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Monday, June 9, 2008

Michael Joseph of Safaricom highlights the promise—and peril—of doing business in Africa

The Economist (print edition)

THIS is a vexing time for those looking to invest in Africa. There are prophets of doom, who predict that population growth and climate change will condemn Africa's cities and dry countryside to crisis and collapse. But there are also optimists, such as Michael Joseph, the head of Safaricom, a Kenyan mobile-phone operator. His is a remarkable African success story.

When Mr Joseph arrived at Safaricom in 2000, the company had 20,000 customers. It was controlled (as it still is today) by Vodafone, a giant British group that is one of the world's largest mobile operators. Vodafone's bosses reckoned that the Kenyan market would top out at 400,000 customers. Yet Safaricom alone now has 10.5m. It is the most profitable business in eastern and central Africa, earning profits of $223.7m in the financial year to the end of March, up 16% on the previous year. Despite a political crisis in January in which over 1,200 Kenyans died and 300,000 were displaced, the firm is expected to report even better results this year. And a public offering of 25% of the firm—a stake that belongs to the government—is expected to raise at least $800m, much of it from retail investors who queued up to buy the firm's shares, which will begin trading on June 9th.

Mr Joseph arrived in Kenya in 2000 having spent a freezing winter in Hungary, where he had set up that country's third mobile-phone network. He quickly decided to go after “pay as you go” customers, who pay for mobile airtime in advance, and therefore do not pose a credit risk to the operator, though they spend much less than wealthier (and less numerous) contract customers. He introduced billing by the second—a big deal for those earning just pennies a month. And he revamped the firm's brand, reasoning that the poorest customers are the most price-sensitive, and that a strong brand can help keep them loyal.

Keeping the Safaricom name inherited from Telkom, the state fixed-line monopoly, Mr Joseph and a local advertising firm set out to create an “emotional connection” between Kenyans and Safaricom. He took an “old school” approach, playing on the company's status when it had been established a decade earlier as a symbol of national pride—as the first mobile operators were in many countries at the time. These days only Kenya's national beer, Tusker, with its elephant label, can match Safaricom for national appeal. A typically shameless television advertisement shows Masai herdsmen gathering cattle before a dusky Rift Valley sunset to the backing of the English hymn “I Vow to Thee, My Country”. Some think Safaricom offers a lesson to mobile operators in Europe and the Middle East: take advantage of your affiliation with a multinational brand when it comes to technological know-how and buying equipment, but keep quiet about it to your customers, and dress up your network in national colours.

Mr Joseph was picked for the Kenyan job because he lacked the finishing-school polish required to be a European boss. In some ways it was a homecoming. A self-described “Bolshevik character” in his South African youth, he fled the country in the 1980s when the strictures of apartheid tightened. He had made his name there as a “network man”, upgrading the coal railway through East Transvaal and setting up electric pylons in the Drakensberg mountains. He pitched up in America just as the mobile-phone revolution was about to start. He then worked on bids to set up networks in Spain, Greece, South Korea and Brazil. His proudest engineering moment was building Argentina's first mobile network, “the fastest-built in the world,” he says.

But his most enduring achievement is likely to be M-PESA, a pioneering service that enables Safaricom's customers to send money to each other by text message. Cheaper and faster than ordinary money transfers, it now moves $1.5m a day across Kenya, in mostly tiny transactions, and is being rolled out in India, Tanzania, Afghanistan and elsewhere. Mr Joseph brazenly calls it the mobile-phone industry's greatest ever innovation. That is an exaggeration—but not a very big one. Mobile banking could be the next stage of mobile-driven economic transformation.
Dial T for trade

Some have criticised Mr Joseph and Safaricom for failing to reveal the owners of a mysterious 5% stake in the company, built into the original deal, which probably enriched people close to the previous government. But by the turbid standards of corporate Africa, the company is clean. Can Safaricom's fairy-tale be matched in other industries? Mr Joseph is bullish. He refused to buckle under immense pressure from Kenyan intelligence to ban text-messaging during the riots and never lost hope during Kenya's political crisis, though he admits the country may have been only two weeks away from collapse. It would be folly, he insists, to bet against a continent as rich and resilient as Africa.

Mr Joseph wants M-PESA to offer new services, such as mortgage payments. He also wants to plough funds into expanding internet access in Kenya using high-speed “third-generation” mobile networks. At 62, Mr Joseph reckons he has three more years left at Safaricom before retiring, perhaps to the house he keeps in northern Kenya, circled by rhino and leopards. Until then he must fend off competition. Not from Celtel, Kenya's second provider, which seems content to earn dividends in Safaricom's shadow, but from France Telecom, which recently bought 51% of Telkom, the state fixed-line monopoly, and Econet, a new Indian-owned network.

Mr Joseph is not shy in weighing in on the perennial question of aid versus trade. The ability to get a phone line without an address or credit for less than $1, he says, “has been hugely more efficient than aid”. Since 70% of the economy is informal and government services are ragged, there is probably some truth in his claim that Safaricom has done more to help Kenya than decades of aid. At the very least, it offers a powerful lesson for would-be investors in Africa: it can pay to bet on the poor.

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