How the US can out-invest China in Africa

China recently surpassed the US as Africa’s largest trading partner, but African countries are also growing wary of Chinese investment. This presents an opportunity for US businesses. To take advantage, US diplomats must become more effective advocates for the US private sector.

Opinion

On her trip to Africa earlier this month, Secretary of State Hillary Rodham Clinton made the case for US companies as effective commercial partners that can help facilitate broad-based economic growth on the continent. “The days of having outsiders come and extract the wealth of Africa for themselves, leaving nothing or very little behind, should be over...” Ms. Clinton said in a speech in Senegal.

More than championing US-Africa cooperation, Clinton’s remarks can also be read as a thinly veiled swipe at China. Africa is indeed growing wary of Chinese investment, which presents an opportunity for US businesses. But in order to take advantage of this opportunity, Clinton must ensure that US diplomats become more effective advocates of the US private sector and reinforce the power of America’s brand in Africa.

Africa’s economies are booming, with several countries growing at around 8 percent per year. China has known this for some time, and David Shinn, former US ambassador to Ethiopia and Burkina Faso, says Beijing or Beijing-backed companies have signed 32 bilateral investment agreements, formed trade cooperation zones with six countries, and have made foreign direct investments of over $50 billion. As a result, China recently surpassed the United States as Africa’s largest trading partner.

[Editor's Note: The original version of this piece incorrectly identified Ambassador David Shinn's first name.]

These trends would seem to pose a significant challenge for the US on the African continent. And yet, all across Africa, a backlash against China is brewing.

Just last month, three separate developments evidence this anti-China mood.

In Ethiopia, the government is in a contractual dispute with Chinese company Petro-Trans after it announced it would revoke the company’s license for oil and gas exploration due to lack of investment. In Senegal, traditional shoemakers are refusing to sell to Chinese buyers for fear that China will knock off its products. And in Mauritius, the government is considering other uses for land it had once promised to Chinese companies to develop a special economic zone, since six years have passed and the Chinese have yet to do anything with the land.

These three flare-ups are merely the ones that became news items. Far more significant is the across-the-board plummeting reputation of the Chinese commercial brand in Africa.

Ask any African ministry official or businessperson his or her views on Chinese companies and you tend to get the same response: horrible quality and broken promises. Africa’s business and government elite aren’t the only ones taking note; the Chinese brand is often the object of ridicule even among average Africans. Photographs of a leaking ceiling in the new African Union headquarters in Addis Ababa, donated and built by Chinese contractors, made the rounds on Facebook last month, with a caption mocking the quality of Chinese construction.

The American brand in Africa, by contrast, continues to be strong. US firms are known to provide the best quality and hire the most local workers. They are considered the least corrupt and the most considerate of the environment. And they are generally believed to complete initiatives on time and abide by their commitments.

But China still enjoys two structural advantages in Africa. First, it still has significant foreign currency reserves that it uses, among other things, to finance the construction of infrastructure projects in Africa. In other words, African countries often do not pay for the shoddy roads and bridges that China builds.

Second, the guidelines that govern how African countries award contracts – as dictated by international funders like the European Union and the World Bank, as well as African governments themselves – typically favor the lowest-price bid. This plays right into the hands of Chinese companies.

Competing against China’s cheap financing and low construction costs will require the effort of various US agencies, including the Overseas Private Investment Corporation, the Export-Import Bank, the Commerce Department, and even the White House. But US diplomats can immediately take advantage of China’s reputational issues in Africa to hammer home certain points to their African counterparts.

First and foremost, China’s cheap financing is not as cheap as it seems. Much like the Godfather, who doles out favors but expects bigger favors in return at some later time, the Chinese government is not ashamed to cash in on preferential trade agreements or access to natural resources. In exchange for this access, China will offer infrastructure development.

Similarly, officials throughout East Africa have complained that the Chinese government will often construct small infrastructure projects (like a small highway) pro bono, but later demand that Chinese construction firms be hired for larger infrastructure projects (like a dam) for which China will no longer foot the bill. In these and other ways, China can slowly gain effective control over much of a country’s economy.

As important, the low-cost of Chinese construction is often more than offset by the higher costs of maintenance and repair or lower output, as the case may be. The poor quality of Chinese constructed infrastructure has been well documented in China, Africa, and elsewhere. Some officials in Ethiopia and Kenya have argued that they have to spend more money fixing Chinese-built roads than it would have cost them to build high-quality roads in the first place.

A cheaper Chinese product might seem like a fantastic buy at first, but not when it produces less efficiently than its American-made equivalent, and certainly not when it breaks.

Guidelines for how African countries award contract must reflect these lessons, so US diplomats should lobby to change their structure. A structure that takes account of multiple factors – not just cost, but also quality, environmental impact, and training of local labor – would be much better for Africa as well as for US companies.

For the US private sector to succeed in these markets, the US government must conduct effective commercial diplomacy, a concept that Secretary Clinton has been promoting for some time. Across Africa, her Department can now lead the way.

Alexander Benard is managing director of Gryphon Partners, an advisory and investment firm. He recently published an article in Foreign Affairs on the US-China competition in emerging markets.