Chief investment officer at Futuregrowth, Andrew Canter, talks about the implications for banking investors in South Africa.

The South African Reserve Bank (SARB) placed unsecured lender African Bank under curatorship on August 10 after it reported major losses and said it needed at least R8.5-billion (US$800m)of capital. A consortium involving South Africa's major banks will inject R10-billion into the embattled bank. Following this development, rating agency Moody's downgraded the credit rating of African Bank's closest competitor, Capitec, by two notches - from Baa3 to Ba2, and also cut the local-currency debt ratings for the country's four biggest lenders.

Andrew Canter, chief investment officer at Futuregrowth Asset Management. He gives his perspective and context to these events below.

After the collapse of African Bank, what are the prospects for Capitec Bank?

While Capitec is facing the same macro-economic headwinds and consumer strains as African Bank, our view is that Capitec is not another “African Bank disaster in the making” for the following reasons:

• Capitec is still first generation owner-managers with their “hands on the tiller”. African Bank’s management (with the exception of the previous CEO, Leon Kirkinis) was largely second or third generation, and the shareholding more widely dispersed. Capitec’s management is more risk averse than African Bank’s.
• Capitec has more honest and robust provisioning for bad debts in their asset book than African Bank had, as well as more conservative treatment of rescheduled loans.
• Capitec had taken the strategic choice to run a service-providing bank and thus has a better customer relationship model, and alternative fee and funding sources.
• Capitec was therefore slightly less driven to chase market share in lending than African Bank.
• Importantly, Capitec’s loan collection model is better than African Bank’s: Capitec generally gets their customers to open bank accounts and deposit their paychecks, while African Bank relied on debit orders.
• It appears Capitec has a less expensive branch infrastructure and therefore has better economies of scale than African Bank.
• Capitec has a reported capital adequacy ratio of 39%, which is considered robust.
• Finally, one can’t help but notice that Capitec’s largest competitor has just been hampered, which should reduce competitive pressures.

Capitec’s institutional funding has an average term of 36 months, and they receive over 60% of their funding from retail deposits: This means the destructive power of nervous institutional investors is muted, but (in a country without deposit insurance) a skittish consumer could cause large withdrawals. We think that is one reason for SARB’s extraordinary and (to our memory) unprecedented public statement of support on the weekend of August 16, 2014 following Capitec’s downgrade by Moody’s.

View SARB statement here.

What are the implications of Capitec’s credit rating downgrade?

We saw the Capitec downgrade as the thin-edge-of-the wedge for all South African banks to be downgraded - Capitec was first merely because of its exposure to the unsecured lending market. The fact is that the African Bank restructuring (bail-in?, bail-out?, resolution?) is a template for future bank failures. The notable points are that:

a) A South African bank has essentially been allowed to fail, and banks in the future will likewise fail. In fact, SARB’s statement said “a bank should be able to fail without affecting the system.”

b) All investors, save for individual/retail depositors, suffered losses. Equity, preference shares, and subordinated debt appear to have been entirely denuded, while senior debt suffered a 10% haircut. The taxpayer, through SARB’s purchase of African Bank’s “bad loan book” for R7bn, is taking risk with capital, but also has a first lien on the “bad” assets purchased for a discount.

Further, it’s noteworthy that the other banks in the system have been tapped to underwrite the equity in the new African Bank: This signals that SARB and the banks all knew the systemic risks of an African Bank collapse.

In short, the perceived probability of default of banks has now de-facto risen, and the recovery rate after default has de-facto dropped. This is a recipe for higher credit risk and rating downgrades.

Was SARB’s response to African Bank appropriate?

Bank failures are not new to South Africa: In a 2012 review, Futuregrowth was able to anecdotally recall over 17 bank failures or near-failures in South Africa during the previous 20 years. But in almost all cases depositors and senior lenders were protected by some sort of bailout or “arranged marriage”. However, once one added the global experience of 2008-2009 and regulators’ response to the massive bank bailouts, the writing has been on the wall: Banks will fail, and governments won’t bail them out.

We think the SARB’s response to the African Bank problem was predictable, well timed, rational, and justified. While it’s unlikely that anyone – SARB or investors – accurately predicted the cascading losses of African Bank, we are conscious that SARB had been monitoring the situation for a long time. Had SARB not stepped in quickly and decisively after the African Bank share price collapse we could have seen:

• African Bank branch closures with immediate job losses;
• An irrational undermining of confidence in the banking system, with accelerating withdrawals from all other banks;
• Chaos in capital markets as players scrambled to manoeuvre in an illiquid, fear-based environment;
• Large withdrawals from money market funds and other unit trusts; and
• A “reverse run” wherein people who have borrowed from African Bank simply stopped paying en-masse, causing even greater losses.

We believe that SARB’s response was the correct balance of timeliness, cost sharing, systemic stability, and loss prevention.

What are the investment implications of all this?

Futuregrowth has been taking a jaundiced view of unsecured lenders and banks for the past few years. Consequently, we have expressed strong public views on a range of related topics, such as the risks to investors of the advent of covered bonds, the unsustainable practices of the micro-lending industry, and the lack of clarity about South Africa’s bank resolution regime.

We have taken the view that the investor market has not been adequately pricing for the evolving risks in this sector. While as a large institutional investor in South Africa it is exceedingly difficult to completely avoid exposure to the banking sector, in order to mitigate risks Futuregrowth has been:

• Keeping clients’ bank exposures shorter-dated (e.g. avoiding bank debt with more than 5 year terms);
• Avoiding bank subordinated instruments (including subordinated debt, hybrids and preference shares);
• Reducing exposure to personal unsecured lenders, particularly African Bank; and
• Allowing such historical exposures to run-down over time.

We will retain this stance until such time as the market re-prices yields for the risks.

While credit spreads on bank debt will widen, the losses will arise only from mark-to-market changes (and not defaults). The scale of potential losses will be much less than the African Bank haircuts and losses.

What other key lessons can investors take away from the African Bank collapse?

The micro-lending industry’s and African Bank’s troubles were visible well in advance, and some portfolio positioning was possible. This case shows that good, forward-looking credit analysis can add value for client funds. Further, the changes to Regulation 28 in 2011 introduced the requirement for a wider range of investment analysis tools, notably environmental, social and governance (ESG) screening which focuses on business sustainability. The practices of the micro-lending industry were visibly unsustainable and that led Futuregrowth to implement suitable investment views. Unfortunate though it is, African Bank’s demise is a strong endorsement for incorporating sustainability screens into investment processes.

How to succeed as a franchisee

Turning a start-up franchise business into a success is tough, but possible. Learn from an expert the keys to striking gold.


By Jeremy Lang

If you’re the kind of guy who likes to go to sleep early, don’t buy a restaurant franchise. I am stating the obvious? Perhaps, but you’ll be surprised how many first-time franchisees make the mistake of buying a franchise that simply does not fit their lifestyles.

In the world of start-up franchising, it can easily be a fatal mistake to make, because there is so little room for error. Very few people who buy their first franchise have the resources for a second chance once they’ve found out that the franchise they had set their heart on is actually not the right fit.

Lifestyle preference is only one of three pillars which prospective franchisees must consider to make sure that the franchise they choose is the right fit for them. The other two are skills and personality.

The skills set of the entrepreneur is the most important. First, there is the technical know-how related to the specific industry, such as a beauty salon or a service station. You’ve got to be able to choose a franchise for which you either have a natural skills set, or one in which you’ve had previous experience in.

Irrespective of the industry, a franchisee will always have to be a jack-of-all-trades to a certain extent - the HR person, the salesperson, the office-manager person and the tea lady, so you’ve really got to have a good general hybrid of skills such as:

• Good management ability, which is the core of what the franchisee is signing up for
• Sales skills, because your whole enterprise revolves around your ability to secure business
• An eye for detail and practical problem solving skills. Because you will be fulfilling multiple tasks in your business, you have to know as much about all the different systems as possible
• Networking and relationship-building skills for forging ties with your clients, staff, suppliers and franchisor, and
• Practical problem-solving skills. You are going to be faced with many challenges every day. You will have to be decisive, and think quickly to find solutions to problems.

This list is true for any start-up business, franchised or not, but there is one set of skills particular to franchising: the ability to follow the rules of the concept. Franchising is a recipe that requires strict adherence by franchisees, otherwise the service or product will start differing from branch to branch, and the collective power of the brand will suffer. If you are not somebody who likes to operate your business under a strict set of rules that you have not created, then franchising may not be for you.

Being a successful franchisee not only has to do with skills, but also with personality. Prospective franchisees need to be honest with themselves about their personality. A generally introverted person should shy from retail or service-heavy businesses such as restaurants. Similarly, a sociable, outgoing personality will become frustrated in a desk-bound business where there is little interaction with clients.

Although nothing can replace common-sense self-knowledge, I would suggest doing a personality test such as the Myers Briggs test, more to help you think through what you already know about yourself rather than teach you about aspects of your personality that you didn’t know.

The unknown usually lies on the side of the franchise. A first-time franchisee who knows himself well could still be in for a nasty surprise when it turns out that the franchise requires an approach, attitude or trait that he simply isn’t comfortable with.

There are two methods of avoiding this mistake. First, speak to the franchisor that you have your eye on. A reputable, established franchise group will have a very clear idea of what kind of personality and skills set are required to make a success of their concept. Some will have formal descriptions and even tests as part of their assessment process.

Most importantly, speak to the franchisees in the group that you want to join. If possible, work-shadow franchisees who are hands-on involved in the management of their businesses for a week or two. The exercise should leave you under few illusions about whether you are up to the task, and whether the work and lifestyle suit you.

Jeremy is regional general manager of Business Partners Limited.

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Below are links to some franchise opportunities on the Frontier platform

International financial services company is seeking a master licensees in Africa

Investors sought for expanding popular fast food franchise in South Africa

Top 6 private equity deals in Africa

Consumer-facing sectors are proving to be the most compelling for private equity in Africa, as demonstrated by the type of deals in July.

The Abraaj Group invests in Tunisian private hospital

The Abraaj Group announced its funds had acquired a majority stake in Polyclinique Taoufik S.A., the second-largest private hospital in Tunisia with 164 beds.

The investment will help the hospital to consolidate it’s strong position in the market by further increasing patient capacity and adding new services, upgrading and renovating the hospital, and investing in human resources and training.

To implement its growth strategy for Clinique Taoufik, Abraaj will draw on its extensive experience in the healthcare sector, gained from investing in businesses across the Middle East, North Africa and Turkey.

Population growth in North Africa is expected to reach 190 million by 2020, and with life expectancy also on the rise there is potential for further demand for quality healthcare services.

Tunisian healthcare sector made up almost 7% of GDP in 2013.

The investment is the sixth by Abraaj in Tunisia. It’s portfolio includes baked goods company Moulin d’Or; Unimed, a leading player in sterile form pharmaceutical products; and Plastic Electromechanic Company (PEC), which specializes in plastic injection, the assembly of electrical equipment and harnesses, and medical products.

AfricInvest Group and FMO form SFC Finance

AfricInvest Group and FMO (The Netherlands Development Finance Company) are part of a consortium which created SFC Finance, a senior secured lender providing funding for growth or expansion to small and medium enterprises (SMEs) in Africa.
SFC Finance will structure its loans with tenors adapted to the cash generation capabilities of its customers. Shareholders committed equity of US$20-million, alongside an initial US$50-million debt facility extended by the Overseas Private Investment Corporation. 

Debt financing for SMEs in Africa is poor, particularly the lack of credit facilities with repayment schedules that reflect company cash flows, a factor which has inhibited their growth. SFC Finance will address these needs, and also SME governance and environmental and social responsibility.

Amethis Finance announces final closing at US$530m

Private investment fund, Amethis Finance, saw final close of their first fund at US$530-million, which included institutional investors from Europe, US and Africa, together with close to 40 European and US entrepreneurs and family offices. 

Amethis has already made five investments since announcing their first close 18 months ago, in fast -performing companies in Kenya, Ghana, Cote d’Ivoire and Mauritius - in the banking, oil and gas, retail distribution, and logistics sectors. 

The Fund's shareholding structure mixes classical institutional investors (banks, insurance companies, fund of funds) with successful private entrepreneurs from the manufacturing and services sectors who are investing often for the first time in Africa and are looking to know better the continent. It assists its investors in their expansion, notably through co-investments.

Economic models are rapidly changing in Africa, with consumer and retail oriented companies taking advantage of those evolutions. This rapid growth is creating significant capital needs for local companies, and Amethis’ strategy is to foster long-term ties with well-established, high-growth African businesses that need long-term capital. 

Private European and US entrepreneurs and family offices are increasingly investing in Africa, and see the continent as the next world frontier for growth.

DPI and PIC in consortium acquisition of RTT

Development Partners International (DPI), through African Development Partners II, and the Government Employees Pension Fund (GEPF), represented by the Public Investment Corporation (PIC), acquired 80% of the RTT Group, Africa’s largest privately owned parcel distribution company, for an undisclosed sum. Ethos Private Equity leads this consortium.

The investment will expand RTT's offerings, and help to tailor services to specific customer needs.

RTT is a market leader in third-party logistics and distribution, and a forerunner in break bulk and express distribution. The company operates across sub-Saharan Africa, comprising over 120,000m2 of warehousing and cross docking facilities. RTT has a combined fleet in excess of 1,200 vehicles and employs close to 5,000 people. Revenues exceed R2.5-million per annum.

Fusion Capital buys equity stake in Kenya’s first free newspaper

Fusion Capital acquired a 40% equity stake in Xtra Publishing Limited, a free newspaper and digital content company in Kenya. 

Xtra will leverage free print and digital services in an attractive new media hybrid model. The company launched the region’s first free newspaper in March and is already the third-largest newspaper in Kenya. The newspaper will be supported by online and mobile services targeted at the young professional demographic. IPSOS/Synovate readership surveys confirm that the newspaper has secured the young, urban professional readership, providing near zero wastage for advertisers.

The investment by Fusion will be utilized in advancing IT and editorial systems, and for working capital requirements.

Kenya and East Africa is showing encouraging trends in digital news and entertainment dissemination. The statistics show impressive growth with Internet usage having doubled between January 2010 and 2011, from 3 million to 7.5 million users. Usage further increased by another 65% between October 2010 and October 2011, rising to 14.3 million users.

That figure corresponds to over 36%of the population having access to the Internet (WAN-IFRA 2012).

Helios Investment Partners and IFC in US$630-million equity fundraising round for Helios Towers Africa

Telecommunications towers company, Helios Investment Partners, and the International Finance Corporation (IFC) participated in Helios Towers Africa’s latest equity fundraising round, which raised US$630-million in new equity resources from existing and new shareholders.

Existing shareholders including Quantum Strategic Partners, Helios Investment Partners, Albright Capital Management, RIT Capital Partners and IFC, added to their current stakes and are now joined by new shareholders, Providence Equity Partners and IFC African, Latin American, and Caribbean Fund.

Helios also expects to complete negotiations shortly on new and extended debt facilities of over $350-million with a strong syndicate of international and local lending institutions.

Following this latest injection of capital, Helios will have raised over $1.8-billion in external financing since inception in late 2009 to fund acquisitions and organic growth.

The telecommunications towers industry in Africa has huge potential. There is need for 100,000 Points of Service (PoS) to merely satisfy demand for 2G coverage and associated capacity demand over the next five years. This PoS requirement is underpinned further by the growing demand for 3G and 4G data, which is driving the need for significant additional infrastructure capacity and in-fill across the continent.

Helios owns over 7,800 towers in Africa.