1 – Key observations
- Chinese firms are reshaping Africa’s economic landscape. Chinese businesses have invested in 49 out of Africa’s 53 countries—US$9.3bn in 2009. While most Chinese investment in Africa is still directed towards extractive industries, Chinese firms are increasingly seeking business opportunities in a wide range of sectors; Chinese investment in Africa’s services sector has risen from about 20% of total inbound investment to nearly half last year. Chinese business activity in Africa is still in an early stage, but it is already changing the economic landscape in many African countries.
- Chinese investment creates new business conditions in Africa. China is the biggest infrastructure developer in Africa, having gained over 40% of the African market in 2008. Chinese construction firms have been involved in over 500 infrastructure projects across the continent. Many of these projects have facilitated market access into Africa. Moreover, Chinese government funded special economic zones across Africa have the potential to create an environment that enables both Chinese and other foreign businesses to establish on the continent.
- Global firms can benefit from China’s growing engagement in Africa. While Chinese investment in Africa means increased competition for African and global businesses, it also heralds new opportunities. Multinational firms with operations in China can leverage the China advantage to tap into the African market. China’s increased involvement in Africa has also created a strong demand for services to help Chinese firms navigate these new markets. Further, Chinese firms increasingly seek to partner with African and multinational businesses to assist their overseas operations.
2 – Gearing up
Globalisation is entering a new phase where China is in the driving seat. According to UNCTAD, China is now the fifth largest investor in the world, and the largest non-African developing economy investor in Africa. China’s engagement in Africa is changing the continent’s economic landscape, and it has already influenced other emerging economies, or BRICs, to gear up their investments on the continent.
But global and African firms need not view Chinese firms solely as fierce competitors. China’s growing activity in Africa is also creating new opportunities for global and African businesses. China and Africa’s economic ties will only increase in volume and importance over the next decade. As a result, businesses should focus on how they best can benefit from this new wave of globalisation.
Although Africa still only makes up about 4% of China’s total outward foreign direct investment (FDI), China’s FDI in Africa is growing fast. Figures from the Chinese Ministry of Commerce (MOFCOM) show a dramatic increase in Chinese FDI in Africa in the last decade – from US$491m in 2003 to US$9.3bn in 2009. China is also Africa’s largest trading partner in combined export and import values. In 2010, China’s two-way trade with Africa surpassed $110bn, and recorded a 43.5% year-on-year increase.
China’s growing economic ties with African countries are not simply a story of exchanging raw materials for capital, infrastructure, and cheap goods – although it is certainly part of the story. Chinese corporations are increasingly investing in diverse sectors across Africa. Moreover, Chinese investment in Africa is widespread across the continent. Of Africa’s 53 countries, only Burkina Faso, São Tomé and Príncipe Swaziland, and Somalia have not received Chinese investments. Most Chinese enterprises view Africa as a huge potential market with plentiful business opportunities.
3 – Old news: Securing raw materials
China’s appetite for Africa’s natural resources is generally the focus of reports on China’s engagement in Africa. It is true that a significant share of the value of Chinese investment in Africa is directed towards the extractive industries. MOFCOM figures show that Chinese investment in the extractive industries accounted for 29.2% of China’s total investment in Africa in 2009 (27.6% in 2000).
China needs to secure natural resources to fuel its domestic economic growth, as well as to support its growing domestic demand for commodities. The Economist Intelligence Unit’s data indicate that China became the world’s largest energy user in 2009, accounting for 20% of global energy use. Further, EIU forecasts that China’s energy consumption will increase by around 67% between today and 2020. Hence, energy security will be one of the most critical issues facing Chinese policymakers in the coming decade. Unsurprisingly, the greatest amount of Chinese investment can be found in resource rich African countries. The top five destinations for Chinese FDI in Africa are South Africa, Nigeria, Zambia, Algeria and Sudan. Moreover, petroleum and minerals still make up over 80% of Africa’s exports to China.
China’s large state-owned enterprises (SOEs) are driving Chinese investment in Africa’s oil sector. For example, China National Petroleum Corporation (CNPC) has invested in oil assets in Sudan and Chad. Similarly, China Petroleum & Chemical Corporation (Sinopec) holds equity in oil fields in Sudan and Nigeria as well as production rights in Angola, Gabon and Algeria. And China National Offshore Oil Corporation (CNOOC) has acquired energy interests in Morocco, Nigeria and Gabon.
Top 10 destinations in Africa for Chinese outward FDI 2005-2009 (US$m)
In contrast, the mining sector engages both Chinese SOEs and privately owned firms. In 2010, the two largest Chinese investments in Africa’s mining sector involved both a SOE and
a privately owned firm. The largest mining investment was a US$1.35bn deal by Chinalco, a Chinese SOE, in Guinea’s iron ore mining industry. The second largest was a US$1.2bn investment by Bosai Minerals, a Chinese privately owned firm, in Ghana’s Bauxite industry.
LARGEST CHINESE INVESTMENT IN AFRICA IN 2010
Chinese investment in Africa’s resource sector is significant, but not a game-changer. The economic structure of many African economies is based on trading raw materials instead of manufactured goods. However, this is changing. Chinese investment in Africa is becoming increasingly diversified as Chinese businesses seek investment opportunities in large new markets.
4 – The emerging story: Reshaping Africa’s economic landscape
Chinese corporations are exploring business opportunities in a wide-range of sectors across Africa. Recent MOFCOM figures on the sectoral distribution of China’s FDI to Africa show a significant upward trend of investment in the services sector (including construction). Chinese FDI in the services sector accounted for 43.3% of total Chinese investment to Africa in 2009 (18.3% in 2000).
A sign of this development came in 2008 when the Industrial and Commercial Bank of China
(ICBC) purchased 20 percent of South Africa’s Standard Bank for US$5.5bn – one of the single largest Chinese direct investments in Africa. Standard Bank is Africa’s largest bank, and provides ICBC with a financial services gateway into the African market.
Chinese enterprises in Africa are involved in sectors as diverse as finance, transportation, telecommunications, pharmaceuticals, retail, manufacturing, tourism, and agriculture. Take Ethiopia, not rich in natural resources but people rich as the second most highly populated country in Africa, now one of the key markets for Chinese investment in Africa.
Two sectors that are seen as new frontiers for growth in Africa, and where Chinese investment is playing an ever more visible role, are in agribusiness and telecommunications. The former is an extension of the “old news”, the later heralds the “new”
5 – AGRIBUSINESS
“Agribusiness is the next big movement for Chinese investment in Africa,” says Anna Howell, partner at the law firm Herbert Smith. Indeed, MOFCOM figures suggest that Chinese investment in Africa’s agricultural sector has grown from nearly US$48m in 2000 to over US$288m in 2009. Agribusiness can be seen as China’s new strategic investment in Africa.
The combination of rising global food prices, growing Chinese domestic food demand, and scarcity of arable land in China make agricultural investment in Africa a means to achieve long-term food security. Africa has 60% of the world’s arable land and about 15% of its population; China, by contrast, has 7% and 20% respectively. MOFCOM estimates that there are over 1,100 Chinese agricultural experts in Africa and over one million Chinese farm labourers dispersed over 33 African countries. The experts help maintain agricultural research stations at over 142 Chinese agricultural investment projects across Africa.
Although Africa has great potential for agricultural development, it also has many challenges including lack of technology, bad infrastructure and water management, and soil erosion. As a result, great benefits can be made from Chinese investments in Africa’s agricultural sector through improvements in infrastructure, technology, equipment and knowledge, as well as an influx of capital. A joint-venture between China State Farm Agribusiness Corporation and the Guinean Ministry of Agriculture increased yields from 1.5 to 9 tons per hectare in Koba, Guinea. Koba rapidly expanded into a large, diversified agribusiness producing hybrid rice, sugar cane, eggs, animal feed, and other foodstuffs.
6 – TELECOmS
“We’ve been looking widely for international investment in our ICT Hub,” says an official from Kenya’s Ministry of Information & Communication, describing a plan to develop an IT-centric outsourcing cluster between Nairobi and Mombasa, “all of the serious investors to date have been Chinese.” Chinese firms have also become giant players in Africa’s telecom sector.
Chinese companies’ interest in Africa’s telecom sector follows a dramatic growth in mobile communications in Africa over the last decade. Chinese enterprises are now playing a visible role in the modernisation and expansion of telecommunications infrastructure.
In 2010, China’s two largest telecom companies, Huawei and ZTE, were active in more than 40 African countries and provided communications services for over 300 million African users. Together these two companies have combined sales of about US$3bn in Africa. Huawei has also set up training centres in Nigeria, Kenya, Egypt, and Tunisia that have helped boost local expertise in communications technologies. In addition, Alcatel Shanghai Bell, a major Chinese telecom equipment maker, has won deals in many African countries, including Ghana, Angola and Nigeria.
The Chinese firms have broken the monopoly of Western telecom firms in Africa through competitive prices, better ‘on the ground’ services and advanced technologies. However, Huawei and ZTE are also competing with each other in Africa. Consequently, Huawei has positioned itself as a low-cost yet high-quality telecom company. Huawei’s pricing strategy is to price itself not more than 15% lower than major international competitors to avoid to be seen as another low-cost Chinese provider. ZTE, on the other hand, prices up to 40% below international competitors and its products are therefore perceived as being of inferior quality.
Huawei’s strategy has so far been the most successful. Despite increased competition from Indian and Brazilian telecom firms, Chinese enterprises are set to continue expanding their telecom businesses across the continent.
Examples of chinese telecom investment in Africa
7 – Chinese investor profiles
Chinese investors in Africa are not a homogenous group, but diverse actors ranging from SOEs, private enterprises and individuals. Chinese SOEs are mainly involved in resource extraction, infrastructure, and finance. The private enterprises include both large privately owned firms and small and medium-sized enterprises (SMEs) that operate across a wide-range of sectors. There are no exact figures on the total number of Chinese enterprises in Africa. Official Chinese estimates suggest that there are around 2,000 Chinese companies. However, this figure is likely to be underestimated as the vast majority of Chinese firms in Africa are privately owned and many are SMEs that are not officially registered.
There are several reasons for why Chinese enterprises are increasingly investing in Africa. Many Chinese businesses are escaping fierce competition at home by seeking new commercial opportunities in Africa. Some Chinese corporations that have strong trade-links with Africa engage in greenfield investments by setting up factories on the continent to circumvent Africa’s weak supply chains. Other Chinese companies invest in Africa as the first stop to test the waters in their overseas ventures. Since most Chinese firms’ strictly focus on new market opportunities, and not risks, they often invest in places that many other foreign firms would avoid. In general, Chinese companies have long-term strategies in Africa. Africa provides low labour costs, rich raw materials and huge market potential.
Chinese investment in Africa is concentrated in labour intensive industries. And despite popular belief, most Chinese companies employ mainly African workers, as local labour is usually cheaper. Professor Deborah Brautigam, author of the book “The Dragon’s Gift”, believes it is rare that local workers make up less than half of the work force in Chinese companies. Chinese staff mainly occupies managerial and technical positions. In 2010, statistics from the Zambian government indicated that Chinese investment in Zambia had created a total of 15,000 jobs for Zambians.
8 – FINANCING
Another common accusation against Chinese investors is that Chinese firms have an unfair advantage due to the generous financial backing by Chinese banks. Unfair or not, the funding opportunities that China’s state-owned banks provide have certainly encouraged Chinese companies to invest and expand abroad, including in Africa.
Both state-owned and private Chinese investors in Africa have access to favourable financing
in their overseas ventures. One of the main providers of finance for Chinese firms is Export-Import Bank of China (EXIM Bank). EXIM Bank is fully owned by the Chinese government. The bank has financed more than 300 projects in Africa, including both low-interest and commercial loans. EXIM Bank’s products are designed to promote Chinese exports, and can be summarised into the following four categories:
1. Export buyer’s credits – loans for exports of Chinese products;
2. Loans to Chinese companies’ overseas investment projects;
3. Loans to Chinese companies’ overseas construction projects;
4. Government concessional loans.
Another significant financial provider for Chinese investors is the state-owned China Development Bank (CDB), which administers the Chinese African Development Fund (CADFund). Established in 2007, the US$5bn CADFund supports and encourages Chinese enterprises to invest in Africa. By the end of 2008, the CADFund had invested nearly US$400m in over 20 projects across the continent. The CADFund funds projects in agriculture, manufacturing industries, infrastructure, raw materials, and export-oriented industrial parks established by Chinese enterprises in Africa.
9 – BUILDING BUSINESS
China is now the biggest infrastructure developer in Africa. According to the Engineering News-Record, a construction industry magazine, Chinese contractors had gained over 42% of the African market in 2008. By 2009, China had been involved in over 500 infrastructure projects in Africa. Chinese construction firms have built railways, roads, airport, ports, power plants, schools, hospitals, and water supply and drainage systems across Africa.
This development can be attributed to the fact that Chinese investment in the extractive industries has created knock-on effects in the construction sector. Many of these projects have been closely linked to the resource sector. China has offered so-called resource-for-infrastructure financing packages to resource rich countries, such as Angola, Nigeria, Democratic Republic of Congo and Sudan. In such deals, China (via its state-owned banks) provides countries with credit in return for access to natural resources and contracts for Chinese state-owned construction firms.
During recent years, however, Chinese firms have increasingly captured civil works contracts in Africa, especially in transport infrastructure. Moreover, the number of private Chinese construction companies is growing rapidly. Chinese construction companies are cost competitive with regards to the overall bidding price and their access to low-priced building materials through supply chains from China. Given Africa’s vast infrastructure needs, the presence of Chinese construction firms in Africa is likely to continue to grow.
Moreover, infrastructure is commonly stated as one of the main impediments to Africa’s growth. Hence, Chinese investment in infrastructure rehabilitation and construction serves the continent well in creating a platform for private sector development. And this could potentially set the stage for future growth and increased productivity in Africa.
10 – THE BIG SEZS
China is also involved in developing potential future manufacturing bases in Africa. In 2006, the Chinese government announced its support for the establishment of several special economic zones (SEZs) across Africa. Currently, six SEZs are under construction in five African countries, namely Zambia, Egypt, Nigeria, Mauritius, and Ethiopia. The zones in Ethiopia and Mauritius are 100% Chinese-owned, while the others are joint ventures with mainly African governments as minority partners. However, Chinese state-owned and private enterprises have been assigned as developers of all the SEZs.
According to the Chinese government, the SEZs are intended to replicate China’s own growth experience where a number of export-oriented industrial hubs successfully attracted FDI and became the country’s growth engines. Similarly, China’s and African governments hope that the SEZs in Africa will develop into new growth nodes by creating an enabling environment where Chinese, foreign and African companies can move in and gradually form industrial clusters. Each zone will focus on a few key industries, mainly in manufacturing and services.
Only one zone will concentrate on mineral processing. This further supports the view that Chinese interest in Africa goes beyond raw material extraction.
The SEZs are also intended to function as centers for Chinese economic activity in Africa, and Chinese enterprises are being given various incentives to invest in the zones. However, steps have also been made to attract other foreign as well as local investors to the zones. For instance, a new US$1bn fund for small and medium-sized African enterprises is directed towards helping African entrepreneurs set up businesses in the zones. Moreover, the Chinese developers of the Zambian zone have stated that they aim to attract forty Chinese companies and at least ten from other countries (including Zambia).
Further, the SEZs require large investments in infrastructure, both within the zones and to connect them to ports and regional markets. China has so far invested US$250m in infrastructure construction of the SEZs. China’s commercial strategy is to link the SEZs by building infrastructure corridors across scattered African markets. As a result, Africa will receive a much needed transnational infrastructure network that will reduce transport costs and benefit regional economic integration as well as African trade with the rest of the world. If the SEZs succeed in attracting foreign and local investment, and advance African countries’ industrial competitiveness, the zones have the potential to expand Africa’s export capacity from raw materials to finished products. And this will turn Africa into the next manufacturing hub.
11 – Globalisation with Chinese characteristics
China’s extensive engagement in Africa represents the next wave of globalisation. Previously, China was the main beneficiary of FDI inflows primarily from Western companies. Now China is driving the world’s growth, while North America and Europe struggle to recover from the global financial crisis. As Chinese industries move up the value chain and China’s traditional export markets in the West falter, China is looking to Africa and other developing markets to sustain its high growth levels. In Africa, Chinese enterprises see an untapped market of nearly one billion potential customers. In other words, Chinese firms view Africa similar to the way Western firms previously viewed China.
Africa is now one of the fastest growing regions in the world. In 2010, the continent’s GDP growth was 4.3%. And the EIU forecasts the regional economy to average growth of nearly 5% a year in 2013-15. Hence, it is not only Chinese businesses that are looking with renewed interest in Africa’s opportunities. In Africa and elsewhere, established multinational companies have traditionally had the advantages of long-term experience, well-known brands and greater innovation capabilities. However, Chinese firms are rapidly catching-up both in brand recognition and technological advancement.
As Chinese firms enter new sectors across Africa, many global and African firms are concerned about their ability to compete. Yet Chinese enterprises growing activity in Africa is also creating new opportunities. Multinationals can leverage new opportunities by adopting a truly global approach in their operations. And African firms can benefit from partnering with Chinese firms.
11 – GOING GLOBAL
Chinese firms have strong comparative advantages in costs as well as in their vast home base. But these advantages do not need to be seen as unique to Chinese firms. In fact, global businesses with operations in China can leverage the ‘China advantage’ by treating China like a home market. In other words, multinational businesses with operations in China can strategically use this connection to gain advantages in African markets by ‘putting on their China hat’. In this way, multinational firms can benefit from China’s extensive trade networks, supply chains, sourcing opportunities and investment-friendly policies such as favourable financing in its operations in Africa. In short, global firms with a presence in both China and Africa can gain advantages in delivering global economies of scale in their Chinese and African operations by integrating production and value delivery.
The Asian managing director of a South African-based global FMCG firm, sees his expanding Chinese business benefiting from the company’s African roots, as his operations come from “similar environments—emerging and developing markets with similar trends: both have growing diversified based of up-trading, aspirational and enthusiastic consumers.” Similar ‘home and away’ market environments also allow the firms’ operations to leverage scale, procurement synergies, and low-cost sourcing opportunities, and local Chinese partners are used to source capital equipment for use in Africa. Another Managing Director of a multinational company with strong presence in Africa stresses the importance of utilizing China as the biggest supply source in the world.
One example of a global company that has ‘put on its China hat’ is the telecommunications company Alcatel-Lucent. Since 2002, Alcatel-Lucent has operated in China through its subsidiary Alcatel Shanghai Bell (ASB), in which the Chinese government has a minority stake. This structure has not only allowed Alcatel-Lucent to position itself in the Chinese market, but also to successfully expand to Africa. The EXIM Bank has granted the company US$63.3m in funding to aid its overseas expansion. In Africa, ASB has won deals in countries such as Ghana, Angola, and Nigeria.
China’s increased activity in Africa has also created a strong demand for services that help Chinese firms navigate in these new markets. This has meant new opportunities for banks, law firms, as well as service providers that can provide distribution channels for Chinese companies abroad. For instance, the global bank Standard Chartered has leveraged China’s growing presence in Africa. In 2010, Standard Chartered launched the China Africa Network (CAN) in several African states. The CAN provides financial tools and strategic advice for Chinese businesses operating in African countries. These include personalised services in Chinese, cross-border account opening opportunities, and access to SME-oriented banking services.
12 – NEW PARTNERSHIPS
New opportunities are also emerging as Chinese firms increasingly seek to partner with African and multinational businesses. Sino-African business partnerships involve several mutual advantages. For Chinese investors, Africa is still a relatively new market and there are apparent cultural differences. Although Chinese firms’ knowledge of Africa is improving fast, many still lack experience and understanding of the continent. Moreover, many Chinese companies are not well-informed about the investment risks in Africa that are not purely business-related. Therefore, partnering with a local African business can spread risks and provide valuable insights into the African market.
For African businesses, the benefits of partnering with a Chinese firm involve both increased liquidity and more tangible gains. Initially, there is the business gain of a boost in capital. In addition, African corporations can leverage Chinese project funding, technology transfers and expertise. The CADFund specifically funds joint ventures between Chinese and African enterprises for investment in African projects. For example, the Chinese company SinoHydro has formed a joint venture with Zambian state power utility ZESCO to build a 700-megawatt power plant. In this deal, the CADFund is lending US$1bn and the two partners are investing a further US$500m. Finally, Sino-African partnerships can also help African firms position themselves in global markets by gaining easy access to low-cost Chinese supply chains as well as the Chinese market.
13 – All roads lead to — and from — China
China is driving the next phase of globalisation. As Chinese companies explore new business opportunities across Africa, they are creating new conditions and challenges for doing business on the continent. Chinese firms’ engagement in Africa has resulted in vast infrastructural gains that facilitate market access into Africa. Moreover, China’s establishment of SEZs in several African countries has the potential to create environments that enable African, Chinese, and other foreign firms to develop export-oriented manufacturing hubs on the continent. This will help African countries diversify their economies, as well as bring new opportunities for global firms to invest in Africa.
Looking ahead, Chinese companies will continue to invest in diverse sectors across Africa. And China’s economic ties with Africa will only grow in importance. Global firms are well-positioned to gain from this development by effectively utilizing their global networks. Likewise, African firms can benefit from building partnerships with Chinese companies.