Risk or Opportunity?

"The man who knows it can't be done counts the risk and not the reward." - Elbert Hubbard

Currently I am in South Africa visiting friends and family and I have spent a lot of time trying to bring myself up to speed with the business and economic environment.  After asking numerous questions and digesting the information it is clear that where some investors see only risk while others see opportunity.  Like most investments the difference between determining whether the opportunity presents itself as an investment or something to be shunned comes down to your assessment of the risk of the investment and the expected reward, however there is more to the equation than first meets the eye.

When you look at investing in Africa as a foreigner the idea is daunting.  The capital risk is enormous as not only can the investment be lost to government nationalization but strikes, bribes, extortion, corruption, blackouts and worker and social unrest are the norm, spending on protection is common place and governments can change overnight.  In addition trying to find and retain skilled workers is becoming increasingly difficult and you start to wonder why anyone in their right mind would bother to invest at all.  It is also no wonder that most African currencies are taking a beating against the dollar and the Euro.

As an example when the South African mobile phone operator MTN expanded into Nigeria they had factored in the cost to build the cell phone towers only to discover that the power grid was so poor that each tower required its own generator to provide power.  Once these were installed they soon found that a new expense was required in that the generators were soon being stolen so now they had to hire security guards to protect the generators.  Fortunately for them the opportunity was so vast that they were able to manage these expenses while continuing to profit which brings me to the first addition to the equation, recurring revenue.  MTN can make a go of this because of the recurring revenue model that is the cell phone industry.  Were this a one off project I doubt these expenses could possibly be borne.

The next thing to look at for MTN was that they had essentially maximized their opportunity in South Africa and so to expand they needed to look elsewhere.  This is similar to a Apple or Microsoft in the United States who seek to grow their markets by expanding into new regions.  For a South African country moving into Africa is the obvious choice as the expertise is there and they are already familiar with the lay of the land.  This expertise is critical and has led to some other South African companies expanding based on first exploiting their local knowledge before taking on the rest of the world.

South African Breweries springs to mind.  They started as a local brewer and soon managed to become the preeminent brewer in South Africa.  They then tried to expand into Africa with minimal success until they realized that their lack of success was due to the lack of refrigeration.  So they began delivering refrigerators to their distributors around the continent and sales started to boom - who doesn't want a cold beer on a steaming African safari?  They are now one of the largest brewers in the world having acquired numerous other breweries including Miller.

The opportunity therefore presented itself to these businesses because of their proximity to the opportunity, their expertise and the recurring revenue that was present (once the refrigerator was installed the only cold beer in town was SAB's or the refrigerator was removed).  So the next time that you determine an opportunity is worth an investment do not limit yourself to the risk and the reward equation but expand it to include expertise and recurring revenue!