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Economy

Emerging economies outpace Japan in the battle for trade with resource-rich Africa

Thika Road under construction by Chinese firms. Chinese state capital enhances the ability of Chinese companies to engage more wholesomely in high-growth African economies. Photo/WILLIAM OERI
Thika Road under construction by Chinese firms. Chinese state capital enhances the ability of Chinese companies to engage more wholesomely in high-growth African economies. Photo/WILLIAM OERI 

Japan has traditionally been one of Africa’s most relevant trade partners.

Historical ties have been augmented by a relatively strong increase in trade linkages since 2000.

As such, between 2001 and 2008 Japan-Africa trade increased almost four-fold, from $8.8 billion to $34.3 billion.

This growth has been inspired largely by African exports to Japan, which grew by 366 per cent between 2001 and 2008, compared to growth of African imports from Japan in the same period of 200 per cent.

However, the global economic downturn has exerted severe strain on Japan-Africa trade.

After the 2008 peak, trade almost halved to $18.5 billion in 2009. The bulk of this decline was in African exports to Japan, which slumped by 56 per cent from $21 billion to $9.1 billion between 2008 and 2009.

Meanwhile, African imports from Japan declined less severely, by 29 per cent from $13.3 billion to $9.4 billion. As such, in 2009 Japan ran a rare trade surplus with Africa.

While Japan-Africa trade relations have displayed growth momentum, they have been unable to keep pace with the frenetic rise in Africa’s trade relations with the emerging world.

As such, while Japan-Africa trade roughly doubled between 2001 and 2009, China-Africa trade expanded by almost 1,000 per cent, India-Africa trade swelled by 525 per cent; Brazil-Africa trade by 224 per cent and Russia-Africa trade by 262 per cent.

Where in 2001, China-Africa trade was on parity with Japan-Africa trade; by 2009 the volume of China’s trade with Africa was more than five times that of Japan-Africa trade.

Tracking Africa’s export relations with the BRICs, commodities form the core of the continent’s exports to Japan.

As such, in 2008, $10.3 billion of Africa’s exports to Japan were in the form of mineral fuels, $4.7 billion in precious metals, $1.2 billion in ores and $958 million in iron and steel.

Together, these four commodities accounted for 82 per cent of total African exports to Japan for the year.

Meanwhile, the majority of African imports from Japan is comprised of vehicles and transport equipment and machinery and mechanical equipment.

Given the large weight of commodities in Africa’s exports to Japan, it is no surprise that commodity-rich nations account for the majority of Africa’s exports to Japan.

South Africa’s abundant reserves of precious metals, ores, iron and steel, aluminium and other base metals is reflected in trade relations with Japan.

The fact that Sudan is virtually Japan’s only African source of crude petroleum translates into a prominent relative relationship.

The growth in natural gas exports from Equatorial Guinea since 2003 has also propelled the nation into Japan’s economic arc.

African exports to Japan will continue to benefit from preferential treatment from the Japanese government.

As part of the government’s overall development assistance agenda to Africa under the TICAD IV process, all African Least Developed Countries (LDCs) should enjoy duty-free access for all exports to the Japanese market.

Meanwhile, Japan’s export relations with Africa are slightly more diverse; with a wider range of countries enjoying fairly strong trade ties with Tokyo.

Investment in Africa

Despite efforts at TICAD IV to inspire deeper Japanese private investment in Africa, volumes to the continent remain proportionately small.

As such, in 2008, Africa soaked up only 1.1 per cent of Japan’s total outward FDI flows of $130.8bn.

Furthermore, Africa accounted for only 0.7 per cent of Japan’s overall FDI stock in 2009, marginally higher only than the Middle East (0.6 per cent) and Eastern Europe (0.5 per cent).

It cannot be denied that the global economic downturn has exerted substantial pressure on FDI flows from Japan to the world.

Where in 2008 Japan’s FDI flows to Africa totalled $2.1 billion, they slumped to $158 million in 2009.

Flipping the coin

Flipping the coin, it is clear that Africa is also underinvested in the Japanese economy.

In 2009, Africa invested only $61m in Japan, 0.5 per cent of the total of Japan’s inward FDI flows for the year.

In the same year, Africa held 0.17 per cent ($342 million) of Japan’s overall FDI stock.

But despite these marginal investment figures, select Japanese companies do have a strong market presence in Africa.

Coherent with the above mentioned trade data, Japanese automotive companies are perhaps the most integrated in African markets.

Firms such as Toyota, Nissan, Honda and Komatsu have established businesses on the continent, eager to lock into income growth in core markets north of South Africa, the established base for operations.

Moreover, Africa provides an abundantly fertile avenue for Japanese used vehicles.

In 2007, 18 per cent of the top 50 importers of Japanese used vehicles globally were African countries.

Beyond the automotive and construction sectors, Japanese electronics firms are naturally competitive.

Yet perhaps the sector most indicative of Africa’s nascent consumer revolution has been in the telecommunications sector.

To engage more wholesomely in these developments, Japan’s biggest telecommunications operator, Nippon Telegraph and Telephone Corporation (NTT), agreed in July this year to purchase South Africa’s London-listed information technology group, Dimension Data, in an all-cash deal that valued the company at $3.2bn.

NTT’s acquisition of Dimension Data provides a clear signal of the intentions of Japanese corporates in engaging in emerging markets to offset stagnant domestic demand.

Importantly, Dimension Data has a strong presence in Africa, South America and the Middle East.

Analysts expect NTT’s overseas sales to almost double following the purchase of Dimension Data.

Several large Japanese trading companies, such as Sumitomo Corporation, and Sojitz Corporation, and construction firms such as Mitsubishi Heavy Industries, the Mitsui Group, and Hitachi Construction Machinery, are adopting a soft approach to engagement with Africa, emphasising social contributions intended to lead to indigenous solutions for African development.

For example, Mitsubishi Corporation began supplying electricity through photovoltaic power generation to a village in Ethiopia free of charge in November last year.

The project is intended to reinforce the company’s marketing efforts in the country, including automobile sales, by enhancing its corporate image.

Meanwhile, Mitsui plans to begin supplying water for irrigation in Mozambique in 2010 through the use of solar power generation.

Mitsui is already involved in oil field development in Mozambique.

In Angola, Sojitz Corporation plans to complete, by 2011, the construction of a cement plant which will meet 25 per cent of Angola’s domestic demand.

Sojitz also hopes to construct a gas power generation plant in Nigeria.

Sumitomo Corporation is set to start work on improving roads, harbours and power plants in Africa as part of its launch of integrated production of nickel and cobalt.

During a visit to Angola organised by the JBIC at the end of July, Toyota Corporation confirmed plans to invest $1 billion in building a fertiliser factory in Angola, in order to import natural gas for sale on the Japanese and European markets.

These efforts are in response to persistent allegations of exploitation loaded on private corporations, particularly in the resources sector, operating in vulnerable African countries and regions.

In August, Japan’s Secretary of State for Foreign Affairs, Osamu Fujimura, led a delegation of over 50 Japanese executives to Angola, Namibia and South Africa to deepen bilateral commercial ties, particularly in the form of Japanese FDI in the selected markets.

Much like Russia’s official visit in July last year (to Egypt, Nigeria, Angola and Namibia), the Japanese group targeted resources (consistent with trade flows), and transport and power infrastructure (consistent with Japan’s competitive advantage).

In South Africa, Japan’s largest and most sophisticated trade partner in Africa, the intention was to market nuclear expertise and capabilities as well as promoting expertise in high-speed rail technology.

A civil nuclear cooperation agreement followed. Interestingly, during South African President Jacob Zuma’s recently concluded visit to China, China Railway Group announced that it was in talks with the South African government to assist in funding and constructing a $30 billion railway linking Johannesburg and Durban.

Angola has been courted ambitiously by all BRIC economies as well as a host of advanced nations, primarily the US, since its readmission into the global economy following the end of the civil war in 2002.

It is thus unsurprising that Japan selected Angola as one of its priority countries in the recent visit, during which the Japanese government extended a $10 million grant for the upgrading of the Professional Civil Construction Training Centre of Viana.

It was also agreed that Japan will soon begin granting concessional credits to Angola in light of broader bilateral economic cooperation programmes in place.

Projects for funding

Technical commissions from both countries will collaborate to select priority projects for the funding.

The Angolan government further requested financial and technological support from the Japanese government in order to build a 20 km-long bridge between the provinces of Zaire and Cabinda, which is part of a larger project named the “Cabinda Link”, which has an estimated cost of $2.55 billion.

As part of the project, the China Road and Bridge Corporation drew up, at the request of the Angolan government, four projects with separate quotes, characteristics and deadlines for execution.

Japan is also providing funding for Angola to refurbish the ports of Lobito and Namibe, as well as water infrastructure and the textile industry.

Namibia is the sixth largest uranium oxide producer in the world, producing an equivalent of 7.8 per cent of world production.

Then, gold export volumes amounted to 2 640kg in 2007. Copper exports amounted to 20 416 tonnes in 2007.

Other mining activities are centred on diamonds, silver, lead and zinc. Therefore, bilateral attention focused on minerals.

In August, Itochu Corporation (a diversified Japanese firm) purchased stakes in two different Australian resource companies (Extract Resources and Kalahari Minerals), which each have uranium assets in Namibia.

Despite intensified economic headwinds, there is clearly much to celebrate about the Japanese economy.

As Tokyo accelerates its strategic repositioning to incorporate a wider berth of emerging markets (increasingly the locales for global growth) opportunities will inevitably arise on both sides of the bargaining table.

Unlike the BRICs, Japan’s contemporary position in Africa is a product of a more established and historically more profound trajectory.

Where the BRICs are building partnerships on the continent, Japan is nurturing those that already exist.

The cornerstone of Japan’s role in Africa has been, and largely remains, its support for African development through its robust and fairly extensive aid contributions to the continent.

Increasingly, this assistance is taking on a regional perspective, with Japanese support for integration within the East African Community a definite signal of Tokyo’s developmental priorities.

Japanese firms, particularly in the automotive industry, have established deep linkages in Africa, and, increasingly, Japanese investors are looking towards African consumer markets in the same manner as they are considering those throughout emerging Asia, the Middle East and Latin America — as vital nodes of future nourishment.

Yet, despite the longevity of Japan-Africa ties, Tokyo, like many of its advanced world peers, has been outpaced by the BRIC economies in recalibrating commercial ties in Africa.

As such, since 2000, the BRICs have dramatically outperformed Japan in Africa in terms of securing access to African natural resources, markets, and strategic support.

To be sure, while Africa has the ability to assimilate a multitude of foreign and domestic market players, and the nature of growth is sufficient to provide adequate nourishment for a far wider variety of firms than are currently invested on the continent, Japan cannot afford to be complacent.

At present, Japan is lagging the BRICs in Africa for two key reasons.

Firstly, the BRICs have a deeper understanding of operating within challenging emerging market environments.

The BRICs are inherently more adept at providing solutions to Africa’s rising and cost-conscious consumer population.

Secondly, BRIC enterprises are, more often than not, provided superior support from their respective governments in securing deeper access to African markets.

This advantage is most clear in the Chinese context, where Chinese state capital channelled to Africa to support development strategies, largely in the infrastructure space, abundantly enhances the ability of Chinese companies to engage more wholesomely in high-growth African economies.

As such, and in contrast to Japan, Chinese aid to Africa has a more direct impact on the ability of its domestic corporations to profitably engage Africa.

Engaging with these challenges must be a central objective for Japanese state and private players currently operating in Africa, or with future intentions to do so.

Clearly, Africa stands to benefit from the nature, depth and philosophy of the cooperation that Japan is able to contribute.

Amid the rumbling intoxication of ties with the BRICs, African countries must remain cognisant of the tremendous potential residing within older partnerships, such as those with Japan.

For Japan, a more ambitious engagement of Africa would be appropriate, incorporating the natural desire to appease with a clear objective to link developmental and commercial objectives into a more pointed and compelling offering for African economies.

Freemantle and Stevens are economists at Stanbic Bank.

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