Chinese state-owned enterprises in Africa: Entrepreneurs or the long arm of the state?

Many observers in the West find the possibility that Chinese state-owned enterprises may actually not be instruments of the state hard to swallow. Even more difficult to fathom is the notion that Chinese SOEs are more interested in – of all things – making a profit than they are in following orders from Beijing. These authors serve up arguments that contradict the stereotypical view of Chinese SOEs.

On the heels of its “open door” policy in the late 1970s, meant to attract Inward Foreign Direct Investment (IFDI) to contribute to its economic growth and development, China today finds itself actively investing in various sectors overseas. China’s contribution to Outward Foreign Direct Investment (OFDI) has been particularly promoted through the ‘go out’ strategy that has been — among other aspects of China’s international political economy — one of the push factors for Chinese companies (SOEs and private) to venture overseas in search of foreign markets and expertise.

Due to the strategic importance of outward foreign investments, most active Chinese multinational companies are state-owned enterprises (SOEs). However, with the current fierce domestic competition, the rise of production and labor costs and the lack of financial support for individual entrepreneurs in China, Chinese private enterprises are also seeking to penetrate foreign markets.

In Africa, China’s investments have been mostly in sectors such as infrastructure and energy (oil, mining, gas, etc.). But in recent years, investors have become interested in the services and manufacturing sectors. For instance, the African telecom industry is driving China’s giant telecom companies (Huawei and ZTE among others) to set up operations in several African countries, thus contributing to the improvement, expansion and building of telecom network infrastructure on the continent. In the financial services sector, China has made one of its major investments through its Industrial and Commercial Bank (ICBC), which has a 20 percent share of Standard Bank-South Africa.  As for tourism, many African countries have been granted Approved Destination Status (ADS) in order to enable Chinese tourists to travel to these countries and increase inbound tourism.

As this article describes, China’s growing investment in the services sector in Africa illustrates the qualitative changes in China’s African investment strategy.


Globalization of Chinese companies

Compared to western multinational companies (MNCs), the role of the Chinese government in the global expansion of Chinese MNCs is significant. China provides its MNCs, mainly state owned, with political and financial support (i.e., involvement of state political and financial agencies in Chinese MNC ventures abroad). Such government support enables Chinese companies to overcome their disadvantaged position resulting from their late arrival in the international market. However, as we discuss later, government support should not be confused with the companies’ own goals.

Chinese multinationals invest abroad because they are looking for new growth markets. By going global, they are subject to less competition. They can realize higher profit, due to their price competitiveness, and diplomatic, political and financial support from Beijing’s central government. To survive the intense competition in the global market, Chinese companies acquire foreign management skills and new technological skills and develop strong relationships with companies in the countries where they operate. Such relationships often lead to mergers and acquisitions.


Strategies of Chinese telecoms in Africa

Africa has become a thriving market for the telecom industry and is among the world’s fastest-growing mobile phone markets. Such growth has been facilitated by the liberalization of telecom policies in African countries, which in turn has led to the creation of regulatory bodies and increased competition.

The presence of new operators in Africa’s telecom market has influenced price competition; today, it drives mobile subscription growth rates. Compared to urban areas, the new telecom companies (including the Chinese) have focused on rural areas, where they have established base stations to ensure wide network coverage. The companies’ business case focuses on communication at cheaper prices with low-price mobile handsets, business development based on mobile money transfer, and merchandise orders. Such policies, particularly those that rely on tailor-made products and services, help to bridge the digital divide between rural and urban areas.

Chinese telecoms in Africa have a strong customer focus. They establish partnerships with local telecom network operators (for instance MTN, Orange and Safaricom) to win trust and a reputation for reliability among customers. Such partnerships are formed to provide telecom infrastructure and equipment in order to offer mobile phone users low fees. In South Africa for instance, Huawei and ZTE have established partnerships with MTN, which operates in more than 20 African countries. In Africa, Chinese telecom companies enjoy advantages that are linked to China’s political economy agenda:

  • Political and economic advantage based on the precept of non-interference in any country’s political affairs;
  • Comparative economic advantage with the financial backing of the Chinese government, which enables them to bid lower than competitors for contracts;
  • Political and economic diplomacy, which is based on the Chinese government’s persistent efforts to reach out to African countries, coupled with support for big projects and development assistance. This represents an important component of Chinese multinationals’ bidding process.


National oil companies and the overstated role of state strategy

China is frequently portrayed as a state that, in a highly co-ordinated fashion, deploys its various industrial organizations to secure commodities abroad. Western media often portray China as orchestrating a grand strategy of resource acquisition. For instance, in Dambiso Moyo’s recent book on China’s commodity boom, Winner Takes All, she argues that China possesses a long-term vision of commodity security that western powers can only dream about. Few institutions embody this perception more than China’s three state- owned oil companies, CNOOC (China National Offshore Oil Corporation), CNPC (China National Petroleum Corporation) and Sinopec (China Petroleum and Chemical Corporation).

Anxieties about the conflation between the Chinese state and its companies stem not only from engagement in Africa but from situations in the U.S. too. In 2005, CNOOC, outpacing ChevronTexaco, made a winning $18.5 billion bid for the U.S. energy firm Unocal. Congress however, quickly whipped up opposition to the bid, arguing, amongst other things, that a foreign company under Communist ownership posed a security threat to the United States (the deal did not go through, although CNOOC has more recently had success with the Canadian company Nexen, which it recently purchased for $15. 1 billion, its biggest foreign purchase to date).


Nuances and generalizations

With regards to SOEs in Africa it is not uncommon in the Western media to read headlines such as: “How China is taking over Africa and why the west should be VERY worried” (from the UK’s The Daily Mail). Here we see commentators frequently use the term “the Chinese” to refer, at once, to the Chinese state, Chinese SOEs, Chinese private companies, and non-Chinese companies run by ethnic Chinese and Chinese migrants (and sometimes Koreans, Japanese and South East Asians). The China-Africa expert, Ian Taylor, has made the excellent counter-point that when, for instance, Shell engages in dubious activities in Nigeria, “no one blames the British Prime Minister and no one makes a direct link between Shell and 10 Downing Street.” This of course begs the question: Why do Western commentators treat “the Chinese” as a single entity and yet display a far more nuanced approach to Western commercial interests in Africa?

One answer is that there is a general feeling in the West that China is encroaching on what it has long considered its “back yard”; another is that there is a sense of a growing strain on resources globally and that the rise of China exacerbates such an anxiety. A third reason is the role of China’s SOEs themselves, which, understandably, are often viewed as arms of the state that are deployed to secure resources. The truth, in fact, is more nuanced, as can be seen in the case of the national oil companies (NOCs).

The NOCs originated during the Maoist years of “self-sufficiency”, when oil production became a sterling example of socialist non-reliance policy. During the era of the planned economy, important petroleum decisions were centralized, local governments exercised no control, and local petroleum enterprises operated as direct extensions of their line ministries. China later switched to a more energy- intensive market economy, and by 1993 it had become a net exporter. This sea change witnessed a shift in energy governance: The central government withdrew from managing the companies and abolished their line ministries. The government strove to turn these institutions into modern corporations, which would take responsibility for both profits and losses. In fact, one of the rationales for developing the modern NOCs we see today is that they would compete against each other for market share. 

As China’s NOCs embraced China’s new “going out” strategy – first in South-East Asia and later in regions such as South America and Africa – they were subjected to increasing market pressures. It is rarely mentioned by western commentators that vast amounts of oil extracted by Chinese NOCs are sold on the international market rather than being shipped back to China. This is done for the simple reason that the NOCs can gain a better price for this oil on international markets. In this sense, China is not taking oil off the international market but actually adding more to it.

While NOCs tend to partner with the host-state’s oil company (such as Sonangol in Angola or Sudapet in Sudan), they have recently moved into the realm of joint multi-national ventures, such as the recent three-way engagement between CNOOC, the Irish Tullow and France’s Total SA to develop Ugandan oil fields in the Albertine Basin. In these co-operative situations, which look set to continue, Chinese players are increasingly obliged to engage according to business situations which make financial sense as opposed to fulfilling the dictates of national strategy.

None of these factors, of course, betray the fact that there still are ties between the Chinese government and the NOCs. In the 1990s and early 2000s, the Chinese state was by no means secretive about its “going out” strategy; the government actively lobbied African states to gain access to oil. Additionally, as pointed out by Michel Meidan, there is something of a revolving door between the NOCs and the government, with officials moving into corporate oil portfolios and vice-versa.  It is not difficult to imagine that if the world were to face a global shortage of oil, the Chinese government would quickly mobilize Chinese NOCs to secure supplies as a national energy security imperative.

But such scenarios must be placed within a larger, global context in order to see that in comparison to large western oil companies, the cosy relationship between Chinese oil companies and the state is not that different from the norm. Western governments and large oil companies frequently harness each other in international oil ventures. Take for instance, the historical dominance of the “Seven Sisters” – seven Euro-American firms (backed by the U.S. State Department) that up until the early 1970s owned over 80 percent of the world’s oil. More recently, Dick Cheney, the U.S. vice-president under George W. Bush and a former CEO of the energy company, Halliburton, exemplified this relationship, particularly following the U.S. invasion of Iraq during Cheney’s tenure – a country which has some of the world’s largest oil reserves.

It is true that Chinese SOEs receive substantial support from the state. In the case of the telecoms in Africa, preferential loans (credit lines received from China Exim Bank, China Development Bank, China-Africa Development Fund) are given to African governments to acquire Chinese telecom equipment and infrastructure. In the oil sector, similar credit lines are offered for the development of infrastructure in exchange for oil. Nevertheless, the state’s role is often exaggerated. To return to CNOOC’s failed bid for UNOCAL, it is significant to note that CNOOC had not even notified the government of their bid. This reflects a larger pattern of China’s SOEs, which is sometimes difficult to grasp in countries with an advanced market economy: They are hybrid organizations which receive, by Western standards, exceptional assistance from the state but simultaneously function as private companies which compete against other global corporations but also amongst themselves.