Asia-Africa Report: Demystifying the dragon in Africa

When the Chinese government agreed to fund the TAZARA Railway connecting Tanzania and Zambia to the tune of RMB988m ($147m) in 1970, few would have predicted that the Asian nation would become Africa’s most important economic partner.

The investment, which was China’s largest individual foreign-aid project at the time, allowed landlocked Zambia to move bulk goods, especially copper, to the sea without having to transit through the white-ruled territories of Rhodesia (now Zimbabwe) and South Africa. Today, China’s engagement in Africa has evolved from important donor to the continents largest trading partner.

Trade between Africa and China has been growing at around 20% per year since 2000, reaching $188bn in 2015, while foreign direct investment (FDI) from China has also exploded over the last decade, growing by 40% annually to reach $35bn. Most of the Chinese projects in Africa over the last 20 years have been supported by Chinese state-owned enterprises and agencies, such as the China Railway Construction Corporation and Chinese Development Bank.

However, over the last decade or so the number of Chinese private enterprises entering Africa has been increasing. The firms, having developed at home, are now looking for opportunities across the globe, including Africa, according to David Dollar, senior fellow at the John L. Thornton China Center at the Brookings Institution and a former US Treasury economic and financial emissary to China.

“Chinese private sector investment is similar to other investment in that it is profit-orientated – it’s trying to take advantage of commercial opportunities that should be helpful for African economies,” he says.

A recent report by global management firm McKinsey found that contrary to previous reports on China–Africa economic relations, the majority of Chinese firms operating in the region are actually private companies. There are up to 10,000 of these firms currently operating in Africa, accounting for 12% – or $500bn annually – of Africa’s industrial output, and creating over 300,000 jobs. 

The private companies are mainly involved in the natural resources, infrastructure, and manufacturing sectors, and they are mainly focused on serving the fast-growing domestic African markets rather than on exports. The main destinations for the Chinese firms are Angola, Côte d’Ivoire, Zambia, Kenya, Nigeria, South Africa, Tanzania and Ethiopia, which together account for more than 60% of GDP in sub-Saharan Africa.

Critics have argued that the glut of Chinese firms in some African countries will prevent African-owned businesses from entering the market or flourishing. However, the vast growth opportunities in the continent mean that there is plenty of room for both Chinese and African firms, according to Kartik Jayaram, a senior partner in McKinsey’s Nairobi office and co-author of the report.

“[The Chinese firms] are good at identifying if they can offer a service or product which is different to the one that currently exists in the market,” he says. “In Africa there is a shortage of manufacturing in general, which is why almost a third of these firms are in the manufacturing sector because they see a big opportunity there.”

“In fact, the Chinese firms are going to make the entire sector more competitive and consistent with world class standards,” he adds. The potential for African firms to learn from their Chinese counterparts could have positive ramifications for Africa’s development.

Who are the Chinese firms?

Some of the entrepreneurs who have started businesses in Africa belong to the group that helped build China into the “factory of the world”. Companies such as China’s telecoms firm Huawei, the world’s largest telecoms-equipment manufacturer, and PHISS Company of China, an international leather trading business, have all set up shop in Africa.

Huawei has research and development (R&D) centres in Nigeria, Egypt, Angola and South Africa; while PHISS invested $8.3m in 2015 in Ethiopia’s Friendship Tannery. Many of the smaller Chinese firms learn about the opportunities in Africa from members of their communities who have had success there, according to Steve Tsang, a Chinese politics scholar at the School of Oriental and African Studies.

“A lot of the smaller private Chinese enterprises going to Africa tend to come from the same region and they invariably go to the same area in Africa,” he says. “So one of the key drivers is word of mouth where an entrepreneur who was successful in Africa spreads the word to contacts in the home region, which encourages other entrepreneurs to then travel to Africa.”

Once the Chinese businesses find their niche in a country, they make investment decisions quickly and adapt when things go wrong. This agility undoubtedly stems from the cumulative knowledge gained during China’s own rapid development. 

And, contrary to popular perceptions, the Chinese firms mostly hire indigenous employees to work in their businesses. However, only 44% of the managers at those firms are African.

“The Chinese firms undoubtedly would want the numbers of local managers working for them to be higher,” Jayaram says. “Just from an economic point of view it is more expensive to bring someone over from China compared to hiring a local person. Overall the transfer of skills is going in the right direction but African governments need to explore how they could make this trend go faster.”

One method to accelerate the transfer of skills would be to invest more in building the domestic talent and knowledge base, possibly through vocational courses, who will be capable of fulfilling the roles, he suggests. But while the wealth of experience that the Chinese firms bring has already boosted economic activity in Africa, there still remains some apprehension among some people in Africa about the Chinese influx.    

Mistrust and controversies

When villagers in Dar-Buruq in Somaliland noticed that their waterways were emitting a pungent smell and their animals refused to drink from the streams, they blamed the nearby Chinese-owned tanning factory owned by PHISS.

Despite investigations by the government of the breakaway East African state, no one has been held culpable for any violations after almost 10 years. Some sources claim that the government did not want to scare off Chinese investment.

The episode epitomises the general mistrust that many African people have towards the Chinese. Some of the criticism has been warranted, with Chinese firms being found guilty of labour and environmental violations across Africa. There are also concerns that trade between the two economic partners is unbalanced in favour of China.  

However, the firms are also creating jobs, transferring technology and building infrastructure on a scale not seen in Africa before, and most governments are willing to look past some of the more nefarious activities by Chinese companies. Nevertheless, most African countries are keen on allowing the firms access to their domestic markets, with countries such as South Africa and Ethiopia leading the way.

“I do expect a lot of the other African countries will try to emulate more robust partner cases such as South Africa and Ethiopia by tailoring the investment attraction to what the Chinese firms want,” says Jayaram. “So we hope that African countries are looking at ways to develop a more robust China strategy to maximise the economic and social benefits on offer from the continent’s most important economic partner.”

Export opportunities 

Average yearly wages in China have more than doubled over the last 10 years, while manufacturing wages have almost trebled to around RMB60,000 ($8,900), according to China’s Ministry of Human Resources and Social Security. Meanwhile, the economy is going through a period of rebalancing from industry to services.

This adjustment could potentially benefit Africa as the Chinese firms look for more economic opportunities outside of their homeland, and manufacturing jobs migrate to cheaper parts of the world. However, Chinese firms in Africa are currently focused on producing goods and services for domestic consumption. Ethiopia is one of the few countries where the Chinese are focusing on global exports of products such as apparel and shoes. 

The East African nation seems to be the African country best positioned to benefit from manufacturing jobs leaving China as it has the right logistics and trade agreements already in place. And according to Tsang, opportunities for other African nations to exploit the changes occurring in China are limited because some of the jobs will be moving to cheaper areas in China’s interior.

“There is certainly a migration with some Chinese industries in the coastal parts of the country moving to less expensive parts of the world, with Africa being one of those regions,” he says. “However, the relocation process isn’t only about taking the companies outside of China, but also the interior of the country. Therefore, the African countries would not only have to compete with other countries across the globe, but also the other less developed parts of China.”  

Future of relationship

Overall, Chinese firms have contributed to Africa by adding jobs, technology and infrastructure in most of the African countries they operate. But to maximise the interactions with Chinese businesses, African countries need to develop coherent policies with a clear end goal.

“To make the most of the Chinese opportunities, African governments need to ask themselves, ‘how is all this Chinese investment consistent with your own industrial and economic growth plans?’ So, if you [as the African country] want to be a manufacturing hub then you need to tailor your investment attraction to that target, which will increase the lure for a Chinese firm looking to invest in Africa,” says Jayaram.

“It is also vital that Chinese investment builds local knowledge by encouraging more local partnerships and a transfer of technology and skills,” he adds. Chinese private companies will continue will continue to invest in Africa because of the potential for high rewards, with McKinsey estimating that the firms’ revenues could reach $440bn over the next 10 years.

While growth in the traditional sectors, such as manufacturing, infrastructure and resources, will continue to surge, there will also be new opportunities in agriculture, real estate and ICT. But if China were to experience a significant slowdown or debt crisis, could the relationship with Africa change? Not according to Jayaram. 

“Most of the financing for the investments that these Chinese entrepreneurs are getting is from their profits that they are making in Africa. So as long as their businesses in Africa are profitable there will be money to reinvest in their business or starting a new company,” he says.

“Also, if the returns and investments in China are slowing down, then Chinese entrepreneurs will look elsewhere to maximise their returns, and Africa is well placed to benefit from that.”

Taku Dzimwasha