Michael diaz jr. china and latin america the art of the deal


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Like most sellers, getting the best price is usually
the primary goal of a Latin American negotiator. While
the Chinese are also interested in price, they often spend more time negotiating other terms of the agreement.

Again, it’s important to understand that they are looking
beyond the immediate contract and are concerned with
the longer-term implications of the transaction – how
will this relationship develop over time and how long
will it last?

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Michael diaz jr. china and latin america the art of the deal

  1. 1. regional China and Latin America: The Art of the Deal By Michael Diaz, Jr. (Diaz Reus & Targ, LLP) In the first decade of the 21st century, China’s vehicles, as well as cell phones, smartphones, laptops and foreign policy toward Latin America has been focused computing tablets. Latin America has readily accessible on the acquisition of natural resources that can support lithium salt lakes, and the Chinese are striving to obtain its growing economy for years to come. Despite the access to those natural resources. global economic downturn, China continues to look for business and investment opportunities in Latin America, including direct purchases of minerals, metals and other Despite the global economic downturn, commodities, obtaining the rights to mine and exploit natural resources, forming joint ventures and acquiring China continues to look for business target companies. and investment opportunities in latin But for these types of high-stakes transactions to be successful, Latin Americans governments, state-owned america, including direct purchases of enterprises and private businesses must understand minerals, metals and other commodities, that there are substantial differences with the Chinese in terms of cultures, negotiation styles, financial objectives obtaining the rights to mine and exploit and long-term goals. natural resources, forming joint ventures As Beijing adopts an active role in the region, most Latin American countries want to do business with China and acquiring target companies. in one way or another. Recent examples include a US$3 billion deal by the Aluminum Corp. of China (Chinalco) for the Toromocho mines in Peru. China Minmetals For China, like the U.S., political risk is a key factor Nonferrous Metals Co. invested US$2 billion in a joint affecting investment decisions in Latin America. Political venture with Chile's state copper giant Codelco, and or economic instability is a turn-off for Chinese investors, Baoshan Iron and Steel's made a US$1.4 billion investment just as it would be for U.S. or European companies. For in a joint venture with Brazilian iron-ore giant CVRD to example, Chinese companies have yet to venture into construct a new steel plant in Brazil. Bolivia, which is awaiting a governmental decree on Venezuela's oil reserves have also attracted Beijing's whether its lithium salt lakes are a protected national attention and not surprisingly, U.S. concern. In the past resource. Other Latin nations have various regulations four years, China has signed more than 20 agreements that affect these types of commodities transactions. Chile, with Venezuela for long-term investments in exchange for instance allows international investment in its lithium for oil. Under President Hugo Chávez, Venezuela has resources, but limits the exploitation rights. On the other borrowed US$6 billion from China, bringing China's total hand, Argentina is more open when it comes to acquiring investment into that country to US$12 billion. In mid-May, and exploiting its mineral resources. China and Venezuela announced multi billion-dollar Once the Chinese have identified a potential investments in Venezuela's iron and aluminum deposits investment – by nation, geography or type of resource industry. Also, China-owned, State Grid has purchased – they begin the process of negotiating a deal. This is various electric transmission projects recently in Brazil in often a long, exhausting process for Latin American another multi billion dollar investment. governments and businesses that are not used to the Today, Chinese state-owned and private entities are Chinese style of negotiations and may not understand actively seeking sources of lithium salts, a key element Chinese objectives. in the manufacture of batteries for electric-powered First and foremost, China’s motive behind both its foreign policy moves and investment decisions is long- Michael Diaz, Jr. (MDiaz@diazreus.com) is Managing Part- term stability, regardless of short-term profits. That is ner with Diaz Reus & Targ, LLP. Based in Miami, Mr. Diaz in sharp contrast to publicly traded U.S. multinationals focuses on international trade and business transactions, operating in Latin America, whose shareholders typically complex commercial, civil, and criminal litigation and arbi- demand immediate returns. tration matters. The firm operates offices in Miami, Florida, Because most Chinese entities are unfamiliar with Shanghai, China, Frankfurt, Germany, Mexico City, Mexico, Latin America as a region, and its diverse nations and and Caracas, Venezuela - as well as affiliate offices in Bo- cultures, negotiations tend to move slowly. Traditionally, gota, Colombia, and São Paulo, Brazil. www.diazreus.com, the Chinese have been wary of “foreigners” and it takes www.chinalat.com May 2010 LATIN AMERICAN LAW & BUSINESS REPORT 12
  2. 2. regional time of overcome that heritage of distrust. In fact, the an oil well or a lithium salt lake that has no infrastructure objective of any substantive negotiation session with in place and no existing production. Those deals tend to the Chinese is to nudge them slowly from a position of be far more complex – and time-consuming. After all, suspicion to one of trust. the Chinese must acquire the land, the exploration and In most cases, China has a strong bargaining position exploitation rights and put in the infrastructure to remove during the negotiation process, thanks to its immense the resources from the ground and make them usable for buying power and long-term financial resources. But Chinese industry. Latin Americans should realize that there is also intense competition for desired resources from U.S., European, Japanese, Korean and other foreign investors. That works While the Chinese are also interested to the benefit of Latin Americans in the negotiation process, in price, they often spend more and promotes greater interest on the Chinese side. With their long-term perspective, unfamiliarity with time negotiating other terms of the the region and lack of trust, the Chinese tend to be very patient negotiators in business transactions. They also agreement. take a more formal approach to negotiations, in contrast to American casualness. That includes a polite tone of For Latin governments, creating new jobs is a priority speech during negotiating sessions, wearing business in these types of “ground-up” transactions. Usually, the attire and avoid face-to-face confrontations. It also means Chinese are willing to employ a local workforce under that Chinese negotiators may need to communicate with their own management. During the negotiations, this is their superiors in China before adjusting their position or a point the Chinese will often concede as an incentive to reaching a tentative deal. getting better pricing or other terms in the contract. At the same time, the Chinese are usually aggressive To manage their investment risk in these types of in staking out their position and reluctant to make transactions, the Chinese are often more comfortable concessions when it comes to terms and conditions. While with mining and exploitation agreements that begin on Latin American negotiators prefer to settle one issue at a a small scale and grow over time, as the relationship time, creating a sense of forward momentum, the Chinese develops and flourishes. With a lithium salt lake, for often go back and forth in what seems to be a random example, the Chinese might focus initially on acquiring fashion. That makes it unclear whether a certain issue has the rights. Then, they would send in a team of geologists been settled or not – a frustrating position for the Latin and chemists to determine the extent and quality of the American side. desired natural resource. If everything meets Chinese Like most sellers, getting the best price is usually expectations, then the investment may expand. If not, the the primary goal of a Latin American negotiator. While Chinese might delay payments, allow the contract to lapse the Chinese are also interested in price, they often spend and move their team to a different location. more time negotiating other terms of the agreement. From a Latin American perspective, it is important to Again, it’s important to understand that they are looking include penalty and incentive clauses in these contracts. beyond the immediate contract and are concerned with Many Latin entities also require a termination clause in the longer-term implications of the transaction – how the contract. If the Chinese have competed a certain action will this relationship develop over time and how long by a particular date, one of the contracting parties can will it last? terminate the agreement. While each deal is different, the Chinese typically Any business agreement should also include a dispute pay somewhere between 10 and 30 percent of the total resolution clause that goes into effect if there is a serious upfront. Virtually all business transactions are done in disagreement between the two sides. A Chinese sovereign U.S. dollars. However, this is not an issue for either side, or state-owned entity will require that any disputes be since Latin Americans prefer this form of payment and litigated in China under Chinese law. However, most Latin the Chinese have ready access to dollars in their own American entities would prefer to arbitrate disputes in a sovereign reserves. third-party jurisdiction, such as London or Panama. These Because Chinese entities are usually not buying types of arbitration matters are rarely, if ever, handled in finished goods, the actual price for the commodity the United States. – and size of the initial payment – typically depends Finally, it is vital to understand that building long on processing and transportation considerations. For term personal relationships is essential to the success instance, a larger payment would be expected when of major business and investment transactions. Like the Latin American entity processes a raw material Latin Americans, the Chinese put a high value on – aluminum, iron or gold – into a compact material that getting to know their suppliers, business partners and can readily be transported to China. professional colleagues. It may take years to develop those However, Chinese entities are also interested in relationships, but the potential rewards clearly justify the developing new sources of supply, such as a copper mine, investment of time and energy on both sides. o May 2010 LATIN AMERICAN LAW & BUSINESS REPORT 13