Why Latin American Companies Can't Thrive In China

China is an eager customer when it comes to Latin America’s raw materials. But it has proven to be far more finicky when it comes to the region’s value-added goods. Even Pollo Campero, Guatemala’s far-reaching fried chicken chain, failed to gain a foothol

Guatemala's Pollo Campero, a fried chicken chain, had to shutter the four restaurants it opened in Shanghai (above)
Guatemala's Pollo Campero, a fried chicken chain, had to shutter the four restaurants it opened in Shanghai (above)
Carlos Tromben

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.

Embraer's difficulties in China are hardly an exception. Although the eastern giant has become one of Latin America's 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 Argentina's 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, IMPSA's 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 UN's 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 doesn't produce buses. It only produces parts," says Rubens de la Rosa, CEO of Marcopolo. "Why don't we have the same authorizations as the local manufacturers? Volume is a major competitive advantage and China, when it comes to volume, doesn't share."

‘Guanxi" is not ‘networking"

Part of the problem is that China and Latin America have pursued very different industrialization models. Embraer's 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."

IMPSA's Pescarmona makes a similar argument. "China wouldn't 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 it's totally different," says Julie Kim, director of the Asia-Pacific Center at Chile's 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 isn't 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. Chile's 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.

Embraer's 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 Bombardier's 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 don't 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 hasn't turned out to be easy either. Guatemala's Pollo Campero, the most international of Latin America's 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 doesn't have a single restaurant in China.

That's bad news for Latin American industry as a whole. Unless the region's 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

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Air Next: How A Crypto Scam Collapsed On A Single Spelling Mistake

It is today a proven fraud, nailed by the French stock market watchdog: Air Next resorted to a full range of dubious practices to raise money but the simplest of errors exposed the scam and limited the damage to investors.

Sky is the crypto limit

Laurence Boisseau

PARIS — Air Next promised to use blockchain technology to revolutionize passenger transport. Should we have read something into its name? In fact, the company was talking a lot of hot air from the start. Air Next turned out to be a scam, with a fake website, false identities, fake criminal records, counterfeited bank certificates, aggressive marketing … real crooks. Thirty-five employees recruited over the summer ranked among its victims, not to mention the few investors who put money in the business.

Maud (not her real name) had always dreamed of working in a start-up. In July, she spotted an ad on Linkedin and was interviewed by videoconference — hardly unusual in the era of COVID and teleworking. She was hired very quickly and signed a permanent work contract. She resigned from her old job, happy to get started on a new adventure.

Others like Maud fell for the bait. At least ten senior managers, coming from major airlines, airports, large French and American corporations, a former police officer … all firmly believed in this project. Some quit their jobs to join; some French expats even made their way back to France.

Share capital of one billion 

The story began last February, when Air Next registered with the Paris Commercial Court. The new company stated it was developing an application that would allow the purchase of airline tickets by using cryptocurrency, at unbeatable prices and with an automatic guarantee in case of cancellation or delay, via a "smart contract" system (a computer protocol that facilitates, verifies and oversees the handling of a contract).

The firm declared a share capital of one billion euros, with offices under construction at 50, Avenue des Champs Elysées, and a president, Philippe Vincent ... which was probably a usurped identity.

Last summer, Air Next started recruiting. The company also wanted to raise money to have the assets on hand to allow passenger compensation. It organized a fundraiser using an ICO, or "Initial Coin Offering", via the issuance of digital tokens, transacted in cryptocurrencies through the blockchain.

While nothing obliged him to do so, the company owner went as far as setting up a file with the AMF, France's stock market regulator which oversees this type of transaction. Seeking the market regulator stamp is optional, but when issued, it gives guarantees to those buying tokens.

screenshot of the typo that revealed the Air Next scam

The infamous typo that brought the Air Next scam down

compta online

Raising Initial Coin Offering 

Then, on Sept. 30, the AMF issued an alert, by way of a press release, on the risks of fraud associated with the ICO, as it suspected some documents to be forgeries. A few hours before that, Air Next had just brought forward by several days the date of its tokens pre-sale.

For employees of the new company, it was a brutal wake-up call. They quickly understood that they had been duped, that they'd bet on the proverbial house of cards. On the investor side, the CEO didn't get beyond an initial fundraising of 150,000 euros. He was hoping to raise millions, but despite his failure, he didn't lose confidence. Challenged by one of his employees on Telegram, he admitted that "many documents provided were false", that "an error cost the life of this project."

What was the "error" he was referring to? A typo in the name of the would-be bank backing the startup. A very small one, at the bottom of the page of the false bank certificate, where the name "Edmond de Rothschild" is misspelled "Edemond".

Finding culprits 

Before the AMF's public alert, websites specializing in crypto-assets had already noted certain inconsistencies. The company had declared a share capital of 1 billion euros, which is an enormous amount. Air Next's CEO also boasted about having discovered bitcoin at a time when only a few geeks knew about cryptocurrency.

Employees and investors filed a complaint. Failing to find the general manager, Julien Leclerc — which might also be a fake name — they started looking for other culprits. They believe that if the Paris Commercial Court hadn't registered the company, no one would have been defrauded.

Beyond the handful of victims, this case is a plea for the implementation of more secure procedures, in an increasingly digital world, particularly following the pandemic. The much touted ICO market is itself a victim, and may find it hard to recover.

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