Unlocking investment potential

Chinese companies are helping urbanization, industrialization in africa with their outreach moves

A growing number of Chinese companies are being forced to shift the manufacturing arm of their business offshore in an attempt to combat growing domestic costs and falling export revenue.

The manufacturing exodus from China comes as businesses battle with the challenge of decreased demand from developed economies, many of which are still struggling down the long road to recovery in the wake of the global financial crisis.

The rising cost of raw materials in China has also seen much of the nation's manufacturing sector forced to watch company profits crushed between rising overheads and falling revenue.

Driven by these two key factors businesses now face the difficult decision of raising prices and losing their competitive advantage internationally, or moving operations to a location where their goods can be produced more cheaply.

Many have taken the latter option, with Africa an increasingly popular destination for Chinese businesses.

Before 2007, Chinese investment in Africa was mostly made up of large, state-owned enterprises, but in recent years an influx of private enterprise has begun to flood the continent. This trend has risen to the point where, according to the Ministry of Commerce, by the end of last year Chinese investment in Africa was dominated by small and medium-sized enterprises. Of the more than 2,300 Chinese enterprises that have invested in Africa, about 170 are state-owned. The vast majority of businesses are small or medium enterprises, with much of the remainder made up of big names including the New Hope Group, Wanxiang Group, ZTE, Huawei, Lifan, and Hisense.

The benefits of Chinese expansion into Africa are by no means one-sided.

The growth of Chinese enterprises on the continent has simultaneously driven an expansion of African urbanization and industrialization. Employment has also risen substantially in line with the demand for local workers.

As Chinese business continues to expand its scope and influence, African governments are increasingly coming to the realization that the accompanying development and modernization is critical for the future of their nations.

This thinking has prompted many African countries to encourage and support Chinese investment in small, high-tech sectors; a strategic shift designed to move their nations beyond agrarian and subsistence based economies.

To best capitalize on Chinese investment, some African nations have created legislative frameworks to ensure they share the benefits of the business boom, drafting laws that set out mandatory requirements for Chinese companies to hire and train locals.

It is anticipated that these skilled local workers will eventually become the backbone of Africa's own emerging manufacturing industry.

In Ethiopia the China Eastern Industrial Park has ramped up local production and bolstered job opportunities for the country's light industry.

As the so-called factory of the world, China has a wealth of experience in the development of basic industries. And Africa is now benefiting from China's expertise.

According to the China-Africa Business Council, in 2007 only South Africa, Algeria, Egypt and Tunisia possessed cement production capacity.

By the end of last year that figure had risen to 28 African nations, most of which use Chinese technology or have business agreements in place with Chinese factories. Garment production, cement and steel factories now flourish on the African continent.

Africa's focus on modern industry has provided international investors with new opportunities.

According to the Ministry of Commerce, by the end of last year China's total direct investment in Africa topped $19.8 billion. In 2012 alone, Chinese investment came to a staggering $2.9 billion, a 16.8 percent increase on the previous year.

More than 50 African countries are now reaping the rewards and riding the boom sparked by Chinese investment.

Remarkably, Chinese enterprises in Africa now account for 12.1 percent of the total number of Chinese enterprises currently operating abroad.

According to the China Chamber of International Commerce, between 1990 and 2012 some 46 percent of Chinese foreign direct investment has been in the manufacturing sector, 28 percent in resources extraction, 18 percent in the service sector, and 7 percent in agriculture.

A number of African nations have been quick to implement lessons learnt from China.

In 2011, Ethiopia launched a new five-year national development plan that aims to help it make the transition from an agricultural to industry-based economy. Zambia, Benin, Angola and other countries have followed suit.

At present, China's contribution to Africa's economy is primarily evident in the upsurge of small and medium enterprises that are creating rising employment opportunities.

Chinese resource ventures have also prompted an accompanying rise in the construction of necessary infrastructure, which ultimately benefits nations and communities.

Chad, Senegal, and Tanzania have now established their own industrial systems, using Chinese investment as a springboard. These countries have also ventured into small garment manufacturing and agricultural processing factories. They now export to the Chinese market, an advent that has been encouraged by China's lenient tariff concessions for African nations.

Last year, African countries' direct investment in China reached $14.2 billion, up 44 percent compared with 2009.

In 2012, China-Africa trade volume reached a milestone $198.4 billion, up 17 percent on the previous year.

While Western nations have traditionally treated Africa as a source of raw materials, China has taken a long-term view and invested in the continent. In doing so, China has invested in Africa's future, and its own.

The author is a post-doctoral fellow at the School of Economics, Renmin University of China.

(China Daily Africa Weekly 09/06/2013 page9)