Waves of Asian Investments in Brazil

By Mario Henrique Ogasavara

China, Japan and South Korea are the most critical economic and political powers in the East Asian region. Latin America represents an important destination of foreign direct investment, particularly in the Brazilian market.  Brazil, which has the world’s fifth largest population and its eighth largest economy, is considered to have a large growth potential as one of the BRIC countries (Brazil, Russia, India and China).   Despite its current domestic political and economic crisis, the country has weathered such situations successfully in the past.  Remarkably, Brazil received waves of investments from these Asian countries throughout its history, in various entries and patterns.  

 

First Asian Wave:  Japanese Investments

The Japanese-Brazilian relationship began in 1908 when the first Japanese ship Kasato Maru arrived in Brazil with 165 immigrant families to work in agricultural fields, especially in coffee cultivation. Currently, Brazil is the country with the largest Japanese community outside Japan, estimated at more than 1.6 million people, a priceless asset in strengthening the bonds between both countries over the past century. Japanese investments in Brazil started in 1935 following a trade mission from that country, and many Japanese companies related to the cotton textile industry began to establish subsidiaries there. To mediate the trade between Japan and Brazil, some Japanese trading firms and banks opened offices in Brazil and created the Japanese Chamber of Commerce. 

Jinping and Kuczynski
Chinese President Xi Jinping (right) meeting with then-Peruvian president Pedro Pablo Kuczynski (across from him) in Da Nang, Vietnam, in 2017.

Japanese investment boomed in the 1950s, when Brazil began to attract the attention of Japanese companies as a potential market for manufacturers and a supply source of raw material. Besides the cotton-related firms, there are also other Japanese companies set up subsidiaries in Brazil, such as Pilot Pen Corporation, Ishikawajima-Harima, Ajinomoto, Yanmar Diesel, and Toyota Motors, which was the first Toyota car assembly plant established abroad. This first boom of manufacturing investments exhibited two special features. First, compared to the Japanese standards at that time, the investment was substantial. Second, these companies established full- or majority-owned subsidiaries. 

The second boom of Japanese investments occurred in the 1970s as Japanese companies and Brazilian state-owned enterprises embarked on large joint projects (known as “national projects”) making significant raw-material investment. During this period, Japanese firms invested as minority owners in ventures related to petrochemicals, aluminum, pulp and paper industries. Another important joint investment related to the “national projects” was the Japanese-Brazilian Program for the Cerrado Development (PRODECER), involving JICA (Japan International Cooperation Agency) and the Brazilian government aiming at expanding the agricultural production of soybeans in the Cerrado region. 

The third boom of Japanese investment occurred from 2008 through 2016 with an average of US$3 billion flow of investment per year. It started with the celebration of the 100th anniversary of Japanese immigration to Brazil, prompting many Japanese firms to invest in the steel sector, in bio-energy and the automotive industry. For instance, the establishment of a joint venture between Sumitomo Metals and the French company Vallourec aims at producing seamless steel pipes in Brazil to supply the national and international markets. Likewise, Mitsui & Co. and Petrobrás established a joint venture to implement bioethanol related projects. 

In the automotive sector, Japanese companies such as Toyota (6th), Honda (8th) and Nissan (10th) have been in the top ten carmakers in terms of sales volume in the Brazilian market in 2017. Together, these three companies had 12.2% of market share in 2014 and increased to 18.4% in 2017. Notably, Japanese companies are well ranked in car segments that provide the best profit margins in the automobile industry: sedan and SUV (Sports Utility Vehicle). For the sedan segment, Toyota Corolla and Honda Civic represented 67% of total volume sales, while Honda HR-V and Nissan Kicks had 33% of sales in the SUV segment. The excellent performance in sales volume required reinvestments in some production plants. New plants have been built in other cities such as Itirapina (Honda), Porto Feliz (Toyota) and Resende (Nissan). 

 

Second Asian Wave: Korean Investments 

The second wave of Asian investment in Brazil came from South Korea. Although the immigration of Koreans to Brazil started officially in 1963, which inaugurated a potential relationship between Brazil and South Korea, the first boom of Korean companies began twenty years later in the 1990s. The investment boom came particularly in the electronics sector with Samsung and LG establishing production plants in the Free Zone of Manaus (Amazon state). In addition, some companies in the automobile industry, such as Hyundai and Asia Motors, took advantage of the financial incentives provided by the Brazilian government to establish assembly plants in less developed regions in Brazil. 

Based on statistics from the Brazilian Central Bank, the second boom of Korean investments took place from 2010 through 2012 with an average of US$1 billion of commitments yearly. The funds went to the establishment of manufacturing plants in the steel, construction machinery, and automotive sectors. Dongkuk Steel Mill and Posco established a joint venture with Vale, a Brazilian multinational firm in the metals and mining sector. 

In the automobile sector, Hyundai Motors already had manufacturing plants in Brazil since 2004. However, its passenger cars became increasingly popular in that country as demand for high-quality yet affordable vehicles rose in the subsequent years. To take advantage of this growing success in the Brazilian market, Hyundai opened a new major production plant in 2012 with more than US$700 million of investment and developed a new car model (HB-20) tailored to the Brazilian consumer. HB-20 is a small car with a beautiful design that quickly gained a reputation for excellent quality and value as a “premium” brand quickly. Before the launch of the HB-20, Hyundai was ranked as the ninth-largest carmaker in Brazil, an industry that was dominated by Fiat, Volkswagen, GM and Ford, and was listed behind Toyota and Honda. In 2017, Hyundai became one of the top five carmakers in Brazil, surpassing the Japanese automakers Toyota (6th) and Honda (8th). Also, HB-20 became in 2017 the second-largest model in volume sales in the small car segment.

Hyundai also established, through its subsidiary Hyundai-Rotem, a production plant of trains to supply regional transit systems as well as a commuter railway in other cities in Brazil. This train factory aims at becoming Hyundai’s second-largest plant in the world. While it was initially focused on the Brazilian market, it now seeks to serve the broader region. 

 

Third Asian Wave: Chinese Investments

The third Asian wave of investments came from China. In 1810, the Chinese were the first Asian people to arrive in Brazil.  However, the economic Chinese-Brazilian relationship intensified only two hundred years later, but then it had a very intense impact on this bilateral connection. In 2009, for the first time, China became the largest Brazilian trade partner, surpassing the United States. Most of the trade is related to the export of commodities that are products of Brazilian firms. 

Chinese investments started mainly in the second decade of the 21st century, but at four different moments. Between 2010 and 2015, the Chinese government invested US$ 37.5 billion in the country, which is a significant amount surpassing Japan as the leading Asian investor in Brazil. The first boom occurred in 2010 focused on business related to commodity products. An example is an acquisition of the operation of the major oil company, Repsol’s Brazilian subsidiary, for US$7.1 billion by Sinopec Group, strengthening the presence of China in the natural resource sector of the Brazilian market. 

The second boom (2011-2013) occurred in the manufacturing sector. Chinese firms established manufacturing plants in the machinery and equipment (Sany Group), automotive (Chery Automobile Company), electronics and communication sectors. The latter refers to Huawei and Lenovo, which increased their business operations during a favorable period of economic growth and expansion of the Brazilian consumer market. The third boom occurred in late 2013 with the establishment of Chinese banks, such as the China Construction Bank Corporation that acquired Brazilian Bic Bank, and the investment of Industrial and Commercial Bank of China (ICBC) to support the internationalization of yuan and the trade and investment between China and Brazil. 

More recently, the fourth boom (2014-2015) is related to the massive amount of investment in the infrastructure sector, mainly related to the construction of energy power plants, and the acquisition of assets in the transmission and generation of energy. For instance, State Grid acquired US$1 billion in assets of Plena Transmissora and CPFL for R$15 billion, gaining the participation of 13% of the Brazilian market of the energy distribution. China Three Gorges (CTG) became consolidated as the primary private energy generator by acquiring the assets of Dulke Energy (US$1.2 billion), Triunfo (R$1.7 billion) and Jupiá and Ilha Solteira (R$13.8 billion). These figures show that although the Chinese investments came later than those of other Asian countries, they came in amounts showing an exceptional commitment to the economic relationship.

 

Asian investments in recent times

In most recent years, these three central Asian countries (Japan, South Korea and China) continue to invest in the Brazilian market but focus on different sectors. For instance, although Brazil had suffered from a severe economic crisis, the sales volume of the franchising sector has continuously increased on average by 8.2% per year. The World Franchise Council confirms the representativeness of this sector showing that Brazil ranks as the world’s fourth in the number of brands offered through the franchising model. We can highlight some Japanese companies in this sector. The Japanese company Kumon, which provides an afterschool program for reading and math, ranks as the seventh largest franchising chain in Brazil with 1,400 units. Two Japanese companies are intensifying their presence in retail by using a franchising model. Daiso Japan—a 100-yen shop—and Miniso, a Japanese fast-fashion designer brand that specializes in household and consumer goods including cosmetics, stationery, toys and kitchenware. 

Spire

Korean firms are focusing on the high technology sector. For instance, Qualcomm Technologies and USI (a subsidiary of South Korean ASE - Advanced Semiconductor Engineering) established a joint venture of US$200 million to install a semiconductor module factory dedicated to the design, development, and fabrication of modules and components for smartphones and IoT (Internet of Things) devices in Brazil. Meanwhile, Chinese firms are looking for the new mobility sector. Didi Chuxing, the world’s largest mobile transportation platform acquired 99, the Brazilian company which operates a ride-hailing business and is the main competitor to Uber in Brazil. Didi Chuxing had effectively invested US$900 million in this company to accelerate market growth in Latin America further and bring more transportation choices to the region’s citizens. 

What about the future, is a new boom of Asian investments coming to Brazil? The trends show a continued commitment to the country with other opportunities in agribusiness, high technology sector, renewable energy sources and the infrastructure sector. 

 

Mario Henrique Ogasavara is a Professor of International Business at ESPM São Paulo, Brazil, Chair of the Academic Division of Strategy in Organization of the Brazilian Academy of Management (ANPAD), Regional Coordinator of the Society for Global Business and Economic Development (SGBED) and Associate Coordinator of the ProAsia-Asia Studies Program at the University of São Paulo