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Chinese companies in Latin America have experienced significant challenges, the author points out. Here Shougang Hierro in Peru, which has suffered from frequent labor unrest. (Photo: Shougang Hierro)
Wednesday, June 18, 2014
Perspectives

Latin America: Challenges for China Firms

Challenges for Chinese companies operating on the ground in Latin America.

BY R. EVAN ELLIS

This article analyzes the new presence of Chinese companies operating in Latin America and the Caribbean, and the obstacles that they face in both establishing and maintaining their presence there.  It analyzes challenges to firm entry, and operational challenges in five areas :  Extractive industries, Agriculture, Construction, Manufacturing, and special service industries.  It finds that the dynamics of Chinese firms, and the associated challenges differ by type of activity, but are collectively impacting the economic and social dynamics of the countries involved, as well as creating challenges for the Chinese government in managing its relationship with the region.

Introduction.  Since 2009, the expansion of commerce between the People’s Republic of China and Latin America and the Caribbean has entered a new stage, characterized by much greater integration between the activities of commercial firms in the two regions, and a much more significant presence of Chinese companies operating in the region. 

The new physical presence of Chinese companies in Latin America and the Caribbean is accompanied by significant challenges, both for those companies and the Chinese government which supports them, as well as implications for the political and sociological dynamics of the region.

Many authors have documented the growth in commercial engagement between the P.R.C. and Latin America and the Caribbean, and its impact on the region (See, for example, Rosales and Kuwayama, 2012; Gallagher and Porzecanski, 2010; Blázquez-Lidoy, et. al., 2006; Devlin, et. al., 2006), and some have documented the growing presence of Chinese companies (See, for example, Ellis, 2014), yet to date, no author has made a systematic, comparative analysis of the challenges experienced by Chinese companies as they expand their physical presence in the region.  This paper is an initial effort to do so.

Methodology.  The counting of the activities of Chinese companies in Latin America and the Caribbean, and characterization of their associated difficulties presents numerous methodological challenges.  There are no reliable figures regarding the number of Chinese projects in the region and their status.  Organizations such as the Heritage Foundation (The Heritage Foundation China Global Investment Tracker, 2014), the China-Brazil Business Council (CBBC Data and Statistics, 2014), and private firms such as HSBC have made estimates of Chinese investments, but each have serious limitations, with respect to the scope and completeness of the data, the status of the projects identified, and the systematic identification of challenges faced by the companies involved.

There are no consistent criteria within companies, the media, or governments when announcing a project.  In some cases, the threshold is that a visiting group of investors announces to the media that they are “interested in” a project.  In other cases, a Memorandum of Understanding, and sometimes even a contract, has been signed.  But clearly, not all “projects” have equal status when they enter the public domain through an “announcement” in the media.  Nor is the actual commencement or completion of a project reliably reported.  Nor do the prospective investors always announce when talks have become stalled, or the investor has changed priorities to focus on other possibilities.

Charactering difficulties associated with projects is similarly complicated.  Public acts, such as strikes, demonstrations and major crimes against Chinese companies sometimes appear in the media, yet the incidents that are covered are not a random sample, but rather, are arguably biased in favor of sites that are most media accessible, countries where media liberties are greatest, and reporter and media owner judgment regarding what is newsworthy.

Because of such limitations, the makes a qualitative, rather than quantitative examination of patterns in the difficulties confronted by Chinese companies as they seek to establish a physical presence in the region.

The cases used are based on research done for the forthcoming book, China Companies on the Ground in Latin America (Ellis, 2014).  While the work has not identified every major Chinese project in the region, it one of the most exhaustive list publicly available which also contains data on problems associated with those cases.

For the present work, the physical presence of Chinese firms in Latin America and the Caribbean is divided into five types of economic activities: (1) Extractive (principally mining and petroleum), (2) Agriculture (including forestry and fishing), (3) Construction, (4) Manufacturing and Retail, and (5) Technology and Services (including Telecommunications, Banking, and Logistics).

Cutting across these five areas, the difficulties experienced by the Chinese are divided into two categories: (A) “Entry obstacles” inhibiting the establishment of a desired presence in the region by Chinese companies, and (B) day-to-day operational challenges.  Entry level obstacles include resistance to mergers and acquisitions, winning public bids, and securing approvals of proposed projects.  Operational challenges include difficulties in dealing with local labor forces and contractors, relations with governments authorities and local communities after the project is underway, resistance from environmentalists, indigenous groups and other affected parties to an established project, plus crime and security challenges to such projects.

Extractive Sector.  By comparison to sectors such as manufacturing and retail, there are generally fewer projects per country in the extractive sector, albeit spread across a broader array of countries. 

The book identified 40 current or contemplated projects in the mining sector.

Most Chinese activity in this sector has involved mergers and acquisitions, accelerating in 2009 with a series of high profile deals including the $3.1 billion acquisition of Argentina’s Bridas by CNOOC, Sinochem’s May 2010 $3.1 billion acquisition of the Peregrino oil field in Brazil, Sinopec’s October 2010 $7.1 billion acquisition of a 40 percent stake in Repsol Brasil and its subsequent $2.45 billion purchase of Occidental Petroleum Argentina in December.

Chinese companies also gradually began to compete for new concessions—first, in countries such as Venezuela, where they enjoyed close relationships with regimes willing to provide access through government-to-government agreements, and later in markets where they had to compete in public procurements, of which the October 2011 the auction of Brazil’s Libra oil block, 2011 in which the Chinese companies CNPC and Sinopec each won 10 percent stakes, is the best known example.

Within the primary products sector, the Chinese had several high-profile difficulty with initial market entry, including the blocking of the 2004 attempt by China Minmetals Corporation to acquire the Canadian minerals company Noranda.  Several deals were also stymied by difficulties with shareholders, the most significant of which was the failure of CNPC’s attempt to acquire Pan American Energy in a deal valued at $7.1 billion.  Nonetheless, CNOOC’s successful 2013 acquisition of the Canadian oil company Nexen, with holdings in Colombia and Peru showed that there was is absolute obstacle to large acquisitions by the Chinese of petroleum companies with assets in the Americas.

With respect to government approval of petroleum and mining projects, the Chinese have experienced several high profile difficulties, including national protests and a march by indigenous groups in Ecuador in June 2012 against the planned Mirador open-pit mine in Zamora-Chinchipe. Similarly, the Rio Blanco mining project near Piura, Peru, was successfully blocked by local residents over environmental and other concerns (El Comercio, 2011).

Yet Chinese companies have also had a number of important, if qualified successes.  These include the Toromocho project, whose commencement required China Aluminum Corporation (Chinalco) to successfully relocate an entire town of 5,000 people, although the project was later delayed for environmental reasons.

The most significant problems for Chinese companies in the extractive sector have arguably occurred after the projects have gotten underway.  In November 2006, in Tarapoa, Ecuador, radical protesters overran an oilfield operated by the Chinese consortium Andes Petroleum, shut down part of the field, and held it workers hostage for a number of days (El Universo, 2006).  In 2012, in Potosi, Bolivia, protesters similarly took over the Chinese-operated Colquiri mine (Los Tiempos, 2012).  In Argentina, in 2010, the Sierra Grande mine was forced to shut down due to disputes involving access to water and other issues (La Nación, 2010).

Many disputes with local communities involve those employed by the project.  Perhaps the longest-standing example is the mine in Marcona, Peru operated by the Chinese company Shougang (Salazar, 2010; Ellis, 2014).

A related common grievance is unfulfilled expectations regarding the number and types of jobs for local residents.  Over 35 people died in Orellana Ecuador in 2008 in violence that began with protests against the Chinese company Petroriental for not hiring the desired number of people from the local community (El Universo, 2007).

Ongoing Chinese petroleum and mining projects have also confronted resistance over the impact of the mine on the environment and surrounding community.  In Puebla Mexico, in November 2012, protesters overran and temporarily ejected the Chinese workforce from the site to bring attention to their charge that the mine was contaminating their community.  In March 2013, the previously mentioned Toromocho mine, was forced to temporarily shut down because of acidic runoff from its operations contaminating the local water supply (El Comercío, 2014)

Finally, the remote areas in which Chinese extractive industry projects frequently occur have made them vulnerable to crime and violence.  Over 18 months from 2010 to 2011, the Chinese-owned company Emerald Energy was victimized by over two dozen attacks against its operations in Caquetá, Colombia, by guerillas from the Fuerzas Armadas Revolucionarios de Colombia (FARC), including the kidnapping of three Chinese employees (El Tiempo, 2011). 

Agriculture Sector.  Although not widely known, the majority of successful Chinese agricultural advances to date have occurred in the fishing and timber sectors.  In fishing, China Fisheries Group has been engaged in a decade-long acquisition of fishing fleets and processing facilities in Peru, with the biggest being the $783 million acquisition of Copeinca in June 2013.  In timber, Sinolumber, operating through the local entity China Greenheart Group, has acquired large timber holdings in Suriname, while Bai Shan Lin has done so in Guyana.  Outside of these sectors, the few projects to successfully go forward include a sugar project in Jamaica, and a soybean processing facility in Brazil.

In 2011, Chinese agricultural companies announced interest in a number of large projects in the southern cone.  Of these, only two major initiatives went forward: (1) a $1.5 billion agroindustrial complex in Rio Negro, Argentina by the Chinese company Beidahuang Nongken, which collapsed after the faction of Miguel Saiz, the governor who had supported the project, lost power in the provincial election, and (2) a soybean processing facility by Chonquing Grain in Bahia, Brazil, which was only a small piece of the $2.4 billion project initially contemplated, and went forward  only with significant delays (MacauHub, 2011).

Indeed, in parallel with signs of interest by Chinese in such agricultural projects, Brazil, Argentina, and Uruguay have tightened laws and administrative restrictions against acquisition of land by foreigners, often with the Chinese in mind (Rebossio, 2011; Agencias Populares de Noticia Suramericanas, 2012; Ellis, 2014).

Beyond the southern cone, Chinese investors were also blocked in an attempt to secure government approval for a 40,000 hectare palm oil plantation in Marowijne, Suriname, when the afro-Surinamese political leader Ronnie Brunswijk made it a national political issue, rallying his supporters around fears that the investors would bring in thousands of Chinese workers.

The small number of Chinese projects which have gone forward have experienced modest difficulties, but generally not to the point of paralyzing operations, as has occurred in the extractive sector.  Following Complant’s acquisition of a sugar mill from the Jamaican government, the new Chinese-owned company, Pan-Caribbean Sugar suffered poor relations with the local sugar cane growers, leading it to replace the plant’s Chinese manager.

In Guyana, the company Bai Shan Lin was sanctioned by the government for improperly using a concession to extract the mineral laterite to build a road on its timberland, and was also targeted by opposition political activists for a proposed parliamentary investigation of foreign timber holdings in the country.

Construction.   Chinese construction projects have proliferated in the region, principally in the ALBA countries, and in the small states of the Caribbean, each of which have lacked access to sufficient capital from traditional Western lenders.  In recent years, however, Chinese companies have also made headway in some Andean countries such as Colombia and Peru, and in Central America, including not only Costa Rica, but also countries which do not recognize the P.R.C., including Honduras, Guatemala, and Belize.  Chinese construction companies have generally been less successful in larger countries with good access to capital, rigid systems of public procurement, and entrenched competitors. 

The amount and nature of difficulties that Chinese firms have encountered has also been a function of the type of project.  Prior to the “diplomatic truce” between the P.R.C. and Taiwan in 2008, projects given as “gifts,” such as stadiums, roads, and clinics, played a more significant role. 

Although projects paid for by loans from Chinese banks dominates the category, “gifts” of Chinese construction project played an important role prior to the 2008 “diplomatic truce” between the P.R.C. and the R.O.C.  In addition, in recent years, Chinese investors, backed by Chinese banks, have begun to make equity investments in the region, principally in Caribbean resort complexes, such as the Baha Mar and Blackwood Pointe resorts in the Bahamas, Bacholet Bay in Grenada, and the now defunct Punta Perla project in the Dominican Republic.  Each different type of Chinese construction project faces a different mix of obstacles.

Because loan-based projects involve governments assuming obligations to repay the Chinese, such projects have understandably faced a greater amount of scrutiny within the host nation.  In Guyana, a change in the political balance of power following the 2011 elections allowed the opposition coalition to block state funding for a $138 million project to modernize the Cheddi Jagan International Airport, contracted by the Guyanese government to the Chinese company China Harbour, and separately led Sythe Global, the integrator for the $840 million Amaila Falls hydroelectric facility, to abandon the project, to the detriment of the Chinese contractor who was to done the work (Stabroek News, 2013b).

Two recurrent themes in opposition to Chinese construction projects are (1) corruption, and (2) that the Chinese will employ excessive numbers of their own people.  A contract between the government of the Cayman Islands and China Harbour to build a shipping terminal was blocked by the British government, which oversees the island administration, on charges of impropriety (Cayman Net News, 2012).  Similarly, the disbarment of China Communications Construction Corporation (CCCC) from contracts with the World Bank over charges of corruption, led to attempts to block its subsidiary China Harbor, Inc. from contracts in Guyana (Stabroek News, 2012) and Costa Rica (Ruiz, 2013), among others.  

Chinese firms have generally not faced serious difficulties with the approval construction projects in the ALBA countries, whose leaders are who negotiate and sign such deals.  Nonetheless, in Ecuador, in 2009, disagreements between the Chinese and the Ecuadorian government during negotiations over the Coca Coda Sinclair hydroelectric facility led to strong public statements by Ecuadoran president Rafael Correa and suspension of talks for four months.

Beyond the Caribbean and ALBA, Chinese bids for construction projects have encountered significant difficulties associated with both the public procurement process, and associated negotiations.

In Brazil, one of the first and only major Chinese infrastructure projects in the country, construction of the Gasene Pipeline, almost didn’t happen because China Export-Import Bank, who was financing most of the project, could not agree with its Brazilian counterpart, BANDES, regarding the percentage of Brazilian vice Chinese companies to be used.  The project was saved when the Chinese prime contractor, Sinopec brought in China Development Bank, which had greater flexibility in contracting Brazilian companies (Ellis, 2014).

In the Colombian department of Antioquia, the company China Harbour was reportedly positioned to win the Hydroituango hydroelectric project, but lost out when the agency managing it, Empresas Publicas, decided not to go forward with the public contract for the project.

Once approved, as in the extractive sector, Chinese construction projects have generated controversy over both the number of local workers hired, and their treatment. 

With respect to projects done as gifts, the fact that the Chinese were paying the bill appeared to generate more acceptance of the use of Chinese companies and laborers, although in the Bahamas there was controversy over the amount paid by the government for site preparation work for a “donated” stadium (Nassau Guardian, 2012), and in Costa Rica, businessmen complained that workers and equipment used by the Chinese company AFECC to build the donated national stadium were improperly used on private projects as well (Nación, 2010).

The increase in projects paid for by host governments through loans after 2008, brought with it expectations that the Chinese would employ local laborers and subcontractors.  Demonstrations in September 2010 against China Harbor engineering’s Palisadoes Road project in Jamaica (Matthews, 2010), as well as against a hotel project by the Shanghai Construction Group in Georgetown, Guyana (Stabroek News, 2013a), both focused on the failure to hire a sufficient number of local workers. 

Protests also have focused on the treatment of workers and subcontractors, including disputes over not receiving bonuses on a Jamaica road project (Balford, 2012), as well as the Toachi-Pilaton hydroelectric project in Ecuador (El Universo, 2013).

As in the extractive industries, groups have also protested Chinese projects over alleged environmental damage and the impact on local communities.

In June 2013 the Ecuadoran water authority, Senagua, revoked the concession for a dam project in Chone from the Chinese firm Tiejsu, after prolonged difficulties in dealing with local residents (Business News Americas, 2013).  In Honduras, Sinohydro had to suspend work on a dam project because of threats from landowners who were being displaced and argued that they had not received proper compensation (La Prensa, 2013).  Protests have also stopped work on the Belo Monte dam in Brazil (Huffington Post, 2011), although in that case, the Chinese firm involved, State Grid, was only a subcontractor.

As in the extractive industries, Chinese construction projects have also been adversely impacted by criminal activity including work in Venezuela by China Railway Road, which in November 2012 had its entire payroll in Chaguaramas robbed by armed bandits (El Universal, 2012).

Manufacturing and Retail.  Chinese expansion into the manufacturing and retail sector in Latin America and the Caribbean has both different characteristics, and follows a different dynamic from its investment in other sectors.  While there have been some projects in Venezuela and Colombia, the majority of such projects have occurred in Brazil and Mexico (Ellis, 2014).  Moreover, such projects typically rely heavily on the local partner, which provides access to the local market through its sales and distribution network.

With respect to challenges to market entry, the principal disputes have centered on negotiating the terms of investments in local factories, with the Chinese investor seeking sufficient relief from import and other taxes to justify the investment.

A number of such disputes have occurred in Brazil, including auto manufacturers JAC and Chery, who threatened to cancel investments in the country because Brazil’s tax policies made them non-viable (Correio, 2012).  Similarly, in Mexico, the Chinese company First Auto Works (FAW) won the right to import cars into the country duty free while pursuant to building a factory in the country, but later abandoned plans for the factory, ceding its duty-free imports in the process (CNNExpansión, 2010).

Beyond factories, the Chinese have also, with considerable resistance, secured approval for a large, integrated wholesale-retail complex called Dragon Mart, near Cancun Mexico.  Public objections to the project concentrated the displacement of Mexican products by Chinese imports and the number of Chinese workers to be brought in (Wilkinson, 2013), yet it was opposition to the site permit on environmental grounds that came closest to stopping the project (El Informador, 2013).

Chinese companies in the manufacturing sector have also faced difficulties after their establishment, yet because of the strong role of the local partner, in the limited number of cases to date, such problems have not been out of the ordinary for manufacturing operations in general.  An example is strikes against the Chinese-owned Effa motors plant in Montevideo, Uruguay (Primera Hora, 2011), and difficulties, due to tariff barriers, in penetrating neighboring Argentine and Brazilian market (AutoBlog, 2011).

Technology and Services.  Chinese technology and service sector activities in Latin America and the Caribbean are a relatively diverse set of cases.   The Chinese telecommunications presence in the region is dominated by two companies; Huawei, and ZTE.  As with Chinese companies in the region’s manufacturing and retail sector, Huawei and ZTE have been relatively successful in putting a “local face” on the Chinese presence with respect to sales, service, and line management.  Yet by contrast to Chinese companies in manufacturing and retail, they have done so with much less help from local partners.

In the banking sector, most of the major Chinese institutions have sought to establish a presence in the region, yet each have pursued different strategies in different countries with distinct associated difficulties.  ICBC and China Construction Bank (CCB) have sought to “buy” existing branch banking networks in the region (with ICBC acquiring Standard Bank, and CCB seeking to acquire the Brazilian firm BicBanco).  Other firms have sought to build branch banking networks from the bottom-up, including Bank of China in Brazil.

The Chinese presence in the logistics sector of Latin America has principally involved one port services company, Hutchison-Whampoa, which significantly expanded operations in the region in the early 2000s to including the much publicized award of concessions to operate the ports of Cristobal and Balboa in Panama, but also including four ports in Mexico, an operation in Buenos Aires, a major hub port in Freeport, the Bahamas, and for a time, the port of Manta in Ecuador.  Hutchison’s counterpart in aviation has had more limited success, operating six regional airports in north-central Colombia under the name China Airport Holdings.  In addition, shipping companies COSCO and China Shipping, and various Chinese airlines have established service to the region.

By contrast to Chinese difficulties with market entry in other sectors, telecommunications companies Huawei and ZTE have successfully won contracts and incrementally expanded their operations in the region, although there have been some problems, such as when, in August 2013, the Costa Rican telecommunications authority Instituto Costarricense de Electricidad (ICE) suspended a $40 million contract to Huawei, finding that it colluded to exclude its competitors from the bid (Agüero, 2013).

In the banking sector, the only successful Chinese foray into branch banking, to date, has been the ICBC acquisition of Standard Bank in Argentina, yet the deal was delayed for more than a year by the Argentine government over differences regarding management of the institution. Industry experts expect that the acquisition of BicBanco by CCB, currently under review, will experience similar obstacles.

In the logistics sector, Hutchison Whampoa has encountered substantial obstacles in winning and retaining port concessions.  Although it was not adversely impacted by the concern in the U.S. surrounding the award to operate the ports of Cristobal and Balboa, in 2008, the Panamanian government quietly excluded it from a proposed new megaport “Farfan,” because of concerns within that awarding Hutchison the project would give it too powerful of a position in the Caribbean.

In Ecuador, in 2009, Hutchison was forced to withdraw from its concession for the port of Manta, after becoming caught up in a dispute with the Ecuadoran government over the legal terms of its operation of the port and the schedule of investment (El Universo, 2009).

With respect to challenges to ongoing operations, the number of publicly reported issues confronted by the Chinese in technology and services appears to be less severe than those faced in the extractive and construction sectors.  Nonetheless, minor challenges persist, including, for Chinese telecommunications companies, the integration of Chinese managerial and technical personnel with local sales and service staff in the countries in which they have established representative offices.

With respect to security problems, the few publicly-reported major incidents involving Chinese firms have occurred in the logistics sector.  The port of Lázaro Cardenas, in Mexico, for example, operated by Hutchison Port Holdings, had reportedly come so thoroughly under the domination of the criminal syndicate Los Caballeros Templarios, that in November 2013, the Mexican Navy intervened to take control of the port (Fausset, 2013).

Conclusions.  The present study should be regarded as a preliminary inquiry, which raises as many questions about the difficulties encountered by Chinese companies in Latin America and the Caribbean as it provides answers. 

A broader, and more rigorous quantitative analysis is needed, to determine whether the nature and frequency of difficulties experienced by the Chinese is higher than that for other firms, as well as whether those rates are changing over time, and if so, why.  Further analysis might also examine how such difficulties correlate with political and cultural attributes and perceptions of the Chinese in different parts of the region.

Such future work non-withstanding, and however imprecise the counting and characterization of cases, the present study establishes the important fact that Chinese companies in Latin America and the Caribbean have experienced significant challenges in almost every sector in which they have sought to set up operations, from the extractive industries to agriculture to construction to manufacturing and retail, to technology and non-construction services, both at the market entry stage, and in the conduct of operations.  This paper thus challenges the myth that Chinese companies are advancing in an unimpeded fashion across the region.  It also illustrates how the new physical presence of Chinese companies on the ground in the region has introduced an important new political and social dynamic into the region, and has created new imperatives for the Chinese government to exercise its growing influence to support its companies and personnel, as well as to more effectively manage the tensions that such activities may cause, and the adverse effects of such tensions on the Chinese government’s efforts to strengthen political ties and show the “win-win” nature of its activities in Latin America and the Caribbean.

R. Evan Ellis is associate professor with the William J. Perry Center for Hemispheric Defense Studies at the National Defense University. He wrote this report for Latinvex.


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