Rebalancing act

As Chinese demand for resources slows, Africa could be new offshore manufacturing center

Is China's trading relationship with Africa about to change? The economic relationship between the world's second-largest economy and the continent has been defined as a "resources play".

A large proportion of China's $201 billion trade with Africa in the first 11 months of 2014 was made up of minerals and oil.

Alemayehu Geda, professor of economics at Addis Ababa University. Wang Chao / China Daily

Deborah Brautigam, professor at Johns Hopkins University. Sun Chenbei / For China Daily

A quarter of it came from flows to and from only two oil

exporting countries, Angola, accounting for $34 billon, and Nigeria, $16.46 billion.

As China moves to being to a more services and consumption-led and less resource-intensive, this may no longer be the case.

A recent report by law firm King & Wood Mallesons has suggested that China's trading partners in Europe may change as a result of this transition with the UK's financial services sector benefiting at the expense of Germany's engineers.

There could be similar trends in Africa too, with the continent becoming a major offshore manufacturing center for China. This has already been seen in Ethiopia with some $800 million of manufacturing foreign direct investment last year alone, according to figures from the Ethiopian government, making China the biggest manufacturing investor in the country after Turkey.

Tourism, set to become one of China's biggest service-sector industries, could also have a dramatic impact on the continent's tourism revenues, vital to economies such as Kenya and Tanzania. The Chinese now top the list of the number of tourists visiting the Masai Mara to witness the annual wildebeest migration.

China's role in infrastructure investment could also continue to evolve from building roads, ports and airports to more mass transit systems and high-speed rail.

Alemayehu Geda, professor of economics at Addis Ababa University, believes the trade relationship between China and Africa could evolve over the next decade.

He produced a report for the African Import Export Bank in 2013 that already showed resources (mineral fuels, lubricants and related materials) making up a smaller proportion of China-Africa trade. They accounted for 59.6 percent in 2011, compared to 73.3 percent in 2005.

"I don't think there will be a major change over the next three to five years. With many commodities the Chinese already control the production process but over the longer term there could be a significant adjustment," he says.

"We are now seeing major trends. There is now huge Chinese investment in infrastructure. Some 70 percent of the roads here in Addis Ababa are now built by the Chinese. There is also major Chinese foreign direct investment in manufacturing, particularly here in Ethiopia."

Somebody who has been at the vanguard of Chinese manufacturing in Africa is Helen Hai.

Now a goodwill ambassador for the United Nations Industrial Development Organization, or UNIDO, she helped set up the Huajian shoe factory in the Eastern Industrial Zone on the outskirts of Addis Ababa.

It is the most celebrated example of China's drive to manufacture offshore in Africa.

Yet the question has always hung in the air as to whether Chinese manufacturing in Africa begins and ends with this one showcase investment.

"It may have overshadowed what else has gone on but the business reason why Huajian works can apply in many other areas of Africa. Labor makes up 22 percent of the cost of manufacturing shoes in China, whereas there it is just 3 percent."

She points to Bole Lemi, another manufacturing zone set up near the airport in Addis Ababa by the Ethiopian government, where the units have been snapped up not just by investors from the Chinese mainland and Taiwan but also from Turkey, India and Bangladesh.

Hai, a UK-qualified actuary and now an adviser to a number of African governments, including Senegal and Rwanda, says other countries are now trying to copy Ethiopia's model.

As chief executive officer of Made in Africa, a development initiative headed by former World Bank chief economist Justin Yifu Lin, she has been working with Senegal's Prime Minister Mohammed Dionne.

"The Senegal government is going to build its first industrial zone in order to attract investors. Manufacturing in this part of Africa has very distinct advantages since it only takes seven days to ship goods to Europe compared to 20 days from Ethiopia."

Deborah Brautigam, professor of comparative politics at Johns Hopkins University's School of Advanced International Studies in Washington and one of the world's leading China-Africa experts, believes one area where Africa may advance is in manufacturing textiles, particularly in southern Africa, where there is an abundant supply of cotton raw material.

"There is a lot of buzz about this at present. It would be redoing to some extent the early-stage development model that some countries went through in the 1960s. The problem with spinning and weaving is that it is highly dependent on a constant supply of electricity and that is obviously an issue in Africa," she says.

For a number of African resource-exporting countries, the future of less resource-intensive China may have come earlier than they may have anticipated over just the past few months.

Slowing Chinese economic growth has been blamed for the recent slump in oil and other commodity prices. The Nigerian government had projected its budget spending on the basis of oil being at $120 a barrel; it now stands at under $60.

Yet Michael Power, global strategy adviser for Investec based in Cape Town, disputes that China is to blame for the current commodity price falls.

"That is certainly the view of many European-based commentators but I don't think it is the case at all. China has actually increased its demand of virtually every commodity with the possible exception of coal. What has been driving down prices has been the sluggishness of the European economies and their demand, which is actually falling."

Power points out that it is not just the oil price that has hit Nigeria recently but the rise of Boko Haram Islamic militants in the north and also, more indirectly, Ebola.

"To be hit by one of these would be bad enough but to be hit by all three is a really big problem, and during an election as well."

Power does not think China becoming less resource intensive over the medium to long term will affect on Africa's resource economies.

"The overall demand will still be there. The volume of consumption will continue to rise, even though the actual economic growth in China will be less resource intensive."

Martyn Davies, chief executive officer of Frontier Advisory, a strategic investment advisory firm based in Johannesburg, disagrees. He does believe a less resource-intensive China will fundamentally affect many African countries.

"I think the markets are still trying to work out how to price commodities based in China growing at 7 percent as opposed to 10 percent and taking into account stockpiles and other factors which may take some time to do."

Davies thinks the test will be how capable African economies are of rebalancing themselves in response to China's adjustment. He is not confident oil exporters Nigeria and Angola nor commodity producers such as South Africa, Botswana, the Democratic Republic of Congo, Zambia or Zimbabwe have the ability to do this.

"I think the general position for the resource-driven economies is very bad, indeed," he says. "I am generally pessimistic as to whether they will be able to rebalance."

Dr Ross Anthony, interim director of the Centre for Chinese Studies at Stellenbosch University in South Africa, insists that whether Africa can adjust its economic model is the "golden question" with regards to the continent.

"It is the big lingering issue with the China-Africa engagement that the lion's share of trade is with resources. There is no value added in the bulk of the resources being shipped out. There is not so much revenue being generated from the African side and also money is being wasted by the elite."

Anthony, however, is not convinced that Africa can suddenly move to being an offshore manufacturing center for China, too

"The first question for me is why anyone from China would think of going to Africa to manufacture when they can go to Southeast Asia which is a lot closer, has a large Chinese population, shares the same values set, has a higher education level and a more disciplined workforce."

He also do not believe that moving to being a low-cost manufacturer and the 21st century's new "workshop of the world" is necessarily the right course for Africa to take.

"It is like Africa making the next race to the bottom. I am not sure what the alternative is but this does not seem to be an ideal strategy."

Brautigam, also author of The Dragon's Gift: The Real Story of China in Africa, thinks the middle-way solution could still come from processing and adding value to raw materials.

"I think there is a lot of interest from China's point if view in the beneficiation of minerals. You don't want to be sending rocks back to China. But I am not really sure how far up the value chain it goes. It still might mainly involve all the dirty processes that nobody really wants in their own backyard."

Harry Verhoeven, a China-Africa expert and professor of international relations at Georgetown University in Washington and at the School of Foreign Service in Qatar, thinks there are a number of key constraints to Africa taking off as a manufacturing center.

"There are a number of things that have to be overcome. Crucially, you need a reliable supply of power, a relatively educated workforce and a stable political context."

Even in countries such as Kenya and Tanzania, which many assume may see some form of manufacturing take off, none of these factors are in place, he says.

"Kenya has had political instability and problems on the power front. Tanzania has nowhere near the legislative framework as well as either the necessary infrastructure."

Verhoeven says Mozambique is potentially an ideal location for Chinese offshore manufacturing because of close political inks to the Chinese government, its natural harbors that would make ideal ports and its proximity to a significant market such as South Africa.

"I am just not hopeful though. Right now it is on the brink of an oil and gas boom which will drive up costs in the economy that would just make it uncompetitive for manufacturing."

Brautigam says some of the manufacturing taking place now is by Chinese companies making the steel and cement for their construction projects across the continent.

"This is not the so-called flying geese manufacturing seeking the country with the lowest labor costs but pure and simple import substitution, but it could still be valuable to a country's economy since it lessens the need for imports."

UNIDO goodwill ambassador Hai insists that if African countries want to focus on building a manufacturing sector in response to a different kind of trade partnership with China, then it is in their own hands.

"It is not going to come to them. Ethiopia has been successful in this area because it has gone to China and sought out Chinese companies and not the other way round," she says.

"It was they who were proactive, particularly the late prime minister Meles Zenawi. This is the only way they can really do it."

andrewmoody@chinadaily.com.cn

( China Daily Africa Weekly 02/06/2015 page1)