Chinese Investment in Brazil: An Overview of Shifting Trends
By Tania O'Conor
September 9, 2013
Over the past decade, the Brazilian economy has benefited immensely from the positive terms-of-trade shock driven in the last decade by China’s accession in the global economy. China’s appetite for commodities (e.g., iron ore, oil, soybeans, and meat products) resulted in an accumulated trade surplus for Brazil of approximately $23.3 billion from 2007 to 2012. Nevertheless, while trade grew quasi-exponentially, foreign direct investment (FDI) flows remained minimal over the past decade despite China’s government driven outward FDI push. This picture reversed dramatically in 2010 when Brazil received an unprecedented surge of $13.09 billion in Chinese FDI, according to a recent report by the China-Brazil Business Council (CBBC). Since then, sustained levels of Chinese investment across a range of sectors from natural resources to manufacturing to services have introduced an important dimension to the bilateral relationship.
In 2010, Chinese FDI in Brazil was concentrated in extractive industries and dominated by state owned enterprises (SOEs) eager to secure critical natural resources. While the speed and scale of these investments were unprecedented, the focus on resources was to be expected. Lacking sufficient domestic reserves of critical commodities and facing increasingly volatile prices, China’s SOEs have been investing in resource-rich countries around the world since the early 2000s. It was only in 2010 that six of China’s national champions including Sinopec, Sinochem and Wuhan Iron and Steel Group entered Brazil with the aim to expand and facilitate commodity exports.
In addition, the financial turmoil in the West has created the opportunity for several Chinese SOEs to acquire strategic assets from mature but financially distressed European multinational enterprises (MNEs) with operations or assets in Brazil. For example, in 2010, Sinopec acquired a 40 percent share in the Brazilian arm of Spanish oil-and-gas company Repsol for $7.1 billion, while Sinochem purchased a 40 percent share in the Brazilian operations of Norwegian company Statoil for $3.07 billion.
Increased Chinese demand for food products has also motivated a handful of companies to announce investments in Brazil’s agricultural sector, including a few large-scale infrastructure projects. Most notably, in 2010 Chongqing Grain Group announced a $300 million investment for the construction of an industrial soy complex in northeast Brazil. While these announcements have incited fears of Chinese land grabs, most of the projects have yet to materialize.
Changing target industries
Since 2011, natural resource-seeking projects have been largely replaced by market-seeking investments in Brazil’s industrial and service sectors. This shift can be explained by a variety of factors. Uncertainty over new government regulations, including a new mining code that imposes stricter regulations and a recent interpretation of a land-purchasing law restricting foreign land acquisition, has deterred natural resource-seeking investment from Chinese SOEs.
On the other hand, Brazil’s large and expanding middle class, relatively well-developed industrial base and proximity to fast-growing markets has made it an attractive target for multinational companies aiming to establish themselves in Latin America. As a result, between 2011 and 2012, Chinese investments were primarily driven by the desire to take advantage of Brazil’s growing consumer base and market dynamism, as well as to establish an export platform for supplying manufactured goods and services to the rest of Latin America.
This trend is evident in Brazil’s automotive industry, where over a dozen Chinese auto companies have announced greenfield investments since 2010. With the entrance of Geely in 2013, China surpassed the USA and Japan as the country with the largest number of car brands in the Brazilian market. In addition, Chinese companies have also invested heavily in Brazil’s machinery and equipment, telecommunications and electronics sectors. In the past two years, Chinese personal-computer manufacturer Lenovo has expanded aggressively into the country, establishing four factories to produce computers, tablets, smartphones, and televisions. In January 2013, Lenovo also acquired local electronics brand CCE for approximately $146.5 million. Taiwanese manufacturer Foxconn Technology has also established four factories in Brazil and is in negotiations for the construction of a fifth plant for the production of touch screens, tablets, smartphones and other electronic devices. Chinese equipment manufacturers including Sany Heavy Industry, Xuzhou Machinery Group and Zooliom have also announced greenfield investments for the production of machinery and equipment for the construction sector in Brazil. High logistical and transportation costs between China and Latin America plus rising taxes and labor costs in China serve as additional incentives for manufacturing companies to shift their production base in order to maintain competitivity.
A more recent wave of Chinese FDI has targeted Brazil’s service industry. Three out of China’s four largest banks (i.e., Bank of China, Industrial and Commercial Bank of China, and China Construction Bank) have established operations in São Paulo to support bilateral trade and facilitate the entry of Chinese firms into the country. More recently, Brazil’s growing online population has also attracted the interest of Chinese Internet giant Baidu, which launched a Portuguese-language version of its Hao123 directory website and is reported to be searching for an office in São Paulo.
In the future, China’s urbanization and gradual transition to a consumption-based economy will mean increased demand for critical food products including soybeans and meat, creating new opportunities for investment in Brazil’s agricultural sector. In order to produce commodities in Brazil, Chinese companies must learn to work with local partners and navigate the legal and environmental regulatory systems. Opportunities exist for investment in other points along the value chain and most importantly in infrastructure that will facilitate and diminish the overall cost of transportation. Recently, Brazil’s Congress approved legislation that will open government-controlled ports to private investment and lift restrictions on the building of private ports, creating new opportunities for Chinese manufacturing and service companies.
The discovery of Brazil’s pre-salt oil deposits may also yield Chinese investment in the exploration, development and production of these fields, as well as in the provision of oilfield services and equipment. In addition, China’s national oil companies could benefit from developing deepwater drilling techniques from Petrobras, a global leader in the field. This coming October, Brazil’s National Petroleum Agency will hold its first offshore lease sale in pre-salt areas and is looking to attract China’s national oil companies.
Tania O’Conor is a co-author of the China-Brazil Business Council’s report entitled, Chinese Investments in Brazil from 2007-2012: A Review of Recent Trends. The China-Brazil Business Council will be partnering with the Dialogue on an upcoming China-Brazil energy conference