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Smaller Than It Looks: The Reality of Chinese Timber Investment in Zambia

Smaller Than It Looks: The Reality of Chinese Timber Investment in Zambia

The following article was written by Hezhu Zhang, a fellow at China House Kenya

The first impression of Chinese timber business in Zambia may not be described as a “small-scale industry” as numerous both Chinese and Zambian are involved. However, if observed more thoroughly, vitalness of Zambian timber market is in fact awash with speculation rather than investment and real production is not as high as expected. At the same time, one would surprisingly find that Zambian are taking the lead in lots of conditions, eagerly looking for Chinese buyers.

Two Forms of Business: Profiteers and Investors

There are mainly two forms of timber business in Zambia. Most Chinese businessmen in timber industry, surprisingly, are only speculative “profiteers”. They simply buy logs as an individual from Zambian owners (some of these logs are often produced in the second form of company which would be discussed later) and sell to Chinese furniture factories after exportation without regular procedure. They usually do timber trade as a part time or a temporary job. However, countless profiteers exist in Zambia and quite a portion of timber trade is done in this informal way, though the scale cannot be estimated. In these small-scale trade, which are often generated by Zambian, working efficiency is quite low due to their lack of electricity-driven machines, thus production in each trade is often quite small. As the demand for hardwood in China has gradually became a common knowledge in Zambia, lots of Zambians are actively looking for Chinese buyers. Generally speaking, the vitalness of the timber market in Zambia is due to the eagerness of both parties.

At the same time, some local agents who are in charge of investors’ machines and factories and are responsible for producing lumps for Chinese investors, sell their products to some profiteers who offer a higher price. These kinds of situations distort the market largely. Also because these trades are mostly done in informal ways without legitimate procedures and taxes,which become a threat to legitimate timber commercial companies.

On the other hand, the second form of timber trades, starts from bushes in Zambia and end at Chinese furniture workshops. These Chinese businessmen are called “investors” by insiders. They look for suitable forests, invest various types of machines, employ Zambian workers, chop down and process logs into lumps, encase and transport back to China. However, In Zambia, there are only approximately 10 Chinese companies. At the same time, as these Chinese companies have huge technical advantages compared with local owners, they produced large percent of the timbers in Zambia timber market and sell at a lower price. Nevertheless, these two forms of timber business don’t have a clear distinction in between. Investors sometimes work like profiteers and purchase timber from local owners when clients’ demands are urgent. And a profiteer sometimes lends money to local owners so they can rent machines to produce lumps more efficiently and thus become half an “investor”.

Small Factories, Little Investment and Low Technology

Generally speaking, timber business in Zambia is basically confined to some very limited process work, which usually include processing logs into lumps of a certain size clients require and processing wood into different kinds of boards used in furniture manufacture. These processes indeed involve little technology and machine operation and employ mostly simple labors rather than trained mechanics. Thus labors hired by Chinese timber industry usually learn very little professional skill. At the same time, Chinese businessmen’s investment on factories and machines is also very limited in small-size machines, such as chain saws, Lucas machines and tractors. Factories are also usually very small and simply equipped. This is mainly because timber business in Zambia remains in a relatively small scale, thus large-scale mechanical equipment are not involved.

YL company is a very representative Chinese timber company. Mr. Lu, one of earliest “investors” and founder of YL timber trade company, used to work in Zambia. Because of close personal network with high-level Zambian officials, he got the franchise right of about 30,000 Hectare of forest in the Southwest part of Zambia and became one of the earliest timber businessmen in Zambia. At the first few years, when policy situation was loose and competitors were few, the business ran fluently. However, as the political situation in Zambia kept changing rapidly, the franchise right was later abrogated and Mr. Lu began to purchase franchise right.  According to customers’ need and relative policies, timbers of YL company are processed into lumps and board materials and then transported back to China. While in recent years, because of the policy reform, a lot of timber products are banned from exporting, YL Company began to smuggle part of their wooden products out of Zambia.

Currently YL is operated by Mr. Lu’s family members and two close friends—-altogether about only 7 people. They never socially recruit Chinese employees and only trust relatives and closed friends. LY’s small scale and family firm operating model is very typical among Chinese timber commercial company in Zambia.

YL invested hundreds of chain saws and Lucas machines and over 20 tractors into the timber industry.  Apart from these machines, no other machines are invested to do further processing.  Those other timber companies in Zambia are basically the same. Hence, very little technology has been brought into local market except basic technics about operating machines and basic carpentering skills.

In brief, Chinese invested timber industry in Zambia remains in a small-scale phase where machine investment and technology import are both quite low. One of the main reason is because the species and forest condition of Zambia.

How Zambia Differs From Mozambique: Different Geography, Different Trees

Insiders reported that Chinese timber companies in Mozambique are with larger scale. One of the Mozambique Chinese companies has scale production with more than a hundred million RMB investment and more than 500 local workers. The main reason is that in forests in Mozambique, almost every one of the trees in the forest is big enough and is the required species. Basically after exploiting, a very large percent of the trees were cut down. And almost all the trees are usable and cut down. Transports become easier. Hence the cutting and transporting to factories will be much easier than in Zambia. In Zambia forests, usable trees need to be found and a long distance exists between one usable tree to another one. Also a lot of trees in the forests are not the target species. Therefore, to transport a log from the deep forest need much more work and more importantly, the amount of logs that could be produced one day are much smaller than in Mozambique.

In short, because of the natural forest condition, the scale of timber business in Zambia is largely limited. Another reason is because Zambia is an inland country and transporting requires much more cost than coastal countries such as Mozambique. Hence businessmen with larger capital usually prefer other countries than Zambia.

Lack of Insurance, Afraid of Investing More

Another factor that limit the scale of Chinese timber business in Zambia is the potential risks and loss caused by the informality of business and deficient legal protection. Because most Chinese companies’ operations contain parts that are not completely legal, most commonly, the purchase of franchise right and production certificate, they meet swindlers frequently and this has become part of their biggest cost.

Timber producing process is highly dependent on local agent. The usual business model of a Chinese company is renting all the machines and tractors to a local agent who directly employ local labors and organize all the producing process. Agents are responsible for the all detailed work, including networking with local chiefs and residents, supervising the processing, storage of timbers, running of funds and distributing salaries and sometimes purchasing franchise right.

However, although Chinese companies have contracts with these agents, what frequently happen is that these agents took the funds from Chinese company and than use the funds elsewhere and disappear. Sometimes they don’t pay the workers salaries. What most frequently happens is they secretly sell some of finished timbers to other Chinese “profiteers” at higher prices. In some circumstances, they rent all the machines to others for rental income and have no productions at all. Chinese timber companies are busy dealing with these problems everyday and large amount of fund is lost in this way. When Chinese companies appeal these agents to Zambian courts, it always takes a tediously long period to hear the case, which also cost a lot of efforts, time, fund and usually lead to no good outcomes. In most cases Chinese companies give up legal approach.

Similar problems exist in the transporting process. Transporting agents often run away with timber that is supposed to be sent to the custom. In brief, the informality of the operation, the deficient legal guarantee of Chinese companies and the ensue potential cost has always been one of the biggest loss of these Chinese “investors”, which largely limit the scale of timber business, and at the same time, impede their further investment on deep-processed industry such as furniture manufacture.

However, besides these objective limits, there are important reasons Chinese companies refuse to enlarge their scale. The biggest reason and challenge for Chinese investors is the unstable policy condition.  Almost every one of Chinese timber companies complains heavily about the fickle policies about the license, export, legal products, etc. And these instabilities bring a lot of risks to their attempts of enlarging their investment.

Hezhu Zhang is senior year undergraduate student at Fudan University and an intern at China House. In July and August 2017, she spent two months in Zambia researching Chinese timber business.

 

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