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September 06, 2009

China vs. India in Africa

Forbes India recently had a cover story on the race by Indian and Chinese companies to set up a foothold in the Dark Continent. The package includes interview with executives with some of the early movers - including Apollo Tyres, NIIT, Tata Steel and Skipper Energy - talk about their experience and an interview with Professor Vijay Mahajan of The University of Texas at Austin and author of the book Africa Rising.
One slice of the opportunity is a middle class numbering anywhere between 350 million and 500 million, larger than India’s. And per capita income is growing. The continent clocked an impressive growth rate of 5.2 percent in 2008. Of course, with recession and a crash in commodity prices, the growth may taper to 2 percent. But its trade links with China and India hold out hope that it could recover in tandem with these countries, says a recent article in the Harvard Business Review (HBR). Besides (as Professor Vijay Mahajan) says, “When you look at [opportunities in] the world, and take out India and China, so where do you go next? The logical answer is Africa.”

But it isn’t as if the risks have disappeared. In fact, sudden regime changes, violence and logistical nightmares continue to slow down businesses. But for the most part, it remains a high-risk, high return game. “In Africa, any country depends on the leadership of the right person. Uganda, for instance, is becoming more open to foreign investment due to President Musevani who is all for an open economy and free trade,” says Madhvani.

...Indian businessmen agree that reducing the gap with the Chinese will be tough. “We are nearly five to seven years late,” admits Prashant Ruia, group CEO of Essar. “Competing with the Chinese is impossible, to be honest. They are building roads, airports and projects as a grant. They are taking a 20 year investment risk — something private companies like us cannot do. We do not have the kind of backing that the Chinese have, they are present on a much larger scale too. They have had a head start and have been there for the past 10 years,” adds Ruia. This state-driven strategy to give infrastructure and take natural resources is the hallmark of China’s African policy. Take the $9-billion deal it struck in Congo. China will build roads, rail networks, hospitals and schools in return for access to cobalt and copper.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of data and analysis on private equity, venture capital and M&A deals in India. View free samples of Venture Intelligence newsletters and reports. Email the author at arun@ventureintelligence.in