China, Japan and South Korea maintain consistent prospects of investments in Brazil, and offer opportunities for companies that want to explore the eastern borders.April-June | 2017
“It does not matter whether a cat is black or white, as long as it catches mice.” One of the most famous quotes of Chinese leader Deng Xiaoping, father of the so-called market socialism, summarizes the vision of many Brazilian businessmen who today feel more hope in Asian powers than in traditional trading partners of the West to help face the economic crisis of recent years. However, how to make the distance to China, Japan and South Korea to be increasingly smaller? The lessons are not few.
Deloitte’s global leaders in the Asian market talk about the business perspectives between Brazil and the region.
Specialists in Asian companies are unanimous in pointing out the main difficulties for Brazilians to seize the opportunities in the Far East: assimilate ancient cultures, accept that the investments there are always long term, without urgency, and provide clear and reliable rules to demonstrate the potential for expansion of the relationship. Without this, possible injections of tens of billions of dollars can go to the drain.
Figures from public sources, consolidated and analyzed by Deloitte, help to show the optimism with Asia in a moment in which the United States, under the new administration, is deviating from multilateral trade agreements. The direct investments made by China and Hong Kong in Brazil in 2016 amount to almost US$ 20 billion – in the year before, almost the same amount. It does not reach the US$ 22.7 billion of 2011, but the clear trend is that the crisis didn’t scare these investors.
Japan injected in Brazil around US$ 1.6 billion in 2016, almost half from the previous year. In 2011, peak of investments from Japan in the country, the amount reached $8 billion.
"Brazil's crisis does not completely stop the investments from Asia because they do not like short-term investments much. Sure, there are uncertainties, but there are opportunities. I think there is a lot of money coming now and in 2019. With the resolution of the political and economic doubts, this potential will be even greater."
George Warnock, Deloitte's global leader of the Chinese, Japanese and Korean Services Groups
South Korea, in which Brazil’s presence is strengthened by three companies (Samsung, LG and Hyundai), has seen its direct investment rise from $287 million in 2015 to $546 million last year. In 2010, this total reached $1.1 billion.
Numbers like these lead George Warnock, Deloitte’s global leader of the Chinese, Japanese and Korean Services Groups, believe that investments should grow again and maintain consistence. To him, Brazil’s crisis does not completely stop the investments from Asia because they are not tied to short-term investments.
Among the three Asian giants, as one might expect, Brazil’s great opportunity is China, today the country’s largest trading partner and now with $560 billion to be invested in infrastructure here in the next five years. Even though the Chinese economy has lower growth forecasts, around 6.5% this year, the basis today is much greater and still allows for the investment of resources in good projects around the world.
“With the consistent grow of the Chinese economy, although the percentage of growth is not currently in the two digits anymore, the financial volume continues to be ever bigger and important”, ponders Paulo de Tarso, Deloitte Brazil’s leader of the Chinese Services Group.
"China has been growing in double digits for more than a decade. The new pattern now is to grow at around 6% on an increasingly growing basis, and this represents that there will ever be more opportunities for Chinese investments in Brazil and the increase in the strategic partnership between the two countries. It means that we have to help them grow with more quality."
Paulo de Tarso, Deloitte Brazil's leader of the Chinese Services Group
Despite doubts about how the second largest economy in the world will grow in 2017, the expectation is an injection of at least US$20 billion in purchase of Brazilian assets this year, equaling 2016 results, per the Brazil-China Chamber of Commerce and Industry (CCIBC). Only the United States has attracted more Chinese investments at this time, which shows the size of the Brazilian links with the Asian giant.
"Both China and other Asian powers will need Brazil to continue growing in the coming years."
Rosa Yang, Deloitte's global leader of the Chinese Services Group
“China and Brazil economies are complementary,” says Rosa Yang, Deloitte’s global leader of the Chinese Services Group. To Rosa, both China and other Asian powers will need Brazil to continue to grow. “Here you have fundamental raw materials, interesting assets and an important platform to operate throughout South America.”
The sectors in which the Chinese most invest continue being oil, gas and electric power, in particular after State Grid buying the electricity retransmission company from São Paulo CPFL and China Three Gorges acquiring hydroelectric plants that were from CESP. However, experts already see a likely landing in Brazil of transportation and agribusiness companies. The builder Concremat and agricultural companies Fiagril and Belagrícola already rely on Chinese investments – a list that may increase soon.
“We have received many contacts from various Chinese companies; they want to operate in Brazil and I’m sure many of them will be here soon,” says Charles Tang, president of CCIBC. “The assets in Brazil are cheaper lately, and this is very attractive. And companies that are coming now understand better how the country works. So, they do less risky transactions and with greatest potential.”
Due to its incredible consumer market, China, in addition to investing in Brazil, can also take Brazilian companies to operate there. One of them is Marcopolo, one of the largest bus manufacturers in Latin America.
The company began in the region with a product development center outside Brazil. The cost of labor in Asia and the large supply chain have made feasible many projects that could not be developed until then. Then, came a production line to meet the new demands and, finally, China appeared immediately as an option for the purchase of raw material for Brazil and other countries’ plants where Marcopolo operates, in a true global sourcing.
José Luiz Moraes Goes, Marcopolo’ s International Business executive manager for the Asia-Pacific region and India, believes that, despite the numerous difficulties to settle in the area, the investment is worth it, including the ones made to bring new technologies learned from there to Brazil.
“The main challenges are laws protecting the local market, access to information (since there are several blocked websites), distance from Brazil (which impacts high freight costs and longer delivery time), time zone and language, since not everyone speaks English,” said Goes. The executive believes that, within five years, Marcopolo’s investment in China will have already been paid off.
Another sector in which there is a growing interest from China is the banking sector. In the last two years, $15 billion in credit lines from institutional Chinese banks were intended to Brazil – this represents almost R$50 billion. Only Venezuela received more, per a study from think-tank Inter-American Dialogue, published at the end of 2016.
The strength of this relationship was heavily tested in March 2017, after the operation “Carne Fraca”, which led the Asian country to suspend imports from Brazil’s meat suppliers. Initially China barred almost all the Brazilian beef. However, in a few days, after the direct intervention from the Federal Government, the barriers have fallen. From this demonstration of confidence, the Chinese must follow as the main meat and meat derived products importers from Brazil. Only in 2016, there has been $1.75 billion in business in the area.
In the case of Japan, the major investments in Brazil should still be concentrated on the industry. However, to rush to get results is the worst thing that a Brazilian entrepreneur can do when dealing with Japanese companies. This is the main lesson that Shuichi Morishige, Deloitte Brazil’s leader of the Japanese Services Group, teaches. “The Japanese businessman likes patience, has eyes on a future of 20, 30 years. It is no use to expect a surge of investments in the next year,” he says.
"The Japanese businessman likes patience, has eyes on a future of 20, 30 years."
Shuichi Morishige, Deloitte Brazil's leader of the Japanese Services Group
This is also the vision of Hitoshi Matsumoto, Deloitte’s global leader of the Japanese Services Group. Matsumoto believes that Brazilian companies should strengthen their ties with Japan not only on business opportunities, but also evoking the ancient relationship between the two countries – in 2018, it will be celebrated 110 years since the beginning of Japanese immigration.
"Brazil and Japan have historical immigration ties, and that is also why the investments remain regardless of the good or the bad times. This special relationship matters a lot at the time of making a deal with Asians."
Hitoshi Matsumoto, Deloitte's global leader of the Japanese Services Group
“Brazil and Japan have historical immigration ties, and that is also why the investments remain regardless of the good or the bad times. This special relationship matters a lot at the time of making a deal with Asians, you can believe that”, says Matsumoto, who is also a fan of Kashima Antlers, the team in which the soccer player Zico ended his career. “Football may seem a detail, but, for us, these affective bonds are very important. They give us confidence that we are not entering into an unknown space.”
It would be a mistake to think that the low growth in Japan in recent years and the post-impeachment political difficulties in South Korea may decisively affect the companies’ investments in these countries abroad, says George Warnock, from Deloitte. “Japanese and Korean companies need foreigner countries exactly because the internal base does not offer many new features. These are countries like Brazil, with a large consumer market, that can help these companies to remain as leaders in their markets.”
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