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When Kenyan entrepreneur Walter Ruigu embarked on his journey to China in 2009, he had no clue this would be the place he’d spot so many business opportunities for a budding African entrepreneur.

Today CAMAL prides itself in successfully assisting companies to leverage China as a source of supplies, capital & technical expertise.

This week he speaks with Nillah Nyakoa about what it takes to find success in China and above all the good business lessons he has grasped over time, working with clients from both China and Africa, and how those lessons have helped steer his company in the right direction.

Listen to the rest on China Radio International Website:

 

I have just returned from a sourcing trip in Tangshan and I was marked by the blue sky and white clouds. In all my years in China, I have never seen Tangshan like this, let alone during winter. I have witnessed the same scene in the last week in Dingzhou, Anping, Shijiazhuang and other steel producing cities of China.

Clean Air at a Cost

New regulations in China have mandated anti-pollution measures / equipment / quotas / shutdowns etc. which have all led to increased costs amongst restricted supply. In Tangshan for instance, coal power is no longer permitted as a source of power for producing steel. The alternative, natural gas, is a cleaner energy source, but one that has lead to an increase of USD 10-15 per ton of steel.

With coal no longer a permissible source of (cheap) power, most coal processing machines lay ideal in most steel mills

Although most people appreciate the breathable air, there are hundreds of mills and processing plants that have been shutdown leading to lost income, unemployment and rising prices. Where shutdowns have not been mandated, increased costs have rendered many firms noncompetitive (locally and internationally) leading to bankruptcies and closures.

With the new regulations, electric furnaces have been targeted due to their typically high pollution and often smaller size in comparison to blast furnaces. The result has been extremely tight supply of steel especially billets that are necessary for downstream production, and which once constituted a major portion of China’s steel exports.

Not everyone is Upset with New Regulations

The biggest beneficiaries of the strict regulations have been blast furnace suppliers of steel billets. They have seen profits sour with figures of over USD 150 per ton. With some factories producing thousands of tons per week, business has been booming as artificially high profit margins continue.

On the other hand, downstream industries have been forced to buy raw materials at these elevated prices and ultimately the costs are being passed on to consumers. With fewer producers, elimination of the (Cheaper) electric furnace producers and new quotas, billet manufacturers have ripped immense profits during this period.

End of Cheap China?

Those who have paid close attention to the steel industry can only reminisce when steel prices were sub USD 150 compared to USD 600 per ton today. It is highly unlikely that the price will ever return to these figures.

Excessive steel billet (such as above) prices have caused a knock-on effect on downstream industries and manufacturing

Given that profits of the billets are abnormally high, it is possible that new regulations targeting certain enterprises will tame these margins therefore resulting in knock on effect for downstream industries, but its clear China has turned a chapter of cheap steel at all costs.

‘New Normal’ and the Changing China Opportunity

So what does all this mean for international firms looking to China for procurement or investment? Next week, I shall examine implications of this new normal.

 (Walter Ruigu is managing director of CAMAL Group, a trade and investment advisory firm based in Beijing, Nairobi and Lusaka and can be reached at wruigu@camaltd.com)

There have been countless articles and books about China’s reign as the factory of the world coming to an end. While it is true that wage increases are making some of China’s lower-end industries, such as textiles, less competitive vis-à-vis other low-cost countries such as Viet Nam, Cambodia and Bangladesh, China remains one of the top procurement sources for mid- to high-tier products. For instance, heavy equipment exports from China experienced a growth rate of about 30 percent in the last decade alone. Even as some of the lower-end industries move out, there is more to a country’s competitive supply chain than labor costs. China maintains a set of key factors that will continue to make it a competitive exporter even as the economic landscape shifts. These include:

• High-quality infrastructure (especially export-related infrastructure): China’s rail and road infrastructure, particularly along the coastal cities, are among the most developed globally. With a history of double-digit investment in infrastructure, China’s ports complement the rail/road infrastructure. Shanghai long surpassed Singapore as the world’s busiest port and it will be a while before key competing countries can match China’s current (and continuously developing) infrastructure.
• Increasing qualified labor force: China produces hundreds of thousands of graduate engineers and scientists each year to be absorbed into the local industries. Moreover, China now has the world’s largest student population studying overseas with a sizeable number returning upon completion of their studies. Although there has been renewed attention to quality rather than quantity in the number of graduates, the increasing education level will boost China’s competitiveness vis-à-vis some of the other low-cost sourcing destinations.
• Growing research and development expenditure leading to higher innovation capacity: Despite the reputation for copying, China’s innovation has continued to pick up pace. A report by McKinsey & Company (Greater China) highlights innovation in areas such as renewable energy, consumer electronics, instant messaging and mobile technology. As internal and external competition increases, China is also focusing on price reduction, adaptation of business models and supply chain development. This will lead to the elimination of less efficient firms, both domestically and those focused on the export market.
• Lower costs relative to industrialized countries: Despite double-digit growth in both wages and currency appreciation during the past decade, China’s minimum wage still stands far below that of industrialized countries. Rising wages are correlated with increasing productivity. Therefore countries competing with China for lower costs will have to also compete with increased productivity and vice versa.
• Specialization, not only at sector level, but also at product level: China’s specialization in various products remains unparalleled globally. There are entire towns dedicated to producing a single product. For instance, Shenyang, a city in northeast Liaoning Province, has developed a reputation for its heavy industry, particularly in the manufacture of automobile and light machinery. The Pearl River Delta is known for textiles/electronics industries, whereas Shenzhen has become the IT hub of China. Moreover, the product range available in these agglomerations is diverse, catering for low- to high-end products, resulting in differentiation as a key competitive factor.
• Pro-export policies: It is true that the Chinese authorities have decided to alter the export-led growth model to one focused on domestic consumption. However, the country’s “going out” policy combined with an increasing saturated domestic market, especially in sectors related to fixed assets investment such as steel, cement and heavy equipment, continues to have explicit support (via export rebates or subsidies) or tacit support (high barriers to entry, licensing requirements), especially at local level. This support will continue to boost Chinese exports’ competitiveness – at least in the short term.

A shift inland: As the coastal areas become expensive, investment in areas such as Chengdu and Chongqing, which are a distance from the coast, continues to see increasing direct investment from both local and foreign firms. This is not to say that the inland does not pose its own problems, but over time it may prove easier to shift inland than abroad.

This article originally appeared in the Chinafrica Magazine, Why China Remains a Major Sourcing Destination

In the Chinese zodiac calendar, 2015 is the Year of the Sheep. Some say it is the zodiac sign shrouded in bad luck, not only for personal issues such as marriage and childbirth but also for business. So what can the Sino-African trader and investor look forward to?

1.An economy continuing to moderate – With China having sustained double-digit growth for almost three decades, the government policy now is to aim for “moderated” growth of 7.5 percent and adjust the economic structure with greater emphasis on domestic consumption. The 2015 outlook will see the growth rate continue to decline as less investment goes into fixed assets and government spending comes under more scrutiny.

2.Increasing prominence of the China (Shanghai) Pilot Free Trade Zone (the Shanghai FTZ) – The Shanghai FTZ represents one of China’s most ambitious economic reform policies. It goes beyond its predecessors, the special economic zones, with more liberal policies and regulations, and more sectors hitherto closed to foreign investors opened up. Foreign trade in the Shanghai FTZ exceeded $120 billion in its first year of operation. Pledges have been made to replicate the Shanghai FTZ policies in other areas.

3.Continued crackdown on corruption  – More actions against “flies” (low-ranking officials) and “tigers” (high-ranking officials) are expected as the government continues its fight against what it views as the biggest threat to the stability of the Party and society – corruption. Foreign and local businesses must be aware that China’s business environment is evolving. What was the acceptable modus operandi in the past may no longer prevail.

4.Continued focus on Africa – 2015 will witness the Sixth Ministerial Conference of the Forum on China-Africa Cooperation (FOCAC) in South Africa. The conference will review the political, economic and social commitments made during the 2012 FOCAC in Beijing. China has always exceeded previous commitments in past forums; in 2012, Beijing announced a $20-billion credit line to Africa. China to surpass this commitment can be expected once again.

5.Rule of Law – One of the key outcomes of the Fourth Plenary Session of the 18th Central Committee of the Communist Party of China, was a greater emphasis on law. 2015 will see the implementation of commitments from the plenary session. Combined with the anti-corruption drive, a greater emphasis on the law will change the way business is done in China and alter the overall social landscape.

6.Increasing consolidation of Chinese firms, especially in mining -As China continues to pursue economic reforms and develop into a world economic power, the government has laid down clear policies to consolidate fragmented sectors that result in inefficiencies in the economy and exacerbate environmental issues. Tens of thousands of coal companies will be consolidated into more than 20 large enterprises. 2015 will see smaller enterprises going out of business or being acquired by their larger counterparts. Foreign companies should take the initiative to engage with the smaller companies in overseas projects.

7.Rise of private banking – China’s banking sector has long been dominated by state-owned banks led by the “Big Four.” However, with the continued opening up of the financial sector, companies such as Tencent have begun offering services hitherto closed to even domestic firms. As the government continues to rein in the infamous shadow banking, private actors including peer-to-peer lending schemes will increasingly find their niches. But the state-owned enterprises won’t accept this new competition without a fight.

8.China’s increasing role as an international economic catalyst – China is already the world’s largest economy on a purchasing power parity basis and will rightly claim that position in nominal terms in due course. Along with the construction of a New Silk Road, plans for a railway linking Beijing to Europe, and launching of the Asian Infrastructure Bank, China will continue to assert its place in the global economic landscape.

9.Increasing energy cooperation between China and the United States in Africa  – There is an African proverb: when two elephants fight, it is the grass that suffers. However, the two giants, the United States and China, seem increasingly likely to cooperate in Africa – at least on renewable energy. A key discussion at the recent Asia-Pacific Economic Cooperation summit in Beijing was on the U.S. proposal to partner with China on improving electricity capacity in Africa. While China will continue to undertake a majority of project contracting, particularly in the energy sector, more collaboration is expected on renewable energy projects in Africa.

10.Increasing mergers and acquisitions (M&A) – Chinese firms, primarily private equity and listed firms, saw an increase in overseas M&As in 2014, a trend expected to continue well into 2015. The key focus of M&As remains the natural resources China needs to continue fueling its economy as well as the high-end technology Chinese firms are looking to access.

As we head into the Year of the Sheep, African companies looking to do business in or with China should be cognizant of the changes taking place and adjust their China strategy accordingly to stay ahead of the pack.

This article originally appeared in the Chinafrica Magazine, What Lies Ahead

Chinese construction firms, typically referred to by the construction model of engineering, procurement, construction (EPC), have gained a reputation for carrying out some of the largest construction projects both domestically and overseas. In fact, China now claims more than half of the top 10 tallest buildings in the world and according to the weekly magazine Engineering News Record, more than 60 percent of major contracting projects in Africa are now being carried out by Chinese firms. A quick look at China’s Ministry of Commerce (MOFCOM) information shows that there are over 3,000 firms permitted to carry out international project contracting. So how does one identify a suitable EPC partner?

1. Can the EPC carry out overseas projects? Not every Chinese construction firm is permitted to undertake overseas projects and the MOFCOM maintains a list of permitted firms. Moreover, given the large domestic market, some firms may have no interest in venturing overseas.

2. What is the source of financing for the overseas project? If one were to pick a decisive factor in deciding if a Chinese EPC company is a suitable partner, the African partner must be clear on the source/type of financing for the proposed project. This is also directly linked to the type of business cooperation model, such as a turnkey EPC project, Build-Operate-Transfer (BOT), Public Private Partnership (PPP) etc. • If a project has financing, then a large majority of firms would be able to carry out the project. However, if one requires financing, then one must address a new set of questions on how the EPC will recoup its financing:

(1) Does the project have sovereign guarantee?

(2) Can an international financial institution guarantee the project?

(3) Can a local financial institution guarantee the project?

• If the above is possible, then the pool of cooperation partners remains significantly large, but will reduce for each question answered “no.”

• If the project cannot offer any of the above guarantees, then a business case for the project must exist:

(1) Does the project have a feasibility study from a reputable institution?

EPCs will more readily consider projects that do not entirely depend on the market, such as power projects that can be backed by a power purchasing agreement.

(2) Does the project require the EPC to carry out the study? This will significantly reduce the type of interested EPC companies in the project.

3. What is the structure of the EPC? There are projects that are more favorable to state-owned companies as opposed to private companies. Moreover, even within state-owned companies, some projects are more suited to central government firms, i.e. those based on government-togovernment agreements or those that require financing from Chinese state-owned policy banks, such as the Export-Import Bank of China or China Development Bank.

4. What are the technical requirements of the project? For most projects, Chinese EPC firms are able to be the main project contractor while subcontracting specific sections. However, only select firms are allowed to carry out projects that require very specific expertise, such as construction of an airport runway or nuclear facilities, especially if they are state-owned, as there are specific licensing requirements.

5. Where is the project? There are EPC firms that are not allowed to venture into certain geographic regions due to Chinese government regulations, internal policies within the firm that restrict intra-group competition, or simply because the EPC has no interest in venturing into a given area. For large EPC companies, such as China Communications Construction, Sinohydro or China Railway Construction, policies to reduce intra-group competition are particularly relevant.

6. To bid or not to bid? For certain projects there must be international bidding and some EPCs are simply not willing to bid. Reasons may be diverse, such as lower profits due to increased competition, a low chance of acquiring the project, the large investment that may be required to carry out the bidding process with an uncertain outcome, etc.

As Chinese EPC firms continue to expand their reach within the continent, it is crucial that their African partners remain cognizant of how these firms are operating on the continent in order to identify and select suitable partners.

This article originally appeared in the Chinafrica Magazine, Selecting a Chinese Construction Partner

This month’s column highlights some of the policies designed to attract foreign capital and enterprises to China (Shanghai) Pilot Free Trade Zone (SFTZ), the challenges these enterprises may face and the implications for African companies. We hope these tips will be useful in providing a basic understanding of China’s complex business environment and how to best navigate it.

Snapshot of some policies inside the SFTZ

The trial period for the SFTZ has been set at three years, during which regulations will be gradually eased to allow more openness within the zone. There are several liberal policies (vis-à-vis the rest of the Chinese mainland) that are bound to encourage foreign capital and enterprises to enter the zone. A few selected ones include:

• No minimum registered capital requirement for companies;

• A faster registration process and simplified requirements for not only domestic, but foreign enterprises as well (registration is supposed to take a maximum of two weeks);

• A more open service sector that cuts across industries ranging from entertainment to the health sector including various types of insurance;

• A program that will test free RMB convertibility, i.e. firms will be able to use a specialized account to access overseas RMB;

• Flexible interest rates within the zone;

• A more liberal tax system including the ability to make payments in installments;

• A more liberal policy toward the establishment of foreign-funded banks and joint-venture banks. Foreign banks will now be permitted to invest overseas and trade financial instruments with less restrictions;

• Less restrictions for incoming goods including more free time at the port;

• An upgraded international commodity trading and resource configuration platform;

• More level playing field between domestic and foreign firms in that no approvals will be required for activities not on the Negative List, i.e. permitted industries.

As the policies continue to be adjusted and implemented, authorities intend to use lessons learned during the initial trial period to expand some of the policies into other key cities in China.

SFTZ development: Some challenges

As the SFTZ takes off, there are still some areas that present challenges for foreign companies. These include:

1. The existence of a Negative List – the list reaffirms that the SFTZ is not a free-for-all and that some sectors such as mining, power services and education are still restricted for foreign investment. Whereas there are plans to continually reduce the number of sectors on the Negative List over the trial period, the pace and breadth of implementation still remains to be seen.

2. Policy gap between the SFTZ and the rest of China – although the SFTZ itself has liberal policies, these policies are confined to the zone. Companies that have a presence both inside the SFTZ and elsewhere on the Chinese mainland may find limits on what can be done across zone boundaries.

3. SFTZ policies are generally more favorable to domestic firms moving out than foreign enterprises coming in.

4. Given that the zone is still in its initial stages, there are still a number of policies that need to be clarified in the coming years. This includes the criteria for shortening the Negative List as well as some financial policies such as futures trading and various tax regulations.

Implications for African firms

The SFTZ is a large step forward for both domestic and foreign firms. African firms should be ready to explore what opportunities lie in the zone, especially for businesses not on the Negative List.

Those on the Negative List should pay close attention to evolving regulation in case their business areas become permitted. The SFTZ represents a more flexible source of partnerships with Chinese companies, which has the potential to overcome challenges related to currency controls, complicated regulations and bureaucracy that at times hampers the process of Sino-foreign cooperation overseas, especially when capital must originate from the Chinese mainland. Companies engaged in international trade will now be able to engage their Chinese counterparts with fewer restrictions and sidestep cumbersome procedures of the Shanghai Entry-Exit Inspection and Quarantine Bureau. This should ease overall trading between China and Africa. The fact that SFTZ policies are more favorable to outbound investment from domestic companies should encourage African companies to tap into this outflow of capital, especially in the resource sector and other similar areas that the Chinese Government has prioritized for overseas investment. By setting up within the SFTZ, African firms will be able to enjoy more liberal policies hitherto unavailable on the Chinese mainland.

This article originally appeared in the Chinafrica Magazine, Shanghai Free Trade Zone: Tips for Investors