When multinational companies want to tap into the massive pent-up consumer demand in emerging markets, the first countries that they usually think of are China and India. But what about Africa, asks Vijay Mahajan, author of Africa Rising: How 900 Million Consumers Offer More Than You Think (Wharton School Publishing). Though often overlooked in global corporate growth strategies, he argues, Africa as a whole has enough consumer power to give China and India a run for their money.

Having returned from various fact-finding missions, he uses his new book to dissect the vast, complex markets of Africa, starting with a look at the home-grown entrepreneurs who have overcome political, economic and social barriers to grow and innovate. For multinationals, particularly those facing shrinking revenues from other emerging markets affected by the global economic downturn, the lessons are timely.

The topic isn’t entirely new for Mahajan, a marketing professor at the University of Texas in Austin. In 2006, he was co-author of The 86% Solution: How to Succeed in the Biggest Marketing Opportunity of the 21st Century (Wharton School Publishing), a look at how companies can reach the vast majority of the population in countries with a per capita gross national product of less than $10,000. In an interview with Knowledge at Wharton, Mahajan talks about Africa Rising.

An edited transcript of the conversation follows.

Knowledge at Wharton: What is the market opportunity that Africa offers? And why do so many companies tend to overlook it?

Vijay Mahajan: Your first question is the heart of the book. Like most of us, I did not realize until I started working on the book that the population of Africa — at about 950 million — is comparable in size to the population of India. And if you look at growth rates, the population could be equal in size in a few years to the population of even China.

The next point is about market opportunity. Are there consumers in Africa who have the resources to buy products like consumers in India and China do? The fact is that the GDP of Africa — that is, looking at the continent as if it were a sort of United States of Africa — is actually higher than India’s. If all the countries in Africa combined forces, they would be the 10th largest economy in the world, one notch above India, and ahead of the other big emerging economies, Brazil and Russia.

In terms of market opportunity, the data I was collecting was so intriguing that it drove me to visit Africa and to speak with a range of companies there, from local entrepreneurs to U.S. and European multinationals. And at the end of the day, I was convinced that the market opportunities in Africa for all kinds of products are similar to the market opportunities that you see in places like India.

Why has Africa been ignored? That has puzzled me. When I travelled from Southern Africa to Northern Africa, I was surprised that I didn’t see more U.S. or Western European companies than I did. One U.S. multinational with an exceptionally big presence is Coca-Cola. It has been there more than 90 years. Another company with a big presence there is Unilever, the Anglo-Dutch consumer goods producer. So while there are some multinationals, it’s not to the same extent as what I saw in India and China when I was researching my previous book, The 86% Solution.

The other thing is that here in the United States and in other developed countries, we get nothing but bad news about Africa in the press. Not to criticize CNN, but you know how badly the Africa that is portrayed in the media like CNN is. The CEOs I was interviewing were so happy that, for the first time, a professor from America was interested in learning about what they were doing.

But it could just be a matter of time. When I started working on The 86 Percent Solution 15 years ago, I used to hear the same stories from many Indian and Chinese entrepreneurs.

Knowledge at Wharton: Africa is clearly a large market, but it is obviously not a monolithic market. How is the market structured across the different countries?

Mahajan: The market is not different from any other developing country. After speaking with a lot of advertising agencies, multinationals and local entrepreneurs, I decided that there are three major groups in Africa, which I refer to in the book as Africa 1, Africa 2 and Africa 3. The terminology is actually taken from an Indian entrepreneur mentioned in the book.

Africa 1 comprises between 5% and 15% of the population of each country. These people could be from anywhere in the world. They may be senior government officials, expats, people working for [non-government organizations], people working for large, international banks. This segment was not as interesting to me as the others.

The segment that really was interesting is what I call Africa 2. People in this segment are neither poor nor rich; this segment comprises average people living from month to month. They may have some savings. And you can guess that these people are civil servants — hardworking nurses, hardworking teachers and so on — or work in the hospitality industry.

This segment has very high aspirations. These people believe Africa is going somewhere, and they are upbeat. I spend a lot of time in the book on what a big opportunity Africa 2 is. The size of this group is between 35% and 50% of a country’s population, the equivalent of between 350 million and 500 million people. Divide that number by 5, which is the average size of a family in Africa (in the U.S., it is 3; in India it is 4)…. So there is a very viable Africa 2, which is really going to drive the economy and the consumer markets.

Now, Africa 3 — the remaining 35% to 60% of an African country’s population — is the one that is struggling. These are the stories that you typically hear about. But that number is not any different from other developing countries. After all, there are 700 million people in India and 750 million people in China who do not have access to a toilet. What’s interesting about Africa 3 is that many of them work for Africa 2 and Africa 1, as maids and the like, and they aspire to perhaps one day be part of Africa 2.

Knowledge at Wharton: Would you be able to give a few examples of innovative, home-grown firms or burgeoning sectors that have identified opportunities in Africa?

Mahajan: One example of a remarkable firm is a company in Kenya called Mabati Rolling Mills. The name is the Swahili word for the rolled metal roofing that many Kenyans use for their houses. For people in Africa 2 and Africa 3, one of their main goals when they save some money is to build a house. So they build one room at a time, which may take years to complete. And they need a roof — that is, the 20 to 30 roofing sheets they need, which they will slowly buy, two or three at a time. You will often see people transporting the sheets on top of a taxi or balanced on two bicycles. Mabati’s entrepreneurs saw that need and the company is now the dominant manufacturer of the $180 million metal roofing market in Kenya. It’s also continuously updating its product lines, and now exports to around 50 countries world-wide.

Then there’s the film industry. For example, Nigeria’s Nollywood makes more movies than India’s Bollywood in India and Hollywood [in the U.S]. The quality, of course, is questionable. And many countries do not have cinemas, so every Nollywood movie is available only on tape, not even DVD or CD.

Another burgeoning area is cosmetics or personal-care products, keeping in mind that African women are not any different from women anywhere else. While many multinationals have not tailored their products as much as they could to suit African consumers, locals have, and so you will see a lot of local hair products.

There’s also a big market for used, or second-hand, products. When you or I change our mobile every two or three years, we do not even think about where it might end up. Actually, the used mobiles from Europe and the United State often go to Africa.

And interestingly, death, too, has a role to play. Although it may not be openly admitted in many of these countries, death is often a celebration. Many people use their savings if someone close to them dies, and they host a wake or what have you. You can imagine when a whole community is invited. So some companies have been set up to cater to those occasions.

Knowledge at Wharton: You mentioned Coca-Cola and Unilever. What are multinationals doing to serve the underserved markets in Africa?

Mahajan: In the last chapter of the book, I talk about “ubuntu”, a Zulu word meaning, “I am because you are.” In other words, we are in this together. Desmond Tutu uses the word to evoke harmony. And I tried to give it a business twist. The way I see it is that companies cannot exist unless they take care of their employees and they take of their customers.

A case in point is Coca-Cola. It has distribution centers in almost every nook and cranny of the continent, whether it means transporting their goods on buses, on donkeys, on bicycles or by whatever means. Why not use that network to distribute condoms? So Coca-Cola has been working with NGOs like Population Services International, based in Washington, D.C., to help deliver condoms to parts of remote parts of Africa.

Unilever, meanwhile, is involved in HIV initiatives that I saw in Southern Africa, which are very different from other initiatives. There they have focused on the orphans of families where both the parents have died because of AIDS. Unilever helps to find adopted mothers to raise these children.

Beyond ubuntu, something else that you see at successful multinationals in Africa is a very clear understanding of consumers. They know that they have to do more on this continent [than in other developing countries] given the spectrum of the consumer they have to deal with.

Knowledge at Wharton: Given your marketing background, what struck you most about marketing in Africa?

Mahajan: I often saw kids buying a bottle of Coke, which is expensive, and they would put the bottle right in the middle of the table so everybody can see it, and they would have enough glasses out to share that Coke with friends. It is an aspiration product. Aspiration also is an important element that I saw in many of marketing campaigns.

Another thing to keep in mind there is that Africa has a young population. A little more than 40% of the population is younger than 15, compared with about 30% in India. That’s why the use of sports in advertisements is very predominant. So is music.

Knowledge at Wharton: What about pricing strategies? Do they address Africa 1, Africa 2 and Africa 3?

Mahajan: Something I had seen in other developing countries was the predominance of the “lowest coinage strategy”. So when you and I buy a bottle of water here, we pay whatever we need to pay — sometimes $1 or at airports we might be paying even higher. You would find that bottled water there from multinationals, such as Nestle. But the local entrepreneurs have developed products that they sell at the lowest monetary unit, which, for example, in Nigeria is 5 naira. But the water might not be sold as it would be in developed countries, and many times it may not be filtered water. It may be the tap water, but they sell it in a small plastic bag.

Now, who is buying that? In many cases, it could be people standing in front of a mosque or a church or a temple and asking passersby for money. Because it’s so hot, they cannot go the entire day without water. Some entrepreneurs figured out that that they could sell water to these people, at the lowest currency.

Knowledge at Wharton: What are the major hurdles that you found, political or otherwise, that companies face?

Mahajan: When I was there, I made a point of not talking to any politicians or any chambers of commerce. I figured that politics is not any different than in India and China, and I wanted to avoid that. Putting aside all the rules and regulations, I wanted to see how companies are able to still get close to Africa’s 950 million consumers.

I saw some very creative solutions. For example, one of the most interesting companies that I studied was Innscor, a fast-food restaurant chain from — of all the places — Zimbabwe. But the interesting thing I discovered about this company was how they are able to cope with their country’s turmoil by, for example, expanding into other parts of Africa.

Then there’s its crocodile farm, the largest in the world. I asked Innscor’s executives: “You have the restaurants and you also have a distribution channel used by multinationals to ship their products, so why this crocodile farm?” The answer was that because of the political situation, they realized that they would not have access to foreign currencies. So the crocodile farm, you can guess — the skin is sold to Europeans and the meat to Chinese.

Knowledge at Wharton: You referred to China and India. In both countries, there is an overseas diaspora that gets actively engaged in the development efforts of the homeland. Did you find the same sort of phenomenon in Africa as well?

Mahajan: Yes, diaspora is involved in Africa. According to estimates based on formal and informal remittances, Africa gets about $40 billion a year, the same amount that India gets. And there are organizations, such as one in London called Recruit Africa, which has been set up to help African emigrants find jobs. But in the book, I make a plea to the African diaspora to really get more involved.

Mo Ibrahim, the founder of mobile-phone company Celtel, is part of the diaspora. He was originally from Sudan, educated in Alexandria, got his Masters and PhD in England while working for British Telecom, and then started the mobile phone company in Kenya. And it is a fascinating story — how he dealt with no electricity, how he provides customer service to all these rural areas, and so on.

He is just one example of many from the diaspora who are returning home to start up companies. The university in Ghana, Ashesi University College, was started in 2002 by a Ghanian, Patrick Awuah, who was part of the diaspora. He was a former software engineer at Microsoft and has created a very nice undergraduate university.

The person who was the head of Coca-Cola in Africa when I was finishing the book, Alex Cummings, is part of the diaspora. He is from Liberia, came to the United States to get his education, and now he has been promoted to chief administrative officer for the entire company at its global headquarters in Atlanta.

There are an estimated 100 million Africans living away from home. But the immigrants who are still connected to their homes — like the immigrants from India and China — are sometimes very innovative. I’ve been seeing some very clever ways that the diaspora is involved in talent, in helping their families to start businesses back home.

Knowledge at Wharton: What advice would you give to companies that want to tap into Africa?

Mahajan: The advice that I am going to offer is not any different than what I would offer for India and China. I met with some very interesting Unilever executives when I was in Harare, Zimbabwe, and they told me that if you really want to understand Africa, you have to go on “consumer safari”. You have to go and see with your own eyes what is going on. A Coca-Cola executive in Kenya also gave me the same advice. And that’s not always the case. Many companies, they said, manage their Africa businesses from their headquarters in Europe. If the top management is not there, they do not really understand the market themselves, and they do not get involved with the local institution. So the good advice that I was given was to “walk the market”.

I would encourage companies to turn to that diaspora for help in penetrating those countries. To my great surprise or ignorance, I found out that the number of immigrants from Africa to the U.S. is close to 1.1 million, which is slightly less than from India. Also, 10% of the population from North Africa is in Europe now. So you are talking about 100 million North Africans, and 10 million of them are in Europe, sending a lot of money back home. There is also a lot of talent there.

Another thing I would suggest is to think about making acquisitions. There are many local entrepreneurs who are running remarkable companies, just like China and India. For example, there’s a supermarket chain in East Africa called Nakumatt. It’s just like a U.S.-style supermarket, but customized and it is growing very rapidly. If somebody wants to go into retailing, I would see Nakumatt as a very nice candidate that they could leverage to really penetrate those markets.

The situation in Africa is not any different from India and China. You have to really get to know that continent and see for yourself what opportunities exist there.