Engagement with Africa set to accelerate

Majority of Chinese companies on continent very positive about development prospects

An overwhelming majority of Chinese companies in Africa are optimistic about the future, and most have made investments that represent a long-term commitment to the continent, a recent report says.

The report by consultancy McKinsey & Co says there are already more than 10,000 Chinese companies operating in Africa - four times the previous estimate. Of those surveyed, 74 percent say they are very positive about their future development in the African market, the report says.

The report by McKinsey was based on a study of eight countries that together make up about two-thirds of Sub-Saharan Africa's GDP: Angola, Ethiopia, Kenya, Cote d'Ivoire, Nigeria, South Africa, Tanzania and Zambia.

Kartik Jayaram, a senior partner of McKinsey & Co and co-author of the report, says that Chinese companies' involvement in Africa is bigger and more multifaceted than previous studies suggested.

About two-thirds of the Chinese companies in Africa are working on long-term investment and plan to operate in Africa for 20 or 30 years, building factories and buying equipment there, rather than coming for quick money, he says.

About 90 percent of the Chinese companies are private and of many sizes. They operate in diverse sectors, with about a third involved in manufacturing, a fourth in services, and around a fifth in trade, construction and real estate, the report says.

Irene Sun, an engagement manager at McKinsey & Co, says Chinese companies take the largest market shares, especially in manufacturing and infrastructure. In manufacturing, the report estimates that 12 percent of Africa's industrial production, valued at about $500 billion a year, is handled by Chinese enterprises.

In infrastructure, Chinese companies account for nearly 50 percent of the market share of Africa's international engineering, procurement and construction market, the report says.

"Chinese companies account for about 20 percent of Africa's manufacturing sector," Sun says. "Another is the construction industry, as many Chinese companies have helped build Africa's infrastructure."

Across trade, investment, infrastructure, financing and aid, China is a top five partner to Africa, with no other country matching its level of engagement, the report says.

Additionally, it says, the China-Africa relationship has ramped up over the past decade with trade growing at about 20 percent per year. Foreign direct investment has grown even faster, at 40 percent per year.

China is also a large source of aid, which is rapidly increasing, and the largest source of infrastructure financing, supporting many of Africa's most ambitious infrastructure developments in recent years, the report says.

"Chinese engagement with Africa is set to accelerate. By 2025, Chinese firms could be earning revenue worth $440 billion, from $180 billion today," Jayaram says. "Additional industries could be in play for Chinese investment, including technology, housing, agriculture, financial services and transportation and logistics."

The drive for accelerated development of Chinese companies will mainly come from two parts, Jayaram says. The first part comprises the manufacturing, natural resource and infrastructure sectors, which will see continued healthy development, he says. The other part is emerging industries, including real estate, in which China's construction companies will see great opportunities, he adds.

The agriculture sector also holds great potential for Chinese companies, Jayaram says. Africa has about 60 percent of the world's arable land, but at very low yields. Chinese companies that are good at making fertilizers, seeds and agricultural machinery can go to Africa and help them increase the yields, he adds.

According to Jayaram, Chinese companies in Africa are already making healthy profits. Nearly a quarter of the 1,000 companies surveyed said they covered their initial investment within a year or less. A third recorded profit margins of over 20 percent.

"These firms are agile and quick to respond to new opportunities. They are primarily focused on serving the needs of Africa's fast-growing markets rather than on exports," he says.

Chinese companies' investment in Africa also has great influence on the market, since the enterprises are bringing capital investment, management know-how and entrepreneurial energy to the continent, and in so doing, they are helping to accelerate the progress of Africa's economies.

Sun says, "In the past three years, we found that of all Chinese companies in Africa, about half of them have brought in new products or services, and about one-third of them have brought in new technology."

The report points to three main economic benefits to Africa from Chinese investment and business activity.

The first is creation of jobs and development of skills for local markets. At the 1,000 companies surveyed, 89 percent of the employees are local. The research suggests that Chinese enterprises employ several million Africans. Nearly two-thirds of Chinese companies provide skills training to their workers.

The second benefit is the transfer of knowledge and new technology to local people. The report says that Chinese companies are modernizing African markets by introducing new products and technologies. Forty-eight percent introduced a new product or service, and 36 percent have introduced new technology in the past three years.

The third main economic benefit is help with financing and development of infrastructure. When asked what they value most from their Chinese partners, about 50 African public-sector leaders said that low-cost financing and improved infrastructure topped the list. They cited Chinese companies' efficient cost structures and speedy delivery as major value additions, the report says.

However, to unlock the full potential of the China-Africa partnership, the most important step that African governments should take is to have a China strategy, Jayaram says.

Eighty percent of the African leaders surveyed said their organizations currently lack a China strategy and engagement plan.

He says that governments should clearly link the China strategy to national industrial policy, including incentives for foreign investment that incorporate key technologies, talent and skills initiatives. They also need to define national financing policies that outline clear guidelines for when to use Chinese versus multilateral financing, especially for infrastructure projects.

The report also says the governments should establish government organizations that specialize in supporting Chinese companies' operations in Africa.

Moreover, for Chinese government, opening government financing and providing guidance on responsible business practices to Chinese private firms in Africa would also accelerate sustainable investment in Africa.

chenyingqun@chinadaily.com.cn