Closer trade link develops with Chile

The most favorable investment destination in the Latin-American region is rapidly becoming a prime target for a growing number of Chinese enterprises, reports Ding Qingfen in Santiago

It is touted as the most competitive economy and also the most favorable destination for foreign companies in the Latin-American region, but China's investment in Chile has been surprisingly small.

This, however, is probably set to change as China and Chile wrapped up a free trade agreement on investment, and a growing number of Chinese companies turn their eyes on a nation that has led the Latin-American region in terms of economic expansion and that is committed to spurring investment in a wide range of sectors, including infrastructure and energy.

Although China has hurled huge investment at some Latin-American nations including Brazil, it has been slow in entering Chile.

China's investment in Chile is quite small, said Shao Yingjun, economic counselor of the Chinese Embassy to Chile.

Figures from the Chilean government showed that from 1974 to 2011, China's cumulative investment in the country reached $94.7 million, accounting for 0.12 percent of Chile's total foreign direct investment during the same period.

"Politically, the country is very stable, with a well-developed legal system and social welfare mechanism," said Yang Wanming, China's ambassador to Chile.

But at the same time, "Chile is a market that is highly market-oriented, very active and strictly supervised and managed. But Chinese investors have limited information about the market", added Yang.

A recent survey by the World Bank showed Chile continued to be the most appealing Latin American nation for foreign businesses in 2013 for three consecutive years.

Chile is the second-largest nation in the Latin-American region in terms of the volume of foreign direct investment, next to Brazil.

According to statistics from the Economic Commission of the UN for Latin America and the Caribbean, Chile attracted FDI worth $12.28 billion during the first half of 2012, up 80 percent from a year earlier.

Despite the drop in FDI worldwide since the financial crisis, China's outbound investment has witnessed a fast growth, reaching $60 billion in 2011.

The Latin-American region has led that growth.

That year, the region became the second-largest destination for Chinese outbound direct investment, accounting for 16.8 percent of the nation's total outbound investment, according to the Ministry of Commerce.

Although China's ODI flowing into Latin America was $54 billion by the end of 2011, its investment in Chile was merely $250 million.

But while China and Chile further strengthen bilateral economic and trade relations, "we could see a big increase (in Chinese investment into Chile) in the future. Industries including mining, tourism, infrastructure and agriculture are the most potential," said Shao.

Early in 2010, State Grid Corp agreed to spend at least $900 million to develop a large copper deposit in Chile in partnership with Vancouver-based Quadra Mining.

A report by Diego Portales University Chile said China's investment in Chile's mining sector will reach $10 billion by 2017.

In November 2005, China and Chile signed a two-way FTA, which came into force in October 2006. In April 2008, President Hu Jintao and his Chilean counterpart Michelle Bachelet witnessed the signing of the Supplementary Agreement on Trade in Services of the Free Trade Agreement between the two sides.

"The FTA and the recent additional agreements on investment are set to stimulate Chinese investment here," said Yang Wanming.

Sky Solar Holdings Co Ltd, a giant renewable energy developer from China, just announced the kickoff of an 18 mW solar power plant in Chile's northern Arica province this month. The plant will be completed before the end of the third quarter of 2013.

With other planned solar projects included, the investment will amount to $900 million.

COFCO Wine and Spirits, the wine unit of the State-owned food company COFCO, also completed its acquisition of Chilean winery Bisquert for $18 million.

Chile is the sixth-largest economy in the Latin-American region, but it is ranked as the freest economy in the region by Washington-based think tank Heritage Foundation.

Chile's economy has registered growth of more than 6 percent during the past decade. A report by the Organization for Economic Cooperation and Development predicted that Chile would outperform other OECD member nations in economic growth from 2012 to 2014.

"Chile is a very free market, and domestic consumption is big and growing steadily. Chile is the right market for Chinese companies," said Marco Salazar, general manager of FAW Chile.

FAW Chile was set up in 2010, and as a test started selling trucks in the market. In 2012, the company decided to expand in Chile and sell cars from BYD, Greatwall and Chery in December, while the Chinese car brands become more and more recognized.

"The Chinese auto brands are very competitive in Chile, and the market share has been growing fast. FAW is ready to continue to expand sales in Chile," said Salazar.

It is estimated that Chinese cars account for 10 percent of the market share in Chile, and the figure is expected to rise to up to 13 percent in 2012.

But it's not only about Chilean economic growth and stability. Chile's commitment to boosting investment is another catalyst for Chinese investors.

Statistics from the Chilean government show that the nation is expected to have new investment projects worth $213 billion from 2012 to 2026 in mining, energy, infrastructure, service, telecommunications and tourism.

According to Chile's chamber of commerce for construction, electricity-related infrastructure requires the largest volume of investment, thanks to the increasing price of electricity.

In December, a group of ministries led by the Ministry of Economy of Chile announced 20 measures to promote FDI in energy, water resource, mining, urbanization, and environmental evaluation.

"We welcome Chinese investment," said Alvaro Jana Linetzky, director general of international economic relations with the Ministry of Foreign Relations of Chile.

Chinese investment used to go mainly into the mining, agriculture, processing manufacturing and fishery industries.

"Chinese companies are expressing strong interest in investing in infrastructure projects. Renewable energy is another major sector that will see a huge influx of investment from China", he added.

According to Wen Sanpin, general manager of Corporation ZTE Chile SA, "around Latin America, Chile is strategically important for ZTE and the company's business in the market is very hopeful".

The leading Chinese telecom equipment company set up its branch office in Chile in 2004, and by 2011, sales revenue of ZTE Chile was $47 million.

To promote the brand in the Latin American market, ZTE spent $10 million to set up a laboratory at the University of Chile, which displays the company's latest high-end products and technologies.

The laboratory came into operation in June 2011, and it also provides training programs for students majoring in technology at the university.

Not an easy market

But Shao Yingjun said Chile is not an easy market, and there are severe challenges ahead for Chinese investors.

Shao said Chinese investment in Chile wouldn't see rapid growth in the short term, as the Chilean market is very different from other Latin American countries.

"It is a very open market with mature and well-developed laws and regulations. It is a market that is highly competitive and also a market where the labor cost is almost the most expensive in Latin America," she explained.

Furthermore, Chile has set the same strict standards in carbon emissions as in Europe when it comes to the entry of foreign auto brands, although it is smaller than Brazil in market size, she said.

Chinese auto brands, in the minds of many Chilean consumers, are "much cheaper but not good in quality".

They need to "improve the value, the quality and the branding of their cars", she added.

Another problem is the high cost of labor, which are squeezing profits. In 2011, labor costs rose by 7.2 percent from a year earlier in Chile, according to government statistics.

"The labor cost is much higher in Chile. The products and services we provide here have to meet the European standard, and it's surprising, right? But it's true," said Wen.

Xie Yu in Shanghai contributed to this story.

Contact the writer at dingqingfen@chinadaily.com.cn

(China Daily 01/08/2013 page13)