By Bizna Brand Analyst
Africa’s richest man Aliko Dangote has entered the Kenyan market with his cement business. Didn’t we see that coming? Investing internationally has often been the advice given to millionaires and billionaires looking to increase the diversification and total return of their portfolio. The diversification benefits are achieved through the addition of low correlation assets of international markets that serve to reduce the overall risk of the portfolio. Dangote says that his cement will be the cheapest. Selling at 350 shillings. But has he really considered the risks?
Has he been advised that this is Kenya and his cement will be bought by cartels who will then pack it onto Bamburi or Blue Triangle bags and sell it to unsuspecting customers at 600 or more? Has he thought of the kind of stiff competition he will face from traditional cement manufacturers? Has he thought of how much his business will be sabotaged because he’s a Nigerian trying to flex his muscles in the Kenyan market?
We can take a ‘wait and see approach’ on that. And maybe ‘fail’ is a big word. I should probably change the title to ‘Why Dangote’s Cement Business Might Severely Suffer In Kenya’. In the meantime, let us examine the real challenges he will face.
Transaction Costs
Likely the biggest barrier he will face while investing in the Kenyan market is the transaction cost. Although we live in a relatively globalized and connected world, transactions costs can still vary greatly depending on which foreign market you are investing in. Brokerage commissions will definitely be higher here compared to Nigeria. In addition, on top of the higher brokerage commissions, there are frequently additional charges that are piled on top that are specific to the local market, which can include stamp duties, levies, taxes, and exchange fees.
Liquidity Risks
Another risk that Dangote will probably face in an emerging market such as Kenya, is liquidity risk. Liquidity risk is the risk of not being able to sell your stock quickly enough once a sell order is entered. Unlike currency risks there is typically no way for the average investor to protect themselves from liquidity risk.
Foreign exchange risks
These occur when the value of investment fluctuates due to changes in a currency’s exchange rate. When a domestic currency appreciates against a foreign currency, profit or returns earned in the foreign country will decrease after being exchanged back to the domestic currency. Due to the somewhat volatile nature of the exchange rate, it can be quite difficult to protect against this kind of risk, which can harm sales and revenues. Something Africa’s richest man should look into.
