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The China Analyst
                                                                                                       Now online at
                                                                                          www.thebeijingaxis.com/tca




A knowledge tool by The Beijing Axis for executives with a China agenda                        September 2011




                  Building a new era




                                  China's business in the developing world


                                                                               Features
         Resources for Infrastructure: China's Role in Africa's New Business Landscape    6
                          China and Latin America: Untapped Sources of Added Value        10
               Rising Stars: China’s Emerging Construction Machinery Manufacturers        14
          The New Scramble for Africa: Emerging Powers on the Emerging Continent          18

                                                                            Regulars
                            China Sourcing Strategy: A New Approach to Procurement        28
                            China Capital: Inbound/Outbound FDI & Financial Markets       32
                      Strategy: Mapping China in the Global Contracting Industry/CCC      36
                                                       Regional Focus: CHINA-AFRICA       42
                                                   Regional Focus: CHINA-AUSTRALIA        44
                                               Regional Focus: CHINA-LATIN AMERICA        46
                                                       Regional Focus: CHINA-RUSSIA       50
The China Analyst   September 2011
Tanzania National Stadium             Modern Sports Stadium
 Dar es Salaam, Tanzania               Ndola, Zambia
 Capacity: 60,000 people               Capacity: 40,000 people
 Completed in 2007                     Construction to commence in 2011



                   EMBLEMS OF A NEW ERA




 Sheraton Hotel & Towers               Dakar Grand Theatre
 Oran, Algeria                         Dakar, Senegal
 The first Sheraton hotel in Algeria   Covers two hectares; capacity of 1,800 people
 Completed in 2002                     Completed in 2011



Notable Chinese Construction Projects in Africa




 Lom Pangar Hydropower Project         African Union Conference Centre
 Cameroon                              Addis Ababa, Ethiopia
 Includes 30-megawatt power station    Covers a floor area of 51,887 square metres
 Construction to commence soon         Under construction
The China Analyst     The Beijing Axis




At the Highest Level
Reflecting on the momentous events happening in the world right now and in the last few turbulent
years, it is clear that the world is changing significantly. China is a big part of this change; in fact, its emer-
gence has become instrumental to a new era that is affecting every region of the world, yet none more
so than the developing world. China is bringing unprecedented change to Latin America and Africa, and
a changing business landscape brings new opportunities.


                           In the last edition of The China        Of course this edition also features all the usual sections on
                           Analyst, we looked at the changing      China's trade and investment, procurement, and regional busi-
                           business landscape within China,        ness. And I am also pleased to announce the launching of a
                           focusing on certain key industries      new website dedicated to The China Analyst, at www.thebeijin-
                           and outlining the opportunities         gaxis.com/tca, where the contents of this and previous editions
                           that can still be found for foreign     can be found in an interactive online format.
                           companies. In this edition, we shift
                           our focus to China's impact on the      I trust our readers will enjoy this edition of The China Analyst,
                           wider world, and especially on          and as always we welcome your feedback.
                           the regions where China's pres-
                           ence and influence have been            Kobus van der Wath
                           strongest, namely the developing        Founder & Group Managing Director, The Beijing Axis
                           world.                                  kobus@thebeijingaxis.com

Africa and Latin America have experienced the most signifi-          The China Analyst - September 2011
cant impact of China's newfound engagement with the
developing world, an impact which the cover of this maga-             Published by              The Beijing Axis
zine has boldly dubbed 'a new era'. China's expanding reach
                                                                                                3806 Central Plaza
is having a profound impact on Africa. Here, China's brand
of state-led capitalism is serving to breach a heritage of risk                                 18 Harbour Road
aversion by foreign investors, and in doing so, contribute to                                   Wanchai
economic growth in many parts of the continent. As our first                                    Hong Kong, PRC
lead feature illustrates, by means of an essential exchange of
resources for infrastructure, China is playing a crucial role in                                Tel: +86 (0)10 6440 2106
a new construction boom on the continent.                                                       Fax: +86 (0)10 6440 2672
                                                                                                www.thebeijingaxis.com
With a rapidly growing trade and investment relationship
                                                                      Executive Editor          Kobus van der Wath
in recent years, China's business with Latin America has to a
large extent been characterised by an exchange of resources                                     kobus@thebeijingaxis.com
for manufactured goods. Yet as our second lead feature envi-          Editor                    Barry van Wyk
sions, the relationship is now set to enter a new phase of                                      barryvanwyk@thebeijingaxis.com
higher value added investment and trade, with wide impli-
cations for Latin America.                                            Editorial Board           Lilian Luca
                                                                                                luca@thebeijingaxis.com
China is not the only new player in these developing regions,                                   Cheryl Tang
however. In our fourth lead feature we outline the trade and                                    cheryl@thebeijingaxis.com
investment activities in Africa of the other BRICS nations,
revealing how the likes of India and Brazil are in their own                                    Javier Cuñat
ways contributing to the shaping of Africa's new business                                       javiercunat@thebeijingaxis.com
landscape.
                                                                                                Dirk Kotze
                                                                                                dirk@thebeijingaxis.com
With the business that these emerging nations, and espe-
cially China, are doing in the developing world, the landscape        To view the contents of previous editions of The China Analyst, see Previ-
in regions such as Africa and Latin America is changing, and          ous Editions on page 55. To subscribe free of charge to The China Analyst,
                                                                      please visit www.thebeijingaxis.com or www.thebeijingaxis.com/tca.
opportunities for businesses are doing likewise. This edition
of The China Analyst is also about these changes and oppor-           For advertising opportunities, please contact Haiwei Huang at
tunities, and about how China's business in the developing            haiweihuang@thebeijingaxis.com.
world is indeed building a new era.

4 The Beijing Axis
Table of Contents
                          September 2011
  6    FEATURES Resources for Infrastructure: China's Role in Africa's New Business Landscape
       Chinese companies active in Africa are reshaping the continent’s business landscape, yet at its core the rela-
       tionship rests on one simple although vital exchange.
 10    FEATURES China and Latin America: Untapped Sources of Added Value
       Trade and investment between China and Latin America have increased ten-fold in the last decade, yet the
       two regions are now set to enter a new higher value added stage of their relationship.
 14    FEATURES Rising Stars: China’s Emerging Construction Machinery Manufacturers
       China's three largest construction machinery manufacturers, XCMG, Sany and Zoomlion, have been success-
       ful in emerging markets and are aiming to catch up with global leaders in the industry. How did they do it?
 18    FEATURES The New Scramble for Africa: Emerging Powers on the Emerging Continent
       Led by China, the BRICS nations are at the forefront of a new scramble for projects and deals in Africa. Yet
       apart from China, how are the other four BRICS doing in this new scramble on the continent?
 22    MACROECONOMY Macroeconomic Monitor: Chinese Inflation - One of the Biggest Fears of 2011
       With inflation having reached 6.5% in July 2011, this edition looks at the Chinese government’s monetary and
       fiscal policy options to fight a scourge for which China's central planners have a legendary fear.
 24    NEWS China Business News Highlights
       Recent headline business stories in China, leading with the business deals following foreign trips by China’s
       leaders, China's power shortage in H1 2011, and China's latest construction marvels.
 26    TRADE China Trade Roundup
       A review of China’s trade performance in Jan-Aug 2011, and an overview of China's trade in services.
 28    PROCUREMENT China Sourcing Strategy: A New Approach to Procurement
       China procurement is changing, and procurement managers need to adapt to a new opportunity landscape.
 32    INVESTMENT China Capital: Inbound/Outbound FDI & Financial Markets
       Analysis on the latest on FDI in China and OFDI by Chinese firms, and a review of China's OFDI approval processes.
 36    STRATEGY Mapping China in the Global Contracting Industry
       In this edition we illustrate the presence of China's contractors in different markets of the world.
 38    STRATEGY CCC: China Inc.'s Leading EPC Contractor
       A closer look at the corporate strategy of arguably China's most internationalised contractor.
 41    REGIONS Regional Overview: BRIICS
       A macro overview of the leading developing economies: Brazil, Russia, India, Indonesia, China and South Africa.
 42    REGIONS Regional Focus CHINA-AFRICA
       China-Africa trade and investment analysis, and the series 'Chinese Contractors in Africa', featuring CCECC.
 44    REGIONS Regional Focus CHINA-AUSTRALIA
       China-Australia trade and investment analysis, and the series 'Australia State Watch', featuring Victoria.
 46    REGIONS Regional Focus CHINA-LATIN AMERICA
       China-Latin America trade and investment analysis, and an interview with the Mexican Ambassador to China,
       Jorge Guajardo.
 50    REGIONS Regional Focus CHINA-RUSSIA
       China-Russia trade and investment analysis, including the series 'China-Russia Resources Watch'.
 52    The Beijing Axis News - March-September 2011
       The latest The Beijing Axis Group news.
 54    EVENTS Upcoming Events
       A selection of upcoming China and global events focusing on the mining and engineering sectors.
Back   About The Beijing Axis
page   Company profile and contact information.
The China Analyst                 Features



Resources for Infrastructure: China's Role in Africa’s
New Business Landscape
Chinese companies active in Africa are reshaping the continent’s business landscape as part of a complex
partnership that has reignited and vastly expanded ties from a previous era. China’s ways of doing busi-
ness in Africa today is different from all those of yesteryear, yet the broad engagement can be under-
stood through the prism of one vital exchange: Resources for infrastructure. By Barry van Wyk




I
   n the 1970s, China’s financing and construction of a 1,870                   customers inland are on average 50% higher than the costs
   km-long railway giving landlocked Zambia access to the                       of shipping costs in other low-income developing regions.
   Tanzanian port of Dar es Salaam was a monument to
Chinese engagement and solidarity with Africa in a previous                     Yet now a new China with vastly different priorities and stra-
era. In a flush of post-colonial exuberance, Africa was under-                  tegic outlook is back in Africa, where it is instrumental in
going a construction boom. Drawing on colonial-era plans,                       Africa’s new construction boom that is reshaping the busi-
various schools, hospitals and roads were being built in                        ness landscape on the continent. In contrast to its piecemeal
Ghana, for example, and in the Democratic Republic of Congo                     interaction with African countries in previous decades, China
(then Zaire), the Inga hydroelectric project was completed in                   is now comprehensively engaged with almost all of Africa’s 54
1977 at a cost of USD 260 million, while a 1,100 mile power                     countries – lending money, providing aid, trading, investing,
line to Katanga also saw the light of day.                                      and more than all else: building infrastructure and extracting
                                                                                resources. This over-simplified description of China’s business
Yet when the Katanga line was eventually completed in 1982                      in Africa goes to the heart of how Africa’s business landscape
at a cost of USD 1 billion, it was four times over the original                 is changing under the influence of a new superpower hungry
budget. Only 18% of Inga’s hydroelectric capacity and 20%                       for natural resources and well-suited to provide Africa with
of the capacity of the new power lines were ever used, and                      something it is sorely in need of: infrastructure.
the sharp fall in the price of cocoa in 1961 put paid to Kwame
Nkrumah’s construction projects in Ghana. Designed to carry                     Levels of engagement: Trade and investment
five million metric tonnes of cargo annually, with a lack of new
investment, mounting debt, poor management and mainte-                          The China that built the railway in Africa in the 1970s is a
nance, moreover, Zambia’s new railway never carried more                        distant shadow of the China of today that routinely builds
than 300,000. From being a symbol of a new era of Africa’s                      railways, roads, ports and other infrastructure in various parts
development, this railway – badly managed and insufficiently                    of the world. In the 2000s, as the size of China’s economy in
maintained – became emblematic of Africa’s lost construc-                       quick succession surpassed that of Italy, France, the UK, and
tion boom turned to protracted bust.                                            Germany, China’s energy consumption expanded four times
                                                                                faster than expected to 16% of global demand in 2006. While
Instead of a boom of new steel and concrete, Africa expe-                       China’s GDP expanded at an annual rate of 10% over 2000-
rienced decades of lost growth. In 2008, the World Bank1                        2008, its annual demand for industrial raw materials such as
estimted that access to the most basic services in Africa                       steel (16%), aluminium (20%), copper (13%) and nickel (23%)
increased only modestly between the early 1990s and the                         all grew even faster. In the ten years preceding 2008, China’s
early 2000s, and only slightly in the last decade. Electricity,                 consumption of crude oil nearly doubled, and during the
for example, is still available to little more than 20% of Africa’s             same period its consumption of copper and iron ore tripled
total population, and piped water to just 12%.                                  while that of aluminium quadrupled. Between 2000 and
                                                                                2008, China accounted for two-thirds of the world’s entire
Compounding the problem was the fact that Africa was                            growth in demand for steel and aluminium and virtually all
largely left to its own devices in terms of infrastructure in the               growth in global demand for copper and nickel.
1990s when both African and donor investment in infrastruc-
ture was scaled back relative to other priorities such as child                 This rapid growth in China’s natural resource use contrib-
immunisation and education, partly due to the mistaken                          uted to a windfall in trade between China and Africa, a major
belief that private investors would step up to fill the infra-                  supplier of raw materials. Bilateral trade stood at just over
structure financing gap. As a result, while Africa’s construc-                  USD 10 billion in 2000, yet in 2010 it breached USD 125 billion,
tion sector deteriorated, poor road, rail and harbour infra-                    exceeding Africa’s trade with any other partner, the closest
structure added 30-40% to the costs of goods traded among                       ones being the US with around USD 115 billion, France with
African countries, and the costs of moving foreign imports to                   around USD 66 billion, and the UK with around USD 31 billion
                                                                                (see chart on next page). This China-Africa trade pattern basi-
1 See ‘Access, Affordability and Alternatives: Modern Infrastructure Services
in Africa', Africa Infrastructure Country Diagnostic. The International Bank    cally encompasses an exchange of a diverse range of Chinese
for Reconstruction and Development, World Bank, Feb. 2008                       manufactured goods for African raw materials.

6 The Beijing Axis
Features
                                                                                      Features                                     The China Analyst



Africa's Major Trade Partners (USD bn, 2000-10)                           Major Investors in Africa OFDI Flow (USD bn, 2003-09)
        China                  UK                US       France
150                                                                       France



120
                                                                                                                                                     2003
                                                                              US
                                                                                                                                                     2004
 90
                                                                                                                                                     2005

                                                                                                                                                     2006
 60                                                                           UK
                                                                                                                                                     2007

                                                                                                                                                     2008
 30
                                                                                                                                                     2009
                                                                          China

  0
      2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010                     0                    5                  10                      15                   20
Source: UN Comtrade; The Beijing Axis Analysis                            Source: OECD Statistical Database; China National Bureau of Stistics; The Beijing Axis Analysis


Along with the US and emerging economies such as Brazil                      •      Export credits to support national exporters. In 2009,
and India, China’s imports from Africa are as expected char-                        China disbursed USD 29.6 billion in export credit
acterised by a disproportionate share of oil and minerals.                          globally
China’s trade with Africa has as a result been very lucra-                   •      Natural resources-backed lines of credit, or the ‘Angola
tive for resource-rich African countries, and these African                         Mode’, where China’s Exim Bank uses natural resource
commodity suppliers have become crucial suppliers for                               exports or preferential access to them as collateral for
China. South Africa is China’s only African trade partner from                      infrastructure projects and as a means to repay loans
which it imports substantial amounts of products that are                    •      Mixed credits, where financing packages combine
not resources, while China’s leading suppliers of oil (Angola),                     concessional and market rate loans, such as a mixture
Manganese (South Africa), chromium (South Africa), cobalt                           of FDI and export credit3
(the DRC), and platinum (South Africa) are all African.
                                                                          Laying down a methodology: The Angola Mode
China's annual flow of Outbound Foreign Direct Investment
(OFDI) to Africa in recent years is still far in arrears of the US,       As China’s engagement with Africa has deepened during the
France and the UK (see chart above, right). In 2009, China’s              last decade, its deals on the continent came to broadly fit a
OFDI stock in Africa reached USD 9.3 billion, still marginally            mould. As a country that recently emerged from civil war yet
behind that of Switzerland, the Netherlands and far behind                that is rich in natural resources and sorely in need of infra-
the US, France and the UK (which has the most invested stock              structural renewal, Angola has become one of the biggest
in Africa, namely USD 61.4 billion). Chinese investment in                recipients of Chinese financing for infrastructure projects in
Africa reflects a similar predilection for resource-rich coun-            Africa, one of China’s largest trading partners on the conti-
tries as is the case with trade, and in 2009 a full 76% of Chinese        nent, and a major source of its oil. In 2004 Angola signed a
FDI in Africa was concentrated in resource-rich countries. In             deal with China that would become emblematic of China’s
2009, the main sectors for Chinese OFDI stock in Africa were              ‘infrastructure for resources’ relationship with Africa.
mining (30%), manufacturing (22%), and construction (16%).
                                                                          Angola received a USD 2 billion loan from a Chinese policy
Yet while Chinese levels of OFDI in Africa still lag far behind           bank, China EximBank, for the development of infrastructure,
those of Western countries, China and other emerging part-                including electricity generation, telecom expansion, railway
ners are following new paths of investing in Africa. Europe               rehabilitation and water. As part of the repayment terms for
and North America have typically relied on FDI and Official               the loan, Angola agreed to supply China with 10,000 barrels
Development Assistance (ODA) in Africa, but emerging                      of oil per day. In a pattern that would be repeated frequently
powers such as China are adopting a more holistic approach                afterwards, a Chinese construction/engineering company
to broaden their economic relationship with Africa that                   was awarded contracts for the infrastructure projects, while
combines trade and investment with development coop-                      rights for extracting natural resources was afforded to a
eration. Thus while developing partners such as China,                    Chinese oil company.
India, South Korea and Brazil are not only engaging with
African countries that Western countries have avoided in the              3 Deborah Brautigam, author of ‘The Dragon’s Gift,’ has put China’s total
past, they are also increasingly using alternative financing              purely concessional loans, zero-interest loans and grant commitments to
methods. China in particular uses the following financing                 Africa at USD 2.1 billion in 2009, while she estimated China’s preferential
                                                                          export credit commitments to Africa for 2007-09 at around USD 2 billion
methods in Africa2:                                                       and non-concessional finance at around USD 5 billion annually. In sum, all
2 For more detail see ‘African Economic Outlook 2011’, ADB, OECD, UNDP,   China’s alternative financial flows to Africa reached an annual average com-
UNECA, 2011, p. 112.                                                      mitment of USD 7.1 billion over 2007-09.


                                                                                                                                           The Beijing Axis             7
The China Analyst                 Features



International Contract Revenue in Africa, China's and Rest                       Chinese contractors have become highly competitive
of World's Share (USD mn, 2001-09)                                               bidders for publicly tendered infrastructure projects. A 2007
2001 7.4% 92.6%                                                                  survey of 35 Chinese construction companies active in Africa
                                                                                 found that around 50% of Chinese projects in Africa were
2002 9.9%      90.1%                                                             actually won via an international bidding process. The extent
                                             China                               of Chinese contractors success in Africa is illustrated in the
2003 11.8%         88.2%
                                                                                 fact that in 2001 China’s share of contract revenue in Africa
2004 14.7%          85.3%                    Rest of World                       was a mere 7.4%, yet by 2009 this had climbed to 36.6% (see
                                                                                 chart to the left), making it the dominant player, far ahead of
2005 21.4%          78.6%                                                        Italy with 15% in second place and France with 10% in third.

2006 28.4%           71.6%                                                       Africa is now China’s largest market in terms of contract
                                                                                 revenue with 41.1%, even more than Asia with 36%. Similar
2007       26.9%             73.1%
                                                                                 to Chinese trade and investment in Africa, the revenue of
2008                42.4%                         57.6%
                                                                                 Chinese contractors is highly concentrated in a few resource-
                                                                                 rich countries. In 2009, the leading six countries (Algeria,
2009                36.6%                           63.4%                        Angola, Sudan, Nigeria, Libya and Ethiopia), mostly oil and
                                                                                 gas-related economies, accounted for USD 18.1 billion or 71%
       0           10,000     20,000     30,000       40,000   50,000   60,000
Source: ENR; The Beijing Axis Analysis
                                                                                 of China’s total revenue (see chart opposite page).

Repaying loans for infrastructure development with natural                       Chinese contractors in Africa have been most successful in
resources is not a new concept. The first reported example of                    civil infrastructure projects such as transport and construc-
such a deal involving China in Africa was actually not 2004 in                   tion. As stated above, around 50% of Chinese contractors
Angola, but 2001 in the DRC when China provided USD 280                          in Africa seem to prefer international bids, yet around 40%
million for dam construction and received loan payments                          were accounted for by grants, concessional loan projects and
in oil. After 2004, however, such deals became more widely                       other mechanisms in which the Chinese government play a
used by China in Africa, and also expanded to other resources                    strong role. The case of Angola, where Chinese commercial,
such as bauxite, chromium, and iron ore. It should be noted,                     investment and contracting activity has been vigorous for
however, that the Angola mode is not the only mode of                            almost a decade now, can be held up as an example of the
engagement for Chinese companies in Africa, yet they are                         progression of Chinese contracting over time. The establish-
common in countries such as Angola, the DRC and Sudan                            ment of Angola’s first loan agreement with China Exim Bank
who have only recently emerged from conflict and instability.                    in March 2004 facilitated the entry of China’s large SOEs into
                                                                                 Angola, and in the time since dozens of Chinese contractors
The process of concluding Angola Mode deals is typically                         have established operations there.4
borne out of intergovernmental agreements that deter-
mine the purpose, amount, maturity and interest rate of the                      Although Chinese contractors typically still focus more on
loan, followed by the signing of a loan agreement – often                        the lower value added part of the construction value chain,
concessional in nature – between China Exim Bank and the                         their ability to undertake construction projects at cheaper
borrower. The capital is then disbursed in tranches in terms                     prices have made them very competitive and, in the case
of project completion, and paid directly to Chinese contrac-                     of Angola, have broken the monopoly of Portuguese and
tors in China, which are selected by Exim Bank and China’s                       Brazilian contractors. Due to the volume of their needs and
Ministry of Commerce and sanctioned by the beneficiary                           the lack of quality products available for sourcing locally,
government. With such a methodology in place, the main                           Chinese contractors bring most of their workers and mate-
Chinese actors in Africa are                                                     rials from China (although in Angola some Chinese compa-
   • Lending agencies: China’s policy banks, China Exim                          nies have in the last few years begun to set up local factories
        Bank and China Development Bank through the                              to produce some industrial inputs). After a few years, mostly
        China-Africa Development (CAD) Fund                                      private Chinese companies also began entering Angola,
   • Extractors and builders: Large state-owned enter-                           largely to subcontract from the larger companies and to set
        prises and some private ones operating in the extrac-                    up a procurement chain for providing equipment and mate-
        tive and construction/engineering industries                             rials from China.
   • Other business people: Small to medium-sized
        Chinese businesses and individual entrepreneurs that                     Windows of opportunity: Africa’s new business landscape
        may appear subsequently
                                                                                 China is engaging with Africa like no other country has ever
Getting their hands dirty: Chinese contractors in Africa                         done before, and in the fundamental exchange of Africa’s
                                                                                 resources for Chinese-built infrastructure, China is making
Collectively, these actors are re-shaping Africa’s business
                                                                                 4 For an assessment of the various estimates provided for the number
landscape, yet none are doing so more obviously than China’s                     of Chinese state-owned and private companies in Angola, see L Corkin,
construction and engineering contractors. Having originally                      ‘Chinese Construction Companies in Angola: A Local Linkages Perspective,’
relied solely on Chinese government-financed projects,                           p. 17.


8 The Beijing Axis
Features
                                                                                   Features                                   The China Analyst



a significant contribution to addressing a lasting struc-            Leading Countries for Chinese Contractor Revenue in Africa
tural bottleneck in Africa. The ‘infrastructure for resources’       and Number of Chinese Contractors in Country (USD mn, 2009)
                                                                              22
deals it concludes in Africa are unique in the way they lock         6,000
African countries into using their resources for infrastruc-
ture – revenue never actually comes in, obviating the need                              17
                                                                     5,000
for taxation. China is transcending conventional patterns of
engagement of straightforward FDI and ODI, and has instead
fashioned an elaborate system where a strong government              4,000
role and alternative financing methods can overcome risk,
and the leveraging of China’s own booming construction
industry can see Chinese contractors building much-needed            3,000

civil infrastructure as well as value-adding processing indus-
                                                                                              17
tries such as refineries and petro-chemical complexes in             2,000
                                                                                                      14        12
Africa.
                                                                                                                         15
China is a strong player in Africa both in upstream activi-          1,000                                                         8       6
                                                                                                                                                7     9
ties such as exploration and extraction, as well as in down-
stream activities such as processing. China's demand for                            1                      1         5         4
                                                                        0
oil and minerals has created a new level of competition for                  Algeria Angola Sudan Nigeria      Libya Ethiopia Congo(B) Egypt   DRC Botswana
Africa’s resources, and has contributed to higher prices, to         Source: China Statistical Yearbook 2010; The Beijing Axis Analysis
the benefit of Africa. In countries such as the DRC and Angola
where previous failed construction booms have formed part            more time in Africa they will become more aware of their
of protracted instability, China has undertaken projects             own shortcomings and more receptive to the value offered
where many other investors have regarded the risk as being           by foreign companies with the right knowledge and experi-
too high. The sustainability and flexibility of China’s contem-      ence. For such foreign companies, the challenge will be to
porary engagement in Africa, moreover, should contribute             utilise these opportunities in the right industries, at the right
significantly to Africa’s current construction boom not being        time. China’s increased business in Africa has also created
as forlorn as the previous one, and that would make it a true        demand for services essential to doing in business in Africa,
new era for Africa.                                                  providing new opportunities for banks, law firms, and various
                                                                     other service providers.
This is not to say that the impact of China in Africa is flawless,
yet this should not be the expectation for something that is         These are but a few examples of how China’s ‘infrastructure
not an exercise in altruism. Chinese projects in Africa are in       for resources’ engagement is creating new business opportu-
essence turnkey projects, in theory fulfilled by contractors         nities for foreign firms in Africa. Yet perhaps the best oppor-
who then sign off on the engagement, and hence the extent            tunity of all is the fact that Africa itself is changing. As China’s
of the true lasting value add on the ground in Africa is some-       activities in Africa increases, Africa is gradually transforming
times brought into question by some observers, especially            itself from a perennial backwater to a new source of growth
since China exports a significant share of its labour to Africa.     with diversifying economies, expanding consumer markets,
Yet this could be changing, as we have seen, as Chinese              and working infrastructure – making Africa open for business
companies seek to establish local manufacturing capabilities         like never before.
on the continent, in addition to establishing several special
economic zones and other forms of skills transfer.                   Barry van Wyk, Senior Consultant
                                                                     barryvanwyk@thebeijingaxis.com
The strong role played by government-to-government inter-
action in Chinese deals in Africa has in practice often meant
that many of Africa’s mineral rights are sold in closed deals
and not in public auctions. Yet the increasing number of
Chinese extractive companies and construction/engineering
contractors in Africa has opened up a vast new opportunity
landscape for foreign companies on the continent, both
in terms of potential partnership and new clientele. Thus
in areas where Chinese companies are still comparatively
less adept, such as consulting and industrial design, many
opportunities for partnerships are now open to foreign firms.
Chinese firms in Africa still lack a deep understanding of local
business as well as cultural and regulatory issues, and here
again foreign companies with experience in Africa can profit.

Foreign companies could also explore joint bids with Chinese
companies for construction projects. As Chinese firms spend

                                                                                                                                       The Beijing Axis   9
The China Analyst                     Features



China and Latin America: Untapped Sources of Added
Value
Bilateral trade between China and Latin America has increased ten-fold in the last decade, preparing
the way for a massive wave of Chinese investment in the region in 2010. While both bilateral trade and
investment are expected to increase further in the coming years, questions remain on how balanced
and sustainable the relationship will be. This article argues that both regions are set to enter a new stage
of their relationship that will be characterised by increasing Chinese investments in more value added
industries and eventually higher value added exports from Latin America. By Javier Cuñat




O
        nly ten years ago, upon China’s entry into the World                        imports and 2% of its total exports (see charts below). Ten
        Trade Organisation (WTO), China was the world’s                             years later, trade between China and LatAm amounted to
        seventh-largest economy, growing at 7.3% y-o-y and                          USD 179.3 billion, a tenfold increase, with LatAm accounting
accounting for just over a tenth of global economic growth. In                      for 6.5% of China’s total imports and 5.6% of its total exports;
2010, with a global financial crisis still persistent in the United                 and China accounting for 12.3% of LatAm’s total imports and
States (US) and Europe, China became the world’s second-                            12.9% of LatAm’s total exports.
largest economy, growing at 9.6% (H1 2011) and contrib-
uting one-third to total world GDP growth. The emergence                            Overall, China is not only more important to LatAm today than
of China as a global economic power has greatly benefited                           ten years ago and vice versa, but the two regions are progres-
the global economy. In China’s phenomenal rise, one thing                           sively becoming more dependent on each other as important
is clear: as China grows, other countries benefit. As China’s                       sources of growth compared to other regions, exemplified by
exported-oriented economy keeps churning out increasingly                           the free trade agreements China has signed in recent years with
higher value added goods, other countries can now purchase                          Chile, Peru and Costa Rica. This trend became more evident
previously unattainable products at competitive prices.                             during the most recent financial crisis, during which China’s
                                                                                    stimulus package and unrelenting demand for commodities
Yet this trend has also to varying degrees presented the                            helped LatAm’s exports to China counterbalance a decrease
regions and countries within China’s trade, investment and                          in demand from the US and Europe. For its part China found
geopolitical radar with a number of challenges. Antidumping                         the perfect partner to serve its own demand, diversifying
and protectionist measures in the US and Europe, labour and                         its sources of fuel and metals needed to power and build its
community issues in Africa, and territorial disputes in Asia                        economy during the financial crisis and into the future.
are just some examples. Latin America (LatAm), with its own
particularities, is no exception.                                                   According to the Economic Commission for LatAm and the
                                                                                    Caribbean (ECLAC), China today ranks among LatAm’s top
The relationship                                                                    trading partners, particularly in countries such as Brazil, Chile,
                                                                                    Peru and Argentina, where China accounts for 15%, 24%,
When China entered the WTO, annual trade between China                              16% and 9%, respectively, of each country’s total exports.
and LatAm amounted to USD 14.4 billion, with LatAm                                  What's more, China is now the largest importer of goods and
accounting for 2.7% of China’s total imports and 2.9% of its                        services from Brazil and Chile, and the second-largest from
total exports; and China accounting for 2.3 % of LatAm’s total                      Peru, Argentina and Cuba. However, these exports remain

China's Trade with LatAm and the Caribbean (USD bn,                                 China's Trade with LatAm and the Caribbean (%, 2001-10)
2001-10)
100                                                                                 14%                       China as % of LatAm Exports
                                                                                                              China as % of LatAm Imports
                          Exports                                                   12%
 80                                                                                                           LatAm as % of China Exports
                          Imports                                                   10%                       LatAm as % of China Imports

 60
                                                                                     8%


                                                                                     6%
 40

                                                                                     4%
 20
                                                                                     2%


  0                                                                                   0
      2001    2002    2003    2004     2005      2006   2007   2008   2009   2010         2001    2002    2003    2004    2005       2006   2007   2008   2009   2010
Source: UN Comtrade; The Beijing Axis Analysis                                      Source: UN Comtrade; The Beijing Axis Analysis


10 The Beijing Axis
Features
                                                                                     Features                                The China Analyst



concentrated in raw materials such as copper, iron ore, and                A survey by the China-Brazil Business Council (CBBC) revealed
soybeans, which account for nearly 60% of total exports.                   that 93% of Chinese investments in Brazil in 2010 were under-
Similarly, China’s exports to LatAm are mainly electronic                  taken by state-owned companies, while 6% were undertaken
items, autoparts, equipment and machinery, and textiles.                   by companies belonging to provinces, and 1% by private
                                                                           companies. The survey also found that Chinese investments
Indeed, the trade relationship between China and LatAm                     in 2010 totalled USD 12.6 billion (slightly higher than ECLAC’s
is essentially built on the exchange of natural resources for              figures), 82% of which involved mergers and acquisitions.
manufactured goods or low value for high value added prod-                 Sinopec made the largest investment when it acquired a 40%
ucts. While this makes a lot of sense from the countries' factor           stake in the Brazilian operations of Repsol-YPF for USD 7.1
endowment and comparative advantage point of view, it also                 billion (see table on next page). Of China's total investment
presents great challenges for LatAm manufacturers who have                 commitments in 2010, 95% were concentrated in the areas
seen Chinese exports progressively replace their market shares             of oil and gas, agribusiness, mining, and ironworks. However,
at home, in other LatAm markets, and especially in the US.                 this trend appears to shifting in 2011, with announced Chinese
                                                                           investments in LatAm and the Caribbean thus far amounting
Regarding investment, China's FDI stock in LatAm breached                  to USD 7.13 billion (see chart below), with a stronger focus on
USD 41 billion at the end of 2009, accounting for up to 18%                higher value added industries.
of total Chinese FDI stock in the world. LatAm's investment
stock in China, on the other hand, dwarfs that number, hitting             If the figures from 2010 and the announced figures of H1
USD 112.6 billion in 2008, or roughly 14% of the total foreign             2011 are any indication, they show that China is becoming
capital absorbed by China. A closer look into the GDP figures              increasingly entrenched throughout the region, possibly
for both regions illustrates that current levels of Chinese FDI            marking the start of a new phase of economic relations
in LatAm and the Caribbean are comparatively low. In addi-                 between China and LatAm which features stronger trade
tion, they are mostly concentrated in tax havens such as the               links that are accompanied by growing investment in not
Cayman Islands and British Virgin Islands, which accounted                 only natural resources, but also manufacturing, infrastruc-
for 96.7% of all Chinese FDI into LatAm between 2003 and                   ture and services. As examples, Huawei, ZTE and Lenovo are
2009. Excluding the two tax havens, LatAm only received                    becoming prominent investors in the telecommunications
about USD 126 million in Chinese FDI, or less than 1% of the               and electronics sectors, and BYD, Chery and Geely are leading
annual total. Overall, there is Chinese under-investment in all            the charge in the auto industry.
sectors but especially in higher value added industries.
                                                                           The fundamental challenges facing the China-LatAm relation-
2010 - Breakthrough                                                        ship are two-fold. Firstly, how to increase and diversify Chinese
                                                                           FDI in the region beyond raw materials to more value added
In 2010, with an estimated investment of USD 15.25 billion,                industries; and secondly how to improve trade by means of
China's investment in LatAm was more than twice the amount                 exporting more value added LatAm goods. Both challenges, as
it invested in the region in the period 2006–09, namely USD                they unfold, will present substantial opportunities for both sides.
7 billion. China's 9% share of FDI in the region now makes
it the third-largest foreign investor in LatAm, trailing only              Forever imbalanced? Unlikely
the US and the Netherlands, which accounted for 17% and
13%, respectively (see chart below). By country, the main                  Over the long term, the greatest opportunity but also chal-
destinations for Chinese FDI were Brazil, Argentina and Peru,              lenge facing Chinese companies in LatAm is successful inte-
all of which have established strong trade links with China.               gration with the host economies. The model it is presently
Brazil, China’s BRICS counterpart in the region, was by far the            utilising in a number of countries, characterised by the acqui-
biggest benefactor of this investment wave, with USD 9.6                   sition of natural resource assets, the extraction and low value
billion in Chinese FDI in 2010.                                            added exports ‘back to China’, and under-developed commu-
                                                                           nity relations, has both a limited political and business shelf
Origin of FDI in LatAm and the Caribbean* (%, 2006-10)                     China's LatAm FDI Destinations by Country* (%, 2010-Q3 2011)
               USD 864.17 bn               USD 112.63 bn                              USD 15.25 bn                USD 7.13 bn
100%                                                                       100
                    8%                         10%         Latin America
                                                           Others                                                                       Colombia
 80%                                                                        80
                    30%                        28%         Caribbean                                                                    Costa Rica
                                                           Financial
                                                                                                                                        Mexico
                                                           Centres
                                                                            60
 60%                                            7%                                                                                      Ecuador
                    10%                                    Netherlands
                     5%                                                                                                                 Peru
                                                13%        China
                     4%                                                     40
 40%                 2%                                                                                                                 Argentina
                     10%                        9%         UK
                                                4%                                                                                      Brazil
                    5%                          3%         Japan
                                                4%                          20
 20%                                                       Spain
                    25%
                                                17%        Canada
                                                                             0
  0%                                                                                       2010                     Q1-Q3 2011
                                                           US
                2006-2009                      2010                        *Note: Data for 2010 is confirmed investments; data for 2011 is announced investments.
Source: ECLAC; The Beijing Axis Analysis                                   Source: ECLAC; The Beijing Axis Analysis


                                                                                                                                  The Beijing Axis          11
The China Analyst                    Features



Major Announced Chinese Foreign Direct Investments in LatAm (2010-11)                                                 highlighted deals denote those in non-resources sectors

 Year    Month      Investor                        Status        USD mn        Partner/target                  Sector              Subsector                    Country
2010 Jan           Honbridge Holdings              Concluded       400          Sul-Americana de Metals        Metals              Iron ore                     Brazil
2010 Feb           Sany Heavy Industry             Ongoing        200           Build a manufacturing plant Manufacturing          Heavy machinery              Brazil
2010 Mar           East China Mineral              Concluded      1,200         Itaminas                    Metals                 Iron ore                     Brazil
                   Expl. & Develop.
2010    Mar        CNOOC                           Concluded          3,100     Bridas                         Energy              Oil                          Argentina
2010    Mar        State Grid                      Ongoing            1,050     Quadra Mining                  Metals              Copper                       Chile
2010    Apr        WISCO                           Concluded          4,700     A JV steel mill                Metals              Steel                        Brazil
2010    May        State Grid                      Concluded          1,720     Cobra, Elecnor and Isolux      Power               Power grid                   Brazil
2010    May        Sinochem                        Concluded          3,070     Peregrino Field                Energy              Oil                          Brazil
2010    Aug        Tongling Nonferrous &           Planning           3,000     A copper mine                  Metals              Copper                       Ecuador
                   China Railway Construction
2010 Sep           Chery                           Ongoing        400           n/a                            Transport           Auto                         Brazil
2010 Oct           Sinopec                         Ongoing      7,190           Repsol/YPF                     Energy              Oil                          Brazil
2011 Jan           CR Zongshen                     Concluded          80        Kasinski                       Transport           Motorcycle                   Brazil
2011    Mar        Chongqing Grain Group           Concluded          2,400     n/a                            Agriculture         Soybeans                     Brazil
2011    Apr        Lenovo                          Ongoing              900     Positivo                       Electronics         PC                           Brazil
2011    Apr        Huawei                          Ongoing              363     Build a plant                  Telecom             Mobile phone, tablet PC      Brazil
2011    Apr        ZTE                             Concluded            200     Build a plant                  Telecom             Tablet PC                    Brazil
2011    May        Chongqing Polycomp              Concluded              60    Owens Corning Plant            Material            Fiber glass                  Brazil
                   International Corp.
2011    May        XCMG                            Concluded            200     n/a                            Manufacturing       Heavy machinery              Brazil
2011    May        Geely                           Concluded              10    Nordex                         Transport           Auto                         Uruguay
2011    Jun        China CNR Corp                  Ongoing              127     T’Trans                        Transport           Train                        Brazil
2011    Jun        Qingshan Mining                 Ongoing                  3   JDC Mining Co                  Metals              Gold, silver & copper        Mexico
2011    Jun        TCL                             Ongoing                21    Radio Victoria Fueguina        Telecom             Mobile                       Argentina
2011    Jul        BOMCO                           Concluded            n/a     BRCP, Asperbras                Energy              Petroleum equipment          Brazil
2011    Aug        ICBC                            Ongoing              600     Standard Bank Argentina        Finance             Banking                      Argentina
2011    Aug        Midea Group                     Ongoing              223     Carrier Corporation            Manufacturing       Home appliances              Argentina,
                                                                                of UTC Group                                                                    Brazil, Chile
2011 Sep         Taiyuan Steel, CITIC              Ongoing            1,950     CBMM                           Metals              Niobium                      Brazil
                 Group and Baosteel
Total for Q1-Q3 2011                                                 7,137
Source: China Global Investment Tracker, Heritage Foundation, Carta da China No 56 June 2010, China-Brazil Business Council; Observatario Iberoamericano de Asia - Pacifico
and press releases. Note highlighted deals denote those in non-resources sectors.


life. While benefits of both existing and proposed Chinese                               construction equipment manufacturers, decided to put down
investments are real, trade tensions from the LatAm side are                             roots in the region by investing USD 200 million in a manu-
emerging and creating contradictions for both parties. We                                facturing plant in the Brazilian state of Sao Paulo. One year
saw a good example of this at the beginning of 2011, when                                later, XCMG, its closest Chinese competitor, followed in its
the Brazilian Finance Minister called for a revaluation of the                           footsteps. We have seen similar examples in the automobile
renminbi following a massive USD 15 billion flow of Chinese                              industry in Mexico, where Chinese automakers Zhongxing,
investments into Brazil during 2010.                                                     Geely and Changan, through a partnership with Mexico’s
                                                                                         Autopark, have all announced plans to establish auto-making
More importantly, LatAm now more than ever represents an                                 facilities. China’s ZTE has started manufacturing smartphones
opportunity for Chinese manufacturers to enlarge their global                            in Argentina together with local white goods manufacturer
footprints and market shares, especially in markets where                                BGH and has also announced it will start producing tablet
their international competitors have a significant presence.                             computers in Brazil. The list goes on in a number of high-
Aware of China’s price advantages, constantly improving                                  value-added industries (see table above). Leading Chinese
technology standards and overall positive macroeconomic                                  companies are looking at a number of LatAm countries as
outlook for the LatAm region (recently revised by the World                              key launchpads from which to market their products not only
Bank to 4.6% growth for 2010), Chinese manufacturing                                     in other LatAm markets but also in North American markets.
companies are realising that an export-oriented develop-
ment strategy towards LatAm without a footprint is a dead-                               According to ECLAC, 90% of China's confirmed investment
end game. Various factors, i.e. consolidated market shares at                            in LatAm has targeted the extraction of natural resources.
home, the need to better understand their customers in the                               Looking into China’s upgraded endowment factors over
region, and strong balance sheets built on export revenue                                the years, the scale, nature and international ambitions of
with low production costs, have laid the foundation for                                  its domestic champions together with recent Chinese OFDI
capital investments to grow and deepen in the years to come.                             figures in the region, one can expect an increasing number
                                                                                         of Chinese manufacturing companies to invest in high value
In February 2010, Sany Heavy Industry, one of China’s largest                            added industries in the region. While investments in oil,

12 The Beijing Axis
Features
                                                                           Features                     The China Analyst



gas and mineral resources will remain at the top of Beijing’s      challenge but probably one of the best opportunities for the
agenda, less value added Chinese investments in LatAm              region’s export diversification ambitions.
going forward would not make much sense from a global
supply chain point of view. If trade relations continue to         Cross-border opportunities for LatAm's exporters do not
unfold as they have in the last decade, Chinese manufacturers      only exist in the natural resources side of Chinese demand
and infrastructure developers will need to integrate LatAm         but also in food, beverages, agribusiness, leather and fabrics,
in their supply chains in the long run as much as LatAm is         plastics, chemicals, pharmaceuticals, machinery and elec-
willing to. So expect this trend to intensify.                     tronics, among other sectors. While market entry strategies
                                                                   may vary greatly - from organic to inorganic growth, from
Over the long term, the greatest opportunity but also chal-        JV partnerships to wholly foreign owned enterprises, from
lenge facing LatAm companies seeking to compete in China           export development to assembling and/or manufacturing,
is to diversify their exports towards more value added prod-       from partnering with a local distributor(s) to developing
ucts. While a significant number of LatAm’s manufactured           one's own distribution channels – one thing is clear: ignoring
exports compete with products China itself produces, one           the Chinese consumption market is neither possible nor wise
should not forget that China is the world’s second-largest         if one aims to remain competitive over the long term.
importer of manufactured goods. So from a sectoral and
product perspective, the challenge is not that there is no         Final word
market for LatAm's manufactured goods in China, but rather
identifying what the specific products with the greatest           If 2010 meant anything for China-LatAm trade and invest-
potential are and how to market them effectively.                  ment relationship, it was change. We are leaving behind a
                                                                   stage in the relationship characterised by booming bilateral
The Chinese market is more complex than any other market           trade, few investments and strong unbalances, and entering
of comparable size, and therefore requires an on-the-ground,       a new stage characterised by the utilisation of new sources
customised and dedicated strategic approach. Even though           of added value. This stage will not only be characterised by
China is a large market for a number of products, entering the     trade but also by increasing Chinese investments in more
Chinese market is not an easy task and profits are usually the     value added industries and eventually higher value added
result of a long-term investment in understanding the Chinese      exports from LatAm. If this happens, and we think it will, the
culture, the specifics of your market and network building.        exchange of natural resources for manufactured goods will
Just as one cannot ignore that the emergence of Chinese            prove to be not the trend itself but the catalyst and continu-
manufacturing companies is disrupting domestic competition         ation of a bigger trend. Both regions are set to take steps
in a number of industries in LatAm, and increasingly in more       towards a more balanced, sustainable, value added and
capital and technological-intensive products, one cannot           mutually beneficial relationship. While Chinese OFDI figures
ignore that the Chinese marketplace represents a tremendous        for 2010 and H1 2011 provide some hints, it is still uncertain
opportunity for international companies. China ranks among         which countries, sectors and companies will be the protago-
the world's largest consumers and importers of power gener-        nists in the coming decade.
ating equipment, aircraft and parts, computers and industrial
machinery, agricultural products, consumer and luxury goods        How do LatAm companies look at China and how do Chinese
among a large spectrum of sectors and products.                    companies look at LatAm? While the challenges involved in
                                                                   business transactions are complex, a change in perception
Brazilian aircraft company Embraer, along with Mexican             will be key as old perceptions have on many occasions been
bread maker Bimbo, are just two examples of successful             as unbalanced as the trade and investment relationship.
LatAm ventures in the Chinese market. Embraer, which               China should not be perceived as a neo-colonial power as
opened its first office in Beijing in 2000, continued with the     much as LatAm is no one’s backyard. The first, and most prob-
construction of a spare parts distribution centre at Beijing       ably the biggest, barriers that LatAm companies face when
International Airport, and the signing of a joint venture with     engaging with China are not that different than what the
Aviation Industry Corporation of China in 2003. Embraer            Chinese face when engaging with LatAm. These are culture,
has delivered more than 70 aircraft in China and has already       language, protocol, and lack of information, and they impact
achieved a 52% share of China’s market for aircraft with up        how we understand the opportunities and challenges.
to 120 seats in 2009. With two plants in China, Bimbo is a
pioneer in marketing packaged baked goods in China, espe-          Working out the information deficits and bringing the market
cially in Beijing and Tianjin, and is expanding to other cities.   realities to the corporate landscape in China and LatAm will
                                                                   further assist and facilitate mutually beneficial and more
Despite such precedents, LatAm’s business presence in China        value added trade and investment. Government bodies,
is still mainly dominated by the so-called multilatinas, with a    industry associations, chambers of commerce, corporate
strong component coming from the natural resources sector,         players and service providers must work in that direction.
while LatAm's small and medium-sized enterprises lag behind
their counterparts in terms of presence and market penetra-        The rules are changing but the game is just beginning.
tion. As LatAm becomes increasingly integrated with China,
bringing the region’s small and medium-sized enterprises to        Javier Cuñat, General Manager: Beijing Axis Strategy
the Chinese market not only represents a major competitive         javiercunat@thebeijingaxis.com

                                                                                                             The Beijing Axis   13
The China Analyst           Features



Rising Stars: China’s Emerging Construction Machinery
Manufacturers
Buoyed by increasing demand, especially in emerging markets, China's construction machinery players
have been actively enhancing their international reach and catching up with their foreign counterparts.
China’s three leading companies in this sector are XCMG, Sany, and Zoomlion, and this article outlines
the different strategies adopted by these rising stars and their global expansion plans. By Ankit Khaitan




S
      tarting from a mere USD 1 billion worth of sales in 1999,    Global Market Share of Construction Machinery Industry in
      China’s construction machinery industry saw a decade         Terms of Sales Volume (2002 vs. 2009)
      of high growth with sales reaching USD 60 billion in                            North
                                                                                                        Europe    Japan   Others
                                                                       China          America
2010. This phenomenal growth in demand was fuelled by
rapid growth in both the developed coastal areas of China          100
and more recently, inland areas. In developed areas, the
                                                                                      16%
genesis of growth was local governments’ expansion of small
                                                                                                                 29%
cities, while in inland China it was a growing market for infra-    80                10%
structure and housing. Currently, for every 1% increase in the
urbanisation rate, 13 million people move from rural areas to                                                    4%
cities, but this number still lags far behind that of developed
                                                                    60                28%                        13%
countries and the global average. The Chinese government
has set a clear target of achieving an urbanisation rate of 60%
by 2020, indicating that China still has a long way to go in
                                                                                                                 22%
this regard.                                                        40
                                                                                      28%
Another key demand driver for construction machinery is
the strong growth in fixed asset investments spurred mostly         20
by downstream segments, including infrastructure and                                                             32%
property investments. For instance, social housing, though                            18%
comparatively smaller investments, is significant in construc-
tion project volume and substantially increases the need for          0
                                                                                     2002                        2009
equipment. Additionally, demand from foreign markets has           Source: CCMA; Off-Highway Research
also grown, allowing China’s construction machinery exports
to experience rapid growth in recent years. Together, these        comprehensive production lines. In contrast, Zoomlion
factors have bolstered the development of the construction         is China’s second-largest, and the world’s tenth-largest,
machinery industry in China, making it the world’s fastest-        construction machinery manufacturer. It emerged out
growing and third-largest market and catapulting the three         of Changsha Construction Machinery Research Institute,
largest players onto the world stage.                              a leading state-owned research institution focusing on
                                                                   construction machinery, effectively affording it a strong
Beginnings                                                         competitive advantage.

According to a report by Off-Highway Research (a consul-           Consolidation and government support
tancy specialising in the research and analysis of interna-
tional construction), China’s share of the global construc-        Though the industry in China is highly fragmented with over
tion machinery market jumped from 18% in 2002 to 32%               900 companies vying for market share, a majority of them
in 2009 in terms of sales volume (see chart above, right).         only manufacture components or engage in sub-assembly
China’s three leading pioneers in this regard are Sany Heavy       due to the hefty upfront financial investments that are
Industry, Zoomlion and XCMG, which have emerged as the             required. In addition, intense competition between both
three dominant manufacturers that together account for             domestic and foreign participants as well as rising demand
about 30% of the market in China, larger than the top three        for improved and advanced technology have forced small
foreign companies active in China (see chart on next page).        operators to either be acquired by more established players
Indeed, these three are now ranked in the top ten in terms of      or simply exit the game.
sales revenue globally.
                                                                   In fact, the large in-house companies have supplemented
Out of these, Sany and XCMG only started operating in the          organic growth and scaled up rapidly through consolida-
early 1990s but quickly transformed themselves from being          tion. In the past decade, Sany has acquired assets from its
single product machinery companies to ones that boast              parent company to expand its capabilities while Zoomlion

14 The Beijing Axis
Features
                                                                                  Features                      The China Analyst



Approximate Market Share of China's Construction                          balanced between its two largest segments, concrete and
Machinery Industry (2010)                                                 crane machinery, contributing 43% and 34% to total revenue,
   Caterpillar       Volvo                XCMG            Zoomlion        respectively, in 2010 (see chart on next page).

   Komatsu           Hitachi              XGMA            Other Chinese   Sany leads the local market for truck mounted concrete
   Kobelco           Sany Heavy           Other Foreign                   pumps and full hydraulic rollers; its production of pump
                                                                          trucks is one of the best in the world. Compared to Zoomlion,
                                                                          it is less diverse and its most important segment, concrete,
                        10%          9%                                   alone contributes more than 60% of its total sales revenue.
                                           7%                             Nonetheless, after Sany acquired the excavator and truck
                                                5%                        crane businesses from its parent, its level of business diver-
                                                 4%                       sification started closing in on Zoomlion’s, with product
               32%                               1%                       categories expanding to include concrete machinery, road
                                               11%
                                                                          construction machinery, excavator, pile driving machinery,
                                                                          hoisting machinery and port machinery.
                                          8%
                      3%
                               11%
                                                                          XCMG is the world’s largest manufacturer of truck cranes,
Source: CCMA                                                              which account for most of its total revenue. The comprehen-
                                                                          sive line of products it offers includes construction mobile
has targeted third parties to scale up its product offerings.             cranes, crawler cranes, wheel loaders, concrete boom pumps,
For example, Zoomlion acquired Hunan Puyuan Construction                  piling rigs, aerial fire trucks, asphalt pavers and cold milling
Machinery's truck crane business and Zhongbiao’s environ-                 machines.
mental and sanitation machinery business in 2003.
                                                                          Over the years, Chinese companies in various industries have
This consolidation is being further encouraged by the                     successfully moved up the value chain by offering a wide
government, who is actively promoting consolidation in                    range of products and the construction machinery industry
the industry to avoid disorderly competition among local                  is no different. Foreign companies have historically served
manufacturers. Furthermore, equipment manufacturing is                    the Chinese excavator market by leveraging their strong
one of the seven strategic emerging industries identified in              expertise and precision quality. Yet according to CCMA data,
the 12th Five Year Plan that the government will focus on so              Chinese companies now control one-third of the global exca-
as to foster the development of a sound market environment;               vator market, up from 22% in 2006. Such strategic moves
hence consolidation will be an ongoing trend in the industry              have undeniably boosted their overall competitiveness and
going forward. Chinese construction machinery manufac-                    allowed them to capture market share from their foreign
turers are also afforded tax breaks and other incentives from             competitors in China and in other emerging markets.
local Chinese governments, enabling them to take a long
term view of the market rather than just focusing on short                Going global – M&A and partnership
term profits.
                                                                          The global presence of US-based Caterpillar and Japan's
It is worth noting that foreign enterprises have had little               Komatsu has been strong for decades as they began
opportunity to compete against local competitors in this                  expanding abroad early on when growth in their domestic
consolidation drive due to regulatory restrictions, and have              markets slowed with urbanisation reaching a saturation
been unable to acquire majority stakes in joint ventures with             point. Following a similar strategy, Zoomlion, Sany and
domestic firms. This has allowed local rivals to gather market            XCMG have been encouraged to expand into foreign markets
share from foreign companies and at the same time narrow                  because of their solid positions in the Chinese market, world-
the capability and quality gap by integrating independent                 class products, sustainable low cost advantage and China’s
enterprises’ abilities via strategic acquisitions. Moreover,              expansive infrastructure projects. Sany in particular has led
foreign enterprises have simply not been able to increase                 domestic equipment manufacturers in overseas expansion.
production fast enough to meet rising demand, diluting their
market shares.                                                            However, the three differ in their overseas expansion strat-
                                                                          egies. Zoomlion focuses on a direct M&A route to expand,
Different specialisations                                                 integrating its costs and scaling its position in China while
                                                                          leveraging its target’s distribution network and technical
The product portfolios of China’s three largest industry players          capacities. CIFA, a global manufacturer based in Italy, was a
mostly overlap, yet there is diversity in their product offerings         very strategic acquisition for Zoomlion that strengthened the
and this unique characteristic defines some of the dynamics               latter's R&D capabilities and helped increase its global market
in the industry. Zoomlion has the world's most diverse range              share. In contrast, Sany has preferred to expand by building
of products including concrete machinery, tower cranes,                   its own plants in foreign countries. For instance, Sany recently
road and earthmoving machinery, environmental sanitation                  built research and development centres in Brazil (2010) and
machinery, and bulk material transportation equipment.                    Germany (2009) as part of an ambitious international expan-
Despite such a diversified portfolio, revenue sources are                 sion plan. Also, it is the first Chinese construction machinery

                                                                                                                    The Beijing Axis    15
The China Analyst            Features



XCMG, Sany, Zoomlion Revenue Mix Comparison (%, H1                  and enter the top five global construction machinery compa-
2010)                                                               nies. For its part, Sany plans to scale up rapidly to achieve
       Concrete               Excavators
                                                      Mechanical    these numbers as soon as 2012. To accomplish this, Sany is
       Machinery                                      Scrapers      building plants in overseas markets with great potential such
                              Environmental                         as Indonesia, North African countries and South Africa, a stra-
       Crane Machinery        Machinery               Compaction
                                                                    tegic step that will open new channels to market its prod-
       Road and Piling                                              ucts. Zoomlion is following similar tactics and expanding
       Machinery              Others
                                                                    quickly to acquire brands, technology and distribution
100                           6%                                    channels, with a keen focus on emerging markets. Similarly,
             7%                                  9%
                                                 4%                 XCMG recently announced the acquisition of two European
             12%                                 3%                 suppliers, marking its first international acquisitions aimed
                              20%                3%
80
             12%                                                    at boosting its value chain and extending its technological
                              10%                                   capabilities in key component production.
60                            12%                37%
                                                                    China’s three leading construction machinery manufacturers
                                                                    seem well placed to achieve these goals, yet each of them still
40                                                                  have much potential to improve their technology. To be sure,
             69%                                                    to enhance their competitive position, Chinese machinery
                                                                    manufacturers are constantly upgrading their technological
20                            52%                44%                capabilities and focusing on technical innovation, but they
                                                                    still have some ground to cover before they start taking on
                                                                    the world leaders. That said, these firms have demonstrated
  0                                                                 a remarkable ability to incorporate technology and quickly
           XCMG              Sany              Zoomlion
Source: CCMA; Bloomberg                                             adapt. As a case in point, Sany invented the first 66-metre
                                                                    truck-mounted concrete pump in the world.
player to set up factories in India and the US, where it recently
opened a USD 60 million assembly plant which in August              Chinese construction machinery manufacturers are set to
2011 started assembling trucks mounted with concrete-               become some of the largest beneficiaries of the infrastruc-
pumping equipment. XCMG, China's largest construction               ture boom in emerging markets where competitive prices are
machinery maker, has opted to cooperate with foreign capital        key, and with improving technology and evolving interna-
and foster close partnerships with overseas dealers. The            tional expansion plans, the likes of XCMG, Sany and Zoomlion
group has already established close cooperation with nearly         are gearing up for bigger challenges.
100 dealers who help sell its products all over the world, but
most notably in emerging markets such as Indonesia, Brazil          Ankit Khaitan, Consultant
and Russia.                                                         ankitkhaitan@thebeijingaxis.com

Among these key differences, there is one commonality
that exists in the internationalisation strategy of all three of
China’s major machinery manufacturers - they have been
aggressively marketing their product overseas though new
distributing channels with a core focus on emerging markets,
namely Brazil, Russia, India and Africa. Emerging markets are
sweet spots for these companies because it is difficult to
access developed US and European markets where dominant
and established players, such as Caterpillar, emphasise their
value-added after sales services. Emerging markets, on the
other hand, are more price sensitive, and prices of machinery
equipment from Chinese manufactures are typically 15-20%
below foreign competitors, providing buyers in emerging
markets with a considerable overall cost saving. Another
important reason is that, like China, these countries are
experiencing a similar urbanisation process and are conse-
quently investing a lot towards infrastructure improvement,
providing Chinese enterprises a potential market to tap into.

Reaching higher: The years ahead

XCMG, Zoomlion and Sany have revealed their sales targets
for the 12th Five Year Plan period (2011-15). XCMG and
Zoomlion aim to achieve USD 20 billion each in sales by 2015

16 The Beijing Axis
CHINAAFRICA
BUSINESS FORUM 2011


SAVE THE DATE | 20 OCT

8.00 am - 7.00 pm
Thursday, 20 October 2011
Gallagher Estate, South Africa



This one day Business Forum will bring together key business

leaders, industry specialists, project managers and others to

explore the exciting current dynamic of the China - Africa rela-

tionship.



For enquiries call +27 11 463 9184 or email Candice at
candice@siyenza.za.com or fax your request to +27 11 463 8432.




Organiser:                           Sponsor:
Siyenza Management (Pty) Ltd         The Beijing Axis Ltd
info@siyenza.com                     www.thebeijingaxis.com
The China Analyst           Features



The New Scramble For Africa: Emerging Powers on the
Emerging Continent
The BRICS of China, India, Brazil, Russia and South Africa – and China in particular – are at the forefront
of a new scramble for projects and deals in Africa. Each one brings to the continent its own distinct busi-
ness nous, yet collectively the BRICS are instrumental in transforming Africa’s business fortunes. Leaving
aside China’s dominant position in Africa, this article focuses on the activities of the other BRICS nations
on the continent. By guest contributor Charlie Pistorius




T
      he global balance of power is shifting into the hands        BRICS Trade Profile (As a % of Country Total, 2009)
      of the rapidly industrialising emerging growth giants,       60
      especially the BRICS block of economies: Brazil, Russia,
India, China and South Africa. The BRICs (excluding South          50
Africa as the smallest strategic member) are today fuelling                                                           Africa
the global recovery with their huge demand requirements,           40                                                 Developed
                                                                                                                      Economies
high growth multiples and vast deployment of capital.
Explosive population growth and rapid urbanisation in              30                                                 Emerging Economies
these economies have engendered a vital demand for food                                                               South, East
and energy security, and an urgent need for capital stock          20                                                 & Southeast Asia
build-up, in particular transport, power, communication and                                                           Latin America
housing infrastructure. In Africa the emerging BRICS have          10
latched onto China’s coattails in seeking commercial favour
                                                                    0
and opportunity, although each with their own individual                China India Brazil Russia       SA    BRICS
modus operandi and business methodology. Yet they all have         Source: UNCTAD Statistical Yearbook 2010
the same purpose, namely to secure a foothold in Africa’s
vast and rich resource offerings. But the story is not merely      is impressive. Between 2000 to year-end 2009, India origi-
one described by an exchange of outgoing raw materials in          nated the majority of deals, 812 in all; China managed 450;
return for inbound capital, tools and cheap final products. As     Russian firms undertook 436 deals; South Africa at least 237;
the floodgates for broader and more ingrained partnerships         and Brazil 190. For the year 2010 up to the end of May 2011,
are opening, so too will Africa’s story change in its balance of   China led the way by undertaking 195 new deals, followed
trade and investment.                                              by India with 183, Russia 102, Brazil 51, and South Africa 40,
                                                                   according to UNCTAD’s World Investment Report (2011).
The BRICS 'Way'
                                                                   The trade relationship between the emerging economies
The large BRICS economies (as well as other emerging players       and Africa is, however, the one that best defines the scale
such as South Korea and Turkey), all have the same compara-        of their overall commitment and interest on the continent.
tive advantage in their outward engagement: they are able          Collective bilateral trade between the BRICS and Africa for
to access large pools of finance and cash reserves (mostly         instance ballooned from a mere USD 24.3 billion in 2000
through state incentives and subsidised support), and they         to USD 193.4 billion in 2010 - though China's share of USD
also uphold a version of the Developmental State Model that        123.3 billion alone makes up 64% of the total. Of Africa’s total
encourages a statist approach to business - explicit in the        trade volume with the world, the BRICS collectively account
case of China - that enables private enterprise and mercan-        for an impressive 22%, which hardly measured 10% in 2000.
tile commerce, rather than perpetuating poor management            Shockingly however, South Africa’s intra-Africa trade only
approaches which translates into an unproductive utilisation       measured 2.3% of Africa’s global total in 2009, dropping to
of strategic assets.                                               1.5% in 2010 (see chart on next page).

As a bloc, the BRICS' global outward FDI stock build-up            Brazil: Not only Lusophone specialists
increased substantially from USD 134 billion in 2000 to over
USD 1,085 billion in 2010 – only a small smattering of this        To date Brazil’s multinational firms have mostly been involved
was, however, destined for Africa (roughly 2.7%). Developed        in Africa’s construction and upstream exploration and
economies still provide the largest vested interest of capital     energy production. The likes of Petrobras, which is one of
stock in Africa – roughly 40% originates from the European         the global oil and gas leaders with 2009 revenues of over
economies. Since 2000, the majority of BRICS outward invest-       USD 118 billion, has staked increasing claims in Africa, espe-
ments in Africa has been in cross-border M&A. Considered           cially in Nigeria, Senegal and Angola, while also maintaining
purely by this measure, the number of BRICS engagements            exploration activity in Mozambique and Tanzania. Brazilian

18 The Beijing Axis
The China Analyst   September 2011
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The China Analyst September 2011

  • 1. The China Analyst Now online at www.thebeijingaxis.com/tca A knowledge tool by The Beijing Axis for executives with a China agenda September 2011 Building a new era China's business in the developing world Features Resources for Infrastructure: China's Role in Africa's New Business Landscape 6 China and Latin America: Untapped Sources of Added Value 10 Rising Stars: China’s Emerging Construction Machinery Manufacturers 14 The New Scramble for Africa: Emerging Powers on the Emerging Continent 18 Regulars China Sourcing Strategy: A New Approach to Procurement 28 China Capital: Inbound/Outbound FDI & Financial Markets 32 Strategy: Mapping China in the Global Contracting Industry/CCC 36 Regional Focus: CHINA-AFRICA 42 Regional Focus: CHINA-AUSTRALIA 44 Regional Focus: CHINA-LATIN AMERICA 46 Regional Focus: CHINA-RUSSIA 50
  • 3. Tanzania National Stadium Modern Sports Stadium Dar es Salaam, Tanzania Ndola, Zambia Capacity: 60,000 people Capacity: 40,000 people Completed in 2007 Construction to commence in 2011 EMBLEMS OF A NEW ERA Sheraton Hotel & Towers Dakar Grand Theatre Oran, Algeria Dakar, Senegal The first Sheraton hotel in Algeria Covers two hectares; capacity of 1,800 people Completed in 2002 Completed in 2011 Notable Chinese Construction Projects in Africa Lom Pangar Hydropower Project African Union Conference Centre Cameroon Addis Ababa, Ethiopia Includes 30-megawatt power station Covers a floor area of 51,887 square metres Construction to commence soon Under construction
  • 4. The China Analyst The Beijing Axis At the Highest Level Reflecting on the momentous events happening in the world right now and in the last few turbulent years, it is clear that the world is changing significantly. China is a big part of this change; in fact, its emer- gence has become instrumental to a new era that is affecting every region of the world, yet none more so than the developing world. China is bringing unprecedented change to Latin America and Africa, and a changing business landscape brings new opportunities. In the last edition of The China Of course this edition also features all the usual sections on Analyst, we looked at the changing China's trade and investment, procurement, and regional busi- business landscape within China, ness. And I am also pleased to announce the launching of a focusing on certain key industries new website dedicated to The China Analyst, at www.thebeijin- and outlining the opportunities gaxis.com/tca, where the contents of this and previous editions that can still be found for foreign can be found in an interactive online format. companies. In this edition, we shift our focus to China's impact on the I trust our readers will enjoy this edition of The China Analyst, wider world, and especially on and as always we welcome your feedback. the regions where China's pres- ence and influence have been Kobus van der Wath strongest, namely the developing Founder & Group Managing Director, The Beijing Axis world. kobus@thebeijingaxis.com Africa and Latin America have experienced the most signifi- The China Analyst - September 2011 cant impact of China's newfound engagement with the developing world, an impact which the cover of this maga- Published by The Beijing Axis zine has boldly dubbed 'a new era'. China's expanding reach 3806 Central Plaza is having a profound impact on Africa. Here, China's brand of state-led capitalism is serving to breach a heritage of risk 18 Harbour Road aversion by foreign investors, and in doing so, contribute to Wanchai economic growth in many parts of the continent. As our first Hong Kong, PRC lead feature illustrates, by means of an essential exchange of resources for infrastructure, China is playing a crucial role in Tel: +86 (0)10 6440 2106 a new construction boom on the continent. Fax: +86 (0)10 6440 2672 www.thebeijingaxis.com With a rapidly growing trade and investment relationship Executive Editor Kobus van der Wath in recent years, China's business with Latin America has to a large extent been characterised by an exchange of resources kobus@thebeijingaxis.com for manufactured goods. Yet as our second lead feature envi- Editor Barry van Wyk sions, the relationship is now set to enter a new phase of barryvanwyk@thebeijingaxis.com higher value added investment and trade, with wide impli- cations for Latin America. Editorial Board Lilian Luca luca@thebeijingaxis.com China is not the only new player in these developing regions, Cheryl Tang however. In our fourth lead feature we outline the trade and cheryl@thebeijingaxis.com investment activities in Africa of the other BRICS nations, revealing how the likes of India and Brazil are in their own Javier Cuñat ways contributing to the shaping of Africa's new business javiercunat@thebeijingaxis.com landscape. Dirk Kotze dirk@thebeijingaxis.com With the business that these emerging nations, and espe- cially China, are doing in the developing world, the landscape To view the contents of previous editions of The China Analyst, see Previ- in regions such as Africa and Latin America is changing, and ous Editions on page 55. To subscribe free of charge to The China Analyst, please visit www.thebeijingaxis.com or www.thebeijingaxis.com/tca. opportunities for businesses are doing likewise. This edition of The China Analyst is also about these changes and oppor- For advertising opportunities, please contact Haiwei Huang at tunities, and about how China's business in the developing haiweihuang@thebeijingaxis.com. world is indeed building a new era. 4 The Beijing Axis
  • 5. Table of Contents September 2011 6 FEATURES Resources for Infrastructure: China's Role in Africa's New Business Landscape Chinese companies active in Africa are reshaping the continent’s business landscape, yet at its core the rela- tionship rests on one simple although vital exchange. 10 FEATURES China and Latin America: Untapped Sources of Added Value Trade and investment between China and Latin America have increased ten-fold in the last decade, yet the two regions are now set to enter a new higher value added stage of their relationship. 14 FEATURES Rising Stars: China’s Emerging Construction Machinery Manufacturers China's three largest construction machinery manufacturers, XCMG, Sany and Zoomlion, have been success- ful in emerging markets and are aiming to catch up with global leaders in the industry. How did they do it? 18 FEATURES The New Scramble for Africa: Emerging Powers on the Emerging Continent Led by China, the BRICS nations are at the forefront of a new scramble for projects and deals in Africa. Yet apart from China, how are the other four BRICS doing in this new scramble on the continent? 22 MACROECONOMY Macroeconomic Monitor: Chinese Inflation - One of the Biggest Fears of 2011 With inflation having reached 6.5% in July 2011, this edition looks at the Chinese government’s monetary and fiscal policy options to fight a scourge for which China's central planners have a legendary fear. 24 NEWS China Business News Highlights Recent headline business stories in China, leading with the business deals following foreign trips by China’s leaders, China's power shortage in H1 2011, and China's latest construction marvels. 26 TRADE China Trade Roundup A review of China’s trade performance in Jan-Aug 2011, and an overview of China's trade in services. 28 PROCUREMENT China Sourcing Strategy: A New Approach to Procurement China procurement is changing, and procurement managers need to adapt to a new opportunity landscape. 32 INVESTMENT China Capital: Inbound/Outbound FDI & Financial Markets Analysis on the latest on FDI in China and OFDI by Chinese firms, and a review of China's OFDI approval processes. 36 STRATEGY Mapping China in the Global Contracting Industry In this edition we illustrate the presence of China's contractors in different markets of the world. 38 STRATEGY CCC: China Inc.'s Leading EPC Contractor A closer look at the corporate strategy of arguably China's most internationalised contractor. 41 REGIONS Regional Overview: BRIICS A macro overview of the leading developing economies: Brazil, Russia, India, Indonesia, China and South Africa. 42 REGIONS Regional Focus CHINA-AFRICA China-Africa trade and investment analysis, and the series 'Chinese Contractors in Africa', featuring CCECC. 44 REGIONS Regional Focus CHINA-AUSTRALIA China-Australia trade and investment analysis, and the series 'Australia State Watch', featuring Victoria. 46 REGIONS Regional Focus CHINA-LATIN AMERICA China-Latin America trade and investment analysis, and an interview with the Mexican Ambassador to China, Jorge Guajardo. 50 REGIONS Regional Focus CHINA-RUSSIA China-Russia trade and investment analysis, including the series 'China-Russia Resources Watch'. 52 The Beijing Axis News - March-September 2011 The latest The Beijing Axis Group news. 54 EVENTS Upcoming Events A selection of upcoming China and global events focusing on the mining and engineering sectors. Back About The Beijing Axis page Company profile and contact information.
  • 6. The China Analyst Features Resources for Infrastructure: China's Role in Africa’s New Business Landscape Chinese companies active in Africa are reshaping the continent’s business landscape as part of a complex partnership that has reignited and vastly expanded ties from a previous era. China’s ways of doing busi- ness in Africa today is different from all those of yesteryear, yet the broad engagement can be under- stood through the prism of one vital exchange: Resources for infrastructure. By Barry van Wyk I n the 1970s, China’s financing and construction of a 1,870 customers inland are on average 50% higher than the costs km-long railway giving landlocked Zambia access to the of shipping costs in other low-income developing regions. Tanzanian port of Dar es Salaam was a monument to Chinese engagement and solidarity with Africa in a previous Yet now a new China with vastly different priorities and stra- era. In a flush of post-colonial exuberance, Africa was under- tegic outlook is back in Africa, where it is instrumental in going a construction boom. Drawing on colonial-era plans, Africa’s new construction boom that is reshaping the busi- various schools, hospitals and roads were being built in ness landscape on the continent. In contrast to its piecemeal Ghana, for example, and in the Democratic Republic of Congo interaction with African countries in previous decades, China (then Zaire), the Inga hydroelectric project was completed in is now comprehensively engaged with almost all of Africa’s 54 1977 at a cost of USD 260 million, while a 1,100 mile power countries – lending money, providing aid, trading, investing, line to Katanga also saw the light of day. and more than all else: building infrastructure and extracting resources. This over-simplified description of China’s business Yet when the Katanga line was eventually completed in 1982 in Africa goes to the heart of how Africa’s business landscape at a cost of USD 1 billion, it was four times over the original is changing under the influence of a new superpower hungry budget. Only 18% of Inga’s hydroelectric capacity and 20% for natural resources and well-suited to provide Africa with of the capacity of the new power lines were ever used, and something it is sorely in need of: infrastructure. the sharp fall in the price of cocoa in 1961 put paid to Kwame Nkrumah’s construction projects in Ghana. Designed to carry Levels of engagement: Trade and investment five million metric tonnes of cargo annually, with a lack of new investment, mounting debt, poor management and mainte- The China that built the railway in Africa in the 1970s is a nance, moreover, Zambia’s new railway never carried more distant shadow of the China of today that routinely builds than 300,000. From being a symbol of a new era of Africa’s railways, roads, ports and other infrastructure in various parts development, this railway – badly managed and insufficiently of the world. In the 2000s, as the size of China’s economy in maintained – became emblematic of Africa’s lost construc- quick succession surpassed that of Italy, France, the UK, and tion boom turned to protracted bust. Germany, China’s energy consumption expanded four times faster than expected to 16% of global demand in 2006. While Instead of a boom of new steel and concrete, Africa expe- China’s GDP expanded at an annual rate of 10% over 2000- rienced decades of lost growth. In 2008, the World Bank1 2008, its annual demand for industrial raw materials such as estimted that access to the most basic services in Africa steel (16%), aluminium (20%), copper (13%) and nickel (23%) increased only modestly between the early 1990s and the all grew even faster. In the ten years preceding 2008, China’s early 2000s, and only slightly in the last decade. Electricity, consumption of crude oil nearly doubled, and during the for example, is still available to little more than 20% of Africa’s same period its consumption of copper and iron ore tripled total population, and piped water to just 12%. while that of aluminium quadrupled. Between 2000 and 2008, China accounted for two-thirds of the world’s entire Compounding the problem was the fact that Africa was growth in demand for steel and aluminium and virtually all largely left to its own devices in terms of infrastructure in the growth in global demand for copper and nickel. 1990s when both African and donor investment in infrastruc- ture was scaled back relative to other priorities such as child This rapid growth in China’s natural resource use contrib- immunisation and education, partly due to the mistaken uted to a windfall in trade between China and Africa, a major belief that private investors would step up to fill the infra- supplier of raw materials. Bilateral trade stood at just over structure financing gap. As a result, while Africa’s construc- USD 10 billion in 2000, yet in 2010 it breached USD 125 billion, tion sector deteriorated, poor road, rail and harbour infra- exceeding Africa’s trade with any other partner, the closest structure added 30-40% to the costs of goods traded among ones being the US with around USD 115 billion, France with African countries, and the costs of moving foreign imports to around USD 66 billion, and the UK with around USD 31 billion (see chart on next page). This China-Africa trade pattern basi- 1 See ‘Access, Affordability and Alternatives: Modern Infrastructure Services in Africa', Africa Infrastructure Country Diagnostic. The International Bank cally encompasses an exchange of a diverse range of Chinese for Reconstruction and Development, World Bank, Feb. 2008 manufactured goods for African raw materials. 6 The Beijing Axis
  • 7. Features Features The China Analyst Africa's Major Trade Partners (USD bn, 2000-10) Major Investors in Africa OFDI Flow (USD bn, 2003-09) China UK US France 150 France 120 2003 US 2004 90 2005 2006 60 UK 2007 2008 30 2009 China 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 0 5 10 15 20 Source: UN Comtrade; The Beijing Axis Analysis Source: OECD Statistical Database; China National Bureau of Stistics; The Beijing Axis Analysis Along with the US and emerging economies such as Brazil • Export credits to support national exporters. In 2009, and India, China’s imports from Africa are as expected char- China disbursed USD 29.6 billion in export credit acterised by a disproportionate share of oil and minerals. globally China’s trade with Africa has as a result been very lucra- • Natural resources-backed lines of credit, or the ‘Angola tive for resource-rich African countries, and these African Mode’, where China’s Exim Bank uses natural resource commodity suppliers have become crucial suppliers for exports or preferential access to them as collateral for China. South Africa is China’s only African trade partner from infrastructure projects and as a means to repay loans which it imports substantial amounts of products that are • Mixed credits, where financing packages combine not resources, while China’s leading suppliers of oil (Angola), concessional and market rate loans, such as a mixture Manganese (South Africa), chromium (South Africa), cobalt of FDI and export credit3 (the DRC), and platinum (South Africa) are all African. Laying down a methodology: The Angola Mode China's annual flow of Outbound Foreign Direct Investment (OFDI) to Africa in recent years is still far in arrears of the US, As China’s engagement with Africa has deepened during the France and the UK (see chart above, right). In 2009, China’s last decade, its deals on the continent came to broadly fit a OFDI stock in Africa reached USD 9.3 billion, still marginally mould. As a country that recently emerged from civil war yet behind that of Switzerland, the Netherlands and far behind that is rich in natural resources and sorely in need of infra- the US, France and the UK (which has the most invested stock structural renewal, Angola has become one of the biggest in Africa, namely USD 61.4 billion). Chinese investment in recipients of Chinese financing for infrastructure projects in Africa reflects a similar predilection for resource-rich coun- Africa, one of China’s largest trading partners on the conti- tries as is the case with trade, and in 2009 a full 76% of Chinese nent, and a major source of its oil. In 2004 Angola signed a FDI in Africa was concentrated in resource-rich countries. In deal with China that would become emblematic of China’s 2009, the main sectors for Chinese OFDI stock in Africa were ‘infrastructure for resources’ relationship with Africa. mining (30%), manufacturing (22%), and construction (16%). Angola received a USD 2 billion loan from a Chinese policy Yet while Chinese levels of OFDI in Africa still lag far behind bank, China EximBank, for the development of infrastructure, those of Western countries, China and other emerging part- including electricity generation, telecom expansion, railway ners are following new paths of investing in Africa. Europe rehabilitation and water. As part of the repayment terms for and North America have typically relied on FDI and Official the loan, Angola agreed to supply China with 10,000 barrels Development Assistance (ODA) in Africa, but emerging of oil per day. In a pattern that would be repeated frequently powers such as China are adopting a more holistic approach afterwards, a Chinese construction/engineering company to broaden their economic relationship with Africa that was awarded contracts for the infrastructure projects, while combines trade and investment with development coop- rights for extracting natural resources was afforded to a eration. Thus while developing partners such as China, Chinese oil company. India, South Korea and Brazil are not only engaging with African countries that Western countries have avoided in the 3 Deborah Brautigam, author of ‘The Dragon’s Gift,’ has put China’s total past, they are also increasingly using alternative financing purely concessional loans, zero-interest loans and grant commitments to methods. China in particular uses the following financing Africa at USD 2.1 billion in 2009, while she estimated China’s preferential export credit commitments to Africa for 2007-09 at around USD 2 billion methods in Africa2: and non-concessional finance at around USD 5 billion annually. In sum, all 2 For more detail see ‘African Economic Outlook 2011’, ADB, OECD, UNDP, China’s alternative financial flows to Africa reached an annual average com- UNECA, 2011, p. 112. mitment of USD 7.1 billion over 2007-09. The Beijing Axis 7
  • 8. The China Analyst Features International Contract Revenue in Africa, China's and Rest Chinese contractors have become highly competitive of World's Share (USD mn, 2001-09) bidders for publicly tendered infrastructure projects. A 2007 2001 7.4% 92.6% survey of 35 Chinese construction companies active in Africa found that around 50% of Chinese projects in Africa were 2002 9.9% 90.1% actually won via an international bidding process. The extent China of Chinese contractors success in Africa is illustrated in the 2003 11.8% 88.2% fact that in 2001 China’s share of contract revenue in Africa 2004 14.7% 85.3% Rest of World was a mere 7.4%, yet by 2009 this had climbed to 36.6% (see chart to the left), making it the dominant player, far ahead of 2005 21.4% 78.6% Italy with 15% in second place and France with 10% in third. 2006 28.4% 71.6% Africa is now China’s largest market in terms of contract revenue with 41.1%, even more than Asia with 36%. Similar 2007 26.9% 73.1% to Chinese trade and investment in Africa, the revenue of 2008 42.4% 57.6% Chinese contractors is highly concentrated in a few resource- rich countries. In 2009, the leading six countries (Algeria, 2009 36.6% 63.4% Angola, Sudan, Nigeria, Libya and Ethiopia), mostly oil and gas-related economies, accounted for USD 18.1 billion or 71% 0 10,000 20,000 30,000 40,000 50,000 60,000 Source: ENR; The Beijing Axis Analysis of China’s total revenue (see chart opposite page). Repaying loans for infrastructure development with natural Chinese contractors in Africa have been most successful in resources is not a new concept. The first reported example of civil infrastructure projects such as transport and construc- such a deal involving China in Africa was actually not 2004 in tion. As stated above, around 50% of Chinese contractors Angola, but 2001 in the DRC when China provided USD 280 in Africa seem to prefer international bids, yet around 40% million for dam construction and received loan payments were accounted for by grants, concessional loan projects and in oil. After 2004, however, such deals became more widely other mechanisms in which the Chinese government play a used by China in Africa, and also expanded to other resources strong role. The case of Angola, where Chinese commercial, such as bauxite, chromium, and iron ore. It should be noted, investment and contracting activity has been vigorous for however, that the Angola mode is not the only mode of almost a decade now, can be held up as an example of the engagement for Chinese companies in Africa, yet they are progression of Chinese contracting over time. The establish- common in countries such as Angola, the DRC and Sudan ment of Angola’s first loan agreement with China Exim Bank who have only recently emerged from conflict and instability. in March 2004 facilitated the entry of China’s large SOEs into Angola, and in the time since dozens of Chinese contractors The process of concluding Angola Mode deals is typically have established operations there.4 borne out of intergovernmental agreements that deter- mine the purpose, amount, maturity and interest rate of the Although Chinese contractors typically still focus more on loan, followed by the signing of a loan agreement – often the lower value added part of the construction value chain, concessional in nature – between China Exim Bank and the their ability to undertake construction projects at cheaper borrower. The capital is then disbursed in tranches in terms prices have made them very competitive and, in the case of project completion, and paid directly to Chinese contrac- of Angola, have broken the monopoly of Portuguese and tors in China, which are selected by Exim Bank and China’s Brazilian contractors. Due to the volume of their needs and Ministry of Commerce and sanctioned by the beneficiary the lack of quality products available for sourcing locally, government. With such a methodology in place, the main Chinese contractors bring most of their workers and mate- Chinese actors in Africa are rials from China (although in Angola some Chinese compa- • Lending agencies: China’s policy banks, China Exim nies have in the last few years begun to set up local factories Bank and China Development Bank through the to produce some industrial inputs). After a few years, mostly China-Africa Development (CAD) Fund private Chinese companies also began entering Angola, • Extractors and builders: Large state-owned enter- largely to subcontract from the larger companies and to set prises and some private ones operating in the extrac- up a procurement chain for providing equipment and mate- tive and construction/engineering industries rials from China. • Other business people: Small to medium-sized Chinese businesses and individual entrepreneurs that Windows of opportunity: Africa’s new business landscape may appear subsequently China is engaging with Africa like no other country has ever Getting their hands dirty: Chinese contractors in Africa done before, and in the fundamental exchange of Africa’s resources for Chinese-built infrastructure, China is making Collectively, these actors are re-shaping Africa’s business 4 For an assessment of the various estimates provided for the number landscape, yet none are doing so more obviously than China’s of Chinese state-owned and private companies in Angola, see L Corkin, construction and engineering contractors. Having originally ‘Chinese Construction Companies in Angola: A Local Linkages Perspective,’ relied solely on Chinese government-financed projects, p. 17. 8 The Beijing Axis
  • 9. Features Features The China Analyst a significant contribution to addressing a lasting struc- Leading Countries for Chinese Contractor Revenue in Africa tural bottleneck in Africa. The ‘infrastructure for resources’ and Number of Chinese Contractors in Country (USD mn, 2009) 22 deals it concludes in Africa are unique in the way they lock 6,000 African countries into using their resources for infrastruc- ture – revenue never actually comes in, obviating the need 17 5,000 for taxation. China is transcending conventional patterns of engagement of straightforward FDI and ODI, and has instead fashioned an elaborate system where a strong government 4,000 role and alternative financing methods can overcome risk, and the leveraging of China’s own booming construction industry can see Chinese contractors building much-needed 3,000 civil infrastructure as well as value-adding processing indus- 17 tries such as refineries and petro-chemical complexes in 2,000 14 12 Africa. 15 China is a strong player in Africa both in upstream activi- 1,000 8 6 7 9 ties such as exploration and extraction, as well as in down- stream activities such as processing. China's demand for 1 1 5 4 0 oil and minerals has created a new level of competition for Algeria Angola Sudan Nigeria Libya Ethiopia Congo(B) Egypt DRC Botswana Africa’s resources, and has contributed to higher prices, to Source: China Statistical Yearbook 2010; The Beijing Axis Analysis the benefit of Africa. In countries such as the DRC and Angola where previous failed construction booms have formed part more time in Africa they will become more aware of their of protracted instability, China has undertaken projects own shortcomings and more receptive to the value offered where many other investors have regarded the risk as being by foreign companies with the right knowledge and experi- too high. The sustainability and flexibility of China’s contem- ence. For such foreign companies, the challenge will be to porary engagement in Africa, moreover, should contribute utilise these opportunities in the right industries, at the right significantly to Africa’s current construction boom not being time. China’s increased business in Africa has also created as forlorn as the previous one, and that would make it a true demand for services essential to doing in business in Africa, new era for Africa. providing new opportunities for banks, law firms, and various other service providers. This is not to say that the impact of China in Africa is flawless, yet this should not be the expectation for something that is These are but a few examples of how China’s ‘infrastructure not an exercise in altruism. Chinese projects in Africa are in for resources’ engagement is creating new business opportu- essence turnkey projects, in theory fulfilled by contractors nities for foreign firms in Africa. Yet perhaps the best oppor- who then sign off on the engagement, and hence the extent tunity of all is the fact that Africa itself is changing. As China’s of the true lasting value add on the ground in Africa is some- activities in Africa increases, Africa is gradually transforming times brought into question by some observers, especially itself from a perennial backwater to a new source of growth since China exports a significant share of its labour to Africa. with diversifying economies, expanding consumer markets, Yet this could be changing, as we have seen, as Chinese and working infrastructure – making Africa open for business companies seek to establish local manufacturing capabilities like never before. on the continent, in addition to establishing several special economic zones and other forms of skills transfer. Barry van Wyk, Senior Consultant barryvanwyk@thebeijingaxis.com The strong role played by government-to-government inter- action in Chinese deals in Africa has in practice often meant that many of Africa’s mineral rights are sold in closed deals and not in public auctions. Yet the increasing number of Chinese extractive companies and construction/engineering contractors in Africa has opened up a vast new opportunity landscape for foreign companies on the continent, both in terms of potential partnership and new clientele. Thus in areas where Chinese companies are still comparatively less adept, such as consulting and industrial design, many opportunities for partnerships are now open to foreign firms. Chinese firms in Africa still lack a deep understanding of local business as well as cultural and regulatory issues, and here again foreign companies with experience in Africa can profit. Foreign companies could also explore joint bids with Chinese companies for construction projects. As Chinese firms spend The Beijing Axis 9
  • 10. The China Analyst Features China and Latin America: Untapped Sources of Added Value Bilateral trade between China and Latin America has increased ten-fold in the last decade, preparing the way for a massive wave of Chinese investment in the region in 2010. While both bilateral trade and investment are expected to increase further in the coming years, questions remain on how balanced and sustainable the relationship will be. This article argues that both regions are set to enter a new stage of their relationship that will be characterised by increasing Chinese investments in more value added industries and eventually higher value added exports from Latin America. By Javier Cuñat O nly ten years ago, upon China’s entry into the World imports and 2% of its total exports (see charts below). Ten Trade Organisation (WTO), China was the world’s years later, trade between China and LatAm amounted to seventh-largest economy, growing at 7.3% y-o-y and USD 179.3 billion, a tenfold increase, with LatAm accounting accounting for just over a tenth of global economic growth. In for 6.5% of China’s total imports and 5.6% of its total exports; 2010, with a global financial crisis still persistent in the United and China accounting for 12.3% of LatAm’s total imports and States (US) and Europe, China became the world’s second- 12.9% of LatAm’s total exports. largest economy, growing at 9.6% (H1 2011) and contrib- uting one-third to total world GDP growth. The emergence Overall, China is not only more important to LatAm today than of China as a global economic power has greatly benefited ten years ago and vice versa, but the two regions are progres- the global economy. In China’s phenomenal rise, one thing sively becoming more dependent on each other as important is clear: as China grows, other countries benefit. As China’s sources of growth compared to other regions, exemplified by exported-oriented economy keeps churning out increasingly the free trade agreements China has signed in recent years with higher value added goods, other countries can now purchase Chile, Peru and Costa Rica. This trend became more evident previously unattainable products at competitive prices. during the most recent financial crisis, during which China’s stimulus package and unrelenting demand for commodities Yet this trend has also to varying degrees presented the helped LatAm’s exports to China counterbalance a decrease regions and countries within China’s trade, investment and in demand from the US and Europe. For its part China found geopolitical radar with a number of challenges. Antidumping the perfect partner to serve its own demand, diversifying and protectionist measures in the US and Europe, labour and its sources of fuel and metals needed to power and build its community issues in Africa, and territorial disputes in Asia economy during the financial crisis and into the future. are just some examples. Latin America (LatAm), with its own particularities, is no exception. According to the Economic Commission for LatAm and the Caribbean (ECLAC), China today ranks among LatAm’s top The relationship trading partners, particularly in countries such as Brazil, Chile, Peru and Argentina, where China accounts for 15%, 24%, When China entered the WTO, annual trade between China 16% and 9%, respectively, of each country’s total exports. and LatAm amounted to USD 14.4 billion, with LatAm What's more, China is now the largest importer of goods and accounting for 2.7% of China’s total imports and 2.9% of its services from Brazil and Chile, and the second-largest from total exports; and China accounting for 2.3 % of LatAm’s total Peru, Argentina and Cuba. However, these exports remain China's Trade with LatAm and the Caribbean (USD bn, China's Trade with LatAm and the Caribbean (%, 2001-10) 2001-10) 100 14% China as % of LatAm Exports China as % of LatAm Imports Exports 12% 80 LatAm as % of China Exports Imports 10% LatAm as % of China Imports 60 8% 6% 40 4% 20 2% 0 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: UN Comtrade; The Beijing Axis Analysis Source: UN Comtrade; The Beijing Axis Analysis 10 The Beijing Axis
  • 11. Features Features The China Analyst concentrated in raw materials such as copper, iron ore, and A survey by the China-Brazil Business Council (CBBC) revealed soybeans, which account for nearly 60% of total exports. that 93% of Chinese investments in Brazil in 2010 were under- Similarly, China’s exports to LatAm are mainly electronic taken by state-owned companies, while 6% were undertaken items, autoparts, equipment and machinery, and textiles. by companies belonging to provinces, and 1% by private companies. The survey also found that Chinese investments Indeed, the trade relationship between China and LatAm in 2010 totalled USD 12.6 billion (slightly higher than ECLAC’s is essentially built on the exchange of natural resources for figures), 82% of which involved mergers and acquisitions. manufactured goods or low value for high value added prod- Sinopec made the largest investment when it acquired a 40% ucts. While this makes a lot of sense from the countries' factor stake in the Brazilian operations of Repsol-YPF for USD 7.1 endowment and comparative advantage point of view, it also billion (see table on next page). Of China's total investment presents great challenges for LatAm manufacturers who have commitments in 2010, 95% were concentrated in the areas seen Chinese exports progressively replace their market shares of oil and gas, agribusiness, mining, and ironworks. However, at home, in other LatAm markets, and especially in the US. this trend appears to shifting in 2011, with announced Chinese investments in LatAm and the Caribbean thus far amounting Regarding investment, China's FDI stock in LatAm breached to USD 7.13 billion (see chart below), with a stronger focus on USD 41 billion at the end of 2009, accounting for up to 18% higher value added industries. of total Chinese FDI stock in the world. LatAm's investment stock in China, on the other hand, dwarfs that number, hitting If the figures from 2010 and the announced figures of H1 USD 112.6 billion in 2008, or roughly 14% of the total foreign 2011 are any indication, they show that China is becoming capital absorbed by China. A closer look into the GDP figures increasingly entrenched throughout the region, possibly for both regions illustrates that current levels of Chinese FDI marking the start of a new phase of economic relations in LatAm and the Caribbean are comparatively low. In addi- between China and LatAm which features stronger trade tion, they are mostly concentrated in tax havens such as the links that are accompanied by growing investment in not Cayman Islands and British Virgin Islands, which accounted only natural resources, but also manufacturing, infrastruc- for 96.7% of all Chinese FDI into LatAm between 2003 and ture and services. As examples, Huawei, ZTE and Lenovo are 2009. Excluding the two tax havens, LatAm only received becoming prominent investors in the telecommunications about USD 126 million in Chinese FDI, or less than 1% of the and electronics sectors, and BYD, Chery and Geely are leading annual total. Overall, there is Chinese under-investment in all the charge in the auto industry. sectors but especially in higher value added industries. The fundamental challenges facing the China-LatAm relation- 2010 - Breakthrough ship are two-fold. Firstly, how to increase and diversify Chinese FDI in the region beyond raw materials to more value added In 2010, with an estimated investment of USD 15.25 billion, industries; and secondly how to improve trade by means of China's investment in LatAm was more than twice the amount exporting more value added LatAm goods. Both challenges, as it invested in the region in the period 2006–09, namely USD they unfold, will present substantial opportunities for both sides. 7 billion. China's 9% share of FDI in the region now makes it the third-largest foreign investor in LatAm, trailing only Forever imbalanced? Unlikely the US and the Netherlands, which accounted for 17% and 13%, respectively (see chart below). By country, the main Over the long term, the greatest opportunity but also chal- destinations for Chinese FDI were Brazil, Argentina and Peru, lenge facing Chinese companies in LatAm is successful inte- all of which have established strong trade links with China. gration with the host economies. The model it is presently Brazil, China’s BRICS counterpart in the region, was by far the utilising in a number of countries, characterised by the acqui- biggest benefactor of this investment wave, with USD 9.6 sition of natural resource assets, the extraction and low value billion in Chinese FDI in 2010. added exports ‘back to China’, and under-developed commu- nity relations, has both a limited political and business shelf Origin of FDI in LatAm and the Caribbean* (%, 2006-10) China's LatAm FDI Destinations by Country* (%, 2010-Q3 2011) USD 864.17 bn USD 112.63 bn USD 15.25 bn USD 7.13 bn 100% 100 8% 10% Latin America Others Colombia 80% 80 30% 28% Caribbean Costa Rica Financial Mexico Centres 60 60% 7% Ecuador 10% Netherlands 5% Peru 13% China 4% 40 40% 2% Argentina 10% 9% UK 4% Brazil 5% 3% Japan 4% 20 20% Spain 25% 17% Canada 0 0% 2010 Q1-Q3 2011 US 2006-2009 2010 *Note: Data for 2010 is confirmed investments; data for 2011 is announced investments. Source: ECLAC; The Beijing Axis Analysis Source: ECLAC; The Beijing Axis Analysis The Beijing Axis 11
  • 12. The China Analyst Features Major Announced Chinese Foreign Direct Investments in LatAm (2010-11) highlighted deals denote those in non-resources sectors Year Month Investor Status USD mn Partner/target Sector Subsector Country 2010 Jan Honbridge Holdings Concluded       400 Sul-Americana de Metals Metals Iron ore Brazil 2010 Feb Sany Heavy Industry Ongoing 200 Build a manufacturing plant Manufacturing Heavy machinery Brazil 2010 Mar East China Mineral Concluded      1,200 Itaminas Metals Iron ore Brazil Expl. & Develop. 2010 Mar CNOOC Concluded      3,100 Bridas Energy Oil Argentina 2010 Mar State Grid Ongoing      1,050 Quadra Mining Metals Copper Chile 2010 Apr WISCO Concluded      4,700 A JV steel mill Metals Steel Brazil 2010 May State Grid Concluded      1,720 Cobra, Elecnor and Isolux Power Power grid Brazil 2010 May Sinochem Concluded      3,070 Peregrino Field Energy Oil Brazil 2010 Aug Tongling Nonferrous & Planning      3,000 A copper mine Metals Copper Ecuador China Railway Construction 2010 Sep Chery Ongoing        400 n/a Transport Auto Brazil 2010 Oct Sinopec Ongoing      7,190 Repsol/YPF Energy Oil Brazil 2011 Jan CR Zongshen Concluded          80 Kasinski Transport Motorcycle Brazil 2011 Mar Chongqing Grain Group Concluded      2,400 n/a Agriculture Soybeans Brazil 2011 Apr Lenovo Ongoing        900 Positivo Electronics PC Brazil 2011 Apr Huawei Ongoing        363 Build a plant Telecom Mobile phone, tablet PC Brazil 2011 Apr ZTE Concluded        200 Build a plant Telecom Tablet PC Brazil 2011 May Chongqing Polycomp Concluded          60 Owens Corning Plant Material Fiber glass Brazil International Corp. 2011 May XCMG Concluded        200 n/a Manufacturing Heavy machinery Brazil 2011 May Geely Concluded          10 Nordex Transport Auto Uruguay 2011 Jun China CNR Corp Ongoing        127 T’Trans Transport Train Brazil 2011 Jun Qingshan Mining Ongoing            3 JDC Mining Co Metals Gold, silver & copper Mexico 2011 Jun TCL Ongoing          21 Radio Victoria Fueguina Telecom Mobile Argentina 2011 Jul BOMCO Concluded n/a BRCP, Asperbras Energy Petroleum equipment Brazil 2011 Aug ICBC Ongoing        600 Standard Bank Argentina Finance Banking Argentina 2011 Aug Midea Group Ongoing        223 Carrier Corporation Manufacturing Home appliances Argentina, of UTC Group Brazil, Chile 2011 Sep Taiyuan Steel, CITIC Ongoing      1,950 CBMM Metals Niobium Brazil Group and Baosteel Total for Q1-Q3 2011 7,137 Source: China Global Investment Tracker, Heritage Foundation, Carta da China No 56 June 2010, China-Brazil Business Council; Observatario Iberoamericano de Asia - Pacifico and press releases. Note highlighted deals denote those in non-resources sectors. life. While benefits of both existing and proposed Chinese construction equipment manufacturers, decided to put down investments are real, trade tensions from the LatAm side are roots in the region by investing USD 200 million in a manu- emerging and creating contradictions for both parties. We facturing plant in the Brazilian state of Sao Paulo. One year saw a good example of this at the beginning of 2011, when later, XCMG, its closest Chinese competitor, followed in its the Brazilian Finance Minister called for a revaluation of the footsteps. We have seen similar examples in the automobile renminbi following a massive USD 15 billion flow of Chinese industry in Mexico, where Chinese automakers Zhongxing, investments into Brazil during 2010. Geely and Changan, through a partnership with Mexico’s Autopark, have all announced plans to establish auto-making More importantly, LatAm now more than ever represents an facilities. China’s ZTE has started manufacturing smartphones opportunity for Chinese manufacturers to enlarge their global in Argentina together with local white goods manufacturer footprints and market shares, especially in markets where BGH and has also announced it will start producing tablet their international competitors have a significant presence. computers in Brazil. The list goes on in a number of high- Aware of China’s price advantages, constantly improving value-added industries (see table above). Leading Chinese technology standards and overall positive macroeconomic companies are looking at a number of LatAm countries as outlook for the LatAm region (recently revised by the World key launchpads from which to market their products not only Bank to 4.6% growth for 2010), Chinese manufacturing in other LatAm markets but also in North American markets. companies are realising that an export-oriented develop- ment strategy towards LatAm without a footprint is a dead- According to ECLAC, 90% of China's confirmed investment end game. Various factors, i.e. consolidated market shares at in LatAm has targeted the extraction of natural resources. home, the need to better understand their customers in the Looking into China’s upgraded endowment factors over region, and strong balance sheets built on export revenue the years, the scale, nature and international ambitions of with low production costs, have laid the foundation for its domestic champions together with recent Chinese OFDI capital investments to grow and deepen in the years to come. figures in the region, one can expect an increasing number of Chinese manufacturing companies to invest in high value In February 2010, Sany Heavy Industry, one of China’s largest added industries in the region. While investments in oil, 12 The Beijing Axis
  • 13. Features Features The China Analyst gas and mineral resources will remain at the top of Beijing’s challenge but probably one of the best opportunities for the agenda, less value added Chinese investments in LatAm region’s export diversification ambitions. going forward would not make much sense from a global supply chain point of view. If trade relations continue to Cross-border opportunities for LatAm's exporters do not unfold as they have in the last decade, Chinese manufacturers only exist in the natural resources side of Chinese demand and infrastructure developers will need to integrate LatAm but also in food, beverages, agribusiness, leather and fabrics, in their supply chains in the long run as much as LatAm is plastics, chemicals, pharmaceuticals, machinery and elec- willing to. So expect this trend to intensify. tronics, among other sectors. While market entry strategies may vary greatly - from organic to inorganic growth, from Over the long term, the greatest opportunity but also chal- JV partnerships to wholly foreign owned enterprises, from lenge facing LatAm companies seeking to compete in China export development to assembling and/or manufacturing, is to diversify their exports towards more value added prod- from partnering with a local distributor(s) to developing ucts. While a significant number of LatAm’s manufactured one's own distribution channels – one thing is clear: ignoring exports compete with products China itself produces, one the Chinese consumption market is neither possible nor wise should not forget that China is the world’s second-largest if one aims to remain competitive over the long term. importer of manufactured goods. So from a sectoral and product perspective, the challenge is not that there is no Final word market for LatAm's manufactured goods in China, but rather identifying what the specific products with the greatest If 2010 meant anything for China-LatAm trade and invest- potential are and how to market them effectively. ment relationship, it was change. We are leaving behind a stage in the relationship characterised by booming bilateral The Chinese market is more complex than any other market trade, few investments and strong unbalances, and entering of comparable size, and therefore requires an on-the-ground, a new stage characterised by the utilisation of new sources customised and dedicated strategic approach. Even though of added value. This stage will not only be characterised by China is a large market for a number of products, entering the trade but also by increasing Chinese investments in more Chinese market is not an easy task and profits are usually the value added industries and eventually higher value added result of a long-term investment in understanding the Chinese exports from LatAm. If this happens, and we think it will, the culture, the specifics of your market and network building. exchange of natural resources for manufactured goods will Just as one cannot ignore that the emergence of Chinese prove to be not the trend itself but the catalyst and continu- manufacturing companies is disrupting domestic competition ation of a bigger trend. Both regions are set to take steps in a number of industries in LatAm, and increasingly in more towards a more balanced, sustainable, value added and capital and technological-intensive products, one cannot mutually beneficial relationship. While Chinese OFDI figures ignore that the Chinese marketplace represents a tremendous for 2010 and H1 2011 provide some hints, it is still uncertain opportunity for international companies. China ranks among which countries, sectors and companies will be the protago- the world's largest consumers and importers of power gener- nists in the coming decade. ating equipment, aircraft and parts, computers and industrial machinery, agricultural products, consumer and luxury goods How do LatAm companies look at China and how do Chinese among a large spectrum of sectors and products. companies look at LatAm? While the challenges involved in business transactions are complex, a change in perception Brazilian aircraft company Embraer, along with Mexican will be key as old perceptions have on many occasions been bread maker Bimbo, are just two examples of successful as unbalanced as the trade and investment relationship. LatAm ventures in the Chinese market. Embraer, which China should not be perceived as a neo-colonial power as opened its first office in Beijing in 2000, continued with the much as LatAm is no one’s backyard. The first, and most prob- construction of a spare parts distribution centre at Beijing ably the biggest, barriers that LatAm companies face when International Airport, and the signing of a joint venture with engaging with China are not that different than what the Aviation Industry Corporation of China in 2003. Embraer Chinese face when engaging with LatAm. These are culture, has delivered more than 70 aircraft in China and has already language, protocol, and lack of information, and they impact achieved a 52% share of China’s market for aircraft with up how we understand the opportunities and challenges. to 120 seats in 2009. With two plants in China, Bimbo is a pioneer in marketing packaged baked goods in China, espe- Working out the information deficits and bringing the market cially in Beijing and Tianjin, and is expanding to other cities. realities to the corporate landscape in China and LatAm will further assist and facilitate mutually beneficial and more Despite such precedents, LatAm’s business presence in China value added trade and investment. Government bodies, is still mainly dominated by the so-called multilatinas, with a industry associations, chambers of commerce, corporate strong component coming from the natural resources sector, players and service providers must work in that direction. while LatAm's small and medium-sized enterprises lag behind their counterparts in terms of presence and market penetra- The rules are changing but the game is just beginning. tion. As LatAm becomes increasingly integrated with China, bringing the region’s small and medium-sized enterprises to Javier Cuñat, General Manager: Beijing Axis Strategy the Chinese market not only represents a major competitive javiercunat@thebeijingaxis.com The Beijing Axis 13
  • 14. The China Analyst Features Rising Stars: China’s Emerging Construction Machinery Manufacturers Buoyed by increasing demand, especially in emerging markets, China's construction machinery players have been actively enhancing their international reach and catching up with their foreign counterparts. China’s three leading companies in this sector are XCMG, Sany, and Zoomlion, and this article outlines the different strategies adopted by these rising stars and their global expansion plans. By Ankit Khaitan S tarting from a mere USD 1 billion worth of sales in 1999, Global Market Share of Construction Machinery Industry in China’s construction machinery industry saw a decade Terms of Sales Volume (2002 vs. 2009) of high growth with sales reaching USD 60 billion in North Europe Japan Others China America 2010. This phenomenal growth in demand was fuelled by rapid growth in both the developed coastal areas of China 100 and more recently, inland areas. In developed areas, the 16% genesis of growth was local governments’ expansion of small 29% cities, while in inland China it was a growing market for infra- 80 10% structure and housing. Currently, for every 1% increase in the urbanisation rate, 13 million people move from rural areas to 4% cities, but this number still lags far behind that of developed 60 28% 13% countries and the global average. The Chinese government has set a clear target of achieving an urbanisation rate of 60% by 2020, indicating that China still has a long way to go in 22% this regard. 40 28% Another key demand driver for construction machinery is the strong growth in fixed asset investments spurred mostly 20 by downstream segments, including infrastructure and 32% property investments. For instance, social housing, though 18% comparatively smaller investments, is significant in construc- tion project volume and substantially increases the need for 0 2002 2009 equipment. Additionally, demand from foreign markets has Source: CCMA; Off-Highway Research also grown, allowing China’s construction machinery exports to experience rapid growth in recent years. Together, these comprehensive production lines. In contrast, Zoomlion factors have bolstered the development of the construction is China’s second-largest, and the world’s tenth-largest, machinery industry in China, making it the world’s fastest- construction machinery manufacturer. It emerged out growing and third-largest market and catapulting the three of Changsha Construction Machinery Research Institute, largest players onto the world stage. a leading state-owned research institution focusing on construction machinery, effectively affording it a strong Beginnings competitive advantage. According to a report by Off-Highway Research (a consul- Consolidation and government support tancy specialising in the research and analysis of interna- tional construction), China’s share of the global construc- Though the industry in China is highly fragmented with over tion machinery market jumped from 18% in 2002 to 32% 900 companies vying for market share, a majority of them in 2009 in terms of sales volume (see chart above, right). only manufacture components or engage in sub-assembly China’s three leading pioneers in this regard are Sany Heavy due to the hefty upfront financial investments that are Industry, Zoomlion and XCMG, which have emerged as the required. In addition, intense competition between both three dominant manufacturers that together account for domestic and foreign participants as well as rising demand about 30% of the market in China, larger than the top three for improved and advanced technology have forced small foreign companies active in China (see chart on next page). operators to either be acquired by more established players Indeed, these three are now ranked in the top ten in terms of or simply exit the game. sales revenue globally. In fact, the large in-house companies have supplemented Out of these, Sany and XCMG only started operating in the organic growth and scaled up rapidly through consolida- early 1990s but quickly transformed themselves from being tion. In the past decade, Sany has acquired assets from its single product machinery companies to ones that boast parent company to expand its capabilities while Zoomlion 14 The Beijing Axis
  • 15. Features Features The China Analyst Approximate Market Share of China's Construction balanced between its two largest segments, concrete and Machinery Industry (2010) crane machinery, contributing 43% and 34% to total revenue, Caterpillar Volvo XCMG Zoomlion respectively, in 2010 (see chart on next page). Komatsu Hitachi XGMA Other Chinese Sany leads the local market for truck mounted concrete Kobelco Sany Heavy Other Foreign pumps and full hydraulic rollers; its production of pump trucks is one of the best in the world. Compared to Zoomlion, it is less diverse and its most important segment, concrete, 10% 9% alone contributes more than 60% of its total sales revenue. 7% Nonetheless, after Sany acquired the excavator and truck 5% crane businesses from its parent, its level of business diver- 4% sification started closing in on Zoomlion’s, with product 32% 1% categories expanding to include concrete machinery, road 11% construction machinery, excavator, pile driving machinery, hoisting machinery and port machinery. 8% 3% 11% XCMG is the world’s largest manufacturer of truck cranes, Source: CCMA which account for most of its total revenue. The comprehen- sive line of products it offers includes construction mobile has targeted third parties to scale up its product offerings. cranes, crawler cranes, wheel loaders, concrete boom pumps, For example, Zoomlion acquired Hunan Puyuan Construction piling rigs, aerial fire trucks, asphalt pavers and cold milling Machinery's truck crane business and Zhongbiao’s environ- machines. mental and sanitation machinery business in 2003. Over the years, Chinese companies in various industries have This consolidation is being further encouraged by the successfully moved up the value chain by offering a wide government, who is actively promoting consolidation in range of products and the construction machinery industry the industry to avoid disorderly competition among local is no different. Foreign companies have historically served manufacturers. Furthermore, equipment manufacturing is the Chinese excavator market by leveraging their strong one of the seven strategic emerging industries identified in expertise and precision quality. Yet according to CCMA data, the 12th Five Year Plan that the government will focus on so Chinese companies now control one-third of the global exca- as to foster the development of a sound market environment; vator market, up from 22% in 2006. Such strategic moves hence consolidation will be an ongoing trend in the industry have undeniably boosted their overall competitiveness and going forward. Chinese construction machinery manufac- allowed them to capture market share from their foreign turers are also afforded tax breaks and other incentives from competitors in China and in other emerging markets. local Chinese governments, enabling them to take a long term view of the market rather than just focusing on short Going global – M&A and partnership term profits. The global presence of US-based Caterpillar and Japan's It is worth noting that foreign enterprises have had little Komatsu has been strong for decades as they began opportunity to compete against local competitors in this expanding abroad early on when growth in their domestic consolidation drive due to regulatory restrictions, and have markets slowed with urbanisation reaching a saturation been unable to acquire majority stakes in joint ventures with point. Following a similar strategy, Zoomlion, Sany and domestic firms. This has allowed local rivals to gather market XCMG have been encouraged to expand into foreign markets share from foreign companies and at the same time narrow because of their solid positions in the Chinese market, world- the capability and quality gap by integrating independent class products, sustainable low cost advantage and China’s enterprises’ abilities via strategic acquisitions. Moreover, expansive infrastructure projects. Sany in particular has led foreign enterprises have simply not been able to increase domestic equipment manufacturers in overseas expansion. production fast enough to meet rising demand, diluting their market shares. However, the three differ in their overseas expansion strat- egies. Zoomlion focuses on a direct M&A route to expand, Different specialisations integrating its costs and scaling its position in China while leveraging its target’s distribution network and technical The product portfolios of China’s three largest industry players capacities. CIFA, a global manufacturer based in Italy, was a mostly overlap, yet there is diversity in their product offerings very strategic acquisition for Zoomlion that strengthened the and this unique characteristic defines some of the dynamics latter's R&D capabilities and helped increase its global market in the industry. Zoomlion has the world's most diverse range share. In contrast, Sany has preferred to expand by building of products including concrete machinery, tower cranes, its own plants in foreign countries. For instance, Sany recently road and earthmoving machinery, environmental sanitation built research and development centres in Brazil (2010) and machinery, and bulk material transportation equipment. Germany (2009) as part of an ambitious international expan- Despite such a diversified portfolio, revenue sources are sion plan. Also, it is the first Chinese construction machinery The Beijing Axis 15
  • 16. The China Analyst Features XCMG, Sany, Zoomlion Revenue Mix Comparison (%, H1 and enter the top five global construction machinery compa- 2010) nies. For its part, Sany plans to scale up rapidly to achieve Concrete Excavators Mechanical these numbers as soon as 2012. To accomplish this, Sany is Machinery Scrapers building plants in overseas markets with great potential such Environmental as Indonesia, North African countries and South Africa, a stra- Crane Machinery Machinery Compaction tegic step that will open new channels to market its prod- Road and Piling ucts. Zoomlion is following similar tactics and expanding Machinery Others quickly to acquire brands, technology and distribution 100 6% channels, with a keen focus on emerging markets. Similarly, 7% 9% 4% XCMG recently announced the acquisition of two European 12% 3% suppliers, marking its first international acquisitions aimed 20% 3% 80 12% at boosting its value chain and extending its technological 10% capabilities in key component production. 60 12% 37% China’s three leading construction machinery manufacturers seem well placed to achieve these goals, yet each of them still 40 have much potential to improve their technology. To be sure, 69% to enhance their competitive position, Chinese machinery manufacturers are constantly upgrading their technological 20 52% 44% capabilities and focusing on technical innovation, but they still have some ground to cover before they start taking on the world leaders. That said, these firms have demonstrated 0 a remarkable ability to incorporate technology and quickly XCMG Sany Zoomlion Source: CCMA; Bloomberg adapt. As a case in point, Sany invented the first 66-metre truck-mounted concrete pump in the world. player to set up factories in India and the US, where it recently opened a USD 60 million assembly plant which in August Chinese construction machinery manufacturers are set to 2011 started assembling trucks mounted with concrete- become some of the largest beneficiaries of the infrastruc- pumping equipment. XCMG, China's largest construction ture boom in emerging markets where competitive prices are machinery maker, has opted to cooperate with foreign capital key, and with improving technology and evolving interna- and foster close partnerships with overseas dealers. The tional expansion plans, the likes of XCMG, Sany and Zoomlion group has already established close cooperation with nearly are gearing up for bigger challenges. 100 dealers who help sell its products all over the world, but most notably in emerging markets such as Indonesia, Brazil Ankit Khaitan, Consultant and Russia. ankitkhaitan@thebeijingaxis.com Among these key differences, there is one commonality that exists in the internationalisation strategy of all three of China’s major machinery manufacturers - they have been aggressively marketing their product overseas though new distributing channels with a core focus on emerging markets, namely Brazil, Russia, India and Africa. Emerging markets are sweet spots for these companies because it is difficult to access developed US and European markets where dominant and established players, such as Caterpillar, emphasise their value-added after sales services. Emerging markets, on the other hand, are more price sensitive, and prices of machinery equipment from Chinese manufactures are typically 15-20% below foreign competitors, providing buyers in emerging markets with a considerable overall cost saving. Another important reason is that, like China, these countries are experiencing a similar urbanisation process and are conse- quently investing a lot towards infrastructure improvement, providing Chinese enterprises a potential market to tap into. Reaching higher: The years ahead XCMG, Zoomlion and Sany have revealed their sales targets for the 12th Five Year Plan period (2011-15). XCMG and Zoomlion aim to achieve USD 20 billion each in sales by 2015 16 The Beijing Axis
  • 17. CHINAAFRICA BUSINESS FORUM 2011 SAVE THE DATE | 20 OCT 8.00 am - 7.00 pm Thursday, 20 October 2011 Gallagher Estate, South Africa This one day Business Forum will bring together key business leaders, industry specialists, project managers and others to explore the exciting current dynamic of the China - Africa rela- tionship. For enquiries call +27 11 463 9184 or email Candice at candice@siyenza.za.com or fax your request to +27 11 463 8432. Organiser: Sponsor: Siyenza Management (Pty) Ltd The Beijing Axis Ltd info@siyenza.com www.thebeijingaxis.com
  • 18. The China Analyst Features The New Scramble For Africa: Emerging Powers on the Emerging Continent The BRICS of China, India, Brazil, Russia and South Africa – and China in particular – are at the forefront of a new scramble for projects and deals in Africa. Each one brings to the continent its own distinct busi- ness nous, yet collectively the BRICS are instrumental in transforming Africa’s business fortunes. Leaving aside China’s dominant position in Africa, this article focuses on the activities of the other BRICS nations on the continent. By guest contributor Charlie Pistorius T he global balance of power is shifting into the hands BRICS Trade Profile (As a % of Country Total, 2009) of the rapidly industrialising emerging growth giants, 60 especially the BRICS block of economies: Brazil, Russia, India, China and South Africa. The BRICs (excluding South 50 Africa as the smallest strategic member) are today fuelling Africa the global recovery with their huge demand requirements, 40 Developed Economies high growth multiples and vast deployment of capital. Explosive population growth and rapid urbanisation in 30 Emerging Economies these economies have engendered a vital demand for food South, East and energy security, and an urgent need for capital stock 20 & Southeast Asia build-up, in particular transport, power, communication and Latin America housing infrastructure. In Africa the emerging BRICS have 10 latched onto China’s coattails in seeking commercial favour 0 and opportunity, although each with their own individual China India Brazil Russia SA BRICS modus operandi and business methodology. Yet they all have Source: UNCTAD Statistical Yearbook 2010 the same purpose, namely to secure a foothold in Africa’s vast and rich resource offerings. But the story is not merely is impressive. Between 2000 to year-end 2009, India origi- one described by an exchange of outgoing raw materials in nated the majority of deals, 812 in all; China managed 450; return for inbound capital, tools and cheap final products. As Russian firms undertook 436 deals; South Africa at least 237; the floodgates for broader and more ingrained partnerships and Brazil 190. For the year 2010 up to the end of May 2011, are opening, so too will Africa’s story change in its balance of China led the way by undertaking 195 new deals, followed trade and investment. by India with 183, Russia 102, Brazil 51, and South Africa 40, according to UNCTAD’s World Investment Report (2011). The BRICS 'Way' The trade relationship between the emerging economies The large BRICS economies (as well as other emerging players and Africa is, however, the one that best defines the scale such as South Korea and Turkey), all have the same compara- of their overall commitment and interest on the continent. tive advantage in their outward engagement: they are able Collective bilateral trade between the BRICS and Africa for to access large pools of finance and cash reserves (mostly instance ballooned from a mere USD 24.3 billion in 2000 through state incentives and subsidised support), and they to USD 193.4 billion in 2010 - though China's share of USD also uphold a version of the Developmental State Model that 123.3 billion alone makes up 64% of the total. Of Africa’s total encourages a statist approach to business - explicit in the trade volume with the world, the BRICS collectively account case of China - that enables private enterprise and mercan- for an impressive 22%, which hardly measured 10% in 2000. tile commerce, rather than perpetuating poor management Shockingly however, South Africa’s intra-Africa trade only approaches which translates into an unproductive utilisation measured 2.3% of Africa’s global total in 2009, dropping to of strategic assets. 1.5% in 2010 (see chart on next page). As a bloc, the BRICS' global outward FDI stock build-up Brazil: Not only Lusophone specialists increased substantially from USD 134 billion in 2000 to over USD 1,085 billion in 2010 – only a small smattering of this To date Brazil’s multinational firms have mostly been involved was, however, destined for Africa (roughly 2.7%). Developed in Africa’s construction and upstream exploration and economies still provide the largest vested interest of capital energy production. The likes of Petrobras, which is one of stock in Africa – roughly 40% originates from the European the global oil and gas leaders with 2009 revenues of over economies. Since 2000, the majority of BRICS outward invest- USD 118 billion, has staked increasing claims in Africa, espe- ments in Africa has been in cross-border M&A. Considered cially in Nigeria, Senegal and Angola, while also maintaining purely by this measure, the number of BRICS engagements exploration activity in Mozambique and Tanzania. Brazilian 18 The Beijing Axis