A transition in values

As South Africa exports more processed goods to China, opportunities are opening up for Chinese investors

At the recent South Africa Expo in Beijing, Ronel Bester, expert and marketer for Lourensford Wine Estate, says she feels just as much competition at the expo as in her home country: Among the 50 exhibitors from South Africa, around half were wine and liquor makers.

Lourensford, established in 1700, already has a distributor in China based in Sichuan and Guangdong province, but Bester says the battle has just started in this market, where she also faces better-established French winemakers, among others.

But exports of South African wine and spirits to China are growing, making it just one of the value-added products South Africa is trying to promote in China.

With the prices of commodities remaining sluggish, affecting a major part of South Africa's income, the government is making a major push to export more finished or semi-finished products of higher value.

Chinese buyers got a taste of such South African products when bag and wallet makers, flower exporters, food producers and industrial parts suppliers joined the beverage firm during the South Africa Expo in China in October, which made steps in Hong Kong, Shenzhen, Chengdu, Shanghai and Beijing.

China is the largest trade partner of South Africa. Since 1998, when China and South Africa established diplomatic relations, South Africa's exports to China have been mainly unprocessed agricultural products and mineral resources, while China's exports to South Africa are mostly finished products.

Trade volume between the two countries was $65 billion in 2013, a third of China's trade with Africa, according to government figures.

To attract more foreign investors to this value-added transition, the South African government is setting up special economic zones across the country.

Earlier this year, South African President Jacob Zuma approved the Special Economic Zones bill, and Minister of Trade and Industry Rob Davies said on July 23 that within the next 100 days, the government would pass all regulations necessary to establish a board so that they can go ahead and establish special economic zones. "We have already fast-tracked a couple of them," he said.

By the time the expo was held in October, the government had announced establishment of several zones focusing on IT, mining and logistics. There are still a number of zones going through feasibility studies, he says.

"If all terms are satisfied, companies in these SEZs are eligible to enjoy a 15 percent corporate tax, building tax allowance, and an exemption of value-added tax and duties from export-bound products," he says.

The move is bringing in some major investments. In March, China's top train makers, China CNR and CSR Corp, which are in merger talks, signed an agreement with South Africa's government to supply 700 locomotives as part of a $3 billion contract.

Davies says the company will set up a local factory, but the plan is still in its early stages and the location of the plant has not been announced yet.

South Africa's efforts to add value to exports are gradually paying off. Between 2009 and 2013, South Africa's export volume of automobiles grew by 130 percent.

"We have seen some success in our previous experiences," Davies says. "For example, wine is a value-added product and it has seen substantial import increases from China. China is now one of the fastest-growing wine importers in the world, and South Africa is the fifth-largest wine supplier to China," Davies says.

He concedes export figures started from a low level, which is part of the reason growth rates for value-added South African products has been so robust. "And so far only 7 percent of the products exported to China are high-value-added products, so we still have a long way to go."

Bradbri Ltd is one of the companies that want to leave its footprints in China. The South African company, which manufactures steering systems for trucks and other machinery, supplies all nine provinces in its home country, as well as Zambia and Botswana. It also is a representative of British automotive and aerospace components company GKN.

"I would love to partner with Chinese automakers in South Africa to supply after-market components," says Felix Tjaone, Bradbri's manager. "It would be cost-effective for Chinese manufacturers to find local part suppliers, and help me to establish my brand among Chinese companies."

Because some components are exempted from customs duties, Tjaone also wants to export to China.

South Africa's added-value vision is creating good business opportunities for Chinese investors, says Cao Jiachang, deputy director of the Department of Western Asian and African Affairs at the Ministry of Commerce.

"South Africa has projected to raise the proportion of its value-added products to 5 percent of its total exports to China by 2020, and Chinese investors in South Africa can benefit from this resolution."

Chinese investment in South Africa was $11 billion by 2013, one-fifth of the total Chinese investment in Africa, according to the ministry's figures.

"This is the best time for investment since 1998," Cao says. "Compared with other African countries, South Africa has its unique advantage: rich natural resources, advanced legal and financial systems, mature infrastructure and direct flights to China."

In recent years, Chinese people's interest in South Africa has warmed. In 2013, the number of Chinese travelers to South Africa reached 150,000, a 20 percent increase year on year.

Chen Wenyi, senior executive vice- president at Bank of China's Johannesburg branch, agrees. "The financial and legal systems are unimaginably good," he says. "I suggest Chinese companies that have intentions to take root in Africa set up a South Africa office first, and then radiate to the African continent," Chen says.

The Bank of China has been operating in South Africa for 14 years and now employs 72 residents of South Africa and 18 Chinese.

The $11 billion Chinese investment in South Africa is mostly in finance, mineral resources, energy, real estate, and clothes manufacturing, government figures show. But South Africa's investment in China is only $600 million, including media group MIH's 34 percent stake in IT company Tencent, and SAB Miller's 49 percent stake in China Resources Breweries Co (which makes popular Chinese brand Snow Beer).

There are about 100 Chinese companies in South Africa, with more than 2,000 Chinese employees, Chen says. The biggest 15 Chinese companies employed more than 11,000 local workers, figures from Bank of China show, he adds.

"Cooperation in the financial sector is the highlight," Cao says. "All major Chinese financial institutions have set up offices in South Africa, and the total financing agreements they have signed have reached $20 billion."

Cao calls for more cooperative arrangements in manufacturing, mining and agricultural-product processing, as well as emerging industries in South Africa such as automobiles and new energy.

Apart from adding value to its export products, South Africa is investing extensively in infrastructure. South Africa has committed to spend $73 billion on infrastructure in the next three years, and the government says it has already spent $91 billion in the past five years.

"When we develop our infrastructure, those who will provide inputs should be ready to invest or manufacture in the country. We will not spend all this money on importing goods," Davies says.

The government is also willing to form partnerships with Chinese companies to invest in other African countries, especially in infrastructure projects, Davies says.

"In practice it should be decided case by case based on the project's merit," he says. "But the biggest challenge is the funding gap. A possible solution is the new BRICS Development Bank, which may be a vehicle to solve the funding gap in the African continent."

The bank was officially established in July, with headquarters in Shanghai, in order to facilitate financial transactions between the BRICS countries.

Speaking of areas open to foreign investors, South Africa's government says foreign investors are welcome in all sectors, but it gives a heads-up regarding agriculture-related investments that involve land ownership.

Gugile Ernest Nkwinti, South Africa's minister of rural development and land reform, suggests foreign investors carefully watch land policies in the country.

Like many African countries, South Africa faces land issues inherited from the colonial age. According to Nkwinti, in 1996 less than 1 percent of the population, mostly whites, owned over 80 percent of the farmland, while an estimated 5.3 million black South Africans lived with almost no security on commercial farms owned by white farmers. In the late 1990s, the country started a massive land reform project to transform land ownership.

Based on the reform proposal, state-owned lands cannot be sold but can be rented; private lands currently can be bought, but the amount is limited.

"Now big farms and multinationals hold 90 percent of the land, which is not a sustainable development mode," Nkwinti said in a speech at a Tsinghua Sannong public lecture on Oct 29.

Over the summer, new draft legislation was floated barring foreigners from owning land and instead permitting them only long-term leases, among other things. But the draft ran into opposition.

For foreign investors, it is more prudent to lease farming rights from state, public, or private lands, than buying them, Nkwinti says. "But the use of land is not restricted."

The minister concedes that land reform is complicated and may not be resolved in the near future, but he says foreign investors are encouraged to get involved in agricultural-product processing.

"We have established such companies and they are very capable. I think we have opportunities in joint ventures in this area," he says.

As for Bester of Lourensford Wine Estate, she says she is confident of making inroads into China.

"I know Chinese people love French wine because of the history and tradition, but South African wine tastes different," she says. "We have a fresh start. We will educate Chinese customers through tasting events, so they know our wine also has good quality."

wangchao@chinadaily.com.cn

(China Daily Africa Weekly 11/07/2014 page14)