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Monday, 5 May 2008

Chinese Investment in Zambia (A Special BBC Report)

BBC Newsnight Programme reports on China's influence in Zambia - A special two part report :

Part 1


Part 2

21 comments:

  1. Cho,
    I saw that BBC Newsnight report a couple of weeks ago or so. Part of the view it presents is that after having assisted Zambia to setup local fabric industries (Mulungushi Textiles), the Chinese worked to undermine those local industries by flooding the local market with cheap fabric imports. There is a tiny element of truth in that.

    However, to substantiate the claim, the reporter went to ask 'Chitenge' merchants why they didn't buy Mulungushi textiles materials. But what's most interesting is their response. They told him they preferred superior quality Congolese, East African and even Malawian fabrics as opposed to Mulungushi Textiles products. And that is a well known fact by locals. Nonetheless, the report misconstrued that and somehow interpreted it as locals preferring cheaper Chinese products, and therefore the Chinese had undermined the local textile industry which they helped build.

    I personally saw no evidence of it in that report. I actually wrote to Newsnight telling them precisely the above. I also told them that Mulungushi started declining some 20 years ago, way before this current wave of Chinese involvement in Zambia began.

    However, not everything in the report was off the mark. I just think it's simply a question of dwelling on the negative. As Felix Mutati said when interviewed in the report, the Chinese involvement in the Zambian mining sector is only 15%. The rest is made up of Canadian, Australian, and other nationalities.

    The report set out to find fault in Chinese investment in Southern Africa and surprise surprise, they didn't fail.

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  2. Zedian,

    I think you are correct about the decline of the textile industry, as much as everything else e.g. Mansa batteries, biscuit industry in Ndola etc. The decline had to do with the policies of the Chiluba years than with the Chinese.

    I do think there's a real issue about labour standards. The question is whether the Chinese are worse than other areas. I am not so sure.

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  3. I do think there's a real issue about labour standards. The question is whether the Chinese are worse than other areas. I am not so sure.

    I really believe they are.
    But the interesting question is to know if those lower labour standards are the reason why they're the only ones getting in new (not-so-high-profit) activities.

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  4. Random,

    We recently had Indian companies with poor labour standards. See here.

    "But the interesting question is to know if those lower labour standards are the reason why they're the only ones getting in new (not-so-high-profit) activities."

    Its tricky. If poor labour standards where the reason, ALL firms would get deals because it reduce labour costs!

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  5. Indian, Chinese.. not so different in that regard.

    The goal is not to reduce labour costs for the sake of reducing them, the goal is to strike the right productivity/cost balance.
    My question was more about if their lower labour standards are the reason why Chinese invest in acitivities like manufacturing in Africa while traditional investors don't stray away from high profit activities.
    After all, you see Chinese companies buying out second-hand oil drils in Angola that Western companies abandon because they're not profitable anymore, given the labour costs.

    Now why others don't reduce their labour costs is an interesting question too.

    May be it's because Chinese companies are less responsive to the pressure Western and Zambian Businesses receive from Zambian and Western NGOs.. And I imagine neither Chinese consumers nor the government cares that much.
    Or may be it's just because they're new entrants in activities that are less organized.

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  6. Random,

    I believe labour costs are relatively low in Africa, in Southern Africa at least. You said:

    "After all, you see Chinese companies buying out second-hand oil drils in Angola that Western companies abandon because they're not profitable anymore, given the labour costs."

    I thought costs of operations were high because of other factors such as corruption, transport, duty tax, etc. Not labour. However, if a foreign company is going to hire expats whom they pay 5-10 times the local pay, then labour will be costly.

    The Chinese economics are such that they maximise production on cheap labour. Even if they bring in expats from China into Africa, their pay is still relatively low and therefore labour costs remain low.

    As for quality, the Chinese work on a simple concept of perception and expectation. The latter has an element govt quality control or lack thereof.

    For example, last year there was an outcry in the West over Chinese made toys containing lead and mercury or something. The authorities (and the media) acted on it.

    In general the quality of products produced in China for the Western market is of very high standard, comparable to local products. Check the labels on the clothes you're wearing and chances are some of it is made in China :)

    In Africa things are very different. The BBC report talks about that terrible mining accident which happened in Zambia. Zambians will probably never see the official report of what happened.

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  7. I believe labour costs are relatively low in Africa, in Southern Africa at least.

    I believe they're not, though they may be lower in Southern Africa than in the rest of continent.

    The thing is it's not so much that the wages are high, it's that the cost are high compared to the productivity. And labour costs include more than the nominal wages, you have to count in the labour conditions, the vacation and sick days, the various benefits (health, housing etc..), the so-called social projects (buildin a stadium or whatever) and yes, the expatriates and the non-productive hirings.

    In the case of those "beyond-peak" oil drills in Angola, corruption, transport costs, duty taxes can't explain why they're unprofitable for Total and Exxon-Mobil and not for the Chinese companies (and some wolfing western ones like Zeta). After all, those costs are the same for everyone. So I simply deduce that the only variable element is labour costs.

    You're right to point out expatriates, since a Chinese engineer is much cheaper than a Western engineer (and probably cheaper than an Africa one. low supply helps in those cases). But I don't believe that's the only difference. You have to remember how the already established companies function. After decades of pressure from unions and governments, they don't only pay more in wages but also provide housing, retirement benefits, healthcare, pay for education, care more workplace safety, hire "political placements", build sports clubs and things like that. The Chinese companies do neither of that and that allows them to be profitable in activities that aren't for others.

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  8. Random,

    I think you raised the all important question in your previous post when you said:

    "Now why others don't reduce their labour costs is an interesting question too.

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  9. Inertia? Not sure.

    Random,

    How does your point on labour costs explain the observation that Total and co choose to continue operations in the North Sea, and hang-up in Angola, given that Britain has much higher labour costs?

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  10. How does your point on labour costs explain the observation that Total and co choose to continue operations in the North Sea, and hang-up in Angola, given that Britain has much higher labour costs?

    They don't hang up on everything in Angola. There is just a point at which the oil fields are not profitbale for them anymore.
    I figure that happens in the North Sea too and anywhere else.


    Another thing they may do is to actually reduce labour costs by mechanizing even more. There is a platform there pumping oil from 4 or 5 fields with a crew of 10 men. Now there are many reasons why this isn't done in Angola, from ownership insecurity to employement requirements..

    And like I said, inertia.

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  11. "Another thing they may do is to actually reduce labour costs by mechanizing even more."

    That makes sense. Our very own ZCCM, Zambia's former copper mining behemoth, suffered a similar fate because they had a duty to employ just about everyone in the community.

    But things have changed in the case of Zambia following the collapse of ZCCM. The new mining companies do not have any such obligations to the community any more. I suppose things may be different in Angola.

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  12. I do think there's another angle worth exploring here. In my view, its not really predominantly an issue of labour costs. The labour costs are pretty low across the continent, even having accounted for the right balance with productivity.

    There's no doubt to my mind that what makes Chinese investment viable in Africa is that they are solving the greatest problem Africa has. That is "uncertainty". If you look at places they are going i.e. Angola, Zimbabwe, DRC and even Zambia, these are places where political forces in the country are not adequately aligned. In other words there's sharp division among parties and so forth.

    What the Chinese have done is to invest deeply rather than lightly. Investing deeply requires that China backs up these interventions at the highest level of government and also they back that with military force. It is these guarantees they have put on the ground that have substantially reduced the uncertainty.

    I believe it is here where China has done better than other nations and that is why they can afford to go in and "take advantage" of cheap labour costs and so forth.

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  13. What the Chinese have done is to invest deeply rather than lightly. Investing deeply requires that China backs up these interventions at the highest level of government and also they back that with military force. It is these guarantees they have put on the ground that have substantially reduced the uncertainty.

    Uncertainity for who and from what ?

    that is why they can afford to go in and "take advantage" of cheap labour costs and so forth.

    It can't be the whole story.
    If you take the former french colonies, they have been provided a lot of stability by France, be it in Aid flows, in military help (and the French actually intervened many times), in diplomatic matters etc..

    One would assume that it would have given the French a huge advantage in those places.
    Well it has, for high profit activities. French companies get first bids in oil, on the biggest infrastructure contracts, in the most profitable activities.
    Yet, they don't really go beyond. They're not opening up ice cream factories in Douala or setting up small private medical centers in rural Congo. Chinese companies do those, just like they get into many non-traditional activities.

    That is really the mystery.

    The aid flows are neither new, nor different. It's helping the politicians helping them. Everybody has done that.

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  14. "Uncertainity for who and from what ?"

    Uncertainty for would be Chinese investors from the precarious and unpredictable nature of investing in unstable African states such as Angola. Also there other risks such as poor legal framework, absense of property rights, and so forth. There's a reason why FDI flows in Africa are not significant. Although other costs are minimal, the continent does carru significant uncertainty in terms of realising your investment. This inevitably requires any investor to manage that risk. China has evidently decided that the best way forward is to minimise these on a political level. So it creates critical mass and then guarantees this with force as it is doing in the DRC where investment and "military aid" are going hand in hand.


    "That is really the mystery."

    It is not a mystery. China wants more security on the ground. That means it is sending people as well as money!

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  15. Although other costs are minimal

    Not only I believe labour costs are high but "other costs" ?

    Transport ? Energy ? Cost of doing business ? What's minimal about those ?

    China has evidently decided that the best way forward is to minimise these on a political level. So it creates critical mass and then guarantees this with force as it is doing in the DRC where investment and "military aid" are going hand in hand. 


    How is that any different from what the French have been doing ?


    It is not a mystery. China wants more security on the ground. That means it is sending people as well as money!

    but why those people are getting into activities others have not been getting into ?

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  16. It seems the Indians are right behind the Chinese in Africa, as this report from BusinessWeek suggests.

    The Indians are probably following a similar strategy to the Chinese of striking deals at the very top of political power, which may cause headaches for those in charge of the environment, community welfare, product quality, trade unions, etc, as the BBC report highlights.

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  17. Random,

    "but why those people are getting into activities others have not been getting into ?"

    Remember these are state sponsored investors....and those who are not state owned companies, the Chinese government offers them incentives....

    My point is that investment from China is state driven..this is not the case with European or American investment..of course there are always some exceptions...

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  18. Just for the record.. I beleive there is a reason why the chinese are basicly giving a slight change to African Economics.. As we all know currency is a prominent factor in all economics.. and there has been a time in all nations that are of power now.. were they created the Eutiopia of Cheap Labour.. Reason being is because.. Cheap Labour = High Productivity = Eventual Goodfinance and Power to control the markets.. Everybody has been through it.. England had there Industrial Era a long time ago.. Which led to there wealth along with the Hijacking of Jewls from around the world remember the chimney sweepers etc.. America had 400 years of it.. But lowered the cost to a All time low by using colonization and slavery to build themselves.. China had a rapid one in the past 30 years.. it was only 10 years ago i remember seeing documentarys on cheap labour in china.. and India is doing the same now and it is predicted india will be a superpower in the next 20 years.. And i beleive China is implementing productivity in africa as they profit from it.. they are very smart investors.. The material Industry is vital right now around the world as Everybody is in to the Fashion Phenom.. As is Oil and Water.. hence the Iraq wars and the problems with Iran and the Oil Crisis in Nigeria.. Aswell as russia and canada looking to the Polar ice caps to melt in order to find oil.. As far as im concerned.. As i nigerian i beleive Africa needs this boost in productivity.. It will cause hard living conditions but under the right governing.. it will eventually lead to prosperity..

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  19. hey everyone, I have started some work on chinese investment in zambia, could yo tell me best writings for it? where do i start from fro mining sector as well as textiles? and the increasing protests against chinese.. please give me ur suggestions...

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  20. Sush,

    The blog has many reports and discussions on China and Zambia.

    Go to the bottom page and do the custom google search. Type China.

    You'll get the appropriate links etc.

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