Chinese Enterprises Look to Africa

By LIU QIONG

Chinese and local employees at a company party at Hisense’s South Africa branch. Cnsphoto

IN post-World Cup South Africa, the droning of the vuvuzelas has faded away and the crowds of spectators have dispersed, but the world’s attention to the continent has not waned. Africa is now the promised land for entrepreneurs and investors across the world, including China.

Higher Returns

A report by Mckinsey & Company shows that return on capital invested in Africa is 60 percent higher than for Asia, making the region the most lucrative spot on earth for investors.

This finding is supported by the 2009 financial report of ZTE, a Chinese provider of telecommunications equipment and network solutions. ZTE reported a gross profit rate of 53.51 percent in Africa compared to 33.02 percent in China and 22.32 percent in other Asian countries. Its African revenue was RMB 6.86 billion last year, representing 11.38 percent of its core business.

ZTE first ventured into Africa in 1995, and has steadily expanded its presence there despite political ups and downs. Now 60 percent of its revenues come from outside China, and Africa is its second largest market after Asia-Pacific.

Huawei, another leading telecom company in China, made its African landfall in 1998. It has set up offices in a dozen African countries, and its total investment now tops US $1.5 billion. It is one of the three largest telecom equipment providers on the African continent.

Chinese capital is conspicuous in other sectors too. The Nigerian factory of Wenzhou Hanzan, built in 2004, is now the largest shoe producer in Africa. The Malawi project of China Africa Cotton Development Ltd., an investment of US $190 billion launched in 2009, is the largest China-funded agricultural project in Africa. On March 19 this year, First Automobile Works (FAW) and China Africa Development Fund signed an agreement to pool US $100 million for a production base in Africa, which will be the largest investment in the continent by China’s auto industry.

As a stimulus for Chinese investment in Africa, China has set up six trade and economic cooperation zones in five African countries including Zambia, Ethiopia and Nigeria. They draw on the experience of the special economic zones that China created in the early years of its reform and opening-up and are introducing Chinese investment into Africa to incubate local processing and manufacturing industries.

China has also established the US $5 billion China-Africa Development Fund, assisting Chinese investment projects in Africa through shares purchase.

Earlier this year Commerce Minister Chen Deming told the media that Chinese investment in Africa has grown 20-fold in the past decade, from US $50 million in 2001 to US $1 billion in 2009. He predicted great scope for further increase.

According to Wei Jianguo, secretary general of the China Center for International Economic Exchange who worked in Africa for 20 years, 2,180 Chinese enterprises are doing business in Africa, getting involved in approximately 8,000 projects encompassing power stations, airports, ports, highways, hospitals and wind farms. He agrees with the consensus of China’s business world that there is no time like the present to go there.

As Mr. Wei sees it, Chinese investors in Africa fall into three categories: First, state-owned companies and big private companies like Huawei, who mostly pursue engineering project contracts; second, manufacturers who move production to the continent, attracted by lower tax rates and labor costs or to evade non-tariff barriers such as import/export quotas; and third, various trades.

African countries are reacting positively and actively to the influx of Chinese money. Many cater to investors’ needs by cutting the red tape in the approval process, offering preferential tax rates and upgrading infrastructure.

Though growing fast, Chinese investment in Africa still lags far behind American and European investment. “The developed nations have a traditional stake in Africa. Many Western companies, particularly those dealing with resources, have been pouring money into the continent non-stop over the past decades. Shell, for instance, has operated branches in the Niger Delta for over half a century,” said Li Anshan, president of the Institute of Afro-Asian Studies of Peking University.

Broad Business Scope

In 1995 a huge billboard was erected by the busy highway leading to Kenya’s famous Treetops National Reserve and Mt. Kenya, declaring to the millions of tourists passing by it every year: “Together we can beat malaria.” It is the pledge of Beijing Holley-Cotec Pharmaceuticals Co., Ltd.

Back in 1993 Holley-Cotec president Lu Chunming commenced a one-man marketing tour across Kenya for the company’s artemesin-based drug Cotecxin, visiting 2,000 of the nation’s 2,300 registered doctors in eight months. Gradually the antimalarial won approval from the local market and the World Health Organization for its clinical efficacy and safety.

After long years in Africa Lu Chunming concludes that it is tough to tap the African market, but the efforts are rewarding. “Mining is traditionally the prime industry in Africa. But there are many more opportunities besides, waiting for Chinese enterprises to discover them.”

Africa has deposits of all the 150 underground mineral resources determined on earth, the world’s largest reserves of 17 of those minerals, and significant deposits of 50-plus rare and precious kinds. Not surprisingly, investment in the resources sector can yield high returns, but it also faces high risks because of the long payback cycle. There is a growing awareness that resources are not the only good place for foreign money, and that Africa constitutes a huge consumer market with a reviving economy and a population of 860 million.

It is also the desire of the continent to diversify its economy. Such diversification is a goal in the mid- and long-term development plans of many African nations, and they are seeking cooperation with China in such fields as manufacturing, and wind and solar power.

With their expansion in Africa, Chinese enterprises are getting more involved with the public in the host nations. Evidence of this is their growing corporate philanthropy: Huawei has donated computer and other teaching equipment to Cameroon schools; China Road and Bridge Corporation and several other Chinese companies supplied food to victims of the armed violence sparked by the 2007 election in Kenya.

Li Anshan, president of the Institute of Afro-Asian Studies of Peking University, thinks Chinese companies in Africa should bang the drum more loudly about their corporate giving. During his recent visit to Africa some Chinese companies had expressed concern that more media coverage could invite a surge of demand for help from local governments or organizations. “The worry is unfounded. One doesn’t have to ‘hide one’s light under a bushel.’ Otherwise Chinese enterprises in Africa might give locals an impression of caring for nothing but their profits,” said Li.

Higher Risks

This July Shandong Iron and Steel Group signed a contract with African Minerals Ltd. to purchase its Tonkolili mine in Sierra Leone for US $1.5 billion. Amid acclamation for this bold deal and forecasts of higher proceeds, Yao Guimei, deputy chief of the Institute for West Asian and African Studies, Chinese Academy of Social Sciences, interjects a note of warning, pointing to lurking uncertainties and risks of which the investor might not have full knowledge when striking a deal.

One thing, she points out, is the 100-km distance from the mine to the coast, entailing the construction of a rail link and concomitant added production costs.

During her 2009 travels in Africa Yao heard many accounts of Chinese companies suffering due to poor transportation. Though African infrastructure has seen improvement in recent years, this is still an aspect investors should look at closely before parting with their money.

Social stability is also an issue that can make or break a business. Generally speaking, most of the 53 countries in Africa are politically stable, but some are still plagued by regional or national disorder, which spells disaster for investors: China National Petroleum Corporation (CNPC), for instance, has not yet extracted a single barrel of oil in Nigeria.

Yao also advises Chinese enterprises to make an extensive study of local markets before entering Africa. One case she heard about during her 2009 visit was that of a glass factory in South Africa funded by the China-Africa Development Fund. It struggled with low sales despite various marketing efforts before eventually realizing that the situation was irreversible because many homes in South Africa have no glass windows at all.

“Behind the picture of a territory three times that of China, a population of one billion and GDP growing at a healthy five percent annually are these hard facts: Africa has a low entry level: its economic gross is small, and its people’s buying power is limited.” That is the lesson Yao draws from the case of the glass factory.

Holley-Cotec made a similar slip-up. In 2006 it launched a pharmaceutical plant in Tanzania with a design capacity of 400-500 million pills, but there were few qualified local workers to staff it. The project has not yet gone into production.

Holley-Cotec president Lu Chunming thinks Chinese enterprises are flocking to Africa primarily as an element of their strategic development plans. They are unlikely to experience leapfrog growth any time soon, because key infrastructure facilities such as water and power supply are nowhere near as developed as in China.

Regardless of all the deterrents, the flame of “Africa passion” still burns fiercely. Yao Guimei urges the government to set qualifications and rules for Chinese investors going to Africa, particularly as regards environment and employee welfare issues, lest, through lack of regulation, some small private enterprises might get involved in pollution or other kinds of scandal, sullying China’s national image.