Last year, while looking ahead to the future of international relations, several global leaders wondered if “winter is coming”. Well, it has come. It’s the winter of coronavirus. At a time where regional and global solidarity should be the norm, it is the exception. This crisis calls for more (and better) multilateralism; not less. The crucial issue at stake is the state of our global health system.
The US must pay attention to new Chinese capital flows to Africa
It is not just roads and railways; China's commercial interests in Africa are moving beyond infrastructure into areas of traditional US strength – FDI, private equity, and venture capital.
When National Security Advisor John Bolton unveiled the Trump administration’s new Africa strategy in December 2018, there were only two countries that he mentioned more than ten times. One was the United States, and the other was China. (The most-mentioned African nation, South Sudan, was referenced four times.)
The administration’s approach to Africa is inextricably linked to its perception of China as a strategic threat.
China’s challenge to US interests in African markets is primarily in the economic sphere: Chinese investment and trade are rapidly eclipsing those of American firms, as evidenced by a 40% annual growth rate in Chinese foreign direct investment (FDI) and tens of billions in government loans and grants over the past decade.
But there is a profound lack of understanding among US policy makers about how China actually operates in African markets. As a result, the administration could misdiagnose the true nature of the threat that China poses and misdirect the required response.
For years, US-Chinese competition in Africa has been conceptualized as a battle between Chinese and American companies over access to large infrastructure projects. This storyline focuses on the unfair competitive advantages conferred on Chinese firms by Beijing’s expansive global infrastructure financing programs.
- These lending programs are part of an ambitious foreign policy program to connect China with other regions through ports, railways, and fiber optic cables. President Xi Jinping re- branded these efforts, which started with the “Going Out” strategy in the late 1990s, as the Belt and Road Initiative in 2013.
Unconstrained Chinese lending to African nations for infrastructure could pose a threat to US security interests on the continent. As Ambassador Bolton indicated in his speech, a handful of countries risk becoming ensnared in a cycle of “dependency, domination and debt.”
But, overall, the infrastructure lending is not all negative and is not the only story. American companies are simply not competitive in the infrastructure domain and—apart from a few notable, globally recognized firms like Bechtel and GE—have little interest in launching massive construction ventures in Africa. American firms tend to lead in the service and financial sectors, reflecting the structure of the US economy.
The strategic threat to future US competitiveness in African markets is not the traditional Chinese government-to-government loans to finance infrastructure, but rather the growing Chinese footprint in areas of traditional US investment strengths, such as foreign direct investment, private equity, and venture capital.
Take telecoms. Yes, Huawei and ZTE have played a large role in the big infrastructural upgrade of telecom infrastructure in dozens of African countries. But Chinese companies are now targeting non-infrastructure market opportunities.
Chinese handset companies entered the African market early relative to their global peers, recognizing upward trends in smartphone adoption.
- Founded in 2006, Transsion Holdings, which does not operate in the United States or Europe, accounts for 30% of African phone sales, ahead of second-place Samsung at 22%.
The successes of its leading phone brands Tecno, Itel, and Infinix have shown how a company with a strong regional focus, the right product mix, and strategically low pricing can out- perform bigger and more dominant firms.
- Already in 2019, two additional Chinese tech giants, Xiaomi and budget smartphone maker Realme, have announced plans to aggressively expand in Africa. Chinese phones are creating the window to the world for millions of young Africans.
For American companies to compete properly in African markets, the administration needs to take a broader look at capital flows into African markets and the diversifying forms of Chinese commercial engagement.
By looking beyond infrastructure and seeking to provide a more comprehensive framework for examining China’s commercial interests in Africa, more effective policies, tools and programs can be rolled out to counter China’s growing incursions into FDI, private equity, and venture capital.
- This could mean, for example, directing the newly-expanded and enhanced Overseas Private Investment Corporation to increase US investment in areas of competitive American advantage that match growing market demand in African countries for city infrastructure, innovative financial products, education, and entertainment.
It could lay the groundwork in a young market with a growing middle class, if only to position US companies for greater success in the future, as has happened in India. Entertainment and media spending in Nigeria in 2017 was $3.8 billion and is projected to double by 2020.
There is much for the United States to leverage in Africa. With China’s slowing growth domestically and rising fear over African debt with China, a door is opening for increased US investment.
Bottom line: To focus only on infrastructure is a strategic mistake.
Capital flows to Africa; comparing the US and China
UNITED STATES – US pension funds, sovereign wealth funds, and other institutional investors have historically not had the risk appetite for African markets, but that is beginning to change. Asset owners such as the $9.8 billion Chicago Teachers’ Pension Fund and the $25.1 billion San Francisco Employees’ Retirement System are starting to make infrastructure and private equity investments, seeking attractive risk-adjusted returns from the continent.
CHINA – Unfortunately, relatively little is known about Chinese institutional investors’ priorities; however, there is a general trend toward diversifying risks worldwide. Given China’s ageing population, its 2 trillion yuan ($290 billion) national pension fund is under increased pressure to deliver higher returns.
UNITED STATES – US Fortune 500 companies such as GE and ExxonMobil have been investing in Africa for decades, cementing market share. Tech giants such as Google and Facebook are already working to capitalize on Africa’s growing internet- connected population, and more large US companies are beginning to look to the continent for business opportunities.
CHINA – Chinese companies such as Huawei and Transsion are rapidly expanding their presence in Africa, playing a key role in the continent’s telecommunications infrastructure development. While Tencent and Alibaba have proven to be competitive with US rivals in emerging markets across the globe, they have yet to make big moves in Africa.
UNITED STATES – US small and medium-size enterprises (SMEs) have historically focused on the US domestic market. Outreach programs by the Department of Commerce and the Small Business Administration and increased support through the new US International Development Finance Corporation should help increase US SME investment in Africa.
CHINA – Over ten thousand Chinese- owned SMEs currently operate in Africa, especially in the manufacturing, services, construction, and real estate sectors. Given their success to date, Chinese SMEs will continue to invest in African markets over time.
UNITED STATES – US private equity investment in Africa has grown considerably since the 1990s, and improved understanding of African markets and exit opportunities should further expand US PE investment over time. All of the top Africa-focused PE firms managing more than $1 billion are American, European, or African.
CHINA – None of the twelve big Africa-focused private equity firms managing over $1 billion are Chinese. While China’s PE industry has grown in recent years, investments have largely focused on domestic opportunities.
UNITED STATES – US venture capital funding of African start-ups has been increasing over time; 2018 saw an almost fourfold increase in total funding for African start- ups—$725.6 million across 458 deals. This year is on track to be another successful year for African VC. Most African VC funds have US investors and/ or Silicon Valley partnerships.
CHINA – Chinese venture capital funding available to African companies is growing. Early moves have been made by the web browsing company Opera, which in 2017 pledged to invest $100 million in Africa’s digital economy and most recently launched a bike hailing platform in Nigeria called Oride.
This piece is part of a larger report, Deconstructing the Dragon: China’s commercial expansion in Africa, published by the Atlantic Council.