Double Handshake

At the beginning of the new year, I was drawn to headlines touting China “opening its doors to ethanol imports.” The government had decided to drop its import tax on ethanol – a sugar-based biofuel typically used in vehicles – from 30% to 5% starting January 1st.

In December, the two countries’ state-owned oil and gas companies PetroChina and Petrobras signed an MOU to build ethanol production projects in Brazil. The project was specifically aimed at exporting ethanol from Brazil to China, though no numbers were given.

Was China getting more serious about developing its biofuels industries? Would Brazil, the world’s biggest ethanol success story, have a giant role to play? I smelled a scoop.

For Americans like myself, the word “ethanol” brings to mind the US’s controversial foray into corn ethanol production, which began in earnest about 10 years ago. I’m not too interested in rehashing the arguments and data for and against the corn ethanol industry in the US (though, file me under ‘naysayer’). However, Brazil’s sugarcane-based ethanol industry (second to the US by production but far more sustainable, carbon-efficient and wide-spread) is probably worth a paragraph, if not a glance at its Wikipedia page.

Brazil, with abundant land resources and heavy rainfall, is an ideal place for growing lots of sugarcane. It is grown sustainably and not on deforested Amazon land. Sugarcane’s higher sucrose content makes it much more efficient than corn, and government subsidies were phased out completely in the 1990s. Cars (92% of new ones) in Brazil run on a mix of ethanol and petrol. The system has been invested in and promoted for about 30 years. By pretty much all measures, it works.

China’s ethanol industry also has its roots in the 1970s and 1980s, from grain overproduction in certain years. With tons of rotting grain on their hands and no good way to store it, the authorities decided fermenting it and turning it into fuel was a feasible option. Things progressed slowly but steadily (China was even a net ethanol exporter in 2006) until five years ago when the use of food crops for ethanol was banned because of rising food prices and concerns over scarcity.

The same fuel-vs-food debate that made ethanol so contentious in the US had delivered a major blow to China’s industry.

I recently interviewed Rob Earley, an expert on biofuels in China for iCET, for my day job. He brought me up to speed on China’s present ethanol industry (and the serious structural challenges impeding its development). You can read the full interview here (need to first register for free). Here is the exchange relevant to the Brazil-China ethanol connection.

Q: As of the first of the year, China lowered its import tax on ethanol. Do you expect this move to affect the ethanol landscape in the country?

A: You have to look at the fundamental question: Why is China interested in biofuel? The answer, at least in my experience, is completely based on energy security. If they’re importing ethanol, it doesn’t improve their energy security greatly considering that the (world’s) supply of ethanol is probably more limited than the supply of oil at present. In terms of diversifying sources of energy, it’s not a bad thing. But realistically, the biggest source of ethanol is from sugarcane in Brazil, and if China and Brazil aren’t getting along, that supply gets cut off. Since there is no policy push for low carbon fuels in China right now, then there is no carbon rationale for using biofuels in China. I don’t think the import tax is going to make a big difference, but anything is possible.

So, this begs the question: Why do it, then? Earley said he couldn’t offer an explanation.

It’s worth remembering that China and Brazil are already closely intertwined when it comes to energy. Last May, China loaned Petrobras US$10 billion to secure a steady supply of oil. The Asian country also overtook the US as Brazil’s largest trading partner for the first time the month previous. Ethanol will probably never replace oil as a primary fuel source in China nor will it likely even surpass oil in importance in the China-Brazil trade relationship. However, it’s not impossible to imagine ethanol trade significantly changing the two countries’ current energy trade relationship (oil produced in Brazil, exported to China). Consider the following:

Diversifying energy sources – As Earley mentions above, it is in China’s interest to diversify its energy sources. Yes, importing ethanol from Brazil does not change China’s dependence on a foreign country for energy, but ethanol does offer much better price stability.

The table is set – The same energy giants (PetroChina and Petrobras) that are responsible for Brazil-China oil trade would be the ones taking on ethanol. Ramping up ethanol trade would not require new companies cutting in on entrenched state-owned interests. Ethanol would simply become a new stream of business for those already involved.

Oil already ties the two together – It’s true that China (and all countries) would rather not depend on foreign countries for energy, but the reality is China has little choice right now. Compared with China’s other oil suppliers (the Middle East, Russia, Central Asia, Africa, Venezuela), Brazil looks pretty good stability-wise. If importing ethanol from Brazil could displace some oil imports from, say, Sudan or Iran, wouldn’t this make China’s fuel portfolio a bit more stable, which is the stated goal?

The cars are a-comin’ – The number of cars on China’s roads is set to sky-rocket in the coming decade. If the country is to realize its goal of cutting energy intensity by 40-45% by 2020, it must keep vehicle emissions within reason. Costs for setting up the infrastructure for ethanol-fueled cars would be significant, but would pay for itself economically and environmentally.

Jump-starting things back home – China’s domestic ethanol industry is not dead, mind you. It’s just not a big priority right now. Working closer with Brazil on ethanol could result in China gaining the technology and experience necessary to revitalize its own ethanol industry, which is all but certain to miss its 2010 production target.

Image: Wired

Venezuela is in serious economic trouble. Production of oil – the backbone of the economy – dropped by 400,000 barrels/day last year due to reduced demand. “Indefinite” four-hour-per-week rolling blackouts have begun in big cities as hydroelectric dams have been hit hard by a drought. And then last week, Hugo Chávez announced last Friday he will devalue the country’s currency, the bolivar, for the first time since it was introduced in 2003.

The Venezuelan people are (rightly) afraid that even more serious inflation will set in. Many rushed out last week after the announcement to buy electronics and other durable goods that would hold their value. Merchants raise their prices as a result – the exact opposite effect a currency devaluation should have.

Chávez is not amused. “‘There is no reason for anybody to be raising prices,’ Chávez said Sunday on his national television show. He explained to listeners that the ‘bourgeois’ in Caracas society would plan price increases but that they would fail. ‘People, do not let them rob you,’ he said. ‘Denounce it,’” the Washington Post reported.

But if that approach doesn’t inspire a lot of confidence in the country’s stability, consider this idea:

A shipment of Chinese home appliances will be sold cheaply in Venezuelan government stores to stop speculation by retailers after the country’s currency was devalued last week, President Hugo Chavez said Wednesday.

“A boat is coming from China. It brings refrigerators, television sets and washing machines we’ll be selling at low prices, as we already do with food products in the Mercal chain,” Chavez said of the government-owned supermarkets opened in 2003.

A single appliance-laded boat from China? Well, that should do the trick for country of 28 million people.

Last month, a group of 15-20 gunman attacked a Chinese-owned copper project in northern Peru at dawn, killing three workers and torching 80% of the site. According to news reports filed in the following days, two other workers were still missing. The US$1.4 billion Rio Blanco copper project (bought by Fujian-based Zijin Mining Group in 2007) has been the site of violence and controversy before. In 2005, before Zijin took over, security guards killed one protester and allegedly tortured two dozen more. Those who oppose the mine argue it harms the environment and has a negative impact on local society.

Like the Bagua protests earlier this year, November’s Rio Blanco attack illustrates the major tensions between Lima’s economic and industrialization development plans for the country and some locals who fiercely resist it. Peru’s president Alan Garcia himself is a perfect example – he is lauded by international businesspeople for his open foreign investment policies and reviled at home, with an approval rating of 26%. Chinese companies, who are heavily invested in Peru’s mines, are caught in the crossfire.

Chinese mines in Peru have been targets of violence before, but I would argue the backlash against Chinese companies in Peru have little to do with them being Chinese. It is fast, polluting, large-scale development, and social and environmental upheaval that protesters are lashing out against. American and European energy and mining companies have been targeted as well.

Conflicts like the one in Rio Blanco are about development – about if and how it should happen, and who whose decision it should be.

In China, of course, fast, unconstrained, top-down development is near Gospel – The Gospel of Fazhan (or development). I’m using “fazhan” instead of “development” from here out because the word connotates so much more than new buildings and roads. You hear “fazhan” everywhere in China; it is a mantra, an obsession. Fazhan is progress, a thing to believe in. Fazhan levels are the way you compare countries. Fazhan is tied closely to national pride and unity. There are those who want fazhan and those who don’t know any better.

So note how state-owned newspaper China Daily handled the Rio Blanco attack:

Drug cartel behind Zijin Peru copper project attack

A weekend attack on a copper project in northern Peru that left three dead may have been the work of drug traffickers who want to keep the area undeveloped in order to protect their trade, the head of a business leaders group said on Tuesday

…

“There is no dispute or conflict with the community, so this makes you think that criminal interests are behind it, probably drug traffickers,” said Ricardo Briceno, head of Confiep, Peru’s largest business federation. Police said they were still collecting evidence from the attack.

Big mines tend to bring roads, police and development to areas where those involved in the drug trade want to keep a low-profile.

…

The company and people from the business community say townspeople now support the construction of the mine, though violence has broken out before at Rio Blanco.

The Peruvian government has also struggled at times to win the public debate over the benefits that big mines bring to isolated towns in the Andes.

The article is lifted from a Reuters report filed the previous day, which distanced itself a bit from the all-is-well comments from Briceno. Rio Blanco’s violent history disappears, as do mentions of environmental concerns. Indeed, with a few edits, the article becomes China Daily’s perfect affirmation of the Gospel of Fazhan – everyone welcomes fazhan with open arms except for the criminals.

It is much easier for China’s government to convince its own people that fazhan is a universal aspiration. Again, few of them need converting to the Gospel, and there’s no reason foreigners wouldn’t believe in the same thing. For every protest or attack against a Chinese mining interest abroad, China Daily and Xinhua will be there to dutifully explain that the cause was a few bad seeds at odds the vast majority of supporters.

But how does China sell the Gospel of Fazhan abroad to those who might resist it, to those who don’t share the same values? There is no doubt China will continue transform all of Latin America with its resource-buying and fazhan-leading. This reality is settled by governments, by trade agreements and investment policies.

But if China hopes to get along harmoniously with the Latin American people whose lives are being utterly transformed by all this fazhan, it may be useful to recognize and plan for the fact that not everyone is a believer.

Earlier this month, much was made of US president Barack Obama’s decision to impose a 35% tariff on tires imported from China. In retaliation, Beijing threatened to stop buying US-made chicken, causing the typical hyperbolic media to declare the start of a Sino-US “trade war.”

Of course, nothing of the sort has happened, and almost certainly won’t given the two countries’ mutual economic dependence. However, the unresolved question remains of how much (if any) countries should level the playing field when confronted with surging Chinese imports that undercut local producers. And it is not only a question the US must deal with. In countries like Brazil, Argentina and Mexico, low-cost Chinese imports across a range of goods remain a cause of trade tension.

At least one commentator, Latin Business Chronicle columnist Victor Mroczka, is calling for Latin American countries to consider following president Obama’s footsteps and impose their own “China safeguards,” when needed.

Mroczka, an international trade lawyer, argues that the imposition of what he calls “safeguard tariffs” against China are more effective in that they can be implemented much faster than WTO trade dispute rulings, which usually take years to be resolved (For the record, Latin American countries have initiated over 200 WTO investigations against China since 2001). By contrast, Obama’s tire tariff will take effect tomorrow, September 26, only five months after the initial petition was filed.

Second, he points out that as part of China’s 2001 WTO accession agreement, the country agreed to be subject to transitional, product-specific safeguard mechanisms, when facts warranted them, until 2013. When are these safeguards allowed to be imposed? “Where products of Chinese origin are being imported [into a WTO member country] in such increased quantities or under such conditions as to cause or threaten to cause market disruption to the domestic producers,” according to the WTO. In other words, imposing product-specific tariffs on China, until 2013, is perfectly legal within the terms of the country’s WTO accession agreement.

Finally, Mroczka argues that if one Latin American country imposes a safeguard tariff against China, it may have a knock-on effect for other Latin economies. As an example, he supposes Brazil impose a safeguard tariff against Chinese refrigerator imports:

If China’s low-price exports to Brazil increased 20 percent from 2006 to 2008 and the Brazilian refrigerator industry was losing market share and sales to China, and as a result began to reduce its workforce, the evidence would be pretty strong to initiate a safeguard action.

…

After the imposition of the safeguard tariff by Brazil, let’s assume that Mexico saw an increase of refrigerator imports from China (even a small increase) and feared that large volumes of refrigerators that were originally destined for Brazil would now be coming to Mexico and threatening its refrigerator industry as well. Reacting to this threat, Mexico could bypass the safeguard investigation process and request immediate consultations with China. If, after 60 days, the consultations fail to obtain assurances from China that an increase in refrigerator imports is not coming, Mexico could then impose tariffs or a quota. The same process could be followed by Chile, Peru, Panama, whoever.

To me, the legality of all this seems convincing enough. My question is not “Is this this something Latin American economies can do?” but rather, “Is this something Latin American countries really want to do?” To wit, the answer largely depends on where you come down on free trade and your stake in the countries involved. One man’s “safeguard” is another man’s “protectionism.”

But in the case of Latin America, it’s important to bear in mind that the region has far less leverage when “poking the dragon” as does the US. The region is dependent on China as one of its largest buyers of natural resources, its economies essentially propped up by China through the global crisis. For, say, Brazil to slap a tariff on Chinese-made refrigerators, it must make sure it doesn’t have serious repercussions for the backbone of its trade relationship with China: soy beans and oil. Ditto, Peru and Chile with copper.

Similarly, even though China “invests” in the US in its holding of US$ trillions in T-bonds, I’d argue that Latin American economies are far more palpably influenced by China’s foreign investment decisions than the US. China Development Bank – a government-owned entity – is responsible for US$ billions in loans to Latin American projects this year. In the global downturn, you can’t get that kind of financing anywhere else.

Moreover, as Latin American companies are still struggling to get their footing in the Chinese market, a retaliatory tariff against them is the last thing they need. China’s love of American chicken feet may save the US in their trade bout, but no one in China will likely notice if bottles of Chilean Malbec disappear from the shelves of Beijing because a 40% tariff makes them prohibitively expensive to import.

First off, apologies for the major drop-off in posting on DH lately, things should pick up again in the fall when I’m more settled in my new home in Beijing. Nevertheless…

Latin America and Africa are often lumped together when talking about China’s interest in them – namely, as two gigantic sources for natural resources. While many of the billion-dollar trade and investment deals have been made in oil and mineral resources to keep the furnaces back in China blazing, agricultural resources are also included. China has had a national policy for 95% food self-sufficiency in place for some time, but with 22% of the world’s population (eating increasingly more and more) and only 7% of the world’s arable land, China is looking abroad as it stares down some frightening food-supply pressures.

Unlike the last wave of Chinese agriculture investment abroad (in the 1990s, largely to Southeast Asia), Chinese companies are now flocking to southern Africa to buy up and develop fertile African farmland to grow food for export. By 2007, China had 63 agricultural investment projects in southern Africa, and last year, Beijing promised US$800 million to modernize Mozambique’s agricultural sector. Loro Horta wrote a good overview of the situation for the Jamestown Foundation earlier this year.

But what about Latin America? With some of the world’s richest agricultural regions in the Argentine Pampas, is China buying up farmland there as well? Apparently not.

Reuters published an interesting article last month about China’s noticeable non-interest in buying up Latin American farmland in the same way it has in Africa.

Land prices and mature farming markets in Brazil and Argentina, the engines of Latin America’s commercial farming, make investments in big production projects less of a bargain for China.

“China’s ideas about farm prices are very different from the reality in Argentina’s Pampas. They think they can buy good farmland for $1,000 per hectare.” said Ernesto Fernandez Taboada, executive director of the Argentine Chamber of Commerce for Southeast Asia.

The best Pampas land costs up to 10 times that much.

—

“They wanted to enter but couldn’t after they realized what kind of investment it would take to have their own local infrastructure and logistics to control production,” said Carlo Lovatelli, president of Brazil’s grain crushing association Abiove.

The complexity of local farm markets makes it difficult to guarantee that the products of Chinese investments in food here would make it efficiently to China’s ports.

“Today China is offering financing and access to cheap labor, neither of which Brazil especially needs,” said emerging market analysts Trusted Sources in a report.

Local growers are closely integrated with trading companies, which provide credit and inputs like seeds, agrochemicals and fuel. Producers, already carrying heavy debt loads, have little need for additional financing. They also have ample directed government credit.

In Africa, Chinese financing goes a lot farther. The Asian nation also has been allowed to deploy one of its competitive advantages in Africa – low-paid Chinese workers. Entrenched Latin American labor interests would not permit that.

Instead, China has bought Latin American agricultural products (especially Brazilian soybeans) directly. This is possible because soybeans are a major exception of the 95% food self-sufficiency policy described above. According to Reuters’ article, China buys 65% of the world’s seaborne soybean trade, making it the country’s number one import from Brazil.

So, while China may not be buying up Latin American agricultural land directly, Latin American is and will continue to play a major role in what ends up on Chinese dinner tables. Should China’s food self-sufficiency policy start causing hunger pangs (as it may already be doing) – and Beijing open up the country to more agricultural imports – look to the sprawling estancias of Brazil and Argentina to play a major role in becoming China’s “new rice bowl.”

The billion-dollar Chinese investments in Latin America are flying; I can barely keep up. Today, The Wall Street Journal reports (subscription needed) two state-owned Chinese oil companies – China National Petroleum Corp and China National Offshore Oil Corp (Cnooc) – have proposed paying at least US$17 billion for a majority stake in Argentina’s biggest oil company, YPF. The two Chinese firms want to buy an 84% stake in the Argentine unit from its beleaguered Spanish parent, Repsol YPF.

This is literally and figuratively a big deal. If successful, it would be China’s biggest-ever overseas investment. The current largest Chinese investment happened last year, when mining firm Chinalco, along with US-based Alcoa, bought a US$14.3 billion stake in Anglo-Australian firm Rio Tinto.

However, in June this year, Chinalco made moves to buy another US$19.5 billion in Rio Tinto, but the deal collapsed because of shareholder and political pressures. On the oil front, Cnooc bid US$18.5 billion for US oil firm Unocal back in 2005, a deal that was scuppered by US congress. There are plenty of other overseas Chinese investments that have gone a rye.

The central sticking point: When it comes to country’s strategic resources, how much Chinese ownership is too much? The answer varies by country, political climate and desperation of the seller. In Argentina’s case, Repsol YPF has been hit hard by the global slowdown and needs cash to pay off its US$14 billion debt. Argentina’s government does not own any of YPF but has the right to veto important transfers of ownership like this deal. If Buenos Aires decides that Chinese ownership would too greatly affect oil pricing and supply at home, the deal may be canned.

We’re a long way from knowing whether or not this deal will clear all its hurdles, but even if it does, is it a smart investment? Some question why China would go to Argentina to secure energy sources at all. From the WSJ’s Environmental Capital blog:

China is spending billions to gain access to energy resources around the world, from gas in the Middle East, gas and oil deals with Russia, offshore oil deals with Brazil, and more.

But the possible YPF deal is odd, because Argentina’s oil fields are old and tired. Repsol has seen production of both oil and gas fall every year recently, even as production costs have risen. As YPF noted in a securities filing:

“Argentina’s oil and gas fields are mature and our reserves and production are declining as reserves are depleted. In the last two years our proved reserves declined by approximately 20%, and we replaced 51% of our production with new proved reserves during 2007; average daily production in 2007 declined by approximately 4.1% from 2006. We are engaged in efforts to mitigate these declines by adding reserves through technological enhancements aimed at improving our recovery factors as well as through deepwater offshore exploration and development of tight gas. These efforts are subject to material risks and may prove unsuccessful due to risks inherent to the oil and gas industry.”

China and Venezuela signed a US$7.5 billion agreement yesterday that will include constructing a 468-km railway in the South American country. A Venezuelan official said the project, to be completed by 2012, will be the largest non-oil investment project in the history of the country. Reports of the deal cite Chinese newspaper Global Times as breaking the story, but I haven’t been able to track it at either the paper’s English or Chinese language site. New portal Sina has a Chinese language version here. Here are some details of the deal from a translation done at China News Wrap:

According to Russian news agency reports on 31 July, Venezuelan government officials stated in interviews with RN Television that the Tinaco-Anaco railroad would be 468 kilometres in length, and link together agricultural and oil-producing areas in two different states. The project is expected to be completed within 40 months. The railroad is designed for speeds of 220 kilometres per hour, and will carry 6 million passengers each year, and 10 million tonnes of goods.

Venezulan government officials said of Chinese investment in the railroad project that this is the largest investment project in the history of Venezuela outside of the petroleum industry. Venezuela and China will jointly create Latin America’s first railroad factory and railcar manufacturer. This will create 7500 jobs for Venezulans, and 100 Venezuelan engineers will be travelling to China for study.

I’m not sure if investing in a railway that connects oil-producing areas is entirely “outside the petroleum industry,” but this is still a significant development.

Other sources quote Venezuelan Public Works Minister Diosdado Cabello as saying the project will use “Venezuelan iron and Chinese technology,” to build train wagons, sleeper cars, switches and rail-welding equipment. Both countries will set up a series of joint ventures for the project, with Venezuela holding a 60% stake and state-owned China Railway Engineering Corporation holding the remaining.

As I mentioned last week, for all the press China-Latin American trade figures have gotten in recent months, China still lags far behind the US when it comes to investment dollars in Latin America – only US$22 billion by China firms in 2007, compared to US$350 billion by US firms. If this railway deal is a sign of things to come, it may not be long before China begins closing this gap as well.

Ever since China surpassed the US to become Brazil’s top trade partner earlier this year, the table has been set for a media-inspired heavyweight bout between the Asian country and the US for dominance in Latin America. Judging by the headlines, China is landing jabs and hooks left and right.* Take a McClatchy July 8th article, “China makes its move as the US falls back in Latin America,” for example:

China has moved aggressively to fill a vacuum left by the United States in recent years, as the U.S. focused on wars in Afghanistan and Iraq and the global economic crisis sapped its economy.

“China is rising while the U.S. is declining in Latin America,” Riordan Roett, a professor of international relations at Johns Hopkins University, said by telephone while visiting Sao Paulo. “China is all over this region. They are following a state-driven policy to expand their peaceful presence.”

It’s a fine and well-researched article, filled with good examples of China’s growing economic, political, military and cultural influence in a number of Latin American countries. In economic terms, China’s soaring trade numbers (largely reflecting Latin exports of raw commodities) over the past decade speak for themselves: US$10 billion in bilateral trade in 2000 compared to US$140 billion last year.

Ten-fold growth is stunning, but how does it compare to the champ? US-Latin American trade last year was US$560 billion, four times more than Sino-Latin trade. European-Latin American trade stood at US$280 billion, twice as much. In addition, with foreign investment in Latin America, China will not pass the US anytime soon. US companies invested US$350 billion in Latin America and the Caribbean in 2007, compared to only US$22 billion by Chinese firms.

These remaining gaps, coupled with the US’s still far-dominant technological and innovative advantages are why Miami Herald columnist Andres Oppenheimer cautions us: Don’t believe all the China-Latin America hype:

The latest figures showing that China is emerging from the global crisis sooner — and more vigorously — than anticipated is triggering speculation that China will soon overtake the United States as Latin America’s top business partner. Sounds very interesting, but don’t bet on it

…

Many economists say that’s not going to happen in their lifetimes. While China will continue to be a major Latin American economic partner, the latest trade figures have to be taken with a grain of salt because they are distorted by the sharp drop in U.S. imports due to America’s worst economic crisis since the 1930’s Depression, they say.

Oppenheimer gives a sprawling list of other reasons for US’s likely business dominance in Latin America for the forseeable future. Average incomes in China need 47 years to catch up with those in the US. Asia’s combined military budget will only equal the US’s in seven decades. American inventors filed 92,000 patents last year, while Chinese inventors issued only 1,225, a fact that presumably means the US will maintain tech-business advantages over China for a long while. China’s population is aging as well, which will negatively impact its economic prospects in the coming years.

I personally find it refreshing that Oppenheimer takes a slightly contrarian position on China’s Rise, but most of his arguments have little to do specifically with the country’s business prospects in Latin America. I also tend to shy away from arguments involving China needing x-amount of time to close any kind of economic or social gap; the country tends to beat projections.

Curiously, what I find to be the most compelling argument against China’s unbridled trade growth in Latin America is absent from Oppenheimer’s laundry list: China’s trade relationship with Latin America remains very one-dimensional (skewed toward commodities and natural resources) and thus vulnerable. China’s hunger for oil, iron ore, copper and soya is boundless now, but who’s to say which resources will be hot in ten years, and at what prices? The astonishing ten-fold trade growth from 2000 to 2008 coincided with a huge price increase in a number resources that were central to the trade relationship, and this will not always be the case going forward.

Regardless of who you have your money on, if the US and China are locked in for a title bout over Latin America, we’re only in round one.

*In some sense, this whole boxing metaphor is dumb, and I’m using it half-ironically. The two trade relationships are not mutually exclusive, and overall increased trade is good for everyone in a global economy.

Here’s an article from Fortune magazine published late last month on Chinese telecom suppliers making inroads in Latin America I’d meant to link to earlier. The gist: Chinese companies Huawei and ZTE are moving into the Latin American market following their success offering low-cost cell phones in Africa. Both companies have done very well in the latter continent – Huawei now has a 29% market share of the phone-company gear industry there, nipping at the heels of market leader Ericsson, with 30%. ZTE, an 11-year-old company, is now the world’s six-largest handset seller.

Indeed, on the streets of Lima, the cheapest cell phone model belongs to ZTE, which goes for about 80 soles (US$27) if memory serves. Like so many Chinese-made products, low-price usually translates to questionable quality. Buying my handset there, I remember the sales girl convincing me that I should spend the extra US$7 to buy the second-cheapest handset, a Nokia, which was much better quality, she assured me. It will be interesting to see how the company fares offering its up-market ZTE i766, which boasts mobile television.

The article discusses one major advantage that both Huawei and ZTE enjoy that other foreign telecom companies don’t: a well-connected, deep-pocketed government:

Huawei and ZTE benefit from the fact that the Chinese government holds stakes in dozens of local phone companies. It is not surprising that these telcos increasingly buy much of their infrastructure from homegrown companies. Financially, China’s telecom suppliers also benefit (like some struggling U.S. companies today) from tax rebates and R&D grants. But what really irks rivals are the government’s low- to no-interest “loans” that needn’t be repaid, and the deep discounts local companies get on the energy and raw materials they purchase from other Chinese companies. According to public filings, this year ZTE received a credit line from the government of nearly $15 billion. Beijing bestowed $10 billion on Huawei in 2004.

Chinese blue chips from different industries also offer “bundles” to emerging-market countries: Buy our phone gear and we’ll source your raw materials. “China coupled a Huawei, oil, and magnesium deal in an African package,” says James Mulvenon, author of a famous Rand report on Chinese defense electronics and technology. “Cisco can’t compete.”

Will we see similar telecom, oil and copper “bundles” between China and Latin America in the near future?

Image: unplggd.com

Last November, just before 2008’s APEC conference in Lima, Peru, China made news by releasing its first policy white paper describing its overall strategy for engagement with Latin American and the Caribbean. It’s a lengthy and far-ranging document, with sections devoted to political visits, trade cooperation and even sports exchanges. One finishes this document thinking: China’s top priority in Latin America may be procuring natural resources, but it has much more planned than that.

What about the reverse? Does, say, Brazil have an overall strategy for engaging with China? Has it been codified in its own white paper? Are Brazilian students flocking to Chinese language programs in Sao Paulo to gain a leg-up for the explosion of Chinese investment that’s to come over the next twenty years? The answers are all no. From Reuters:

China and Latin American specialists speaking at a conference in Sao Paulo said China sees Latin America as vital to its own future energy, food and economic security, but that the region had been slow to develop China policies.

“Latin America is acting toward China’s expansion in the world in a reactive, disorganized or ad hoc fashion,” said David Shambaugh, professor of political science at The George Washington University.

“When I asked Itamaraty (Brazil’s foreign ministry) about its strategy on China, I got blank stares. There is no strategy.”

Shambaugh, who is very well-respected on China-Latin American relations, has talked about Latin America’s unpreparedness for China before. Countries like Brazil and Argentina granted China market economy status years ago, which has created problems as Chinese manufactuers undercut local producers. “It’s almost as if these (countries) didn’t do their homework,” said Shambaugh. “The United States, Europe, Japan and Australia did not grant China market economy status.”

This alleged lack of strategy includes language. The article notes there are only two serious Chinese language studies programs in all of Latin America, one in Mexico City, the other in Buenos Aires. It is telling that in Latin America, the biggest development in Chinese language learning has come from China itself, in the form of its promoting Confucius Institutes abroad. These centers, which promote Chinese language learning and culture, are springing up throughout Latin America and the rest of the world. As of May, 328 institutes had been established, including a new one at Catolica University in Santiago, Chile.

I’ll add tourism to this list as well. Traveling in Peru, Chile and Argentina, I often asked tour operators about the prospect of Chinese tourists. Many of their eyes lit up at the prospect of a billion customers. Like many countries, Latin American countries are anticipating a wave of newly monied Chinese tourists to arrive in the coming years.

Yet, aside from some enterprising Chinese and Taiwanese businessmen I met in Lima, no one I spoke to was prepared to handle Chinese-speaking tour groups. Nearly no one in these tourism industries speak the language or understand the, um, unique demands of the Chinese tourist (hot water thermoses, slippers, casinos, shopping). It seems that when the tourism wave hits Latin America, it will be Chinese-owned (or ethnically Chinese-owned) tourism companies that will cash in.

So, how long will Latin American countries wait before they formulate their own China strategy?