In the ever-evolving landscape of global trade, Chinese firms operating in East Africa find themselves grappling with challenges as the Red Sea becomes a focal point of disruption. Attacks by Houthi militants in the Red Sea shipping lanes, particularly around Yemen, have escalated since the commencement of the Israel-Gaza war in October. These attacks have forced some shipping companies to suspend transits through the Suez Canal, leading to a cascade effect on the economic activities of Chinese businesses in the region.
Chinese traders, facing heightened uncertainties and complexities, are cautiously considering alternative routes, such as circuitous air, land, and sea options, to ensure the safety of their shipments. This strategic shift includes hiring risk-tolerant feeder shipping lines or, in some cases, scaling back production until the security situation in the Red Sea improves. The disruptions have prompted a comprehensive re-evaluation of shipping strategies and contingency plans among Chinese companies operating in East Africa.
The implications of these disruptions are particularly significant for China, given its substantial economic ties with Africa. According to United Nations Conference on Trade and Development data for 2021, China is Africa’s fifth-largest source of foreign direct investment, with investments reaching $1.8 billion in the first half of 2023, reflecting a 4.4% year-on-year increase. As Africa’s largest trading partner, the disruptions in the Red Sea present multifaceted challenges for Chinese businesses with significant stakes in the region.
The geographical importance of the Red Sea cannot be overstated, particularly in terms of African ocean access. Chinese port operator China Merchants Group, recognizing the strategic significance, signed a substantial $350 million agreement in 2020 to modernize the Port of Djibouti along the Red Sea. Additionally, Chinese investors have been actively involved in infrastructure projects, including the construction of two airports and a pipeline for water transportation from Ethiopia to Djibouti. A Chinese-funded railway connecting Djibouti to Ethiopia commenced operations in 2018.
Notably, the disruption in the Red Sea has repercussions for countries beyond Yemen, affecting Djibouti, Ethiopia, Eritrea, and Sudan. He Liehui, Vice President of the African-Chinese People’s Friendship Association, highlights that the “suspension of shipping” in the Red Sea has created a chain effect, severely impacting the import and export of trade goods, raw materials, and auxiliary materials for Chinese-funded enterprises in these nations. The intricacies of the shipping routes in East Africa, coupled with the absence of advanced road and rail systems, make detouring around the Cape of Good Hope at the southern tip of Africa an impractical solution.
Chinese shippers are confronted with a combination of challenges, including higher cargo rates, a scarcity of empty containers, and the dilemma of whether to opt for land routes from China to Europe. Sunny Huang, a director at Fitch Ratings in Hong Kong, points out that port operators are also feeling the impact, albeit to a lesser degree, with reduced operating efficiency and increased costs.
Despite the hurdles, Chinese businesses in East Africa are not halting shipping activities outright. Christian Roeloffs, CEO of the German container logistics platform Container xChange, notes that while Chinese shippers face higher costs, they can still utilize feeder ships from India, Pakistan, or the Persian Gulf that are willing to navigate the Red Sea into Africa. However, this alternative comes with its own set of challenges, including additional time and costs associated with transferring cargo from Chinese ships to feeder vessels in locations such as Kolkata in India or Karachi in Pakistan.
Feeder lines, ranging from small to large fleets, gained popularity during the pandemic-induced surge in global shipping demand. Some Chinese shippers are also exploring alternatives such as ocean routes around the Cape of Good Hope or combinations of air and rail transport, particularly for e-commerce shipments. Cargo sometimes reaches Dubai by sea from China before continuing its journey via costly air routes to the final destinations, showcasing the lengths to which businesses are willing to go to navigate the challenges posed by the Red Sea disruptions.
Gary Lau, Chairman of the Hong Kong Association of Freight Forwarding and Logistics, emphasizes the need for adaptive and agile strategies to mitigate the impact of ongoing disruptions. While some stability is anticipated in the near term, analysts expect the overall outlook to underscore the necessity for continual adaptation to the changing dynamics of global trade.
While the disruptions in the Red Sea are expected to be temporary, Sunny Huang from Fitch Ratings anticipates growth in container shipping capacity within the year, providing a potential remedy to the current challenges faced by Chinese businesses in East Africa. However, a prolonged disruption in the Red Sea could have transformative effects on China’s investment in Africa, potentially shifting focus away from shipping-linked infrastructure projects, such as ports, towards higher-value, labor-intensive manufacturing.
T.L. Yip, an associate professor at The Hong Kong Polytechnic University, suggests that if the Red Sea disruption persists, it may incentivize the development of labour-intensive manufacturing in Africa. This potential shift mirrors the historical trajectory of China’s investment model, moving from infrastructure development to labour-intensive manufacturing. The Red Sea crisis, if protracted, could serve as a catalyst for reshaping China’s investment priorities in the African continent, presenting new opportunities for both Chinese businesses and the African economies they engage with.
Image Credit: Nigerian Ports Authority
