Brazil and China: Different Paths to Riches in Africa

Brazil and China both have a strong geopolitical incentive to establish a worldwide influence, and to be seen as benevolent powers in lesser-developed nations. Africa, which has until recently been all but ignored by U.S. investors, presents the most logical opportunity.
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Several years ago, during a visit to Tanzania, I was struck by what I thought was a truly bizarre sight. Our bus was hurtling along a dirt path, choking on its own cocktail of dust and diesel fumes as we bounced around like pinballs trying not to asphyxiate. Nearby snaked a glistening, newly paved asphalt road: we couldn't access it yet, because the pavement was drying, but we could see the work crew resting nearby. Twelve Tanzanians, and their foreman, a Chinese guy.

At the time, this site was completely novel to me, and probably to most in the West. Largely unbeknownst to us (or to me at least), China was making inroads throughout the African continent, building highways in Tanzania, financing electricity projects in Sub-Saharan Africa and constructing whole towns in Angola. Now, of course, this is all common knowledge: as the West has moved out of hard infrastructure sectors, China has sensed an opportunity to fill this gap and has profited handsomely. According to the London-based Africa Research Institute, trade between China and Africa surged from approximately $10 billion in 2000, to more than $160 billion in 2011.

Though China has been the unequivocal recent leader in infrastructure development within Africa, a more recent development has been the entry of Brazil. As detailed by the New York Times in August, Brazil has embarked on a massive loan, aid and infrastructure campaign within the continent from which so many Brazilians originally hail. Brazilian energy giant, Odebrecht, is among Angola's largest employers; the Brazilian government has lent $150 million to build roads in Kenya; and Brazilian mining company, Vale, has embarked on a $6 billion coal expansion project in Mozambique. Brazil quadrupled its investment in Africa since 2002, to more than $20 billion in 2010.

Again, this is not breaking news. Those in the development world have watched for years as China and Brazil, along with India, made cautious, then bolder, strides into the African continent.

However, what might merit some analysis is, "Why?"

Differing Investment Strategies

As it turns out, the reasons for China and Brazil's forays into the African market are starkly different. According to Jonathan Wheatley, the Financial Times' Deputy Emerging Markets Editor, who spoke at a conference I attended not long ago, while China invests in Africa largely for commodities, Brazil invests in Africa to diversify and secure its expertise in large-scale international ventures. Wheatley says Brazilian companies are diversifying into Africa, but the move is "less about commodities, more about new markets."

According to Stephen King, chief economist at HSBC who spoke at the same conference, China's lack of domestic natural resources and other commodities provides a powerful incentive to invest in infrastructure in Africa, along with Latin America and other emerging economies. In 2010, 89 percent of the imports from Africa to China were mineral products and metals.

But because Brazil is already rich in natural resources, its motivations are different: to increase international opportunities for Brazilian companies. Brazil and Africa's close historic, cultural and linguistic ties make the African continent an unsurprising choice.

Melissa Cook, founder and managing director of African Sunrise Partners, a company that educates international investors about African markets, offered a slightly different perspective: whereas China enters Africa for strategic reasons, mainly to acquire minerals and secure new markets, Brazil's motivations are more political. Brazil's aim is to help Africa by transferring knowledge and technology, while at the same time using shared history and culture to form bonds. And, of course, as a mineral-rich nation itself, Brazil has the luxury of obtaining raw materials from Africa and re-selling them elsewhere.

"They're mining to ship somewhere else," Cook said. "This is all about global trade."

One example of this phenomenon is Vale, the world's second-largest mining company and one of the largest Brazilian investors in Africa (Vale operates in 9 countries, mostly in Southern and Central Africa). Vale mines coal in Mozambique, and sells it to East Asia, the Americas, Europe and India. Vale's reason for entering Africa, according to a spokesperson, is that many African countries are starting to play a more relevant role in the global economy. This economic trend, combined with Africa's mineral-rich soil, makes it the logical investment for companies in the extractive industries. Interestingly, my query to Vale generated an unprompted discussion of the company's development and humanitarian work on the continent, which includes developing training programs for local communities, hiring local employees and building local infrastructure. Evidently, companies that operate in this space are hyper-sensitive to being seen as plundering the natural resources of poorer countries.

Another difference is that while Chinese investment in Africa is marked by scores of government-backed businesses and independent entrepreneurs (according to Africa Research Institute, more than 2,000 Chinese investors and businesses have operations in Africa), Brazilian investment is still concentrated in a few large multinational corporations. According to Cook, the Chinese government, through its state-owned banks and through funds such as the Chinese-Africa Development Fund, offers attractive vendor financing, especially for strategic state-owned companies such as ones that do business in Africa. Brazilian companies don't enjoy the same kind of support. Then again, the African markets, despite issues with corruption, lack of transparency, lack of infrastructure and the like, are still relatively underdeveloped and therefore easier to break into.

Potential Similarities

While there exist marked differences between the investment strategies of China and Brazil, it is no coincidence that these two members of the "BRIC" group of emerging nations have chosen to concentrate on the same investment target. As rapidly developing superpowers, Brazil and China both have a strong geopolitical incentive to establish a worldwide influence, and to be seen as benevolent powers building infrastructure and tapping opportunities in lesser-developed nations. Africa -- which has until recently been all but ignored by the United States investors, and which has been let down by its main source of capital, Europe, because of the financial crisis -- presents the most logical opportunity.

Not only does Africa provide a necessary platform to showcase China and Brazil's advancements to other BRIC and G20 nations, but the continent itself serves as a strategic future investment. The so-called "winning hearts and minds" technique of helping locals build roads, develop agriculture, obtain access to clean water and electricity, and so on. If and when African nations become more important players on the world stage, China and Brazil's political positions will have been favorably cemented.

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