E-commerce: Poor infrastructure holds Africa back

BY PETER WANYONYI

Year 2017 was an astonishingly successful year for e-commerce worldwide. Retail (Business-to-consumer, B2C) e-commerce sales were worth over $2.3 trillion, making up over 10% of total retail sales worldwide. Business-to-business (B2B) global e-commerce sales topped $20 trillion in 2017.

Forecasts are that this will continue to rise: as companies worldwide look to make as much profit as they can, they will continue to shift many of their customers online, cutting out expensive middlemen and moving towards ever-tighter supply chains. As usual, though, there’s a “but” in this rosy picture: e-commerce is growing worldwide, including in Africa, but the barriers that Africa throws up are formidable and can easily discourage even the most optimistic of retailers. As a result, Africa’s share of global retail e-commerce is a paltry 2%. The digital divide has never seemed wider.

E-commerce is a fairly simple concept: it’s buying and selling online. All manner of goods and services can be traded online, with the internet providing the initial basic infrastructure that links buyer and seller. At a very high level, there’s little difference between e-commerce and traditional commerce – after all, both involve a buyer wanting a product or service, a seller willing to provide that product or service, a payment mechanism, and a way of getting the payment from the buyer to the seller in exchange for the product or service.

In traditional African commerce, the buyer is generally responsible for picking up the product they have purchased. If they purchased a service, the customer generally has to travel to the point of service delivery for completion of the transaction. The components of the transaction are therefore underpinned by a transportation mechanism – how the customer physically gets to the point of merchandise or service pick-up – and a payment mechanism that has to be kept secure until the merchant has received payment. Typically, particularly in Kenya, the merchant is not the original manufacturer of the goods, nor the originator of the services, that they sell. In commerce involving physical goods, there’s usually a middleman – the wholesaler – who acquires the goods from the manufacturer at a fairly low price, adds a mark-up for profit, and then sells these on to a retailer. The eventual customer then has to buy from the retailer, who in turn adds yet another mark-up to the cost of the goods in question. It’s easy to see why this model is so expensive and inefficient: the consumer ultimately pays for the middlemen’s existence, alongside their accompanying facilities like warehouses and so on.

In e-commerce, the components are more or less similar, but some roles are reversed. Instead of the customer making their own transport and logistics arrangements, the seller usually handles this. Large logistics companies have been set up to handle customer fulfilment. The customer doesn’t pay directly to the merchant – this is handled by an online payment processing software engine, and payment is always by card or similar non-cash methods. Security is built into the shopping and payment software engines.

Traditional commerce takes the general workflow shown below:

E-commerce takes the general workflow shown below:

Figure 2: E-commerce High-Level Workflow
Figure 1: Traditional Commerce Workflow
Tricky logistics on the Isiolo-Mandera Road (Image credit: http://kenyasomali.blogspot.com/)

Logistics and infrastructure

The first challenge that e-commerce has to overcome in Africa is non-existent logistics and fulfilment infrastructure. For one, roads in most of Africa are absolutely atrocious. There’s no way a retailer can run an e-commerce business delivering perishable or other valuable goods to north-eastern Kenya, for example, what, with the non-existent roads and the complete absence of security.

This necessarily means that e-commerce in Africa will generally be intra-city, rather than inter-city. The traditional supply chains that currently fulfil customer needs therefore have to remain in place, creating a sort of hybrid model between traditional and electronic commerce. The wholesaler and the retailer are merged into one, and this becomes the end-to-end merchant that the customer deals with.

Even in the cities, logistics is made exceedingly tricky by the absence of rational addressing systems. This seemingly trivial thing – locating addresses by street name and location number – has completely eluded African states. On the continent, only a handful of countries – South Africa, Rwanda, Tunisia, Morocco – have working location address systems. Delivering a package to someone living in the housing estates of Nairobi is more or less impossible, as there is just no coherence in addresses, and locating an address costs significantly in terms of time and money. As a result, customers are forced to pick up their deliveries from fulfilment centres run by logistics giants like DHL and FedEx.

With this model, the benefits of cutting out the middleman are lost, as is the possibility of tight supply chains: it’s impossible to offer same-day or next-day delivery in Kenya unless the merchant and the buyer are in the same city. As a result, merchants must hold “dead” inventory – products held at the merchant’s warehouse or store awaiting customers. The stock costs money every minute it sits in the warehouse, and the warehouse space costs money as well. Stock control becomes a do-or-die affair for the merchant, and the risk of financial loss is passed onto the customer in the form of higher product prices.

Physical addressing

The absence of fixed, easily identifiable physical addresses for locations in African cities presents a second problem: lack of trust. In developed countries, merchants are happy to dispatch goods even on credit, allowing retailers to rely less on expensive bank credit. This is because national business registries are clean and trustworthy, and these in turn rely on physical business addresses that are easy to get to and verify. This is simply not possible in most of Africa – you cannot trust a merchant whose only contact is a mobile phone number. This forces most transactions to be cash-based, or pushes the risk to banks via credit cards. These are, in turn, incredibly expensive due to the generic lack of trust in the market.

Technology

Perhaps the easiest hurdle to overcome for African e-commerce, relatively, is technology. While Western customers generally use computers and laptops and broadband fixed-line internet connections that are quite reliable, African internet users generally access the net over mobile phones, and the form factors – size, features – of the phones are many times not conducive to e-commerce. However, in many places a mobile-phone-compatible variant of e-commerce, called m-commerce, has taken the place of traditional e-commerce. This still requires the user to own a relatively expensive smartphone if the purchasing experience is to go beyond a basic text-based interaction, and this presents a significant hurdle for African buyers – though not one that is insurmountable. Even in these cases, though, coverage is spotty at best. Africa accounts for 15% of world population, but the continent has just 6% of the world’s internet subscribers.

Fragmented economies

The United States, where e-commerce giant Amazon is based, is one economy with a seamless flow of goods from one to the other. China, where e-commerce giant Alibaba is based, is also one economy with smooth flow of goods and services within its borders. Developed economies like the European Union, Japan, South Korea and Singapore have been able to integrate their logistics and supply chains into other international networks easily, because at home they have coherent, well-regulated supply chains operating in an efficient economic environment with two-way trust.

Africa’s economies, on the other hand, are very poorly integrated – if at all. Each African country operates more or less as an independent economy, and their supply chains do not dovetail into each other unless neighbouring countries are involved. Supply chains in Kenya are radically different from those in South Sudan, which in turn look nothing like Ethiopia’s. This lack of supply chain integration makes intra-African e-commerce almost impossible. Africa’s many countries have many different languages and a bewildering array of currencies, making it difficult for cross-border e-commerce merchants to scale their websites and still cater for every potential customer across Africa.

Illiteracy

E-commerce generally needs the customer to be able to read. Africa’s literacy levels are world-trailing: just 64% of Africans can read and write. In the West, literacy levels generally are above 90%, while Asia has even higher rates. Illiterate people cannot participate directly in e-commerce platforms, and in Africa this means even more people are left out of the e-commerce basket – to add to those left out because of lack of access to the internet, poor logistics and infrastructure, and the fragmentation that characterises African economies.

Solution Approaches

There are no easy fixes to the challenges that face African e-commerce. Fixing infrastructure is exceedingly expensive, and the uniquely African inability to maintain physical infrastructure – roads, railways, airports, electricity transmission facilities – means that even the little infrastructure there is in Africa is rapidly falling into disrepair. All around the continent, one finds colonial-era infrastructure that has been neglected to the point of being unusable. It’s difficult to believe, for example, that East Africa was once linked by a robust railway line from Mombasa to Voi to Tanga and thence to Dar es Salaam and Arusha, and also Mombasa to Kisumu and then Malaba and to Kampala. This railway network serviced a series of ferries on Lake Victoria linking Kisumu, Kampala in Uganda and Mwanza in Tanzania. The ferries carried rail delivered via the railway line. The ferries have not run since 2006, however, and the vibrant commerce that they enabled on the Lake has died.   

Fixing infrastructure like roads will allow the establishment of reliable, predictable supply chains across African countries. This in turn will allow merchants to store less inventory, reducing costs and in the process cutting the price of goods within African economies. The more this happens, the more the economies of scale come into play, and the process more or less feeds on itself from that point onwards in a virtuous cycle.

There are several attempts in flight to fix physical addressing systems across Africa. Most of these are concentrated in cities, and are led by both private stat-ups and government efforts. In Rwanda, the government is rolling out a physical addressing scheme across Kigali and other cities. In Kenya, private start-ups like OKHi are leading efforts to bring coherence to a non-existent physical addressing scheme. These efforts need to be expanded and extended across the continent. Even more importantly, these addressing schemes need to be compatible with each other.

For such schemes to work across the continent, Africa needs to integrate its economies. This is not as complex as it sounds – it requires the full usage of existing economic blocs like the East African Community (EAC), the Southern African Development Community (SADC), the Economic Community of West African States (ECOWAS), and so on. These economic blocs can lead internal efforts at logistics integration, and this can then form the basis of cross-border supply chains in Africa.

Africa has very poor fraud detection and prevention mechanisms. Even when the medium involved is mobile money and m-commerce, fraud is very common. This makes it difficult to build trust within African economies, and means e-commerce has a difficult time taking off. The levels of mistrust in African commerce are the highest in the world, and both governments and merchants have a role to play in building trust within their respective sectors – using such tools as social media and word of mouth – to allow e-commerce to take root.

Illiteracy is a long-term issue for Africa. Successive African governments across the continent have paid lip service to raising literacy levels, but the truth is that adults across Africa generally are poor readers. To grow internet subscriptions, Africa needs to raise literacy levels, as it’s generally only literate people that can go online and buy or sell items.

Finally, African governments need to invest more into education. Education creates literate graduates who will be able to participate in e-commerce. Education also creates a skill base for such roles as web designers, payment system entrepreneurs and merchants. Although there are a few online payment platforms started by Africans – such as PesaPal – many are western systems adapted to African e-commerce, a task that doesn’t usually succeed very well when those systems were not designed with African trading peculiarities in mind.

Around the world, solutions to commercial issues are usually found in private enterprise. This is because most other places in the world have basic components of commerce – like roads, railways, ferries, ports, affordable and reliable electricity, postal systems, internet connections and so on – in place. Africa doesn’t have any of these, save for South Africa – which is a western economy by and large.

Solutions to these challenges in Africa will necessarily come from governments, because only governments can resolve infrastructure, regulatory, and regional trading challenges. For Africa to enjoy a bigger share of the world’s growing e-commerce pie, African governments will need to do better than just steal elections and public money, and then send in police to beat up protesters who turn up to decry the thefts. For Africa to get rich, governments will need to actually govern the continent.

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