China: The Superpower Shaping Latin American Business

Companies doing business in Latin America and the Caribbean need to keep another nation on their radar as they shape their strategy and operations: China. This giant on the other side of the world is funding massive infrastructure projects, grabbing market share across industries online and off, influencing global supply chains, and driving the boom for commodities like the lithium powering the world’s electric vehicle revolution, to name just a few examples of its influence.

What does this all mean for investment, competition, distribution, and market growth?

Answers to this question are complex and highly specific to each individual business; however, a good place to start the journey is with an understanding of overall trends and the landscape. In August 2021, we detailed why China is the evolving superpower every global business should watch. A Latin America-focused update follows for 2022, outlining overall trends and context, highlighting impact in a few key industries, and spotlighting four countries: Argentina, Chile, Colombia, and Brazil.

An Evolving Relationship of Trade and Investment   

In the world of international business, a lot can happen in a relatively short amount of time, as the shifting dynamics in U.S., Chinese and Latin American trade demonstrate. From 2010 to 2021, the volume of trade between China and Latin American countries more than doubled, from $180 billion to $450 billion, and this figure is projected to reach $700 billion by 2035. “Outside of Mexico, the top U.S. trade partner, China has overtaken the United States in Latin America and widened the gap last year,” Reuters reported in June.

China has made itself invaluable to the region in many ways. As just one example, the nation’s early recovery from COVID-19’s first wave and relatively strong economy made it an avid buyer of commodities such as Chilean copper, Brazilian soy and beef, Ecuadoran shrimp, and Salvadoran sugar. Today, Chinese companies have made their presence known across sectors, from 5G to biotech, ridesharing to ecommerce, and beyond.

As Latin American goods flow across the Pacific to China, the nation has sent a steady stream of investment financing in the opposite direction. The mechanisms for lending have changed, moving from loans to governments to private financing through state-owned commercial banks, with loans devoted to projects with a Chinese component such as a Chinese firm working in partnership with a local company. Yet the projects and their goals remain ambitious, including a megaport on the Peruvian coast being brought to life by state-owned Cosco Shipping.

“The Chancay port is a prime example of how China seeks to secure, from end to end, the supply chains that underpin its economic growth and its aspirations to upgrade its economy,” Margaret Myers, director of the Asia & Latin America Program at the Inter-American Dialogue in Washington, told the Christian Science Monitor.

Farther north, there have been reports of a proposed deep water port and manufacturing zone in El Salvador by a state-owned Chinese firm called “Shared Opportunities, Shared Future.” In Panama, Chinese companies are engaged in or bidding for several projects related to the Panama Canal: water management, a logistics park, and a global strategic chokepoint, including port operations on both ends of the canal. Indeed, the 2022-2024 Action Plan for the China-Community of Latin American and Caribbean States (CELAC) calls for “the construction of infrastructure in multiple domains,” as well as engagement across a broad range of economic sectors and a deepened presence in strategic technology areas.

What could dampen this multifaceted investment and influence in the months ahead? As COVID-19 outbreaks, prolonged shutdowns, and continued stress on the real estate sector sharply slowed China’s projections for economic growth. Meanwhile, ongoing global developments such as the war in Ukraine, supply chain disruptions, and economic headwinds are sure to impact the landscape in some shape or form. “For many countries, recession will be hard to avoid,” World Bank President David Malpass said in a press release June 7

Industry Highlights

How have macrotrends been playing out across specific industry sectors? A few examples follow.

Retail and ecommerce get complicated: In previous blog posts, we’ve talked about Latin America’s smartphone-centric young shoppers and China’s leadership in ecommerce and a digitally enhanced, pandemic-defying retail experience. It seems like the ideal pairing, and for some time it was. Latin America became the world’s second-largest ecommerce market, with 52 million consumers shopping online for the first time during the pandemic. In earlier blogs, we’ve discussed how Brazil, Argentina and Mexico are among the top five countries globally with the highest levels of ecommerce growth and how stay-at-home conditions during COVID-19 connected nearly 1 in 8 Brazilian homes to shopping via WhatsApp, and turned more than half of Colombian households into continued digital shoppers, with 12% saying they would shop more online in the future.

Chinese companies recognized the opportunity, with technology giant Alibaba partnering with Mexico’s OpenPay, exploring expansion in Colombia, Brazil and Argentina, and leveraging charter flights by Cainiao Smart Logistics Network and Atlas Air to trim delivery times for shipments to the region.

Then came the tech crackdown: with the State Administration for Market Regulation levying a record $2.8 billion fine on Alibaba and the crackdown overall wiping more than $1 trillion off the collective market capitalization of China’s largest internet groups.

Could this free up more market share for home-grown ecommerce platforms like Casa Bahia and Americanas in Brazil and Mercado Libre across the region? It depends on the platform and the region. In March 2022, members of the Brazilian business community wrote a joint letter to the Attorney General’s Office accusing e-commerce companies like Mercado Livre (Mercado Libre’s Brazil branch), as well as the Asian companies AliExpress, Shopee and Shein, of unfair and predatory competition. And Nanjing-based fast-fashion brand Shein has been establishing a powerful foothold in the region. The company has tailored its offerings to the Mexican market with payment vouchers and installment plans and is eying further regional expansion.

In terms of the smartphones used to conduct these transactions, Chinese companies also have been gaining traction, including brands like ZTE, Huawei, Oppo, Vivo and Xiaomi, which ranks at the top of sales in Peru and Colombia.

“The next challenge (for Chinese brands) will be to penetrate protectionist markets—such as Brazil and Argentina—to continue expanding in the region,” Damian Leyva-Cortes, the Latin America region manager and senior mobility analyst at market analysis firm Canalys, told China Daily.

Manufacturing shifts open up LATAM opportunities: In August 2021, we talked about how China was the world’s manufacturing center, especially for TVs, computers, handsets, and electronics, with specialized production capacities, co-location of key suppliers, economies of scale, and the nation’s sheer size and capacity giving it a difficult-to-shake competitive position.

But a year is a long time in terms of global supply chain developments, particularly in today’s volatile world. Surges of COVID-19 led to manufacturing shutdowns from Shanghai to Shenzen, spurring many global companies to rethink their operations with an eye toward Mexico.  In March 2022, a representative for the maquiladora industry trade group INDEX noted an “unbelievable” amount of interest among firms wanting to return their operations from China back to Mexico.

Meanwhile, public policy developments are aiming to expand and codify these trends. In the United States Congress, April 28 marked the bipartisan introduction of the “Western Hemisphere Nearshoring Act,” which would direct revenue from tariffs on Chinese goods to efforts to incentivize companies to relocate from China to Latin America. Nearshoring has also been the focus of international discussions. An April meeting by the Annenberg Foundation and Wilson Center convened officials from 13 Latin American and Caribbean countries, five US government agencies, two multilateral development banks, and seven private sector companies on the subject.

A mixed forecast in energy: China’s investment in the Latin American energy sector may be undergoing similar changes in fortune. In our August 2021 article, we noted how M&A deals in Latin America’s energy sector represented 25% of total Chinese deals worldwide in 2020—and also how China’s two biggest policy banks issued no new loans to the region for the first time in 15 years.

“Could Mexico’s signature infrastructure projects fail?” BNAmericas asked about projects including the Dos Bocas refinery project we cited. Meanwhile in renewables, Bloomberg reported in January that “President Andres Manuel Lopez Obrador’s proposal to give control of Mexico’s electricity market to the state utility has scared away would-be green-energy investors at a rapid pace,” according to the country’s wind and solar associations.

Meanwhile, the State Grid Corporation of China’s $3 billion bid to take control of Compañía General de Electricidad SA in Chile came to fruition. “The acquisition marks one of the largest Chinese investments in Chile, as well as State Grid’s second-largest overseas investment since the establishment of its international business,” according to M&A law firm Paul, Weiss, which advised the transaction. “State Grid now owns two of the largest electricity distributors in Chile and serves approximately 45% of the domestic market via its acquisition of CGE, combined with its June 2020 acquisition of Chilquinta Energía S.A.”

Chinese lenders finance renewable energy projects that facilitate the development of low-carbon energy sources, in alignment with China’s energy policy. They also help Chinese enterprises export energy products and services to Latin America and elsewhere: photovoltaic equipment, wind turbines, geothermal plants, and advanced low-carbon technologies, as well as the lithium-ion batteries powering the world’s shift to electric vehicles.

Symbiotic partnerships for sustainability and profit: China has been playing an active role in Argentina’s lithium production as well. In February 2022, Zijin Mining Group Co Ltd announced that its local subsidiary Liex will invest $380 million to build a 20,000-ton lithium carbonate plant located in the Tres Quebradas project. This investment follows on Zijin’s 2020 purchase of Neo Lithium Corp, the Canadian company which operates Tres Quebradas, and is one of many Chinese investments in the Lithium Triangle.

In June, Ultra Lithium of Canada announced an agreement with China’s Zangge Mining Investment for exploration and development of the Laguna Verde Brine Lithium project in Argentina’s Catamarca Province. The deal includes Zangge taking a 65% stake in Ultra Argentina, the subsidiary which holds the Laguna Verde property, Mining Journal reported, adding that Zangge produces 10,000 tons of lithium carbonate each year at its facility in Golmud.

China’s Ganfeng Lithium is the majority stakeholder in Argentina’s Cauchari-Olaroz operation, set to begin production by mid-2022. China’s Tianqi Lithium became the second-largest shareholder in SQM, Chile’s largest lithium mining company.

Argentina is the world’s fourth-leading lithium producer with lithium reserves surpassed only by Chile and Australia and lithium resources second only to Bolivia. Lower operating costs due to extraction from salt flats rather than hard rock deposits, plus a willingness to cede state control, give the nation key competitive advantages—advantages it can leverage even more through Chinese partnership.

“Just days after Argentinian President Alberto Fernandez signed his country up for China’s Belt and Road Initiative during a high-profile trip to Beijing this month, the spot price of lithium metal in the Chinese market reached 2 million yuan (US$315,000) per tonne for the first time – more than four times what it cost a year ago,” the South China Morning Post reported in May.

Sustainability and environmental impact: In tandem with heightened regulatory and investor interest in ESG worldwide, Latin American nations have prioritized environmental defense and factored it into business and political decisions. For example, April marked the ratification of the Escazú Agreement, the first regional environmental agreement in Latin America and the Caribbean. Concurrently, nations like Colombia have sharpened their focus on environmental issues like deforestation.

“The only way to avoid deforestation is with state presence everywhere. And to achieve this, you need an investment of millions of dollars.” Manuel Rodriguez Becerra, Colombia’s first environment minister, told Diálogo Chino. “Mobilising the military, the police, providing public goods such as health, education, generating employment. It is something very complex and costly, which Colombia is not in a position to do, and even less so in the situation that the pandemic is leaving us in.”

How will China factor into the sustainability plans of Latin American nations? Global businesses should keep an eye on these developments in the months, and years, ahead.

Regional Spotlights

What does China’s influence and impact look like on a national level? Highlights follow from four Latin American countries with different investment landscapes, trade drivers, and developments shaping the future.

Argentina: Chino-Argentine relations have evolved significantly since the turn of the century, when telecom giant Huawei began operations in the nation. In the current decade, Argentina bought hundreds of millions of doses of Chinese-produced COVID-19 vaccines, signed on the Belt and Road Initiative, and saw China surpass Brazil as its largest trading partner.

Today, Chinese organizations are involved in Argentina’s communications, education, and economy. Huawei supplies hardware to Argentina’s three top telecoms, is selling smart cities technology, and will likely provide the nation’s 5G infrastructure. An expanding network of Confucius Institutes—a joint effort with China’s Jinan University, the Chinese Embassy in Argentina, and Argentine universities—offer courses in Chinese language and culture. In terms of trade, Beijing exports a wide array of Chinese goods and services and imports Argentinean items ranging from soy to minerals.

In the mining sector, lithium represents just one facet of China and Argentina working together to get valuable resources out of the ground. Shandong Gold owns 50% of Veladero, Argentina’s largest gold and silver mine. Hanag, which operates four lithium projects in Chubut, acquired gold-focused Ochre Mining in La Rioja, and Tres Quebradas investor Zijin reportedly has plans to expand its focus to gold and copper.

Underlying all of this activity is an increasing amount of Chinese-funded infrastructure. In February 2022, Modern Diplomacy reported Chinese funding for 11 projects including railways, dams, solar power, and nuclear power plants as well as financing for the $4.7 billion Santa Cruz Hydroelectric Project and Cauchari, one of South America’s largest solar farm projects.

Since the late 1990s, and especially in recent years, Argentina has had ambitious goals for reducing its reliance on fossil fuels and increasing its capacity for renewable energy, as a December 2021 article by the Carnegie Endowment explained. Yet renewable projects have been hindered by the nation’s high indebtedness, limited access to foreign finance, export controls, and investors’ difficulty getting the necessary guarantees for renewable energy investments.

Enter a mutually beneficial partnership with China. “Argentinian government officials and business leaders have attracted Chinese investment and finance into renewables and other types of energy to promote Buenos Aires’s goals of taking a hybrid path to an energy transition,” the Carnegie Endowment article explained. “For its part, China has seized this opportunity to advance its own development goals and to participate in Argentina’s energy transition strategy.”

Both nations have been actively deepening cooperation in 2022, from China’s reported invitation that Argentina attend the next BRICS summit to a meeting between Chinese President Xi Jinping and Argentine President Alberto Fernandez in Beijing. Discussion topics included infrastructure, hydropower and railway projects, green and sustainable development, and the digital economy, with China agreeing to provide Argentina with more than $23.7 billion in financing, reported. Minus $14 billion already approved for infrastructure projects, the remainder will fund the Belt and Road Initiative (BRI).

“Analysts believe joining the BRI could attract more Chinese investment in sectors such as alternative energy and national and regional projects such as financing for railways and roads for intra-country and inter-country connection,” Modern Diplomacy reports.

During the past year, Argentina also joined Chile and Peru in joining the China-led Asian Infrastructure Investment Bank (AIIB). Boston University’s Global Policy Development Center anticipates that investment and finance packages for new BRI and AIIB members are likely this year and next, with Argentina and China already signing a Memorandum of Understanding for $23 billion in financing.

Chile: “Chinese investment has arrived in Chile later than other countries, and it continues to grow,” InvestChile Director Andres Rodriguez told Al Jazeera. In some sectors, this growth has been spectacular. China now accounts for nearly 38% of Chile’s fresh fruit exports, for example, and public works investments by Chinese firms include one portfolio with $14 billion earmarked for 2020-2024.

Will this trade and investment relationship continue to grow at such a breakneck pace? Chile has actively courted Chinese partnership in many ways, from the Chilean Blueberry Committee’s campaign to make “blue pops” the snack of choice in Chinese movie theaters to the Chilean Health Ministry’s embrace of a Sinovac manufacturing plant in Santiago. But concerns have been growing as well, particularly as Chinese companies play a substantial role in services like 5G mobile connectivity, bank operations, and electricity distribution. In December, after StateGrid purchased two electric companies, gaining 60% of the distribution market, a group of Chilean congressional representatives called for stricter regulations on foreign investment.

This is one of many developments potentially recasting China-Chile relations. In telecom, the Humboldt project, a proposal to lay submarine telecommunication tables from Chile to New Zealand, originally garnered interest from Huawei. After U.S. pressure on Chile’s government, the contract ultimately went to NEC, a Japanese corporation. As for investment in the booming mining sector, economists in Chile and other nations have begun discussing tax reform as a way to cover the government’s costs of increased management and supervision.

But one of the biggest variables in the equation is new President Gabriel Boric. As Boric conducted an interview with the New Yorker, “The Chinese Embassy had hand-delivered a letter from Xi Jinping, in which he courteously reminded Boric that the People’s Republic of China was Chile’s biggest trading partner.” As China’s battery and cell phone manufacturers depend on Chile’s stores of copper and lithium, and as Boric seeks to act upon his campaign promises of a national health care system, government subsidized pensions, and poverty alleviation, it will be interesting to see how relations and the policy landscape evolves.

Colombia: “We are a country whose economy is based on coal and oil, and we need to diversify,” Colombia’s former environment minister Manuel Rodriguez Becerra declared. “To do this, we need investment in science and technology, we need to innovate.” Becerra went on to tell Diálogo Chino that Chinese investment in Colombia is “not yet significant”, but that agriculture could provide an “interesting” opportunity.

Agtech is only one area where outside investment could yield long-term dividends. Due to factors like landslides and long-running armed conflict, Colombia’s roads lag in both quality and quantity compared to those of fellow Pacific Alliance members such as Chile, Mexico, and Peru. This impacts Colombia’s competitiveness as an exporter.

China has had a growing economic presence in Colombia, with Chinese goods and services now making up a quarter of Colombia’s imports and more than $6 billion in investment committed to projects like building public transit in Bogota. China has also invested in Colombia’s ambitious 4G infrastructure plan, with construction of the Mar 2 highway one of Latin America’s first public-private partnerships with a Chinese sponsor.

According to America’s Quarterly, the country now faces a turning point, to “further strengthen its ties with the U.S., or continue advancing its rapid pace of trade and investment integration with China?” Colombia will be making this decision with new leadership at the helm: Gustavo Petro.

Petro’s plans include improved public services, halts on new oil and gas exploration contracts, and smart tariffs to protect Colombian agricultural production. As in Chile under new leadership, it will be interesting to see how China factors into this vision, and how these developments will impact business in the nation and across the region.

Brazil: As the largest country in South America, Brazil has a lot to offer China and a lot to gain from the relationship as well. Brazil is the world’s largest beef exporter, for example, and China is its largest market for the product. Sales spiked during the COVID-19 pandemic, and even when China banned Brazilian beef in September 2021, shipments that month were the highest monthly total on record. JBS, the Brazilian meat giant, sees long-term Chinese demand as key to its profits, helping to offset low domestic demand for beef due to high unemployment and a struggling economy.

This symbiotic relationship extends to technology and innovation. In January 2022, China’s Great Wall Motor announced a decade-long, $1.8 billion investment in building electric cars in Brazil, at a factory formerly owned by Daimler. With this investment, Brazil gains highly skilled technical jobs and a stronger foothold in the booming EV market, and Great Wall gets closer to its ambition of boosting its sales from 1.28 million in 2021 to four million in 2025.

Such strong mutual dependence between nations can have its disadvantages. Brazil is one of China’s largest mineral suppliers, with iron ore accounting for 9% of Brazil’s 2020 exports to the Asian country overall. Brazil’s Vale, one of the largest mining companies in the world, collaborates with China entities on ventures from ports to app-based spot trading platforms. China’s slower economic growth “will have a very negative impact on Vale and other mining companies in Brazil,” Rio de Janeiro State University Professor Maurício Santoro told Díalogo Chino.  One development ahead will undoubtedly shape the future in both countries across industry sectors: Brazil’s presidential elections in October.

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