Letter from China

CHINA’s economic involvement in Africa has thus far been dominated by that country’s need for and extraction of resources, and its exporting to Africa of all types of "Made in China" manufactures.

Its construction contractors, telecom players and banks are also big players in the infrastructure arena, energetically and successfully selling to Africa.

But as China’s business landscape evolves and its engagement with Africa deepens, one wonders how much scope there is for China to boost Africa’s manufacturing capacity. Africa is a dynamic region, one increasingly seen as a market with much consumer and industrial potential. Could the world’s factory floor potentially be a catalyst for the development of Africa’s manufacturing base?

This question is prompted by personal experience. Recently we have had far more Chinese companies knocking on our door to get support in setting up assembly facilities or to invest in manufacturing capacity abroad — state-owned enterprises, private firms, super-large and smaller ones — across a wide product range. Is it just a coincidence?

Probably not, because there is more than just our experience as an advisory practice that supports the idea that this is an emergent phenomenon. Several long-term trends that are unfolding suggest that China may, over time, become a positive force in the development of local industrial and manufacturing capacity.

• First, outbound investment is set to increase significantly, and these annual outflows will be sustained. It is already clear that resources are not the only interest. China’s companies are looking more widely. The secondary and tertiary sectors in Africa stand to attract sizeable investments in plant, equipment and other productive facilities. China’s outbound mergers and acquisitions compound the greenfield and brownfield investment, and much will flow into the retooling and refurbishing of existing facilities. In some cases, this will lead to "leapfrogging" and solid technologies being deployed.

• Second, state-owned enterprises and other firms still support China’s political agenda in overseas markets. China Inc is not just about business, it is also about international relations and geo-strategy. The message that "China must add value and beneficiate and cannot just extract resources" has been heard in Beijing. Moreover, there is a deep-seated need to raise the country’s global profile and craft a robust presence in the international system, thereby proving that the China model works. This entails raising its game and enhancing its welfare, while making a difference in the global community. It is about building its capacity to help shape the world.

• Third, most Chinese businesses are trying to accelerate their international business growth, sales targets and engagement. A truly globalised China Inc cannot be achieved from head office or home base in China. It implies the need for multinationals with upstream and downstream integration, distributed research and development, international hubs, regional distribution centres and so on. This building of international market share often coincides with the need to have local assembly and manufacturing.

• Fourth, there is a gradual change in the competitive model employed by Chinese companies. This shift is from a China factory and low-cost production focus to one with a global position — inclusive of international customers, global value chain with integrated supply chains, multiple manufacturing sites, global sales and distribution networks, localisation of product characteristics and last-mile support and after-sales service. This often calls for product development, manufacturing and efficient logistics that are more customer-centric.

• Fifth, while China will remain competitive in many sectors and product categories, it is true that it has experienced significant cost increases in some regions and industries. Some competitiveness has already been lost for sure, especially in low-end, labour-intensive industries such as apparel and footwear. Therefore, Chinese companies may invest in capacity closer to their large overseas markets in cases where they have captive customer networks, and good market share, to protect. In some cases, they will go to low-cost countries in Asia. But in other cases they will be setting up shop in Africa.

While these factors may help propel Africa on its way to becoming a manufacturing economy, many difficulties prevent faster progress. A dearth of policies, poor infrastructure and weak institutions are examples commonly cited. However, China’s globalisation and changing role in the world economy may yet see it supporting Africa’s evolution to a more productive environment.

While it remains to be seen to what extent China will invest in Africa’s manufacturing capacity, it is clear that some countries, companies and growth zones on the continent stand to benefit if they can tap into the flows that will occur. Some could become industrial centres in their own right.

They may not rival China soon, but hopefully this will contribute to the establishment of our own global "Made in Africa" brand.

• Van der Wath is group MD of The Beijing Axis. He can be reached at kobus@thebeijingaxis.com