Reference no: EM133315524

Question: A Chinese business in Africa select 3 most important facts relating to innovation and entrepreneurship?

Case Study: Developing business from China to Ghana 'I did not know much about Ghana, except that China and Ghana had enjoyed good relationships since Chairman Mao.' Recruited in 1993 by China Anhui Corporation for International Techno-Economic Cooperation, a large state-run enterprise, Tang Hong was first sent to Ghana in 1995. The company business spanned from engineering projects to import and export. He was 29 years old and had been married for only five months when he was sent to the West African country. The first country in sub-Saharan Africa to win independence from British colonial rule in 1957, Ghana is known to be one of the most politically stable countries on the continent. Initiated as a parliamentary democracy under the leadership of pan-African leader Kwame Nkrumah, Ghana fell shortly after into a period of military and civilian authoritarianism, which lasted until 1992, when electoral democracy was peacefully restored. Ghana is also a fast-growing economy, which had an average economic growth of around 5 per cent between the early 1980s and early 1990s. Rich with natural resources, Ghana had nonetheless no manufacturing industry. Most capital-intensive goods were imported from Europe or America. In 1995, only a small number of items were being imported from mainland China to Ghana - mainly textiles and hardware - while the economic turnover between Ghana and China was only around US$30m per annum. As a result of China's transition to market economy, launched by the 1978 Open Up and Reform Policy, China was on the path of developing its industrial capacities, which would have transformed the country from a lowincome raw material exporter to the so-called factory of the world. In the 1990s African countries were not popular destinations for Chinese migration, which was mainly directed to developed countries. In those early years of China's transition to a 'socialist market economy', Chinese going abroad for private business were generally frowned upon by the state: people mostly left the country for study or to work for State-Owned Enterprises (SOEs). This was also true in the case of Tang Hong. Tang Hong had grown up in Anhui province, Eastern China. Upon graduation in Engineering and Business Management, he had been assigned to work in his native province as a sales representative for an SOE producing bath towels. The job entailed a lot of travelling across China on trains and busses, selling towels to department stores and retailers and meeting different kinds of people. 'Among my family and friends, nobody understood why an engineering university graduate would want to remain a salesman - a type of job which did not require a degree.' However, continues Tang 'I had read many books written by successful Hong Kong businessmen: all of them had started their business careers as salesmen.' For Tang, those years spent working as a salesman across the country built the foundation of his future business. Business in Ghana was initially tough for Tang. It took time to familiarise himself with doing business in English, Ghana's official language. Most of all, it took time to understand the local customs and social norms. While living standards and levels of income did not differ much from what he had known growing up in 1970s-80s China, there were profound differences between China's strict Confucian work ethic and Ghana's more relaxed attitude towards labour and time. Another striking difference was the pervading role of religion and spirituality in Ghanaian society, in stark contrast with the secular socialist values around which Chinese society was organised. Despite these cultural and geographic differences, coming from a similar experience in terms of living standards facilitated Tang's understanding of his Ghanaian clients and customers, their habits, needs and constraints. For example, like his Chinese customers, Ghanaians were concerned about the affordability of goods and were highly price sensitive. Another matter he understood well from his sales experience back home was how Ghana's poor infrastructure affected the demand and supply of certain goods. Moreover, Tang did not have too much trouble in operating within Ghana's administrative and legal environment. As in his native China, in order to be able to exist in and navigate the Ghanaian system, personal relations and connections were key. Both systems were further characterised by an uneven implementation of laws and regulations, institutional weakness and high levels of informality, all typical characteristics of emerging markets. Development of Caitec group In 1997, a positive environment towards private business initiatives had fully emerged in China, prompted by the advancement of radical reforms of SOEs. The time was ripe for Tang to quit his company and start his own import business. The Caitec group started as a partnership 680 This case was prepared by Paola Pasquali, Shameen Prashantham and Mathew Tsamenyi. It is intended as a basis for class discussion and not as an illustration of good or bad practice. Not to be reproduced without permission. Caitec: A Chinese business in Africa 681 between Tang and a Ghanaian stakeholder, who at some stage decided to opt out. As a result, the business became a fully Chinese-owned private company owned by Tang and his wife, Zheng Yun, who became the managing director and a vital support to the running of the business. The group started under the name of Caitec Delta, a company importing tyres for agricultural vehicles, heavy and medium vehicles, industrial vehicles and passenger vehicles. No local production of tyres existed in Ghana. Tang knew from his previous experience that there was a large stock of good quality tyres in China. No Chinese company had thought of exporting them to Ghana yet, likely due to its geographic distance and his compatriots' preference for destinations such as Europe and the USA. At the time, there were seven companies importing tyres from China: they were Ghanaian, Lebanese and Indian. Tang felt that such business was not easily accessible to the competition as it was rather complicated. Tyres have different sizes and shapes and are a capital-intensive product. They also have their own name and brand and once the latter is adequately promoted the customers become loyal to it. Furthermore, tyres are a consumer product: similar to the demand for food, even when the economy is in bad shape, there will always be a minimum demand for them. Tang leveraged his contacts in China and out of a pool of suggestions he picked GT, a wellrespected Chinese brand. He originally began importing, ordering four to six containers a month with a value of US$150,000. From 1995, the Ghanaian economy began to expand greatly and so did the demand for tyres. Over the following years, Caitec Delta began selling wholesale to customers in Togo, Cote d'Ivoire, Mali, Burkina Faso, and began selling different brands. The business of Caitec Delta thrived in spite of the constant problem of the depreciation of the Ghanaian Cedi.1 The cargo normally took 45 days to reach Ghana from China. Upon arrival of the containers, Caitec Delta transferred the money to the manufacturer in China and import duties were either paid at the harbour or at the Customs Division of the Ghana Revenue Authority. The tyres were normally stored in Caitec's warehouses and resold to local retailers. Tang's customers grew increasingly loyal to Caitec's tyres because of their quality and affordability compared to other Western brands. In 2000 Tang decided it was time to expand. He was thinking of a business which could both be successful and at the same time contribute to Ghana's industrial development and local employment. His instincts told him that, given Ghana's location by the sea, the fishing business would always exist within Ghana's economy. Accordingly, he decided to open a factory manufacturing fishing nets and ropes. While many businesses were importing fishing nets into Ghana, Caitec Fishing was the first fishing net factory to be established in the country. In contrast to dealers importing fishing nets, Caitec Fishing had the ability to promptly satisfy the demand for nets with a scale of transaction of about US$600,000 per year. However, the production of nets is also highly dependent on the regular supply of electricity, which is lacking in Ghana.2 As a result of electricity shortages, since 2011 the percentage of Caitec Fishing's production dropped by 50 per cent. However, Tang could continue fishing net production by supporting it with revenue generated by Caitec Delta. The diversification of his business into different sectors turned out to be a winning strategy: each time preventing him from suffering too much from the downturns of Ghana's business environment. Tang had another target for his group - to import cars from China. In 2005, he sensed it was the right time to pilot car importation. Accordingly, he began with spare parts such as batteries, brakes, filters, jacks, plugs and pumps as these could fit in the same container as the tyres. He then moved into importing engine oil and lubricants. The final undertaking was commercial vehicles (light trucks, pickup trucks, vans and buses), which he imported from three major Chinese manufacturers under the banner of Caitec Motors. He did not opt for saloon cars as he believed that it would have required too long to promote Chinese brands and compete with new or second-hand cars from Europe or America. Despite these insights into Ghana's car market, the import of commercial vehicles turned out to be a disappointment and Tang made little profit out of Caitec Motors. Some of the vehicles remained unsold, some had problems, and others were not fully paid for by his customers. He however decided to maintain the business for its name, hoping for the situation to change in the future. Once again, he could do so by supporting the business with revenue generated by Caitec Delta. In 2010, using his construction company Hai Hong, Tang began construction of a luxury hotel in a high-class neighbourhood of Accra, expecting it to become 'Accra's no.1 trendy, modern luxury hotel'. A year later, Tang decided to further venture into the import of heavy-duty machines from China. His business instinct told him that in a country such as Ghana, where many areas are still not industrialised, heavyduty machines would be key enablers of development. Heavy-duty machines were also crucially employed in the extraction of natural resources, of which Ghana had ample supply. The import of heavy-duty machines was an extremely capital-intensive enterprise, three or four times more expensive than importing cars or tyres. They constantly needed technical support and required technicians to be constantly on the spot for assistance. In the beginning, the business was a success. Tang's customers were predominantly Chinese miners, mainly from Shanglin County, Guangxi province in Southern China, which is simi lar to Ghana in that it also has a tradition of gold mining. It is estimated that as of 2013, mining-related Caitec: A Chinese business in Africa 682 activities employed as many as 50,000 Shanglin locals in Ghana.3 The Chinese customers knew Caitec Delta's machines well, so there was no need to promote the brand. Customers would normally put down a deposit and then pay Caitec Delta through monthly instalments as the daily extraction of gold yielded profits. In contrast to local small-scale miners, the Chinese had the capital to pay the initial deposit by combining savings they had collected among families, friends and bank loans in China. Being in Ghana with the aim of making fast profits from the gold rush, Tang's customers also had high levels of productivity and were always able to make the monthly instalment payments. The sales made from the import of mining equipment rapidly became a big portion (over 20 per cent) of the revenue of Caitec group. Seeing that this business was so successful, at the beginning of 2013, Tang decided to import 400 excavators for a trade credit value of US$100 million from the Chinese company SANYI. He had purchased 100 machines to wholesale and had taken responsibility to sell the remaining 300 on behalf of the supplier. In the original contract, he was going to sell the excavators and pay SANYI within ten months. He had never imported these many machines and was aware that such an operation was quite risky. Yet, as somebody who loves risk, he believed that risk could make money. Moreover, when he concluded the deal there was a large demand for his machines among Chinese miners. Gold mining in Ghana and the government's crackdown on ' galamsey' Mining represents an important sector for Ghanaian exports, making up 37 per cent of Ghana's total exports in 2013. Known as the Gold Coast in the colonial period. The focus of Ghana's mining industry is on gold, of which Ghana is Africa's second largest producer, which accounts for over 90 per cent of the entire mineral exports.4 Alongside large-scale mining operations, small-scale gold mining has existed from time immemorial in Ghana. In 1989 small-scale mining (considered to be areas smaller than 25 acres) was legalised for Ghanaian nationals with the scope of benefiting the livelihood of local communities. According to data collected by the Precious Minerals Marketing Company, small-scale mining (both legal and illegal) made up 34 per cent of Ghana's total exports of gold between 2012 and 2013.5 The same data showed that as of 2012, about one million people were involved - mainly illegally - in such operations. While in the Ghanaian context large-scale mining is legal for foreigners, it is considered illegal below a certain scale of operations (the threshold being a minimum investment of US$10m). Small-scale mining operations are risky and capital intensive but also potentially very profitable. Excavators are a key part of such operations and are utilised at two points of the mining process. First, excavators are employed to survey the land in order to determine whether there is gold on a certain plot. Once the presence of gold is established, small-scale miners apply for a license from the Minerals Commission - which has branches in each of the local assemblies where mineral resources are known to be. A prospective miner would also have to make arrangements with the local police, the Chief, and then buy the land from the landowner. Excavators would then be employed at a second stage, to dig and collect heaps of sand to be subsequently washed to separate the gold from the sand. Mines are normally set up next to rivers or alternatively rivers are diverted in order to create small streams to wash the sand. Small-scale mining traditionally has negative effects on the environment, producing farming land degradation, deforestation and water pollution from mercury used in gold processing. The situation has been aggravated by the new heavyduty equipment brought in by foreigners, which increased the efficiency of gold production but also the scale of en vironmental destruction. Although banned by law from small-scale gold mining, as of 2013, thousands of foreign small-scale miners were present in the country, operating in collusion with Ghanaian nationals and local authorities under the guise of providing technological equipment. Among these foreigners, a particularly large influx of Chinese small-scale miners arrived in Ghana in 2010 as gold prices sky-rocketed. As of 2013, it was estimated that more than 1,000 small- and mid-size gold mining operations in Ghana were led by Chinese nationals, with each gold mine utilising one or two excavators on average.6 Because of their growing wealth, mining operations - especially small-scale ones - were often the targets of looting. Following a series of violent and at times deadly incidents between Ghanaians and Chinese miners, the situation escalated, prompting President Mahama to launch a Ministerial Task force to tackle illegal mining ('galamsey' in pidgin English) in Ghana.7 The campaign led to the swift arrest and deportation or voluntary departure of thousands of foreigners, many of whom were Chinese nationals - as many as 3,877 in June 2013 alone. A dealer's dilemma When Tang concluded his deal with the manufacturer SANYI, he could never have imagined the scale of the events that were to occur within such a short space of time. With most of his customers leaving the country, Tang's segment of the market suddenly vanished. Although the act of selling excavators was not illegal, Tang regretted not having verified the exact size and scope of operations of his Chinese customers, nor their mining licences. Until that moment, the government itself had allowed smallscale mining operations in collusion with foreigners by not enforcing the existing law. But now things had changed. Caitec: A Chinese business in Africa 683 Meanwhile some of the machines he had sold, partly unpaid for, had been abandoned on mining sites or had been seized by locals. Tang had never experienced such a tough time in his whole business career. The worst situation he ever had to face was not making profit or having to endure bad economic turns. However, this time was different. He had taken up too much risk. It was very clear to him that he had to adopt new practices. As a result, he decided to put in place a new procedure whereby before selling excavators to customers, he would check their mining permits and only sell to those who had them. However, this didn't change the situation he found himself in and he could not undo the past. He originally thought of selling the excavators to local district assemblies, for them or their contractors to carry out construction work. Yet, he had many reservations about the government's capacity to pay back the money on time. He also feared that as elections were approaching, a new government might set aside contracts that previous governments had entered into - a common situation in Ghana's construction business. He talked to a couple of prominent politicians, but soon realised that selling to the government would be too risky. He also set aside the option of selling to foreign large-scale mining companies as he knew that they were not keen on buying Chinese machines. Through the Chinese Embassy and the Ghanaian government, he had managed to recover some of the machines which had been abandoned on mining sites. However, a huge dilemma kept him awake at night: how to sell the hundreds of SANYI excavators sitting in his warehouses? Who could buy these machines now that his market segment had disappeared? How to quickly enter another segment? How to sell in a way that could successfully cope with future uncertainties in Ghana's political environment? Tang was pondering a few options: 1. Getting a loan to pay the manufacturer within the agreed time (ten months) and in doing so, gain more time to sell the machines. Such an option would have saved his deal and reputation with SANYI: the latter would have received its payment as agreed. The unpredictability of Ghana's regulatory environment had forced a delay on his operations. A loan would hopefully gain him the necessary time to adapt the machines and sell to another market segment. Of course, a loan alone would save his situation only in the short term, but it was a start. A critical issue was that the borrowing situation in Ghana was extremely di¨cult at that time. All the banks in the country were investing in treasury bills and seldom lent to the private sector. Unlike Chinese banks, Ghanaian banks had small capacities and were reluctant to lend large amounts of money. Tang had approached the two Ghanaian banks he had borrowed from in the past, but neither of them was willing to support him this time. Who else could he turn to? 2. Returning the excavators to the manufacturer SANYI to be sold to its dealers in other African countries. Tang decided to bring up this possibility at the meeting he had scheduled with the SANYI regional director in South Africa. Returning all the excavators to SANYI would surely have helped him to evade debt issue. However, such an exit option would have borne an extremely high cost. As the export cost of one machine was around US$16,000, he would have lost millions of dollars in such an operation. Moreover, such a move - provided that SANYI agreed- might not have avoided collapse of the Caitec group in the long term as a result of the huge losses he would incur. Finally, the act of returning all of the excavators would have entailed losing face with the manufacturer SANYI. His longestablished reputation in Ghana would have also been seriously damaged by such decision. 3. Setting up a Ghana-China Chamber of Mines to enable partnerships between Ghanaian and Chinese stakeholders utilising SANYI machines. What had allowed Tang to previously sell machines to Chinese small-scale miners was the lack of enforcement of Ghanaian legislation and the agreements between small scale foreign miners and local authorities. Small-scale mining had a bad reputation mainly because of the poor regulation and safety practices, as well as a high incidence of accident rates and environmental degradation. However, Tang thought, what if this practice could instead be somewhat self-regulated and made mutually beneficial through a partnership between local authorities, communities and Chinese miners? Together with his management staª, Tang innovatively came up with a 'Proposal for Green and Sustainable Alluvial Mining Pilot Zone Development' to submit to the Parliament. This project entailed the collaboration of local and central government actors, such as the Ministry of Mines and the Minerals Commission, mining institutions, Ghanaian SMEs operating in the mining business as well as Chinese small mining businesses. Within such a larger framework, Chinese small-scale miners could join up forces to carry out legal mining work and at the same time use and purchase his machines. However, this was a very ambitious project which required the support of several actors and most crucially government approval, which was notably long to obtain. 4. Selling the machines to other small-scale miners operating in the Ghanaian market. 'After all, small-scale mining continues in Ghana, so there has to be a way to sell these machines', Tang kept repeating himself. It was clear to him that an aggressive sales strategy to a diªerent segment of the market was the fastest and Caitec: A Chinese business in Africa 684 financially healthiest way to recover his investment. This option would also enable him to protect his good name.

The challenges to selling to another market segment were significant. First, how to reach out to local small-scale miners? And how to eªectively promote a brand such as SANYI, very well known among Chinese miners but unknown to Ghanaians, which seemed to opt for more globally established brands? He had identified the Small-scale Mining Association as a key site to start promoting his machines. He also planned to be actively involved with such associations as well as Ghana's Chamber of Mines in order to be better informed of future political developments which could aªect his business activities. Another key challenge with Ghanaian customers was the issue of payments. Local small-scale miners did not have the same initial financial capital to invest in such machines as Chinese miners had, nor the same propensity for timely payments. In fact, many of them did not buy heavy duty equipment but rather, rented it at daily rates of between 1,500 and 2,000 GH¢ (US$390-520). Yet, with Chinese miners forced out of the country, he had no choice but to figure out a way to sell to local small-scale miners, as well as indemnify himself against the possibility of late or non-payment. Notes and references: 1. A great barrier to businesses in Ghana is the depreciation of the Ghana cedi against the main global currencies. The latter has been a constant problem for Ghana's economy over the last few decades. 2. The incapacity of power producers to meet the electricity demand in Ghana has been a constant problem over the recent decades and notably one of the main challenges to the development of a national industry in the country. The situation improved in 1986, reappeared in 1994, 1998, 2006 and has been deteriorating between 2011-2013. 3. Sophie Song, 'A modern day gold rush - how people of one county in China are making millions in Ghana', International Business Times, 15 May 2013, www.ibtimes.com/modern-day-gold-rush-how-people-onecounty-china-are-making-millions-ghana-1260801, accessed 20 March 2015. 4. Ghana Chamber of Mines statistics,