CHINESE BUSINESS CHANGES THE PLAYING FIELD

C O N F I D E N T I A L SECTION 01 OF 02 LAGOS 000215 SIPDIS SIPDIS DEPT PLEASE PASS TO JAMES WILLIAMS, OPIC DEPT PLEASE PASS TO TDA E.O. 12958: DECL: 02/20/2017 TAGS: ECPS ECON EINV EIND PGOV PREL NI SUBJECT: CHINESE BUSINESS CHANGES THE PLAYING FIELD LAGOS 00000215 001.2 OF 002 ¶1. (C) Summary: U.S. firms face "stiff and unfair" competition from Chinese competitors in Nigeria. In a March 12 meeting, Motorola Managing Director Raphael Udeogu (protect) said Chinese firms offered a combination of flexible financing and low product costs, as well as financial "inducements" in order to win contracts. However, Nigerian companies complain of partially-completed infrastructure, poor product quality, and elastic finance terms. While European firms have long used similar business practices, the Chinese are unusual for how widespread the practices have become and the scale of the inducements. End summary. -------------- Motorola Competes On An Uneven Playing Field -------------- ¶2. (C) In a March 12 meeting, Motorola Managing Director Raphael Udeogu (protect) told Econoff Motorola faced "stiff and unfair" competition from Chinese firms operating in Nigeria. Motorola could compete in some instances; in others, it was forced to cede ground to firms from countries that have more liberal regulations regarding business pratices and ethics. Chinese firms often paid "inducements" to Nigerian authorities and companies in exchange for contracts, he said. In other instances, Chinese firms offered lower purchase prices to existing Motorola clients. In the latter case, Motorola could sometimes compete and retain its contract with the customer by matching those prices, Udeogu said. While this decreased Motorola's profit margin, explained Udeogu, it was fair market competition. Where Motorola could not compete was in the former scenario, in which Chinese firms essentially bought contracts, he stated. ¶3. (C) Udeogu explained that Chinese firms have been successful in obtaining contracts because they promised competitive financing and products whose quality matched that of Western companies. However, these promises were often not delivered, claimed Udeogu. The installation of infrastructure was partially completed or the attractive financing would become unavailable. Furthermore, Nigerian clients often complained of shoddy products, which had to be replaced at additional costs to the Nigerian firm. Because there was significant cost associated with breaking a contract, �0A;Nigerian clients had little choice but to continue with these agreements, explained Udeogu. ¶4. (SBU) While Nigerian companies often preferred to purchase products from U.S. suppliers such as Motorola, U.S. firms often could not compete with the financing offered by Chinese firms. Chinese firms offered below-market interest rates, long grace periods, and long-term financing. In contrast, while financing from the USG through finance arms such as the U.S. Trade and Development Agency, Export-Import Bank, and Overseas Private Investment Corporation was valuable, continued Udeogu, these agreements usually took a long time to effect. This was a longer timeframe than the market was willing to bear, lamented Udeogu. As a result, contracts were sometimes lost to Chinese competitors. ¶5. (C) Udeogu said these business practices were not new. European companies such as Siemens and Ericsson have long offered "inducements" to obtain contracts, he observed. However, Udeogu explained, the difference in competing with Chinese firms was the pervasiveness of the practice and scale of inducements offered. -------------- --- Transparency Initiative Levels The Playing Field -------------- --- ¶6. (SBU) In order to increase its competitiveness, Motorola employed a U.S.-based global advisory firm, GoodWorks International, to lobby the GON to be more transparent in bidding processes. GoodWorks was instrumental during the privatization of NITEL and Mtel in 2003, Udeogu recounted. During the bidding process, Goodworks brought to the LAGOS 00000215 002.2 OF 002 attention of President Obasanjo opaque transactions. Obasanjo was responsive, Udeogu sQd, going so far as to fire some NITEL and Mtel leadership as a commitment to transparency. Since the privatization of NITEL and Mtel, Motorola's reliance on GoodWorks had lessened, stated Udeogu, and Motorola was now better positioned to sell its own products. ¶7. (C) In spite of the challenges enumerated above, the telecoms sector has been immensely successful. Evidence of this was that Motorola now offered direct financing to Nigerian firms. In a recently-signed agreement with Celtel Nigeria (Celtel)/Mobile Telecommunications Company (MTC), Motorola provided full financing in the amount of USD 50 million for a global system for mobile communications (GSM) contract. This was a sign of a stable and lucrative operating environment, Udeogu summed, and said Motorola was willing to take a risk when dealing with reputable telecommunications firms. Nonetheless, said Udeogu, the success of the telecoms industry involved a good deal of luck. He recounted he was recently told by a retired general that, had the GON known telecoms reform would be so successful, the process would have been politicized from the start, as everyone would have wanted to share in the profits. -------------- Comment -------------- ¶8. (C) Comment: Udeogu's comments echo those of representatives of other foreign as well as Nigerian firms. Foreign firms say they often cannot compete with the financing and product cost offered by Chinese firms. Moreover, U.S. businesses, in particular, are at a disadvantage with firms that offer financial sweeteners in exchange for contracts. Nigerian firms complain of shoddy Chinese products and contract terms that are not upheld. In spite of these well-known business practices, the finance terms and product cost offered are too attractive to refuse. End comment. BROWNE