DON'T MISS : Talking Africa New Podcast – Zimbabwe's artisanal mines: 'There's no real form of law and order' - Piers Pigou

Manufacturing: Made in Africa

By Nicholas Norbrook in Nairobi and Lagos
Posted on Monday, 29 November 2010 15:58

While some African companies are nervous about Asian competition on their own turf, the arrival of Chinese industrialists signals an important opportunity for Africa to assert itself while absorbing new technology and expanding the continent’s export capacity from raw materials to finished products.

Listen to Nicholas Norbrook on why Chinese manufacturing is moving to Africa on the China in Africa podcast plus read about Nigeria’s new sweatshops.

The Chinese are queueing up to start businesses in Africa. “In France it was so-so”, says Joseph Kosure, the CEO of Kenya’s Export Processing Zones Authority, who is on a worldwide tour to showcase Kenya’s potential. “The hall was half-full of French businessmen. But in Shanghai, two weeks ago, we had to change rooms! People were standing in the aisles.”

African manufacturing has been struggling for some time. The shoemakers of eastern Nigeria no longer export across the continent. Kwame Nkrumah’s gleaming towers have been scrapped under successive waves of structural adjustment. Zimbabwe’s industrial fabric has been mothballed. The textile workshops that bankrolled Togo’s ‘Mama Benz’ have fallen into disuse; the heavyweight women carrying blocks of cash under their colourful wraps are now importing fabric from abroad. Only in a few spots like Egypt and South Africa, the last bastions of industrial-sector jobs, is the candle kept alight.

There is an argument over why: corruption, poor business plans, weak implementation, cheaper imports, the Bretton Woods dogma. But everyone agrees that Africa is the only region in the world where there is rapid urbanisation without industrialisation. The large numbers of unemployed youth in Africa’s cities are a top priority for African policy makers, keen not to squander the demographic dividend.

Industrialisation needs more than labour: it needs power and transport infrastructure. For exporters, it needs a government that can expedite licences and provide tax holidays, or else Vietnam, Thailand or Mexico will get there first. The debate is over before it has even begun, perhaps, for a continent that needs over $30bn in infrastructure investment per year for the next decade to catch up, according to estimates at the World Bank and African Development Bank.

The elephant in the workshop is China. Wage inflation coincides with Beijing’s drive to push infant industries out of the nest. Despite the perceptions of US congressmen, China is shedding manufacturing jobs in its most labour-intensive sectors to lowcost alternatives elsewhere. Bangladesh’s garment exports are now worth $12bn, up from $5bn in 2002. Can Africa join the party?

The china price?

In the popular imagination, the decimation of Africa’s manufacturing sector is due to cheap Chinese goods strangling nascent African industries. There is a measure of truth to this, and the ‘China price’ has hit manufacturers worldwide. But the number of Chinese factories in Africa is also rising. In South Africa, China’s second-largest car manufacturer, First Automobile Works, announced plans in April to build a $100m auto parts facility. The following month, ­Jidong Development Group announced a partnership with Wiphold Capital, a women’s empowerment group, to open a new $217m cement factory. South Africa’s Standard Bank, which has partnered with China’s ICBC, told The Africa Report in June that they were in conversation with dozens of Chinese manufacturers who were keen to set up in Africa.

In Douala, A $500m bus-assembly plant should start producing vehicles by the end of 2010 in a joint venture by Chinese and Cameroon investors. The Xinxiang

Five reasons why China will shed manufacturing jobs

1 Demographics: The Chinese workforce is set to undergo profound changes over the next decade. The one-child policy means that the population is set to peak at about 1.5 billion in 2030. The percentage of 15-24 year olds in the working population – those most willing to work for less – will shrink by one-third over the next 10 years.

2 Kids these days: The younger generations did not live through the Cultural Revolution or the great hungers of the 1960s and 1970s. They represent a more aspirational and lifestyle-conscious group that takes a certain level of comfort for granted. The strikes at the Honda facility in Foshan and the 30% pay increase at the Foxconn complex show China’s younger workers are demanding more from their employers.

3 Regional development: The Chinese government reacted to the global downturn with an unprecedented stimulus package focused on building up the interior provinces and linking them with high-speed trains. Anhui Province, once a poorly developed region that provided migrant labour to the coast, has been transformed into a bustling investment destination.

4 Value-chain ambitions: China does not want to be the world’s workshop forever. The government has put in place incentives to move industries up the value chain, subsidising pharmaceuticals and high-tech companies in the Pearl River Delta. It has tightened emissions policies and forced employers to pay health and pension contributions. It has also tightened margins in labour-intensive industries.

5 Currency pressure: The global economic downturn was a consequence of an imbalance in the financial system, with the artificially low exchange rate of the renminbi boosting Chinese exports. International pressure and China’s desire to change the consumption/savings mix should see the renminbi rise slowly – and China’s exports grow less competitive.

Kuroda Mingliang Leather Company is setting up a $67m leather factory in Ethiopia.

“Ethiopia is the best example to refute some of the criticism of China being in Africa only for resources,” the Chinese ambassador to Ethiopia, Gu Xiaojie, said in October.

These examples are only some from 2010. Many examples date from earlier in the decade, such as Brother Shoes in Egypt, which arrived in 2001 and has captured 50% of the footwear market.

Consumer goods?

Deborah Brautigam, author of The Dragon’s Gift, catalogues many more enterprises that are taking advantage of a ready market and cheap local inputs, from the Hisense electronics company which bought a factory in Johannesburg in 1997 and by 2008 was exporting to 16 African countries, to the Chinese plastics factories in Kano, northern Nigeria. At the large conglomerate and the micro-enterprise levels, Chinese manufacturers can see business sense in locating operations in Africa – just as telecoms operators at the beginning of the 21st century disproved the notion that ‘poor’ Africans could not afford to buy airtime. China-Africa trade will top $100bn in 2010, almost half of which is accounted for by imports of Chinese goods. Only 10% is machinery, while much of the rest is inexpensive consumer goods that could be made in Africa.

A more activist Chinese industrial policy to help manufacturers move into international markets has accelerated the trend. In the 1990s, this was done in a haphazard manner, without proper planning; it was more a political venture than a business proposition. The second wave has been more successful because it copies the patterns that brought such success to manufacturers at home.

Special economic zones (SEZs) are attractive to manufacturers: they are relatively free of red tape and onerous taxes, are close to ports and roads and have a ready supply of cheap labour. In 1979, China established the first SEZ just north of Hong Kong in Shenzen, signalling the first steps of a manufacturing juggernaut.

In 2006, the Chinese government announced it would launch 50 SEZs around the world. Africa has seven that are nearing readiness: two in Nigeria, and one each in Algeria, Egypt, Zambia, Ethiopia and Mauritius. The Egyptian zone, launched in 1998, is relatively modest, at around 5km². Zambia’s Chambishi zone is well advanced, mostly processing ore from surrounding mines and employing around 6,000 people. A second Zambian zone near Lusaka is planned to host manufacturers of electrical goods and mobile phones. To a greater or lesser extent these zones are funded by the China-Africa Development Fund (CADF), an equity investment fund announced in 2006 at the landmark Forum on China-Africa Cooperation.

This is not charity; the profit motive is important for the operators of these SEZs. It also perhaps points to the long-term viability of manufacturing in ­Africa. “If these were just for soft power, where would we expect to see these showing up: Angola, which is where China gets most of its oil? Equatorial Guinea, where it wants to get in? Zimbabwe? Sudan? Tanzania? If it were just for the political motive, these zones would be going to places like this, but that’s not the case,” says Brautigam.

?Trade terms

China has also offered preferential trade terms, with 95% of goods duty-free for Africa’s least-developed countries.

Even though there is a ready market for a great deal of goods in Africa itself, the accumulation of Chinese national and state offers has even created incentives for Chinese factories to sell back into China, according to Brautigam. “It depends what they are producing,” she says. “Some, in Egypt, are already exporting back to China: those processing marble, for example. The Chambishi zone in Zambia sells copper all over the world, some of which goes to China, with some marketed internationally via the commodity exchange in London.”

Of course, Chinese manufacturers do not all require state support. Shao Junhao arrived in Côte d’Ivoire at the age of 23 after graduating from Xi’an International Studies ­University. A French major, he wanted to practise his French and seek a posting abroad because it offered a better salary. He has now been there for eight years. “I’m not leaving yet, but I won’t stay forever,” he says. Shao’s firm currently manufactures pharmaceuticals from a factory in Abidjan’s industrial zone. “At the moment, our products are sold on local markets,” he says. “The zone offers favourable policies. Companies get a tax break of three or four years.”?

Business incubators?

Athi River is the fastest-growing municipality in Kenya. It is a burgeoning industrial zone, with four cement manufacturers, most of which are expanding and still cannot meet Kenyan, let alone regional, demand. But most of the growth has been down to the export-processing zone (EPZ), which lies a few hundred metres off the road to Mombasa.

Inside the zone, 23 companies are busy making everything from clothes and tarpaulins to pharmaceuticals, dartboards, batteries and various agro-processing products. A new business incubator is being built, with the current one fully occupied by Nestlé. A sewage plant 16km away takes care of effluent and is built to scale up for future growth. An electrical substation runs off a special circuit to the main grid.

A pink doll surrounded by Mandarin characters takes pride of place on top of the awards cabinet in the boardroom of the EPZ main office. “A gift,” explains John Chifallu, communications director for the EPZ. “Every month or so we receive a delegation from China.”?

The Chinese bring more than just dolls. The road to Mombasa from Nairobi is financed and built mostly by China Road and Bridge Corporation, and several Chinese textiles companies are already operational in the EPZ.

Peter Hsu, the Taiwanese owner of Protex Kenya, which operates in the EPZ, started operations nine years ago and now employs around 3,000 workers. The factories produce 250,000 items a day. Taking advantage of the US government’s African Growth and Opportunity Act, which ­allows duty-free access for certain items into US markets, Protex imports textiles from Asia to transform them into clothes that are sold predominantly to Walmart. He has no regrets about coming to Nairobi, citing the quality of the workforce. In Cambodia, where Protex also has a factory, “about 70% of the workers are illiterate,” says Hsu. “Here they are skilled and pick things up quickly.” Employees work hard but they enjoy an hour’s lunch break in a subsidised canteen, an onsite doctor and health insurance. The factory looks like almost any other modern garment facility but is clean and well-maintained. Working hours are long but employees earn around $120-$150 per month and all belong to the Tailors and Textiles Workers Union.

The long view?

The 10-year tax holiday offered by the EPZ and duty-free access to the US make it an attractive proposition, even when Protex starts paying regular taxes in 2012. Moving operations to China is not an option. “Fifteen years ago, when as a Taiwanese person I could invest in China for the first time, that would have made sense. Now the margins are not there,” says Hsu.?

For now, the real profits accrue to Protex, to the textile manufacturers in Asia and to the retailers in the US. The jobs in Kenya are not negligible, but they don’t bring much money into the economy. On the other hand, new factories can build strong backward and forward linkages, with a textile company creating demand for weaving, spinning and ginneries, as well as for a garment industry.

Some take the long view. Abebe Selassie, IMF regional studies chief, believes that these are tomorrow’s issues. “In China in the early 1980s, there was no attempt to try to capture the value chain,” he says. “There was only the rush to attract investment. Only later did they start concerning themselves with technology transfer.” ?

The Kenyan EPZ’s Chifallu is also sanguine, even though he admits that there is no government plan to ensure technology transfer. However, he recounts a story told to him by the Bangladeshi ambassador to Kenya on a visit to the EPZ.

The ambassador said that his country launched its own textile industry after several years of producing for South Korean factory owners. “After a secret cabinet meeting, the Bangladeshi government agreed that local entrepreneurs had enough experience of the technical, managerial and marketing sides of the business,” says Chifallu. It set up a fund to provide interest-free loans to businessmen and within 10 years, the majority of the sector was in Bangladeshi hands. “And these Bangladeshi factory owners are now coming here, looking to set up factories in the zone,” enthuses Chifallu.

In this fairly benign version of Africa’s economic future, the continent has to focus on attracting investment into manufacturing by continuing to upgrade infrastructure and providing tax breaks. And after a time, technology transfer and local ownership will follow.

In Nnewi, Nigeria, this is already happening. Local entrepreneurs such as Cletus Ibeto and Innocent Chukwuma, both of whom run a flourishing business inspired after interaction with Chinese traders, are manufacturing auto parts. In Ethiopia and Mauritius, the arrival of cheap Chinese leather imports pushed local manufacturers to invest in new technology, and industries in both countries are thriving.

Sino-African issues?

Where countries play a strong hand, the process may be enriching in the best way: encouraging broad-based growth, sharing technology and kickstarting industrialisation as local copycats open similar factories or feed into supply chains, with industrial-sector salaries stimulating the service sector.

Outside of the fairly well-regulated economic zones, life is much tougher. Anecdotal evidence of hazardous working conditions has already emerged, especially in labour-intensive industries. On Ladipo Oluwole Street in Lagos, a Chinese wig factory (see left) employs children who are barely teenagers. “We cannot afford to take ­okada,” or motorcycle taxis, says one, walking home after her shift.

Sanusha Naidu, research director at the NGO Fahamu in South Africa, says African governments need to be aware of a series of concerns, from ensuring appropriate levels of technology transfer to governance issues. China may also be exporting its environmental costs along with its labour-intensive jobs.

This cuts to the heart of the debate about the future Sino-African relationship. China is interested in Africa for a growing list of reasons: access to natural resources, opening new markets for Chinese products and helping domestic industries expand abroad. African politicians can draw on plenty of lessons from the past to make the most of Asia’s new interest in Africa.

Click below for a preview or subscribe to The Africa Report via our online store.