The Chinese city of Harbin, whose grand boulevards and orthodox churches are a testament to the many Russians who made the city home after the revolution in 1917, has some selling points. Its Siberian climate, however, is not one of them particularly for seven visiting employees from the Brazilian airplane producer Embraer. The dreary weather adds insult to injury for the company officials, whose Harbin factory has basically been inactive since last April.
Embraers difficulties in China are hardly an exception. Although the eastern giant has become one of Latin Americas largest trading partners, with annual trade reaching $200 billion, many Latin American companies have tried but struggled mightily to gain a foothold there.
Some, like Argentinas IMPSA, have given up altogether. IMPSA, a producer of the large cranes used to load and unload shipping containers, opened offices in Hong Kong and Beijing in the 1980s. But it soon ran into trouble with its Chinese subcontractor, which launched a separate company, Shanghai Zhenhua Port Machinery (SZPM), and began competing with IMPSA.
They had large government subsidies. The Chinese government gave them a port, 10 boats and cheap money. It was practically impossible for us and the rest of the world to compete, recalls Sofía Pescarmona, IMPSAs vice president. Today, SZPM controls 70% of the global crane market, and sells a number of products in Latin America.
Asia is still an interesting market, but now we serve it from Malaysia, says Pescarmona. We are no longer interested in the internal Chinese market.
For Osvaldo Rosales, director of foreign trade at the UNs Economic Commission for Latin America and the Caribbean (ECLAC), the shift in economic relations presents a huge challenge for Latin American governments and companies. One possible strategy is to be passive. Let China drag us along, which is what we are doing, says Rosales. The other possibility is to participate in the Asian value chain, which is structured around China.
Putting that theory into practice is harder than it seems. Even the auspiciously named Brazilian bus manufacturer Marcopolo has failed, in China, to repeat the success it enjoyed in South Africa, Egypt and India. Our plant in China is the only one that doesnt produce buses. It only produces parts, says Rubens de la Rosa, CEO of Marcopolo. Why dont we have the same authorizations as the local manufacturers? Volume is a major competitive advantage and China, when it comes to volume, doesnt share.
Guanxi is not networking
Part of the problem is that China and Latin America have pursued very different industrialization models. Embraers case is a clear example. Embrear is a large company thanks to its strategy of buying the best systems and components for its planes, says Richard Abulafia, vice-president of Teal Group, a consulting firm specializing in the aerospace and defense industries. China, on the other hand, buys components and systems from whoever is willing to give up the technology, just like the Soviet Union did.
IMPSAs Pescarmona makes a similar argument. China wouldnt let us produce in their country unless we gave up the knowhow that we had painstakingly gathered over the course of more than 100 years. We preferred not to do that, she says.
People familiar with China say that cultural differences are another stumbling block for Latin American companies. The nuances of Chinese culture, needless to say, are not easy to master. In Latin America, people say not to mix friendship with business. But in Asia its totally different, says Julie Kim, director of the Asia-Pacific Center at Chiles Diego Portales University. That is a crucial difference that you have to understand in order to do business there.
In China, business depends on a tradition known as Guanxi, a network of connections and favors. The system precedes the Communist Party and bureaucracy, starting with family relationships. It grows as an individual goes to school and gains connections. Guanxi isnt networking as Latin Americans understand it, but rather an exchange of rights and obligations, a chain of favors.
A few Latin American firms have had success in China despite the cultural barriers to entry. Chiles Compañia Sudamericana de Vapores, whose former president managed to establish a relationship with the late Communist Party leader Deng Xiao Ping, managed to get a foot in the door in China. Another example is the Mexican bread company Bimbo, which bought a Spanish bread company that already had operations in China.
Those few companies that have had success in China tend to produce products there that will ultimately be sold in Latin America. To enter the market with manufactured products and services, on the other hand, has proven far more difficult.
Embraer is an interesting example. The Brazilian firm has lost ground in China to a rival Canadian company called Bombardier, which recently closed a deal with the Commercial Aircraft Corp. of China to provide planes of 100 to 149 seats. Embraer was barred from producing similar planes. Why? The answer may very well have to do with guanxi.
Embraers head of operations in China, Guan Dongyuan, has some guanxi. An engineer who studied at University of Sao Paolo and the China Europe International Business School, he previously represented the mining company Vale. But his counterpart with Bombardier, Jianwei Zhang, has even more. An engineer who graduated from the University of Tianjin, Zhang was a public administrator from 1975 to 1982. He then completed an MBA and a doctorate in administration at the University of Montreal before joining Bombardier.
Relationships are crucial in China, says Bombardiers CEO, Pierre Beaudoin, in a corporate video. For long term success, one has to be patient. And they have been patient: Bombardier has been doing business with China since the 1950s.
Visibility is another problem. Outside of Latin America, people dont know much about the region or its companies. According to Michael David, a senior consultant with the Boston Consulting Group in Beijing, the region would benefit from increased student and academic exchange with China, and more cultural products, like fashion and cuisine, in the country.
But that hasnt turned out to be easy either. Guatemalas Pollo Campero, the most international of Latin Americas fast food joints, failed in its attempt to break into China. In 2007 the fried chicken chain opened its first store in Shanghai. It planned to open 500 more restaurants in China within five years. Pollo Campero had reason to be optimistic based on its success in expanding throughout Latin America, into the United States and even in Indonesia and India. But after just two years, the company closed its original four Shanghai locations. Today, it doesnt have a single restaurant in China.
Thats bad news for Latin American industry as a whole. Unless the regions firms can change strategies and become more patient, the Latino model for trade with China will continue to be one that consists solely of commodity exports.
Read the full original story in Spanish
Photo - cornfed1975