Many years ago, a journalist asked a governor why he was recycling politicians who had served in previous  administrations. The governor simply told him: “we only use those who are active”. I am not here to debate if that is an efficient method to use when building teams. Yet there is a small lesson there: we all like to join moving trains. In forming governments, the moving trains can be simply those that show up irrespective of their capabilities.  Also, in companies, once they become active and start winning, a continuum is established and they just keep going.  It is called positioning.

We have read that Amazon received 238 proposals for its second headquarters. Cities competed for the opportunity for Amazon to choose them for its headquarters.

Amazon.com Inc.’s second headquarters, dubbed HQ2, has lured 238 proposals extending across 54 states, provinces, districts and territories in North America, the company said Monday. Only seven U.S. states refrained from bidding: Arkansas, Hawaii, Wyoming, North Dakota, South Dakota, Montana and Vermont, according to a map Amazon published on its website.

Cities are battling for Amazon’s investment of $5 billion in construction and 50,000 high-paying jobs spread over the next two decades: New York City’s Mayor Bill de Blasio ordered landmarks around the city lit up in “Amazon orange” before the bids were due last week. Canadian Prime Minister Justin Trudeau penned a personal letter to Amazon Chief Executive Officer Jeff Bezos advocating for HQ2. Newark, New Jersey, has offered $7 billion in potential tax credits.

Notice that Newark, New Jersey, is offering $7 billion in tax credits. But that may not be enough. Amazon had made it clear that it would make the selection based on the city that can provide all the basic things (good roads, access to airport, electricity, etc) with massive “tax breaks and grants”. The grant part is interesting because that means that the city will have to give Amazon money. So, you waive tax and you also have to provide grant to Amazon.

Let me connect this to the Nigerian case: Few weeks ago, many people went ballistic when the Nigerian government noted through a minister that it was offering tax incentives to enable Dangote Group fix some roads. Some felt it was immoral to do that in a country of more than 180 million people. (I do not know the terms to ascertain how balanced the tax concessions are. Also Dangote Group has refuted some parts of the statements made by the minister.) Unfortunately, that is how capitalism works. I have called this type of incentives Conglomerate Tax: for their successes, conglomerates tax the economies where they operate as the economies indeed subsidize their businesses.

It is called Conglomerate Tax. It is a game played in all parts of the world. Conglomerates use their powers and scales to bully governments to do things the very way they want things. If governments refuse, they do not invest and nothing changes. Because they know the governments are financially incapable or strategically deficient, they hit them at the pain points: I cannot solve this problem if you do not accept my terms.

You may not like it, but there is nothing you can do about it. It is legal. From GE to Carlos Slim Grupo Carso, citizens subsidize most things conglomerates do as most times they do not have to pay tax. They get great deals you wish you can. And you can if you follow the game plan (I will explain later).

The news is that the Dangote Group will not pay tax in the next ten years for it to help Nigerian government fix roads.

Amazon does not seem to be a natural company to receive any support when you consider that it has ravaged communities through its ecommerce operation that has devastated shopping malls across America. The cities that plan to give it billions in tax credits and grants are the same cities complaining that Amazon has reduced their tax receipts by out-competing retailers who collapse taking with them local taxes. To add salt to injury, Amazon does not even collect local taxes for most cities. So, using historical impact data, Amazon should be punished by cities for what it has done on them, though indirectly.

Unfortunately, conglomerates are so critical because they open up markets and economies. What they do is so vital to communities that you can forget their past “sins”. Yes, Amazon wants to invest $5 billion but cities are offering packages in billions of dollars of tax credits. I expect the winning bid to offer around $5 billion in tax credits and at least $250 million in grants.

Now, why will a city do this? If Amazon is bringing $5 billion, it will drive the local economy. It is a virtuous circle that the $5 billion can stimulate more than $100 billion of value in the city. The cities are competing because Amazon over the years has accumulated capabilities, operating at the upstream level of the economy. The cities want more economic growth and Amazon can help them to unlock it. The fact is this: any company that attains that level of capability can get the same deal because governments are looking for entities that can fix their major pain point which is job creation. If you want to invest $5 billion in any Nigerian state, you will not just get land, you will receive tax benefits.

Conglomerate Tax is not corruption. You cannot even say that it is making the market not to operate freely and fairly. For example, Amazon competitors can say that the industry leader is getting an unfair advantage. You can say all you want, but government does not care, since if you have the same level of resources and want a deal, they will package something for you. Government does not create jobs, it only provides enabling environments.

Capitalism can be interesting because not everything seems fair. But as the Amazon case teaches us, it is better people focus on the motivating energy of capitalism. They will build firms and unlock value, instead of wasting time complaining on what the government is giving to conglomerates like Dangote Group. Every Nigerian government will keep offering benefits because if they do not, another African government will invite Dangote Group to come, offering the same benefits. Our problem is just that only one company is at the level of the Dangote Group when you talk of conglomerates. (We have other companies but most are not at Dangote Group level as diversified industrialized conglomerates.) In America, Amazon is making its own competition a show, but it could have gotten these same benefits secretly, just as GE and Honeywell do yearly.

We are at the early phase of an AI (artificial intelligence) race with amalgam of platforms available for developers to build upon. We have Amazon Alexa, Google Assistant, Microsoft Cortana, Samsung Bixby, Apple Siri, and more. For African startups, the choices will not be easy because besides the technology, we need to consider primitives and datasets which can support an African business. In this piece, I examine some things to take into considerations as founders make decisions on the AI platform to adopt.  You want to build a business on a platform your customers will like to use your products.

Around 2010, at the peak of Blackberry, I wrote that Blackberry would fade and Android would rise in Africa. I took many things into considerations when I made that call. I had lived in the U.S. with constant visits to Nigeria, and I saw some enablers and anchors which were in Android but lacking in Blackberry. It was evident that the adoption of the open framework of Android in a largely emerging region would happen.

Today, I want to provide the same direction for startups looking for a roadmap into the future of AI. Google has declared itself an AI-first company, and it’s doing everything possible to awaken the world with its computational capabilities. Amazon from nowhere changed the basis of competition with Alexa, a voice AI system which is evolving as an operating system for voice. With Alexa, new possibilities were unveiled and quickly incumbents like Microsoft got themselves in a catch-up mode. But this warfare is far from over: we are just starting in this sector since AI is still at the level of infancy.

So, as an African startup, you have a decision to make, since no one knows who the clear winner will be. We do not have the same level of clarity, at the moment, on AI as we have on Search (Google is the winner), social connection (Facebook is the winner), micro-blogging (Twitter is the winner), OTT (WhatsApp and WeChat are the winners), VOIP (Skype is the winner), and so on. Yet, AI will not have the same level of shape as most other sectors because AI itself is structured to make these platforms and ecosystems smarter. So, AI can improve Skype, WeChat, Facebook and more. We may not see a product called AI because there is nothing like that. That angle will help us to understand how to approach the adoption of a platform of choice.

But in this piece, I will narrow the AI into voice-activated AI systems. That classification is amorphous but I will go with it. Voice is going to be a huge factor in Africa since we like to talk and voice does not discriminate on literacy level. If you can build the solution in the native language of the people, you have a product that can be used in insurance, banking and other sectors. I have not included Facebook in this piece because it does not have an enterprise facing voice activated AI system. Sure, Facebook does AI but that is largely for its ecosystem, not for startups to build at scale through integration.

Here are factors to consider:

• Technology: The most important factor is that the technology works. If the technology does not work, there is no value even considering a specific platform. In this space, I give Amazon a lot of credit for its pioneering vision on voice assisted AI systems through Alexa. Yet, there is nothing Amazon does today that Google cannot do. Microsoft is also innovating. I will consider Amazon, Apple, Microsoft and Google as strong enough that the technology capabilities are largely even.
• Popularity/Network Effect: The construct of network effect is very important. You want to build on popular ecosystems, not just in U.S. but also in Africa. Google has an edge there because if Google Assistant on-boards on Android, you will have many clients since Android is popular in Africa. For Amazon, you will need to have a new hardware which increases the adoption cost. Apple is strong but not many Africans use Apple. For this, I give it to Google. Microsoft has Windows where Cortana runs but unfortunately, laptop and desktops are largely not as ubiquitous as smartphones.
• African Data: Among all the companies, Google is well positioned on data that involves Africa. YouTube had clearly documented African culture with our accents and lifestyles. In other words, Google Assistant can understand Africa more than any other platform, if it chooses to do so. It can understand how we talk, greet and stand in reverence to elders by reviewing videos we have uploaded on YouTube. No other platform comes close. So Google wins here.
• African Business Presence/Developer Engagement: Google and Microsoft have invested thousands of hours to grow and nurture ecosystems in Africa. These companies have organized competitions and sponsored conferences. Apple and Amazon are largely alien in building relationships with African developers and startups. Samsung is also local and working but Microsoft and Google are far ahead.
• Others: Google and Microsoft are strong on other factors. In most African major cities, you can pinpoint their offices. You cannot say the same for Apple and Amazon. Though Amazon is in the continent selling its Amazon Web Services, the focus is acceleration of consumerism. In South Africa, it operates a lackluster ecommerce operation where it has refused to invest more capital. So, Amazon seems focused on India as a place to win, neglecting Africa. Microsoft and Google do well on other factors. But Google has a clear edge because of YouTube which can help it teach AI systems how African humans hug, cook and drink through massive datasets of videos it has accumulated over the years. We have made those videos and Google can make sense of them if it finds market opportunities in the continent.

Google, which owns YouTube, announced on Oct. 19 a new dataset of film clips, designed to teach machines how humans move in the world. Called AVA, or “atomic visual actions,” the videos aren’t anything special to human eyes—they’re three second clips of people drinking water and cooking curated from YouTube. But each clip is bundled with a file that outlines the person that a machine learning algorithm should watch, as well as a description of their pose, and whether they’re interacting with another human or object. It’s the digital version of pointing at a dog with a child and coaching them by saying, “dog.”

All Together

I must note that Africa does not have any of the core technologies like Alexa, Siri and Cortana to build AI solutions. It may not really be absolutely necessary for us to pursue such goals at the moment. We do not need to have Windows before we can create products for PCs. Though I do hope we can get there, the fact is that we do not have the financial and technical capabilities at the moment to pursue such expensive endeavors. Note that I did not say that it is impossible: I am saying that if we do it, we will not win because Silicon Valley will out-compete us. Our opportunity is to find a space to differentiate on these platforms locally. Yes, we can solve local problems using these platforms. If that is our focus, I do think that local data will be catalytic to success. In that space, Google wins because it has more data about Africans and Africa than any other company. And for that, I will suggest that you consider building on top of Google platform because it will win in Africa even if Amazon Alexa wins in U.S. Yes, it will mirror the smartphone operating system platform where Apple is winning in U.S. (across many metrics and indicators) but Google is doing better in Africa.

Just making it out of a “cave” where I have been with a client working on strategy since Saturday. Yes, in this age of disruption, Nigerian companies just like their counterparts anywhere must evolve to compete locally and globally. It was a very wonderful session. But I need to quickly address a key point, as a follow-up to a recent post on ecommerce.

The main thing I am hearing is that they expect to have a dedicated space in these platforms which will be under their controls. In other words, they want a clearly defined and dedicated digital store, just as you have in physical malls. They will hold the digital key and can brand as they want in that space. Consider something like konga.com/brand-name where that page showcases exclusively what that brand offers with no other brand therein.

I have been reading comments and getting emails from founders telling me that they have the solutions. Apparently, they read the piece without noting this important line: “Yet, these companies do want to expand and are very ready to go online provided someone will handle the logistics while they drive the online sales.”

That you have a website where companies like Soulmate, Unilever or PZ can list their brands without a strategy on how they can ship the items does not solve their main pain points. The main pain point is logistics and shipping the items after the buyer has paid online. These firms can open their own websites and drive their ecommerce businesses themselves. But most are not ready to deal with logistics.  And you do not blame them because logistics in Nigeria is another business entirely. With no postal service, they will need to invest capital in non-core business areas thereby degrading the efficient utilization of capital. For them to get your respect, you need to do that for them. That you have a website where you expect them to open a brand page is nothing. Anyone can create a website today.

The FMCG Distribution Model

For years, fast moving consumer goods (FMCG) companies work with distributors. These distributors buy in bulk and then help the FMCG sell to retailers. The retailers then sell to end-users in their shops. The brands never sell directly to retailers or end-users, and they do not want to change that model. It has worked for them for years.

So, if you expect them to come to your site and host a page without you offering them a way on how they can ship the items, when bought online, you are not closing the loop. They want you to handle the logistics and you have to demonstrate that you have the capability to do so. So the value proposition must be thus: I will give you a page to list on my site and we will ship all the items when bought to end-customers.  You may need to have scale for them to trust you to store their goods in a case they do not want you to buy as a distributor upfront. Yes, they may handle the website page but they need you to ship, and that arrangement on where the goods are warehoused must be planned ahead to reduce delay in shipping to customers. Where you cannot afford to buy in bulk and they are not open to ship to you, the business model crashes. So, you must deal with that issue very well.

The Marginal Cost in Ecommerce Business

I have noted many times that a Nigerian ecommerce business marginal cost is high, and that cost is at the offline element of the business. The cost of adding a user online is close to zero but the cost of shipping to an additional user is non-zero. If you are operating in Lagos as an ecommerce company, you have a huge marginal cost to ship to someone in Opopo. To reduce that marginal cost, you can bound your geographical location of service as within Lagos State.  When you do that, you are no more a web business which is typically unconstrained and unbounded by geography. You have been limited by location driven by marginal cost. That means you are not really running a web business: your business is offline! You may have 60,000 users in your platform but only those in Lagos (say 40,000) can be easily addressed efficiently and profitably. If I am advising you, I will make it clear that you have only effective 40,000 potential buyers since you are focusing on servicing clients in Lagos. (You may think that you can ask customers to cover the shipping cost to Opopo. Sure that can work except that there are still shops and open markets where the user can buy. In other words, you are not the only alternative and when the cost of buying from you is high, the consumer looks for alternatives. So, you have an incentive to reduce the overall cost for buyers if you expect them to use your platform.)

That is the same challenge FMCG companies are facing: how can they have websites and then restrict who can shop on their sites, due to marginal costs dominated by distribution costs? To avoid that paralysis, they simply do not want to run online shops. They are open to promote the brands, but you still have to deal with retailers to buy these items across Nigeria. Sure, they welcome distributors who can place big orders online, but not end-users buying one pack of detergent or soap.

All Together

We have huge opportunities in ecommerce. Markets will move online, eventually. But we need to understand that our biggest cost element is not the website but the logistics of moving the items. As we develop businesses in the ecommerce sector, we need to work out how partners can overcome the distribution challenges. That is the key missing link in some of the models: the nice websites are not enough. Founders that can solve that distribution cost problem at scale, affordably and efficiently can open a new basis of competition in the Nigerian ecommerce sector.

Tomorrow, I will be making a presentation to a client, a foreign company that invests in commercial real estate (mainly shopping malls) in continental Africa. My firm serves as an independent advisor, providing insights as the investor deploys capital in our continent.  The firm had hired some companies to prepare market intelligence reports on continental Africa at regional levels. When the reports were sent to my office, we had some exceptions: we concluded that the market intelligence work was not evolutionary. Largely, the reports were mundane, looking at real estate competitors purely within the real estate sector.

This is part of my comment: “We have reviewed the reports. Unfortunately, the reports miss a very critical point: they failed to model the impacts of Konga, Jumia and other e-commerce companies in Africa on real-estate should the ecommerce firms become very successful. We do believe that investing in malls and commercial real estate in the age of ecommerce must capture the latent disruptions on real estate values if commerce in Africa moves online, at scale. Should that happen, we may not have the need for many shopping malls, and the implications will be that real estate value will drop in many African cities”.

My client called me right away, asking why we made that correlation. I explained that I have seen that competitors in real estate companies in U.S. are not necessarily real estate companies but Amazon. As Amazon advances across American cities, shopping malls are closing and remaining ones losing values. So, the competition is not coming from industry players, but a clearly different parallel sector. So, modeling competition in the real estate must include what is happening in the ecommerce sector.

I was quick to note that Africa is not there yet, but investing in shopping malls must take into considerations that we may have massive dislocations in the structure of commerce where shopping malls will not have much value. Yes, we still need shopping malls today. But it is very important we understand potential impacts as decisions are made. Africa does not have a lot of malls to start with, but the continent is modernizing.

This insight applies to any company investing in shopping malls. The fact is this: within the next decade, we will not have shopping malls in most American cities. Africa will have its own moment and we can even leapfrog because we never really shop in malls to start with.

Our perspectives on the potential disruption of shopping malls by African ecommerce should apply to insurance companies who are good at investing premiums in real estate. They need to model how ecommerce is growing in the selected cities and how such growths could affect the commercial values of shopping malls over time.

Tomorrow, I will provide insights on how my client can model some of the challenges by looking at different scenarios on what ecommerce can do on commercial real estate (shopping malls) in Africa. It will be interesting.

Added This Comment on LinkedIn After a Question

The Question: Some weeks back Sir, you explained some of the logistics challenges affecting e-commerce business in Africa and how Africa isn’t there yet, was this also considered, Furthermore, a lot of consideration need to go into how long the company wishes to invest in shopping malls in relation to the empirical assumptions to when the values of shopping malls will start dwindling in Africa.

Ndubuisi: Sure – there are many elements. Yes, some specific cities may get ecommerce faster. If you are going to build a mall in VI or Lekki. I do think you need to worry if Gloo/Konga/Jumia and others will figure out ecommerce within a decade even though no one cares what is happening in Aja or Opopo.

So, broadly Africa may take years, but specific regions or areas in cities may be ready in few years. Lekki is a new city with no typical African open market. If they figure out ecommerce, you may never have to need a Mall. But that does not mean that building malls in Aba will not be a good idea. Broadly, logistics is an issue. But that does not mean that ecommerce cannot reach optimum level in specific cities within 5 years. I think VI and Ikoyi will may there. Focusing therein keeps marginal cost (i.e. distribution cost) low.

Unfortunately, people that want to build malls always target those areas where ecommerce may do well. Why? That is where the money is. So for me, how can we reconcile those factors at city level. That is what I have to help my client sort out. They will invest, but we need to be prepared ahead on scenarios which can come up. This can affect how the mall is designed so that we can easily convert to offices

United States is a brilliant nation. It has the capacity to connect its citizens to a shared vision. From science to technology, literature to military, America has always set the global benchmarks. But in one specific sports, soccer (yes, football in anywhere else), America continues to struggle. This year, a very small country, Trinidad and Tobago, extinguished the U.S.’s plan to play in Russia 2018 World Cup. That is it: U.S. Men Soccer lost to Trinidad and Tobago and will not play in the next World Cup.

The U.S. men’s national soccer team is not going to the World Cup next year. Let that sink in for a moment.

A U.S. squad that had qualified for soccer’s global spectacle every four years since last missing out in 1986 will watch the Russian-hosted tournament from home.

All it needed to do was defeat or tie last-place Trinidad and Tobago on Tuesday night.

Instead, the Americans played a shameful first half and lost, 2-1, before a few thousand observers in a lonely little stadium 25 miles from the capital

What has been happening in the U.S. Men Soccer can teach us some basic things in our developmental journeys in Nigeria. There are three key features I will like to examine:

• Opportunity: The U.S. Soccer has opportunities for sportspeople. But it is not as exciting as American Football and Basketball. The hockey and baseball are also there. In the order of things, for most talented young men in U.S., soccer is not among the top three options. While a football player can sign millions of dollars in contract, some soccer players earn less than $40,000 per year playing for teams. So, the opportunity may be there, but for most players, they are not seeing them at individual levels.  You can relate this scenario with our country: there are opportunities everywhere in Nigeria but people, the citizens, are not experiencing them.

Beginning and lower-echelon players in Major League Soccer make a minimum of $35,125 a year, by far the lowest minimum salary of major professional team sports in America. As of the end of the 2013 season, 154 players made less than $50,000 a year. The average salary in the MLS, however, was $160,000, and the median salary was $100,000. About 45 percent of MLS players — that’s 249 — made over $100,000.

• Talent: With the individual lack of clear opportunity in U.S soccer, the U.S. struggles to find talent. With lack of talent, they have nothing to develop, at scale. Why play soccer and earn $40,000 yearly when football can make you a multi-millionaire? Talent moves into areas of opportunities. And it teaches us a major lesson as a nation: you need the right talent to unlock developmental big gains. Yes, unless you have the talent, the nation will struggle. Nigeria needs the talent in emerging technologies, banking, insurance and other areas to compete globally. That talent is expected to be seeded in the universities for the markets and the economy. Where the university is not doing that, markets and our economy cannot necessarily do much. There is a limitation on what can be done without a solid talent pipeline from the universities. U.S. is doing everything it can on soccer, but talented American kids do not want to waste time on sports they will be paid $40,000 per year. The Nigerian case is that markets have limited talent to expand because our schools are not supplying talent. So, in business, small countries are knocking us out of business world cups.
• Outcome: The outcome in U.S. Men Soccer is similar to what we have in Nigeria. Everyone knows that Nigeria has huge opportunities but we are yet to experience the real outcome collectively. The developmental results have not been extremely stellar. American soccer has the same issue, internally and globally: it is not popular at home compared with other sports and the team continues to struggle at global level.

All Together

U.S. will continue to experiment on how to fix its soccer. A possible option will be to entice talented foreigners to join the team. That is an option Nigeria may not have. But for U.S. to follow that model, the soccer teams must also pay well. (From those teams, they can form a national team.) But they cannot pay well without revenue coming from TV rights and ticket sales. With not many people interested in seeing soccer games, that is a challenge. But at the root cause of this issue is that the boys that can make soccer exciting in U.S. are not interested to participate because they prefer other sports. U.S. has a talent problem there. And when that happens, the result is always poor whether it is a nation or a sports commission.

Nigeria should learn that nothing is magical because even America can struggle big time due to its lack of capacity to unlock the talent it requires to develop its soccer game. For Nigeria, the stakes are even higher: it needs to develop its economy and markets. It needs talent for those and it’s high time for the universities to make the talent available. Indeed, there are things which cannot be leapfrogged: you must deal with the basis before you can improve the outcome.