CHINESE CONTRACTORS FACE COMPETITION

While Chinese contractors have undeniably become the dominant force in African construction over the past decade, new competitors are lowering costs and to Africa's benefit, improving construction quality. Increased competition, along with natural growth plans, are transforming Chinese contractors operating in Africa into more than just builders. They are now diversifying into other businesses, making investments in non-core areas such as agriculture, and mineral and energy products, as profit margins narrow in the contracting industry.

Though the headquarters of the African Union in Addis Ababa is the latest example of a symbolic structure built by Chinese contractors, Uganda's National Social Security Fund earlier this year announced the shortlist of construction companies to build Uganda's tallest building: China Civil Engineering Construction Corp. East Africa, China National Aero-Technical International Engineering Corp. and Sinohydro Corp. – all Chinese contractors. These successful tenders show that Chinese construction activity in the continent has grown significantly over the past decade.

Backed by China's national policy banks such as China Exim Bank, Chinese contractors including Sinohydro and China Railway Construction Corp. are now the most active firms in Africa's infrastructure sector. According to Engineering News Record (ENR), China's share of Africa's construction market reached 36.6 percent in 2010.

The arrival of competition from other emerging markets is also forcing all players to improve their performance. In 2011, Turkish company Summa completed the African Union Summit Convention Center in Equatorial Guinea. Turkish contractors have a formidable presence on ENR's list of top international contractors. Similar to China's model, Turkey's Export-Import Bank announced $750 million in new financing for construction projects in Libya and Tunisia in January 2012.

In terms of investment, according to Ministry of Commerce, China's FDI in Africa increased by 58.9 percent year-on-year in 2011 to reach $1.7 billion. Meanwhile China's cumulative investment in Africa accounts for less than 4 percent of Chinese enterprises' cumulative ODI (outward direct investment), which shows considerable room for further Chinese investment on the continent. As an example, China Road and Bridge Corp., already a relatively experienced investor in Africa, announced earlier this year it is proceeding with investments in areas such as mineral resources, ports and transportation, and power stations. In 2004, China Road and Bridge Corp. invested in a cement plant in the Republic of the Congo, which it has been operating successfully ever since.

This new trend does not diverge that much from Chinese contractors' long term ambitions. With intensified competition, Chinese contractors are shifting into investment to secure long-term sources of growth. Furthermore, these investments are not regarded as high risk as Chinese contractors in Africa mainly invest in infrastructure projects backed by African governments. With the Chinese Government's FOCAC pledge to provide $20 billion in loans to Africa over the next three years, there is expectation of this trend to continue over the mid term.

The ChinAfrica Econometer is produced by The Beijing Axis, a China-focused international advisory firm operating in four principal areas: Commodities, Capital, Procurement, and Strategy.

For more information, please contact:

Daniel Galvez, danielgalvez@thebeijingaxis.com

www.thebeijingaxis.com