The Asia factor: raw materials and jobs are heading away from Latin America, but there's an upside if the region's businesses can turn competition into opportunity.

Seventy-six year old Carlos Paulino has never been to China--nor does he plan to visit anytime soon. Nevertheless, when the chance arose, he plunked down US$130,000 to invest in a new chain of cafes, sight unseen, with two partners.

"It seemed like a good opportunity," says Paulino, who is the president of Cooxupe, one of Brazil's largest coffee exporters. "The other markets--the United States or Europe, for example--are saturated, but China is a virgin market."

Cafechocolat, launched last June in the northwestern city of Xian, is just the first of a series of cafes that Paulino and his partners plan to open to sell roasted Brazilian coffee and Belgian chocolate to the Chinese masses. Never mind that sales of coffee beans are still small, for the moment. "It took Japan 30 years to start drinking coffee," he says, upbeat. "I think China is probably more difficult. But you have to start somewhere."

Like Paulino, a growing number of Latin American businessmen are starting to plunge, pell-mell, into the world's most coveted market, swept up by the lure of prospects on a new frontier, and hypnotized by the idea of selling goods to a potential 1.3 billion customers. In Mexico, companies like Hylsamex and Villacero are studying the market to look for niches in the steel industry. In Chile, fruit producers are looking for a way in.

From the streets of Lima to Mexico City, Asia's star is on the rise, spearheaded by Chinas growth as a manufacturing giant and its insatiable demand for commodities like soybeans, iron ore, copper and wood pulp. In 2004, Latin America posted its best export revenues in the past two decades, due in large part to soaring trade with China--up 34% from the year before, to $14 billion, according to the Inter-American Development Bank.

No wonder Latin American nations are eagerly wooing the world's newest superpower, both as a parking spot for some of Chinas staggering $600 billion in foreign reserves and as a welcome counterweight to Western nations.

"It's a complementary relationship," says Charles Tang, the president of the Brazil-China Chamber of Industry and Commerce. "The world is changing from a uni-polar world to a multi-polar world. We're going to see a much greater alliance of China with South American nations who need hard currency investments in the future, and not just with Brazil, but also Argentina, Chile, Peru."

In geopolitical terms, of course, that may mean closer collaboration between Latin America and China on the international stage, the way Brazil and China worked together with a developing world bloc to protest agricultural subsidies by rich nations at a World Trade Organization (WTO) conference in 2002, ultimately derailing talks, in trade terms, that translates into acute Chinese interest in buying natural resource suppliers, instead of just exporting raw materials from them back home.

"You can't imagine the number of Chinese delegations who are visiting us each week," says Carlo Lovatelli, president of the Brazilian Association of Agribusiness. "They're very, very interested, and not just in investing in infrastructure. They'd like to buy land as well."

China isn't alone in the drive to build trade ties with Latin America. Worried about being left behind, Japan and Korea also are racing to secure their own access to strategic resources and to ink free trade agreements with countries in the region. Months after Chinese steel company Baosteel announced a $2 billion joint-venture steel mill with Brazil's Companhia Vale do Rio Doce (CVRD), the world's largest iron-ore producer, Japanese and Korean steel companies also signed decade-long contracts with CVRD. Meanwhile, Chile's free trade agreement with South Korea went into effect last year, sparking a 72% jump in exports for the first 11 months of 2004. Not to be outdone, Japan recently agreed to a historic trade deal with Mexico, opening access to Japan's highly protected agricultural markets for the first time ever.

Part of Latin America's newfound romance with Asia, of course, is the allure of increasing exports to the world's fastest-growing economic region. At the same time, a weakening U.S. dollar is prompting businesses in the region to seek more customers in Asia, where Latin American currencies remain competitive, analysts say. Be that as it may, Asia is not an easy market to crack, with often-impenetrable cultural and linguistic barriers and demanding customers.

"We entered the Asian market eight years ago, and only now are we reaping the benefits" says John Baldieri, export manager of Chile's Agrosuper, the world's largest pork producer. "When we first got there, we had to change our entire production processes. We Latinos, we have short-term goals. We want to get business going as soon as possible. But, though there's a huge market in Asia, you have to invest time, money, and state-of-the-art technology. You have to pay lots of visits. You have to learn what the consumers want. You have to be patient. It's difficult."

Agrosuper's patience is paying off: In 2004, export revenue to Asia shot up to $220 million, a 60% rise from the year before. In the coming few years, the company projects a hefty 30% annual growth rate, at minimum, in pork, wine and fruit exports.

Another key to selling to Asia is moving products up the economic food chain, exporters say. "Value-added products, that's our strategy," says Juan Pablo Sierralta, the Asia sales manager for Chilean salmon exporter Aguas Claras, which has seen exports to the Far East grow by 12% in the last two years.

Though processed food products are labor-intensive, their prices are much steadier compared to commodities like whole frozen fillets, where prices can change weekly. "That helps protect the company from market fluctuations," Sierralta says. Another benefit of value-added products is that they aren't subject to country bans, a risk with agricultural commodities if, for example, an avian flu or mad cow disease hits a region.

Deficit risk. Beyond diversification, however, there are other important reasons to sell higher-value products, executives say. For the time being, commodities exporters like Brazil enjoy a comfortable $1 billion trade surplus with China. But take a closer look at the numbers and cracks appear on the trade balance sheet. For every $10 of Brazilian products currently sold to China, only $2 is value-added goods. Meanwhile. Brazilian imports of manufactured Chinese goods rose at a 3-to-1 ratio over its exports in the first 11 months of 2004.

"If that trend doesn't change, Brazil's surplus with China could soon turn into a deficit, and then the relationship could cool down," says Mexandre Uehara, political and economic analyst at the Japan External Trade Organization  in Brazil.

Or worse. You just have to look north of the equator, alter all, to see a completely different outcome in the booming relations between Latin America and Asian economic powerhouses.

Since 2000, more than 270,000 Mexicans have lost assembly jobs, hundreds of factories have closed down and Mexico's trade deficit with China has catapulted to more than $5 billion, according to consultancy McKinsey and Company, due to Chinas rapid rise as a low-cost manufacturing giant. It's a far cry from a decade ago, when Mexico was a magnet for multinationals seeking to establish factories next door to the world's-biggest consumer market.

The plain fact of the matter, of course, is that virtually no one can compete with the cheapness of Chinese labor. According to the Inter-American Development bank, the cheapest workers in Latin America are still paid three times what a Chinese laborer makes.

Despite the havoc wreaked by Chinas ascent, savvy multinationals in Mexico have managed to keep sales flowing and factories open, says Sergio Langarica, secretary of Mexico's National Chamber of Electronics, Telecommunications and Information Technology. They've done so by focusing on niche markets, seeking to produce low-volume, high-mix products, and by leveraging the geographical advantages that the country possesses as neighbor to the current world's-largest consumer market, the United States.

"Due to the threat of China, it's no longer good enough just to make products: You need to create and design them," says Langarica. "Adding value is a requirement. Another key as well is to be very flexible in your production process. Companies like HP and IBM have taken the lead in this area."

For U.S. computer chip manufacturer Intel, which has an operation in Costa Rica whose exports to Asia go primarily to Malaysia, customizing and tailoring is essential. "We're continually adding to our products by dealing not just with manufacturing but operations, development, quality and research," says Arturo Barboza, Intel's media and marketing manager. Otherwise, he says, "we couldn't compete."

It's not easy. There are big risks upon entering the Chinese market, as Brazilian soybean exporters learned to their dismay last year when Chinese officials held up shipments of soybeans for two months starting in April due to trace amounts of fungicides in the shipments. Exporters like Bunge and Cargill lost up to an estimated $800 million as ships were delayed and cargoes were turned back. By the time the Chinese lifted their embargo, soybean prices had slipped by half on world commodities markets. Exporters were furious but impotent in the lace of Chinese trade decisions.

Chinas spotty compliance with WTO rules has been a running issue, as well, for prominent business groups in both Brazil and Argentina, who sharply criticize their governments for granting China official recognition as a market economy following Chinese president Hu Jintao's high-profile visit in November.

There will be "serious and negative consequences" if the government fails to heed their warnings on China, says Paulo Saab, the president of Brazil's association of household-appliance manufacturers, Eletros. Among the warnings he issued were notes on China's lack of respect for intellectual property rights and its penchant for dumping products at artificially low costs, which drives down prices to a point where domestic producers struggle to compete.

Changes have to be made on a governmental level, not just at the corporate level, for Latin America to compete with Asia, executives say. A long-term political vision is essential. In the case of Brazil, for example, an oppressive domestic tax regime combined with some of the highest interest rates in the world makes the cost of doing business exorbitant and discourages local entrepreneurship. In Mexico, over-regulation and inadequate infrastructure hamper growth.

By contrast, Chile and Costa Rica both have highly skilled workforces and a good investment environment. Costa Rica has even changed graduation requirements at its universities to create more technically capable workers, one more reason the country is attractive to electronics companies.

For the next few years, ties between Latin America and Asia should soar as the proliferation of free trade agreements continues. After all, the deal with South Korea is going "great" so far, according to Chile's economic director of bilateral negotiations, Mario Matus. In the first 11 months of 2004, Chilean exports soared more than 70% from the same period in 2003 to $1.6 billion, while South Korean imports rose nearly 24% to $614 million. More importantly, Matus notes, even if you subtract Chile's huge amount of copper exports and rising prices for the metal, the country's sales to South Korea still rose 56%, a clear sign of Chile's increasing diversification to items like pork, grapes, wine and plywood.

Higher standard. Chile is interested in trade deals with China and Japan and it should be signing an accord with Singapore and New Zealand sometime this year, Matus says. Korea's exports to Chile--mostly big-ticket manufactured items like autos and cellular phones--will eclipse Chile's exports in a few years, Matus says. No matter. "In general terms, we don't mind if we have a surplus or a deficit with another country," he says. "That's not part of our equation, because if we have a deficit, that just means that we have a higher standard of living."

Mexico, too. is considering a trade deal with South Korea and with China. While that might not do anything to help Mexico's deficit with Asia, the Mexican government is looking to attract more foreign investment to the country, and to promote exports of oil, steel, cement and agricultural products along the way.

When all's said and done, though, free trade agreements only provide an initial boost to exporters, exporters say. For example, imported food in Japan makes up 60% of the calories Japanese people consume, notes Tadayashi Nagashima, executive director of the Japan External Trade Organization in Mexico. "It's a very good business, but it's also necessary to know the Japanese market requirements," says Nagashima. "The trade agreement alone won't help in expanding exports. You have to study what the Japanese consumer needs." Basic marketing is essential. Brazil is the main supplier of orange juice to Japan, for example, but the packaging doesn't make that clear to Japanese consumers.

Despite the difficulties, Latin America's relationship with Asia has, in some ways, nowhere to go but up. Brazil is the only Latin American country among Chinas 20 leading sources of imports, and it accounts for just 1% of the country's total foreign consumption. China buys as much as it sells, and sectors as varied as airplanes, powdered mill banking technology and cow embryos offer openings for Latin American businesses to sell.

Still, you have to do your homework. That's the strategy that Brazilian bus manufacturer Marcopolo has taken. In 1997, the company determined that China's market had the growth potential to be four or five times greater than in Brazil or Europe, with an estimated annual production of up to 100,000 buses. Five years later, they signed a $12 million contract to transfer their bus technology to a Chinese joint venture over seven years.

Marcopolo is currently studying the possibility of building its own factory in China. Even the Mexicans these days are starting to perceive China not just as a competitor but as a possible partner. Companies like Mexico's Gruma, the world's-largest corn tortilla producer, are planning to open factories in China in 2006. A billion-plus tortillas is a lot of dough, if Latin Americans can cross the cultural divide.

Looking East

Latin America trade with Asia's Big Three is booming.

CHINA

Brazil      30%
Mexico      19%
Chile       13%
Argentina   12%
Panama       6%
Others      20%

JAPAN

Mexico      23%
Panama      19%
Brazil      19%
Chile       15%
Colombia     3%
Others      20%

KOREA

Brazil      22%
Mexico      19%
Chile       15%
Panama       8%
Bahamas      6%
Bermuda      4%
Ecuador      4%
Others      22%

Note: Table made from pie charts.

SOURCE: IMF, LATIN TRADE

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