A case study in business failure

Businessman warns those too eager to rush into Africa

Chinese private businesses with ambitions to operate in Africa should think twice and be aware of the risks they run, a businessman who has had his fingers burnt in doing so has warned.

Tangshan Shuguang Enterprise, founded by Zhang Chunlai 30 years ago and located in Hebei province, was the first private cement company in China and the first to set up a branch outside China, in Madagascar, in 2006.

Setting up the business in Africa was highly problematic, says Zhang, the company president.

The project was part of China's support for infrastructure construction in Madagascar. At first building of the factory was contracted to Changchun Construction Engineering Ltd, but the project was put on ice as the company failed in an effort to raise finance of $10.3 million.

Urged by the Chinese embassy in Madagascar to revive the business plans, Zhang Chunlai traveled to Kenya, Madagascar, Mozambique and Tanzania with members of the China-Africa Business Council in 2006. Most of them were also private entrepreneurs and were visiting Africa for the first time. Because they knew little about the continent, they had no firm plans to do business there and were essentially going as observers, Zhang says.

But he had a different agenda: he was in Africa to select a site for the concrete factory, and to find out about transport for raw materials and about the cement market in Madagascar.

During his week-long tip he not only learned that the only competitor in the market would be a French company, but he also obtained government promises of preferential policies in buying land and of tax breaks.

A month later, Shuguang registered its subsidiary in Madagascar, making Zhang the first Chinese private entrepreneur to set up a factory in the country through the China-Africa Business Council.

The first stage of Shuguang's factory was a production line that could produce 300,000 tons of cement a year. The second entailed increasing production capacity to 800,000 tons a year, and this was to go into operation by the end of 2009.

But less than three months after the opening ceremony, the Madagascan government was overthrown and the political instability forced Shuguang to cease operations.

It lost about 400 million yuan ($65.3 million), Zhang says, "a heavy blow to the company".

"It is like driving on a highway," he says. "You can, of course, keep on driving at top speed, but you need to be prepared to step on the brakes when you have to."

Despite failure, Zhang still has faith in the African market.

"Although the cost of fixed assets, land and labor are high, the high price of cement, $200 a ton, guarantees big profits. But everything depends on a stable political environment. If you don't have that, there will be no demand, and any plans you have become meaningless."

Zhang says the factory is still standing and he plans to switch the core business from cement production in Africa to cement exports from the parent company.

He returned from a trip to Tanzania recently, during which he familiarized himself with local laws and religious beliefs, and he says Shuguang will set up a logistics company there by the end of November or early December. It will specialize in importing cement, steel, ceramics and other construction materials from China.

A tourism agency based in Madagascar is also a possibility. It would target wealthy tourists from China and act as the company's administrative center for business development in Africa, Zhang says.

"After the difficulties I have faced in Africa, I can understand why many Chinese companies wanting to go there have problems, but they have to be more careful and thoroughly look into their target market.

"I think it is good to talk to other business people about what we learn from failure. It reminds you that careful thinking is needed when you plan to go abroad. You need more than passion and initiative and to do your research.

"The China-Africa Business Council is not a bad place to start. From it you can learn about others' successes or failures and see things from many perspectives."

Xiao Lixin@chinadaily.com.cn

(China Daily Africa Weekly 11/28/2014 page1)