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Latin America – A Strategic Concern for the Chinese
China’s growth as the factory of the world requires ever increasing
amounts of raw materials. Latin America has become a strategic source
of raw materials for China's manufacturing process. It is also a
supplier of agricultural goods to feed China's people.
This
has led to an increasing involvement by the Chinese in Latin America's
Economy. The Chinese government and its oil company, CNOOC, have
invested US$400 million in gas exploration in Venezuela. China
Minmetals Nonferrous Metals Co. has invested US$2 billion in a joint
venture with Chile’s state copper giant Codelco. Baoshan Iron and Steel
has invested US$1.4 billion in a joint venture with Brazilian iron-ore
giant CVRD for the construction of a new steel plant in Brazil.
Yanguang Group has created a new coal company in Brazil in a joint
venture with CVRD and Japan’s Itocho Corp. Chinese petrochemical
corporation Sinopec has an alliance with Brazil's state oil company
Petrobras.
The Chinese also are beginning to move higher into
the supply chain itself. This is the next natural move. What is the
point in investing in raw material if you cannot get it back to China
quickly and profitably? Chinese and Korean companies are lobbying for a
new Pacific freight port in Baja California at Punta Colonet. This is a
US$1 billion investment, aimed at reducing congestion at U.S. Pacific
ports, and most importantly, at increasing the efficiencies of getting
Chinese imports into the Americas.
As long as China wishes to
maintain its economic growth rate, it will depend on raw materials from
Latin America. This will drive commodity prices, which will remain
strong through 2009, leading to strong currencies in South America. The
influx of liquidity will continue upstream into the supply chain,
galvanizing the logistics segments of the major Latin American
countries.
Two Latin American countries take the lion’s share of
economic activity. Brazil and Mexico amount to 72% of total Latin
American GDP, and 68% of total population. Brazil and Mexico are large
diversified economies. Brazil, with its 186 million people and Mexico
with 107 million, also have large internal markets to bolster their
domestic economies.
Mexico and Brazil are also the largest
traders in the region. In 2007 Mexico exported upwards of US$185
billion worth of goods, Brazil exported $96 billion , while imports
for Mexico were US$197 billion , and US$63 billion for Brazil. Trading
is clearly an important part of the economy for both countries, and for
Brazil, a huge foreign currency earner to the tune of US$33 billion .
Latin
America also attracted $48 billion in foreign direct investment
(FDI), equity funds attracted US$4.5 billion, a nine-year record,
with Brazil and Mexico taking the largest proportion. Remittances
(money or goods sent home by migrant workers) are also a huge money
earner. Out of a total of US$60 billion of remittances going into the
region, Mexico is getting US$30 billion, and Brazil US$6 billion in
2005. Latin American remittances already exceeded FDI figures by 26%
back in 2003.
These figures pale in comparison to what China has
promised Latin America. “In exchange for its access to raw materials
and new markets, China promises to provide US$100 billion in
investments in the region during the following decade.”. China has
begun its investment to secure its share of raw materials. It has now
come up against the same problem everybody has in Latin America – that
of its logistics infrastructure.
Chronic under investment in infrastructure has reduced productivity and competitiveness.
Logistics
costs are high because of inadequate transport infrastructure. Brazil
could increase exports by US$25B annually if only it could implement
logistics and customs modernization.
A look at Brazil gives an
idea of the costs incurred by these logistics inefficiencies. Brazil’s
logistics cost is 12.6% of gross domestic product (GDP), while in the
United States it is 8.2%. The difference of 4 points represents US$35
billion in terms of Brazilian GDP. This is almost as much as Brazil
produces with its trade surplus. Reducing these inefficiencies by even
a couple of points would still mean savings in the billions of dollars
for Brazil.
Studies show that “a doubling of a country's
transportation costs lead to a reduction in that country's trade by
80%.” “On average, each additional day that a product is delayed prior
to being shipped reduces trade by a least 1%. Put differently, each day
is equivalent to a country distancing itself from its trade partners by
70 kilometers on average…”
At present it takes 39 days for products leaving the factory to be exported from Brazil.
Mexico
is slightly more efficient with 20 days. Brazil has the fourth most
inefficient export and import system, just behind Bolivia, Colombia and
El Salvador. In the US the average is 12 days
Clearly these
inefficiencies are costly to Latin America, and it hits where it hurts
most. Foreign trade is the way Latin America earns its foreign
currency. For the Chinese, who have invested billions of dollars in
procuring and securing raw material resources in Latin America, it is a
huge constraint on getting their raw materials back to China. Their
desire to reduce the impact of these bottlenecks is driving them to
invest upstream, into logistics infrastructure and eventually into
logistics companies. The opportunity for logistics process improvement
companies and efficient logistics service providers is clear.
Latin
American underinvestment in its logistics infrastructure is not new.
What is new is that there is a motivated player in the market whose
strategic interests are being hampered by the resulting inefficiencies.
Significantly, this new player has hundreds of billions of dollars at
its disposal, and is prepared to spend it to secure raw materials
production assets and a supply chain to ship these resources back to
China.
As the logistics segment moves up its maturity curve to
ever more sophisticated service requirement and just-in-time-processes,
the need for logistics process improvement companies and efficient
logistics service providers become more acute. Mexico and Brazil are
the most sophisticated and largest logistics markets in Latin America,
but they have a long way to go compared with the United States.
One
of the early sign of increasing logistic sophistication is the
outsourcing of logistics services to third-party providers. This is
usually accompanied by a desire to reduce the number of logistics
suppliers. Both the shipper and the carrier can benefit from the
greater efficiencies, cost reductions and quality of moving toward core
competency specialization.
In Latin America consolidation has
already occurred in Brazil and Mexico, Countries like Colombia, Chile
and Argentina are not far behind, while the rest of the continent is
still catching up. Research shows, that even in the top countries
consolidation in both international and domestic carriers is still far
from the ideal, and that companies are looking forward to greater
efficiencies in their supply chains.
Other research supports this dynamic view of the Brazilian logistics environment.
Brazilian
shippers are looking to reconfigure themselves for ever higher trading
efficiencies. A study by Brazilian logistics specialists found that
Brazilian international shippers are either planning or implementing
changes in the way they manage their supply chains in six major
management categories.
If we look closer at the areas where they
are planning these changes they mostly have to do with their capability
to trade internationally. 34% of shippers say they are either planning
or implementing changes in the way they ship internationally. 33% say
they are implementing organizational changes to help them improve the
way they ship internationally.
Some of these changes have to
do with the changing customer environment, but in almost 40% of cases
shippers are also implementing changes in their supplier base, and
changes in distribution center configurations (26%). While 82% of
Brazilian companies outsource the logistics of their international
trade, only 31% are doing so with global suppliers. Global suppliers
are more likely to be the more efficient and sophisticated companies,
like UPS and FedEx. These companies are also connected to a global
network of trade allowing them to offer lower prices, as they are able
to spread their costs across a larger volume. Clearly the remaining 82%
are using a fragmented base of much smaller carriers that are probably
less efficient and maybe even more expensive to the shippers in the
long run. There is a real opportunity for further consolidation in the
market.
Brazilian companies in the logistics segment have
already realized their industry is going through rapid change. They
realize there is growing interest from investors who see the needs and
new potential of a market galvanized by the Chinese demand for raw
materials and the resources to get these to port. They are not waiting
and have already begun to invest heavily in their own capacities and
efficiencies.
One notable company is America Latina Logistica
(ALL): “Net profits of ALL have almost doubled up during 2006 first
semester totaling R$98million against R$50 million reported last year.
Transported volume grew by 8.8% from January-June, achieving 9.268
billion tons. EBITDA rose 17.4% during the second quarter hitting
R$164.8 million…”.
It has already attracted the attention of
major Investment houses like Merrill Lynch; “In a research note …, the
US investment house (Merrill Lynch), cited an improved earnings
outlook for ALL’s existing operations, and benefits from the possible
acquisition of railway firm Brasil Ferrovias/Novoeste”, and; “Bear
Sterns has raised its end-2006 price target for units in Brazilian
logistics firm America Latina Logistica to R$264 from R$213
(US$1=R$2.142).”
U.S. process improvement enablers have already
made major inroads into Mexico. Ferrocarril Mexicano is a private
transportation company, formed by mainly Mexican capital (Grupo Mexico
SA de CV) and by North American capital (Union Pacific Railroad), it
was founded on February 1998, offering the cover area that extends from
Mexico City to the cities of Gudalajara, Hermosillo, Monterrey and
Chihuahua.
ALMER, a Mexican company that distributes grains and
is a supplier of logistics services, hired for the second time
RedPrairie’s services to improve their inventory management systems.
In
conclusion, Mexico and Brazil are the largest markets in Latin America.
Both present ample opportunities for global third-party logistics to
improve logistics efficiencies. And both are now cash rich from
commodity driven export income. These conditions will continue as long
as China maintains its strategic imperative to grow its manufacturing
capacity and to feed its population.
Sources:
IMF World Economic Outlook, 2005
UN Economic Commission for Latin America and the Caribbean, 2005
Latin America's Chinese wake-up call, By Jose Orozco, Asia Times Oct 11 2006
Source: Pimenta Lima Mauricio, CEL – do Coppead/UFRJ, “Custos Logísticos na Economica Brasileira”, January 2006
Limao,
N. and A.J. Venables (2001), “Infraestrcuture, Geogrphical Disadvantage
and Transportation costs”; World Bank Economic Review 15
Simeon Djankov, Caroline Freund, Cong S. Pham, May 2006, Trading on Time, World Bank Policy Research Working Paper 3909
Copublication of the World Bank and the International Finance Corporation; “Doing Business in 2006: Creating jobs”; 2006
CEL and COPPEAD, “Panorama Logístico: Relatório de Pesquisa”, 2005
South American Business Information, August 15, 2006
Agência Estado, May 9,2006
Agência Estado, August 21, 2006
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