China Goes Africa

Investment Analysis Clubs Macro Economic Trends and Risks
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For many years, China was so competitive in light manufacturing—garments, shoes, toys, and electronics assembly, for example—that very few other countries managed to compete in such labor-intensive industries. However, this competitive advantage is now eroding, as industrial labor costs are skyrocketing. In fact, Chinese garment and footwear firms see rising labor costs as their main challenge. This could offer great opportunities for other developing regions, notably Africa, which has labor costs that are lower than China’s.

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Auto makers have a long history of exporting knock-down kits. Receiving countries often have import substitution policies requiring the automaker to use local parts like seats and tires.

GoggleAI:

Automotive manufacturers use knock-down kits—categorized as Semi-Knock-Down (SKD) or Complete-Knock-Down (CKD) kits—to export disassembled vehicle parts for local assembly, avoiding high import tariffs and complying with domestic manufacturing laws. [1]

How Knock-Down Kits Work

  • SKD (Semi-Knock-Down): Partially disassembled vehicles shipped with major modules intact (such as pre-assembled engines or bodies).
  • CKD (Complete-Knock-Down): Completely disassembled parts that require full local welding, painting, assembly, and finishing.
  • Cost Savings: Local assembly plants are cheaper to build and run because they avoid expensive robotic infrastructure and benefit from lower local labor costs. [1, 2, 3]

Import Substitution Policies

  • Local Content Rules: Receiving nations mandate that a specific percentage of a vehicle must be made from locally sourced components (like tires, batteries, seats, and glass) to protect domestic supply chains. [1, 2]
  • Economic Trade-offs: While these policies successfully create local manufacturing jobs and transfer technical skills in the short term, they can lead to an “import substitution trap,” making domestic suppliers reliant on permanent government protection and shielding them from global competition. [1, 2]

I got to know GM while installing an IBM 1401 at their Caracas assembly plant, 1962. Some fellow sailors made parts for local assembly plants.

The Captain

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