Chinese firms plug into African market

As economic globalization intensifies and the African economy maintains healthy growth, the African market is driving urbanization on the continent, where a huge demand for household products is increasing every year. Currently, Africa is becoming a hotspot for Chinese household electrical appliances businesses.

Opportunities in Africa arise because Chinese and African economies complement each other, in terms of resources, industry, trade and markets. Almost all African countries have a high demand for appliances, electronics and light industry products, but this is precisely the market that Chinese business executives have ignored for many years. According to the United Nations Trade and Development Organization, the demand for home appliances in Africa increases 5.5 percent every year. Due to a weak household electrical appliance industry in Africa, most equipment, supporting components and raw materials are imported.

Meanwhile, the Chinese appliance manufacturing industry has entered the era of excess capacity and meager profit. Televisions, refrigerators, air conditioners, washing machines and other household appliances have nearly saturated domestic demand. China's former edge of relatively cheap labor resources is diminishing, whereas Africa's cheap labor is prompting a consumer market to ripen.

Chinese home appliances, mobile phones, integrated circuits, and the IT and textile industries have been highly competitive in overseas markets after years of the go global policy. Among the appliances categories, the greatest demand in Africa is for televisions. Using a conservative estimate, demand in Africa increases by more than 16 percent annually. Africa's weather also makes air-conditioning products popular among consumers. It can be said that the Chinese home appliances sector is booming in Africa.

According to the World Bank, the next 10 years will see Africa's economic growth remain around 3.5 percent annually. Some of the rapidly developing African countries such as Kenya, Nigeria and Ghana have become important emerging markets. It is easy to see how investment in Africa can help Chinese enterprises occupy a huge market share and take advantage of direct investment in Africa as a way of circumventing trade barriers in developed countries. This can also provide a way out for China's household electrical appliance businesses, which are feeling the pinch in the face of the international financial crisis and domestic market saturation.

In recent years, some of China's large home appliance firms have started directly investing in Africa. At present, a number of Chinese home appliance companies have chosen a more localized strategy -building co-owned factories or a production base with Africans.

Under the Chinese government's go global policy, and financial support from the China-Africa Development Fund, China's Hisense, Haier, Shinco have, in South Africa, Tunisia and Nigeria, established home appliance industrial parks, where a variety of products are being made.

In fact, even for overseas factories, the Chinese have worked out how to open up foreign markets through different methods. Some companies prefer to build cooperation in the form of stakes and shareholders. Some choose to acquire and rebuild the production line. Some find local dealers for assembling technology exports.

In recent years, Chinese home appliances businesses have preferred pushing their own brands through their overseas factories. One of the most representative examples is from the Chinese appliances maker Shandong Hisense Group. Back in 1997, Hisense began a production line 130 kilometers from Johannesburg, South Africa's largest city. Thanks to this operation, Hisense's South African growth has skyrocketed. Strong sales in South Africa are reflected in its annual 20 to 30 percent sales revenue increase.

Moreover, Hisense is based in more than 20 African countries and has built its own sales network. Today, all types of stores in South Africa stock Hisense products. Hisense television sets account for more than 15 percent of the total South African market. Its home theater systems, refrigerators and microwaves also account for 10 percent of the market share. According to the Chinese embassy in South Africa, in 2014, Hisense's sales in the South African market were among the top three for these items.

Based on the urgent need to accelerate their development, many African countries have preferential taxation policies for Chinese businesses, especially those in the manufacturing field. African governments offer pre-tax relief and state support to help Chinese companies develop locally.

Moreover, South Africa, Nigeria, Egypt and other economically developed African countries are planning to establish industrial parks, roads, utilities and other forms of infrastructure in order to provide better conditions for Chinese entry into the African marketplace. Chinese enterprises have established branches and plants in some countries to distribute their products to neighboring countries as a way of promoting their brands and products to a wider audience.

Chinese home appliances manufacturers still focus on low prices, rather than on high quality or establishing a good reputation, however, so they are at the bottom of the global industry value chain. They have strong manufacturing capability, but not value-added profitability.

It is essential for them to decide where they should be in the industry chain.

The author is a researcher at the Institute of Industrial Economics of the Chinese Academy of Social Sciences.

(China Daily Africa Weekly 04/03/2015 page9)