China's growing commercial interest in Africa during the past decade has been widely documented. The November 2006 Forum on China-Africa Co-operation (FOCAC) meeting in Beijing saw the announcement of several overarching initiatives to increase aid and commercial linkages between China and Africa. At the conference alone, according to China Daily (2007) US\(1.9bn worth of commercial transactions took place. In addition, Chinese president Hu Jintao (2006:8) announced a US\)5bn fund that would: 'encourage Chinese companies to invest in Africa and provide support to them'. This China-Africa Development Fund was approved by the Chinese State Council in May 2007 according to Peoples Daily (2007). Such actions on the part of the Chinese government reflect the economic imperatives of Chinese foreign policy, particularly towards Africa. Such diplomatic activities have thus by design paved the way for the entry of Chinese companies into all sectors of Africa's economies where they increasingly compete with South African companies for market space.
Africa as a Strategic Partner: Markets & Minerals
China's rising interest in African markets is predicated on several factors. While certainly not the only reason (Taylor, 2006:940), one of the most important motives for current Chinese commercial forays into Africa is the growing need for raw materials and oil to feed China's burgeoning economy. China became a net oil importer in 1993 and was ranked as the second largest oil importer after the US in 2004 (Luft, 2004). Furthermore, rising commodity prices render African oil reserves, which often require substantial infrastructure investments to enable exploitation, more commercially viable. China currently acquires 28% of its oil imports from Africa, primarily from Angola, Sudan, Nigeria and Congo (Wolfe, 2006). Particularly due to its strategic importance for economic growth, the procurement of secure oil supplies are a principal national interest and form a fundamental part of China's foreign policy. Furthermore, Chinese companies are encouraged to acquire energy 'at source' (Naidu & Davies, 2006:79). This translates to Chinese national oil companies investing in African countries' oil sectors.
Far from taking the western view that Africa is a lost cause for investment, Chinese companies see Africa as a potential market of 900 million consumers waiting to be tapped (Burke, Corkin & Tay, 2007:86). Bearing in mind that China is still a developing country, Chinese companies' domestic market comprises a similar number of Chinese consumers with similar levels of disposable income to their African counterparts. Chinese companies that have experience in such market conditions are thus increasingly moving into African economies to realise the perceived potential of such a large market.
Furthermore, according to the Investment Authorities of Kenya, Ethiopia, Uganda and Tanzania, over 60% of Chinese pledged investment is in the manufacturing sector. Thus it seems that Chinese companies are preparing to take advantage of the preferential market access that African goods receive in some developed countries to enter these third country markets. This model has had some success before, as in the case of Lesotho (Sandrey et al. 2006).
By adopting the approach of entering the less competitive developing countries' markets, aspirant Chinese multinationals can gain international experience. In the wake of increased diplomatic and commercial traffic between China and Africa, the latter has become a favoured testing ground in which aspirant Chinese multinationals can cut their teeth (Corkin, 2006a: 12). Chinese companies are extremely price-competitive, but weak in terms of branding (Zeng & Williams, 2003). Operating in an environment where millions of consumers have limited disposable income, it is possible that Chinese companies will attempt to use their price competitiveness to gain market traction and develop their brand name in a less competitive environment before attempting entry into developed country markets.
South African & Chinese Investment in Africa
Page and Te Velde (2004:23) found South Africa to be the rest of Africa's third largest investor, after the UK and USA. According to the latest statistics of the South African Reserve Bank (2007), South African investments in the rest of Africa totalled US$5.6bn in 2005. By contrast, China's recorded FDI in Africa was only US$3bn in 2006 according to the Chinese Ministry of Foreign Affairs and Commerce (MOFCOM) (2006), albeit up from US$1.9bn in 2005. Thus, SA foreign direct investment (FDI) levels in Africa outweighed those from China a few years ago. However, this looks set to shortly change as Chinese FDI in Africa seems to be increasing rapidly according to MOFCOM (2006) and thus may be part of China's recent aggressive drive to invest in emerging markets (Zappone, 2007). There are several aspects which have allowed Chinese companies to increase their commercial footprint in Africa in the space of a few years, albeit from a low base.
A Multi-pronged Approach
The state-directed nature of Chinese engagement in Africa results in 'coalition investments' (Davies & Corkin, 2007:243) across various sectors and is very evident in various countries to which China has extended loans. According to stipulations of China Exim Bank,1 which is the sole vehicle for Chinese government concessional loans, projects financed by these loans must be undertaken by a Chinese company. Furthermore, at least half the procurement requirements must come from China. This ensures that loans from China provide market entry for Chinese companies from a range of sectors, including construction, telecommunications and mining.
This is in contrast to the fragmented nature of South Africa's government departments, and lack of co-ordination in terms of policy-making (Blaauw, 2006:5) which often renders them ineffective in terms of supporting South African firms' expansion into foreign markets (Hagedorn, 2007). According to a senior South African diplomat,2 South African embassies are trying to position themselves as a conduit for South African business interests, but the prevailing perception is that an embassy is an ineffective mechanism. This, according to the same source, prompts businesses to 'go it alone' when attempting to enter a new market, greatly increasing the risk of failure.
Temporal Perspective
Investing in Africa is traditionally seen as an unpalatable option (Hagdorn, 2007) given the challenging operating environment. Nevertheless, Chinese companies appear to be entering African markets with gusto. With regards to larger Chinese state-owned enterprises, this is due to their ability to adopt a more long-term view of investments in Africa, focusing on areas where they perceive medium to long-term benefit (Burke, Corkin & Tay, 2007:87). The Chinese government, as the primary shareholder, is more interested in securing strategic reserves of raw materials and energy that are important for China's continued domestic growth. These ventures in Africa will often need years to show a profit due to the capital intensive nature of mineral exploitation in Africa and the paucity of existent infrastructure required for extraction.
This long-term view of the Chinese government allows state-directed enterprises to invest in strategic acquisitions that may not yield short-term profits, but may render returns in the long term, especially given rising commodity prices and China's need to secure reliable access to resources. By way of illustration, the Chinese National Equipment & Machinery Import and Export (CEMEC) company has recently been given sole rights to exploit one of the largest untapped iron ore reserves in the world in Belinga, Gabon. Although discovered as far back as 1955, no foreign investor has tendered for mineral rights due to the prohibitive costs of the infrastructure required to access the reserves. The project, estimated at US$590 million, includes the construction of a railway linking Belinga to the coast (Business Report, 2006). Belinga's exploitable iron ore reserves are worth over US$3bn.
Cost Competitiveness
In the construction sector, South African construction companies are currently some of the most expensive in the industry, due in part to the strength of the South African Rand (Corkin, 2006b:13). Additionally, Chinese companies have a propensity to work on lower profit margins than other firms (Burke & Corkin, 2006:74) rendering them difficult to compete with. Compounded by South Africa's inflexible labour law regime (Hagedorn, 2007) and the subsequent labour and supply-chain cost advantages of Chinese companies, the latter's' tenders are far more attractive than what South African firms are prepared to offer (Corkin, 2006a:16).
Prospects for Collaboration
The potential for South African and other traditional market-players in Africa to lose market share to Chinese companies is considerable. Nevertheless, this needn't be a zero-sum game. Opportunities for co-operation between particularly South African companies and Chinese companies do exist. For Chinese companies, collaborating with a partner that has a longer in-market presence and established networks in Africa, such as South African-based firms, could have several distinctive advantages.
Indeed recent developments seem to support this. It was announced in October 2006 that South African ABSA Capital would be consulting for China Exim Bank, providing the Chinese state-owned enterprise with advice on future investment opportunities in Africa (Marketwatch, 2006).
Furthermore, China's largest listed bank, Industrial and Commercial Bank of China, announced its intention to purchase a 20% stake in South Africa's Standard Bank, the biggest bank in Africa. It was unanimously approved by the shareholders in December 2007. The deal, worth US$5.6bn, is the largest foreign acquisition by a commercial Chinese bank to date (Georgy, 2007). Standard Bank's operational network in 17 other African countries is important for ICBC, whose clients are increasingly interested in making African investments. Standard Bank it seems, is hoping to access China's large domestic market. Thus despite being potential competitors, collaboration is seen as a viable option.
This is true of other service sectors. Africa is viewed as a lucrative market by the telecommunication sector and foreign operators are eager to secure new contracts (Southwood, 2006). African telecommunications have recently seen the arrival of Chinese companies such as state-owned Zhong Xing Telecommunication Equipments Company Ltd. (ZTE) and the private Chinese multinational Huawei. South Africa's telecoms companies, Vodacom and MTN are important market players on the continent, with a dominant presence in Africa's largest telecommunications market, South Africa (Williams, 2006). Nevertheless, MTN shares leapt in price following an industry speculation that China Mobile was interested in buying shares (Onyango & Odhiambo, 2007). On the back of the ICBC-Standard bank deal, this may indicate market approval for such developments.
Conclusion: A Real 'Win-Win' Situation?
South African firms are reportedly increasingly concerned as to the perceived encroachment of Chinese companies on their market share in Africa, particularly the South African market (Financial Mail, 2007). While Chinese companies may have a structural competitive advantage in certain areas, this is not to say that South African companies do not have niche expertise that could see them benefiting from Chinese companies' success in Africa markets.
Given the long-term approach of many of China's investments in Africa (Burke, Cor kin & Tay, 2007:182), it is evident that Chinese commercial interests in Africa are not fleeting and Chinese companies are in Africa for the long haul. The inevitability of China's commercial presence does not mean however, that South African companies cannot profit from it, provided these developments are viewed as a potential opportunity rather than a threat. This is perhaps demonstrated most clearly in ICBC's proposed acquisition in Standard Bank and the implications this has for increasing Chinese commercial access in Africa. Consequently, there seems to be a window of opportunity for both South African and Chinese companies to advance their business in Africa through collaboration. For Chinese companies, South Africa is a good base from which to launch investment ventures into Africa. Investment in a South African firm with operations in Africa allows access to emerging African markets while mitigating direct exposure to risk (Olson, 2007). In addition, despite structural constraints to competitiveness, such as a strong currency and an inflexible labour regime, South African companies do have established networks and market knowledge of African markets (Theobald, 2007:50). This is valuable for Chinese companies new to the African context.
For South African companies, many of which may feel defeated in the face of Chinese competition, opportunities for collaboration would allow them to tap into and benefit from a growing Chinese market presence in Africa by forming part of the service value chain. In light of South Africa's lack of export competitiveness to the developing world, maintaining a strong commercial presence is particularly important for South African companies (Hagdorn, 2007).
The targeted African countries may also potentially benefit economically from such collaboration. Neglected until the late 1980s, the contribution of infra-structural development to broader economic and social development is now acknowledged by the Word Bank (Van der Merwe, 2007). Furthermore, African countries are in need of financial and telecommunication system improvement in order to improve the environment of business in Africa and lower the cost of commercial transactions. Channelled through South Africa, which has pledged to uphold the principles of NEPAD and other such mechanisms that monitor good governance and human rights, the benefit of Chinese investment in Africa may be enhanced and its disadvantages mitigated.
The dynamics of such a partnership will not be without their complexities. Indeed, from a political perspective, such coordination between China and South Africa, two regionally dominant powers, might be viewed with some suspicion by other African states, protective of their sovereignty. Political will, as ever, will be required. Nevertheless, China's increasing commercial presence in Africa is becoming an inevitable part of the continent's economic landscape. Their level of adaptation to such circumstances will determine whether South African transnational companies will continue to lose ground in Africa, or capitalise on it.