Are Chinese vendors entrenching themselves in Africa?

Wednesday, 02 November 2011 11:57  |  Raushan Sagalbayeva, Lead Consultant, Analysys Mason

In the last two years, Huawei and ZTE secured a total of at least USD55 billion in credit facility from Chinese policy banks to support their expansion into overseas markets.

China’s economic presence in Africa has expanded dramatically over the last decade. The Chinese government provided financial aid or concessional loans to develop mines, build airports, roads and railways, erect power grids and hospitals, and develop telecoms infrastructure across most of sub-Saharan Africa. In the last two years, Huawei and ZTE secured at least USD55 billion in credit facilities from Chinese policy banks, state-owned banks responsible for financing trade development and administration of Chinese foreign aid, to support their expansion into overseas markets.

China’s relationship with Africa is driven by strong commercial motives. In 2006, the Chinese government stated in a paper on its foreign policy in Africa that “the Chinese Government encourages and supports Chinese enterprises’ investment and business in Africa, and will continue to provide preferential loans and buyer credits to this end”. Moreover, in November 2009, at the Forum on China–Africa Cooperation, the Chinese government pledged to spend USD10 billion in the form of concessional loan finance for infrastructure development in Africa over the next three years.

In telecoms markets, Chinese investments usually take the form of equipment supply with generous and flexible vendor financing terms and conditions. State-controlled ZTE and privately-owned Huawei both enjoy enormous support from the main Chinese policy banks – China Export Import Bank (China Exim Bank) and China Development Bank (CDB). In 2009, ZTE secured credit facilities of USD15 billion and USD10 billion from CDB and China Exim Bank, respectively. Similarly, Huawei secured a USD10 billion loan facility from CDB in January 2005 and another one for USD30 billion in September 2009. 

With this support, ZTE and Huawei have swept the African telecoms markets with products at significantly lower prices than those of European or US vendors. In a paper published by the Wharton School of the University of Pennsylvania, Wilson Yang (former head of Huawei’s operations in West Africa) wrote that Huawei regularly prices itself between 5% and 15% lower than its European rivals Ericsson and Nokia Siemens Networks.1 Similarly, ZTE is said to routinely offer prices around 30% to 40% below those of its European competitors.

Both companies have now managed to dispel the commonly held perception of ‘cheap but low-quality’ Chinese products and their hardware has now earned a robust reputation. However, they have struggled to address problems with contract implementation. In 2006, the Ugandan government contracted Huawei under the National Data Transmission Backbone and E-Government Infrastructure initiative to lay a 2122km fibre-optic cable for USD106.6 million. Prompted by reports about inflated cost and poor quality of the project, the government launched an investigation in July 2011. Later, Uganda cancelled a USD74 million contract with Huawei for equipment that Uganda Broadcasting Corp. needed for migration to digital TV, due to alleged procurement flaws.

The two Chinese vendors are also working rapidly to overcome previous challenges, including cultural and communication difficulties when working in Africa. At the same time, they differentiate themselves by their impressive responsiveness and fast decision making – it can take as little as 24 hours for either vendor to make a decision on a discount or a revision to a contract.

Chinese companies have been criticised for their lack of transparency. For example, it was not until April 2011 that Huawei disclosed the names of its board members (in its 2010 annual report), a move that was believed to be a response to growing US concerns about the vendor’s alleged links with the Chinese military. Moreover, the reputation of Chinese vendors has been tainted by press reports on unfair labour practices, poor working conditions, low rates of pay, etc.

Whatever the reservations and criticisms, there can be no disputing that Chinese vendors have been hugely successful in Africa. This has put their European and US competitors under growing pressure. Not only is Huawei closing in on Ericsson in terms of worldwide revenues (USD28.1 billion and USD28.4 billion, respectively in 2010), but Ericsson also saw a steady decline in the volume of sales it generated in sub-Saharan Africa last year. The next few years may be crucial in defining the balance of power in telecoms networks: the giants of the West – Ericsson, Nokia Siemens Networks and others – urgently need to find a compelling response to the nimble challengers from the East.

Analysys Mason has carried out over 200 projects in Africa alone within the last three years, supporting both regulatory authorities and private enterprises during market entry, regulatory, commercial and technological developments, as well as mergers and acquisitions. Our global insights and local knowledge mean we can help our clients to devise successful commercial strategies.

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