Results of a recent study shows there are 10,000 Chinese firms operating in Africa; a figure which is four times higher than those revealed in previous studies. The report of the study carried out by McKinsey Africa were made public June 28.
It is no longer news that China is Africa’s largest economic partner, but according to McKinsey Africa, the challenge in recent years has been to appreciate the full extent of the partnership. The reason for this difficulty, the organisation said a press release today, was a dearth of data. The findings of the McKinsey Africa study carried out in eight countries that make up two-thirds of Sub-Saharan Africa’s GDP, has been able to prove that China’s involvement in the continent is bigger and more multifaceted than previous studies suggest.
Going by the release, about 90 percent of the 10,000 companies are private owned and operate in diverse sectors, with about a third in manufacturing.
“These firms are bringing capital investment, management know-how and entrepreneurial energy to the continent, and in so doing, are helping to accelerate the progress of Africa’s economies. Across trade, investment, infrastructure, financing and aid, China is a top five partner to Africa—no other country matches this level of engagement. The China-Africa relationship has ramped up over the past decade with trade growing at around 20 percent per annum” the release reads in part.
The study also shows Foreign Direct Investment, FDI, has grown even faster; at an annual growth rate of 40 percent. China’s financial flows to Africa are 15 percent larger than official figures suggest when non-traditional flows are included. China is also a large and fast-growing source of aid and the largest source of infrastructure financing, supporting many of Africa’s most ambitious infrastructure developments in recent years.
Investing for the long-term
According to McKinsey Africa, a quarter of Chinese firms on the African continent operate in service delivery while a fifth operate in the trade, construction and real estate sectors – in addition to manufacturing. The firms are said to be handling 12% of Africa’s industrial production worth $500 billion (circa 300 trillion FCFA) a year.
“In infrastructure, Chinese firms’ dominance is even more pronounced, having cornered nearly 50 percent market share of Africa’s international Engineering, Procurement and Construction (EP) market. Chinese firms are making healthy profits. Nearly a quarter of the 1000 firms surveyed said they covered their initial investment within a year or less. A third recorded profit margins of over 20 percent. These firms are agile and quick to respond to new opportunities. They are primarily focused on serving the needs of Africa’s fast-growing markets rather than on exports. Chinese firms have made investments that represent a long-term commitment to Africa.”
Contrary to popular opinion that Chinese companies seldom recruit local labour, McKinsey Africa found that 89percent of employees of the 1000 companies surveyed are locals. In fact, the study says Chinese firms employ several million Africans and almost all of them provide skills and training.
The study also showed the thought that Chinese companies do not transfer knowledge, is a misconception. “Chinese firms are modernizing African markets by introducing new products and technologies. Some 48 percent introduced a new product or service and 36 percent have introduced a new technology in the last three years.” McKinsey Africa said in the press statement, adding that for some 50 African public-sector leaders, low-cost financing and improved infrastructure topped the list of what they valued most in their Chinese partners.
The study however revealed some shortcomings which McKinsey Africa indicated need improvement. These include local sourcing, recruitment of locals into top positions in Chinese companies. The companies are also faulted for labour and environmental violations. African countries on their part were found lacking in the area of providing safety for Chinese firms. Chines firms also pointed to corruption, language and cultural barriers as pain points in their relationship with Africa countries.
Kartik Jayaram, a senior partner and co-author of the report is quoted in the release as saying “Chinese engagement with Africa is set to accelerate—by 2025 Chinese firms could be earning revenues worth $440 billion, from $180 billion today. Additional industries could be in play for Chinese investment, including technology, housing, agriculture, financial services and transport and logistics. However, to unlock the full potential of the China-Africa partnership, we have identified 10 recommendations for Chinese and African governments as well as the private sector. To highlight two key ones—African governments should have a China strategy and the Chinese government should open financing and provide guidance to Chinese firms.”