China Inc.’s Investment in Africa - A Discussion on Resources & Governance

Presented by

Dr Martyn Davies, Chief Executive Officer, Frontier Advisory

Presentation to Emerging Actors in Africa:

Impact and Opportunities for EU-Africa and Global Relations

Maputo, Mozambique, 23rd April 2012

CONFIDENTIALITY and DISCLAIMER: This document and its contents are strictly private and confidential, privileged and for the information of the intended recipient only. Frontier Advisory makes no representations or warranties in respect of the content of this document, and will not be liable for any loss or damage of any nature that may arise from this document, the content thereof or your reliance thereon. Should you have received this document in error please contact the sender immediately and destroy this document.

Primary Objectives of the WEF Chinese Emerging Globalizers Project

1. To stimulate and promote dialogue on the emerging best practices of Chinese Globalizing firms focusing on global corporate citizenship

2. Scale up the efforts on the globalization process and corporate citizenship made by Chinese companies and jointly demonstrate the emerging best practices of these globalizers

3. Provide to current, and potential members of the group an opportunity to learn and exchange practices which have made each of them a potential leading Chinese Globalizer and thus, have a long-term impact on Chinese companies as a whole

The Profile of China’s Outbound FDI

China’s Transitioning Economy

Leading

producer

Historical Projecting forward in the

post-crisis global economy

Post-Crisis

China

Leading

consumer

Where China’s engagement of Africa

currently is positioned on the Chinese

development curve - ahead of the “economic

reality” due to political enablement

China’s current position in the global

economy as it is rapidly transitioning from a

producer to investor to consumer –

acceleration of process post-crisis

Leading

investor

China’s Outbound FDI 2010

For the past decade, many China companies have increasingly established

international operations in markets around the world. As part of this evolution, the

country has become a major outbound investor. In terms of foreign direct

investment, China ranks fifth in the world in 2010, with outbound FDI approaching

US $70 billion, and a five-year compound annual growth rate (CAGR) of 34%

between 2006 and 2010

Source: WEF, BCG, Chinese Globalizers Report, January 2012

China’s Outward FDI Breakdown by Industry, 2006-10

Source: Source: Statistical bulletin of China's outward foreign direct investment

(2006-2010), BCG analysis

China’s Outward FDI by Region, 2006-2010

Hong Kong and Macao account for 86% and 0.2% of China's outward FDI in Asia in 2010

respectively 2. British Virgin Islands and Cayman Islands account for 58% and 33% of

China's outward FDI in Latin America in 2010, respectively 3. Investment number adjusted

due to discrepancy between total amount and regional sum-up

Source: Source: Statistical bulletin of China's

outward foreign direct investment (2006-2010), BCG analysis

China’s Domestic Rebalancing

With rising costs of production in China, increased pressure on manufacturing to relocate to take advantage of lower cost & improving infrastructure

China’s changing industrial

structure & Implications for

Africa

Manufacturers relocate to southeast Asia – possibility of Africa becoming a destination for Chinese manufacturing? Are African governments actively courting Chinese manufacturing investment?

As China’s growth model becomes more balanced – less dependent on fixed asset investment, shifting to domestic oriented services. Will this have negative repercussions for Africa’s supply of commodities?

Chinafrica – The Economic Growth Coupling

-2

0

2

4

6

8

10

12

14

16

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80

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81

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01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10f

%

Africa real GDP growth China real GDP growth

1999-2008: Growth correlation of 0.919972!

Almost an absolute correlation

after 1999 – Coincided with

China’s New Africa Policy

Africa’s growth is tracking the

V-shaped recovery of China

since Q1 2009

No correlation in growth trends

between China and SSA prior to

1996

African growth tracked

downwards China’s as fixed

asset investment spend was

cutback from Q4 2007

Africa’s growth has been robust

on back of strong resource

demand from the PRC

Source: IMF, EIU; Frontier Advisory analysis

The China-Africa Growth Coupling

China-Africa Trade Expansion

China-Africa Merchandise Trade (1995-2010)

Trade up from $3.9bn in 1995, to $106.8bn in 2008 and $123bn in 2010

Target of $100bn by 2010 – met in 2008; again in 2010

On the back of rising commodity prices, trade has picked up

Driven by commodities; mainly oil

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

US

$m

China's importsfrom Africa

China's exports toAfrica

Source: China Customs,

World Trade Atlas

>$20bn

10-12bn

5 -7bn

3 - 4.9bn

0.9 -2.9bn

Legend (US$)

Africa’s Rising Trade Dependence on China

Top 10 African

Exporters to China

in 2010

Source: China Customs, Frontier Advisory

(2011)

African Exports to China, % of GDP, 2010

Source: IMF, Frontier Advisory Analysis 2011

China’s Top 10 Trading Partners in Africa, 2009

Source: China Customs

2.05

2.11

2.50

5.13

5.16

5.86

6.36

6.37

15.14

17.05

0 5 10 15 20

Benin

Congo, Rep.

Morocco

Algeria

Libya

Egypt

Sudan

Nigeria

South Africa

Angola

US$ billion

China’s Major Trading Partners in Africa

China’s Trade with Africa by Country

Source: China Customs, World Trade Atlas; Frontier Advisory analysis

Rank By total trade Value

China's top export

destinations Value

China's top sources

of imports Value

1 Angola 24,813.6 South Africa 10,807.19 Angola 22,809.91

2 South Africa 22,230.8 Nigeria 6,694.59 South Africa 11,423.58

3 Sudan 8,609.38 Egypt 6,039.18 Sudan 6,654.05

4 Nigeria 7,763.05 Liberia 4,386.32 Libya 4,505.63

5 Egypt 6,956.87 Algeria 3,999.09 Congo 3,154.69

6 Libya 6,567.03 Morocco 2,484.25 Zambia 2,549.22

7 Algeria 5,173.36 Benin 2,273.21 Congo, Dem. Rep. 2,466.34

8 Congo 3,508.33 Libya 2,061.39 Algeria 1,174.27

9 DRC 2,940.09 Angola 2,003.71 Nigeria 1,068.47

10 Morocco 2,934.01 Sudan 1,955.33 Mauritania 968.40

Share of

total 74.19% 71.38% 89.42%

High concentration of trade partners

The Investment Relationship

Growth in China’s outbound flows (2003-2008)

Source: Ministry of Commerce of PRC, National Bureau of

Statistics of PRC, State Administration of Foreign Exchange, 2009

254%

504%

531%

1,858%

2,793%

5,661%

7,239%

0 2,000 4,000 6,000 8,000

LatinAmerica

Europe

NorthAmerica

World

Asia

Oceania

Africa

%

FDI to Africa has been

increasing rapidly but

from a very low base

By 2006, 800 Chinese

companies in Africa,

dominated by activity of

SOEs

By 2008, 2,000 Chinese

companies in Africa

including also more small

private businesses

The Investment Relationship

China’s Outward FDI stock to Africa (2003-2009)

In 2009 by country, the largest

recipients of FDI stock were:

South Africa (US$2.3bn)

Nigeria (US$1.03bn)

Zambia (US$843.97m)

Algeria (US$751.26m)

Sudan (US$563.89m)

Source: Ministry of Commerce of PRC, National Bureau of

Statistics of PRC, State Administration of Foreign Exchange, 2010

0.49 0.90

1.60

2.56

4.46

7.80

9.33

0

2

4

6

8

10

2003 2004 2005 2006 2007 2008 2009

US

$ b

n

Algeria

Tunisia

Libya Egypt

Sudan Chad

Niger Mali

Mauritania

Morocco

Sierra Leone

CAR

Ethiopia

Somalia

Djibouti

Cameroon

Nigeria

Senegal

DRC

Republic of

Congo Kenya

Uganda

Gambia

Angola Zambia

Malawi

Burundi

Rwanda

Tanzania

Madagascar

Mauritius

Guinea

Namibia Botswana Mozambique

South-Africa

Swaziland

Lesotho

Zimbabwe

Gabon

Equatorial

Guinea

Liberia

Cote d’

Ivoire

Togo

Be

nin

Burkina Faso

China’s outward FDI

flows, 2009, US$

millions

10.1-20

5.1-10

0.1-5

China’s FDI flows into Africa

21-50

>50

Source: MOFCOM

China’s Mining Investments into Africa – H2 2011

China’s Top Resource and Infrastructure Projects (2008-2011)

Ethiopia

Uganda

DRC

Zambia

Botswana

RSA

Nigeria

Cameroon

Mozambique

Zimbabwe

Ghana

Guinea

Liberia

Sierra Leone

Mining: Kalia iron ore

deposit - $2.7bn

Mining: Simandou iron ore project - $1.35bn

Mining: Bauxite and

alumina refinery - $1.2bn

Power: Sunon Asogli

gas-powered plant -

$450m

Power : Bui dam

hydropower project -

$622m

Infrastructure: oil & gas,

road, rail and power - $12.87bn

Mining: Bong iron ore

deposit - $2.68bn

Mining: Tonkolili iron ore

mine - $1.5bn

Infrastructure: Container

terminal - $154m

Infrastructure: 200MW

Memve’le hydro dam -

$795m

Mining: Copper and

cobalt concessions -

$2.6bn

Infrastructure: Rail,

road, power and

social infrastructure

- $6bn

Infrastructure:

150MW Zongo

hydro dam - $367m

Infrastructure: 1.87GW

Gibe III hydro dam -

$1.75bn

Infrastructure: 530MW

Ayago North hydro dam -

$900m

Mining: Luanshya Copper

Mine and Chambishi

smelter - $600m

Infrastructure: 1.3GW Tete

hydro dam - $2.4bn

Infrastructure : 300MW

Kariba South expansion -

$400m

Infrastructure : 600MW

Morupule B coal-fired power

station expansion - $1.6bn

Mining: Frischgewaagd-Ledig PGMs

deposit - $877m

Mining: Chrome production - $440m

Source: Frontier Advisory

China’s Emerging Globalizers & Corporate Citizenship

Emerging Trends Impacting on Chinese Globalizers

Chinese companies are expanding to the

more developed regions, which often

have stricter regulations and

requirements

Chinese "exporters" are expanding

beyond their traditional role along the

value chain, leading to higher

requirements in corporate citizenship

and brand building

The scale and complexity of overseas

projects are increasing, often requiring

consideration on broader environmental

and social issues

Increasing localization in overseas

markets raises the necessity of utilizing

local talents, from product design to

sales and marketing

Pure price and cost advantages no

longer guarantee success in global

competition, urging for more

differentiation factors

Both domestic and foreign authorities

are raising the bar and requirements on

corporate citizenship activities

NGO's and media are increasingly

monitoring companies' daily operations,

and promoting and sharing good

corporate citizenship practices

Employees' awareness on job security

and welfare has been raising, and needs

to be handled with care by the

companies

Consumers are valuing more the "social

purpose" of a company, and start

following companies' practices with

advanced social networking services

Chinese Corporate Citizenship Practices are still at an Early Stage

More and more companies are demonstrating corporate citizenship practices

in overseas markets Overseas corporate citizenship practices by both SOEs and private companies are increasing

rapidly in the past few years. Progress has been observed across different industries

Variety and impact of these corporate citizenship practices are increasing Scale and coverage of the contribution are expanding

A few entrepreneurship and corporate citizenship practices have emerged recently

Engagement with external stakeholders is becoming more frequent Chinese companies have become more sophisticated in responding to external requests and

engaging with external key stakeholders

Cooperation with international and domestic NGOs is more common than before

Companies are taking a more systematic approach towards global corporate

citizenship More related reports published, and companies are beginning to adopt international standards

while conducting these activities

Leading companies like COSCO, China Minmetals, and Huawei have established internal

management system and developed future plans on global corporate citizenship

Chinese firms and Corporate Citizenship Practices

Progress Across the Various Sectors

The Scale of Financing is Rapidly Expanding

Some Chinese are Already following International Practice

Challenges Remain…

Some companies still see corporate citizenship activities as a

cost, but actually it’s an investment where the returns are the

company’s core competitiveness and future development

Talent scarcity is a big issue for us. We need to understand and

to communicate with local communities to perform citizenship

practices but there are very few people who have both the

language capability and management skills

It’s common for companies to conduct similar practices in the

overseas market as they do domestically. With rigorous

regulation in the home market, you cannot expect firms to take

even greater initiatives to be more responsible when abroad.

It’s complicated to get incentives for practicing citizenship

activities. For example, we need to go through many processes

to get a tax reduction for a small amount of donation, so

sometimes we just forget about that….

Concluding Comments

• China’s Africa foreign policy is “de-linked” from its domestic economic situation

• Upcoming political transition in China will not result in a change in Beijing’s Africa

policy – reaffirmation will take place at FOCAC (Beijing) in July this year

• There is a growing dependency factor for African economies on China’s fixed

asset investment spend – this will only increase for mineral exporting economies

• Resources are the focus (oil and solid minerals) with agribusiness to grow in

importance in the short term

• Without “state capital” the bulk of Chinese investment in Africa would not be

competitive (the majority of the finance has gone into power infrastructure)

• Arguably, over the medium term, African economies that align to their

development needs to China’s strategic interest will succeed, others will falter

• China’s “developmental model” is increasingly influencing African states micro-

economic policy i.e. the “developmental state”

Questions & Answers

CONFIDENTIALITY and DISCLAIMER: This document and its contents are strictly private

and confidential, privileged and for the information of the intended recipient only. Frontier

Advisory makes no representations or warranties in respect of the content of this

document, and will not be liable for any loss or damage of any nature that may arise from

this document, the content thereof or your reliance thereon. Should you have received this

document in error please contact the sender immediately and destroy this document.

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