China in Africa â New challenges beyond the commodities supercycle
Comment of the Day

November 04 2013

Commentary by Eoin Treacy

China in Africa â New challenges beyond the commodities supercycle

This article by Hannah Levinger for Deutsche Bank is perhaps most interesting for its reference to a number of detailed academic reports on Africa's prospects. Here is a section
Firstly, Africa is becoming increasingly attractive as a market where products can be sold, and not just labour-intensive imported items. Some 18% of Chinese exports to Africa in 2010 were textiles, whereas in 2006 the figure was still about 25%. Machinery and electronics made up the largest share at 29% (Africa Research Institute, 2012: “Between Extremes”, Briefing Note 1202). With China's move upstream in the value chain more advanced technologies are proving a good fit for a more demanding clientele and the fast growing market for mobile phones in Africa.

Secondly, in the manufacturing sector Chinese firms are making more frequent use of local labour and are relying on their own experience of industrial development driven by companies from Taiwan and Hong Kong. Since wage costs in China are rising, it is likely to become more important in future to exploit the differences in wage costs by generating more added value on African soil.

Thirdly, China's activities in Africa are no longer performed solely via state-owned entities. On the contrary, 45% of China's direct investments in 2011 came from the private sector, including small and medium-sized enterprises (Shen, 2013: “Chinese Private Investment in Africa”; World Bank Policy Research Paper).

Eoin Treacy's view In a sector as focused on margins as textiles we have become desensitised to where products are manufactured. If one goes through one's wardrobe clothing and shoes now tend to be manufactured in countries like Vietnam, Cambodia, Peru, Ecuador, India and Bangladesh. China and Indonesia still have substantial textiles sectors but the most cost sensitive parts of the industry have already migrated.

On touring Egypt a decade ago, I hired a taxi driver to give me a local's tour of Cairo including slums such as the City of the Dead. A group of young people I chatted with at a café also gave me a tour through Islamic Cairo and the bazaar. As a tourist in Egypt one could buy perfumes, hieroglyphics and other faux historic memorabilia. However, while Egypt is famous for its cotton, there didn't appear to be anywhere selling it. People I asked had no idea what I was talking about when I asked about Egyptian cotton. An internal or even tourist market for high quality cotton products just did not exist.

Half a continent away Zambia is one of the world's largest exporters of precious stones. The added value in emeralds, as in all stones, is in how well they are cut and how many steps can be removed in getting the finished product in front of the right customers. With a view to developing the local industry the country is encouraging the development of a cutting and polishing sector to retain more of the added value from these resources.

Just as it would be a mistake to make blanket statements about Europe or Asia, each country in Africa has unique characteristics. However, the trend of improving governance, particularly in Sub-Saharan Africa, suggests that the region is likely to remain a global growth engine for the foreseeable future. The development of vibrant domestic economies is likely to go hand in hand with this process.

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