Is South Africa a gateway for China’s investment in Africa?
Africa is the world’s second-largest and second-most-populous continent with 54 different countries, consisting of a large diversity of ethnicities, cultures and languages. After the end of apartheid more than two decades ago, South Africa is an economic powerhouse in Africa. Though South Africa is still the largest economy in Southern Africa, Nigeria surpassed it as Africa’s largest economy in early 2014. The rapid rising economies of other African countries threaten South Africa’s position as a gateway to Africa.
Wharton’s global business week visit to South Africa in September 2016 provided first-hand experience through visits to multi-national companies, local companies and small start-ups in Johannesburg and Cape Town, across consulting, mining, construction, agriculture, financial services, energy, technology, telecommunication, healthcare, media and wine industries. The most striking factor is that China has a quite substantial economic presence in Africa. It also acquired a military base in Djibouti, which is complementary to its economic presence in Africa.
According to Voice of America, Chinese president Xi Jinping offered a whopping US$60bn loan and aid package to Africa in December 2015. Xi said that China aims to develop infrastructure, improve agriculture and reduce poverty on the continent. China’s investment in Africa is far beyond Xi’s recent offer: its investment there has skyrocketed from $7bn in 2008 to $26bn in 2013. China’s investment and economic influence in South Africa and the entire Africa continent is impressive.
Since China is Africa’s and South Africa’s largest trading partner and South Africa is the second-largest investment receiver from China (surpassed by Nigeria), based on the number of deals China has made with each African country, this paper will mainly assess South Africa as a gateway to Africa via the lens of China’s investment in Africa, to answer the question: Is South Africa a gateway to Africa for China’s Investment in Africa?
Where’s hot in Africa for China?
There are three primary motivations for China to invest in Africa:
1. Africa is very rich in natural resources with a considerable presence of diamonds, gold, silver, uranium, cobalt, wood, copper, aluminium and large oil reserves. Africa is estimated to contain 90% of the entire world supply of platinum and cobalt, half of the world’s gold supply, two-thirds of the world’s manganese and 35% of the world’s uranium. It also accounts for nearly 75% of the world’s coltan, an important mineral used in electronic devices, including cellphones. With the rapid economic growth after China’s 1978 economic reform, China faced a growing shortage of raw materials and it is hungry for raw materials to fuel its own economic growth. Africa is an ideal choice for China because of its abundant natural resources and eagerness to get help to develop their economies. China commonly funds the construction of infrastructure such as roads and railroads, dams, ports, and airports in exchange for the mining of raw materials. Mining investments account for nearly one-third of China’s total foreign direct investment (FDI) in African nations. By working to secure a solid base of critical raw materials, China has strengthened its economy for decades to come.
2. Africa as a big emerging market with a fast-growing population, presents a lot of business opportunities. Over the past decade, six of the world’s 10 fastest-growing countries were African countries. In eight of the past 10 years, Africa has grown faster than East Asia, including Japan. Besides that, China’s population growth is slowing down and aging due to its one child one family policy. Africa, in contrast, has a growing pool of low-cost young labourers, which gives Chinese companies a huge and cheap labour pool to tap into. Like Western countries, China’s investment in Africa is largely profit- and market opportunity-driven. According to recent studies, the foreign investment rate of returns in Africa are higher than that of any other major developing areas in the world.
3. As China became a global economic and political power, China’s investment and aid to help African countries build their economies, also helped China gain their support for its “One China” policy and increase its political influence for its foreign policy agendas in multilateral forums such as the United Nations. Besides that, China also served as a successful model for African countries led by non-democratic leaders.
However, it’s also very challenging to conduct business in Africa since it’s a continent with 54 countries. Each country has its own government and regulations. For example, doing business with the Nigerian government is very different than doing business with the South African government. Corruption and government inefficiencies are also very common in African countries. Exchange rate and interest rate volatilities can also impact businesses and profit margins in an unpredictable manner.
Those challenges could also present opportunities for foreign investors. Foreign investors who are good at building relationships in African countries will gain more advantages in the weak governance environment. Chinese investment is generally indifferent to the recipient countries’ regulations and governance environments since Chinese companies are used to the practices of conducting business in emerging markets. Western investors tend to stay away from the poor governance environments, which gives Chinese investors more opportunities with less competition from Western countries.
South Africa’s role for China’s investment in Africa
Though South Africa has a lot to offer for China’s investment, South African companies also compete with Chinese companies in some sectors, such as infrastructure, construction and textiles, etc. This challenges South Africa’s position as a gateway for China’s investment in Africa. The relationship between South Africa and China is therefore a very unique partnership, characterised by both competition in the overlapping areas of interests and collaboration in the areas of shared common interests.
- South Africa is one of the wealthiest countries in terms of natural resources. It is a leading mining country and is renowned for having one of the most valuable mineral reserves in the world, which are estimated to be worth about $2.5tn. South Africa’s platinum and manganese reserves are the largest in the world. The country is also one of the leading producers of chromite ore, vanadium, gold, and diamonds. South Africa produces more than 10% of the word’s gold and has 50% of the global gold reserves. It is among the top ferrochrome producers in the world and has 72% of the globe’s chromite reserves and more than 80% of the globe’s platinum reserves. Because South Africa’s construction companies, such as Group Five (a leading African construction, concessions and manufacturing group with the ability to deliver across the full infrastructure life cycle), often compete with Chinese construction companies for the infrastructure projects in South Africa, it reduces the chances for Chinese investors to get into mining by funding the large-scale construction projects in South Africa. State-owned Chinese construction companies are still quite competitive because they have strong financial backup from the Chinese government and often have sufficient funds to offer the lowest bid for construction projects. In order to compete with Chinese companies, South African construction companies, such as Group Five, are working on providing whole package offers of handling all the design, construction, operation and financing by themselves. Group Five not only competes with Chinese construction companies in South Africa, but also in other sub-Saharan African countries. In parallel, Chinese construction companies and the government are exploring new opportunities in other natural resource-rich African countries and have invested in large construction projects in countries such as Nigeria ($12bn coastal railway project) and Angola ($5.8bn construction of oil refinery).
- South Africa’s GDP (in PPP terms) has almost tripled – to over $700bn – since international sanctions were lifted in 1996, the economy growing nearly 4.8% annually in PPP terms between 2005 and 2014. However, recent real GDP growth tells a different story, with 2014 growth of only 1.5% and 0.6% growth for 2016, the lowest since 2008. This slowdown has been driven by the weakening economies of trading partners (primarily China and Europe), electricity shortages, and extended strikes in the mining sector. Real GDP growth was forecast to increase to 2% through the 2015-2016 fiscal year on the back of a global recovery, as well as through growth in exports driven by a depreciating Rand. South Africa had about 54.96 million people (Figure 5) in 2015, with 47% of the population less than 24 years old. The unemployment rate in South Africa is 26.6%; and poor education contributes to the high unemployment rate. Though South Africa’s growing emerging market opportunity and young labour component still attract investors, other rapidly growing Africa countries, such as Nigeria, Ethiopia, Democratic Republic of the Congo, Tanzania and Mozambique, etc. have become credible alternative options for China’s investments.
- South Africa-China relations have become increasingly close with increasing trade, policy and political ties since 2007. Nelson Mandela had played a critical role to strengthen the relationship between China and South Africa by supporting the “One China” policy, including People’s Republic of China (PRC) and Republic of China (ROC). In the 2010 Beijing Declaration, South Africa was upgraded to the diplomatic status of Strategic Comprehensive Partner by the Chinese government. The relations between South Africa and China have evolved to the multi-faceted partnership we see today, which includes historical links, diplomatic relations, multilateral co-operation, trade and investment, and public media engagement. The two countries are finding points of convergence in their diplomatic engagements on the continent, and they have cooperated closely in the UN Security Council to further a range of peacekeeping initiatives in Africa. China’s approach to the continent’s development runs parallel to South Africa’s commitment to pursue regional infrastructure development. For example, Premier Li Keqiang announced that China would finance and construct a railway link between Nairobi and the port of Mombasa (with the possibility of extended routes to Rwanda, Uganda, Burundi and South Sudan) in May 2014, which aligns with President Xi Jinping’s articulation of a new ‘Maritime Silk Road’ between China, the Indian Ocean rim and the African eastern seaboard countries. South Africa and China also cooperate in the global arena by framing the participation of South Africa and China on shared multilateral platforms and provide mutual support in global forums such as the BRICS, the UN and G20 on multiple initiatives, which reflect their shared interest in reforming the global governance architecture to satisfy developing country needs. Meanwhile, the differences between South Africa and China continue to shape ties and distinguish them from China’s relations with other Africa countries. For example, South Africa and China have not always shared common positions in complicated cases like Sudan/South Sudan and Zimbabwe, and those two countries are also competing commercially in regional services and trade on the Africa continent; the love and hate relationship between South Africa and China, with both collaboration and competition, adds to the complexity of the partnership.
At present, the most significant link between South Africa and China, apart from diplomatic relations, is economic – with two-way trade accelerating since 2009. South African companies have enjoyed a degree of success through their presence in China, such as the case of South Africa’s media conglomerate, Naspers and its investment in China’s largest Internet company, Tencent. Another example is the winery La Motte, owned by the wealthy Rupert family. The CEO of La Motte Wine Estate, Hein Koegelenberg, skilfully leveraged his relationship with a former president of South Africa to help him market his wine to highly ranked Chinese officials, and middle and upper class Chinese as a high-end product with a unique French-sounding brand name. Koegelenberg enjoyed a much bigger demand in the China market than in the local South African market; he views the China market as a huge market and strategic opportunity for his company’s future growth. However, South Africa overall has a large trade deficit with China, driven by its high imports of value-added goods.
South Africa as a leading economy on the African continent, and especially in the Southern African region, has unique advantages of serving as a gateway for China’s investment in Africa. It has a diversified economy with investor-friendly regulations to attract foreign investors, relatively strong institutional structures, sophisticated financial services and better infrastructure availability compared to the majority of other African countries. For example, the better infrastructure availability in South Africa allows more profitable mining operations compared to other resource-rich locations with insufficient infrastructure, which could make mining economically unsustainable. Exxaro, for example, looked at a rich ore deposit in Congo, but had to skip it as there were no good transport options available. Besides that, South Africa’s rich natural resource base, domestic diversity and unique location flanked by the Atlantic Ocean on the west and the warm Indian Ocean on the east, also attracts not only Chinese investors, but also other Western investors.
South Africa also faces a lot of challenges, such as out-of-target inflation, rand depreciation, substandard education, economic growth slowdown and incompetent leadership, to name but a few. South Africa’s Reserve Bank targets inflation of 3% to 6%, but the country has struggled to maintain this range in recent years. In 2008, inflation spiked to double digits, driven by global increases in food and oil prices, as well as domestic issues, with a falling rand and electricity constraints. Inflation spiked again to 6.6% in mid-2014, before falling back into the target band in early 2015. The rand is also steadily depreciating due to labour market unrest and an increasing global unease with emerging markets. All these challenges add complexity to China’s investments in South Africa.
The merits of South Africa’s Broad-Based Black Economic Empowerment (BBBEE) Act are viewed with quite a lot of scepticism. The BBBEE act is a government initiative aimed at increasing the economic participation of black South Africans, which applies to all state-owned enterprises (SOEs) and to private businesses with annual revenues over R10m (around $710,000). Businesses are rated based on a scorecard that allocates points for black empowerment across five metrics and are classified being either non-compliant or falling in a compliance level between BBBEE Level 1 (the highest) to Level 8 (the lowest). BBBEE scores have significant implications for an organisation’s ability to conduct business in South Africa.
For example, state entities are required to use BBBEE scores when contracting suppliers, issuing licences, or granting concessions. Industries that require government licences to operate (for example, financial services or liquor) typically require higher BBBEE scores. Financial services, construction, and extractives have the highest overall scores, while retail, manufacturing, and transport tend to have the lowest. This initiative puts a lot of weight on individual businesses to change the socio-economic landscape of South Africa without having enough support from the government in terms of improving the education system to help black South Africans gain required skills for the job or other avenues for change. BBBEE also makes it harder for foreign investors to operate in South Africa, while it creates a big and inexpensive labour pool for enterprises with the assumption that there are sufficiently qualified black South Africans.
Despite all these challenges of doing business in South Africa, the country has served as a gateway for China’s investment in Africa and especially in the Southern Africa region. Considering South Africa’s strategic partnership with China, it will continue serving as a gateway for China’s investment in Africa. However, South Africa will not be the only gateway for China’s investment in Africa and its position as a gateway is also challenged by other rising economies on the Africa continent.
For example, the Chinese are actively scouting infrastructure projects in Africa and will be more than happy to fund infrastructure construction to gain access to the mining industry with local government support. Other mineral-rich locations will become more economically attractive once infrastructure improves throughout the continent. Though South Africa has the most well-developed, business-friendly policy framework in the region, regulatory policy varies significantly from country to country. Chinese investors, as well as Western investors, still need to evaluate each African country independently to understand the local regulations and policies for conducting business. From that perspective, South Africa cannot effectively serve as the only gateway to the rest of region and the African continent. With the increasing competition from other African countries, South Africa can no longer take its position in Africa, and its unique partnership with China, for granted.
What Western countries can learn from China
Though Western media sources consistently condemn China’s no-strings-attached attitude towards dealing with African regimes, supporters say that China’s initiatives to build and improve infrastructure such as roads, railways and telecom systems have been a boon to Africa’s manufacturing sector; have freed up domestic resources for other critical needs such as healthcare and education; and have aided everyone doing business on the continent. The entrance of China into Africa has shifted the paradigm that urged the West to rethink their strategy in Africa. The business and political influence China has established in South Africa and Africa largely contribute to three key practices:
- China has essentially treated Africa with far more dignity than Western governments. It treated Africa not as a continent in need of saving or lecturing, but as partners in a long-term business deal. China strikes business deals that exchange loans, infrastructure aid and goods in exchange for African commodities, political support and access to its vast and emerging markets, while leaving Africans alone in finding solutions to their problems.
- China doesn’t stay away from countries with poor governance in terms of property rights and rule of law, while Western investors tend to stay away from countries with weak governance. China takes more risks, which rewards it with more business opportunities.
- Chinese companies act very fast by working 12 hours a day and six days a week as a norm, while Western companies usually care about work life balance and can’t match the speed of China.
Although the West, and particularly the United States, retains key advantages, including possessing more transparent political models, better and more mature technologies in certain key sectors, and recognisable global brands that China still lacks, China’s presence provides alternatives to African nations minus the traditional political interference of Western countries. As more states, such as India, Brazil and others, seek to gain influence on the continent, African countries are at an unprecedented position where their strategic options are better than at any time before. It is crucial that the United States and other Western nations begin to reassess their attitudes and strategies in Africa in order to solidify partnerships with African countries as the continent gains more prominence in the future.
South Africa has served as a gateway for China’s investment in Africa and especially the Southern Africa region, but its role as a gateway is declining because other fast-growing African countries are becoming attractive alternatives, not only for China’s investments, but also for other foreign investment. Considering South Africa’s strategic partnership with China, South Africa will continue serving as an important gateway for China’s investment in Africa and especially in the Southern Africa region by operating at bilateral, continental and multilateral levels with government involvements from both countries. However, South Africa will not be the only gateway for China’s investment in South Africa. China will be very practical to cooperate with South Africa for the areas in which the two countries share common interests, and cooperate with other African countries based on the strengths, economic and political fit assessment of each African country. Potential destinations for future Chinese investment in the African continent also depends on opportunities in the industry sectors and the investment destination decision could vary for different industry sectors.
The rise of other African countries, and China’s rapid expansion in Africa, are bringing new economic and political dynamics to Africa and the world. This also brings healthy competition and collaboration for African countries, as more countries, such as China, India, Brazil, besides well-established Western countries such as the United States, seek to gain more influence in Africa. The healthy competition will also help South Africa to defend and grow its role as a gateway to Africa, because South Africa can no longer take it for granted in the future.
Natalie (Qiaolin) Mao is a second-year MBA for Executives student of the Wharton School. Natalie has worked for Microsoft globally in both the US headquarters and China, and she is currently a principal product manager in Microsoft Artificial Intelligence & Research Group. Natalie holds multiple US patents and has rich industry experience with expertise in online advertising, search, knowledge graph & big data, and digital media. Natalie is a co-founder for two non-profit organisations – ACM SIGKDD Seattle chapter and Chinese Women in Computing, actively advocating for data mining & machine learning education and connecting Chinese technical women globally to help each other achieve more. Natalie loves travelling, experiencing different cultures, writing, and yoga.
This report was presented to the NTU-SBF Centre for African Studies for publication. The Centre is a trilateral platform for government, business and academia to promote knowledge and expertise on Africa, established by Nanyang Technological University and the Singapore Business Federation. The Centre can be reached at http://www.ntusbfcas.com.