Powering Africa's Industrialization

Economic growth in Africa has been largely spurred by market liberalization and improved public management of finances as well as a boom in the commodities that the continent has in abundance. However, perhaps the biggest factor has been the engagement of emerging powers led by China, whose demand for African resources is stimulating a revival in the terms on which the continent trades. According to Ernst & Young, Africa is probably 30 years behind China on the developmental curve, leading to speculation that Chinese companies will start to look at parts of Africa as potential sites for low-cost manufacturing and outsourcing.

Africa has become an increasingly important investment destination for Chinese machinery and auto companies as Chinese companies look for more attractive growth opportunities in other emerging markets. As China's economy slows, Chinese manufacturers are targeting African markets for profits to offset sluggish domestic demand. However, for Chinese companies, going overseas now entails a much more complex business model than simply loading goods onto a ship and selling them in Africa. As tax barriers increase and profit margins get slimmer, Chinese manufacturers are adopting other approaches to explore overseas markets, including building complete knock-down (CKD) assembly plants, where machinery is delivered in parts and assembled locally and materials are procured locally.

Guangxi-based Liugong Machinery Co. has prioritized Africa as one of its strategic markets. During the first three quarters of 2012 alone, Liugong increased its revenue from South Africa by 117 percent year on year to reach $62 million. SGMW, a joint venture in which SAIC Motor Corp., Liuzhou Wuling Motors Co. and GM China have stakes, is also treating Africa as one of its most important overseas markets. A factory has already been established in Egypt, serving the North African and Middle Eastern markets. In November, operations at the BAW South Africa's new minibus assembly plant officially commenced, which is expected to boost the development of the local taxi industry as well as create more than 1,000 local employment opportunities. BAW South Africa is the result of partnership formed by the Industrial Development Corp., Beijing Automobile Industry Holding Co. (BAIC) and China Africa Motors (CAM), the previous importer and distributor of BAW taxi vehicles into South Africa. While the new plant will assemble taxis on a semi-knocked down basis, there are plans to eventually establish a CKD manufacturing plant, marking an important step toward full localization and manufacture of taxis in the country.  

Closer relations between the private sector and government undeniably help to ensure these projects can benefit the local economy in the long run. Similarly, African governments are expecting much more from foreign manufacturers who are looking to set up facilities inside their country. Market entrants are now expected to create jobs and help build supply chains to attract other manufacturers. The government is doing their part as well, with government investment in power helping to develop much needed African power capacity increases that will in turn drive manufacturing and resource beneficiation, initiating a positive circular effect which will further power Africa's own industrial revolution.

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