The business environment in the CEMAC region has historically been dominated by foreign multinational enterprises (MNEs). Their presence ranges from industrial products with world renowned brands, such as Mercedes-Benz trucks (Daimler Benz Group), to locally branded consumer goods such as Mambo chocolates (Tiger Brands). Most of these companies have been providing us, for decades, the products we have grown accustomed to, often without noticing their foreign origins. From a pure economic perspective their importance is tantamount. In Cameroon, 97% of the state’s fiscal income comes from foreign MNEs; Brasseries du Cameroun (Castel Group subsidiary) is the largest private company in Central Africa with a turnover of $ 584.5 Million in 2016.
In spite of their hegemony, foreign MNEs have increasingly been challenged through the proliferation of low cost competitors’ in almost every industry. Dangote Cement Cameroun has overtaken Lafarge Holcim’s Cimencam, with 43% of the cement market share (in less than two years) by introducing cements 20 to 40% cheaper than its competitors at comparable quality. Likewise, in the Cameroonian beverage industry, Source du Pays has conquered the mineral water market (52 % of market share in 2016) in a short time span by repackaging products into more economical formats. In the central African auto industry, established distributors such as CFAO and Tractafric have steadily faced market share erosion in the passenger vehicle segment due to the introduction of cheaper and often more reliable South Korean cars from the likes of KIA and Hyundai.
The growing threat of low cost competitors to established incumbents is particularly potent in Central Africa due to the importance consumers place in pricing as the single most important purchase decision factor; more so than in most other regions in the world. In light of this problem, we define in this article what exactly makes a low-cost competitor and why it is particularly hard to compete with in the CEMAC region. Throughout our analysis and research we determined that the best strategies to cope with such market conditions are either to become a solutions provider, partner with a low cost company (or at least with the potential to be one) or transform into a low cost business entirely. In all instances, established firms are required to respond quickly and effectively.
Attributes of low cost competitors
Low cost companies are mainly characterized by structurally low operational costs and high asset turnover.
Lower production costs than the established incumbents’ production costs, enable low cost companies to substantially lower prices while remaining profitable. In the CEMAC region, a common approach to minimize operational cost is by maximizing employment of local labor at competitive salaries and leveraging manufacturing tax exonerations. As a result of these advantages, local manufacturing companies such as Laboratoires Biopharma and Parlite Foods have been capable of consistently selling their products at the lowest price ranges of their product categories. Alternatively, European dairy products provide over 70 % of market demand due to the European Union subsidies and low import tariffs. Free trade agreements such as the EPA [1] often allows imported goods to be sold at prohibitively low prices for local producers.
High asset turnover results from maximizing asset utilization and/or minimizing working capital needs. Dangote Cement Cameroun (DCC) owes its competitiveness to its robust logistics. The cement company purchased 220 loading trucks (20 % of its entire national fleet) to secure shipments across the country. DCC’s reliance on its own trucks not only reduces shipment cost by 9 %, it also ensures a more flexible and reliable supply of cement. Additionally, DCC built its own ship dock on the Wouri river to avoid procurement bottlenecks from the Port of Douala. Such intensive asset utilization improves operational productivity, which in turn maximizes sales volumes.
It is the combination of higher asset turnover and lower gross margins that enables low cost businesses to achieve superior returns and growth.
Challenges arising from low cost operators
Part of the reason why low cost companies are such challenging competitors is that they are difficult to identify and respond to. They are difficult for established incumbents to identify because they often build momentum stealthily by competing in undeveloped segments of a market. Sometimes they can narrow capability gaps by tapping the look, feel, and suppliers of bigger rivals. In other cases, competition between low-cost entrants can produce unintended second-level effects (customers get acquainted with cheap products) that escape the attention of incumbents until it’s too late to prevent a severe erosion of their market position. It is also hard to respond to low cost operators because price wars are usually more damaging to the established incumbents than to the former; their business models cannot be easily replicated as they can take years to be implemented and partial copy of their modus operandi never works; differentiation strategies only work under a particular set of circumstances.
Another reason why low cost operators represent a challenge is that their customer value proposition are especially well suited and appealing to sub-Saharan Africans. For instance, according to the McKinsey research institute, although brand loyalty and perceived quality of products matter, pricing is the most critical purchase criterion to sub-Saharan Africans. Only 32 % of them are concerned that low priced products could be of poor quality. In Nigeria, 89 % of respondents believed that international brands are not better than local brands. These facts imply that lower priced goods are more easily accepted by sub-Saharan Africans even though they may be of lower quality and attach lower status. Hence relying on the strength brand image to sell premium products to Africans, as most Western MNEs usually do, is not a sufficiently effective strategy to counter low cost companies in the CEMAC region.
The low cost companies’ ability to redefine the entire competitive landscape make them even more dangerous. The low-cost competitor transforms its value chain to reduce prices drastically. With low costs as a pivot for influencing consumer habits, it shifts the ground beneath larger, less flexible opponents and turns their mass and momentum against them. Responses often come too late to be effective, and are hampered by strategic assumptions that no longer apply. Larger rivals soon find they are fighting a war on the new competitors’ terms.
Mature industries and products offered by mid quality-range firms are particularly vulnerable to low-cost competitors. Many mature industries are characterized by low research and development expenditures, old-school firms that resist change, and a belief among existing firms that their industry’s low growth rate deters new competitors from entering the market. This coincidentally explains, for instance, why the cement, the sugar and the paint industries in central Africa have been noticeably submerged by low cost competitors in the past few years.
Antidotes to low cost competitors
Despite the dangers of low cost companies to established foreign MNEs, we believe there are mainly 3 strategies that can help to cope with such competition in central Africa: become a solutions provider; complement conventional operations with low cost ventures; transform into a low cost operator.
Become a solutions provider
Becoming a solutions provider means combining product offerings with services in a bundle. The caveat of this strategy is that the combination of the firm’s products and services should provide higher value to customers than the products sold alone.
For example, up to the 1990’s, IBM was known as major hardware computer company, credited with important inventions such as the ATM, PC, and floppy disk. By the early 90’s, IBM’s business was threatened as it became increasingly possible to move some corporate workloads off expensive mainframes onto computers powered by lower-cost microprocessor technology. As a response the company began charging separately for services and support that previously had been rolled into the price of a big mainframe. During that time, the company shifted away from many of its hardware businesses including the spin-off of Lexmarks, its printer manufacturing, and the sale of its PC business (ThinkPad) to Lenovo. Today services and software account for more than 80 % of IBM’s business. Since July 1996, IBM’s stock price has grown six fold to $ 144.
This strategy has the advantage of allowing the company to move upstream and develop new capabilities; provide higher margin products and services through higher value customer proposition. However, it often requires considerable changes in a company’s skill set.
Combine traditional and low cost businesses
Combining a traditional business with a low cost business can be achieved either through alliances, joint ventures or acquisitions. Like most business partnerships, success depends on proper identification and unlocking of synergies. The combined entities should have the potential to be better off together than separated, i.e. the traditional established business can allocate adequate resources to the low cost business, the traditional established business will be more competitive as a result, and the low cost venture will be more profitable than it would as an independent company.
Facing intense competition from both high end and low end car manufacturers such as BMW and Tata Motors respectively, Renault acquired stumbling Romanian car manufacturer Dacia in 1999 with the aim of providing economic and reliable passenger vehicles to emerging markets by its leveraging manufacturing capabilities and its global distribution network. From then on, € 2 Billion was invested in modernizing Dacia’s main factory in Mioveni. Renault took a stringent cost-to-design approach, using fewer parts than a typical Western car, offering a limited range of exterior color options, redesigning the windshield to reduce production and installation costs, and creating a vehicle that was easy to maintain. Dacia’s ruthless focus on cost cutting has given it a price advantage of more than 30% over some rivals. Out of Renault Group’s 5 best-selling passenger cars, 3 are Dacia models with over a 1 million units sold in 2016. According to a former chief operating officer of Renault, Carlos Tavares, Dacia is a ‘cash cow’ to the Renault Group.
The combination of low cost and traditional businesses have the advantage of expanding market reach while improving profitability on frontier markets. Nevertheless, it forces the company to have solid discipline in evaluating markets and products.
Transform into a low cost business
If no synergies are foreseen between the established business and the low cost venture, the owners are willing and capable of acquiring new capabilities; and a major segment of their consumers primarily makes purchases based on price, then established firms should try to transform into a low cost competitor.
Unbeknown to most, Ryanair was a traditional airline carrier that changed every aspect of its business model into the dominant low cost airline operator it is today. Ryanair’s transformation entailed the recomposition of its entire fleet of variety of planes into a single type of plane; operations were shifted towards cheaper secondary airports; and bookings were reoriented towards call center and the internet rather agency bookings. Common airline business features such as business class, cargo carrying and free meals have been eliminated. The company now dominates the European short haul flight market with 1,800 routes.
A low cost transformation strategy has the benefit of enforcing efficiencies through reorganization. It also improves the long term competitive positioning of companies. However, in order achieve such a transformation, established incumbents need to truly eliminate legacy costs from low cost offshoots which can be singularly burdensome for companies with deeply entrenched cultures and management styles.
Afterthoughts
Because low cost companies are difficult to identify and counter, because their value proposition fit better customers’ expectations and because they have a tendency to alter entire industries competitive landscapes, established companies ought to be quick and effective in adopting counter strategies. We contend that transforming into low cost business, combining traditional with low cost businesses or becoming a solution provider can yield long term results against low cost competitors. Deciding which strategy suits best requires in depth research and analysis to determine which resources are most relevant to deploy within a certain context. Negus Advisory specializes in the development of competitive strategies for complex business problems such as tackling low cost competitors.
By Arnold A. KAMANKE
[1] Economic Partnership Agreements are a scheme to create a free trade area (FTA) between the European Union and the African, Caribbean and Pacific Group of States (ACP).