July 2010 Archives

After the end of its long-running civil war, Angola required funding in order to finance much-needed growth. From 2002 until 2007, various facilities were set up by the OECD community, including Portugal. However, increasing amounts of non-performing loans inspired the International Monetary Fund’s refusal to roll-over the Angolan debt in 2007. Many of the OECD financiers did the same and Portugal, being largely tied to the EU political decisions on the one hand and committed to maintaining adherence to the developed world’s lending practices on the other, was bound to toe the line. 

This was a key opportunity for China, which it seized without hesitation. While the Angolan government was constantly reminded about outstanding debts by the EU community with occasional threats to downgrade its credit ratings and seize its overseas assets, China came up with an open hand and offered the funds on exceptionally flexible terms. In return, they wanted to provide construction, procurement, engineering and management services develop Angola's civil infrastructure, energy-generation facilities and housing. The opportunity was there, and China took it. 

Yet for China, the Angolan experience is still very novel. While China has only recently adopted a coordinated approach to Angola, Portugal had a co-ordinated agenda right from the start, realising very well that any sustainable investment in the country will require close synergies between the public and private sectors. The contest between Portugal and China on Angolan soil is only beginning. It remains to be seen how things will turn out in the next few years, but China certainly has a much better Angola strategy now than it had when it first entered the country, with all the necessary resources in place to support implementation. 

Portugal, however, has a unique set of competitive advantages that China lacks. Sharing a common language and history with Angola, it is generally perceived by the former colony as a more natural and more favourable partner. In addition, Portugal has made some good progress in the SADC region, undertaking similar initiatives in its other former colony Mozambique and achieving strategic partnerships on various levels with South Africa – the giant of the region with its own substantial interests in Angola. Finally, Portugal is favourably positioned to partner with two other important nations with significant presence in Angola, namely the USA – with whom Portugal has been enjoying good relations, and its former South American colony Brazil – with whom it shares a language and many significant ties. Whether it will be able to successfully develop such partnerships remains to be seen, but if it does it will give China a good run for its money.
This is the first of a series of two postings contributed by our South Africa-based consultant, Kirill Riabtsev. In keeping with the Africa focus of our last few postings on this blog, these two postings look at Angola and how the business interests of China and erstwhile colonial power Portugal are competing in this resource-rich African country. 

Angola has become one of China’s leading partners in Africa. However, one unlikely contender to China is adopting its own very different ‘Angola strategy’, and instead of engaging in a head-on battle, it is opting for alternative and rather unique methods. 

Portugal is one of the smallest European economies, with a GDP of less than 3% of China’s and a population of less than 1% of China's. Its trade activities with the rest of the world are likewise dwarfed by those of China and barely worthy of comparison. However, when it comes to Africa – and specifically Angola – Portugal boasts a special kind of relationship. A former Portuguese colony, Angola has a lot in common with its former parent nation. 

Nearly 500 years of colonial rule (save for the eight year break in the 17th century when it was briefly ruled by the Dutch) gave Angola the Portuguese language and, inevitably, a substantial cultural heritage. The city of Luanda was built by the Portuguese and remained under their administration until full independence was obtained in 1975. The Portuguese may have left Angola that year, but the special relationship was never fully severed. As soon as the 25 year civil war ended and Angola opened up to the world, the Portuguese wasted no time in re-establishing strong ties. 

Between 2003 and 2008, Portuguese presidents and prime-ministers made four high level visits to Luanda, accompanied by a vast entourage of business leaders, while Angola’s President Jose Eduardo dos Santos reciprocated with an official visit to Lisbon in March 2009. Angola’s importance to Portugal is not hard to understand. It represents a strategic opportunity for its former coloniser: on the one hand it is an important gateway for Portugal (and through Portugal, for the EU) into the southern African region; on the other, it bolsters Portugal (and therefore again the EU) in international negotiations like those at the World Trade Organisation. Reciprocally, Portugal is an important ally for Angola in the international arena and effectively serves as a vital channel into European markets. This became especially apparent during Portugal’s term of EU presidency when it assumed a natural role of European interlocutor for Angola, safeguarding the country’s interests in the EU and promoting widespread recognition of Angola’s growing power and importance in Southern Africa. 

Portugal began to see the fruits of its coordinated efforts in the past five years. At the beginning of the new millennium, Angola ranked in 10th position as a market for Portuguese exports. Portugal had invested a mere EUR 40 million on the ground in Angola and by 2004 imported a modest EUR 1.8 million worth of crude oil from the country. However, by 2008 Angola moved up to 4th position among Portugal’s key export partners and with EUR 2 billion worth of trade became the country’s biggest trading partner outside of the EU, surpassed only by Spain, France and Germany. On-the-ground investments reached EUR 263 million in 2005, EUR 775 million in 2008 and a further EUR 557 million in 2009, while oil imports from Angola to Portugal in 2008 surged to almost EUR 400 million. Every major Portuguese bank now holds a minority stake or significant joint-venture operations in Angola. This generated combined deposit flows from Angola into Portuguese banks of close to EUR 114 million in 2009, compared to a mere EUR 6 million in 2005. 

What is significant about these figures is not their absolute value (the Chinese ones are much higher) but the staggering growth rates over a short period of time and the tactical importance of the sectors in which these growth rates are occurring. What is even more significant is the Portuguese involvement in the construction and engineering sector. Although it may seem like China is running the show in Angola - given the amounts it has invested and the size of the projects it has undertaken - the reality is actually rather different. Every major Portuguese construction company has been on the ground in Angola since the early 2000s with the top three (Escom, Soares da Costa, Teixeira Duarte) enjoying approximately 17% of the total market share, while the gross outstanding payments on completed projects to the Portuguese civil construction companies to date amount to around EUR 1.5 billion, according to reports. Massive Chinese investments in the Angolan infrastructure sector from 2007 to 2009 have not in fact had a major negative impact on the position of the Portuguese construction companies operating in the country. What the Portuguese have managed to do was capitalise on their reputation and cultural and historic ties with Angola, and deliver in accordance with the best international quality and transparency standards. China, on the other hand, has at times won projects competing most efficiently on price and not completely on quality, which has generated unexpected negative externalities and various conflicts of interest on the labour front. Even though China works to correct its mistakes, some might say: you will not likely have a second chance to make a first impression. 

Given such a convincing position that Portugal now occupies in Angola, one might be tempted to ask how it came that the Chinese managed to get such a strong foothold there in the first place?

China and Africa have become increasingly linked economically, particularly over the last decade. As a whole, Africa has become China’s fifth largest trade partner—behind only the United States, Japan, South Korea and Germany. The USD 90.9 billion exchanged between the two represents around 6% of Africa’s entire GDP. China to Africa investment has also picked up to the point where the People’s Republic has become the continent's second-largest foreign investor. Furthermore, China is the largest international contributor to Africa’s infrastructure development, its contractors receiving over 40% of all project revenues awarded to overseas-based firms. Key to this push into Africa has been China's banks, most notably Export-Import Bank of China (China Exim Bank) and China Development Bank (CDB).

China Exim Bank and CDB are two of three banks established by the Chinese government to further national economic policies (the third being Agricultural Development Bank of China). China Exim Bank’s main focus is on international loans and export credit, and is the only Chinese bank authorised to distribute concessional loans. As much as 80% of its funding activity in Africa is dedicated toward infrastructure projects.

Since Exim Bank’s founding, its impact overseas has grown substantially. Its asset base of USD 292 million in 1994 expanded dramatically to USD 116 billion by 2009’s end, with African assets accounting for as much as one-third of the total. If the Export-Import Bank of the United States is used as a benchmark, China Exim Bank’s footprint in Africa is substantial. The American bank claims a mere USD 7.8 billion in assets, with only 7% of its total exposure in Africa.

China Exim Bank issues loans in a wide range of African countries. Although Angola, Ethiopia, Nigeria and Sudan have been the traditional recipients, recent projects announced in 2010 suggest a more diverse group. In this year alone, China Exim Bank has agreed to back an airport upgrade in Mozambique, to the development of Zimbabwe’s water supply, and to a concessional loan for the Kenyan government, just to name a few.

Whereas China Exim Bank focuses on infrastructure development in Africa, CDB is more focused on investment. Yet CDB is less focused on international affairs than is China Exim Bank. Although its USD 560 billion asset base is larger, only around 5% of its loans are extended to parties overseas. Only recently has CDB played a significant role in Africa, this due to its establishment of the China-Africa Development (CAD) Fund in 2007. USD 5 billion was proposed for the fund which is now finding its way toward minority stakes in African businesses, particularly those in primary industries.

In 2009, CAD Fund invested USD 148 million on the continent. Deals announced so far in 2010 include USD 226 million for a South African wind farm, USD 284 million for a copper mine in DR Congo (deal still pending), and USD 228 million toward a platinum company, also in South Africa.

Based on the activity of China’s financiers in Africa, 2010 may prove to be the most remarkable yet for China-Africa economic ties, and China Exim Bank and China Development Bank are setting the pace for another record breaking year in the story of “South-South” trade.

Transactions are prioritised based on the duration of client relationship and volume, as production difficulties make it a challenge to fulfill growing orders on time. 

China's export manufacturers are in a conundrum. Overseas demand is picking up, but with the shortage in key materials and labour, suppliers are now finding themselves in a situation where they can be selective in accepting orders. While this means they are in a position to charge higher prices, it also raises the possibility of slower growth for the rest of the year. 

The deficit in parts, components and labour has made it difficult for many factories to finish goods within traditional lead times. Companies are extending their delivery schedules by at least 15 days, which sometimes results in frustrated buyers and cancellations. Fuzhou Hunter Bags & Luggage Mfg Co. Ltd said a handful of its EU buyers cancelled orders because lead time were not met. Production was delayed due to labour shortages at the fabric mills, which made it difficult for them to supply materials as scheduled. The situation is likely to extend through Q4 2010 and even beyond for some industries, including LEDs. 

To balance manufacturing difficulties and on-time shipment, suppliers are quoting more expensive rates or requiring larger quantities per transaction for them to prioritise an order. Depending on the product and specifications, prices can be 5 to 30% higher. The MOQ, on the other hand, can be as large as three TEUs especially, for garments and electronics. This measure, however, is implemented only as a last resort as it cannot shield businesses from cost spikes. Most companies, including Fuzhou Hunter, are also accepting and finishing orders from clients they have been working with for at least two years before they accommodate new customers. Furthermore, some are keeping close contact with their buyers to help the latter monitor raw material sourcing and production schedules, which would then enable both sides to react quickly to unexpected developments. 

Persistent shortages 

Although various provincial governments have lifted the minimum wage, the measure has done very little to ease the labour situation. It is estimated that factories in labour-intensive industries are still 10 to 30% short of hands. Specialists that dye fabrics for Zhejiang Weida Industry Investment Co. Ltd used to need only one week to finish the process. Now, it takes them 30 days. Because it does not have enough dyed fabrics, Zhejiang Weida had to prioritise orders, accomplishing those from long-term clients and with large volumes first. Until the fabric mills and dyeing specialists are able to speed up turnaround, there is not much garment manufacturers can do, especially since it is not easy to find suitable alternate sources. 

In the electronics industry, the scant supply of components such as LED chips is a factor slowing down production. Global demand for LED chips increased 100% this year to about 200 billion pieces. In contrast, worldwide output is projected to reach only 100 billion pieces. Analysts believe the only way for supply to outstrip demand is if there are 3,000 MOCVD machines, which are the key equipment in producing LED chips. But as of 2009, there are only 1,200 units globally, with 150 of these in China. Roughly 350 machines are expected to be put into use this year, of which 130 will be installed in Chinese factories. This still leaves a deficit of 1,450 units. 

Besides LED chips, electronic components such as digital signal processors, tantalum chip capacitors, optocouplers and amplifiers are also in short supply and have become more expensive, some doubling in cost. AVX 10µF 16V tantalum chip capacitors, for instance, was RMB 0.26 each in April. In June, quotes reached RMB 0.60 per chip. iSuppli senior analyst Gu Wenjun said in a report published in the Yangcheng Evening News, a Guangdong province-based newspaper, that many leather, luggage and mining businesses in Wenzhou started to invest in electronics last year. But they are believed to be hoarding the components they procured to inflate prices.  

Because of the deficit, some consumer electronic manufacturers are transacting with several upstream suppliers to see which one can deliver the fastest. Once the orders arrive at their factory, pending deliveries from other providers are cancelled. This practice, however, may cause more harm to the industry as it increases the operational risk at electronic component plants. Once the shortage eases, factories with large stockpiles may face significant losses.

This article was originally published by Global Sources, a leading business-to-business media company and a primary facilitator of trade with China manufacturers and India suppliers, providing essential sourcing information to volume buyers through e-magazines, trade shows and industry research.
There are a few outstanding similarities between the African countries of Angola and Zambia, yet the most glaring one is probably the fact that both these countries have their economic stars hitched to a single commodity: oil in the case of Angola, and copper in the case of Zambia. If you look at a map of the state of transport infrastructure in the region, you could certainly also say that another thing these countries have in common is that they can both count the number of railway lines they have on one hand, so to speak. 

THE BEIJING AXIS just completed a southern African market entry project for a large foreign manufacturer, and if you would excuse me for just slightly taking the spotlight off China in this posting, I'm going to briefly look at the similarity of the sheer lack of diversity in the economies of Angola and Zambia. But of course, like almost everything else these days, you'll still see a lot on China below, I mean, how else?

The Only Show in Town
If most people think Angola and Zambia today, they think oil and copper - there's just no two ways about it. Not least anyone in China, who is the largest consumer in the world of Angolan oil and the second-largest consumer of Zambian copper. To give you an idea of the sheer scale of Angola's 'only show in town,' in 2008 a full 98% of its exports consisted of mineral fuels, oil and products, and China was taking the largest share of Angola's exports (32% - mind you the US was not far behind at 29%). On the back of rising oil exports, Angola's economy has been riding a high wave since the end of its almost 30-year civil war in 2002, with average GDP growth of 13.4% between 2002 and 2009. Its no surprise then that Angola's one-horse economy suffered greatly in 2009 with the drop in commodity prices, and GDP growth for this year fell to about zero, yet growth is expected to return to 7-8% for 2010.

As another economy dominated by commodity exports, Zambia weathered the global financial crisis remarkably well. That Zambia could register 5.3% GDP growth in 2009 was mostly due to contributions from its wholesale and retail sector (which contributed 16.4% to GDP); agriculture, forestry and fishing (12.5%), and construction (11.4%). Indeed, strong contributions from sectors other than mining in 2009 illustrates the value for Zambia's economy in being a little more diversified than Angola's. In 2009, copper exports made up 67.5% of Zambia's total exports, and the only other significant category was ores, slag and ash, which constituted 11.2%. China was Zambia second-largest trade partner, consuming 11% of Zambian exports (interestingly enough, Switzerland was Zambia's largest trade partner, taking a full 48%).    

Only One Way to Get There
While Angola and Zambia have much in common in the way a single commodity dominates their economies, they also share the consequences of this lack of diversity. Outside Angola's oil sector and Zambia's copper industry, both countries face immense development challenges. One could say a lot more about developmental problems in these countries, but here I will focus only on transport infrastructure (and especially the lack of it). The following image can illustrate just how under-developed transport infrastructure in Angola and Zambia still is:
Africa Railways.jpg
This illustration contrasts the extent of railways in Angola (far left) and Zambia (middle) with the MAJOR railways in South Africa (right). You can see that comparison between Angola and Zambia on the one hand and South Africa on the other is very striking. While South Africa has about 20 000 km of railways, Angola has only 3 000 km and Zambia has only one major railway line. To make matters worse, as much as 80% of Angola's transport infrastructure is reportedly not operational. What this means in practice is that getting from one place to another, or getting goods from one place to basically any other, is no small feat, and many places in Angola and Zambia are simply inaccessible. 

Desperate for Diversity
Attempting to break the stranglehold of oil, diamond mining is being encouraged in Angola, although the contribution of the mining sector is still only 5% of GDP. A range of exploration activities were cancelled in Angola in 2009, and foreign mining firms are purportedly having a hard time with bureaucratic hurdles and 'not knowing the right people' in Angola. The potential is there, however, and it is estimated that around 50% of Angola's confirmed diamond reserves have not been touched yet. As things stand, Angola does produce 7-9% of the world's diamonds. Yet Angola is still 169th on the World Bank's Ease of Doing Business ranking, and in the Trading Across Borders sub-section it is ranked 171st. 

Exploration is ongoing in Zambia for minerals other than copper, like gemstones, gold and nickel, and Zambia's government has proclaimed its Fifth National Development Programme with which it aims to turn Zambia into a middle-income country by 2030. The programme focuses on poverty reduction as well as health, education and infrastructure, yet spending for the plan is likely to keep Zambia dependent on foreign loans and aid over the near term. For the time being, however, subsistence farming remains the largest source of jobs in Zambia. 

For Angola and Zambia to comprehensively escape the problems of long-standing under-development, the answer will have to come from oil and copper AND something else, although in both cases it is not quite certain exactly what yet. In the meantime, a few more railways should surely help matters along. 

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