McKinsey consultant Irene Yuan Sun serves as tour guide in this revealing look at China’s impact on African manufacturing.
Irene Yuan Sun is the lead author of McKinsey & Company’s research report on China’s economic engagement in Africa and co-leads the firm’s work on Chinese economic engagement. She makes a compelling case that manufacturing can pull Africa out of poverty and reports on McKinsey’s findings that by 2017 more than 1,500 Chinese companies had invested in factories in Africa.
Makers of cars, construction materials and consumer goods flock to Nigeria. In Lesotho, factories churn out Levi Strauss jeans, Reebok athletic gear and yoga pants for Kohl’s. As Ethiopia recovers from devastating famines and a bloody Marxist dictatorship, Chinese investors are establishing special economic zones.
Sun contends that well-intended Western development programs won’t turn the economic tide in sub-Saharan Africa. Factory jobs are an essential economic building block to enable 100 million people to collect paychecks and 500 million to rise out of poverty. Local services, such as restaurants, stores, construction and medical care can’t supply the same economic leverage. Manufacturing creates a demand for other jobs. Each factory job spins off 1.6 service sector jobs.
A generation ago, bicycles filled China’s streets, hundreds of millions of people lived in poverty and the nation accounted for 2% of global manufacturing. Today China is responsible for 25% of the planet’s industrial output. Its GDP has soared; 750 million Chinese have moved from poverty into the middle class. Cars, toilet paper and Sprite are no longer luxury items.
Chinese investors look to Africa for similar growth opportunities. With its cheap labor and lack of development, Africa could become the next factory of the world. Yet, investors must bear in mind Africa’s history of violence, poverty and corruption, and its scant infrastructure.
Take Mrs. Shen, for example. She runs a family factory in Lesotho that produces Reebok T-shirts. She employs a few hundred workers and has a few hundred sewing machines, but few assets and little inventory. The T-shirts aren’t her property; they remain on the balance sheets of the contractors who hire her.
The opening for Africa to become the next factory of the world coincides with another shift: As Western countries turn inward, China is increasingly turning outwardIrene Yuan Sun
In contrast, the Formosa denim mill in Lesotho exemplifies capital-intensive African manufacturing. Nien Hsing Textile, a publicly traded firm based in Taiwan, built the $100 million plant. It employs 1,200 workers and, as a result of their work, it supplies jeans to Levi Strauss, The Gap and Old Navy. At the Formosa mill, workers load thread and cloth into machines that perform much of the sewing and assembly work. Workers make about $70 a week, more than the going rate in similar Vietnamese textile mills. Even if wages rise or the local currency appreciates, Nien Hsing Textile is unlikely to abandon its $100 million investment.
Chinese investment drives manufacturing in Africa, where it faces slight competition. The United States and Europe have already offshored their factories to China, leaving it as the dominant power in global manufacturing.
Labor Over Automation
In the developed world, machines run factories. In Africa, labor remains cheaper than automation.
If robots take over manufacturing work, there will be no need to reduce labor costs and hence no reason for factories to relocate.Irene Yuan Sun
The intricate work required of Mrs. Shen’s employees is robot-proof. Her workers cut cloth into shapes and sew the pieces together following precise instructions. Apparel companies constantly change their cuts and styles, and reprogramming robots would be more difficult and expensive than giving human workers new instructions.
Exchange rates pose a serious risk to manufacturing in Africa. Mrs. Shen’s customers pay her in foreign currency; she pays workers in Lesothan money.
Factories in developing countries tend to hire workers who are encountering formal employment outside the home for the first time, which unleashes a torrent of change.Irene Yuan Sun
A depreciating currency boosts Mrs. Shen’s profits; appreciation hurts her bottom line. When Lesotho’s currency soared in 2005, factories employing 14,000 workers shut down. An economic development strategy that is dependent on the whim of exchange rates cannot endure.
In Nigeria, the textile industry thrived in the late 1980s. Some 200 textile firms served as the nation’s second-largest employer. But, by 2010, Nigeria’s textile sector had vanished.
This movement of factories matters, because when factories arrive en masse, prosperity soon follows.Irene Yuan Sun
Millions of jobs ended, most factories closed and poverty dominated quiet factory towns. Ghana and Tanzania boasted thriving manufacturing in the 1960s; both declined sharply. When factories begin to die, the trend doesn’t reverse.
Cornering the Market
Consider the Lee family’s factory in Nigeria. Each day, the plant churns out 1.2 million pairs of sandals that retail for a dollar each. Nigerian consumers value low prices, so the Lee Group invests little in making its thongs stylish. It doesn’t raise prices, which eliminates competitors.
When Lee Group turned down the opportunity to supply Walmart with flip-flops, it had a robust market of wholesalers waiting outside its factory gates.
Bribes and other forms of corruption are common in China and Africa. Marrying the two regions has yielded predictable results. Africa’s rapid industrialization and lack of interest in regulation all but guarantee workplace deaths.
To be clear, the rise of manufacturing is not an altogether happy story. Up close, it’s often ugly.Irene Yuan Sun
The United States rose to prominence after a period of excessive industrialization, characterized by loose regulation and indifference toward human life. American authorities didn’t regulate the garment industry, for example, until after the 1911 Triangle shirtwaist factory fire killed 146 young women.
Sound, Not Juicy
Sun is an eager social observer and a dry, distanced analyst. She swings between these two poles with some success. Her financial analysis is sound, if not juicy. Her appreciation for the daily travails of Chinese investors in Africa seems sincere, but she fails to evoke the emotions of their daily lives in ways that might inform investors. Sun, who was optimistic about Africa’s future in 2017, also explored the downsides and risks of doing business in a region that, over the decades, has broken many an entrepreneur’s heart. Her overview works best as a collection of short but insightful human assessments and quotable statistics. Investors and entrepreneurs seeking a primer on Africa’s rising manufacturing sectors will gain real insight from reading Sun’s analysis despite changes – including the Covid pandemic – that have occured since she wrote it.