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Guangdong’s Firms Hunt for Business in Africa

Entrepreneurs from China’s southern Guangdong province are increasingly viewing Africa as a land of business opportunities. Since the Belt and Road initiative was proposed in 2013, the continent has become one of the main destinations for province’s private companies to focus on when going global.

Guangdong firms established some 29 overseas companies in Africa last year 2017, Yicai Global learned from the province’s commerce department, while agreed investment grew 14.3 percent annually to USD369 million. Actual investments surged by close to three-quarters to USD57 million compared to the year before.

A total of 244 enterprises have been set up in the continent by Guangdong firms as of the end of 2017, with agreed investments of USD13.8 billion and actual investments of USD1.2 billion.

However, it is not easy to turn a business opportunity into cash and Chen Xiuxia, Chairwoman of Guangdong-based Choice International, told Yicai Global that there are great risks but it is a price that has to be paid.

Starting With Business

Choice International started life as a foreign trade company engaged in original equipment manufacturing before establishing its own brand in 2005. Its products rose to prominence in Africa and by 2010, the firm started to regard Africa as its key market.

“We acted as GAC Group brand Trumpchi’s sole distributor in Nigeria in 2014,” said Chen, adding that the firm then opened dealerships to penetrate the local retail market.”

Choice International thus kicked off its investments in Africa. Trumpch’s first flagship store became operational in December 2014; Trumpch’s branch in Nigeria was established in May 2015; Choice International became Gree’s sole distributor in Nigeria in the same year; Trumpch’s second store and a Gree specialty store opened in April 2016; the first batch of passenger cars were assembled and rolled out of Trumpch’s SKD (Semi Knocked Down) works. In 2017, Choice International held a top spot in vehicles exported from China to Nigeria, with a market share of over 50 percent.

Chen told Yicai Global that opening dealerships and making investments in the construction of plants were part of efforts to business for the brands the firm acted for and to expand their sales. The firm built a semi-knocked-down works to meet the requirements of local policies. If they didn’t do so, the company would need to pay high tariffs for exporting vehicles to Nigeria.

Unlike Choice International, Guangdong Shineng Electric Equipment Group, a second-hand generator exporter, entered the African market after a local company made contact directly.

“In 2010, a well-known Ugandan enterprise contacted us online, saying that they were looking for a suitable secondhand generator unit to build a 100-megawatt heavy oil power plant. At the time, we were the only vendor in China that had this kind of equipment,” Shineng Group Chairman Hou Jianxiong told Yicai Global. “Although we were still in the midst of negotiations with other customers at the time, we eventually decided to undertake this project, out of consideration of exploring the African market.”

Nevertheless, Shineng remained very cautious. The enterprise undertook the project as the main engineering, procurement, and construction contractor, with charges based on project progress. Before installation, Shineng made sure that the money for the sale of the equipment was basically collected, and the remainder of the funds was to be collected in installments or converted into investments based on construction progress.

During the contract fulfillment process, both sides gradually established mutual trust, and on the basis of the successful completion of this project, in 2012 Shineng started a full investment business in the country, actively participating in and promoting the local industrialization process.

In fact, most of the Guangdong-based enterprises that invest in Africa started their businesses through import and export. From 2003 to 2012, the trade volume between Guangdong and Africa grew approximately fourteenfold. In 2015, the import and export volume between Guangdong and Africa reached USD43.1 billion, accounting for about one-quarter of China’s total trading with Africa.

Multiple Risks Exist

Despite adequate psychological preparation, trouble can continually arise from the moment investments are made. For example, to build a local store or factory, an investor must first figure out how to provide electricity.

“As the electricity supply system in African countries is unstable, each local household needs to have a power generator of their own,” Chen said. For us to open a dealership, we also needed to provide electricity for ourselves, and the commercial costs were therefore very high.”

In fact, the entire continent of Africa, not just Nigeria, lacks traffic, communication, and electricity infrastructure, and some countries do not even have their own manufacturing industry or are in desperate need of it.

The poor economic foundations and inadequate facilities have caused trouble for Shineng. Hou used industrial parks found across China as an example and explained to the reporters that China provides infrastructure as well as land and tax preferential policies to promote investment in industrial parks, but things are entirely different in Africa.

Land is private in Africa and cannot be allocated by the government, while the construction of infrastructure such as roads and water supply, depends on the enterprises themselves. Preferential tax policies are also difficult to obtain and local talents are limited. Dispatching employees from abroad requires high labor costs, with a one-year work visa costing two to three thousand dollars, hardly a small burden for investors.

“An industrial park represents a cluster of industry-chains, and their development represents a wise choice though it is not an easy thing to undertake due to their huge investment scale and long-term construction cycle,” Hou said.

Therefore, Hou Jianxiong made a change in thought, which was to establish joint ventures and carry out investment programs on a one-by-one basis. Shineng has established a power equipment company and a fuel generation plant in Uganda through joint ventures, both of which were also the first China-Uganda enterprises to be incorporated.

The dealerships established by Chen in Nigeria are yet to turn a profit. To her surprise, the local dealerships could not even open their doors to customers because of the security problems. “Everyone who comes in has to go through strict registration and security procedures,” Chen said. “Do you think dealerships are useful in an environment where you can’t open for business? So, we need to keep spending a large amount of money on branding, conducting various activities, and dealing with all social classes.”

Aside from that, there exist common risks such as political strife and regime change, disease, terrorist attacks and religious issues. At the time of the Ebola outbreak, Shineng required all Chinese employees in Africa to return home, and Choice International’s local employees don’t typically work harder for higher salaries.

Laws, Capital Are Increasingly Difficult

The good news is that some risks can be avoided by buying insurance. As China’s only policy insurance company, China Export & Credit Insurance can provide political risk guarantees for Chinese enterprises’ exports and overseas investment as well as certain commercial risk guarantees.

Risks like terrorist attacks, riots, and exchange restrictions can be avoided by buying CECIC’s products, Hu Yongfeng, deputy director of the CECIC’s project risk business office in Guangdong told Yicai Global.

However, CECIC does not cover some areas such as legal risks. Chen holds that this area is the biggest threat for investments in Africa, even more troublesome than the poor infrastructure. “As long as someone writes a complaint letter, (the company) will be involved in a lawsuit,” she said, adding that her top priority is to establish a legal department for the company. “Lawyers and legal teams employed are all locals, which helps with working to local customs and culture.”

Just like the huge differences among China, Japan and South Korea in East Asia, the 54 countries in Africa each have their own distinct features, Li Dawei, a senior member of the Association of Chartered Certified Accountants told Yicai Global. Even two neighboring countries, like Ethiopia and Djibouti, are totally different in terms of language, culture, eating habits and business & trade environment.

“Influenced by Europe and America, Africa has its own sound legal system. Chinese enterprises can not use their unfamiliarity with local laws as an excuse and adopt a separate legal system to run the company unilaterally,” Li said. “Since some Chinese enterprises which enter Africa market at an early stage have not abided by local laws strictly, some countries in Africa are wary of cooperating with Chinese enterprises.”

Hou believes that funding shortages represent the biggest challenge. Although the bank takes measures to support the Belt and Road Initiative, it is still hard and costly for companies, especially private ones, to raise money for their globalization strategy, he said.

In recent years, companies have usually borrowed money against domestic assets to invest abroad. Sometimes, lenders would still refuse companies using real estate as collateral, Hou added

Chen agrees with Hou on high financing costs, she decided to focus on company growth before seeking financial support from the government or the industry. Choice International signed an investment agreement with China-Africa Development Fund in April 2015 after two years’ due diligence.

She indicated that the capital injection provides encouragement for Choice and emphasized that private enterprises are the pacesetters for going global strategies, capable of releasing significant market potential.

Brand Building

After experiencing a period of initial hardship, Choice International’s automotive business in Africa began to flourish. A little over one month ago, Dangote Group, a Nigerian multinational industrial conglomerate, purchased 150 Trumpchi brand GA3S cars produced by GAC Group from Choice International and donated them to the Nigerian police, setting a national record for donations.

Chen believes that building a reputable brand is the foundation for the long-term development of the company in Africa. Whether it is Choice International’s own products or agency products, they should all be of a high quality.

The advantage of doing this is that once a reputable brand is established, it can achieve long-term development. Chen is already considering investment in setting up an electrical appliances plant and aims to introduce 10 Chinese brands into the African market over the next five years.

Hou also chose to focus on brand development. He believes that in addition to carefully choosing a specific entry point before deciding to go overseas, there are two other factors that must be considered – the funding and technical thresholds. In other words, the projects selected by a company should not be easily replicated so as to avoid the fierce competition that comes with it.

Due to the shortage of materials supply in Uganda, raw materials and semi-finished products for electrical equipment such as transformers need to be exported from domestic sources and then assembled by local factories. Guangdong Shineng Electric Equipment Group took over a transformer factory in Dongguan, which was previously plagued by overcapacity, to act as a supplier for the African facility.

“Our transformers are produced according to domestic industry standards, while many products in the market are low-quality imported products, which often break down in three years,” he said. “In contrast, we set up local factories, with local after-sales services and we have an advantage as our products are good quality and are locally branded.”

At present, Shineng is expanding from Uganda to countries such as Kenya, Rwanda, South Sudan, Madagascar and Nigeria.

Focusing on Solutions

Apart from the aforementioned risk prevention and control measures such as purchasing insurance and building brands, Hou also suggested that Chinese companies team up with local players such as state-owned enterprises or private firms.

There is no industry restrictions on partnerships. It can be cooperation between capital and industry, between industry and industry, or cooperation in technology. “As long as there is an entry point, everyone can cooperate, which can not only enhance the ability to resist risks, solve fund shortages but can also lead to share resources and even solve personnel problems,” Hou said.

When China Export & Credit Insurance, more commonly known as Sinosure, provides services, it applies the same standard to all enterprises, whether they are state-owned or private enterprises, Hu said. State-owned enterprises have an advantage in mobilizing domestic resources, mainly because private firms have not learned to apply reasonable rules to obtain financial support.

“The reason that private enterprises have difficulties when looking for bank financing is often that these companies do not operate according to international standards,” he said. “For example, a private firm planned to make investments in Africa and we found that its financial report was very informal. If it didn’t find a professional accounting firm to make the report, how can a lender provide credit?”

When giving advice to companies wishing to expand into Africa, Hou and Chen expressed similar sentiments.

Chen said that many markets in Africa are still in the early stages of development with many opportunities. “If you don’t go out and try, you will never be able to go out, you must develop it yourself, and will gain experience in the process of long-term cultivation,” she said.

“Africa is a vast world where you can make a difference,” Hou said, adding that when you go out, the world is your home.

Source: yicaiglobal.com

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