Sunday, August 8, 2010

China and Africa: entrepreneurship and business

Some will find the same traits as the old European, or perhaps American, imperialism. Others consider that China is interested only in real business, trade, investments and commodities...
Paulo Roberto de Almeida

Chinese entrepreneurs in Africa, land of a billion customers
Tessa Thorniley
Danwei, August 2, 2010

Multi-billion dollar resource and infrastructure deals between China and African countries make the business headlines ever more regularly, but there are very few reports on the growing numbers of Chinese entrepreneurs and small private companies seeking opportunities in Africa that they cannot find in China.

The trouble began in February when members of the Windhoek chamber of commerce complained that an invasion of Chinese corner shops, hairdressers, restaurants and traders was forcing out local businesses.

"There has been rapid growth in the number of small-scale retailing outlets throughout the country, offering low-quality products and replacing long-existing locally-owned businesses," the chamber announced, lobbying the government to protect Namibian businesses from such energetic Chinese competition.

Hage Geingob, Namibia's trade and industry minister and former prime minister, heard their plea. He banned all foreign investment in hair salons and public transport and introduced a permit system for new shopowners.

In defence of his protectionist new law, Mr Geingob suggested that members of the Chinese business community might have been operating illegally, without registering their businesses or declaring all of their earnings. "There have been concerns sparked by the activities of Chinese business people," he said.

Whatever the excuse, the strength of the backlash shows the extent to which Chinese firms have penetrated markets across Africa, and how worried the locals are. Armies of small entrepreneurs, marching in the wake of China's huge state-owned firms, have reached the very darkest parts of the continent.

"Across Africa today, everywhere, no matter how remote, you'll find a Chinese restaurant and a Chinese shop or local traders," says Martyn Davies, a South African consultant who is a director of the China Africa Network at the Gordon Institute of Business Science at the University of Pretoria. "And African consumers are buying Chinese products. More than two-thirds of the non-food products sold at Shoprite [a South African retail and fast-food group with stores across the continent] are from China," he adds.

Although multi-billion natural resource deals dominate the headlines, as many as 80 per cent of the Chinese companies that are currently operating in Africa are small or medium-sized enterprises, according to Dr Jing Gu, a research fellow at Sussex University's Institute of Development Studies.

They have come to get rich, she says: "Chinese private sector investment in Africa is not driven by Chinese government policy or Chinese political interests. They are more focused on the pursuit of profit."

Bilateral trade between China and Africa fell 15 per cent during the financial crisis. But in the first two months of this year it bounced back strongly, up 94 per cent year-on-year to $17.6 billion. The total trade for the year should top $100 billion and China is the biggest trading partner for many African states.

Estimates of the number of Chinese vary. Official figures from the Namibian Trade ministry show there are 500 small Chinese retailers in the country. But since the majority of small companies do not register themselves, the number could be far higher. "Senior Chinese officials estimate that there are a million Chinese on the continent but no-one truly knows because the borders are porous and there are no real records, such as bank accounts," says Mr Davies.

Many Chinese on the continent came over with the large SOEs but then spotted openings in the market that were too good to resist. "In terms of actual SMEs, companies with hundreds or thousands of employees, there are relatively few," says Adam Mahamat, a project advisor from Cameroon who now works at the China-Africa Business Council in Beijing. "What we have seen is that Chinese people who first went over to Africa to work for state-owned businesses are quitting these jobs and setting up on their own. Then they invite their friends and families over to help them when they begin to grow."

In the eyes of small Chinese companies, Africa is a land of opportunity. As one African official in Beijing put it: "The Chinese view Africa as an entity of one billion potential customers, much like the way the West views China."

* * *
At Oxford University, Alex Gadzala's doctoral work focuses on the effect of small Chinese businesses on the Kenyan economy. Her conclusions are dramatic. Africa may have received billions of dollars of aid money and infrastructure investment, but the arrival of large numbers of Chinese migrants will have an even more significant effect on transforming the continent's fortunes.

"Rather than large-scale investment and aid projects, it is the migratory influx [of Chinese] that carries the greatest ramifications for Africa's economic development," she says, arguing that Chinese competition is forcing stagnant local economies to adapt or die.

For decades, business in Kenya has been conducted on a short-term and informal basis known in Swahili as 'jua kali' or 'under the hot sun'. The Chinese, with their tight networks of guanxi, or relationships, have a strong competitive advantage. Kenyan businesses will be forced to evolve, argues Ms Gadzala, and to jettison the short-term thinking that is hampering their development.

Small, pragmatic and flexible, the Chinese companies are also prepared to tread where others have dared not to. Traders have been willing to enter the very lowest-margin sectors of the economy where supply chains are weak and which most other foreign businesses do not consider worthwhile.

The latest generation of mainland Chinese migrants have brought with them such a cheap and competitive array of products and services that they are even pushing out the first wave of ethnic Chinese migrants, the small groups of Taiwanese or Hong Kongers who arrived ten or 20 years ago.

"Chinese entrepreneurs often invest in places that many in the West would avoid," says Dr Gu. "They are more focused on new market opportunities and the pursuit of profit. They are not overly concerned about the investment climate, although they do have serious day-to-day issues relating to infrastructure."

The early challenges in adapting to the African environment are also being rapidly overcome. Until now, small Chinese companies have found it difficult to raise capital to expand because they distrusted the local banking system. Most also either stashed their profits or sent the money back to China. Earlier this year, however, Standard Chartered launched premium banking services in a number of African states, including Ghana and Nigeria, for Chinese SMEs who want to speak to bankers in their own language.

But despite bringing tangible benefits to African economies, small Chinese businesses are still viewed with suspicion and, in some cases, hostility. Some African countries, including Namibia, believe the arrival of the Chinese poses a threat to local jobs and industries and have imposed protectionist measures.

In South Africa, the effect of Chinese trade has been problematic. Chinese imports have decimated the local textile trade, forcing as many as 70,000 people out of work. In Nigeria, textile imports are banned and there are tariffs of up to 45 per cent on clothing imports.

And not all the Chinese businesses arriving are wholesome. Neon-lit karaoke parlours, where entertainment stretches beyond singing, and the occasional brothel lit by red lanterns have also sprung up, giving anti-Chinese groups fuel for their criticism.

Last year, a court in Ghana sentenced "King" James Xu Jin, his wife Chou Xiuying and his brother to a combined 41 years in prison for sex-trafficking. The trio had run the Peach Blossom Palace and had "enslaved" eight Chinese women, tricking them into believing that they were travelling to Africa to work in a restaurant before seizing their passports and forcing them into prostitution.

* * *
In Cameroon, David Xie, a 28-year-old business manager from Sichuan, has been in Africa for five years. He works as a liaison between a construction company building new water supply projects and the local government. But he readily admits he has spent little time outside the company walls. "Our company offered me a bed in a dormitory so most of the time I hang around there with my colleagues," he says. "I do not eat African food, except for fruit and beer." Although his company is a good mix of locals and Chinese, and despite the fact that he says communication is no problem ("most people here speak English or French"), the two sides remain clearly divided.

In Portuguese-speaking Angola, which pumps two million barrels of oil a day, the two communities are even further apart. Meng Mei, born in France to Chinese parents, has been working in Luanda since 2008. "In my experience there is almost no contact between the locals and Chinese workers. There is no integration. On the construction sites, the Chinese usually live on site. They live, work and sleep there. They don't go out. It's quite similar to the way migrant workers behave in China. They save money and send it home.

"For me, however, it is quite odd. I am Chinese but born and raised abroad. The Chinese workers do not go to movies or out to restaurants very much and they certainly don't do this with the locals. Some higher-ups may interact more, but only for business purposes," she says.

The lack of strong ties between the communities has created distrust and resentment. There are long-simmering tensions over the number of Chinese workers brought over by firms doing unskilled jobs that could have been given to local laborers. The Angolan government has tightened its immigration policies, and the cost of winning a long-term visa for a Chinese worker, together with travel costs and welfare payments, has risen to as much as USD20,000.

In response, Chinese companies have tried to take on more local staff, according to William Wang, an IT engineer who works with Meng Mei in Angola. “Back in 2008, maybe you would only see Chinese workers in Chinese companies but that has changed a lot in the last two years. I know a Chinese construction boss in Luanda, he hires 70 Chinese workers and 500 or 600 locals. It's not uncommon," he says. "I don't think the Angolans feel we are taking jobs. We have created employment also."

He adds: “In the past, I think there were problems because even the brightest Angolans had no real expertise – because of the war they didn't have much chance to develop. An IT engineer was qualified if he could switch on a computer and type. That's not the case anymore. Universities are training Angolans and they are increasingly skilled. Perhaps Chinese companies doing business here incentivised that?”

Mr Wang doesn't speak Portuguese but he says he occasionally socializes with African colleagues in Luanda, most of whom speak English. "I've been out with my African clients in Luanda. People in the telecoms sector. We eat dinner in a Chinese restaurant and once I invited them out for karaoke. I think they quite liked it. The bar had songs in Portuguese, Chinese and English so we could all sing," he says.

But clearly it will take more than a kizomba song from Ralph Anselmo, one of Angola's hottest singers, to bridge the chasm between Chinese and African culture, language and business practices. Just as foreigners operating in China find themselves baffled by Chinese culture, the Chinese in Africa often become exasperated with their inability to comprehend the attitudes of the locals.

“Chinese bosses complain to me that African workers, compared to Chinese workers, can be very slow. In Angola, the Africans used to say to me, you have to get used to Angola time. They told me that my timetables for projects were totally impossible. I told them they were not. There's a Chinese company which constructed a giant tower block in less than two years in the center of Luanda. It is beside a building for the Angolan Government that has already been under construction for ten years and which still isn't finished. In China that tall building would have been finished even quicker," says Mr Wang.

Meng Mei, meanwhile, has felt the frustration at first-hand. "It can be very hard to understand how Chinese run projects," she says. "In many cases I find it hard to understand why Chinese investors in Africa can ignore risks in the field of business in which they operate.

"For example, for two-and-a-half years I worked on a project for one major Chinese company in Africa. It was for a company's internal intranet. I regularly filed reports explaining what the project would need to succeed. In particular I repeatedly stressed the importance of a constant electricity supply. It's a basic but fundamental thing.

"Finally when the project was about to finish I said: 'So we are ready to go?' and only then did they say that they could not guarantee 24-hour electricity. I was told it was a local infrastructure problem and the boss of the company told me to just 'fix it'.

"I was very frustrated. I explained that I am IT professional not an engineer and that it would take major government co-operation to fix that kind of problem. They just hadn't factored it in at all,” she says.

Meanwhile, many small Chinese businesses, who are used to a focused, authoritarian and unchanging government at home, find the behavior of some African officials perplexing. "They always think that government officials can and will solve everything. It may be the case in China, but in Africa just because one official says yes, it does not stop another official from saying no. In this way projects and business deals get blocked and stalled. Our political systems are very very different," says Mr Mahamat.

“I think the biggest challenge for Chinese firms is their lack of experience and understanding of African business. Very, very few Chinese companies work with African partners because of this. Their approach to business is so different," he adds.

"In Africa, a businessman will say: 'I have some land, come and look at it and we can talk about what you want.' The Chinese want to know who owns what, the value, the cash flows and so on. It's not the same approach for Africans,” Mahamat explains.

Professor Gu, who interviewed more than a hundred companies and officials across Ghana, Nigeria and Madagascar to write a report on private Chinese businesses, identifies another stumbling block that is feeding tensions. "There are weak links between Chinese firms and local African firms," she says, arguing that this has had an impact on the extent of the technology and skills transfer between the two sides.

* * *
The question of whether Chinese firms are in Africa merely for their own profit, like their colonial predecessors, or whether they are also willing to be involved in the continent's development, will determine whether other countries follow Namibia's lead and close their doors too.

As a reflection of the anxiety felt by the Chinese side over its reputation, Beijing has ordered Chinese embassies and companies to forge greater links with local communities. At last year's Forum on Africa-China Cooperation, China committed billions of dollars of low-cost loans and support for African SMEs, as well as pledging funding for 30 hospitals, 30 malaria treatment centers and 50 China-Africa Friendship schools.

These gestures should ensure that Chinese SOEs can continue to snap up vast reserves of Africa's natural resources, and they should encourage African communities to look more fondly on the Chinese small businesses in their midst.

But whether the small businesses are doing enough to forge stronger links with African businesses and communities remains to be seen. There is little coordination or wider strategy among the SMEs to highlight the positive benefits they can bring. And there has been little recognition from African governments that the arrival of Chinese entrepreneurs could, with the right policies, and by encouraging investment in the right industries, revitalize their economies. "African governments, along with the African Union and civil society, needs to work to establish a constructive policy framework that help ensure that foreign investment makes a positive contribution to society," Professor Gu's research concludes.

While Chinese firms may be profiting handsomely from their presence in Africa, it is difficult to see much movement along this two-way street until they have laid deeper roots in the communities they serve.

Tessa Thorniley, a freelance business and travel writer based in Shanghai. She writes for newspapers, magazines and websites including The Daily Mail, the South China Morning Post, the Guardian, The Daily Telegraph and Wallpaper. Her previous articles for Danwei are Bankrupt schools and their fleeing foreign bosses and China's private healthcare racket.

Links and Sources
We make money not art: The Chinese Far West (photo source)
The Atlantic: The Next Empire by Howard French
The Guardian: China 'wants to set up factories in Africa' by Tania Branigan
The Centre for Chinese Studies at the University of Stellenbosch
The Gordon Institute of Business Science, University of Pretoria: The Asia Network and China Africa Network
Deborah Brautigam's blog China in Africa: The Real Story
China Talking Points: China Africa posts
MoneyWeb (South Africa): Taming Africa's Dragon column

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