BRAZIL AND CHINA'S TRADE BRIDGING GAP BETWEEN EAST AND WEST

Brazil Now - March-April 2002
The Brazilian Trade Magazine

Pedro Rocha and Ernst Weber

The largest economies of Asia and Latin America, China and Brazil intensify trade relations, identify mutual opportunities and strengthen their positions in the international arena in this age of globalization.

The Brazilian trade mission that visited China at the start of April-the largest ever organized by the country, formed by 120 businesspeople-marks a new chapter in the history of Brazil's foreign trade. The business opportunities afforded through newfound ties with the Sino-market have, in fact, given new dynamism to trade relations between Asia and Latin America's main powerhouses. Bilateral trade between China and Brazil is experiencing its best moment yet, turning over US$ 3.230 billion last year-a whopping 75.27% growth over that posted in 2000.

Fiat models on the Great Wall of China: an example of the growing presence Brazilian-made products in the Sino-market. The Brazilian trade mission that visited China at the start of April-the largest ever organized by the country, formed by 120 businesspeople-marks a new chapter in the history of Brazil's foreign trade. The business opportunities afforded through newfound ties with the Sino-market have, in fact, given new dynamism to trade relations between Asia and Latin America's main powerhouses. Bilateral trade between China and Brazil is experiencing its best moment yet, turning over US$ 3.230 billion last year-a whopping 75.27% growth over that posted in 2000.Even brighter days are to come. Growth potential in this area is incredible, as the world's fourth ranked regional jet producer and Brazil's largest exporter Embraer demonstrated during the trade mission to China. Integrating the Brazilian delegation, the company's president, Maurício Botelho, announced in Beijing the construction of an aircraft factory in the Yunnan Province to meet the demand of Chinese airlines. Embraer's project envisages the production of 30- and 50-passenger jets, which could be exported to other countries.Determined to make mutual commercial relations more dynamic, the governments of both countries are making a concentrated effort to lay the groundwork for new business deals. The Brazilian Development Bank (BNDES), for example, is opening financing lines to companies seeking to set up shop in China (see interview on page 24).

Further, the head of the Brazilian trade mission Minister of Development, Industry and Foreign Trade, Sérgio Amaral, has invited Chinese businessmen to participate in infrastructure projects, such as the construction of airports, ports, highways and hydroelectric and thermoelectric plants, totaling US$ 230 billion.

The Chinese government has already announced investments in Brazil to the tune of US$ 1.4 billion by 2005. And upon receiving the Brazilian trade mission, the chief minister of China's Minister of State Development Planning Commission, Zeng Peiyan, readily announced his intention to send representatives from the Chinese supermarket sector to Brazil, in order to become familiar with local products and suppliers.

However, what really calls attention is the agility with which Brazilian companies are kicking off operations in China. Mining giant Companhia Vale do Rio Doce (CVRD) is a notable example. Last year, the company finalized a partnership with Shanghai Baosteel Group Corporation, China's largest steel mill, and also closed a long-term contract for the supply of iron ore, which will generate nearly US$ 2 billion in revenue over the next 20 years. The Chinese firm will pay for part of CVRD's iron ore shipments in coke, which will be shipped to Brazil for utilization in local blast furnaces.Also in 2001, China also became one of the five largest buyers of Brazilian vehicles, importing over US$ 800 million from local carmakers. The automaker that has made the greatest inroads to China is General Motors do Brasil, which closed a 10-year supply contract worth US$ 1.5 billion.

The car manufacturer currently exports the Corsa, S10 pick-up and Blazer models, using the CKD system for assembly in China. GM debuted in China with the Blazer model, but shortly after, the Corsa became the most-requested model.Fiat is following the same road. The Brazilian subsidiary will be the largest supplier of the Italian group's Chinese factory, installed in Nanjing. Initially, Fiat's Brazilian subsidiary should export nearly US$ 30 million in auto parts for the Palio model.

Marcopolo, a bus and microbus body manufacturer headquartered in Caxias do Sul, Rio Grande do Sul state, closed a seven-year contract worth US$ 12 million with Italy's Iveco (of the Fiat group). That firm, in turn, formed a joint venture with China's Changzhou Changjiang Bus Co., based in the Jiangsu province, for the production and commercialization of urban and inter-municipal buses, built using Iveco's chassis structures and Marcopolo's technology for bodies.

Following the car makers' lead, last year, Brazil's auto parts industry increased the sale of car and tractor parts to China fourfold, surpassing the US$ 30 million mark.

Bosch do Brasil began shipments of diesel engine injection pumps, manufactured at its Curitiba unit, a deal representing US$ 2.5 million of the factory's overall US$ 150 million annual export revenue. The company already has a subsidiary in China, and the sale of its Brazilian-made pumps partially offset the up to 50% reduction in orders from long-time customers, such as the US, which accounted for 25% of the Paraná state factory's total output.

In 2001, Delphi was likewise able to increase the sale of electrical connections, connectors and cables to China by 50% to US$ 4.2 million, operating in specific market niches different from those of the Chinese subsidiary of the US' Delphi Automotive.

Germany's Brose is also heading in the same direction, shipping module seating and door systems manufactured in its factory in São José dos Pinhais (Paraná state) to China, which will equip Volkswagen's Polo model to be produced on Chinese soil. This deal will account for 3% of the US$ 100 million revenue reported by Brose's Brazilian subsidiary.

One of the most promising business areas, however, is in the foodstuffs segment, due to the well-known competitiveness of Brazil's agribusiness sector and China's scarcity of productive farmlands-the former has approximately 150 million hectares of virgin land reserves available, three times the size of France.

In the first few months of 2002, some US$ 185 million in soybean export contracts to China were closed, equivalent to 44% of the total volume that the Chinese acquired from Brazil in 2001. The Brazilian Meat Exporting Industries Association (Abiec) is also expecting a hearty increase its business with the Chinese. The association is set on the immediate sale of US$ 150 million alone in beef products, such as lips, eyes, feet and intestines, parts which are not consumed in Brazil and whose export would provide precious gains in productivity.

Pork and chicken meat exports are also very promising, not only due to the recognized competitiveness of Brazilian producers, but also because of the growing demand for animal protein derivatives on the Chinese market. Brazil's largest meat producers and processors are already in negotiations with local importers, only awaiting the finalization of sanitary accords.

Coffee, orange juice, fuel alcohol and sugar are just a few other examples of products offeringtremendous business opportunities, especially after the entrance of China into the World Trade Organization (WTO), which promoted a reduction in the country's import tariffs.

After reporting US$ 10 billion in revenue last year, with US$ 1.6 billion of the total stemming from exports (up 4% on the previous year), Brazil's footwear industry hopes to increase foreign sales to US$ 2.5 billion this year. And one of the most strategic markets is, in fact, China-curiously, the world's largest producer and exporter of footwear, at eight billion pairs per year. (Brazil produces 620 million pairs per year, following second-ranked Italy).

According to the Brazilian Footwear Industry Association (Abicalçados), local producers intend to fill in the gaps left by special market niches-especially elegant women's footwear-which has been left to the wayside due to China's mass production that concentrates on tennis shoes, vulcanized-sole footwear and women's leisure shoes. São Paulo footwear and canvas manufacturer Alpargatas has already sent various groups to research the Chinese and Indian markets.

Brazilian exports should also be favored by the good opportunities in the white-line segment. Embraco, producer of hermetic compressors for home refrigerators, has been present in China since 1995. Headquartered in Santa Catarina state, the company formed a joint venture-Embraco Snowflake, which it controls with a 55.23% stake-with a Chinese firm and began production in Beijing, with an installed capacity of 1.7 millions compressors per year.

Owner of the Brastemp and Cônsul brands-and controlled by US-based Whirlpool Corporation-,Multibrás is already exporting ovens and refrigerators to China and India, but is set on increasing the range of products and sales volume to both the populous countries.

But Brazil also has more sophisticated products to offer, such as computer programs. Local software producers exported US$ 100 million last year and are now looking to China, principally in the banking sector, which is undergoing great reforms in that country.

At the end of last year, the Brazilian Software Export Promotion Society (Softex) negotiated with China the creation of internationalization software centers and the opening of that market-which spends an estimated US$ 3.2 billion per year in this area-to Brazilian products. The prospects are especially good for programs regarding e-government, in addition to cellular telephony and agriculture. All this comes on the heels of a specific cooperation accord in the computer technology sector, signed between the Science and Technology Ministries of both countries.

And one company already reaping the fruit of this accord is Light Infocon. Installed in Paraíba state in Brazil's Northeast, the company just finalized negotiations on the creation of a new version of its LightBase software for Linux in Mandarin Chinese.

However, the development of economic relations between Brazil and China is not solely limited to the strengthening of bilateral trade, the establishment of business partnerships and direct investments. It also includes the services sector and scientific-technological cooperation.

In the first case, one can point out the participation of Brazilian companies in infrastructure projects in China. Of these, the largest is no doubt the construction of the Three Gorges hydroelectric plant, on the Yang Tse River. Begun in 1994, this undertaking, with an estimated cost of US$ 24 billion and a 20-year deadline for conclusion, will result in the largest hydroelectric plant on the planet.

Brazil's extensive experience in the construction of the Itaipu and Tucuruí plants led the Chinese government to select Brazilian companies-including federal bank Banco do Brasil and Companhia Brasileira de Design de Engenharia e Construção-to develop feasibility studies and act as technical consultants for the project. In addition, the Brazilian subsidiaries of three large multinationals-Siemens, Voith and Asea Brown Boveri (ABB)-will supply the turbines and generators for the mega-project.

Besides the Three Gorges project, Brazilian companies are participating in other Chinese undertakings. In 1997, Paraná state power company Copel carried out a technical feasibility report for the construction of a dam for the Shibuya hydroelectric plant, in the Hubei Province. And, in 2000, Mendes Júnior Engenharia participated in the construction of the Tiancheng-qiao hydroelectric plant.

Regarding scientific-technological relations between the two countries, one can highlight the aerospace cooperation program, specifically the Sino-Brazilian Satellite Program, signed in July 1988, jointly-implemented by the Chinese Academy of Spatial Technology (Cast) and Brazil's National Spatial Research Institute (Inpe). The program led to the development of the China Brazil Earth Resources Satellite (CBERS), a remote sensory satellite that monitors the planet.

The CBERS-1 was launched in October 1999 and it its still in operation today. Between July and October, CBERS-2, also built by INPE and Cast, should be put into orbit at the Taiyuan Launch Center. The next two satellites-the CBERS-3 and CBERS-4-will be launched in 2005 and 2008, respectively.

And on another front, it will be difficult to estimate the potential offered by the cooperation agreement in strategic areas of the Society of Information and Information Technology; Biotech-nology and the Genome and Advanced Materials signed last year between the two countries.

In addition to allowing for the development of new software to process data in natural speech-benefiting the promotion of e-commerce-in the areas of Biotechnology and Genetic Research, the accord also makes it possible to carry out research to produce new phytotherapeutic medicines, as well as the development of genetic research and the transgenic manipulation for agriculture-an area in which Chinese scientists are following a completely different course than that of western laboratories.

"Geography has made us distant and history has made us different, but this initiative establishes a solid point of approximation between the largest nations of Latin America and Asia, multiplying the possibilities of trade transactions and economic interchange, with investments coming from both sides," evaluates Minister Amaral.

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