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Development of China’s investment in Africa

Released on:2020-06-11 Views:

From the data projects supported by the World Bank, Brookings Institution and William & Mary as well as the research of the US-based Pew Research Center, it can be seen that:

First, China's overseas investment is mainly driven by interests;

Second, China accounts for about 3% of the stock of direct investment in Africa;

Third, China's investment in Africa goes beyond resources with increasing proportions in services and manufacturing;

Fourth, Chinese enterprises are attaching greater importance to the multiple social effects of investment;

Fifth, more than 70% of African respondents spoke highly of Chinese investment.

I. Scale of China's investment in Africa

David Dollar, a senior research fellow at the U.S. think tank Brookings Institution, recently published a paper Why Is China Investing in Africa? Evidence from the Firm Level. According to the paper, "China accounts for about 3% of the stock of direct investment in Africa." "But still China's investment is relatively small," compared with other developed economies.

China's investment in Africa is both big and small. According to him, "China's investment in Africa has been growing rapidly and its share will rise over time, but slowly, starting from a low base. China's investment in Africa is big in a relative sense, however. It is small in the sense that China is a latecomer to Africa and accounts for only a very small share of the total stock of foreign investment on the continent."

An increasing number of people have realized that China's development projects in Africa belong to a public diplomacy strategy to build friendly relations and win international support in the future. "All countries give aid for a variety of reasons, and China is no exception," said Deborah Brautigam, Director of the International Development Program (IDEV) at Johns Hopkins University.

From Africa's perspective, Chinese investment – especially in basic infrastructure – is more than welcomed, according to Steven Kuo, an analyst at Control Risks, a global risk consultancy. It is estimated that Africa suffers from a USD 900 billion infrastructure deficit: without potable water, all-weather roads and reliable communication, African economies cannot thrive. Chinese investment in these fields has, to a great extent, provided strong infrastructure for undeveloped African countries, especially in utilities, telecommunications, port construction and transportation.

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II. Key industries invested

 

China invests in various fields in Africa. So far, over 2,000 Chinese enterprises have invested in Africa, encompassing natural resource exploitation, finance, infrastructure, power generation, textile, household appliance and other industries.

The World Bank said recently that Asian countries have diversified their investment strategies to go beyond major industries such as agriculture and mining. "Mining and construction account for the bulk of Chinese investment in Africa, but the stock of manufacturing investment is increasing in recent years."

According to The Guardian, a British newspaper, U.S. researchers have launched a public database of Chinese development finance in Africa. There are few mining projects in the database, while transport, storage and energy initiatives account for some of the largest sums.

According to the research of some financial institutions, China's cumulative investment stock in the manufacturing sector in Africa grew 10% year-on-year. From 2003 to 2014, manufacturing projects accounted for the largest proportion of new projects in Africa built by Chinese enterprises.

Manufacturing offers an entry point for industrialization. By attracting more foreign direct investment, African countries can benefit from skills development, management experience and technology transfer and integrate themselves into the global value chain. Ethiopia and other African countries have already benefited from increased investment by Chinese manufacturers. For example, the Chinese shoe manufacturer Huajian Group has increased its jobs from 600 to 3,500 in just a few years.

David Dollard's research suggests that Chinese enterprises are unlikely to invest in capital-intensive industries. To some extent, capital is more mobile than labor. Despite this, Chinese investors obviously did not do so. "About 60% of the projects are in service sectors, with the remaining portion almost evenly split between manufacturing and natural resources. The two sectors that received the most Chinese ODI in terms of the number of deals are business service (1,053 deals) and import and export (539 deals)."

Against popular Western perception, "most of the Chinese ODI deals are not engaging in raw material related projects, but rather, are involved in service sectors." "Whether it is a non-oil resource intensive country or any other African country, we can see that regardless of the degree of raw material export intensity of the country, the majority of Chinese ODI projects tend to be in the service sector."  For instance, in oil-rich Nigeria, about two-thirds of the projects are actually in service sectors.

III. Emerging Chinese VC firms

"Private Equity (PE) firms have been active in Africa for nearly 15 years, mainly in financial services, infrastructure and other sectors. Venture Capital (VC) firms have become active recently," said Du Kai, partner of Cathay Capital.

He believes that in recent years, with the development of communication networks in Africa, the use and popularization of smartphones and function phones in Africa, and the rapid development of various social software, people will have more opportunities to contact and connect with each other. Technological breakthroughs and the development of the digital economy mean more and better investment opportunities for VC firms.

VC firms are active in some places. "They are active in Kenya, Nigeria, Egypt and South Africa, and countries such as Ghana, Tunisia, Morocco and Côte d'Ivoire are also seeing a significant increase in investment," said Du Kai.

Nigeria in West Africa and Uganda and Kenya in East Africa are the three most representative markets in Africa in the eyes of Crystal Stream, which also pays close attention to African markets.

A large number of VC/PE firms are attracted by this continent. At the beginning of 2019, a team led by Crystal Stream's investment director Chen Yun and analyst Tao Kai conducted a two-week investigation in Africa. "The mobile Internet, as an emerging industry, is rising on that continent." They believe they are investing for the future.

According to Disrupt Africa's report, 210 African tech startups raised USD 335 million in 2018, an increase of 71.5% year-on-year. The number of startups that got funding grew by 32.1%. There was increasing entrepreneurial enthusiasm.

More importantly, "in 2018, 210 African startups only raised USD 1.59 million on average. Excluding the mature M&A of private equity funds in Europe and the USA in the late period, African capital supply faced a price vacuum in the growth period of startups, providing opportunities for Chinese investors with capital and the Internet know-how to invest overseas," said Crystal Stream.

As excellent African Chinese teams such as Boomplay, CLEVERHOME and Kepay are being discovered and recognized by Chinese capital in recent years, a large amount of capital has entered Africa for field research since mid-2019.

Gobi Partners is also looking for investment opportunities in Africa. "We are optimistic about the African market, where the overall competition is less fierce compared with other regions. It is highly possible for newcomers to become giants in certain fields. However, such opportunities are few in China and India," said Investment Director Tu Zhiyue.

"When I went to Africa, I noticed that the retail format there is very primitive. There were lots of stalls on the roadside. Clothes were jumbled on the ground. And these stalls sold exactly the same products that might be purchased wholesale from Yiwu, China. However, large local demand, little supply and low cost performance made room for e-commerce platforms." said she.

Raising, investing, managing and withdrawing are also gradually improving. On March 14, 2019, Jumia, Africa's largest e-commerce company, launched an initial public offering (IPO) on the New York Stock Exchange (NYSE), with total cumulative funding exceeding USD 800 million. In February 2018, Nigerian e-commerce giant Konga was acquired by local hardware manufacturer Zinox, with total cumulative funding of USD 108 million. The withdrawal channel of VC/PE became clear.

"Of course I bought things on Jumia. I bought a hairdryer on it with cash on delivery. The delivery fee was RMB 7 or so. I received the product in only two and a half days. I had purchased a blue hairdryer and the outer packing box was also blue, but the product I got was pink, which was disappointing." Lin Bei gave such an example, without commenting on Jumia directly.

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 "Venture Capital in Africa has just begun"

 

Many people who have visited Africa or worked and lived there have tried to throw a wet blanket on the "African Gold Rush", or at least to correct the position that "African economy is developing surprisingly fast".

However, Du Kai believes that "Venture Capital in Africa has just begun with both advantages and disadvantages. But there are also opportunities for leapfrog development as well as advanced and useful experience."

According to the survey, by 2020, 60% of African youth aged 20 to 24 will receive secondary education (currently 42%), and such trends will promote the emergence of higher consumer demand for goods and services. Therefore, Cathay Capital believes that Internet projects in Africa will not all be "depressed". "For example, the e-payment company M-Pesa, established in Kenya in 2007, now operates in six countries."

Despite its demographic dividend, some people believe that Africa is not suitable for pursuing a fast-speed light business model. "It does not mean you cannot take this model, but the process will be full of difficulties. Once a giant enters the market, or a competitor supported by vast amounts of capital grows, your project will be wiped out in helplessness."

A case in point is the motorcycle hailing projects in Africa. Zhou Yahui, Chairman of Beijing Kunlun Tech, launched a similar project in Africa and deployed 100,000 motorcycles overnight, leading to the quick collapse of small companies engaged in the same business with only thousands of motorcycles.

Hunted by giants, startups feel more pressure. In Africa, the mining industry monopolized by central enterprises from China or international giants, or capital-based large manufacturing industries such as cement and petrochemical engineering, as well as industries dominated by Indians such as telecommunications and banking, are doing better. It is said that Africa's richest man is running a cement factory, an industry already saturated in China. These projects have one thing in common: They all have a deep foundation. The owners of giant companies have been focusing on a single industry for a dozen years and have set up insurmountable walls.

Based on the investigation, Crystal Stream believes that "water, electricity and coal" combined with infrastructure upgrading will become the First Wave of the implementation of the Internet, and is optimistic about mobile payment, travel and logistics. Moreover, the team in charge of startups investment will gradually change from overseas Chinese teams to local teams.

Made up of 56 countries, Africa has a scattered population of 1.3 billion, which means it cannot be taken as a whole. But the "enthusiasm" of Chinese and global capital can be felt by the entire continent.

Source: China Value, China-Africa Business Council