China's huge investment in Africa not without challenges

Cape Town – Although China is Africa’s largest infrastructure financier with 40% year growth in foreign direct investment on the continent, the country’s involvement is not without challenges, according to a new report by McKinsey Africa.

In a study that McKinsey conducted across eight countries that together make up about two-thirds of Sub-saharan Africa’s GDP, it was found that there are already over 10 000 Chinese firms operating in Africa. This is four times more than the previous estimate.

The new data, McKinsey said, show that China’s involvement on the continent is "bigger and more multifaceted" as suggested in previous studies.

READ: Infrastructure the key to unlock growth in Africa 

China is one of the top five partners to African countries with trade growing at around 20%. The country also supports many of Africa’s most ambitious infrastructure developments, which amounted to $21bn in 2015.

"This is more than the combined total of the Infrastructure Consortium for Africa, whose members include the African Development Bank, the European Commission, the European Investment Bank, the International Finance Corporation, the World Bank, and the Group of Eight (G8) countries," according to the report.

China has far surpassed Africa’s longstanding trade partners such as France, Germany, India, and the United States. In 2015, total goods trade between China and Africa amounted to $188bn – more than triple that of India, which is Africa’s next-biggest trade partner.

Chinese firms are responsible for 12% of Africa’s industrial production, which is valued at $500bn per year, while having close to 50% of the market share of Africa’s engineering, procurement and construction market.

Foreign direct investment (FDI) into Africa has also grown substantially and at the current rate China will become Africa’s biggest source of FDI. In South Africa, Chinese FDI has grown at an average of 59% per year, for example.

"Chinese firms are making healthy profits," the report said. "Nearly a quarter of the 1 000 firms surveyed (in the study) said they covered their initial investment within a year or less."

READ: China firm to buy Chevron SA assets 

A third of the companies surveyed say they recorded profit margins of over 20% percent, while 74% said they are optimistic about their prospects on the continent.

The report noted that two-thirds of the private Chinese firms surveyed for the purposes of the study say their investments were self-financed through earnings or savings or personal loans. Only 13% of investment funds came from financing schemes linked to the Chinese government, and less than 20%.

Benefits to Africa  

In the report, McKinsey highlights clear economic benefits that can be derived from China’s involvement in Africa:

- Of the 1 000 companies surveyed, 89% of their employees are local African, suggesting that Chinese firms employ several million Africans.

- Chinese firms’ involvement also translates in the modernisation of African markets – close to 48% of the firms surveyed said they introduced a new product or service, while 36% brought new technology in the last three years.

Room for improvement

China’s involvement in Africa however has also put pressure on local, homegrown companies, the report notes.

This present a challenge to African governments, which must balance the broader benefits of Chinese engagement with preserving locally owned companies.

"One example of such a struggle is the South African steel industry, which is under threat of collapse as local producers struggle to compete with imports from China," according to the report.

There are for example allegations that Chinese steel producers are engaging in "dumping", which means selling in export markets at prices below those charged to domestic customers and below the cost of production.

READ: Stop Chinese steel dumping in SA, urges Solidarity 

In addition, only 47% of the companies surveyed sourced material from local suppliers on the continent. This is a lost opportunity for African companies. Chinese firms surveyed say they would like to make use of local suppliers, but that their quality and price specifications aren’t met.

Chinese firms said they are concerned about personal safety and corruption on the continent, while African leaders say there have been instances of labour and environmental violations by Chinese firms.

These range from in inhumane working conditions to the illegal extraction of natural resources including timber and fish.

McKinsey said in the report there is "considerable upside" for Africa if Chinese investment and activity increase on the continent.

"At the macroeconomic level, African economies could gain greater capital investment to boost productivity, competitiveness, and technological readiness, and tens of millions more African workers could gain stable employment."

At the microeconomic level however there will be "winners and losers", particularly in sectors such as manufacturing, where African firms lag behind global productivity levels. African countries will therefore need to drastically improve their productivity and efficiency to compete or partner with Chinese companies operating within their borders.