Capital Markets

China firms earn 20pc profit on local investment annually

china

McKinsey & Company worldwide managing director, Dominic Barton (R) sits beside Nigeria's Minister of Finance Ngozi Okonjo-Iweala (L) during the World Economic Forum. PHOTO | PIUS UTOMI EKPEI | AFP

charlesmwaniki_img

Summary

  • Chinese firms, particularly in manufacturing, identify ample pricing headroom in Africa as a key factor in their profitability.
  • In China, manufacturers operate tight on margins due to fierce competition, with many having to do with less than a percentage point in profit margin.
  • In the Kenyan market, the split between private and state owned Chinese firms stands at 80 to 20 per cent.

Chinese firms operating in Kenya and Africa are making annual returns of over 20 per cent with more than half taking less than three years to earn back their initial investment, a new survey shows.

McKinsey & Company says in a report on Sino-African trade and business partnership that a third of the surveyed firms operating on the continent reported returns of over 20 per cent in 2015, with manufacturing and services firms the most profitable due to the gaps in these sectors in the region.

READ: SGR trains push value of China imports to Sh113bn

“A manufacturer in Kenya said they expect to make back their investment in less than a year because the prevailing market price is high for their product,” said McKinsey in the report released yesterday.

“Chinese firms, particularly in manufacturing, identify ample pricing headroom in Africa as a key factor in their profitability.”

In China, manufacturers operate tight on margins due to fierce competition, with many having to do with less than a percentage point in profit margin.

The survey was carried out in eight African countries including Kenya, which together account for two thirds of the continent’s GDP.

READ: China's economy shows signs of slowing in April

In Kenya, where McKinsey says 396 Chinese firms operate, the majority (44 per cent) are in manufacturing, followed by services and construction at 18 and 16 per cent respectively.

Privately owned Chinese firms have found it easier to make money in Africa compared to their state-owned peers, McKinsey says.

In the Kenyan market, the split between private and state owned Chinese firms stands at 80 to 20 per cent.

READ: China - Africa trade, investment 'off to a flying start' in 2017

The Chinese companies setting up shop in Kenya have taken advantage of the country’s central position to make goods for sale in the region, as well as a growing middle class which provides market for their products.

Chinese firms have also won major public tenders in the country in recent years, including key infrastructure projects such as the SGR, the Lamu port, refurbishing Jomo Kenyatta International Airport and major road works such as Thika Road and bypasses in Nairobi.

READ ALSO: China firm among four to invest in pyrethrum sector