Why we need a Nigeria to China Hardware Accelerator–Accessing and Amplifying Opportunity Between Nigeria and China
Jeremy Kirshbaum
In Articles, Business, Emerging technology, High Delta Markets Posted July 08, 2018
Nigeria is already one of the largest countries in the world by population, and it is growing quickly. It is estimated that by 2050, Nigeria will be the third most populous country in the world. It’s economy is sizable—according to a recent report by McKinsey, Nigeria’s consumer market is presently worth nearly $400 billion per year, and based on its expanding consumer class, could reach nearly $1.4 trillion a year by 2030. Despite raw size, there are other favorable economic indicators as well. Internet penetration is high, with an estimated 84 million internet users, and an urbanization rate at 48.6% and rising.
However, despite the economic potential, few companies or investors create offerings for the Nigerian market. The risks involved are not trivial—it is no secret that Nigeria is a complicated place to do business. However, a unique combination of global factors has created the right time and place to accelerate companies with market specific features, particular connected “IoT” devices based on commoditized hardware produced in China.
A Story From the Past–Cell Phones in Nigeria:
When Chinese phones first entered the Nigerian market, their primary value proposition was low cost, although this was understood to come at the expense of quality. One of the first notable feature innovations was multiple SIM cards. Both for cultural reasons and for cost reasons (to take advantage of deals and network coverage from several companies), Nigerian customers desired multiple cards in the same phone.
Over the last decade, the “made in China” brand has evolved, and is no longer necessarily equated with a compromise on quality. Perhaps the leading company in providing good quality, inexpensive phones is Transsion Holdings, which owns the brands TECNO, Infinix, and itel, among others. Transsion has won huge chunks of market share in many emerging markets with features such as cameras that are attuned to dark skintones. Many good articles have lately been published about Transsion’s success,[1] but something that they miss is that Transsion’s journey began nearly a decade ago.
In September 2017, Jeremy joined the director of digital marketing for TECNO in Nigeria to interview some of their biggest distributors. The distributors were all headquartered in the Computer Village market in Lagos. The interviews were in preparation for a yearly conference Transsion hosts for its distributors, flying them to Shanghai to celebrate their partnership and consult with them on market trends and designs. Several of these distributors had been partnered with Transsion for over a decade, since 2006. This is very significant—a nuanced and respectful relationship stretching back a decade is very different from the story sometimes told of Chinese companies dumping cheap electronics into emerging markets.
This sets the stage for the technology innovation relationship between Nigeria and China in the next decade…one that is already founded on mutual design and a history of partnership. It is not a relationship of balanced power, but it is often a relationship of respect and trust. Building on this relationship as more and more objects become connected and more and more hardware gets commoditized as cell phones have is one of the next few decade’s biggest opportunities.
China’s Successful Model—“Shanzhai” Innovation:
The model of innovation that drives the Chinese white-label manufacturing ecosystem is called “shanzhai” innovation by some[2]. The word is sometimes mistranslated as “copycat,” but this is misleading. It is worth understanding its true meaning, as it helps to explain the evolving innovation relationship between China and Nigeria around IoT.
“Shanzhai” open product development is based on sharing common resources, from production to product designs to technical solutions. Entrepreneurs leverage openly available resources to quickly iterate new products based on existing ones, adapting them to the needs of many possible markets segments at the same time. New business is built through modification, branding, marketing, distribution, and business model development for the products. Feedback loops between entrepreneurs and customers quickly shape the next round of design and manufacturing. Far from being a hindrance to innovation, open products provide a powerful leg-up for entrepreneurs so that they can focus on the hardest parts of building a business without wasting precious time building a market-ready prototype from scratch.
A side effect of this is that the entire ecosystem learns from failures and successes. This makes it extremely collectively resilient, and cost efficiencies are enormous. Nobody really knows who invented the double-SIM phone…it simply emerged from the ecosystem, and every company began copying it as soon as it was successful. Similar stories can be told of other classic shanzhai phenomena like the selfie sticks, “hoverboards”, and “fidget spinners.”
This style of innovation is very different from corporate investment or venture capital-style innovation in the United States, but it is much more familiar to traders in the informal markets of Nigeria or Ghana or Kenya. These traders live in an innovation environment with similar characteristics, although less wealthy and resourced. Indeed, many of the goods they are selling emerged from this “shanzhai” ecosystem.
Returning to our example of the cell-phone, Transsion, and pretty much any other cell phone company besides Samsung or Apple (including giants like Xiaomi and BBK Electronic Corporation), make their money by taking white-label phones with the desired price point, quality, and features, and providing branding, software and services. They don’t design the phones from scratch at all. This allows them to move very quickly, and keep their products very cheap by leveraging components that are already being produced at-scale.
Based on these principles learned from China’s highly successful “shanzhai” open innovation ecosystem, and leveraging the new capabilities available to any entrepreneur through free, open source artificial intelligence tools, a culture is emerging that challenges current entrepreneurship paradigms. These partnerships and projects between Nigerian, Ethiopian, Kenyan, Ghanaian, and other African entrepreneurs and Chinese companies and organizations that leverage resources in the Chinese white-label manufacturing ecosystem are the early signals of an enormous and quickly growing opportunity.
The Opportunity—A Growing Nigeria-China Connection:
The likelihood that the relationship between Nigeria and China will be an important economic driver of the world economy in the next decade has never been higher. For anyone interested in influencing or benefiting from the relationship, the necessity to get substantively involved in this new environment has never been more urgent.
Nigeria is already a large market for Chinese products. However, these products are rarely designed with the specific market needs of Nigeria in mind. As a result, most companies’ products are generic and compete only on the basis of quality and price. However, companies that do design products with locally-oriented features have made considerable gains as a result, like the story of Transsion we described above. And it’s not just Transsion: a 2018 study from Covenant University found that product features are strongly correlated with firm competitiveness in Nigeria.
Manufacturers in many Chinese cities, including Chongqing, Guangzhou, Yiwu and elsewhere already have channels to the Nigerian market, and other African markets, but there is interest in expanding these channels. The “One Belt, One Road” initiative, a massive Chinese government program to connect China to Africa, Southeast and Central Asia, and Gulf nations, is amplifying already significant interest from Chinese companies in expanding into African markets.
Another important element of this is the large and quickly growing pool of Nigerian software development talent, and a smaller but still significant pool of Nigerian hardware design talent. Nigerian software outsourcing company Andela recently received $40 million in Series C investment from an international group of investors, and Google announced in 2017 that it would train 100,000 an additional software developers in Nigeria. These entrepreneurs understand local market conditions, and market needs.
The opportunity is to connect these talented entrepreneurs with interested manufacturers in China to create products with features specific to the needs of the Nigerian market. This opportunity goes beyond Nigeria, as well. Many conditions found in the Nigerian market (many small kiosk stores, personal water tanks, gasoline generators, bad roads and others) are also found in parts of other very large markets elsewhere in Asia and Africa.
The Challenges:
Although there are many African entrepreneurs trying to address these issues, they often lack the necessary context and connections to bring their ideas to scale. Some African entrepreneurs try to work with traditional hardware manufacturers in China, but their products are not designed for the African market, and they are not able to modify their designs without large purchases already confirmed, which is not possible when the product idea is new or intended for mass-market. This leaves a gap between the needs of the entrepreneur (to sell products that are specific to their customers) and the needs of the manufacturers (to sell products that they are already producing at scale). This makes it very difficult to develop new products, despite the opportunity.
A similar gap exists with available financing options. Existing equity-based financial options often expect venture-style returns, which are not realistic for these projects. Debt-based financing mostly exists in bridge loans, but they usually require a signed purchase order before considering a beneficiary, and the rates are very high.
It is well established that creating new hardware products entirely from a prototype is prohibitively expensive, so the most impact will come from connecting needs in the Nigerian market to white label products that already exist, and modifying them very slightly, mostly at the level of software, to create market-specific features. Entrepreneurs who are otherwise incredibly talented lack this context and proper information, which causes them to focus energy on prototype-level solutions that can never reach the market or, even worse, already exist in white-label form unbeknownst to them.
Examples of Companies Already Taking Advantage of This Phenomenon:
Skytech:
Skytech produces connected smart-home and smart-office solutions for a low-infrastructure context. An example is the IoT water pump control system. Nearly every house in Nigeria, and many other places as well, uses a personal water tank because no functioning municipal water system exists. Most people pump water from a well up into the tank using an electric pump. The tank is elevated to create running water for the house or building. However, it’s difficult to tell when the tank is full, and so it often overflows, causing inconvenient and costly water damage. With Skytech’s product, the tank automatically stops filling when it hits a sensor at the top, and the pump can be controlled remotely through Wifi, Bluetooth, or SMS. They currently run a profitable business doing custom installations for apartment buildings and large businesses, but with a modest runway and gudiance they could create a mass market product, expanding rapidly.
POS4Africa:
POS4Africa is based in Kano, Nigeria, the second-largest economic epicenter after Lagos, based in the North of Nigeria. They create customized POS products and services for local businesses. In Northern Nigeria, some of the largest businesses are run by people with little formal training, so their software has a UI designed for users with low literacy. The components and casings for their hardware is produced in China to their specifications, and they combine it with their software and cloud services, which work across Android, iOS, and Linux. They integrate with the notoriously particular Nigerian payment infrastructures, as well. They currently run a successful, profitable business, but could expand rapidly and raise their margins with more effective sourcing and growth capital.
Nerve Mobile:
Silas Okwoche was the co-founder of Nerve Mobile, a cell phone company that he launched with one other partner by reaching out via the Chinese online marketplace Ali Baba to contact an OEM producer of white label Android smart phones in Shenzhen. The OEM would routinely send Silas reference designs with a basic Qualcomm or MTK chipset—a gongban—and he would modify them slightly to his specifications. For example, he might add a better camera to one or a longer-lasting battery to another. Then he would use an Android OS as a software base and design some bespoke apps for industry verticals like agriculture or mining, selling the phones in small, customized batches.
The Solution—An Accelerator for Nigerian Products Scaling in China:
This accelerator will bridge the gap between consumer and business needs in Nigeria and available manufacturing capabilities in China to create market-leading products in Nigeria. This is most easily done by identifying white-label products that already exist at scale, and modifying them in intentional and creative, but inexpensive ways to better apply to market needs. This can be done by providing entrepreneurs addressing the Nigerian market with access to design-for-manufacturing and sourcing guidance, and a modest capital runway of around $50,000USD per company. The accelerator is a partnership between the ARTOP design firm, Shenzhen Open Innovation Lab, and Jeremy Kirshbaum to provide this investment capability to capital partners looking to expand into the Nigerian market and beyond.
If you’d like to learn more about the accelerator, and how you can get involved, please reach out to Jeremy Kirshbaum at jeremy@handshake.fyi
[1] One of the better examples is this Wall Street Journal article https://www.wsj.com/articles/two-sim-cards-and-better-selfies-how-chinas-smartphones-are-taking-on-apple-1496827801 (paywall)
[2] David Li, co-founder of the Frontier Markets Access Accelerator, is one of the foremost global experts on Shanzhai innovation and white-label manufacturing http://chinainnovation.campaignasia.com/home/articles/shanzhai-open-innovation-as-an-invitation-to-start-new-brands/
