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Latin American guide to China: a practical guide to doing business in China for Latin American companies.

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SHANGHAI -- A Bolivian executive lands at a Chinese airport and politely kisses the cheek of an assistant sent to greet him, as she recoils in astonishment. A Dominican businessman buys a container of red beans in China, but when the shipment arrives it's half full of pebbles. A Peruvian chef steps onto the streets of Shanghai, surveys the black sedans, the gray sky, the rusty bicycles, and asks himself: "Do these people really want to eat ceviche?"

It hasn't always been smooth sailing for Latin Americans doing business in China. From hulking multinationals down to adventure-driven entrepreneurs, the journey has been fraught with regulatory headaches, marketing missteps and copy-cat competitors, not to mention a yawning cultural divide.

But despite the challenges, many Latin American companies are forging ahead, moving beyond the tried and true commodities trade, and seeking out Chinese buyers for value-added products like Brazilian shoes and Mexican tequila. Others are launching trading companies, communications ventures, tourism services and Latin-themed restaurants, all with a common goal: to stake a claim in the world's fastest growing major economy.

I'm quite amazed at how many people are coming and taking the chance to start something up here. And in Latin America, I don't think they're seeing this," says Edgar Puch, director of the procurement and trading company Pryme Group, in Shanghai.

While many large Latin American companies have struggled to find a toehold in China, Puch says a growing army of Latin American entrepreneurs is scrambling up the learning curve; they are getting their hands dirty, and immersing themselves in China's business culture.

"Small companies are doing an important job here, opening our eyes, accumulating knowledge, and I expect more and more to come," he says. "And they must come."

A glance at the numbers explains why: With a staggering 1.3 billion inhabitants, China has posted economic growth rates of around 10 percent for three decades. What's more, trade between Latin America and China is on fire--shooting up 51.2 percent in 2010, to $178.6 billion.

In other words, Chinas trade with Latin America is growing at nearly twice the level of US trade with the region.

"The Chinese market is truly becoming an attractive market," says Efren Calvo Adame, president of the Mexico-China Chamber of Commerce. In the context of Europe's debt crisis and the United States' limping recovery, he added, "China is healthy, emergent, and sustainable over the long-term. What other market offers that?"

Yet by most accounts, Latin America has arrived late to the game, and several of Latin America's large multinationals have had a bumpy ride in China so far. Experts point to the case of Brazilian airplane maker Embraer, which stood by for months with an inactive factory in China while it waited on government authorizations.

"China is not for a first-timer in Asia. You don't enter the Chinese market in a gung-ho spirit," says Mario Ignacio Artaza, Chilean consul-general in Hong Kong. "The first rule of success is investing in a plane ticket, in a hotel stay, in a cab, and seeing for yourself.."

THINK NICHE, THINK RICH

Puch, who is Bolivian, came to China as an executive for a Chilean company in 2005. He struck out on his own two years later, selling his car and sinking all his savings into Pryme Group. The company has grown swiftly ever since and recently added a research and analysis division.

Puch says his most important piece of advice for Latin American clients is to find a niche in China, preferably one that taps into the country's luxury spending spree. Chinas millionaire households surged 31 percent last year, a recent Boston Consulting Group survey showed; the group expects China's middle-class and affluent consumers to double in number over the next decade, to more than 400 million.

"China has more millionaires than any country outside Japan and the United States," Puch says, "and Chinese society has become aspirational."

He pointed to a Chilean client that sells avocado oil as a company poised to take advantage of the trend. Food safety looms large in China, and cooking oil has been a major offender. In September, the official Xinhua news agency reported a police crackdown on a gang that sold thousands of tons of illegally recycled cooking oil, much of it collected from drains behind restaurants.

As a result, Chinas wealthier consumers are willing to pay a premium for imported food products that conform to stricter safety standards.

Puch's advice to the avocado oil client: "You have a very good product for this market, but you have to sell it like a delicacy, not to the supermarkets."

Consuelo Valdez, CFO of LaREDChina. corn networking website, says Chinas urban spending habits caught her off guard when she arrived earlier this year.

"You have an image of China as rice and pirated DVDs, but when you come you see women with Louis Vuitton shopping bags and Chanel shopping bags ... big bags," she says. "Plus you see construction everywhere, infrastructure everywhere. I've been very impressed by the buying power, and by the pace of change."

Before venturing into the Middle Kingdom, Puch advises clients to take stock of China's value-added and import taxes. China has thrown open its doors to commodities like Argentine soy, to feed its livestock, and Brazilian iron ore, to feed its construction boom. But China slaps import duties on everything from wood to wine to food products, sometimes as high as 35 or 40 percent.

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SECOND-TIER CITIES

When Peruvian Eduardo Vargas arrived in Shanghai in 2002 as an executive chef for a Hong Kong-based restaurant, his first impression was of a dreary city with the black sedans of party officials swooshing by.

"There was no western food that was particularly good. There weren't choices. We were new," he says.

A year later he opened his own cafe. Skip forward more than a dozen openings--an Italian bistro, a deli--and Vargas has become a culinary fixture in the city, listed by CNNGo as one of Shanghai's "20 people to watch," alongside former NBA star Yao Ming. Vargas's latest venture, Chicha, features ceviche, anticuchos and pisco sours in a lounge bathed in deep yellow and orange hues, and swaying to samba. Across the street, in Fuxing Park, elderly Chinese play mahjong and practice tai chi.

But now Vargas is looking beyond Shanghai, at Chinas so-called second-and third-tier cities. Shanghai, Beijing and Guangzhou are China's major business hubs, seen as the country's early winners. But China has at least 15 cities with populations above five million people--Uruguay has a population of about 3.3 million. They're all simmering with ambition, throwing up malls, fitness clubs and even opera houses.

"There are cities in China that look like Shanghai 10 years ago, when I arrived," says Vargas, referring to cities like Suzhou, Tianjin, Chongqing, Hangzhou and Chengdu. He added, "A city that used to have only Kentucky Fried Chicken and McDonald's," in the way of foreign restaurants, "now has an Italian restaurant ... It could be a money-making machine."

Artaza, the Chilean consul-general, is encouraging companies from his own country to tread the same path. Chile was the first South American country to recognize the mainland Chinese government in 1970, and Artaza says China has "almost a first-kiss remembrance" of those early diplomatic ties. China and Chile signed a Free Trade Agreement in 2006.

"And we should be the first ones to plant a kiss in these second-third-and fourth-tier cities," Artaza says. "Within these cities there is an efficient market for distributing our goods to a population that's eager to enter a growing globalization process."

CUSTOMIZE, OR NOT

As for the manual on customizing Latin American products to Chinese tastes, it hasn't been written yet. Mexican food giant Grupo Bimbo became one of the first to test the waters after entering China in 2006. Taking note of the Chinese penchant for savory foods, the company cut back on sugar and introduced breads with layers of meat and red bean paste. According to the China Daily, "roiling style bread", or juanqu, with beef floss, is the company's best selling product in the Middle Kingdom.

Experts say packaging is also key. Red signifies good luck, for example. Gold, wealth and happiness. Puch recommends packaging food products in small quantities, since the Chinese tend to shop often and buy small amounts. During China's Mid-Autumn Festival, he notes, friends and family exchange moon cakes filled with lotus seed paste. The cakes are small and, by western standards, bland. But they arrive in large, elaborate boxes, sporting thick ribbons and painted fabric.

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At the same time, experts say, Chinese consumers often seek out imported products precisely because they are not Chinese. A bottle of French wine bestows more status than, say, a bottle of Chinas own Great Wall Wine. No need to mess with a good thing.

"I don't believe in 'Chinacizing' things. It doesn't work," says Vargas of the western cuisine that's built his reputation.

Ex-pats flock to his upscale eateries, but Chinese diners, he says, "are my bread and butter."

SETTING UP SHOP

For those who decide to set up shop in China, Steve Dickinson, co-author of China Law Blog, has some bad news and some good news. The bad news: a steady stream of Latin American business clients have come through his door over the years, seeking help after being cheated by Chinese partners. "It's just one after the other, after the other," says Dickinson, who works almost exclusively with foreign companies setting up operations in China.

The good news: he insists most of their problems can be avoided.

In particular, he counsels new businesses not to form joint-ventures with Chinese partners unless they have to. China requires joint-ventures in some key sectors, but the structure has been famously problematic in cases where intellectual property "leaks" to Chinese partners, who then turn around and compete against their foreign partners with a home-court advantage.

In most cases, Dickinson says, a Wholly Foreign owned Enterprise, known as a WFOE, will do the trick. An increasingly popular investment vehicle in mainland China, WFOEs are limited-liability corporations belonging to foreign nationals, set up with foreign funds.

Common-sense precautions also apply, like rigorous vetting of suppliers. Dickinson cited one client who bought a container of red beans in China to ship to the Dominican Republic: He took delivery of a container that was half full of pebbles. Another bought frozen shrimp, but received a container full of ice blocks. Dickinson says many have let their judgement be fogged by a delusional concept of "the Chinese price."

"The fundamental thing is, if the price is too good to be true, it's too good to be true," he says. "Steel is steel. It costs a certain amount."

For companies manufacturing in China, experts also advise keeping vital components and trade secrets out of the equation, to avoid copying. A company manufacturing a household electronic device, for example, might produce the housing for its product in China. But if the machine relies on a computer chip with special embedded codes, the company can insert the chip as part of a separate assembly...elsewhere.

On the bright side, says Luis Alberto Guahuna, a Colombian apparel entrepreneur, "China has something that's extremely important: Things get done."

Guahuna and his partners started Hong Kong-based Prolinks in 2007, "as a hobby, really." But orders quickly piled up. Somewhere around the time he took an order for $200,000 of brassieres, Guahuna says, "We realized the business is not small anymore." Prolinks is currently working with designers to develop its own line of electrical appliances to sell in Latin America.

Guahuna says anchoring the company in Hong Kong had offered easy access to mainland China's vast manufacturing sector, and simplified accounting. He also noted labor costs have risen in China, where inflation hit a three-year peak of 6.5 percent in July, and where the government's one-child policy has gradually reduced the labor pool.

Bangladesh might offer cheaper manufacturing, Guahuna says, "But in China the quality is a lot better now. The infrastructure is in place and there is efficiency."

RESOLVING DISPUTES

From fake iPhones to copy-cat designer bags, Chinas reputation for intellectual property infringement can cause night sweats for foreign investors. But experts say there are ways to minimize risk, or at least maximize profits early on.

"China has a good trademark system, but you have to use it," says Dickinson. He advises clients to register not just their trademark, but "all the paraphernalia, the colors, the little fluffy animal that represents your brand."

If a big operator infringes on a trademark, "you can shut them down," Dickinson says. A mom-and-pops operation, selling fake coffee mugs from a push cart, might have to be tolerated as a nuisance.

Companies introducing new technology in China have a harder time.

"It can be a losing battle," says Stan Abrams, a prominent intellectual property lawyer and law professor in Beijing. "Eventually someone else, legally or illegally, adopt your technology and start doing the same thing, and the competition catch up to you very quickly."

With the right advance, "You can probably jump in and do very well," Abrams added. "But I always tell my clients, 'As soon as you're in China, the clock starts ticking.'"

The World Bank's 2011 "Doing Business" report gave China low marks as a place to start a business, but China ranked 15 out of 183 countries in the category of enforcing contracts.

"There is this sense, this sensation, that there are no clear rules in China, but there are," says Calvo, of the Mexican Chamber of Commerce in China. "That's how they are able to grow."

THE CULTURE GAP

According to Marusia Musacchio, the Mexican co-founder of Zhao Cards, such misconceptions reflect a gaping cultural divide. She says most Latin American universities have yet to incorporate Chinese studies into their curriculum.

And she remembers the reaction of one of her favorite professors when she announced she would be focusing her studies on Sino-Latinamerican relations.

"I really love her, but I remember she said, 'Marusia, why do you want to be so eccentric?'" Musacchio went on to earn a masters degree, not in Mexico, but at Harvard University.

She started her tourism guide company, Zhao Cards, with a friend after being bombarded by out-of-town visitors.

At the time, China had very few signs in English, so she gave them her cell phone number in case they ran into trouble. Overwhelmed by their calls, she started making small flashcards for them. I need a coke," read one, in Chinese characters.

"They got kind of sophisticated, like, 'Go to this specific restaurant and order this really great dish,"' she laughs, or, "'I need a massage, but more for my lower back.'" Today the company sells rings of detachable cards to help English speakers navigate Shanghai, Beijing and Hong Kong.

There's a Spanish version on the way. The company also has an audio-enabled iPhone app that made Apple's "New and Noteworthy" list. Now, users can literally ask for that coke in Mandarin.

But if Zhao Cards are meant to shrink the culture gap on the tourist grid, the business world may require a whole new map.

Executives are told to present business cards with both hands. During toasts, they learn, it is respectful to keep the rim of your glass below the rim of your host's glass. Karaoke sessions may be part of sealing a deal, as may late-night drinking games fueled by rice liquor.

"It's not a cliche, the personal relationship matters a lot," says Musacchio. "With the distributors you have to go sit down and have a cup of tea and socialize."

Abrams says companies shouldn't be spooked.

"There is a whole industry (in China) about training people for cultural issues. I think that's all a bit overblown," he says.

"There are some things that are useful to know, but in the end, if you have something people want, and if you're friendly, it doesn't really matter."

And the way things are going, says Artaza, of Chile, Latin America's business class has no choice but to place more chips in China.

"My competitive advantage as a Latino professional is my English," he says. "But my daughter can write, speak and read in Mandarin, and she's 12 years old. That's her comparative advantage, for life."

editorial@latintrade.com

Contacts

laredchina.com

laredchina.com Contains many business forums {in Spanish] where Latin Americans exchange tips on suppliers, vendors and Licensing in China.

www.thebeijingaxis.com

The Beijing Axis is a China-focused international advisory firm operating in four principal areas: Commodities, Capital_, Procurement and Strategy. (Website in English)

www.investhk.gov.hk

InvestHK is a division of the Commerce and Economic Development Bureau of the Hong Kong SAR Government. It supports overseas businesses setting up and expanding in Hong Kong, providing free advice and customized services. The website has a Spanish-language section.

Other Information

www.chinatawblog.com

In English, this is an excellent blog about business law in China, geared towards international companies. It's co-authored by Steve Dickinson, who is a source for our story.

www.chinahearsay.com

Also in English, written by another source, Stan Abrams, this blog offers deep insight into international business news in China, plus economic commentary.

www.china-files.com

With many stories in Spanish, this site contains general news but also runs Latin America-specific stories.

www.hola-china.net

A Spanish-language magazine geared towards Latin Americans living in China.

ProMexico

promexicoldpromexico.gob.mx

http://www.promexico.gob.mx

ProChile

info@prochile.cl

http://rc.prochite.gob.cl/

ProExport (Colombia)

informacion@proexport.com.co

http://www.proexport.com.co/
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Title Annotation:SPECIAL REPORT
Author:Morris, Ruth
Publication:Latin Trade
Article Type:Editorial
Geographic Code:9CHIN
Date:Jan 1, 2012
Words:2938
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