[caption id="attachment_2019" align="alignleft" width="371"] Latin American firms in China[/caption]

While natural resources continue to make up the bulk of the region’s exports to China, a diverse group of LAC firms selling products from pastry rolls and passenger jets to IT services have established a strong presence in the Chinese market—showing the answer to that question is a resounding “yes.”

How have these firms managed to succeed in a highly competitive (and unfamiliar) Chinese market? The key for many has been to set up business operations in China rather than relying on exports alone. The Inter-American Development Bank (IDB) has just released a report, LAC Investment in China: A New Chapter in Latin America and the Caribbean-China Relations, on the business strategies of 98 LAC firms that have followed this path.

The first notable feature of this group of firms is its diversity. In contrast to LAC-China trade, manufacturing firms are the majority, making up 56 percent of the sample, and representing sectors such as industrial machinery, metals, and foods and beverages. The primary sector accounts for a mere 15 percent of the total.

Another important finding is that while the overall amount of LAC foreign direct investment (FDI) in China is small—official data puts the number at US$ 917 million between 2002 and 2012—firms do not need to engage in FDI per se to succeed in China. While FDI figures only reflect productive units set up in China, many LAC firms have reaped the benefits of direct presence in China via commercial affiliates, representative offices, and investments in distribution networks.

What are those benefits?

Being in China mitigates several challenges that often face LAC exporters: transportation costs, high tariffs, and limited knowledge of the regulatory environment. Perhaps most importantly, a direct presence allows firms to better understand their Chinese customers—whether they be consumers looking for a tasty snack or an industrial firm looking for low-cost inputs.

Take Mexico’s Grupo Bimbo. The firm quickly discovered the products that enjoyed such success in Mexico were too sweet for the Chinese palette. Bimbo changed course, introducing a new line of savory products, including meat pies, bread rolls stuffed with beans, and corn sandwiches, after extensive market research with Chinese consumers. The firm has since grown into one of China´s top bakery firms.

The same logic applies in industrial sectors. WEG, a Brazilian producer of electric motors, oversees one of the most extensive LAC-owned manufacturing operations in China, employing over 600 people. The company credits strong, personal relations with clients, partners, and Chinese officials; as well as tailoring products to exact customer specifications for its success. Both would be hard to achieve from the firm’s headquarters in Southeast Brazil. WEG also benefits from being one of the few producers of energy efficient motors in China, an important asset given the government´s determination to introduce sustainable technologies.

The experience of these firms suggests two areas where LAC might enjoy important competitive advantages in China: offering convenient, affordable consumer goods to China´s middle class and bringing energy efficient technologies to Chinese industry.

Both represent promising growth areas. China´s already enormous market is widely expected to grow faster than the broader economy in the next couple decades. Meanwhile, China continues to be manufacturing hub, attracting US$123 billion of FDI in 2013, second only to the United States. Chinese officials are intent on ensuring that all this manufacturing activity uses increasingly energy-efficient technology and processes.

These trends ensure that Latin American firms’ ability to compete in China beyond the region’s traditional exports will not lose relevance any time soon. Fortunately, a group of pioneering firms has shown that success is possible—it just might require a journey East.

* About the author:

Theodore Kahn is a consultant for the Integration and Trade Sector. He has worked at the IDB since 2011, focusing on Latin America-Asia trade and investment, cooperation between Latin American and Asia, and regional integration policies in Latin America.  He holds a Masters in International Relations and is working on a PhD in International Relations at the Johns Hopkins University School of Advanced International Studies.