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The Nature and Extent of Chinese Investments in Africa Dirk Kotze Director and General Manager Africa The Beijing Axis

The Nature and Extent of Chinese Investments in Africa Dirk Kotze Director and General Manager Africa The Beijing Axis Johannesburg, 29 February 2012. Drivers of China’s Resource Demand Nature and Extent of China’s Engagements in Africa Investments Contracts Typical Modes of Engagement

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The Nature and Extent of Chinese Investments in Africa Dirk Kotze Director and General Manager Africa The Beijing Axis

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  1. The Nature and Extent of Chinese Investments in Africa Dirk Kotze Director and General Manager Africa The Beijing Axis Johannesburg, 29 February 2012

  2. Drivers of China’s Resource Demand Nature and Extent of China’s Engagements in Africa Investments Contracts Typical Modes of Engagement Discernable Trends Final Observations Agenda

  3. In 2009, China consumed around 1.5 billion tonnes each of coal and iron ore. If transported in 58,000 tonneHandymax dry bulk carriers, this would amount to about 70 shipments each of coal and iron ore every day of the year…

  4. Africa is key to China’s supply of cobalt, manganese, chromium, platinum and crude oil. In 2010 crude oil, iron ore, manganese and copper accounted for 76% of China’s total imports from Africa China’s imports of selected commodities from Africa (USD bn, 2000-2010) China’s imports from Africa as a % of total imports in 2010 Cobalt - High growth rate - High quantity - High growth rate - Low quantity Crude Oil Manganese Platinum Ferroalloys Tobacco Diamonds Copper Wood Cotton Nickel Stainless steel Iron Ore Petroleum Gases CAGR 2000-2010 Note: Bubble size is based on the commodity’s share of China total commodity imports from Africa in 2010 Source: UN Statistical Database; The Beijing Axis Analysis

  5. In 2010, African countries were among the top five suppliers of several commodities to China Crude Oil Manganese Chromium Saudi Arabia Australia Other Angola South Africa Iran Other Oman Other Turkey South Africa Russia Oman Pakistan Gabon India Brazil Malaysia Cobalt Platinum Diamonds South Africa Switzerland DRC Cuba Other Other Other Belgium South Africa Japan India Congo Switzerland South Africa Russia UK US Israel Source: UN Statistical Database; The Beijing Axis Analysis

  6. New markets and resource acquisition are key drivers for Chinese companies' thrust into Africa Quest for new markets • New sources of growth needed • Competition and margin pressure at home • Africa push as part of globalisation Increasing level of activityin Africa Significant market potentialof Africa • Sales activity • Agencies and VARs • Representative offices • Marketing Joint Ventures • Assembly Joint Ventures • Asset acquisition • Possible repeat of successful China growth story • Newest untapped source of growth with insignificant Western competition Need for diversification • Balance exposure across regions and industries/projects • Balance income sources across regions and industries/projects Low cost funding sources • Healthy corporate cash reserves • Access to state-owned and policy bank financing • Depleting investment opportunities at home Resource security • Secure/diversify raw materials sources • Break existing supplier power and have greater influence over pricing Source: The Beijing Axis Analysis

  7. Drivers of China’s Resource Demand Nature and Extent of China’s Engagements in Africa Investments Contracts Typical Modes of Engagement Discernable Trends Final Observations Agenda

  8. Drivers of China’s Resource Demand Nature and Extent of China’s Engagements in Africa Investments Contracts Typical Modes of Engagement Discernable Trends Final Observations Agenda

  9. In 2005, the State Administration of Foreign Exchange (SAFE) considerably eased restrictions on capital outflow to help reduce net capital inflows and take the heat out of the economy. This also translated into increased outward M&A activity from 2005 onwards • China’s FX Reserves (USD bn, 2000-2010) Source: The People’s Bank of China; IIF; The Beijing Axis Analysis

  10. China has been a large recipient of incoming FDI, and since 2005 there has been a rapid rise of Chinese outgoing FDI China FDI Inflow/ Outflow (USD mn, 1980-2010) Source: UNCTAD; The Beijing Axis Analysis

  11. Chinese Outgoing Foreign Direct Investment started gathering pace in 2005 (graphic illustrates Jan 2005 to Dec 2011) 2010 2009 2007 2011 2008 2006 2005 USD1bn

  12. Chinese Outgoing Foreign Direct Investment started gathering pace in 2005 (graphic illustrates Jan 2005 to Dec 2011) 2010 2009 2007 2011 2008 2006 2005 USD1bn

  13. From January 2005 until the end of 2011, major state-sanctioned Chinese investments in Africa reached almost USD40bn 2010 2009 2007 2011 2008 2006 2005 USD1bn Chinalco obtains 45% of Simandou Project, partnering with Rio Tinto USD3bn Eximbank credit line for metals investments CNPC pledges USD4.9 bn to develop Agadem oil block Sinomach commits to develop USD3bn iron mine Jinchuan buys Metorex ICBC buys 20% stake in Standard Bank CITIC, CDB. Long March Capital buys Gold One

  14. From January 2005 until the end of 2011, major state-sanctioned Chinese investments in Africa reached almost USD40bn 2010 2009 2007 2011 2008 2006 2005 USD1bn Chinalco obtains 45% of Simandou Project, partnering with Rio Tinto USD3bn Eximbank credit line for metals investments CNPC pledges USD4.9 bn to develop Agadem oil block Sinomach commits to develop USD3bn iron mine Jinchuan buys Metorex ICBC buys 20% stake in Standard Bank CITIC, CDB. Long March Capital buys Gold One

  15. From 2005 to 2011, around 40% of Chinese OFDI flowed into only five countries South is the 11th largest recipient of Chinese OFDI over this period, the largest in Africa • Chinese Cumulative OFDI (Jan 2005 to Dec 2011) India South Africa Indonesia Canada Brazil USA Australia

  16. In terms of regions, around 40% of Chinese OFDI flowed into only five countries The big story since the Financial Crisis has been the uptick in OFDI into Latin America • Chinese Cumulative OFDI (Jan 2005 to Dec 2011)

  17. Drivers of China’s Resource Demand Nature and Extent of China’s Engagements in Africa Investments Contracts Typical Modes of Engagement Discernable Trends Final Observations Agenda

  18. Selected Chinese Infrastructure Projects Mauritania: 430 km railway by Transtech linking Nouakchott to phosphate deposits in Bofal Sudan: 4 power plants, 2 hydro projects, 1,506 km oil pipeline, oil terminals DRC: 3,500 km long highway linking Kisangi to Lubumbashi, 3,200 km long railway linking Copperbelt to Matadi on the Atlantic Nigeria: USD5.4 bn in roads, railways and coal and hydro power stations Gabon: Part of the USD 3 bn Belinga project, deep water harbour, hydro electricity, railway line linked to Belinga Mine Angola: USD 3.2 bn infrastructure funding including roads, rail, power, water, and telecoms Zambia-Tanzania: USD 500 mn investment in 1,900 km Tanzam Railway built in 1975 Angola-Zambia: USD 500 mn partial Lobito corridor rehabilitation of the 1,400 km Benguela railway, which links the copperbelts in both countries To link resource sites with ports, China is building up Africa’s infrastructure capacity • Africa’s Railways (2007) Angola, DRC, Zambia, Tanzania: China plans to construct a 3,000 km transcontinental railroad Selected Projects Existing Railways China has mineral rights China has oil rights China has both oil and mineral rights Source: Various; The Beijing Axis Analysis

  19. Chinese contractors have overtaken traditional powerhouses in Italy, France and the US to become the dominant force in Africa Internationally contracted revenue in Africa* by country (USD bn, 2001-2009) *Note: Worldwide Indian revenue is earned in Africa Source: ENR; The Beijing Axis Analysis

  20. Similar to trade and investment, Chinese contractor activity in Africa is highly concentrated in a few resource rich economies. Algeria and Angola alone account for almost 40% of the total Revenue of Chinese contractors in Africa, Top 30 countries (2009) Key to Lingua Franca/Dominant Cultural Legacy Top 6: Mostly oil and gas-related economies; USD 18.1 bn or 71% of total Anglophone Francophone Portuguese speaking Rank 7 to 17: Non oil-related economies; USD 6 bn or 23% of total Arab Other Total Revenue of Chinese Contractor ($USD million, 2009) Rank 18 to 30: Diverse minor players; USD 1.3 bn or 5% of total Source: China Statistical Yearbook 2010; The Beijing Axis Analysis

  21. Chinese contractors earn the most revenue in North Africa, where oil is abundant, but do not constitute a majority due to the strong presence of Western contractors in the region Chinese contractor activity in top 10 Africa nations by revenue (2009) Total Revenue of Chinese Contractors (USD million, 2009) # of Chinese Contractors Note: Bubble size represents % of Chinese contractors compared with total contractors in respective country. Contractors amongst the ENR Top 225 International * South Africa is not amongst the top ten, but is put here for comparison. It is actually ranked 22nd Source: ENR; China Statistical Yearbook; The Beijing Axis Analysis

  22. In contrast, Chinese contractors have a dominant presence in many Sub-Saharan countries rich in mineral resources Chinese contractor activity in Top 11-25 Africa nations by revenue (2009) Total Revenue of Chinese Contractor Activity ($USD million, 2009) # of Chinese Contractors Note: Bubble size represents % of Chinese contractors compared with total contractors in respective country. Contractors amongst the ENR Top 225 International Source: ENR; China Statistical Yearbook; The Beijing Axis Analysis

  23. Drivers of China’s Resource Demand Nature and Extent of China’s Engagements in Africa Investments Contracts Typical Modes of Engagement Discernable Trends Final Observations Agenda

  24. Chinese investment in Africa has followed a familiar pattern spurred by resource demand Chinese Resource Demand Diplomatic Efforts Access to Resources in Return for Economic Aid • High-level visits • Policy of non-interference • Promises of diplomatic cover • Isolation of Taiwan • Allocation of resource quotas to China • Technological and labour support for infrastructure • Cheap loans • Huge population • Scant resources • Protecting own reserves • 10%+ economic growth Non-State Owned Companies involved State-Owned Companies involved Diverse M&A Development of Infrastructure Assets Acquiring of Resource Assets • Further secure supply through downstream acquisitions (refineries, etc.) • Chinese commercial network develops economies of scale • Goodwill creates access to resource acquisition • China’s non-interference policy means that China supports whatever government is in power • China starts acquiring in more diverse fields (telecoms, utilities, etc.) • Chinese private enterprises begin entering Africa en masse Source: The Beijing Axis Analysis

  25. 50% of Chinese projects in Africa are secured through an international bidding process. Contrary to popular belief, sole-source negotiations are relatively rare Procurement methods for Chinese contracts in Africa Source: Collaboratory for Research on Global Projects, Stanford University. Based on a survey of 35 Chinese contractors; The Beijing Axis Analysis

  26. Chinese contractors routinely win many international projects by underbidding the competition Process flow for international bidding Process Step 4 Contractors send proposals to African gov for review Step 1 Step 3 CC 1 IC 1 Requests funding Institution (World Bank, ADB) Solicit bids from all interested constr. firms African Government Step 2 IC 2 CC 2 Provides funding IC=International contractor CC=Chinese contractor Step 5 African gov selects winning contractor Explanation • The request for funding is usually sent by a governmental department, i.e. the Federal Airports Authority of Nigeria requires funds to build a new airport terminal, which the national government then represents to look for international funding • Chinese banks and financial institutions usually enter the process at Step 4 providing Chinese contractors with favorable financing terms • In some African countries (i.e. South Africa), partnering with a local company is a prerequisite for foreign contractors to bid for a government project. In this respect, Bigen can market itself as a potential partner to Chinese contractors looking to bid for government projects Source: The Beijing Axis Analysis

  27. The Chinese government often plays an important role in preselecting the winner of government-to-government projects Step 2 Solicit bids from list of Chinese contractors Process flow for bidding amongst Chinese companies Step 5 Process African gov selects winning bid amongst Chinese contractors Step 1 African Government Chinese Government G – G Agreement Step 4 Step 3 China gov receives bids from Chinese contractors China gov sends bid info to African gov • The Chinese government often has exclusive government-to-government arrangements with certain African nations, such as the DRC and Sudan, due to the West’s unwillingness to engage with these countries • In such arrangements the Chinese government is the financial backer for the construction project, thus only Chinese contractors are allowed to bid. All contractors must be a registered member of the China International Contractors Association (CHINCA) • During this process the Chinese government often preselects certain preferred contractors and only forwards their bids to the respective African governments. For example, if the Chinese government wants certain SOEs to establish a market presence in the host nation it would just forward the bids of those SOEs, regardless if other Chinese enterprises have submitted more competitive bids. In a way, the Chinese government plays an important role here in selecting ‘the winner’ • Bigen’s influence in this process would be limited, as much of the negotiations are government-to-government Explanation CC 1 CC 4 CC 3 CC 2 Source: The Beijing Axis Analysis

  28. Sole source negotiations are rarely used by Chinese contractors unless the host country is very stable Process flow for sole source negotiation Step 2 Process Awards contracts One-to-one agreement Step 1 Chinese Contractor African Government Step 3 Performs services Explanation • In sole source negotiations a Chinese contractor negotiates with the respective African government (with or without the aid of the Chinese government) to become the contractor of a project without competing against other companies • To enter into these negotiations, the Chinese contractor usually has to put in more initial capital during the project (more risk) • This form of bidding is relatively rare with only about 10% of Chinese contracts negotiated this way. The reason for this is that payment problems are often an issue, since the funding for such projects are usually provided by the host country • Chinese contractors will usually enter into such arrangements only if the host country is very stable • Bigen’s good connections with the South African government is of great help here to Chinese contractors looking to deal directly with the South African government. This is especially valuable in a country like South Africa, in which the government is stable Source: The Beijing Axis Analysis

  29. The financial terms provided for Chinese projects in Africa serve to highlight the prominence of Chinese aid projects funded by the Chinese government Procurement methods for Chinese contracts in Africa # of times used Source: Collaboratory for Research on Global Projects, Stanford University. Based on a survey of 35 Chinese contractors; The Beijing Axis Analysis

  30. Drivers of China’s Resource Demand Nature and Extent of China’s Engagements in Africa Investments Contracts Typical Modes of Engagement Discernible Trends Final Observations Agenda

  31. China is constantly improving its ability to make bolder international deals • They would take into consideration strategic factors such as domestic reserves and long-term demand, macro-investment environment, PR strategies, etc. More Strategic They are becoming more conscious of the benefits of using investment banks, law firms, accounting firms, risk insurance companies, and other advisors. More Used to Int'l Standards Rather than going for investment on their own, Chinese investors would consider partnering with other investors – e.g. China Railway Group partnered with a few Chinese companies in DRC. More Cooperation & Partnership With financial losses or local labour strikes and other risks derived from the ongoing global financial crisis, Chinese investors have learned valuable lessons. More Risk-Aware It is expected that the Chinese government will give more support to Chinese investors in overseas mining projects, especially SOEs. Government Support Source: The Beijing Axis Analysis

  32. Drivers of China’s Resource Demand Nature and Extent of China’s Engagements in Africa Investments Contracts Typical Modes of Engagement Discernible Trends Final Observations Agenda

  33. Chinese OFDI faces a unique set of challenges Political Challenges Integration • Investments by State-Owned Enterprises invite much media attention. Concerns centre around the notion of ‘national interest’, and whether government should be allowed to own significant foreign resource assets, especially if it doesn’t allow meaningful investments in its own resources • Examples include the attempted Chalco-Rio Tinto deal in 2009, Minmetals-Norandabid in 2005, both of which failed. In African countries, the political challenges are exacerbated by ignorance in the areas of public relations and human resource management • China Inc. is inexperienced in managing global businesses. The slate of successful Chinese offshore IPOs is more a sign of confidence in China’s growth and in the dominant role of in the market, than to any belief that Chinese companies have greater operational efficiencies • When acquisitions are made abroad, the integration is often problematic due to this inexperience as well as to cultural barriers, leading to situations where some markets regard a Chinese acquisition as destructive to the value of a company Opportunity Assessment Strategic Direction • Even though it may sound implausible in the information age, Chinese companies are somewhat impaired in the identification and assessment of foreign investments • There is a disproportionate focus on quantifiable measures, with less attention paid to merits that are harder to quantify. In many cases this leads to Chinese companies making investments very high up on the value curve • Acquisitions of foreign assets are often not accompanied by a comprehensive global strategy. This was the case in late 2008 and 2009 when Chinese companies took advantage of the global financial crisis by cheaply acquiring troubled assets in North America and Europe, without much consideration for strategic fit. In general, management in Chinese companies is often ill-prepared for the management of a global enterprise Source: The Beijing Axis Analysis

  34. Much of Chinese involvement in Africa has a positive social impact, however, tension exists beneath the surface Negatives Positives • Chinese economic activity in Africa extends into public infrastructure, such as building hospitals, schools and affordable housing, which greatly benefit the general populace • Chinese construction activities in Africa create a source of employment for the local population • Cheaper Chinese manufactured goods and services are more readily affordable to impoverished African consumers and allows them economic access to new products • Chinese construction projects in Africa still import about half of their workforce from China. This mass influx of Chinese labour into the African continent has led to tensions with the local community, especially since the Chinese do not attempt to intermix • Although cheaper Chinese manufactured goods benefit the African consumer it threatens local business; the fear is that in the long-run this will destroy local manufacturing capabilities and competitiveness • Chinese labour practices in Africa are a source of many conflicts. Chinese construction activities in Africa regularly pay wages lower than the host country’s minimum wage requirements, have poor working conditions and are anti-union. This has led to many protests and work stoppages at Chinese construction sites in Africa Source: The Beijing Axis Analysis

  35. What lies in wait…? • 1. Smaller stakes • 2. Privatisationof ‘resource security’ • 3. Enhanced requirements of Chinese investors • 4. Diversification of holdings • 5. Increased cooperation between Chinese and African entities • 6. China becoming a feature of the African political landscape • 7. Manufacturing?

  36. Thank you! 谢谢您! Dirk Kotze Director and General Manager Africa dirk@thebeijingaxis.com

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