China-Brazil, Both Challenges and Opportu nities for the Cooperation

The strengthening trade and financial relationsWhile the world focuses on European debt crisis and the weak economy in the United States， another noticeable economic growth point between China and Brazil is developing fast and worthy of attentions. The development of Sino-Brazilian trade and economic cooperation in the past five years was amazing， making Asia-Latin America trade corridor the fast-growing trade corridor in the world， with Sino-Brazilian trade as the core.China is the largest foreign trade exporting country of Brazil. Since this January， exports from Brazil to China have taken a share of 17% in the total Brazilian exports for the same period. In 2010， 15% of the Brazilian exports went to China， jumping from 4% in 2002. The strong demand for Brazilian bulk goods from China such as iron ore， sugar， soybean and so on helps Brazil continuely benefit from trade preferential terms. Besides， the seldom mentioned Sino-Brazilian joint venture mode， which targets at Brazil domestic market， also succed in Brazil. However， there are also problems in Sino-Brazilian trade cooperation.We collect major challenges enterprises engaged in Sino-Brazilian trade are facing， including problems in logistics， local infrastructure construction， language and cultural and tax. Meanwhile， we summarize the opportunities for further strengthening the trade relations between the two countries. In the past few weeks， we had discussed these problems with some enterprises engaged in Sino-Brazilian trade， and the discussion is recorded in the report presented below.Through the communication with all relevant parties， we find that challenges and opportunities co-exist， including carrying out investments in Brazil and imports from Brazil.Lack of infrastructure is the major challengeInfrastructure is the greatest challenge for Brazil to secure a long-term high economic growth rate. Serious traffic jams are frequently reported by Brazilian local TV stations， such as the awful trip of goods from inland to the shore by truck. What’s the worse， as 2014 World Cup and 2016 Olympic Games approach， infrastructure will become a more wracking and urgent issue for Brazilian governments.Scale， strengthening demand and stability make Brazil an ideal marketAll the Chinese enterprises we spoke to agreed that the domestic market of Brazil has a potential to continue to grow. With nearly twenty million urban residents， 240 billion US dollars of economy scale and a rapid expanding middle class， Brazil is raising more attentions of Chinese enterprises. While many Brazilians are pessimistic about local politics， Brazil is seen as a stable market relative to other emerging markets. One of the surveyed companies said that compared to other investment targets such as Pakistan and Vietnam， Brazil has a stable political and economic environment. As a democratic country， the transfer of governments in Brazil in the past ten years was relatively smooth.Gree Electric Appliances (Brazil)The first example is Gree Electric Appliances Co. Ltd， a Brazilian subsidiary of China listed company Gree Group. As for Gree Electric Appliances， the hot weather and large population in tropical nations means hugedemand. The company believes that personal consumption is the main driving force for Brazil- ian economic development， which is also the source of purchasing power for Gree products. Gree expects the World Cup and the Olympic Games will boost local demand for air conditioning systems. Gree builds a plant in Manaus in Brazil to cover the whole Brazilian market. However， given the consideration of local transportation cost， the costs for products transported from the factory to Latin American markets are higher than those of direct exports from China. Therefore， now Gree sells electric appliances directly from China in Latin America excluding Brazil. Other enterprises that construct plants in Brazil bear the same purposes with Gree: Brazil local market and further the entire Latin American market.Brazil CR Zongshen CompanyBrazil CR Zoneshen Company is another successful example， which is a 50-50 joint venture established by Zongshen Group of China and Claudia Rosa of Brazil. The joint venture targets at Brazilian market with a large population and great potential， mainly involving in RD， production and sale of motorcycle and electro mobile. Zongshen notices the regional development balance in Brazil， which provides an opportunity for leveled development of Zongshen’s products and services. Domestic market in Brazil is not homogenized: for example， there is a great difference between demands of tropical Amazon basin and the temperate southern Brazil.Cultural differencesThose Chinese companies in Brazil we surveyed all emphasized the challenges in integrating production， sales and management with local market. In general， cultural differences have a great influence. Gree mentioned that it encountered troubles such as governmental fines， labor conflicts and product style unsuitable to local fashion during the early operation in Brazil， because of Chinese style management mode and insufficient understanding of local tax laws and regulations.Bearing the experiences and lessons in mind， Gree Brazil takes a more flexible and cautious attitude to Brazilian market. It will always face language barrier and cultural differences to operate businesses in a foreign country. In recent years， Gree Brazil continuously raises the proportion of local employees， which reduces the language barrier. CR Zongshen also confirms that cultural differences can affect internal communication in the enterprise， especially for cooperation on joint ventures.Due to that China and Brazil have a different legal environment， laws and regulations will affect the development of Chinese enterprises in Brazil. CR Zongshen finds that there are imperfections and conflicts in laws and regulations between China and Brazil， which would challenge the operation of enterprises. Multinational companies often spend a great amount of time and resources in solving compliance problems， especially when facing the most complicated Brazilian tax laws in the world.In all sorts of international surveys， Brazil has never been included in the list of countries and regions “easy to operate a business”， for its cumbersome procedures such as tax rules fence business activities. For example， Gree has to pay high import taxes for introducing hightech production equipments from China. In addition， local governments tend to prefer local brands.Brazilian macro economy is an element that multinational companies focusEconomic factors Gree Electric Appliances focuses include:1. Complex tax laws in Brazil. Gree chose Manaus mainly because of local tax preferential policies， since this city locates at center of tropical rainforests， having a not very convenient transportation infrastructure. CR Zongshen also mentioned tax policy is one of the factors they most concern about. 2. Production localization can be a good way to hedge exchange rate risk. 3.Appreciation of RMB will cause increases in costs for Chinese imports. At present， the appreciation of Real brings a totally different trend. 4. To hedge exchange rate risk of Brazilian currency， Gree China provides Gree Brazil a long payment cycle.Participants in Brazilian agriculture industry benefit from demand of ChinaWe also interviewed local participants in Brazil agriculture industry. For years this industry benefits from the rapid growing demand in China. A person from soybean industry pointed out that in 2004 China imported fifteen million tons of soybeans， and the imports will reach 57 billion tons in 2011. In 2012， the imports are expected to continue to increase.Demand from China is expected to maintain strong. Thus， Brazilian companies input more resources in research and development of agricultural technologies. With advancing agricultural technologies， Brazil makes new records in soybean production year by year: from 58 million tons in 2009， to 69 million tons in 2010， and 75 million tons this year.China seeks opportunities to introduce Brazilian experiences in agricultureChina hopes to introduce the integrated technology for agricultural products from RD to production from Brazil， and utilize the technologies to improve agricultural output in China， which will improve SinoBrazilian economic relation.Logistics obstacle still existsEvidences show that import and export companies in China are seeking direct trade cooperation with Brazilian producers. However， direct trade is so easy to realize because of lacking experiences in direct contact， language barrier， time difference， and the uncertainty in contract execution. Barriers in logistics mean great challenges to bulk goods export. Transport losses and limitations in storage capacity are understandable， but the thirty-day waiting period at the port for civil trade is criticized mostly. Sometimes enterprises may actively improve logistics. For example， Vale builds railways of its own to transport iron ores to ports. Some Brazilian municipal governments are taking measure to reduce transportation costs for agricultural trade， by calculating transportation demands for a city， and then determining the costs via negotiations for both sides.Adjustments in regulations restrict land purchase of Chinese in BrazilIt is reported that China is a major land purchaser in South America， especially in Brazil. However， a dealer of agricultural products said that although there were various reports， he didn’t see many land deals. As to infrastructure investment plans， people have the same feeling.The new land rules against foreigners In Brazil may further restrict land purchase of Chinese. The new rules have a new interpretation on the base of existing laws， to lift the barriers for foreigner to own lands in Brazil. It may be hard for China to secure a long term resource supply from Brazil if they can not be the major owner of properties.We see there are workaround plans for the new land rules， meaning Chinese enterprises can participate in land purchase to secure long term resource supply， if they become minor shareholders of Brazilian joint ventures. And there already are successful cases of this model.At the same time， we found that Brazil asks Chinese enterprises to participate in share investments in infrastructure construction projects， which may be difficult for large state-owned enterprises of China. Due to this special divergence， Chinese enterprises have relatively few chances to invest in infrastructure projects in Brazil. We expect that there will be workaround plans， but the time is difficult to estimate.In the long run， we expect the barriers for China to make direct investments in Brazil will be moved out， but we can not be sure whether the solutions can be put forward in time for 2014 World Cup and 2016 Olympic Games.