Author: Miguel Perez Ludeña, UN Secretariat
China became the third-largest investor in Latin America in 2010 — behind the US and the Netherlands — while the Economic Commission for Latin America and the Caribbean estimated that Chinese foreign direct investment (FDI) reached US$15 billion for the year. Ninety per cent of this was in extractive industries.
Chinese FDI may have been somewhat smaller in 2011, but the presence of Chinese companies in the region continues to grow: Sinopec in Brazil and Sinochem in Argentina have both carried out numerous acquisitions, and other corporations have favoured greenfield projects such as the copper mining operations of Chinalco and Minmetals in Peru or the Chery automotive plant in Brazil.
Chinese investment in Latin America has become a hot topic in the last couple of years, yet Chinese companies have been in the region since the early 1990s. The China National Petroleum Company — originally the Chinese Ministry of Petroleum — signed extraction deals with governments and state-owned corporations in Peru in 1994, Venezuela in 1998 and Ecuador in 2003. Outward Chinese FDI has taken the shape of government-to-government deals in many countries, and especially in the extractive industries, where all large Chinese corporations are state owned. This was the preferred approach in 2006, when Minmetals signed a deal with the largest copper producer in the world, the Chilean state-owned mining company CODELCO. In exchange for US$500 million, CODELCO agreed to sell 55.75 tons of copper over 15 years at a fixed price and granted the option of acquiring 49 per cent of Mina Gaby, a mining project in northern Chile. The first part of the deal is still in force today, and has proved particularly lucrative for Minmetals since 2006, when the price of copper rose significantly. But the joint venture option was derailed by trade-union opposition in Chile around the same time, and was finally cancelled without any compensation to Minmetals.
Chinese companies are not the only ones to suffer setbacks in acquisitions, but they have a higher percentage of failure (at 11 per cent) than, for example, US or UK firms (2 per cent and 1 per cent, respectively). Chinese takeovers face stronger opposition for many reasons, and it is often remarked that the main cause of failure is that almost all Chinese multinationals are state owned. In the US this has raised concerns about national security, for example in relation to Huawei’s operations, a non-state owned company but allegedly state-controlled. For their part, Latin American commentators have criticised the lack of transparency and accountability in negotiations surrounding company acquisitions.
A great deal of direct investment in the region still takes place through government-to-government deals, especially in the smaller economies of Central America and the Caribbean. But since 2006 Chinese multinationals have generally favoured direct takeovers of private companies and joint ventures with other multinationals as their preferred mode of entry into Latin American economies. For example, while in Peru Chinese companies have bought junior mining companies and started building mines, Chinese oil companies operating in Brazil have partnered with the Spanish Repsol and the Norwegian Statoil.
Some of the Chinese companies which have entered Latin American markets in this way have taken a back-seat position in their subsidiaries. Such is the case of Wuhan Steel, for example, which has a minority stake in the Brazilian miner MMX. Other companies are managing their operations more directly. This has confronted Chinese companies with another problem: handling their relations with communities affected by the company’s operations. This is especially problematic in relation to large oil and mining projects. Coming from a country where the government takes direct responsibility for any externalities caused by their operations, Chinese companies have faced difficulties in adapting to an environment in which civil society demands compensation from companies — although the track record of Chinese firms operating in Peru’s mining industry shows there has been consistent progress since the early 1990s.
Many Latin American businesses also complain that investment opportunities are not reciprocal, and that it is hard for foreign companies to make direct investments in China. Unlike many manufacturing companies from Europe, Japan or the US (which have been investing in China for decades), most ‘multilatinas’ operate in natural resource and services sectors that are practically closed to FDI in China.
But despite complaints from social activists and communities on the one hand, and Latin American corporations on the other, Mina Gaby remains the only major setback to confront Chinese multinationals in Latin America. Governments may have taken measures to restrict Chinese investment in agriculture, but these are not intended to discourage investment altogether. There are no reliable figures for the amount invested by Chinese companies in Latin American agribusiness, but the perception that Chinese companies (again, mostly state owned) were acquiring large amounts of land led the Brazilian government to pass legislation limiting this practice in 2010, with Argentina and Uruguay following suit in 2011. These restrictions do not represent a ban on Chinese investment in agriculture, but they will force the Chinese to enter into partnerships with local companies or reach agreements that will not involve land ownership, such as contract farming. In the next few years Chinese companies will learn to become more transparent in their procedures and to rely more on local management and less on imported labour.
Multinational corporations from Europe and the US have learnt over time to conduct business successfully in Latin America and other regions. Chinese corporations are increasingly adapting their strategies to cope with their international expansion, but further changes will be needed. A generational change in management will no doubt help to bring about this change; as younger, more worldly executives reach decision-making positions in Chinese companies, we can expect a change for good in their business practices.
Miguel Perez Ludeña is an economist at the United Nations Secretariat, currently focused on foreign direct investment and corporate strategies in Latin America and the Caribbean.