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Most Brazilian trade with China is in the form of exports of raw materials: big companies send huge amounts of iron ore, soya and sugar eastward. This has been the basis of the Sino-Brazilian relationship for the past decade, and it has helped power Brazilian growth.
But Marco Polo, the busmaker based in the southern Brazilian city of Caxias do Sul, is taking advantage of a different kind of venture with China. As its name might unintentionally suggest, Marco Polo has set up a small base in the Middle Kingdom from which it sends back materials to be used in its production centres around the world.
“Right now we have a procurement office there, with 60 people to develop parts and components for Marco Polo in Brazil, Colombia, South Africa and Mexico,” says Ruben Bisi, director of strategy at the company. “We expect to have 500 in 2-3 years.”
For Marco Polo, the attraction of China is cheap goods, solid infrastructure and low interest rates – three characteristics Brazil lacks. In spite of expected gross domestic product growth of more than 7 per cent this year, Brazil now has one of the most overvalued exchange rates in the Group of 20 – prompting its finance minister recently to declare the “currency war” – and some of the highest real interest rates in the world. Backed-up roads and ports systems make transport within and out of the country expensive.
“We buy raw materials and components in China, and we have a small factory to produce seats, windows and heating systems,” says Mr Bisi.
These are sent to its factories around the world and made into complete buses that are largely sold into markets in Latin America and Africa. For Marco Polo, the high price of the Brazilian real has made it attractive to do as little production in Brazil as possible.
“To export from Brazil has become very expensive,” Mr Bisi says. “The costs in Brazil are too high. For that reason we moved part of our production to China. In the past, 55 per cent of our net revenue was exports [from Brazil]. Now, it’s 25 per cent.”
Marco Polo has not taken the full plunge into production in China because of local rules, he says. “We don’t produce full buses there, because we aren’t allowed by law. We would need a local partner, and 50 per cent of the venture would need to be Chinese. And, we would need to make an investment of at least $100m.”
And selling within the country can be very difficult because of internal Communist party protectionist rules, he says. If buses are produced in one region, it can be difficult to try to enter the market in another. “China is a big country, but it is not one country; it is many countries,” Mr Bisi says.
Nevertheless, China’s high-quality, low-cost goods, efficient production machinery, support from the local administration and well-oiled export machinery make it an ideal location for these kinds of parts supplies. “It’s more expensive to move parts from Nigeria to South Africa than from China to South Africa,” Mr Bisi says.
If the strength of the Brazilian currency has made Brazilian exports expensive and hit the country’s industry hard – to the benefit of the raw goods export industry, chiefly to China – the rapid growth of its consumer market has given Marco Polo a compensating lifeline.
Mr Bisi says: “We are not able to export from Brazil, but on the other hand the domestic market is booming. We are expecting both the World Cup and the Olympics. We believe we will see a boom in local demand for the next five years.”
For better or worse, some of the passengers in these new Brazilian buses will be looking out of windows made in China.