Japan and India are joining forces to boost their commercial presence in Africa and counter China’s dominance. Will they be able to compete with the continent's top trading partner – and how is Beijing reacting to the new competition? Stefania Palma reports.

Battle to build Africa

China has dominated the story of trade and foreign investment in Africa for the past two decades. The country’s commercial presence in the continent has grown at a rapid pace and is set to continue as Africa is part of China’s Belt and Road initiative, which aims to strengthen trade and investment routes all the way to Europe.

But now, India’s and Japan’s heads of state are simultaneously determined to recover lost ground. With Chinese competition fierce and both countries having complex relations with Beijing, New Delhi and Tokyo have found common ground to help each other counter China’s African dominance.

This new Japan-India dialogue, also known as the Asia-Africa Growth Corridor, is galvanising the countries’ commercial banks, government agencies and corporations to sharpen their focus on Africa and form partnerships to be more competitive. African countries are welcoming the opportunity to reduce their dependence on China for trade and investment. But how is Beijing taking it?

China catch-up

Catching up with China in Africa is a Herculean task. Trade between China and Africa jumped twentyfold to $220bn between 2000 and 2014, according to the China Africa Research Initiative (CARI) at Johns Hopkins School of Advanced International Studies. At $36bn, China’s 2016 capital expenditure in Africa dwarfed the efforts of Japan and India, at $3bn and $1bn, respectively, according to Financial Times investment monitor fDi Markets. Additionally, China’s most powerful institutions constructed its Africa strategy: the central government shaped policy direction; commercial and policy banks provided finance; and state-owned enterprises rolled out investment.

While Chinese foreign direct investment (FDI) in the continent began to accelerate in the early 2000s, Japan and India have only formalised clear Africa strategies in the past two years. At the 2016 Tokyo International Conference on African Development (Ticad) in Nairobi – the first to be hosted in Africa – Japan’s prime minister, Shinzo Abe, pledged $30bn in investment.

“[Before then], Japan’s public agencies have operated on a tightly defined mandate. There was no imperative to secure resources and market share [as there was] in China. It is more about supporting individual dossiers that have merit, just like in any other commercial situation,” says Christopher Marks, managing director, emerging markets, Europe, Middle East and Africa at Mitsubishi UFJ Financial Group (MUFG).

Taking Africa seriously

Japan’s move into Africa coincides with growing competition and rising wages in Asia, the second biggest destination of Japanese FDI after North America. “Japan’s government used to focus mainly on Asia but now it is thinking of increasing business in Africa like never before,” says Moeno Hotta, who works in the African global strategy planning department at the Japan External Trade Organisation (Jetro) .

Japan’s growth is stagnant and the population is shrinking, so companies are on the hunt for new export markets. According to a 2016 Jetro survey of Japanese companies in Africa, more than 50% of respondents expressed an intention to expand further into the continent, mainly in Kenya, Nigeria and South Africa.

In India’s case, though there is a large diaspora in East Africa dating back to the 19th century, the government only started formalising an Africa strategy under Narendra Modi. “There definitely has been a significant step up [in building a presence in Africa] since the new government took effect,” says David Rasquinha, managing director at the Export-Import Bank of India (Exim Bank India). At the third India-Africa Forum Summit in December 2015, Mr Modi offered Africa $10bn in concessional credit, $600m in grants and 50,000 scholarships in India through to 2020. In addition to this, it was announced that the summit will be held every three years instead of the original five.

According to Akinwumi A Adesina, president of the African Development Bank (AfDB), the step-up by Japan and India is long overdue. “There has to be an increase of trade flows between Africa, Japan and India, [and of] FDI into Africa. China today is the largest trading partner for Africa, both India and Japan are making investments so that they are not left behind in the continent,” he says. In 2017, the AfDB hosted its annual meeting in Ahmadabad, India, in what was seen as a signal to strengthen commercial relations between the two countries.

One result of the Indian government’s formal push into Africa is Exim Bank India has increased its ventures in the continent. Among its initiatives is Kukuza Project Development Company (KPDC), a joint venture set up in 2015 together with the AfDB, the State Bank of India (SBI) and Indian infrastructure company Infrastructure Leasing & Financial Services to identify bankable infrastructure projects in Africa.

“Africa is a continent that is 10 times the size of India, yet the rail network in terms of kilometres is probably the same. The population [across] Africa is about equal to India’s and the gross domestic product [GDP] is almost identical. The infrastructure needs in Africa are absolutely gigantic,” says Mr Rasquinha. The World Bank estimates Africa will need $20,173bn in infrastructure investment between 2016 and 2040. “You can [put together] every country currently engaged with Africa and these needs still wouldn’t be [met],” he adds.

Worth the risk?

But are Indian and Japanese commercial banks willing to support project financing in Africa? In SBI’s case, project finance remains a small part of its African business. “We don’t understand the risks there, [they] are beyond our appetite. KPDC will help us better understand the risks in project finance in Africa,” says Siddhartha Sengupta, deputy managing director of the international banking group at SBI.

Some foreign investors point to Africa’s sovereign risk as a big challenge. In 2017 alone, Kenya held two elections after the Supreme Court annulled the original vote on grounds of irregularities; Robert Mugabe resigned as president of Zimbabwe after a military coup; allegations of corruption involving president Jacob Zuma and his allies, the Gupta family, have destabilised the ruling African National Congress party in South Africa; and the Economic Community of West African States intervened militarily in Gambia to enforce the results of 2017 elections, which saw Yahya Jammeh, leader of the country for 23 years, step down.

But the AfDB’s Mr Adesina argues the perception of political risk in Africa is sometimes exaggerated. “[These political events] are an expression of political pluralism. We have seen very strong civil participation in the political sphere. There is greater demand for good and better governance from the people,” he says. “If you take a look at Europe, there are some countries that have gone through challenges and they change prime ministers every so often.”

Outbound deals into Africa

Where Japan leads

If Indian banks are still testing the water for project finance, Japan – which is home to the world’s top structured finance houses – was the biggest project finance investor in Africa in 2015, investing almost three times as much as China, according to a Linklaters report.

Project finance is crucial to MUFG’s new Africa strategy, launched in December 2016 and spearheaded by Mr Marks. “This is where big structured finance houses such as MUFG can make their way, by pulling in support from the development finance institutions. This is why Africa is a logical place for us to be,” he says.

Beyond project finance, top Japanese and Indian banks in Africa are focused on corporate banking. SBI and MUFG lend mainly to companies from their home markets or strong African corporates, which tend to be concentrated in South Africa. Moving into other markets remains hard for foreign banks, however. “Doing cash flow lending requires a lot of knowledge and there are very few of us that can really do that,” says Mr Marks.

But SBI and MUFG are both broadening their Africa business. SBI is currently in Botswana, Nigeria, Mauritius and South Africa, but is considering expanding further in east Africa. MUFG has offices in South Africa and in Egypt but does business in about 20 African countries. According to Mr Marks, Morocco has strong potential thanks to its proximity to Europe and a growing middle class, which have made it an attractive market for Japan’s auto giants. “There are several dozen Japanese companies looking at or engaged in‎ building factories in Morocco to plug into this [opportunity]," he says.

Cautious drivers

Indian automotive manufacturer Mahindra & Mahindra also sells its vehicles in Morocco, but South Africa remains its base in the continent. In the past 10 years, the auto manufacturer has set up offices, assembly lines and factories across the region.

Nonetheless, it operates cautiously in Africa, which is one of the few regions where it only accepts payments in euros or US dollars, and where vehicle parts are shipped from India only after a transaction is completed. “We are very, very careful,” says Arvind Mathew, chief of international operations at Mahindra & Mahindra. “Some of these countries have overextended themselves and have limited access to foreign exchange. We never do an open transaction. There are too many variables.”

This sometimes stops the firm from entering new markets. “I have customers that want my product in Ethiopia, Mozambique or Nigeria, but I cannot sell it because my dealer has no access to foreign exchange,” says Mr Mathew. But not all automakers are as cautious. “We are a publicly listed company and just cannot afford any sort of hassles. We may be a bit more conservative versus our competitors,” adds Mr Mathew. Chinese firms tend to fall into this category.

Joined-up thinking

What is unprecedented about Japan and India boosting their presence in Africa is that they are doing this together. The two countries share similar experiences in dealing with the biggest competitor in the region, China. Tokyo is a key absentee in the Asian Infrastructure Investment Bank (AIIB), the Beijing-based policy bank that, among other roles, helps finance projects along the Belt and Road, a policy prerogative for president Xi Jinping.

Japan and India both have historically complex relations with China. Events such as the Battle of Nanjing in 1937 have fostered a fraught relationship between Tokyo and Beijing that continues to this day. Meanwhile, India has a historical border dispute with China that escalated to a quarrel among soldiers on the Himalayas in August 2017. India is also suspicious of China’s growing investments in Pakistan, with whom New Delhi has had hostile relations ever since the partition of British India in 1947. Under the Belt and Road’s China Pakistan Economic Corridor, Beijing is offering Islamabad $62bn in infrastructure financing.

One form of Japan-India collaboration in Africa is partnerships between government agencies. In 2017, Jetro hosted debut business matching seminars for Japanese and Indian corporates in Japan and in Ethiopia. Meanwhile, the Japan Bank for International Co-operation (JBIC) has co-financed a joint venture involving Japan’s Nippon Steel and Sumitomo Metal and India’s Tata Steel. “[This is an example of] India [increasing] exports to Africa using Japanese export financing,” says Hirofumi Oishi, chief representative at JBIC's London office.

A perfect match

Some market participants argue the partnership is necessary if both countries are ever going to compete with China. Others argue it just makes business sense. “The complementary [nature of the arrangement] is amazing, it’s a marriage made in heaven,” says Mr Rasquinha. “India has a high cost of capital, Japan’s cost of capital is close to zero. India has a large population and Japan is short of labour skills,” he adds.

In a hypothetical infrastructure project in Africa, Japan could provide high-quality machinery and technology, and experience in structured finance, while India could provide labour as well as two centuries’ worth of business history in the continent. “Whenever I visit Nairobi, Johannesburg or Cape Town, I am always impressed by the presence of Indian corporates. [They] are the key to Japanese companies. So far there are not so many success stories, but we will see [more] in a couple of years,” says Mr Oishi. “I know almost all [Japanese] trading houses are seeking business opportunities jointly with Indian [counterparts].”

Some collaborative infrastructure projects are already taking shape. Japanese trading company Mitsui & Co as well as India’s ONGC Videsh (a wholly owned subsidiary of the national oil company Oil and Natural Gas Corporation), Bharat PetroResources and Oil India are among the stakeholders in Mozambique’s Offshore Area 1 liquefied natural gas (LNG) project. Building is still under way, but on completion this could be the largest LNG project in Africa.

The fact that Mitsui is the project’s second largest shareholder (at 20%) is testament to Africa satisfying Japan’s appetite to diversify energy sources away from nuclear, especially after the 2011 Fukushima Daiichi disaster. “If and when Mozambique or Tanzania have the LNG revolution they are hoping for, Japan could be their biggest customer,” says John Ashbourne, Africa economist at Capital Economics. Japan accounts for about 35% of global LNG demand.

It is no accident, therefore, that Mr Abe included Mozambique in his 2014 Africa tour. “It’s a pretty small country in the big scheme of things,” says Mr Ashbourne. What is more, Jetro opened a Mozambique office in October 2017. “Mozambique is politically stable and there are already Japanese corporates and factories. So we thought Mozambique is one of the countries that may grow more and attract more Japanese companies,” says Ms Hotta.

Diversification welcome

But how are African countries responding to renewed Japanese and Indian interest? Some analysts argue that few African governments can afford the high-quality but relatively expensive infrastructure on offer from Japan. “Many African governments are still looking for the cheapest possible options. The big infrastructure projects are often funded by cash-strapped governments so it’s hard to beat China coming in with big concessional loans,” says Mr Ashbourne. JBIC’s Mr Oishi, however, argues that taking into account life-long operational and maintenance costs, Japanese infrastructure is cheaper overall.

More broadly, Africa’s top recipients of Chinese investment could be in an awkward position as Japan and India strengthen their presence in the continent. But Mr Adesina says: “Competition offers you a choice, a broad range of partners [and the chance to] look at the quality and pricing of different investment instruments. The more the better. Competition is good for Africa.”

Yun Sun, a non-resident fellow at Washington-based policy organisation Brookings Institution, says tougher competition could even make China more rigorous when designing African infrastructure projects. “When there is [no competition] they just go for the lowest denominator,” she says.

On the trade front, diversifying partners could help reduce Africa’s risky reliance on raw commodities exports. China mainly imports commodities from the continent, and Africa’s top five export products in 2015 were petroleum, ores, copper, wood and timber, and oilseeds, according to CARI. This became a problem when commodity prices crashed in 2015. The total value of exports from Africa’s top three exporters to China – Angola, South Africa, and Congo – fell at least 30% year on year in 2015, and the value of oil, ores and copper dropped by an average 37% in that period, according to CARI.

“African countries need to focus a lot more on markets that are less susceptible to global commodity price volatility. It makes no sense that African countries export raw materials. The secret of the wealth of nations is obvious. Rich countries are the ones that export finished, value-added products,” says Mr Adesina.

China’s response

The Chinese reaction to India and Japan boosting their presence in Africa has thus far been negative. In response to Japan’s pledge at the sixth Ticad meeting, China’s foreign ministry spokesperson, Hua Chunying, said: “Japan attempted to impose its will on African countries [in its own] interests and drive a wedge between China and African countries.”

Ms Sun argues that this comment proves how single events tend to taint China’s entire tone towards a given country. “China and Japan have had very bad relations because of the East China Sea dispute. [Ms Hua’s] comment was made in a context [where] China felt Japan not only disrespected China in maritime territory, [but it did so in a third region],” she says. With the East China Sea dispute showing no signs of resolution, Sino-Japanese relations are unlikely to improve significantly.

Meanwhile China has so far ignored India, considering it economically weak. “[But] militarily and politically it is such a big troublemaker for China in [Asia]. I think China’s India policy is going through a stage of recalibration, [especially in light of] the [border] stand-off this summer,” says Ms Sun.

Potentially, such moves mark a paradigm shift in FDI into Africa. If Japan and India deliver their financial commitments to the continent and continue to build solid partnerships, they could challenge China’s dominance. Africa’s commercial attractiveness, and fraught relations between China, Japan and India, make this a high stakes game – one that could have repercussions beyond Africa’s borders.


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