Why China trumps SA
China is proving a much more effective player in Africa than South Africa, writes Lynley Donnelly.
Heavyweight construction giant Murray & Roberts is taking the Namibian Tender Board to the High Court in Windhoek for awarding Chinese competitor China Nanjing International a state tender.
Murray & Roberts says the award did not comply with Namibia’s affirmative action or labour laws.
The case, which began on July 22 , is a sign of growing tension between African and Chinese companies on the continent.
Chinese companies, often backed by ultra-cheap state financing, can easily undercut their competitors.
Anecodatal evidence shows that Chinese firms have been able to beat local competitors before. In a project for the Trans Caledon Tunnel Authority in 2005, Chinese construction firm, Covec was able to out bid competitor Murray & Roberts by 25%, amounting to a difference of millions of rands.
But Brian Bruce, group chief executive of Murray & Roberts, says that the company is not at all concerned about increased Chinese competition. “We are in no way short of work outside of South Africa,” he told the Mail & Guardian.
Bruce said that while Chinese firms can enter the market offering extremely low rates through state subsidised products and cheap labour, he believes this is unsustainable.
Yoon Jung Park at the Centre for Sociological Research at the University of Johannesburg conducted a research trip to Namibia as the case began. She said there were growing tensions around two areas of Chinese economic engagement in the country, namely construction and retail.
“Complaints are mounting in the construction sector that the Chinese are not meeting legal requirements with regard to minimum wages, employment equity, social security, pension and general work conditions,” she told the M&G.
There are also complaints that Chinese firms are importing Chinese labour or hiring illegal Zimbabwean workers, she says. “However, the Chinese continue to win most of the tenders for large state projects, including, most recently, contracts to work on the new state house as well as roads.”
The Namibia Economist reported that Murray & Roberts believe their Chinese competitor did not meet many of the prerequisites stipulated in the tender.
According to Park the Namibian government argues that one of the reasons it is promoting business with China is because it wants to diversify investments away from its traditional trading partners and investors in South Africa, Europe and the United States.
“They realise that they may be sacrificing current local economic development but they’re looking at longer-term political as well as economic relations,” said Park.
“We also found that only 17% of all Namibian companies were actually abiding by employment equity regulations to some extent, the Chinese are being singled out for criticism,” she said.
While Bruce was unaware of the Namibian case, he said the only reason the company would object to the award of a tender would be if the tender was adjudicated unfairly and the conditions of the tender were not met by the winning company.
He said China was “just another competitor” alongside many international companies, including contractors from the European Union and South America. Murray & Roberts competes “on the basis of value” against China, much as it does against other competition.
Bruce acknowledged that there are concerns around the import and treatment of cheap labour but he says “countries allow this to happen”.
“There may be nations and contractors whose moral standards differ from the norm,” said Bruce. “It may be a competitive issue for a time but we believe that global norms will eventually be applied.”
He said governments in Africa often lack the capacity to enforce regulations but that would change as capacity was improved.
Experts back Bruce’s argument. Simon Freemantle, senior manager at Frontier Advisory, a research and strategy company that helps businesses enter and operate in emerging market economies, said that if African states want to better protect the interest of their people and their local businesses, they need to be more proactive in their dealings with China.
But when it comes to commercial investment in Africa, says Freemantle, Chinese firms could have the competitive edge because Chinese banks, often belonging to or backed by the state, are willing to finance projects at extremely cheap rates, ensuring Chinese firms undercut their competitors as well as eradicate much of their risk.
South African firms, particularly those in construction, are beginning to feel the heat.
Freemantle said investments in Africa have thus far focused on the resources sector, often “package deals” with Chinese companies
working closely with Chinese banks and the government on specific undertakings.
“The biggest criticism of China is that no local beneficiation takes place,” he said, “but of course it does, because [at the simplest level] the infrastructure is built.”
With regard to the import of skills, Freemantle said this often happens because the required skills “are simply not available” in Africa.
He acknowledged however that this acts as a “double-edged sword” for the countries, simply because the Chinese can import very cheap, often highly skilled labourers, who work around the clock and implement projects in a far quicker time than any competitor. “Lots of South African firms have seen the threat posed by China and have been very pragmatic and taken on partnerships with Chinese firms,” he said.
There is a great deal of eagerness from Chinese firms to establish partnerships with South Africa, he pointed out, and in the case of a transaction like the Standard Bank/ICBC deal, Chinese money is channelled into Africa through a South African firm.
“It is a threat but it needs to be put into perspective,” said Freemantle. “China’s total foreign trade with Africa as a whole is still only 3%. So while we are strategic, we are a very small player.”
The biggest problem outside South Africa was the “lack of a regulatory framework to govern foreign investment”. “In the vast majority of the continent, these rules don’t exist,” said Freemantle.
African countries need to be far more proactive in negotiating with Chinese investors and ensuring that all their local legislation is adhered to. Until now, said Freemantle, Africa’s response to trade with the Chinese had been incoherent and dissenting.
He wants regional bodies like the Southern African Development Community (SADC) and others to devise concrete agendas when dealing with the Chinese.
Hannah Edinger, economist at the Centre for Chinese Studies (CCS) at Stellenbosch University, disagreed. She says that in cases where regulations do exist, Chinese companies generally abide by them.
She said foreign investors, whether Chinese or traditional investors from the West, “can’t be blamed” for operating without sufficient legislative frameworks. “African government’s must be more pro-active,” she argues. “Currently their response has been very reactive.”
Edinger said there was an overlap between Chinese development assistance and formal commerce.
Chinese non-financial foreign direct investment flows to Africa, according to the Chinese Ministry of Commerce, was a mere $1-billion in 2007, said Edinger. This type of investment would not include deals like the ICBC/Standard Bank deal.
In contrast, infrastructural financing from China was estimated at $7-billion in 2006 and $4,5-billion in 2007. There is, however, no clear record of how much Chinese aid money makes its way to African countries, she said.
There have been calls, she said, for China to increase transparency when it comes to the terms of developmental aid and loans the country makes to African countries. This would certainly help prevent the suspicions that arise regarding Chinese activity in Africa.