Chinese businesses have gone international in spectacular way. First to Asia, then Africa and now, most recently, they are moving in awesomely great numbers into Latin America. China’s newest frontier is the land of Spanish, Portuguese, meringue and salsa.
Latin American natural resource deals are surging. And there have been some great successes – as well as some high profile failures. Both cases hold important lessons.
Earlier this month, I spoke about this with Eric Bethel, founder of SinoLatin Capital and one of Shanghai’s rising stars. An ex-Morgan Stanley and ChinaVest deal maker, fluent in English, Spanish, Portuguese and Mandarin (almost), he and his teams in China and Latin America have become the undisputed experts on China-Latin America deals.
And, unsurprisingly, he’s got fascinating stories.
Such as how foreign businesses get into trouble in Ecuador because they often don’t realise they need to check to make sure their purchased mine isn’t in a drug-trafficking corridor (drug lords are known to hire protestors to picket sites). Or how most Peruvians have no idea that their traditional Peruvian corner restaurants, named chifas, are actually descendants of Chinese restaurants (chifa is from “chi fan”). Or how California-based environmental groups have become very effective at shutting down Chinese projects in places like Brazil. And so on. Eric has become the guy every Chinese company wants on their team when heading to Latin America.
My main question for him was what are the key early lessons for Chinese deal-makers in Latin America.
Lesson #1: Don’t underestimate the complexity of the local environment.
Business in Latin America is very different than in China. People stop work at 5pm. They don’t work 24/7. They have lots of religious holidays. Environmental groups from the West can derail your project. Local mayors can hold you up. Do you know what could cause thousands of local indigenous Indians to come out and block the roads to your mines?
When Chinese companies run into such problems, they too often conclude that Latin America is just too difficult a place to do business in. It’s really not. It’s just different and it takes time to understand the local environment.
He cites Chinalco’s recent +$700M investment in the Peruvian Toromocho project as a deal where everything was done just right. They constructed a smart deal. They are building infrastructure. They are dealing well with community issues and local indigenous groups. They are doing it all right.
Lesson #2: Don’t move too slowly relative to Japanese and Western competitors
Resource deals in Latin America are competitive and Japanese and Western firms tend to be faster. They have also been operating internationally for decades so they are still a bit more comfortable investing across the world. These things do make a difference when you are fighting for a competitive project. When Chinese companies lose deals, its often because they act too slowly or they try to be overly clever in the deal structure.
Lesson #3: Use Advisors
Too many Chinese companies go to Latin America and think they can do it on their own. This rarely works. It can take months to get visas. The long flights and time differences slow discussions. Similar to Westerners learning the hard way that flying into say Hunan to do deals themselves wasn’t very successful, many Chinese companies have learned the hard way that you need advisor and partner networks to enter Latin America successfully.
Lesson #4: Don’t overestimate how much politics can help you
It’s natural for Chinese companies to reach out through government officials to companies or government officials in Latin America. It works well in China. It works well in Africa. But it doesn’t work very well in Latin America. Most Latin America officials have little actual authority in the private sector, where most all the deals are. Being introduced by an ambassador is a starting point but rarely enough.
Lesson #5: Build your bridges before you need them
Latinos operate similar to Chinese. Business is based on trust as much as contracts. And trust develops over time. Flying into Brazil and trying to do a deal quickly with people you don’t really know is unlikely to succeed. You need to build your relationships over time, and its better to do this before you actually need them. It’s just like in China (but there’s less emphasis on KTV).
For China, the Latin America frontier is still just beginning. When Latin American executives arrive in China to discuss deals, it is still often their first trip here. And meetings are still held in a mix of Spanish, Chinese and English. But despite such problems, over $15B of Chinese capital was invested in Latin America in just the last 12 months alone. This is the kind of opportunity where getting it right early on means winning very big.