04/11/2023, 06:34 Harnessing the AfCFTA for Increased German Investment in Africa - Africa Policy Research Institute (APRI)

Harnessing the AfCFTA for Increased German Investment in

Africa
BY TENIOLA T. TAYO
JUL 19, 2023

The author argues that German investors should keep their eyes on the AfCFTA.

Photo by Julius Silver from Pexels

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Table of Contents
Summary

Introduction

Germany is already supporting the

AfCFTA

But struggles to do so in the way that

matters the most

Why are German businesses bearish

about Africa?

The AfCFTA can help

German cars made in Africa?

How about logistics?

Conclusion

About the author

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04/11/2023, 06:34 Harnessing the AfCFTA for Increased German Investment in Africa - Africa Policy Research Institute (APRI)

DOI: https://doi.org/10.59184/sa.026

Summary
The African Continental Free Trade Area (AfCFTA) is designed to stimulate African industrial growth through intra-African
trade; however, it requires more investment.
Despite Germany's various efforts, including the Compact with Africa and "German Desks", to encourage private investment in
Africa, the outcomes have been modest with less than 1% of its outward investment flowing into Africa.
Constraints such as limited sector participation, negative stereotypes, and infrastructure challenges have hampered German
foreign direct investment in Africa; the AfCFTA's investment protocol could help alleviate some of these issues.
German car manufacturers such as Volkswagen, Daimler, and BMW have established operations in Africa. However, the market
size is small, necessitating a broader investment strategy including financial sector and skills development.
Although African regional value chains are still nascent, German investors can take an ecosystem approach to investing in
Africa, anticipating the various inputs that a mature ecosystem will require and investing in their production.
Germany could greatly support AfCFTA's logistics sector development, capitalising on successful firms such as DHL to improve
infrastructure and optimise processes, whilst encouraging other German logistics companies to invest in Africa.

Introduction
'The African Continental Free Trade Area (AfCFTA) agreement is a flagship initiative of the African Union’s Agenda 2063 and is
expected to help transform African economies through increased intra-African trade in goods and services. Over a period of 13 years,
the AfCFTA seeks to remove import tariffs on over 90% of goods produced and traded within the continent, creating a single African
market that can help increase productivity and drive industrial growth. However, for this growth to happen, the continent will need to
scale up production by attracting more investment into its industrial sectors.

Germany is the largest economy in Europe and the fourth largest in the world. In 2021, trade was about 89% of Germany’s GDP,
with its exports of goods and services at a healthy 47%. In 2022, Germany exported US$429 billion worth of machinery and parts
under Harmonised System (HS) codes 84 and 85. It also exported US$257.5 billion worth of vehicles under HS code 87 in the same
year. Germany is a world leader in industrial production and its industrial sector was 26.6% of its economic output in 2021. In many
ways, Germany is a role model for Africa’s industrial growth ambitions.

Germany is already supporting the AfCFTA

Germany has also been an important supporter of the AfCFTA. Commissioned by its Federal Ministry for Economic Cooperation and
Development (BMZ), its implementing arm, the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH is
deploying programme support to the AfCFTA. The programme started August 2020 and is expected to continue until August 2024. The
total programme budget as of September 2022 was €55 million. The programme has deployed experts to support the negotiation and
implementation of the AfCFTA and provides capacity building to the AfCFTA secretariat, regional economic communities, and a few
state parties on specific areas.

But struggles to do so in the way that matters the most

However, top of the African agenda in its conversations with European partners has been the need for more investment into its
economies. During its G20 leadership, Germany attempted to respond to this call by establishing the Compact with Africa to promote
private investment into Africa. It also introduced initiatives such as “German Desks” and “AfricaConnect” as tools to promote
investment into the continent by providing financing solutions. There are also German Chambers of Commerce Abroad in 13 African
countries, which are intended to help correct information asymmetries by informing the German private sector of investment
opportunities in Africa. The German government has also moved to provide investment guarantees as one way to help de-risk
investment decisions in developing countries.

These efforts have, however, struggled to yield results. In 2021, foreign direct investment (FDI) from Germany into Africa was around
€1.6 billion, representing a share of less than one percent of its outward investment flows. Africa’s share of Germany’s FDI has
remained stuck at around 1% for a number of years. In addition, the presence of German businesses in Africa is concentrated in South
Africa and some northern African countries.

Why are German businesses bearish about Africa?

This situation is usually explained away by the low involvement of German businesses in extractive sectors, in which other European
firms participate on the African continent. It has also been reported that the relatively low presence of German firms in Africa’s
construction sector is due to there being few of these firms left, and some of them have been taken over by international companies.
A 2020 study by the Kiel Centre for Globalisation found that economic size (as a measure of market size), bilateral trade, and
geographical proximity were strongly correlated with Germany’s FDI stock abroad. An interesting find was the moderating effect of
investment guarantees on institutional quality in predicting FDI stock. Although the study results showed that poor institutions were
negatively correlated with German FDI stock, the availability of investment guarantees slightly reduced their impact on investment
location decisions.

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There are other general reasons that apply to most foreign investors, including strong negative stereotypes, infrastructure challenges,
workforce challenges, and knowledge and capacity gaps.

The AfCFTA can help

Implementing the AfCFTA could help address some of these challenges by creating a larger African market, which could strengthen
the investment case. The AfCFTA also has an investment protocol that aims to improve and streamline the regulatory environment for
investment in Africa, and this should benefit German firms.

There has, however, been an increased interest from German firms in Africa outside AfCFTA-related developments. This interest has
been driven more by domestic issues such as finding alternative sources of energy supply, particularly for renewable energy. The
discussions around critical raw materials are ramping up as geopolitical tensions are also driving European companies to explore ways
of diversifying their supply chains. Although these sectors are of great interest to Africa, the AfCFTA has also prioritised some other
sectors for investment and development. They include the agriculture, automotive, and logistics sectors. Of these three, Germany has a
competitive advantage in automotives and logistics.

German cars made in Africa?

German car manufacturers are already present on the continent. The German Association of the Automotive Industry (VDA) has
partnered with the Association of African Automotive Manufacturers (AAAM) towards facilitating investment into the automotive
sector in Africa. Large German manufacturers such as Volkswagen, Mercedes-Benz owner Daimler, and BMW have operations on the
continent. They accounted for over 90% of passenger cars produced in South Africa in 2019. Morocco, South Africa, and Egypt are on
the list of Africa’s biggest car producers. Volkswagen opened a new vehicle assembly facility in Accra, Ghana, in March 2023 with a
capacity to assemble 5000 units per year.
Averagely low incomes in African countries and the high cost of vehicle financing means that a significant portion of the output of
German producers is headed for Europe. Although this helps with import revenue and foreign exchange, it signals the persistent issue
of the small market size on the continent. A 2022 study on automotive sector development under the AfCFTA also identified
inadequate infrastructure and skills as other challenges facing the sector in addition to the small market size. The sector is, however, of
crucial importance to Africa’s industrial development and is on the radars of many AfCFTA state parties. The sensitivity of the
sector has been made apparent by the delays facing the Rules of Origin negotiations.

Overcoming the challenges facing the sector will require a more holistic approach. German firms can participate in developing the
automotive sector value chains in several different ways, including in the financial sector and in skills development. This participation
will require coordination among German companies in the financial sector, the education sector, the manufacturing sector, and the
logistics sector - to name a few. Taking a long-term view of the African automotive sector and working with the AfCFTA’s plan for
developing the industry could help the VDA come up with a plan for facilitating more German investment into the sector. This
facilitation could then plug in other German investment facilitation initiatives, such as the guarantees, and the financing solutions.

How about logistics?

Perhaps a bit less talked about is how Germany can support the development of the logistics sector under the AfCFTA. High transport
costs due to poorly developed cross-border logistics solutions are a major threat to trade and competitiveness under the AfCFTA.
A 2023 report by the World Economic Forum identified transport and logistics as one of the priority sectors that holds opportunities for
global investors interested in the AfCFTA. Germany is in a great position to support this sector’s development, especially given
the global success story of DHL. DHL already has operations across Africa and recognises the importance of the AfCFTA.

However, there is probably still more value that can be unlocked with the objective of strengthening Africa’s logistics sector. The
expertise that DHL has built over time in navigating African borders should be an even bigger part of efforts to build the sector’s
capacity and increase its attractiveness to investors. Firstly, DHL can collaborate with governments and regional organisations to invest
in transport infrastructure, such as roads, railways, ports, and airports, to enhance connectivity and facilitate trade flows within the
AfCFTA. Secondly, DHL's expertise in supply chain management can be deployed to help optimise logistics processes, reducing costs,
minimising delays, and improving overall trade efficiency. Thirdly, DHL can provide guidance and support in trade facilitation,
including customs processes and compliance requirements, to expedite cross-border trade. Additionally, DHL can leverage digital
solutions and technology to enhance transparency and visibility in transport and logistics operations.

The company should also be more involved in scoping exercises carried out by German firms with an interest in Africa. Other German
logistics companies are entering the African market, including Harren Group, a shipping firm that opened its first office in Africa in
2022. The office was set up in Nigeria and is targeting the West African market. The German Chambers of Commerce Abroad will
need to closely monitor the operations of these new entrants, helping them address challenges and using their experience to support
prospective investors.

Conclusion
The opportunities the AfCFTA presents are apparent, and German companies have signified an interest in expanding their investment
in Africa. The larger market and streamlined regulatory framework of the AfCFTA will benefit German companies with innovative
investment facilitation measures. The competitive edge Germany has in the automotive and logistics sectors can be pillars of a strategy
to increase German participation in the single market. However, a comprehensive, long-term perspective that encompasses different
sectoral initiatives and investments is crucial. All in all, enhancing German-African ties through the AfCFTA could not only spur
Africa's industrial growth but also mark a significant stride in Germany's international relations.

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About the Author

Teniola Tayo
Teniola Tayo is a policy advisor with a focus on regional integration issues in Africa including the African Continental
Free Trade Area and wider trade, security, and development policies on the continent. She is currently the Trade Policy
Fellow at the Africa Policy Research Institute. She has previously worked as a consultant with the Institute for Security
Studies, Supply Chain Africa, United Nations Development Programme, and the West African Think Tank. She has also
worked as a senior legislative aide with the Nigerian Senate and as a consultant with the Office of the Vice President.
She has a Master’s degree from the London School of Economics, a Bachelor’s degree from the University of Ghana,
and recently completed a fellowship at the European University Institute's School of Transnational Governance.

APRI does not take institutional positions on public policy issues. The views expressed in publications are those of the author(s) and do not necessarily reflect the views of
APRI, its staff, or its board.

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