Ideas & Debate

China calls the shots in Africa’s manufacturing

President Kenyatta (back row, second left) witnesses an agreement between Huawei Technologies and Kenya in Beijing. FILE PHOTO | NMG
President Kenyatta (back row, second left) witnesses an agreement between Huawei Technologies and Kenya in Beijing. FILE PHOTO | NMG 

Earlier this year, McKinsey and Company released a report on Sino-African relations that assessed the activities of Chinese businesses as well as Sino-African economic partnerships. There are about 10,000 Chinese-owned firms operating in Africa today and about 90 per cent of these are privately owned, debunking the myth that Chinese business activity in Africa is dominated by state-owned enterprises and overly influenced by statecraft.

Of particular interest is understanding how the Chinese presence is informing industrial development, a chronically underdeveloped sector on the continent.

Some 31 per cent of Chinese firms are in manufacturing and already handle about 12 per cent of industrial production in Africa with annual revenues of about $60 billion; revenue in manufacturing outstrips that of any other sector listed. Chinese factories are focused on Africa’s domestic markets; 93 per cent of revenues come from local or regional sales.

A third of Chinese firms reported profit margins of over 20 per cent in 2015. In manufacturing this is attributed to ample pricing headroom in Africa; prevailing market prices for manufactured products are so high that Chinese firm earn comfortable profits and their profit levels are higher than those of African firms.

Interestingly, although manufacturing is capital investment and commitment heavy, 31 per cent of firms made investment decisions within a week.

Then 67 per cent investments are self-financed and Chinese companies are optimistic about the future of the African market with most firms indicating plans for expansion.

Chinese firms are also generating local employment as 89 per cent of employees are African — this figure is 95 per cent in the manufacturing sector.

Another 61 per cent of the firms upskill African employees through professional training and/or apprenticeships, an indication that Africa is poor at educating Africans with skills relevant for employment.

In terms of management, 44 per cent of managers are African, this figure is 54 per cent in the manufacturing sector. Chinese firms contribute to African markets mainly by introducing new products, services, technologies and methods.

The report is clearly optimistic of Chinese firm activity in Africa; for example more content is focused on detailing the benefits than delineating the costs, one wonders why.

And the costs are significant, there are concerns of Chinese firms engaging in dumping where they sell products in export markets at prices below cost of production in domestic markets.

This may be leading to ‘unfair’ capture of export markets from African firms. Breaches of labour regulations are more common among Chinese firms than in other foreign-owned firms.

These include inhumane working conditions, work without contracts, exceeding legal limits on work hours and threatening to fire workers who refuse to work in unsafe conditions.

Clearly Chinese firms will continue to make inroads and the continent will accrue many benefits but will also have to vigilantly manage the costs.

With regards to industrialisation, it will be interesting to see how African industrial policy will be structured to encourage a stronger indigenous presence in the sector given the ability, innovation, efficiency and commitment of Chinese manufacturing firms.

Chinese firms make it clear that there is a lucrative domestic market that indigenous firms have failed to fully tap and thus local firms have a lot to learn from them.

If the trends continue, a situation may emerge where African industrialisation is owned and dominated by Chinese firms.

While this is welcome in terms of contributions to Africa’s development, can it then be termed ‘African’ industrialisation?