As the saying goes, “the world is flat”. Economic borders between countries are being swept away by the wave of globalization. For example, after years of investments in Africa, can China reap any benefits in the future? And how should Hong Kong respond?
Hong Kong should take advantage of Africa’s swift rise
Thomas Chan, Director of the One Belt One Road Research Institute at Chu Hai College of Higher Education
China is the main source of capital for Africa
In terms of loans of a relatively commercial nature alone, such as those from the Export-Import Bank of China, a total of USD63 billion were granted between 2000 and 2015, covering all 54 African countries. Over the same period, the Export-Import Bank of the United States granted only USD17 billion in loans and was limited to five countries. Political and military factors were obviously the main considerations.
China and the US have radically different mindset towards aid
In 2015, President Xi Jinping announced that China will spend USD60 billion on funding Africa’s new major infrastructure investment projects, with the priority given to transport infrastructure as emphasized by the “Belt and Road” initiative. And as transportation between regions is becoming more convenient, investments in the manufacturing and service industries will go hand in hand with trade.
The United States’ investments in Africa are driven by politics and it often forces other countries to accept its political standards and requirements. The International Monetary Fund pointed out that China’s investments in Africa are not dependent on the degree of rule of law in a particular country. While this may lead to investment risks, it greatly helps local development. The USD60 billion in funding proposed by Xi in December 2015 is for promoting local economic development of different countries in Africa, which is very different from the old and new US/European colonialism and multinational corporations' investments.
For example, after experiencing a civil war, Ethiopia managed to achieve an annual economic growth of 10% in the past decade even though it has no oil or mineral resources and lacks export ports. China’s investments in Ethiopia had played a substantial role.
Africa’s future demographic dividend will be considerable
Africa will be the world’s strong growth region, with growth in the rest of the world slowing down or even becoming negative. According to the United Nations, Africa’s demographic dividend will become apparent in the decade before 2035. China’s large-scale infrastructure investments in Africa will precisely enable the future economic benefits brought by the demographic dividend to accrue earlier and more substantially.
According to the African Union’s 2012 plan, infrastructure in Africa would reach USD360 billion by 2040, but the African countries could only raise USD30 billion by themselves. The USD60 billion in funding proposed by China in late 2015 was just a start, with more to come. Subsequently, the USD10 billion loan granted by the China-Africa Fund for Industrial Cooperation can be redrawn. These figures do not even include the business investments from Chinese enterprises. China will be the largest investor in Africa’s infrastructure and industrial development. It should therefore also be the biggest beneficiary of the huge economic benefits when Africa’s demographic dividend translates into the world's factory.
Africa's development opportunities are huge. In the next three to five years, when the China-funded construction of railways and harbours are completed and link the African countries together as an integrated whole, the entire geopolitical landscape will change fundamentally.
How Hong Kong can respond
From the perspective of doing business, Hong Kong enterprises should follow the Central Government’s infrastructure investments to enter the markets of the various African countries, with the focus on trade and services. Take the example of various hardware and software for building a port economy, Hong Kong enterprises can contribute much.
The next is personnel training. Hong Kong can assist Africa in training related technical and managerial personnel at the Aviation Academy and the MTR Academy. Tertiary institutions should also run courses on the development of Africa in order to establish ties with Africa in terms of knowledge and personnel.
Hong Kong enterprises and the Government have never had a long-term development plan. For example, they often lag behind the need for education and personnel training. However, they will act quickly once business opportunities emerge. Hopefully, Hong Kong enterprises can follow the Central Government’s investments and kick off the development of Hong Kong’s relations with Africa in trade, commerce, as well as other ensuing areas.
Exploring the Industrial Virgin Land of Africa
Frank Leung, President of the Federation of Hong Kong Footwear
Frank Leung is a pioneer in opening up the African market, having established a factory in Ethiopia back in 2009. He describes Ethiopia as an industrial virgin land. Industry awareness is low and no major industry is very successful yet. His factory there is engaged in raw material processing, and the semi-manufactures and manufactures are exported mainly to the US.
Raw materials and labour supply encourages development
Leung feels that entrepreneurs wishing to “go global” must first ask themselves why they want to develop business there. “What is it that you want? Capital? Cheap labour? Or raw materials?” He was attracted by the quality sheepskin of Ethiopia when he first visited the country. He explains that Ethiopia is plateau terrain and the climate is dry. Therefore, sheep seldom have flea problems, which translates into premium sheep leather. Many fellow footwear manufacturers from Italy are buying raw materials in Ethiopia to make leather goods. As his business expanded, he decided on a major investment of $100 million in 2009 to build an integrated business chain that includes upstream wholesale and production of raw materials.
Cheap labour is also a consideration, yet Leung admits that Ethiopian workers lack enthusiasm. He said, “China is an agricultural society where seasonality and discipline are important, whereas in Ethiopia where sheep farming is the main livelihood, the pace of life is slow and workers are relatively unenthusiastic. It is part of the local culture. In the beginning, workers went home at sunset and there was no way to get them to do overtime. However, since cheap mobile phones became available, these new and important consumer products have created an incentive for working overtime.”
With backward infrastructure and systems, building goodwill takes time
As a trailblazer, Leung had to address a host of issues. Starting with the decision to set up a factory, he faced great transportation challenges due to geographical limitations. It took him six months to ship machinery from China to Ethiopia, where transport across highlands and inadequate infrastructure added difficulty.
However, relative to backward infrastructure, backward systems cause even greater inconvenience to investors. Leung laughingly said, “I have to fly over there in person and queue in front of the service window just to renew my license.” Professional services are similar. Unlike Hong Kong, where services are well-connected and you can get everything done in one go, all services are handled independently in Ethiopia, which is more complicated and time-consuming.
Leung says the biggest challenge of all in making a foray into a foreign market is establishing goodwill. “There was no shoe manufacturer in Africa before we set up our factory. With no traceable track record, professional buyers were worried that we could not deliver on time. Persuading clients to place the first order was therefore very difficult but had milestone significance.”
Import promotes diplomacy
China has been very active diplomatically in recent years. According to Leung, who has “gone global” for years, import is a soft power that promotes diplomacy. “The US has limited overseas infrastructure investment, and allowing foreign countries duty-free access to her market is already a huge ‘favor’. This economic-driven diplomatic approach is worth learning for China.”
By “going global”, China is taking the old path of Western countries who set up factories in the Mainland in the past. Leung feels that while seeking convenience and benefits on the economic and diplomatic fronts, it is vital to protect the environment. “Environmental protection is an important issue today and China as a major power should have adequate legislation in place to protect overseas resources and environments.”
Mutual support between Chinese traders
Hong Kong businesses investing overseas may be worried by anti-Chinese sentiments. Leung points out that while anti-Chinese political risks exist, Africans would not rashly take hostile actions against Chinese people. He suggests entrepreneurs wishing to invest in Africa establish contact with the local Chinese chambers of commerce, so that they would have a channel of assistance if needed.
Leung’s business is developing smoothly in Ethiopia. While striving for business growth, he would also like to promote development of the country. “Helping Ethiopia develop is a meaningful cause to me. I feel I am needed here, and I hope in ten years’ time to introduce African goods to all parts of the world and create a favorable trading environment that is as vibrant as the developed world.”
