multilatinas

How China’s rise forced Latin America to wake up and innovate

March 20, 2013
March 20, 2013

I am frequently asked about the impact of China in Latin America. What is Latin America’s position on China becoming manufacturer to the world? What does the region’s future hold without the US as a sole economic superpower?

At the outset, it’s unfair to group all of Latin America into the same bucket; it is a region comprised of more than 20 countries. Unlike the European Union, in which 27 member states share similar political, economic and social systems, Latin American countries differ in terms of labor laws, currency, infrastructure development and education. For example, Mexico is more a foreign commerce-oriented economy, whereas Brazil has a huge domestic market. Even neighboring countries such as Chile and Argentina exhibit stark contrasts in their political, economic and cultural make-up.

For most of the last two decades, Latin American countries have been impacted differently by the rise of China. On the one hand, there is Mexico, which saw a steady decline of its manufacturing exports while witnessing the same jobs migrate to China. Mexico’s competitive advantage was seemingly erased by the powerful combination of cheap labor, a massive workforce and attractive government incentives put forth by the Chinese.

On the other hand, China’s economic success, bolstered by a booming middle class and huge infrastructure growth, created a need to import commodities at an unprecedented volume. This generated rapid growth in sectors like oil, mining and farming in countries like Brazil and Chile. These countries have mostly been positively impacted by the Chinese boom, due to rising commodity prices, making up the lion share of their exports. In fact, China is the No. 1 trading partner of both of these nations.

A third dimension of influence of China in Latin America is its lending power. According to the Financial Times, China’s credit to Latin America totaled $143 billion in 2010, which is more than the World Bank, the Inter-American Development Bank and US Ex-Im Bank loans combined. Venezuela, Argentina and Ecuador are three of the biggest beneficiaries of these loans.

Where does this all fit in the overall picture of innovation in Latin America? First, we need to look at the quiet rise of the Multilatinas: Latin American-born organizations that are growing at unprecedented rates. Mexican leading baked goods producer Grupo Bimbo, Argentinian steel producer Ternium, Mexican chemical manufacturer Mexichem, Brazilian aircraft manufacturer Embraer and telecommunications giant Telmex are all playing increasingly significant roles in the global landscape, many of which are following a three-prong approach to globalization with expansion in the US, Latin America and Asia.

Even in Mexico, probably the country that was most negatively affected by China’s manufacturing rise, there is a silver lining. Last month, my company hosted an event where Joel Barker, the author of Innovation at the Verge, said: “In times of crisis, innovations will be sought out instead of resisted.” Thanks to China’s rise, and the pressure it put on the Mexican manufacturing sector, the country may be living one of the most innovative periods in history.

Companies are starting to rethink their China strategy and “re-shore,” or near-shore in Mexico for a variety of reasons. Trade and proximity benefits associated with cost and convenience are an obvious one; however, businesses are catching wind of the increasingly higher educated workforce. Mexico has 115,000 engineer graduates per year—more than three times that of the United States in proportion to population.

Mexico also has seen GDP growth above 4% in the last three years, due in part to its focus on improving the efficiency of its regulatory, business registration, tax processing and legal systems, which is producing record foreign investment. In fact, according to a recent Global Retail Manufacturers and Imports survey, 40% of US importers or manufacturers are considering moving their manufacturing away from China.

And 26% of retail-goods importers already have moved some of their manufacturing out of China. Add this to the fact that Mexico has more free trade agreements with other nations than any other country in the world, and you start to see why Mexico’s manufacturing hit a record high in December 2012, reaching $26.1 billion.

North American manufacturing is rising due to increased automation, the creation of new technologies like 3D printing, new highly automated factories, and velocity, which cannot be achieved in China. High interactivity leads to leaner production cycles that require smaller productions and faster turnaround. In our dynamic and interconnected world economy, this much is certain: Latin America has not reached its full potential. It hasn’t even come close yet.

We welcome your comments at ideas@qz.com.

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