What Chinese companies plan for Latin America

China's foreign direct investment outflows grew 8.5% year-on-year in Q1, with investments in Belt & Road Initiative (BRI) countries accounting for 20% of the total, or more than US$5.3bn.

Chinese firms invested over US$120bn in Latin America over the last decade, according to Daniel Lau, lead partner of KPMG's China Desk in Brazil and South America.

Brazil, in particular, has benefitted from the trend, receiving US$5.9bn in investments last year, compared to US$1.9bn in 2020, according to the China-Brazil business council (CEBC). A total of 28 projects and acquisitions made by Chinese companies were mapped by CEBC in Brazil in 2021.

Lau talks to BNamericas about what to expect from China’s future investments in the region.

BNamericas: What would you highlight as relevant in this massive series of investments by Chinese companies in the region?

Lau: In the last 10 years, more than US$120bn has been invested in Latin America. Brazil, as the largest market in Latin America, grabbed two thirds of this, just over 60% of this total. We’re therefore talking about around US$75bn in investments in the last 10 years for Brazil.

Looking ahead, the new cycle of the Belt & Road Initiative will tend to increase investments in Latin America as a whole.

If we had this conversation a decade ago, I would say that they were looking more at Brazil, Mexico, maybe Argentina, which are the biggest economies. But today, Chinese companies and their executives already have a more comprehensive view of the opportunities and risks, where the best opportunities and initiatives are for their investments.

About 15 years ago, moreover, the focus was much more on specific market opportunities, for the acquisition of a cheap company. The conversations were usually about how much the company would cost and the dollar exchange rate at that time. Today that has changed. Today they want projects, M&As of small, medium-sized and large companies. The main thing is the [prospected] company's solidity, if it offers low risk, if that company is capable of generating cash the day after the acquisition.

BNamericas: And what are the prospects for the coming years?

Lau: The outlook for growth in the coming years is strong. This year, in the post-pandemic period, I’ve continued to talk to Chinese companies and they have a lot of projects in the pipeline. Some are waiting for the political issue [to settle down]. 

This year we’ll have elections not only in Brazil, but also in China. China will also choose its president this year.

But all in all, everything contributes to good momentum, in this post-pandemic period, for projects in Brazil and Latin America, especially in the area of energy and renewables.

BNamericas: Is there more caution due to the elections?

Lau: I’d say that this is just one of the issues to consider in the analysis. This year and in the past, many investments have taken place and continue to take place. The investments in energy, for example, involve very large sums and comprise long-term projects.

It’s worth mentioning that different departments of Chinese companies are looking at opportunities all over the world. Brazil was dominant and had no major competitors in Latin America 10 years ago, and the Chinese understanding was more limited about opportunities in other countries. Today it’s different.

We already have a lot of investments in other Latin American countries. Puerto de Chancay [in Peru] is being built [by Chinese companies] and is now in its second year. It’s a very large investment of US$4bn. We haven’t yet seen [Chinese] investments of this size in the port sector in Brazil.

On the other hand, we see other investments taking place in other areas. Last year in Brazil, an investment of 10bn reais [US$1.93bn] was announced over the next 10 years in [carmaker] Great Wall Motors.

These investments aren’t decided overnight. They have a maturation time. There are at least six months of discussions before entering a “funnel” within the top management of Chinese companies, when they assess the issue of risk, return, whether there will be funding, equity capital, whether capital will be raised on the market. 

I’d say that the main factor that prevented most Chinese investments in Latin America was the pandemic, locally and worldwide, for several reasons.

BNamericas: Which ones?

Lau: One of them, perhaps the main one, was the mobility of professionals. 

Chinese companies in general still have this profile of liking going to the site, watching, observing, talking to local, state, federal authorities, etc. And there are usually several delegations involved in this process.

The greater the volume of investment, the more departments are involved. The pandemic stopped this mobility of Chinese executives.

BNamericas: In other words, the elections aren’t as important an issue as the pandemic has been?

Lau: Exactly.

Many of these [Chinese] companies don’t operate in just one sector. There’s a Chinese group which already operates in the infrastructure area in Brazil and with whom I spoke last month, who told me that they will continue to invest in infrastructure in the country, but that they’d also look into renewable energy. In these talks, they asked us to present new projects in the energy area.

When we look at the Chinese company, we need to look at it not just how it operates today, because that may only represent a piece of what that company is really about.

Other companies we've talked to recently have expressed a lot of interest in the digital, innovation, startup ecosystem. They want to have a greater presence in the Brazilian market in these segments.

BNamericas: What are these companies targeting in technology specifically?

Lau: When we talk about technology, that can be information technology, greentech, biotechnology, nanotechnology, next-generation software.

But, overall, everything that involves technology is part – it's one of the cores, one of the pillars – of China's current five-year strategic plan.

They’re seeking both in-house software development and acquisitions of companies abroad. Latin America, Brazil, can benefit in two ways. If we have a technological solution that addresses the needs of the Chinese population or if companies here have solid projects that deserve capitalization.

The big Chinese hubs and cities look at opportunities and at big startups that are being created and cultivated around the world and try to bring that expertise into China.

[At the same time] we’ve seen many Brazilian startups standing out, becoming really innovative in the last three or four years above all, and with that several are being attracted to China.

You have to take technological development to China. China needs it. Who’ll do it? The Chinese government won’t, companies will. And when, for various reasons, this isn’t being addressed and developed in China, they start looking abroad.

An important issue right now is same-day or next-day delivery of products in e-commerce. A lot of companies are doing it there, they have a lot of capital and they can make acquisitions to gain mass. And they’re also able to bring this knowhow to the region.

BNamericas: In this sense, are they more focused on logtechs [logistics and supply chain technology startups] or on large retailers in the region?

Lau: I’d say at first the logtechs. There’s some interest directly in retailers, but it's not the main focus of Chinese companies for now.

BNamericas: Chinese companies, with a few exceptions, such as Didi, which acquired urban mobility operations in Latin America, have generally been very shy about investing in the regional startup, software sector. The same goes for telecom services. In the recent past, there was a lot of talk that China Mobile or China Telecom would enter the region. Nothing happened. Why is that?

Lau: There are several factors. One is that the Chinese market is very big, very important, and Chinese companies make a lot of money in their local market.

On the other hand, and we've seen this recently, when the local government tightens regulation on Chinese digital companies, all these companies that have a lot of cash, a lot of access to capital, start looking overseas more.

And when we consider the global geopolitical scenario, Latin America has a lot to benefit from this process.

The logistics sector, logtechs I would say, is one in which we’re tending to see more investments from Chinese technology companies in Brazil. And it’s interesting because this usually leads to a cascade effect.

When the first Chinese development bank arrived in the region, other competing Chinese banks followed later, ICBC, CCB, etc. This also happened with energy companies. And this movement should now take place more in the technology sector as well.

BNamericas: Who will be leading that?

Lau: We already have the logistics operation of the Alibaba group in Brazil, AliExpress. Their logistics arm has grown a lot in Brazil, and that’s attracted other Chinese companies.

Alibaba has also made investments in several Brazilian startups. Tencent also made investments in Brazilian startups .... These giants coming to Brazil begin to attract their competitors who are in China and that we don’t even know about. We've heard a lot about B.A.T, Baidu, Alibaba and Tencent, but there are other companies that could come this way.

BNamericas: Have you been talking to them? Are there other companies already looking at this market?

Lau: Yes, we have. There are a handful of companies looking at the market.

BNamericas: Last year Tencent announced a datacenter in Brazil for its cloud services. Should movement in this sector intensify as well?

Lau: I'm not a datacenter industry expert, but Tencent, Baidu and Alibaba itself, among others, generate a lot of user data in China. But they’ve been looking to expand their presence in other markets and they’re doing that, so it’s natural to see an interest and greater need for storing and processing this data, using different technologies, such as artificial intelligence, big data, BI in general.

These three players undoubtedly have a very large capacity to store, analyze and capitalize on this data to generate more revenues, to be more profitable.

The scale issue is interesting when we look at this and as such Brazil is a country that can stand out a lot in this regard, because the size of the Brazilian market, with more than 210mn people, is appealing to Chinese technology companies that have been dealing domestically with a large consumer base to replicate their model here.

BNamericas: In telecom infra, China has a giant in this sector, which is Huawei, a company that’s been in the region for more than 20 years. What can we expect for Huawei in Latin America in the coming years?

Lau: Huawei is a company with a lot of energy and intellectual capital. Despite the restrictions that some western governments imposed on them, they’ve managed to turn that around and they’ve been looking for new clients, new sectors of activity, to expand their business. 

I think we should expect greater diversification of Huawei's lines of business.

BNamericas: Huawei is doubling down in the solar energy segment in Latin America ...

Lau: They are. In the case of Huawei, its activity in this segment is mainly in the area of [solar] inverters. Huawei is one of the largest companies in the segment of inverters for solar energy in China.

And they want to take this knowhow, expand this sector, to other countries around the world where there’s is great potential for growth in solar. That’s where Brazil appears on the radar again.

There are other companies, obviously, that work with [solar] inverters. But in the case of these Chinese firms, there’s a certain complementarity in the ecosystem. Huawei manufactures the solar inverter, BYD produces solar panels in Brazil. BYD also has a battery plant.

At the last Intersolar [solar energy summit], in São Paulo, I counted more than 15 Chinese companies showcasing their solutions. They’re not as big as Huawei or BYD, but they’re getting started in Brazil. There are others that haven’t arrived yet but will arrive in Brazil.

Solar energy is going to be a big and growing market for Chinese companies.