Chinese Investment In South Africa On Continued Road To Success

Chinese President Xi Jinping (L) shakes hands with South African President Jacob Zuma after their speech during the opening session of the Forum on Africa and China Cooperation at Sandton, in Johannesburg, on December 4, 2015. Chinese President Xi Jinping announced $60 billion of assistance and loans for Africa at a summit in Johannesburg on Friday, signalling China's commitment to the continent despite a recent fall in investment. / AFP / MUJAHID SAFODIEN (Photo credit should read MUJAHID SAFODIEN/AFP/Getty Images)

2018 marked the 20th anniversary of diplomatic relations between South Africa and China. China is South Africa’s biggest trading partner, with bilateral trade growing 11.7% to USD 39.17bn in 2018 – just under a third of total China-Africa trade1 . Chinese foreign direct investment (FDI) into South Africa reached USD 15.2bn in 2017, or 19% of total FDI,2  making the country the second-largest recipient of Chinese FDI in sub-Saharan Africa after Nigeria.3  One of the most significant Chinese investments in South Africa was the Industrial & Commercial Bank of China (ICBC)’s acquisition of a 20% stake in Standard Bank for USD 5.5bn in 20074. ICBC was attracted both by South Africa’s status as the only G20 member state and its developing economy with a significant middle-income consumer segment.

Improving political climate brings new opportunities for investors

Heightened political tensions in 2016-17 caused by leadership struggles within the ruling African National Congress (ANC) raised international business concerns about South Africa’s investment environment. Chinese investors in particular were initially concerned by the replacement of Jacob Zuma by Cyril Ramaphosa as national president in early 2018, and the adverse impact it might have on South Africa’s relationship with China. Zuma saw China as an alternative investor source and often had a confrontational attitude to the West. Ramaphosa, by contrast, was perceived to be close to the West, and possibly sceptical about China and the BRIC nations more broadly.

However, despite the change in leadership, the future for the China-South Africa relationship looks promising:

  • Ramaphosa avoids antagonistic relations, and focuses more on consensus and compromise: he will not attempt to play West off against East and will not show political bias in favour of one side or the other.
  • Ramaphosa’s principal objective is to attract investment and grow the economy, and he will see China as a key part of that plan.
  • he expected wider positive effect of Ramaphosa’s leadership on the South African economy will also benefit Chinese investors. His administration is likely to become increasingly responsive and transparent. This will serve to strengthen the business outlook for Chinese and other overseas companies beyond the 2019 general elections and in the longer term – something that is also reflected in an improved risk-reward score for the country.5


South Africa’s security threats remain a challenge

Amid the enthusiasm around the pro-business developments under Ramaphosa’s leadership, investors should not forget that the country still has a very challenging operating environment that presents a number of security threats to Chinese companies and their employees.

Chief among these is crime. High rates of violent crime continue to receive extensive coverage in international media. However, overall rates of violent crime such as rape and murder have declined significantly since the early 1990s. Levels of crime also vary considerably between and within provinces. For example, according to South African Police Service (SAPS) statistics, Eastern Cape province saw 52.8 murders per 100,000 people in 2015-16, compared with 15.7 in Limpopo. Low-income areas typically have substantially higher crime rates than elsewhere.

Socio-economic factors drive continued high levels of crime. These include income inequality, unemployment and destitution fuelled by a breakdown in social networks, and exacerbated by the prevalence of migrant labour and high rates of HIV/AIDS. These underlying causes mean that reducing levels of crime will remain challenging, and rates are unlikely to decline substantially over the coming years. The growing prevalence of registered and unregistered firearms also exacerbates the problem of violent crime. Studies have put the number of illegal firearms in South Africa at between 500,000 and 4m.

Chinese employees can also get caught up in civil unrest. Protests and marches occur relatively frequently in major cities, notably Johannesburg and Tshwane/Pretoria. As the country’s political and economic hub, Gauteng province typically experiences more labour unrest than other provinces. Labour issues trigger many demonstrations. Trade unions are active and vocal across South Africa, and maintain substantial political clout, meaning that they are able to swiftly mobilise thousands of people. However, it is necessary to apply in advance for police permission to demonstrate. Marches are therefore policed, and routes and locations publicised in advance – these are monitored by Chinese companies with effective travel security functions.

Community engagement limits threat of negative perceptions of investors

Chinese investors must also contend with occasionally negative local perceptions about how Chinese companies operate. There is a strong perception that Chinese companies are not concerned about labour issues, that they have weak internal compliance frameworks, and that they are therefore more inclined to engage in corruption and other non-compliant behaviour.

Some of the negative views are driven by the perception among many South Africans that Chinese companies bring in Chinese workers for their projects, and that this is contributing to the 28% unemployment rate. Yet the reality may be more positive, with Chinese companies creating job opportunities for local workers, as well as bringing skills training, and new products, services and technology to the market. It is important for Chinese investors to address these perceptions by proactively engaging with local communities, communicating the skills and services they bring, and integrating the local workforce into their projects.

Avoiding the pitfalls

To overcome some of the key challenges of operating in South Africa, Chinese investors should be aware of these common mistakes and how to avoid them:

  • Management continuity and local knowledge. Multinational companies tend to have a relatively short tenure of country manager and other positions (as little as three years). This rarely provides sufficient time for the head of the business to appreciate fully the local market conditions. It also tends to create perverse business incentives, where the manager is more incentivised to secure short-term wins and less concerned with solidifying a sound and sustainable business structure. Longer in-country tenures help Chinese companies operating in South Africa to gain a more sophisticated understanding of the local political, operational and security environment, and to benefit from its full potential.
  • Community engagement. Chinese companies are frequently accused of importing labour rather than hiring locally, which can stoke anti-Chinese sentiment. Yet while some Chinese specialists are brought in at the project construction stage, the majority of labour is sourced locally in South Africa. Chinese companies need to manage their relations with trade unions and local communities in the areas of their operations, effectively communicating the benefits they bring, and being fully engaged in community healthcare, educational and other social initiatives.
  • Local procurement. Some recent studies generally support the view that Chinese businesses are a boon rather than a threat to local employment in Africa. Areas for improvement, however, include the limited levels of local procurement on the part of some Chinese companies and their relatively low levels of local management.
  • Mutual understanding of a) the partner and b) the business environment are a critical factor in ensuring the success of joint projects. For example, Chinese companies need to fully understand the importance of black economic empowerment (BEE) and what this means for a joint project.
  • Employment equity and BEE credentials. The principal regulatory challenge faced by Chinese businesses in South Africa is compliance with complex Broad-Based Black Economic Empowerment (B-BBEE) legislation. The initial rollout of the latest draft of this legislation in 2015 saw poor government communication and delays in the publishing of sector-specific codes cause confusion among investors. Businesses undergoing the accreditation process have reported inconsistencies in the application of regulations across auditing agencies. This will result in further uncertainty, particularly among foreign-owned operations, and complicate efforts to comply with the law.
  • Local workers must not be disadvantaged. From an immigration law perspective, various work permits can be issued, all with different requirements. In essence, Chinese talent may be brought in as necessary to provide required skills, but not to the detriment of available South African workers able to perform in those roles. Having workers in contravention of the immigration laws exposes companies to material fines or even imprisonment for its leadership.
    Overseas businesses ordinarily want to bring in their own nationals at management level to set up in a new market, but transfer of skills and knowledge to local employees is key. Taking a strategic view of skills-transfer opportunities could be highly advantageous for South Africans. A reciprocal approach to skills transfer should mean that when expatriates depart, they leave behind valuable skills and knowledge.
  • Caution with dismissals. South African labour law requires employers to implement a system of progressive discipline, with dismissal being reserved for serious transgressions and repeated misconduct. Grounds for dismissal are limited to misconduct, poor performance, ill health and the company’s operational requirements. In all four instances, a proper reason to dismiss must exist, and due process must be followed. If not, the employee can be reinstated or awarded compensation of up to 12 months’ remuneration. In some specific instances, the compensation that can be awarded goes up to 24 months’ remuneration. Chinese investors need to plan enough resilience into their workforce to allow operations to cope with some performance challenges.
  • Data privacy. Chinese companies doing business in South Africa should also be aware of the country’s draft data protection legislation, which contains provisions regulating the collection and use of data – both inside South Africa and across to other jurisdictions – as well as the period for which data can be retained. Lack of compliance exposes companies to the possibility of a hefty fine.