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China Accelerates Infrastructure & Resource Investment in Africa, India and the U.S.

China Accelerates Infrastructure & Resource Investment in Africa, India and the U.S.

By David Alioto

China today is translating its expanding wealth into global economic clout. The Country last year overtook the U.S. as the world biggest trading nation. However, China manufacturing industry which has long been the economy major engine is struggling. In order to support the growth of their economy, China is seeking natural resources, energy, food and markets for its products outside the country.

President Xi Jinping expressed last year a primary goal to reform the economy by liberalizing financial flows and encouraging Chinese companies to invest more outside of China. As a result, deals done by Chinese firms are steadily rising in profile and size. China has already invested huge sums in its own infrastructure. The Chinese government has now prioritized allocating a major portion of the $3.8 trillion in reserves toward overseas investment with a key focus on Africa, India and the United States.

China investment strategy is different for each country. In the case of Africa, it is building the initial infrastructure of pipelines, railroads and ports to gain favorable access to Africa vast resources securing energy, labor resources and new markets for its manufacturer products. In India and the United States, China is navigating the political and business climates of two of the largest economies in the World. If successful, Chinese firms will be allowed to participate in over $9 trillion of infrastructure projects planned over the next several years in India ($1 trillion) and the U.S. ($8 trillion).

Africa

A core focus of China investment interest has been the nation of Africa. Africa has about 40 percent of the global reserves of natural resources, 60 percent of uncultivated agricultural land, the growing purchasing power of a billion people and a low cost wage environment. The continent has the fastest-expanding labor force in the world with more than 500 million people of working age. In the next 25 years, Africa will have just as much workers as China and India.

The logistics infrastructure in Africa is very inefficient. It is very costly and difficult to get transport flowing within African countries, not to mention across the borders. Poor infrastructure and lack of funds to develop modern transportation systems hinders efforts at creating efficient supply chains to seamlessly flow goods in and out.

Africa suffers from the lack of a centralized transportation infrastructure as well as a lack of major ocean ports and air transport hubs outside of South Africa and the Suez Canal.

Beyond the ports, less than one-fifth of Africa's road network is paved. According to the International Monetary Fund, the trade barriers between countries and lack of transport integration limited the growth rate in sub-Saharan Africa for 2013 to 5.3%.

However, China is forging alliances with Africa Leaders and making infrastructure investments in order to leverage the tremendous resource and economic potential in Africa

In March 2013, Tanzanian President Jakaya Kikwete and Chinese President Xi Jinping signed 16 agreements for development projects on mainland Tanzania, and three agreements for Zanzibar.

The deals clear the way for China to finance and build a $10-billion port at Bagamoyo. China has committed to a $500-million installment in 2013 to initiate the port project. The Port is scheduled for completion by 2017 and will increase capacity from 800,000 TEU to 20 million TEU.

Tanzania is one of the focal points of the Chinese globalization strategy in Africa. Recently, enormous natural gas reserves of an estimated 40 trillion cubic feet were discovered off the Tanzanian coast. The China National Petroleum Company is currently installing a 532-kilometer (333-mile) pipeline from the port city of Mtwara to Dar es Salaam.

"Our relations are at a new historic beginning," the Chinese president told his Tanzanian hosts. He noted that Africa is one of the world's fastest-growing regions, pressing forward like a "galloping lion." Xi reminded his hosts of the warm relationship between the Great Chairman Mao Zedong and Tanzania's first president, Julius Nyerere. He also praised the two countries' shared struggle against imperialism and invoked the common interests of all developing countries. "We are true friends," he said. "We treat each other as equal partners."

n return for developing the infrastructure, China has received lucrative licenses to exploit natural resources and fossil fuels. For instance, Angola is almost as large as Saudi Arabia as one of China's key oil suppliers. Angola is China's top African supplier of crude, and China buys 43.8 percent of Angola total oil exports. The bilateral trade between the two countries exceeded $120 billion in 2010 according to China Briefing.

In addition to oil-related projects, China is heavily involved in Angola reconstruction effort, after a devastating 27-year civil war that ruined much of its infrastructure. ne of the main investments is the rebuilding of the Benguela Railway, an 840-mile transcontinental railway that links the Atlantic Port of Lobito in Angola with rail networks in the Democratic Republic of Congo and Zambia. The project is expected to cost $300 million./span>

Since 2000, trade volumes between China and Africa have grown twentyfold, reaching $200 billion in 2012. China has become Africa's most important trading partner.

India

India's massive infrastructure requirements offer several opportunities to China. Over the next five years, India is planning infrastructure investment of $585 billion.

A Chinese working group submitted a five-year trade and economic planning cooperation plan to the Indian government in the first week of February, offering to finance as much as 30 per cent of the $1trillion targeted investment in infrastructure during the 12th Five-Year Plan (2012-17) of about $300 billion. Although the largest by any one country, China is facing serious political obstacles.

he Union Home Ministry and the Department of Economic Affairs have cautioned the government regarding relaxing the Foreign Direct Investment (FDI) norms in the Indian Railways. In its comment on the proposal of the Department of Industrial Policy and Promotion (DIPP), the home ministry, citing security concerns, said Chinese investments in such a sensitive sector should be viewed with caution.

The home ministry has pointed out that China is India's main rival on the economic front and the two countries have unresolved border disputes. Sources said FDI from a neighboring country in a core sector, like the railways, may pose a danger to national security. The ministry also clearly stated that Chinese investments should not be allowed in border areas such as Jammu & Kashmir and the North Eastern states./span>

While India and China are targeting $100 billion in bilateral trade by 2015, the balance is heavily skewed in favor of China. At the end of fiscal 2012-13, China's trade surplus with India was about $39 billion. China doesn't see this narrowing in the short to medium term due to the nature of the two economies, with India being services led and China a manufacturing economy.

A tremendous opportunity exists for China manufacturers to set up plants in India. From a labor perspective, the average monthly wage of a Chinese worker in Shanghai is $275 while in Mumbai the average monthly wage is $81 per month (e.g., three times less). China no longer has the inexhaustible supply of young workers who formed the backbone of its manufacturing revolution. This has led to a sharp increase in manufacturing costs in China - which have risen 40 per cent in the last five years.

he World Bank ranks India 134th out of 183 countries in terms of ease of doing business and ranks the country's logistics performance 46th out of 154 countries. By contrast, the United States and China ranked 5th and 79th, respectively, for ease of doing business and 15th and 26th for logistics performance. Several promising infrastructure improvements are underway to support logistics. These include the Golden Quadrilateral, North-South Corridor and East-West Corridor (roadways); Pipavav, Mundra and Hamra ports; and Bangladore, Hyderabad, New Delhi, and Mumbai airports. Furthermore, the Indian government plans major investments that will triple the country's cargo handling capacity at 12 major ports, with the goal of being able to handle three billion tons per year by 2020[iv]

China manufacturers should draw on the geographic benefits, labor savings and logistics infrastructure, by setting up facilities in India. Most importantly, the increased localized presence of the Chinese firms should bode well in securing infrastructure projects and growing sales in India.

United States

wo-way infrastructure investment has emerged as one of the most promising opportunities to spur economic growth and job creation in both the United States and China,U.S. Chamber President and CEO Thomas J. Donohue said. his type of investment would benefit both of our countries, strengthening our relationship and enhancing global stability and prosperity./span>

At a minimum, more than $8 trillion in new investment will likely be needed in U.S. transportation, energy, and wastewater and drinking water infrastructure from 2013 through 2030otaling some $455 billion per year.

According to data from the American Enterprise Institute and Heritage Foundation, Chinese outward investment reached $85 billion in 2013, a dramatic increase from a mere $10 billion in 2005. The U.S. has been the No.1 destination, luring more than $14 billion of investment last year alone.

hereas state-owned companies have dominated in total deal value in the past, that is no longer true. In 2013, more than 70 percent of investment came from private enterprises, responsible for more than 80 percent of a total of 87 deals (of which 44 were acquisitions and another 38 were greenfield projects). Where is the money going? Unconventional oil and gas was a top draw, with $3.2 billion invested in deals that include CNOOC (CEO) purchase of Calgary, Alberta-based Nexen Energy U.S. operations, Sinopec (SHI) joint venture with Chesapeake Energy (CHK) of Oklahoma City, and a Sinochem International (600500:CH) stake in West Texas Wolfcamp Shale. Commercial real estate was also a big draw, with 18 investments in San Francisco, Los Angeles, New York, and Detroit totaling $1.8 billion. And the single biggest deal: Shuanghui (000895:CH) $7.1 billion takeover of pork processor Smithfield

In January 2014, Ohio officials announced that Fuyao Glass Industry Group, a maker of windshields and windows for automobiles, would acquire about 1 million square feet of the GM truck assembly plant in Moraine, OH. Fuyao Glass will make an investment of $200 million at the site in total to get it ready for production.

It is the largest Chinese investment yet in Ohio and one of the largest ever in the US. The plant is expected to begin operations in 2015, employing about 800 people within three years.

For Chinese companies like Fuyao Glass, the U.S. has become a better, less expensive place to set-up manufacturing. The company said Ohio's location was selected based on logistics cost, quality of workforce as well as the business environment.

Founded by Cao in 1987, Fuyao has captured 20 percent global market share for auto glass. Company chairman Cao Dewan said "This investment is actually due to the demand of our customers. And they believe we should be here, because we provide a large percentage of their products."

t could be the biggest role reversal since, well ... when Nixon went to China. The gap between manufacturing costs in the U.S. and China is shrinking explains John Ling, a naturalized American from China who runs the South Carolina Department of Commerce's business recruitment office in Shanghai.

Today some 33 American states, ports, and municipalities have sent representatives like Ling to China to lure jobs once lost to China back to the U.S. Besides affordable land and reliable power, states and cities are offering tax credits and other incentives to woo Chinese manufacturers. Beijing, meanwhile, which has mandated that Chinese companies globalize by expanding to key markets around the world, is chipping in by offering to finance up to 30% of the initial investment costs, according to Chinese business sources.

In August 2013, the World largest retailer, Walmart, held its first U.S. Manufacturing Summit, attended by 500 suppliers, 34 states, 8 governors and government officials, who met to discuss opportunities to create jobs, restore communities and drive economic growth within the United States. Following the Summit, Walmart made a commitment to buy an additional USD $250 Billion over the next 10 years in products from American manufacturers.

A key presentation was made during the Summit in which Hal Sirkin, Managing Director, Boston Consulting Group, provided the following illustration of the shrinking gap between labor costs in China versus the U.S.:

The simple math on labor costs
(nominal USD)
2000
2010
2013E
2015F
China wages in Yangtze delta (USD/hour)
$0.72
$2.82
$4.59
$5.98

U.S. wages in logical state (USD/hour)
China productivity (% of U.S.)

$15.81
$20.71
$21.85
$22.93

China productivity (% of U.S.)

21%
32%
38%
42%
Productivity-adjusted China wages (USD/hour)
$3.43
$8.81
$12.08
$14.24
China labor cost as % of U.S. labor cost
22%
43%
55%
62%

Hal Sirkin, Senior Partner & Managing Director, Boston Consulting Group

The ade is the USAtrend is not simply patriotic, but also driven by the changing factors of labor cost, lower inventory carrying costs and the strength of the world most advanced transportation network.

As Fuyao Glass recognized the benefits of purchasing an existing plant in the U.S., other Chinese manufacturers should seriously consider investment or acquisition of U.S. based facilities or firms. The current political environment in the United States is supportive of outside investment.

China has done an excellent job in pear headingdevelopment in Africa. In contrast, China needs to further encourage their companies to embrace a greater global supply chain vision by establishing more local operations in China and India enhancing growth and profitability.

David Alioto is the President & CEO of Probity Enterprises. Probity Enterprises is comprised of industry experts that provide management services to leading corporations in the United States & China. The Company has comprehensive experience in the rapidly evolving business climate for retail, manufacturing and supply chain solutions.

Email: dalioto@probityenterprises.com

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