/ 8 January 2008

China wakes up to global clout of small firms

Xing Houyuan’s advice to investors who seek her out is patient and practical: do due diligence on any potential partner, clarify its ties to the government and make sure you control any joint venture.

Her words would have sounded familiar to any firm trying to enter China in the 1980s and 1990s. But the nervous-looking man who had just shown Xing his proposal was Chinese, and he was looking to do business in Africa.

While Beijing has pushed aggressively to win major mining, oil and hydroelectric projects around the world, it is only now starting to pay attention the smaller companies that supply everything from cement to explosives for these mega-projects.

Xing is director of multinational business at the Chinese Academy of International Trade and Economic Cooperation, which is affiliated with China’s Ministry of Commerce. The academy offers policy analysis, market information, due diligence reports and advice — originally for foreigners seeking to invest in China and now also for Chinese firms seeking to do business abroad.

Even though investment by small- and mid-sized firms in Africa has taken off in the last six or seven years, the Chinese government only started to pay attention in 2006, when it hosted a gathering of African leaders in Beijing, Xing said.

While deals by big state firms get the most attention, smaller, private firms have been quicker to spot opportunities abroad, just as they have done inside China in the last decade. Oil, metals and telecoms are the most promising sectors in Africa, according to the Chinese Academy of Social Sciences, another government-backed research institute.

”Private companies are the most proactive in our own economy, and in many ways, the African market is suited to smaller players,” Xing said. ”Small and private companies are more likely to find projects and partners that fit their capability.”

Last year, for the first time, Africa accounted for the greatest number of Chinese deals signed overseas. But the continent’s share of China’s foreign investment actually shrank to 3% in 2006 versus 7% in 2005, indicating a shift toward smaller deals.

Dispensing advice

To help these smaller businesses, the government organised a Sino-African investment conference in Beijing in December, where Xing dispensed advice to people like the executive from a small steel company in Tangshan, east of Beijing, who was looking into investing an iron-ore mine in Libya.

Beware of partners who can’t deliver what they promise, Xing told the steel executive.

Other attendees ranged from the expected — bankers hoping to lend to successful projects — to the surprising. A representative from textile firm Hodo Group wanted information on mining projects in Madagascar.

China is also focusing on what it calls ”development zones” in areas where Chinese investment is concentrated in Africa, where it aims to ease small and medium companies’ access to credit and government channels.

”We are setting up the zones to help them access resources, and find and get access to local governments, partners and projects that are suitable to their size,” Xing told Reuters.

”The governments there like it because they have an intermediary bigger than just that one company and we like it because we can keep track of our companies, especially if there is a problem.”

Keeping track of these smaller players, which are becoming the face of China in Africa, is increasingly important to maintaining Beijing’s effort to secure resources in Africa without exploiting its people.

While Zambia’s Chambishi copper mine, operated by China Nonferrous Metal Mining Group, has seen disputes over wages and safety, one of the worst accidents was not in the mine itself but at an explosives supplier, Beijing General Research Institute of Mining and Metallurgy, where an explosion killed 46 workers in 2005.

And some Chinese contractors who have won infrastructure deals with the lowest bids have come in late and well over budget, as they failed to anticipate safety and labour regulations.

”In a broad sense, as Chinese companies flood into Africa, there is a big risk of disorderliness. There’s a big risk that unfavourable incidents could turn hearts and minds against China,” Xing said.

Copper belt

Beijing has designated Zambia’s Copper Belt, where the Chambishi mine has attracted a cluster of companies in service and secondary industries, as its first development zone in Africa. Chinese companies have signed deals to invest a total of $900-million in the region, according to the Zambian government.

”It’s a huge and complex project and it has the potential to be disorderly. Instead we decided to make it a model for how Chinese can participate in the industrialisation of Africa,” Xing said.

A second zone would be in Nigeria, where Chinese oil firm CNOOC last year purchased a $2,7-billion stake in the Akpo field, Xing said. The African oil giant is a magnet for Chinese traders selling clothing, shoes and electronics.

Chinese investment in Africa hit $6,4-billion at the end of last year as firms from giant telecoms gear maker Huawei Technologies to small players like Zhejiang Huayou Cobalt Nickel Materials made inroads around the continent.

African economies are expected to grow faster in the first quarter of this century than they did in the past 25 years, creating ample opportunities for Chinese firms, said Yao Guimei, an Africa researcher at the Chinese Academy of Social Sciences.

Big Sino-African deals have diversified away from infrastructure. This year, Industrial and Commercial Bank of China agreed to pay $5,6-billion for a 20% stake in South Africa’s Standard Bank — a move which should help Chinese investment in the rest of the continent.

The Sino-African investment conference in Beijing in December coincided — perhaps not coincidentally — with a meeting of European and African leaders in Lisbon, where Senegalese President Abdoulaye Wade warned a ”slow, bureaucratic” Europe that it risked being left behind by China and India in the race to invest in Africa,

Despite hand-wringing in some European capitals over China’s expansion in Africa, Joshua Eisenman, a fellow at the American Foreign Policy Council, said there was probably more complementarity than competition.

”I don’t think that China’s efforts in Africa necessarily run contrary to those of the United States and Europe because, let’s face it, when was the last time the United States or Europe built infrastructure in Africa?” he said.

”I don’t see it as a zero sum game. They are involved in different things.” — Reuters