Monday, 05 August 2013 12:16

Newsletter 34

In this newsletter:

  • China is 3rd biggest mergers and acquisitions player in Africa
  • Africa invites China, other countries to infrastructure bid
  • China and the US Court Africa
  • China Makes First Investment in South African Wine Industry

China is 3rd biggest mergers and acquisitions player in Africa

China has become the world's third-largest country doing mergers and acquisitions in Africa, favoring the oil and gas sector, says a report by international law firm Freshfields Bruckhaus Deringer.

The country has made 49 M&A deals totaling $20.8 billion in Africa since 2003, following the United Kingdom with $30.5 billion and France with $30.47 billion.

The value of African inward investment has tripled in the last 10 years, reaching more than $182 billion, up 214 percent in 2012 compared with 2003.

"Africa's rapid pace of growth makes it an obvious investment partner for China in many jurisdictions," said Rob Ashworth, Freshfields Asia's managing director.

Chinese dealmakers favor the natural resources sector with $8.1 billion invested in oil and gas across three deals and $6.7 billion invested across 19 deals in metals and mining over the last 10 years, and their preference for these sectors will probably continue, the report says.

Globally, there were 1,190 M&A deals totaling $87.6 billion in Africa over the same period.

"Extractives and mining opportunities have been big drivers of growth," Ashworth says. "However, consumer-related M&As could take the limelight as GDP per household continues to grow, the middle class in Africa expands and consumer demand rises."

The value of investment targeting these industries has doubled in the last 10 years with $3.8 billion across 71 deals invested last year, up from $1.9 billion and 33 deals in 2003.

Nigeria, South Africa and Uganda became attractive destinations for Chinese investors with 23 deals totaling $16.4 billion, says the report.

One of the largest deals was the China-Africa Development Fund's acquisition of a stake in Misr Refrigeration and Air Conditioning Manufacturing Co, a Cairo-based manufacturer of refrigerators and air conditioning systems, from the Barakat Group, for $5.6 billion in 2010.

"The African economy is growing and China's similar development experience makes us believe that Africa is on the right track," said Chi Jianxin, president of the China-Africa Development Fund.

Africa is full of opportunities and is increasingly attracting multinational companies from Europe, the United States, Japan and South Korea, Chi says.

More than 2,000 Chinese companies have invested in Africa. Apart from the traditional big SOEs, such as PetroChina Co Ltd and Aluminum Corp of China, that are significant investors in the energy and mining sectors, private Chinese companies have become a key driving force in recent years.

Alan Wang, a Freshfields partner based in Beijing and Shanghai, told China Daily that Chinese privately owned companies see great opportunities in Africa given the continent's rising income levels and economic dynamism in recent years, and the high complementary nature of its economy and China's.

Wang says that main challenges to Chinese investors in Africa include lack of understanding of local laws, particularly of labor, environment and taxes; inadequate infrastructure, particularly power supply, transport and logistics; and lack of political stability, as well as bureaucracy and corruption.

"They need to understand the local laws and be prepared to follow them. It is important to study the political environment and not to overly rely on special deals made with particular government officials since they may not hold once there is a change of government," says Wang, adding that companies should also never underestimate startup costs, consider structuring investments in Africa, and find an international partner.

Wang says that as the domestic economy slows, Chinese companies are likely to be driven to focus more on developing overseas markets, particularly in Africa, Southeast Asia and Latin America.

"Over the next few years we expect Chinese investment in Africa to continue to rise. POEs will lead the way in services and manufacturing, to take advantage of low tariffs that some African nations enjoy when exporting to Western markets as protectionism rises against Chinese exports."


Africa invites China, other countries to infrastructure bid

The two-day African infrastructure conference ended on Wednesday, calling on China and other countries to invest in the continent's infrastructure development.

The conference was attended by governments, captains of industry and the private sector on the African continent.

The African representatives agreed that developing infrastructure will boost the economy in Africa since the superior infrastructure will make it easier for trade and movement of goods between countries.

Infrastructure in Africa is old, poor, dilapidated and absent, which has been viewed as a hindrance to trade and economic development on the continent.

The World Bank in its report said Africa suffers infrastructural deficiency of at least 93 billion U. S. dollars per year.

During the conference, the Africans agreed to work together to improve road, rail, port and other infrastructure projects on the continent.

Addressing the gathering, South African Minister of Public Enterprises Malusi Gigaba suggested the source of infrastructure funding should come from China, BRICS (Brazil, Russia, India, China and South Africa) and Africa.

"To date, China represents Africa's leading trading partner, making up more than a third of Africa's trade. Chinese pragmatism has certainly enabled infrastructure and broader investment in a range of African countries," he said.

The minister told Xinhua that funding should also be sourced from other emerging markets and Europe. "Local funding from bonds and pension funds should also be explored," he added.

Peter Subramaoney, the president of the New Partnership for Africa's Development (NEPAD) said Africa should look at various sources for the funding.

"There should not be any conflict of ideas between government and the private sector. The public-private partnership should enhance recovery to our infrastructure," he said.

"The global landscape is changing and Africa should look to BRICS and also the US. The proposed BRICS development Bank will assist African countries with their infrastructural deficiency," he added.

Most Africans were convinced that there should be skills transfer by investors, so that Africans would be able to maintain infrastructure when the investors are gone.

Sylvester Mashamba, executive director of the National Council for Construction in Zambia, urged other African countries to follow the Zambian example of skills transfer.

"The Chinese are constructing Lusaka stadium and we have Zambian engineers working with the Chinese. When the Chinese are gone, the Zambian engineers will maintain the stadium," Mashamba said.

He also disclosed that they are negotiating with the Chinese to assist in the construction of the railway line in Zambia.

The Zambian deputy high commissioner to South Africa, Joe Kaunda, said they are harmoniously working with the Chinese, while inviting other Africans who are willing to develop infrastructure to approach the Zambian government.

Africans also agreed that intra-African trade can promote the development of infrastructure.

Qedani Mahlangu of the executive committee for infrastructure in Johannesburg, told Xinhua that Africa should accelerate infrastructure growth by even promoting small projects.

"We should improve trade relations among African countries to improve our economies. As (in) South Africa there are small projects like the railway we can work with our neighbors like Mozambique, Lesotho and Swaziland," Mahlangu said.


China and the US Court Africa

CLEVELAND: During a weeklong trip to Africa, with stops in Tanzania, Senegal and South Africa, President Barack Obama announced a new model of engagement between the United States and Africa, based less on aid and more on trade and partnership, with his country helping Africa “build Africa, for Africans.” Through several US-Africa economic initiatives launched during his visit, especially regarding trade and energy, Obama strives to catch up with China, which has created strong partnerships on the continent. Obama arrived three months after Xi Jinping visited Tanzania on his first foreign trip as Chinese president in March 2013.

During the trip, the US president indirectly juxtaposed the US and Chinese trade and investment proposals, suggesting that US investors would support local economic capacity, not simply consume its raw materials, eyed by China, given its ever-growing industrial capacity.

The US and China are both interested in ensuring employment for their citizens, gaining access to valuable resources and securing new stable trade partners. Nevertheless, China will likely win the battle over Africa, due to its policies of non-interference in internal affairs, especially regarding human rights and democracy, lagging for many African countries.

Tanzania was a logical choice among Obama’s destinations, given that the US and the African country have had longstanding economic relations. According to Obama, Tanzania has continuously been one of the best US partners in Africa. The US has provided aid to promote transparency, address health and education issues, and target development indicators to sustain progress. In turn, Tanzania exports agricultural commodities, minerals and textiles to the US, while importing wheat, chemicals and machinery.

One key initiative announced by Obama was Power Africa, a $7-billion program combining public and private funds and loan guarantees, aimed at ensuring cleaner, more efficient electricity generation capacity. He suggested the program will build on “Africa’s enormous power potential, including new discoveries of vast reserves of oil and gas, and the potential to develop clean geothermal, hydro, wind and solar energy.” An indirect implication is that the US could make use of new resource reserves in Africa for both Power Africa and its own national interests. Obama visited the Ubungo power plant, run by US-based Symbion.

Another key project on Obama’s agenda was launching Trade Africa, a new partnership between the US and sub-Saharan Africa “that seeks to increase internal and regional trade within Africa, and expand trade and economic ties between Africa, the United States, and other global markets.” The partnership will be initially implemented in the East African Community, or EAC: Burundi, Kenya, Rwanda, Tanzania and Uganda. Among its original goals, Trade Africa intends to “double intra-regional trade in the EAC, increase EAC exports to the United States by 40%, and reduce by 15% the average time needed to import or export a container from the ports of Mombasa or Dar es Salaam to land-locked Burundi and Rwanda in the EAC’s interior.” This suggests that the US wants to assist these countries in improving regional trade capacity.

Despite indirect suggestions that the US, because of its support of local economies, is a better economic partner for Africa than China, the two global players have similar goals and approaches. China has already massively supported local African economies, by building much needed infrastructure, including roads, ports and bridges in multiple African countries.

Chinese companies, either building infrastructure or involved in other businesses, have also provided job opportunities. While it’s true that China brings most white-collar workers to develop infrastructure projects, the majority of blue-collar staff is African. For instance, the 2010 construction of Chinese-funded Imboulou Hydroelectric Dam in the Democratic Republic of the Congo, employed more than 2,000 locals and 400 Chinese construction workers; at the China-Benin Textile Company, there are 5 Chinese employees and 1,100 local staff members.

This is partly because in many African countries, especially those enduring prolonged periods of war, there is an acute penury of highly-skilled workers. Given this context, the US would most likely have to bring its own white-collar workers to develop energy projects. Almost inevitably, the two countries would end up applying a similar employment model: Highly skilled laborers include their own nationals, and less skilled labor comprises African locals.

Of course, one of US and China’s key objectives is to benefit from Africa’s abundant natural resources. Tanzania possesses significant quantities of gold, diamond, iron, uranium and natural gas, while Burundi has nickel, uranium, kaolin and gold. China has made significant investments in Sudan and South Sudan, known for its oil resources, and Angola, with major reserves of oil, gas and diamonds. Moreover, at this moment, oil represents 66 percent of China’s exports from Africa, while minerals and metals represent 30 percent. US imports from Africa consist of 89 percent oil.

The African continent is an increasingly active market, with six of the world’s fastest growing economies and projected to grow by 5 percent in 2013. China surpassed the US as Africa’s largest trading partner in 2009. In 2012, China invested more than $40 billion in African countries and promised $20 billion in aid during the upcoming three years. That same year, total trade between China and Africa was $128 billion, while Africa’s trade with the US was $100 billion. As African countries’ economies grow, trade relations will become more profitable.

Despite many similar interests in African countries, one key difference could determine whether China or the US wins over Africa: their approach to countries’ respect for human rights and good governance. China has a policy of non-interference in internal affairs with its partners, whereas the US advocates for democracy and human rights, often conditioning aid receipt on efforts to achieve certain standards. During his recent trip, Obama encouraged African countries to strengthen good governance and hold human rights abusers accountable. Many African countries are far from the standards called for by the US, some due to ongoing conflict, like the Democratic Republic of the Congo, others due to political disinterest, as in Uganda. Therefore, these countries, hungry for economic partners, might be more inclined to work with China, almost strictly interested in economic pursuits, rather than the US, which seeks social and political involvement in internal affairs and will scrutinize every move.

At the same time, people in other African countries, like South Africa, are increasingly disillusioned with the US and criticize US double standards. During his visit in South Africa, people protested against Obama for the use of drones in the Middle East and failure to close Guantanamo Bay.

South Africa is among Africa’s most prosperous nations, constructing strong economic relations with both the US and China. Nevertheless, since 2010, China has become its largest trading partner. During his visit to South Africa, Obama emphasized that the country is a “critical partner.”

South Africa is one of the few countries in Africa in the privileged position of efficiently joggling between the economic interests of China and the US. It’s a stable democratic country. Many other African countries, possessing more resources than South Africa, such as Sudan and Congo, cannot boast the same political circumstances and, therefore, do not have the same bargaining capacity.

By losing ground on the continent, the US might also lose to China the great power battle for influence in Africa. While the U.S. and China might be fighting for supremacy, other rising global powers, such as Brazil and India, have started claiming their piece of the African pie. According to a Chatham House Report, during the past decade, Brazil raised its trade with Africa from $4.2 billion to $27.6 billion, with oil and other natural resources comprising 90 percent of its imports from the continent. Both nations perceive Africa as an excellent consumer market for their manufactured goods. Regardless of who wins the battle over Africa, Africans might see their resources sucked up with few considerable improvements to show in their lives.


China Makes First Investment in South African Wine Industry

A Chinese company bought a wine cellar and vineyards in South Africa, the first such investment by an operator from the Asian nation.

Perfect China bought the cellar of the Val de Vie estate, located between the towns of Paarl and Franschhoek, near Cape Town, it said in an e-mailed statement yesterday. The purchase includes a 25-hectare (61.8-acre) wine farm with 21 hectares of vineyards, it said. The cellar will be used by Perfect Wines of South Africa, in which Perfect China has a 51 percent stake. PWSA exported 2.8 million bottles of wine to the Asian country in 2011 and 2012, or about 25 percent of all South African wine shipments to the nation, it said.

“Perfect Wines of South Africa plans to extend the current cellar facilities at Val de Vie and increase the maturation capacity,” according to the statement. Perfect China didn’t disclose the purchase price.

Exports rose to 469 million liters (124 million U.S. gallons) in the year through April, up 25 percent from the previous 12 months and more than triple the total shipped in 2000, data from the Wines of South Africa trade body show. The U.K. took the biggest share of the nation’s wine exports last year with 22 percent. While shipments to the U.K. and U.S. fell in the five years to 2011, they surged sixfold to 4.28 million bottles to China.

The cellar is part of the original manor house that was built on the farm in 1825, according to the estate’s website. The farm grows the Cinsaut, Carignam, Grenache Noir, Mourvedre, Syrah, Clairette Blanche, Grenache Blanc and Viognier varietals.
Ryk Neethling, a swimmer who was part of the South African team that once held the world record for the 4x100-meter freestyle relay, is the marketing director of Val de Vie, according to the estate’s website.


Last modified on Monday, 05 August 2013 13:00