Chinese VCs bet on Africa

By Shen Weiduo Source:Global Times Published: 2019/6/5 19:40:56

The continent’s rapidly growing economies promise huge potential

An African exhibitor shows a drum at an expo in Yiwu, East China's Zhejiang Province. File photo: IC

"Today's Africa is similar to China ten to 15 years ago - everything is booming and opportunities are everywhere," Hu Tangjun, partner at Gobi Partners China, a venture-capital (VC) firm in Shanghai, told the Global Times in a recent interview.

Although the African market has been developing rapidly for some time, Hu's company hadn't seriously considered investment opportunities there until it dispatched a business investigation team to the continent last year. "You will never know the real Africa and how many opportunities the continent holds until you step onto the land," Hu said.

"Based on the field investigation, we believe that it's the right timing to invest in the region," Hu said. "We have already invested in some projects and companies, while also observing some that we have not yet made up our minds about."

Hu's company is not the only one that has turned its attention to Africa and bet big on the continent. In the beginning of this year, a team from Crystal Stream, another Chinese VC company, made a trip to Nigeria, Uganda and Kenya for two weeks to take a closer look at the market there. 

Echoing Gobi's experience, Crystal Stream found that the timing for investing in Africa is excellent as a rising internet mobile industry on the continent and rapidly growing economy had prepared it to welcome more capital, according to an investigation report the company sent to the Global Times.

Industry insiders the Global Times talked to predicted that with solid and growing bilateral relations between China and Africa, the number of Chinese VCs and companies invested in Africa is likely to rise further in the coming years.

China has been the largest trading partner of Africa for 10 consecutive years. In 2018, trade between China and Africa recorded $204.2 billion, up 20 percent year-on-year, Qian Keming, China's vice minister of commerce, told a press conference on June 5.

As of the end of 2018, there were more than 3,700 Chinese enterprises in Africa, with a total investment of $46 billion, Qian said.

Why now?

A fast-growing economy, demographic dividend, developing mobile internet industry and improving infrastructure are fundamentals driving these Chinese investors to the continent, according to Crystal Stream.

Africa recorded high GDP growth of 3.4 percent in 2018, with a GDP of $2.33 trillion, higher than the 2.6 percent average growth rate over the past four years, according to IMF calculations. The organization also predicted that Africa's overall growth rate will reach 3.8 percent in 2019.

"Actually, many countries in Africa have already shaken off poverty, and people there live a happy and satisfying life. This might surprise many Chinese people who have never been to Africa before," Zhang Hongsheng, a 30-something Chinese trader in Nairobi, capital city of Kenya, told the Global Times.

The population of Africa has reached 1.26 billion and is expected to continue growing rapidly to exceed 1.7 billion by 2030 and 2.5 billion by 2050. Moreover, the average age of the population in Africa is only 19.4 years old, much lower than the world average of 30.6 years old. 

Younger generations will be more open to accepting new products, services and lifestyles, such as mobile payment. "For example, China 'skipped' the bank card era that US and European markets experienced, instead jumping directly to the mobile payment era. Africa is likely to share a similar development model with China, as are the Southeast Asian countries along the China-proposed Belt and Road Initiative (BRI)," Hu said. 

The huge potential consumption power of these young people, backed by the rapid development of the economy, also adds to the continent's promise.

Zhang, who has been conducting small commodities business in the city for three years, believes that the continent is a land where one can "dig for gold." "People in Nariobi now have great demand for daily necessities and small commodities, and in the future, I believe they will need more home appliances and high-end electronic products, and demand for tranport and entertainment will also pick up with the development of the local economy," said Zhang.

Meanwhile, many infrastructure facilities such as ports and railways are under construction by Chinese companies under the BRI framework. 

China's experience

An early entry into the African market is likely to help cultivate some tech giants on the continent comparable to China's Alibaba and Tencent, Zhang said, adding, "Everything is booming, and no monopoly or local unicorns have emerged yet."

 "The booming continent could achieve what China has achieved in past years, and it might achieve that in an even faster manner. We believe Chinese players could share our experience with them and help them achieve that," Zhang said.

Indeed, some of China's experience has already proved helpful for the African market. For example, a Chinese tech company involved in the African market for three years told the Global Times that goods and services Chinese people are familiar with, such as phones, e-commerce, O2O and internet finance, have been emerging in African markets as well. 

"We are now exploring opportunities in the application of intelligent finance and intelligent transport, aiming to use big data and artificial intelligence technology to build future banks, intelligent malls and airports to improve the convenience and safety of local people," the company, which preferred not to be named in the report, said in a statement it sent to the Global Times.

"Africa in Latin means 'burning,' and now millions of Chinese people are burning and striving for the continent," said the company.

Although Hu mentioned that the firm is interested in e-commerce and all sectors related to the mobile internet industry, he revealed only one of the many companies Gobi has invested in - Cleverhome, a Shanghai-based e-commerce company selling products including building materials, home appliances and motorcycles to Africa.

"We are more inclined to invest in projects and companies with both local and Chinese people in their decision-making bodies. That way, the company not only has someone who can help bring China's experience in the new market, but can also know how to localize and know the real demands of local people," Hu said.

Crystal Stream said it believes mobile payment, transportation and logistics are promising sectors that they would recommend and are interested in investing in but did not disclose which projects it has invested in so far.

Challenges are also huge. For example, language barriers, culture and localization issues are challenges that every Chinese company has to overcome once entering Africa. And the continent cannot simply be considered "one entity" as development levels in different countries are quite different, said industry insiders.

Moreover, industry players cautioned that despite Africa's potential to grow based on a development model similar to China, the market also has its unique characteristics that Chinese investors have to be aware of and learn about. For example, local people prefer to ride motorcycles instead of hailing a taxi when going out.

 "Maybe it will still take some 10 years before the harvest season for start-ups in Africa finally arrives," Hu said. "But there's no doubt that everyone is looking at the promising continent."

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