Manufacturing Africa Investment Sample

Where will China's labor-intensive industries go in the future? Professor Justin Yifu Lin, former senior vice president of the World Bank, believes that one way out is to follow historical laws and move to areas with low labor costs. The next stop of the transfer is not Southeast Asia with limited human resources, but the last "cost depression" with a population of 1 billion and very low labor costs - the African continent.

Lin Yifu's judgment was positively responded by Zhang Huarong, chairman of Dongguan Huajian Group, one of China's largest shoe manufacturers: Huajian and the Ethiopian government reached an investment and construction agreement at the end of 2011, which will be completed and put into operation three months later. At the time it had less than 600 employees, but now it has more than 3,000 employees.

Interactive topic: Where to move factories - Africa or Southeast Asia?

Investment in Africa achieved by "accidental"

Speaking of the decision to invest in Africa, Zhang Huarong, member of the National Committee of the Chinese People's Political Consultative Conference and chairman of Huajian Group, admitted that it was full of "accidental". In 2011, at the suggestion of Professor Justin Yifu Lin, the then Ethiopian Prime Minister Meles Zenawi decided to take the opportunity of participating in the Universiade held in Shenzhen in August of that year to come to China for investment promotion. Huajian Group, a leading shoe-making enterprise in Guangdong, was naturally invited to negotiate with it. After a pleasant conversation, Zhang Huarong, the chairman of the Asian Footwear Association, decided to set up a business delegation to visit Ethiopia.

After the inspection, Zhang Huarong was tempted by the Ethiopian government's enthusiasm for attracting investment, local low labor costs, and abundant leather raw materials. The plant was built and put into production to coincide with the inauguration of the AU Headquarters Conference Center in Addis Ababa, the capital of Ethiopia, which was built with Chinese aid. Zhang Huarong, who saw the opportunity, agreed, on the condition that the Ethiopian government provide maximum assistance in customs clearance and other aspects. In the end, the shoe factory was completed and put into production as scheduled, and the dignitaries from African countries who came to visit were amazed at the speed of production and the orderly internal management.

This somewhat hasty decision eventually became a story of Chinese companies investing in Africa. This is undoubtedly the result of the sincere cooperation of all parties involved, and if we put it into the analytical framework of the new structural economics that Justin Yifu Lin has been advocating, we will find that there is an inevitability behind it. As China's largest shoe company that does OEM for the world's major women's shoe brands

, Zhang Huarong's company was facing the huge pressure of rising labor and other costs in China at that time, and urgently needed to find a solution; Ethiopia, with a population of nearly 100 million, is eager to reduce unemployment and increase national income by introducing industries. The two sides hit it off, and it makes sense.

Investment in Africa, advantages and disadvantages

Talking about the advantages of investing in Africa, especially in Ethiopia, Zhang Huarong believes that there are at least the following advantages:

The first is cheap labor. According to a report released by the National School of Development (NSD) of Peking University, the current monthly salary of industrial workers in Africa is only about US$50, which is only about one-tenth of that in China and about one-fifth of that in places such as Vietnam.

The second is the abundant labor resources. According to Professor Justin Yifu Lin’s observation, due to the large volume of labor-intensive industries in China, the scale of labor in Southeast Asian countries cannot be carried at all. Once transferred in, the price of local labor will rise rapidly, and the growth rate will even be faster than that of China.

Therefore, the only place in the world that can now undertake the transfer of China's 150 million manufacturing jobs is the African continent. The African continent has a population of 1 billion, which is as large as China's reform and opening up in 1978, and The vast majority are young laborers, and after the labor-intensive industries are transferred, wages will not rise rapidly for 20 years as in China in the 1980s and 1990s.

The third is that the local animal husbandry is developed, and the leather resources required for shoemaking are abundant. Ethiopia, as the country with the largest number of livestock in Africa, has very rich leather resources. Huajian has set up a factory here to obtain materials locally and reduce costs.

The fourth is that Ethiopia and Africa have the advantage of zero tariffs on exports to European and American countries. To support the economic development of the least developed countries in Africa, many countries have signed duty-free export agreements with them. For example, Ethiopia has signed a duty-free export agreement with the European Union, Japan and other developed economies. The biggest advantage of this agreement is that the export of products in Ethiopia can be tax-free within seven years and has no quota limit.

Although there are many excellent conditions, Zhang Huarong admitted that there are still many unfavorable factors to set up factories in Africa:

The first is the transportation cost. Due to the relatively backward infrastructure construction such as highways in Ethiopia, transportation costs account for 7% of the total cost, while in China, the logistics cost of manufacturing is generally controlled at 2%. This is undoubtedly a huge cost loss for the low-profit manufacturing industry.

Secondly, due to customs clearance and other reasons, the cross-border transportation time is too long. For example, it takes about 35 to 40 days for a container of imported raw materials to travel from China, which slows down the overall delivery time. In China, the time from order receipt to shoe production is generally 60 days, but in Ethiopia it can only do 80 to 90 days at the fastest. This is undoubtedly a major bottleneck for the fashionable women's shoe manufacturing industry where the trend is changing rapidly and the delivery time is emphasized.

In addition, the lack of local supporting industries also restricts the development of the factory. For example, the footwear industry needs supporting upstream and downstream industries such as molds, shoe materials, and chemicals. Otherwise, a large number of raw materials need to be imported, which will significantly reduce production efficiency. At present, the local supporting industry in Ethiopia is still in its infancy. Living conditions and cultural differences are also disadvantages that need to be overcome. When Chinese employees go to Ethiopia, they are often unable to adapt to the local diet and other habits. At the same time, the relatively simple medical conditions also discourage many Chinese employees. More importantly, it will take time for Chinese employees and managers to learn and integrate into the local culture.

The Way of Huajian Overseas Management

Faced with these difficulties, Huajian Group is constantly exploring solutions. For example, regarding the reality that the local area is dominated by traditional agriculture and animal husbandry, and the employees lack the influence of industrial civilization, Zhang Huarong believes that through continuous corporate training, high-efficiency industrial standards should be instilled into the concept of local employees.

At the beginning of the factory, he recruited 100 local employees to China for professional training, and dispatched Chinese workers and management to the Ethiopian factory for production and management. This model speeds up the production run-in process, enabling local employees to quickly acquire the skills required for industrial production, enabling Huajian's factory to be completed and put into operation in just three months. This management model will be continued in the following factory operations, and the group still regularly arranges Ethiopian employees to receive training in China.

And in the Ethiopian shoe factory, Huajian's mature management model is also successfully replicated here. Every morning, thousands of workers in green uniforms do a set of standard Chinese morning exercises and then go to their respective assembly lines to work. At the same time, newly recruited employees will undergo uniform military training. These management arrangements are aimed at correcting the local employees' poor organization, discipline, obedience and accountability.

According to the head of Huajian's Ethiopian factory, in many local factories, 30% of the workers are gone the next day after receiving their salaries. Come back to work. Huajian's strict management and training have solved the problem of lateness and absenteeism.

Zhang Huarong has clearly realized that management will be the key to the success or failure of Chinese enterprises in non-factories. As the World Bank report states, in Ethiopia, for example, some "well-managed" local companies have production capacities comparable to those of Chinese and Vietnamese companies.

In addition to changing the concept of local employees in Ethiopia and improving their production efficiency, Zhang Huarong also realized that the management model from China also needs to be adjusted to adapt to the long-term development in the local area. "When we first arrived, speaking Chinese and singing Chinese songs were no problem in the short term. However, in order to operate in the long term, we must learn the local language to communicate in order to respect the local culture and bring into play the positive factors of the local area. A problem." Zhang Huarong said.

Constructing the whole industry chain service pattern

When it comes to the key supporting links of the industry chain, Zhang Huarong is also actively looking for solutions. The most important thing is undoubtedly the "Ethiopia China Huajian International Light Industry City" established by him in cooperation with the China-Africa Development Fund and the Ethiopian Ministry of Industry. According to the plan, the light industry city will focus on attracting investment in the future, including a series of light industry enterprises from China, including shoemaking, leather, denim clothing, handbags, etc., forming a light industry cluster with a scale of more than 100,000 people.

According to the plan, this grand industrial park can undertake enterprises in all links of the industrial chain, thus forming a complete industrial base and solving the current dilemma that investment enterprises in Africa are fighting alone and the industrial chain is not matched. At the same time, the park is also equipped with residential, commercial, leisure and other functional areas, which can solve the problems of people's clothing, food, housing and transportation in the park, forming a closed loop of "work-life" in the park.

This model is similar to the industrial park model in China's reform and opening-up process. Similar to China in the early days of reform and opening up, African countries have insufficient infrastructure and the business environment needs to be improved. It is difficult to rapidly improve infrastructure nationwide. By implementing one-stop efficient services, an attractive investment environment can be achieved within a short period of time in a small area. Huajian's Light Industry City can achieve this goal.

On the other hand, unlike when mainland China took over the manufacturing industry of Hong Kong and Taiwan, it had the advantage of language and culture consistency. Chinese companies need to overcome the challenges of different language, culture and lifestyle when setting up factories in Africa. This problem can be effectively solved by making great efforts to build relevant supporting facilities in the light industry city.

In the light industry city project, Huajian's role has been transformed from a manufacturer to a manufacturing industry chain service provider, which solves the problem of Chinese labor-intensive manufacturing enterprises' investment in building factories and living services in Africa. , supporting the industrial chain and a series of issues. The emergence of this idea and model is not accidental, but the result of Zhang Huarong's thinking and practice of enterprise transformation and upgrading.

In fact, as early as 2012, before the official launch of the light industry city project in Ethiopia, Huajian has been transforming into a service provider of the entire industry chain of the footwear industry in China. When the financial crisis in 2008 ravaged the world and the Dongguan shoe industry encountered an unprecedented winter, Huajian Group, the leader of Dongguan shoe enterprises, was also under tremendous pressure. Zhang Huarong decided to invest in the establishment of the "World Footwear Headquarters Base" in Houjie, Dongguan, intending to gather the footwear industry in Guangdong and even the whole country, develop together in a group, and form a comprehensive integration of industry information exchange and consultation, import and export trade, finance and standardized services. Industrial Park.

In this park, shoe companies can easily obtain the latest industry information, fashion information, etc., which can undoubtedly greatly improve efficiency for shoe companies that need to respond quickly to market trends; The entry of domestic and foreign high-end brand owners, shoe materials, shoe machine operators and finished shoe manufacturers can greatly reduce the transaction costs of all parties and increase the transaction volume; at the same time, there are many financial service providers, brand incubation and promotion agencies and Standard certification and other institutions settled in, these are the services that small and medium-sized shoe companies are eager to get.

Insights on Manufacturing Transformation and Upgrading

The establishment of the two major industrial parks at home and abroad started from Zhang Huarong's thinking on the transformation and upgrading of China's manufacturing industry, especially labor-intensive manufacturing. In his view, the demographic dividend era of low labor prices in China has passed, especially in the footwear industry, it is necessary to gradually shift from pure OEM to ODM and OBM, master the initiative of orders, and form their own in design, development, and branding. new competitive advantage. On the production side, the factory model of 10,000 people will gradually give way to exquisite small and medium-sized factories, "it is very similar to Italy. In 20 years' time, there will be many exquisite small factories in China, a family, with technology, factories, hundreds of years. Personally, it is very possible to be a century-old store.”

Therefore, companies with more experience in R&D and branding will stay in China, and are expected to form business centers in traditional shoe-making bases such as Dongguan. , R & D center, brand center, this is the goal of the World Footwear Headquarters Base. "Our friends in the shoe industry need to make a change in concept and culture. In the past 30 years, we have to be big first, second to be fast, and third to make a lot of money, but that era has passed; Refinement, to be stable, and to be far. This requires innovation, market personalization, and production personalization.” Zhang Huarong suggested.

As for those enterprises that are better at manufacturing, Zhang Huarong believes that outward transfer is the only way. Zhang Huarong particularly praised Professor Justin Yifu Lin's theory of "New Structural Economics". Similar to Justin Yifu Lin, Zhang Huarong also believes that Africa is the best destination for China's labor-intensive industries because of its rich labor resources and low level of development.

Different from some other Chinese resource-based investments in Africa, which have been criticized by European and American public opinion for "colonizing Africa", Huajian Group's investment in Africa has won awards from Western countries including The New York Times, Financial Times, and CNN. The positive coverage of the mainstream media is known as the "Huajian phenomenon". The reason is that Huajian's investment model is more in line with the law of global industrial transfer, bringing tangible benefits such as employment and income to the local area, and the "two ends are outside" industrial structure has avoided being subject to competition with local enterprises. Lee's accusation.

As a typical example of the successful implementation of economic theory at the enterprise level, the success of Huajian Group's transformation undoubtedly benefits from Zhang Huarong's insight into industry and economic laws, as well as his decisiveness and execution during critical periods. He has always emphasized that the work he has done is completely focused on shoemaking and related labor-intensive industries, promoting the transformation and upgrading of the industry while realizing the company's own benefits. This pragmatic and visionary philosophy is undoubtedly commendable.