The Next Factory of the World

How Chinese Investment Is Reshaping Africa

Irene Yuan Sun

• Publisher: Harvard Business Review Press
• Year: 2017
• Print ISBN:
  9781633692817
• eBook ISBN:
  9781633692824
• Topic: Business
• Subtopic: Entrepreneurship
• Index: Business

A Best Business Book of 2017 -- The Financial Times

China is now the biggest foreign player in Africa.

It's Africa's largest trade partner, the largest infrastructure financier, and the fastest-growing source of foreign direct investment. Chinese entrepreneurs are flooding into the continent, investing in long-term assets such as factories and heavy equipment.

Considering Africa's difficult history of colonialism, one might suspect that China's activity there is another instance of a foreign power exploiting resources. But as author Irene Yuan Sun vividly shows in this remarkable book, it is really a story about resilient Chinese entrepreneurs building in Africa what they so recently learned to build in China--a global manufacturing powerhouse.

The fact that China sees Africa not for its poverty but for its potential wealth is a striking departure from the attitude of the West, particularly that of the United States. Despite fifty years of Western aid programs, Africa still has more people living in extreme poverty than any other region in the world. Those who are serious about raising living standards across the continent know that another strategy is needed.

Chinese investment gives rise to a tantalizing possibility: that Africa can industrialize in the coming generation. With a manufacturing-led transformation, Africa would be following in the footsteps of the United States in the nineteenth century, Japan in the early twentieth, and the Asian Tigers in the late twentieth. Many may consider this an old-fashioned way to develop, but as Sun argues, it's the only one that's proven to raise living standards across entire societies in a lasting way. And with every new Chinese factory boss setting up machinery and hiring African workers--and managers--that possibility becomes more real for Africa.

With fascinating and moving human stories along with incisive business and economic analysis, The Next Factory of the World will make you rethink both China's role in the world and Africa's future in the globalized economy.

PART ONE

REALITIES

CHAPTER 1

A Human Chain Reaction

Mr. Sun insisted that we have tea. My fellow researcher and I had already seen his ceramics plant—earlier, the manager had taken us through the factory and explained the workings of the machinery and the logic of the business. But Mr. Sun had just returned to Nigeria from a trip back to China, and he had a batch of top-quality green tea that he wanted to share with his visitors, in an age-old gesture of Chinese hospitality.

He ushered us into his office and motioned us toward a plump sofa. We had had tea the previous morning with another Chinese manufacturer down the road, sitting on low-slung stools in the weedy yard of his factory and drinking lukewarm brownish liquid poured from a cracked teapot. Mr. Sun clearly had something different in mind. He set out a proper Chinese tea-making set, with a polished wooden tray and separate containers for steeping, rinsing, discarding, and enjoying the tea. He chatted away as his hands expertly went through the intricate steps of tea preparation. His words, too, followed a ritual: he was so honored to receive us; he relished having visitors from Tsinghua and Harvard, since he himself was only an elementary school graduate who had started working at age thirteen; he hoped that we would look kindly on his humble factory. Meanwhile, that so-called humble factory hummed along in the building next door, producing 56,000 square meters of ceramic tile—enough to cover ten football fields—a day. Inside the office, Mr. Sun raised the first steep of fine tea to his nose; like a connoisseur enjoying the bouquet of a rare wine, he closed his eyes, inhaled, and then poured the entire contents into the discard drain. Classic Chinese tea etiquette holds that the first pour is too sharp, too dirty, to drink, so the finest teas are drunk only after a second steep. A few moments later, the tea was ready. Mr. Sun poured us each a tiny cup. We smelled the delicate aroma, then sipped carefully.

High-end Chinese teas are meant to be drunk over the course of as many as a dozen pours, with each steep producing a slightly new experience to be savored. It was clear that Mr. Sun intended his tea to be enjoyed thus, so we settled in for what would surely be another hour or two. At the second or third pour, we were still on the ritual niceties—we complimenting Mr. Sun on his factory and his tea; Mr. Sun insisting that he did not deserve such praise. By the fourth or fifth pour, we had run out of small talk, and Mr. Sun became reflective. He started telling us his life story, almost fable-like in its contours: a poor, uneducated Chinese boy works hard, eventually becomes his own boss, and gets rich.

Mr. Sun’s story is a rags-to-riches story about an individual’s rise, but it’s also a story about the industrialization of nations. The shift toward working in factories, running factories, and owning factories is a macroeconomic process that has transformed China over the past generation and is on the cusp of unleashing great changes in Africa as well. As we shall see, Mr. Sun in many ways embodies China’s remarkable development path from the 1970s to today—the fastest rise in living standards in recorded human history. That rise was possible precisely because China did not follow the orthodox advice of Western development institutions but instead created the conditions for Mr. Sun and a generation of his counterparts to work in factories and learn to run them. Many did so by working for Taiwanese factory owners, who in turn had learned from Japanese ones. This trajectory suggests that industrial development is not a self-generated phenomenon, but rather a chain reaction ignited from one country to another. And the indispensable vector at the heart of this transformation is nothing so grand as capital or so abstract as technology. It is human beings. The beneficiaries of someone who decided to put a factory in their country, human beings such as Mr. Sun become the living embodiment of accumulated manufacturing know-how. And when they decide where to put their next factory, they are choosing the next link in the chain of manufacturing. A generation ago, they chose China and transformed it in their wake. Today, they are choosing Africa.

Back in his office in Nigeria, at the eighth or ninth pour of his truly excellent tea, Mr. Sun was waxing philosophical: “The train of development—which station first and then which station you need to go through—we Chinese know exactly what the path is. Nigeria needs to learn from China! For Africa, the Western path is unwalkable.”

…

Mr. Sun can be considered more of an authority than most on how to get rich. He started life poor, barely had an education, but got rich before he got bald. His strategy has been simple: learn how to make things, make them, and sell them. The way he characterizes China’s development path is what he himself has done again and again: make money by building factories. To him, it’s obvious that Africans should do the same.

This strategy that Mr. Sun laid out—and lived out—is not unique to China. In fact, after Britain became the first country to generate rapid economic growth on the back of what was then the greatest manufacturing sector in the world, most nations that joined its ranks did so by shifting their economic structure toward industry before transitioning to services. The few exceptions are countries like Qatar that have lucked into extraordinary resource wealth, far beyond even the proportions of amply resource-endowed countries such as Russia and Angola. Globally, there is a strong linkage between industrialization and economic growth: a United Nations analysis of 131 developing countries found a strong correlation between economic growth and manufacturing value addition.¹ This correlation is even stronger for sub-Saharan Africa than for the rest of the world. And economists have shown that modern manufacturing is the only sector in which poor countries have consistently managed to catch up to rich ones in productivity. As the Harvard economist Dani Rodrik writes, “This is a rather remarkable result. It says that modern manufacturing industries converge to the global productivity frontier regardless of geographical disadvantages, lousy institutions, or bad policies.”² Moreover, this convergence happens regardless of time period or region, and studies have found that Africa is no exception.³ The accumulated history of countries around the world turns out to be exactly what Mr. Sun intuited: if you want to get rich, build yourself a manufacturing industry.

It is worth noting that this advice is very different from what mainstream development institutions have been dispensing to poor countries for the past two generations. In the 1980s and 1990s, expert advice converged around the Washington Consensus. Influenced by the Ronald Reagan–Margaret Thatcher push for bigger roles for markets and smaller roles for government, the Washington Consensus advocated a sharp curb on government spending and involvement in shaping markets. Its pillars included ensuring macroeconomic stability, cutting subsidies, deregulating markets, privatizing national companies, and liberalizing trade—as Rodrik summarizes it: “Stabilize, privatize, and liberalize.”⁴ International financial institutions such as the International Monetary Fund and the World Bank played a large role in crystallizing this package into mainstream orthodoxy and guaranteeing its implementation, often by making much-needed economic assistance to developing countries conditional on their agreement to these prescriptive reforms. As we will see in the next chapter, Nigeria was among the many countries in Africa that endured the harsh consequences of these structural transformation programs.

Meanwhile, on the other side of the world, after Mao died in 1976, China embarked on a very different development path. Mr. Sun is from Wenzhou, a midsize city in southeastern China. Wenzhou is famous for inventing a lustrous, pale-green glaze called celadon nearly 4,000 years ago—a discovery that spawned dynasties’ worth of elegant Chinese ceramics of the sort found in art museums the world over. In the late 1970s, Wenzhou was again first in China: this time, first in the now-communist country to set up private enterprises. In keeping with the times, Mr. Sun dropped out of school at age thirteen and started working in factories. He worked his way up in several leather-processing plants, eventually saving enough to own one. He was among thousands of Chinese who did the same—working long hours, saving scrupulously, and then using that accumulated knowledge and savings to become factory bosses themselves.

On the global level, it was clear by the mid-2000s that the Washington Consensus had failed. Even the coiner of the term admitted in 2002 that “[t]he results have been disappointing, to say the least, particularly in terms of growth, employment, and poverty reduction.”⁵ To make matters worse, the implementation of Washington Consensus policies contributed to growing inequality within countries and to increasingly frequent financial crises.⁶ Rodrik wrote in 2006, “Proponents and critics alike agree that the policies spawned by the Washington Consensus have not produced the desired results. The debate now is not over whether the Washington Consensus is dead or alive, but over what will replace it.”⁷

Over the past decade, the monolithic orthodoxy of the Washington Consensus has splintered into several camps that, while not directly contradicting one another, emphasize differing ingredients as being critical to success in development. Some, like Daron Acemoglu, an influential development economist at MIT, emphasize the quality of governance and institutions. Meanwhile, funding and attention among practitioners in the development community has shifted toward service delivery: getting tangible aid to those who need it most. This is exemplified by the eight Millennium Development Goals spearheaded by the United Nations and championed by other global donors that put primary emphasis on measurable outcomes in health and education. And within Africa, there has been considerable buzz about the notion of leapfrogging—or as Forbes put it, “the promise that Africa, thanks to the rise of new technology and access to telecoms and internet, would rapidly reach a ‘tipping point’ that would dramatically accelerate development by enabling trade and entrepreneurship amongst its populations.”⁸ According to this theory, countries can leap from an agriculture-based economy directly to high-value-added services, bypassing the classic manufacturing-intensive stage of development.

Meanwhile, Mr. Sun continued to manufacture leather goods in China, oblivious of and impervious to these debates raging in the rarefied halls of the World Bank in Washington, DC, and the United Nations in Geneva. Eventually, his business went global. In the late 2000s, costs in China were climbing at an alarming pace, and Mr. Sun realized he needed to move his factory abroad. But where? He considered Bangladesh, then Uzbekistan. Then a friend told him about Nigeria.

He went for a five-day visit. “I got off the plane, and immediately all these poor people were asking for money,” he recounts. “But then I realized there were a lot of rich people, too, and although it’s hard to make it in this market, I realized that it’s just as hard for everyone else as it is for me to make a factory here.”⁹ Back in China, he called a contact at the customs authority and asked him what was the physically heaviest product being shipped in large quantities to Nigeria. The answer? Ceramics.

There is a certain pleasing aptness that a native son of Wenzhou, the birthplace of ceramics, discovered ceramics as his worldly calling. After that single visit to Nigeria, Mr. Sun devoted nearly $40 million to building a ceramic tile factory there. His factory runs 24/7 and employs nearly 1,100 workers, a thousand of whom are locals. Electricity is unreliable and costly, but business is good. Nigeria, with its relative lack of competition and booming demand, allows Mr. Sun to earn a 7 percent profit margin, compared with the 5 percent he earned in China. In the manufacturing business, margins are often razor-thin; a 2 percent bump is substantial. And that is why, in the middle of the Nigerian bush, an uneducated Chinese man could serve us some of the finest tea on earth.

…

What makes these entrepreneurs so willing to move to an unfamiliar land with a foreign tongue and an alien culture? One answer is business economics: as Mr. Sun acknowledges, labor costs in China have been rising rapidly, and there is the lure of large, underserved foreign markets like Nigeria, where competitors are fewer and margins are higher. But another, less obvious answer to this question is that these Chinese entrepreneurs move because they grew up in factories whose bosses had moved to China, and those bosses in turn had grown up in factories with foreign bosses. In short, manufacturing is an industry in which everyone moves to make their next buck.

This point hit home most vividly at a lunch I attended in Maseru, the capital of Lesotho. In the winding hills in a corner of the city, the Avani Lesotho Hotel, the fanciest in town, perches high in a carefully manicured landscape. It was Friday afternoon, and I had spent a long week walking through hot and crowded factories. The blast of the air conditioner as I entered the elegant hotel was a welcome shock.

I was shown downstairs to the Chinese restaurant and into a private dining room—the customary setting in Chinese fine dining. The host of the lunch was already there, perched incongruously in gym shorts and a T-shirt against an elegant dark wood side table. The large round dining table was made of matching wood, and orchids sat on the side tables. Over the next ten minutes, the other guests arrived, a succession of five middle-aged Chinese men. They all knew one another from having been among the only Chinese in Lesotho for much of their working lives, but each politely introduced himself to me. None of them were related, but by sheer coincidence, they were all named Chen.

Lunch commenced in grand fashion. There were oysters on the half shell and salmon sashimi, freshly trucked in from the sea. There was a platter of duck tongues—delicacies in Chinese cuisine—and a half dozen other, more prosaic meats. Soup was served in individual ceramic bowls with matching Chinese-style fat ceramic spoons. As dictated by Chinese custom, red wine was poured into thumb-size glasses for toasting. I had rarely had such an elegant meal in either China or the United States, yet none of the Mr. Chens seemed to share my astonishment.

Despite the lavishness of the setting, the Mr. Chens are not modern-day Chinese versions of the old European colonialists living a life of luxury in Africa. Their backstories show them to be more familiar with “eating bitter”—the Chinese term for working hard—than with eating delicacies. The Mr. Chens all started at the bottom, finding their way from China to Taiwan in the late 1980s and 1990s as hired help. At that time, labor agencies commonly picked up young Chinese workers and matched them with Taiwanese firms in need of cheap labor, and each of the Mr. Chens just happened to be paired with bosses with businesses in Lesotho. Although they had no experience living outside China and Taiwan and no knowledge of English or Sesotho (the local language), each was packed off to the remote African country. Two of the Mr. Chens were extra unlucky: their destination was not the capital city Maseru, but distant mountain villages in the countryside. This being the 1990s, there were no cell phones and no internet. They could call home once a year. As one Mr. Chen reminisced, laughter and bitterness mixed in his voice in equal measure: “That damned phone! I would dial the number, listen for a voice, say something, and wait because there was a delay in transmitting the sound. As soon as I would hear ‘Happy new year! How are you?’ the line would drop.” He shook his head. “In those days, I never had enough money to make a proper phone call home.”

After years of hard living and scrimping to save, the Mr. Chens had enough to start their own small businesses. Some started factories, and others ran small shops. A Chinese friend of theirs from that same cohort had cofounded the hotel we were eating in, which explained the careful attention to the niceties of Chinese fine dining. The only man at that lunch not named Mr. Chen was the one who had invited me, and his story was slightly different. Instead of working for Taiwanese bosses in his youth, he had started off working for Japanese companies. “I am still the best Japanese speaker in the entire country of Lesotho!” he boasted after a few rounds of red wine toasts.

The men at that table are the latest link in the historically multinational chain of manufacturing. In academic circles, this phenomenon has been codified as the flying geese theory—a mid-20th-century Japanese idea explaining the country’s meteoric economic rise. The theory was recently resurrected by the Chinese economist Justin Yifu Lin, the only citizen of a developing country ever to have held the post of chief economist at the World Bank. Studying the success of East Asian countries that rapidly industrialized in the twentieth century the theory postulates that manufacturing firms act like flying geese, migrating from country to country and from product to product as costs and demand change.

The flying geese theory describes the path of the Mr. Chens in Lesotho and Mr. Sun in Nigeria. Without intending to, the long years the Mr. Chens worked for Taiwanese bosses also served as apprenticeships that prepared them to one day run their own enterprises. A wave of Japanese entrepreneurs spawned a wave of Taiwanese entrepreneurs who spawned a wave of Chinese ones. Drawn on a graph of competitiveness over time, the waves f...

Table of contents

• Cover
• Title Page
• Copyright Page
• Dedication
• Table of Contents
• A Note On Names
• INTRODUCTION: From the Current Factory of the World to the Next Factory of the World
• PART ONE: Realities
• PART TWO: Possibilities
• Epilogue: Feeling the Stones
• Notes
• Index
• Acknowledgments
• About the Author