Cablegate: Kenya - Doing Business the Chinese Way

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RR RUEHGI RUEHRN
DE RUEHNR #4246/01 3030813
ZNR UUUUU ZZH
R 300813Z OCT 07
FM AMEMBASSY NAIROBI
TO RUEHC/SECSTATE WASHDC 3164
INFO RUEHXR/RWANDA COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 0373
RUEHGH/AMCONSUL SHANGHAI 0021
RUEHGZ/AMCONSUL GUANGZHOU 0027
RUEHSH/AMCONSUL SHENYANG 0018
RUEHCN/AMCONSUL CHENGDU 0019
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS SECTION 01 OF 02 NAIROBI 004246

SIPDIS

SENSITIVE

SIPDIS

STATE PASS USTR - BILL JACKSON
STATE FOR AF/E, AF/EPS AND EB/CIP

E.O. 12958: N/A
TAGS: ECON ECPS EFIN KCOR CH KE
SUBJECT: KENYA - DOING BUSINESS THE CHINESE WAY

REF: NAIROBI 4202

NAIROBI 00004246 001.2 OF 002

Sensitive-but-unclassified. This cable is not for release outside
USG channels.

1. (SBU) Summary: Chinese firms selling into Kenya's information
and communications technologies (ICT) sector are throwing a lot of
money around, according to industry contacts. Indeed, Chinese
influence may be so great that it is distorting important investment
decisions in the country. Putting aside corruption, Chinese ICT
vendors are difficult to beat on price and quality, and therefore
often win government procurement tenders. However, companies that
buy Chinese equipment often find that they end up paying the piper
later due to poor after-sales service. End summary.

2. (U) In the course of gathering information for reftel report on
developments in Kenya's information and communications technology
(ICT) sector, interesting anecdotes emerged about the way Chinese
firms do business in Kenya.

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China "Re-Colonizing Africa"
----------------------------

3. (SBU) "The Chinese are re-colonizing Africa for natural
resources," according to Michael Joseph, the Amcit CEO of Safaricom,
Kenya's largest and most successful mobile phone company, speaking
to U.S. Mission staff on October 18. Joseph diverged from his brief
on Kenyan efforts to build FONN, a new terrestrial national fiber
optic network (reftel), to say the project is an example of how "the
Chinese are driving the ICT agenda in Kenya." FONN, he said, was
poorly planned - consciously so, in his view, so that Chinese
companies could get fatter contracts. As noted reftel, FONN will
extend all the way to the borders of Kenya's neighbors, which means
it will traverse vast tracts of virtually empty land in Kenya's
northern and western reaches. Two Chinese firms and one French firm
have been awarded contracts to construct the network. According to
Joseph: "We don't need fiber to Garissa (in sparsely populated
Northeast Province), we need it in Nyeri" (a bustling market town
just north of Nairobi).

--------------------------------------------- ----
Chinese Stuff: Good and Cheap, But Service Stinks
--------------------------------------------- ----

4. (SBU) Joseph went on to describe the use by Chinese ICT vendors
of concessional credits from the Chinese government to lock up
contracts - nothing new there. Echoing the views of many industry
contacts, he said the quality of the ICT equipment provided by
companies like Huawai and ZTE is pretty good, and their prices are
low. But he used a monosyllabic expletive beginning with "S" to
describe after-sales service. When there are equipment problems
later, he said, the Chinese run for the door, and matters are made
worse by the language barrier. Safaricom purchased equipment last
year from Huawei, but the deal was too good to be true. Huawei
effectively reneged and only delivered half the equipment promised
in the contract. Joseph went to China personally, eventually got
the Huawai CEO to admit that the company had lied, and then forced
it to cancel the contract.

----------------------------------------
Chinese Buying Politicians and Influence
----------------------------------------

5. (SBU) More insidious, said Joseph, is that "the Chinese" (by
this we believe he meant Chinese firms, not the government) are
"funding the political agenda" of Kenyan politicians and ministers.
When he returned from China after cancelling the Huawei contract, he
was summoned to the office of Mutahi Kagwe, the Minister of
Information and Communication, and told the cancellation put all
Chinese foreign assistance to Kenya at risk. He also received phone
calls from different ministers with no responsibility for ICT who
insisted that he reconsider the cancellation. One was the Minister
of Immigration, who hinted that Joseph, a foreigner, might have work
permit problems if he cancelled the contract. He held his ground.
Joseph said that whenever he meets with a Chinese firm, "within 20
minutes" he receives calls from various Kenyan ministers or members
of parliament lobbying on behalf of the company.

6. (SBU) Another likely manifestation of the undue influence and

NAIROBI 00004246 002.2 OF 002

unfair play by the Chinese, said Joseph, was the recent Phase II
expansion of the CDMA fixed wireless service being rolled out by
Kenya's monopoly fixed line phone company, Telkom Kenya (see
reftel). Because of Telkom Kenya's state-owned status, the project
by law should have been put out for public tender. But instead, the
Kenyan government quietly and unilaterally awarded the contract to
Huawei, the Chinese company that did Phase I. Separately in August,
the CEO of one of the country's largest internet service providers
confirmed the details of the deal, which he said raised eyebrows
throughout the industry.

--------------------------------------------- ----
Telkom Kenya Looking for Non-Chinese Tech Partner
--------------------------------------------- ----

7. (SBU) Asked about China's influence in the ICT sector on October
18, the more restrained CEO of Telkom Kenya, Sammy Kirui, insisted
that the Chinese "can't throw their weight around too much." He
echoed Joseph's assessment that Chinese equipment is decent quality
and low price. But like Joseph, he complained that "you pay down the
line" in terms of poor after-sales service. As a state-owned
entity, he said, Telkom has to follow government procurement
procedures, and "the Chinese always do well on government tenders."
After Telkom is privatized (reftel), however, it will have more
flexibility to procure equipment on the basis of factors beyond
price, such as network compatibility. The company already counts
Huawei as a "strategic technical partner", but has issued an
expression of interest for a second such partner. Huawei rival ZTE,
also a Chinese company, is pressing hard, but Kirui insists that the
company's second strategic tech partner must be non-Chinese.

------------------------------------------
Finding Ways Around the Chinese Juggernaut
------------------------------------------

8. (SBU) More emphatic is the Permanent Secretary of Information
and Communications, Dr. Bitange Ndemo. Ndemo, a talented former
U.S.-resident business executive, has repeatedly lamented the
inability of U.S. firms to win Kenyan government tenders. A strong
proponent of U.S. technology, he is resorting to creative ways to
circumvent a tender process which he sees as handcuffing the country
by virtually guaranteeing that it is forced to buy low-cost Chinese
equipment, without heed to other important factors, such as
after-sales service and network compatibility. Ndemo recently
signed a memorandum of agreement for a public-private partnership
with a Saudi firm that for the most part sells and services
U.S.-made equipment. The deal calls for the construction of at
least one $30 million data center that will complement the roll-out
of the national fiber network. By structuring the relationship in
this way, Ndemo believes he can legally buy the equipment and
technology most appropriate for Kenya, without having to pander only
to the lowest price seller.

9. (SBU) More generally, Ndemo regularly expresses concern about
the influence of China in the ICT sector. Without providing
details, he has told Econ/C many times that he and other senior
technocrats are under constant pressure from their own ministers and
the country's senior political leadership to buy Chinese.

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Comment
-------

10. (SBU) The views and anecdotes conveyed by people like Joseph
and Ndemo put a bit flesh on the bones of the oft-repeated (but
seldom proven) contention that Chinese companies play dirty. Most
disturbing in this case is the idea that Chinese influence is so
great that it's actually distorting critical investment decisions in
Kenya's all-important ICT sector. For further investigation is the
role of the Chinese government. We wonder if it simply turns a
blind eye to the dirty work of Chinese firms, or if it actively
contributes to the problem.
Ranneberger

...

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